FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11330
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PAYCHEX, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 16-1124166
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
911 PANORAMA TRAIL SOUTH, ROCHESTER, NEW YORK 14625-0397
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (716)385-6666
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value 108,775,265 Shares
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CLASS OUTSTANDING AT MARCH 31, 1998
<PAGE>
PAYCHEX, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets - February 28, 1998 and
May 31, 1997 3
Consolidated Statements of Income - For the Three Months
and Nine Months Ended February 28, 1998 and 1997 4
Consolidated Statements of Cash Flows - For the Nine Months
Ended February 28, 1998 and 1997 5
Notes To Consolidated Financial Statements -
February 28, 1998 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
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<PAGE>
PART I. FINANCIAL INFORMATION
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
February 28, May 31,
1998 1997
ASSETS (UNAUDITED) (AUDITED)
Current assets:
Cash and cash equivalents $ 19,072 $ 50,213
Investments 216,727 132,780
Interest receivable 11,514 10,462
Accounts receivable 51,293 45,527
Deferred income taxes 2,098 2,560
Prepaid expenses and other current assets 4,976 2,486
--------- ---------
Current assets before ENS investments 305,680 244,028
Electronic Network Services investments (A) 1,357,695 896,633
--------- ---------
Total current assets 1,663,375 1,140,661
Property and equipment - net 63,095 54,178
Deferred income taxes 581 72
Other assets 6,095 6,412
--------- ---------
Total assets $1,733,146 $1,201,323
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 4,787 $ 5,649
Accrued compensation and related items 31,291 26,969
Deferred revenue 5,861 4,335
Reserve for workers' compensation 2,534 1,813
Accrued income taxes 8,132 1,774
Other current liabilities 11,585 9,427
--------- ---------
Current liabilities before ENS client deposits 64,190 49,967
Electronic Network Services client deposits (A) 1,352,712 896,080
--------- ---------
Total current liabilities 1,416,902 946,047
Other liabilities:
Reserve for workers' compensation 1,124 928
Other long-term liabilities 3,941 2,806
--------- ---------
Total liabilities 1,421,967 949,781
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized
300,000,000 shares; Issued: 108,745,068
and 108,518,831, respectively 1,087 1,085
Additional paid-in capital 45,200 37,531
Retained earnings 264,892 212,926
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Total stockholders' equity 311,179 251,542
--------- ---------
Total liabilities and stockholders' equity $1,733,146 $1,201,323
========= =========
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See notes to consolidated financial statements.
(A) Electronic Network Services (ENS) investments and related client
deposits result from the collection of funds for Taxpay and Direct Deposit
products.
<PAGE>
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share amounts)
For the three months For the nine months
ended February 28, ended February 28,
1998 1997 1998 1997
Service revenues:
Payroll $122,239 $ 97,934 $335,632 $269,945
HRS-PEO 9,634 8,420 26,361 22,948
------- ------- ------- -------
Total service revenues 131,873 106,354 361,993 292,893
PEO direct costs billed (A) 139,482 89,208 363,166 238,210
------- ------- ------- -------
Total revenue 271,355 195,562 725,159 531,103
PEO direct costs (A) 139,482 89,208 363,166 238,210
Operating costs 35,347 30,233 97,544 84,856
Selling, general and
administrative expenses 61,674 51,099 166,668 137,569
------- ------- ------- -------
Operating income 34,852 25,022 97,781 70,468
Investment income 2,349 1,764 6,828 4,994
------- ------- ------- -------
Income before income taxes 37,201 26,786 104,609 75,462
Income taxes 10,825 7,500 30,441 21,035
------ ------- ------- -------
Net income $ 26,376 $ 19,286 $ 74,168 $ 54,427
======= ======= ======= =======
Earnings per share $ .24 $ .18 $ .68 $ .50
======= ======= ======= =======
Diluted earnings per share $ .24 $ .18 $ .68 $ .50
======= ======= ======= =======
Cash dividends per share $ .09 $ .06 $ .24 $ .16
======= ======= ======= =======
Weighted-average shares
outstanding 108,719 108,346 108,639 107,853
======= ======= ======= =======
Weighted-average shares
assuming dilution 109,994 109,489 109,762 109,071
======= ======= ======= =======
- ------------------------------------------------------------------------------
See notes to consolidated financial statements.
(A) Wages and payroll taxes of PEO worksite employees and their related
benefit premiums and claims.
<PAGE>
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the nine months ended February 28, 1998 1997
OPERATING ACTIVITIES:
Net income $ 74,168 $ 54,427
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization
on depreciable and intangible assets 13,646 10,660
Amortization of premiums and
discounts on securities 6,013 3,013
Net change in provision for deferred
income taxes (2,256) (3,372)
Provision for bad debts 1,523 1,186
Net realized gains on sales
of available-for-sale securities (414) (191)
Changes in operating assets and liabilities:
Interest receivable (1,052) (1,147)
Accounts receivable (7,289) (1,187)
Prepaid expenses and other current assets (2,490) (1,148)
Accounts payable and other current liabilities 14,223 17,137
Net change in other assets and liabilities 1,237 479
-------- --------
Net cash provided by operating activities 97,309 79,857
INVESTING ACTIVITIES:
Investment purchases of
available-for-sale securities (315,672) (249,953)
Proceeds from sales of
available-for-sale securities 134,060 152,909
Proceeds from maturities of
available-for-sale securities 4,914 2,125
Net change in Electronic Network
Services money market funds
and other cash equivalents (367,796) (274,759)
Net change in Electronic Network
Services client deposits 456,632 342,091
Additions to property and equipment,
net of disposals (21,764) (13,219)
Purchases of other assets (388) (2,167)
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Net cash used in investing activities (110,014) (42,973)
FINANCING ACTIVITIES:
Proceeds and tax benefit from
exercise of stock options 7,671 7,415
Dividends paid (26,081) (17,607)
Payment in lieu of issuance
of fractional shares (26) -
Other - 406
-------- --------
Net cash used in financing activities (18,436) (9,786)
-------- --------
Increase (decrease) in cash and cash equivalents (31,141) 27,098
Cash and cash equivalents, beginning of period 50,213 19,999
-------- --------
Cash and cash equivalents, end of period $ 19,072 $ 47,097
======== ========
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See notes to consolidated financial statements.
<PAGE>
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FEBRUARY 28, 1998
A) The accompanying unaudited consolidated financial statements of
Paychex, Inc., and its wholly-owned subsidiaries have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the consolidated financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the information furnished herein reflects all adjustments
(consisting of items of a normal recurring nature) which are necessary for a
fair presentation of the results for the interim periods. Operating results
for the three months and nine months ended February 28, 1998, are not
necessarily indicative of the results that may be expected for the year ended
May 31, 1998. There is no significant seasonality to the Company's business,
except that over 30% of new Payroll segment clients added in each of the last
three fiscal years have been added during the third fiscal quarter.
Consequently, greater sales commissions are earned in that quarter, resulting
in higher selling expenses for the third quarter. The accompanying financial
statements should be read in conjunction with the financial statements and
footnotes presented in the Company's Form 10-K and Annual Report for the year
ended May 31, 1997.
B) Earnings per share, diluted earnings per share, cash dividends per
share, weighted-average shares outstanding, weighted-average shares assuming
dilution and all other applicable information for the three months and nine
months ended February 28, 1997, have been adjusted to reflect a three-for-two
stock split effected in the form of 50% stock dividends to holders of record
on May 8, 1997, and distributed on May 29, 1997.
C) Effective for the three months ended February 28, 1998, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share". All earnings per share information has been restated to conform
with this SFAS. In accordance with this SFAS, the Company's earnings per
share is determined by dividing net income for the period by the
weighted-average common shares outstanding for that period. The Company's
diluted earnings per share is determined by dividing net income for the period
by the sum of the weighted-average common shares outstanding plus the assumed
exercise of dilutive stock options for that period, as determined under the
treasury stock method. For the three and nine months ended February 28, 1998,
stock options were exercised for 51,392 and 226,777 shares of the Company's
common stock, respectively.
<PAGE>
D) Recently issued accounting standards: In June 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as "the
change in equity of a company during a period from transactions and other
events and circumstances from non-owner sources." It includes all changes in
equity during the period except those resulting from investments by owners and
distributions to owners. The Company's management believes that adoption of
this SFAS will not have an effect on the Company's future results of
operations or financial position.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of An
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company's management has not yet completed its review of this
SFAS.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for Computer Software Developed For or
Obtained For Internal-Use", which is effective for fiscal years beginning
after December 15, 1998. The SOP requires preliminary stage project costs to
be expensed as incurred. Once a project is in the application development
stage, the SOP requires all external direct costs for materials and services
and payroll and related fringe benefit costs to be capitalized, and
subsequently amortized over the estimated useful life of the project.
Currently, the Company incurs certain costs to enhance its computer programs
and all such costs are expensed as incurred. In addition, expenditures for
major software purchases from external sources are capitalized and amortized
by the straight-line method over their estimated useful lives. The Company's
management has not yet assessed what the impact of the SOP will be on the
Company's future results of operations or financial position.
E) Certain amounts from the prior year are reclassified to conform to
fiscal 1998 presentations.
F) Property and equipment - net:
February 28, May 31,
1998 1997
(In thousands) (UNAUDITED) (AUDITED)
Land and improvements $ 2,815 $ 2,789
Buildings and improvements 24,739 24,672
Data processing equipment and software 61,555 50,973
Furniture, fixtures and equipment 51,124 44,251
Leasehold improvements 6,272 3,582
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146,505 126,267
Less accumulated depreciation and amortization 83,410 72,089
------- -------
$ 63,095 $ 54,178
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<PAGE>
H) Segment financial information: The Company operates in two business
segments: Payroll and Human Resource Services-Professional Employer
Organization (HRS-PEO). The Payroll segment is engaged in the preparation of
payroll checks, internal accounting records, all Federal, state and local
payroll tax returns, and collection and remittance of payroll obligations for
small- to medium-sized businesses. The HRS-PEO segment specializes in
providing small- and medium-sized businesses with cost-effective outsourcing
solutions for their employee benefits. HRS-PEO products include 401(k) plan
recordkeeping services, group benefits and workers' compensation insurance
services, section 125 plans, employee handbooks and management services. As
an outsourcing solution, HRS-PEO relieves the business owner of human resource
administration, employment regulatory compliance, workers' compensation
coverage, health care and other employee related responsibilities. Consistent
with PEO industry practice, HRS-PEO revenue includes all amounts billed to
clients for the services provided.
(In thousands and unaudited)
For the three months For the nine months
ended February 28, ended February 28,
1998 1997 1998 1997
Total revenue:
Payroll $122,239 $ 97,934 $335,632 $269,945
HRS-PEO revenue:
Service revenue 9,634 8,420 26,361 22,948
PEO direct costs billed (A) 139,482 89,208 363,166 238,210
------- ------- ------- -------
Total HRS-PEO revenue 149,116 97,628 389,527 261,158
------- ------- ------- -------
Total revenue 271,355 195,562 725,159 531,103
PEO direct costs (A) 139,482 89,208 363,166 238,210
------- ------- ------- -------
Total revenue less
PEO direct costs 131,873 106,354 361,993 292,893
======= ======= ======= =======
Operating costs:
Payroll 33,105 27,228 90,943 77,353
HRS-PEO 2,242 3,005 6,601 7,503
------- ------- ------- -------
Total operating costs 35,347 30,233 97,544 84,856
======= ======= ======= =======
Selling, general and
administrative expenses:
Payroll 53,051 44,821 145,727 121,449
HRS-PEO 7,219 4,488 17,859 11,137
------- ------- ------- -------
Total selling, general and
administrative expenses 60,270 49,309 163,586 132,586
======= ======= ======= =======
Operating income:
Payroll 36,083 25,885 98,962 71,143
HRS-PEO 173 927 1,901 4,308
------- ------- ------- -------
Total operating income 36,256 26,812 100,863 75,451
General corporate expenses 1,404 1,790 3,082 4,983
Investment income 2,349 1,764 6,828 4,994
------- ------- ------- -------
Income before income taxes $ 37,201 $ 26,786 $104,609 $ 75,462
======= ======= ======= =======
(A) Wages and payroll taxes of PEO worksite employees and their related
benefit premiums and claims.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Management's discussion and analysis reviews the Company's operating results
for the three months and nine months ended February 28, 1998 and 1997, and its
financial condition at February 28, 1998. The focus of this review is on the
underlying business reasons for significant changes and trends affecting
revenues, net income and financial condition. This review should be read in
conjunction with the February 28, 1998 consolidated financial statements, and
the related notes to consolidated financial statements contained in this Form
10-Q. Forward-looking statements in this management's discussion and analysis
are qualified by the cautionary statement at the end of this discussion.
RESULTS OF CONSOLIDATED OPERATIONS
(In thousands except per share amounts)
For the three months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Service revenues $131,873 +24.0% $106,354
Total revenue $271,355 +38.8% $195,562
Operating income $ 34,852 +39.3% $ 25,022
Net income $ 26,376 +36.8% $ 19,286
Diluted earnings per share $ .24 +33.3% $ .18
===========================================================================
For the nine months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Service revenues $361,993 +23.6% $292,893
Total revenue $725,159 +36.5% $531,103
Operating income $ 97,781 +38.8% $ 70,468
Net income $ 74,168 +36.3% $ 54,427
Diluted earnings per share $ .68 +36.0% $ .50
===========================================================================
The Company's record levels of service revenues, total revenue and net income
resulted from continued growth in its client base, increased utilization of
ancillary services, and decreased operating and selling, general and
administrative expenses as a percent of service revenues and total revenue.
<PAGE>
PAYROLL SEGMENT
(In thousands)
For the three months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Payroll service revenue $122,239 +24.8% $ 97,934
Payroll operating income $ 36,083 +39.4% $ 25,885
===========================================================================
For the nine months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Payroll service revenue $335,632 +24.3% $269,945
Payroll operating income $ 98,962 +39.1% $ 71,143
===========================================================================
Client statistics at February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Payroll clients 286.6 +11.9% 256.1
Taxpay clients 212.2 +25.6% 169.0
Direct Deposit clients 97.0 +37.8% 70.4
Check Signing clients 31.8 +23.3% 25.8
===========================================================================
Revenues: Payroll, Taxpay, Direct Deposit and other payroll revenues include
service fees and investment income. Investment income is earned during the
period between collecting client funds and remitting the funds to the
applicable tax authorities or client employees from Taxpay and Direct Deposit
products. Client base gains continue to be the main reason for the increased
Payroll segment revenues for the three months and nine months ended February
28, 1998.
Operating income: Operating income for the three months and nine months ended
February 28, 1998, increased as a result of continued growth of the client
base and utilization of ancillary services, plus continued leveraging of the
segment's operating and selling, general and administrative expenses as
percent of revenue. The segment's operating and selling, general and
administrative expenses as a percent of revenue decreased to 70.5% for both
the three months and nine months ended February 28, 1998, as compared to
73.6%, for same periods in the prior fiscal year.
Effective July 1, 1997, the Company complied with the Internal Revenue
Service's Electronic Funds Transfer Payment Service by making client tax
payments "good funds" one business day earlier. Therefore, revenue and
operating income for the quarter was reduced by lower levels of tax-exempt
municipal security investments. The Company offset these reductions by a
modest price increase for its Taxpay services.
<PAGE>
HRS-PEO SEGMENT
(In thousands)
For the three months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
HRS-PEO service revenue $ 9,634 +14.4% $ 8,420
PEO direct costs billed 139,482 +56.4% 89,208
-------- --------
Total HRS-PEO revenue 149,116 +52.7% 97,628
PEO direct costs 139,482 +56.4% 89,208
HRS-PEO operating income $ 173 -81.3% $ 927
===========================================================================
For the nine months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
HRS-PEO service revenue $ 26,361 +14.9% $ 22,948
PEO direct costs billed 363,166 +52.5% 238,210
-------- --------
Total HRS-PEO revenue 389,527 +49.2% 261,158
PEO direct costs 363,166 +52.5% 238,210
HRS-PEO operating income $ 1,901 -55.9% $ 4,308
===========================================================================
Client statistics at February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
401(k) clients 5.2 +100.0% 2.6
PEO worksite employees 18.2 + 51.7% 12.0
===========================================================================
Revenues: For the three and nine months ended February 28, 1998, the increase
in HRS-PEO service revenue was due to gains in the number of 401(k)
recordkeeping clients, section 125 cafeteria plan clients and PEO worksite
employees, but was somewhat offset by decreased revenues from Handbook
products. Fiscal 1998 revenues are expected to grow as the Company continues
to increase 401(k) clients, section 125 cafeteria plan clients, PEO worksite
employees and other HRS-PEO ancillary product sales.
Operating income: For the three and nine months ended February 28, 1998, the
decrease in HRS-PEO operating income was primarily due to lower average
selling prices for the Company's PEO products and continued investments for
the Company's PEO operations and centralization activities. These factors
were somewhat offset by strong sales growth of the Company's 401(k)
recordkeeping services.
PEO direct costs billed and direct costs: Consistent with industry practices
and generally accepted accounting principles, PEO revenues reported in the
consolidated statements of income include the service fee, plus the direct
costs billed to clients for the wages and payroll taxes of worksite employees,
their related benefit premiums and claims and other direct costs. The Company
continually manages the costs related to employee benefits, including workers'
compensation liabilities. The Company records reserves for workers'
compensation claims costs at the expected liability amount based on the
estimated loss exposure considering the maximum potential exposure under the
workers' compensation deductible insurance policies. At February 28, 1998,
the recorded reserve is at the maximum exposure under these insurance
policies. The increases in PEO direct costs billed and direct costs are
reflective of the increases in the number of PEO worksite employees.
<PAGE>
INVESTMENT INCOME
(In thousands)
For the three months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Investment income $2,349 +33.2% $1,764
===========================================================================
For the nine months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Investment income $6,828 +36.7% $4,994
===========================================================================
Investment income earned from the Company's Investments, which does not
include the income earned from ENS investments, has grown primarily as a
result of increases in investment balances generated from successive gains in
operating cash flows. Investment income for fiscal 1998 is expected to grow
as a result of increased net income and investment of subsequent operating
cash flows, but will be impacted by typical changes in market rates of
interest.
INCOME TAXES
The Company's effective tax rate for the three months ended February 28, 1998
and 1997 was 29.1% and 28.0%, respectively. The Company's effective tax rate
for the nine months ended February 28, 1998 and 1997 was 29.1% and 27.9%,
respectively. The effective tax rate for the three months and nine months
ended February 28, 1998, was impacted by the reduction of investment income
earned from lower levels of tax-exempt municipal securities and by the
increase in taxable service fee revenue charged for the Company's Taxpay
services. Fiscal 1998's effective tax rate is expected to approximate 29.1%.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated operating cash flows:
(In thousands)
For the nine months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Operating cash flows $97,309 +21.9% $79,857
===========================================================================
The increase in operating cash flows resulted primarily from the continued
achievement of record net income for the nine months ended February 28, 1998.
Projected operating cash flows are expected to be adequate to support normal
business operations and continued growth, planned purchases of property and
equipment and dividend payments. Furthermore, at February 28, 1998, the
Company had $235.8 million in available cash and investments and $262.5
million of available, unsecured and unused lines of credit.
Investments and ENS investments: Investments and ENS investments consist of
various government securities, investment grade municipal securities, money
market funds and other cash equivalents that are available-for-sale. The
Company is exposed to credit risk in connection with these investments through
the possible inability of the borrowers to meet the terms of the bonds. The
Company attempts to limit credit risk by investing primarily in AAA- and
AA-rated securities, A-rated or better money market funds and by limiting
amounts that can be invested in any single instrument. The Company invests in
short- to intermediate-term securities as they are less sensitive to interest
rate fluctuations. At February 28, 1998, the portfolio of securities had an
average duration of 2.7 years. The Investments and ENS investments balances
continue to increase from positive operating cash flows and increases in
Taxpay and Direct Deposit client counts. In addition, the Company redirected
over $25.0 million of excess available Corporate cash balances into municipal
securities during the three months ended February 28, 1998, in order to
increase the return earned on these available funds.
<PAGE>
Purchases of property and equipment:
(In thousands)
For the nine months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Purchases of property and equipment $21,936 +60.0% $13,745
===========================================================================
Purchases of property and equipment for the nine months ended February 28,
1998 increased over 1997 as a result of additional data processing and
personal computer equipment, workstations, and leasehold improvements at the
Company's expanding branches. Purchases of property and equipment in fiscal
1998 are expected to range from $25 to $30 million.
Cash dividends:
(In thousands except per share amounts)
For the nine months ended February 28, 1998 Change 1997
- ---------------------------------------------------------------------------
Cash dividends $26,081 +48.1% $17,607
Cash dividends per share $ .24 +50.0% $ .16
===========================================================================
On October 2, 1997, the Company's Board of Directors declared a 50% increase
in the Company's quarterly dividend from $.06 per share to $.09 per share. On
January 8, 1998, the Board established a policy of setting future dividend
record dates on the 1st business day of February, May, August, and November
with the dividend payable date on the 15th or first business day thereafter of
the same month.
OTHER
Recently issued accounting standards: In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. Comprehensive income is defined as "the change in equity of a
company during a period from transactions and other events and circumstances
from non-owner sources." It includes all changes in equity during the period
except those resulting from investments by owners and distributions to owners.
The Company's management believes that adoption of this SFAS will not have an
effect on the Company's future results of operations or financial position.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of An
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company's management has not yet completed its review of this
SFAS.
<PAGE>
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for Computer Software Developed For or
Obtained For Internal-Use", which is effective for fiscal years beginning
after December 15, 1998. The SOP requires preliminary stage project costs to
be expensed as incurred. Once a project is in the application development
stage, the SOP requires all external direct costs for materials and services
and payroll and related fringe benefit costs to be capitalized, and
subsequently amortized over the estimated useful life of the project.
Currently, the Company incurs certain costs to enhance its computer programs
and all such costs are expensed as incurred. In addition, expenditures for
major software purchases from external sources are capitalized and amortized
by the straight-line method over their estimated useful lives. The Company's
management has not yet assessed what the impact of the SOP will be on the
Company's future results of operations or financial position.
FORWARD-LOOKING CAUTIONARY STATEMENT
In an effort to give investors a well-rounded view of the Company's current
condition and future opportunities, this Form 10-Q includes comments by the
Company's management about future performance and results. Because they are
forward-looking, these forecasts involve uncertainties. They include risks of
general market conditions, including demand for the Company's products and
services, competition and price levels; changes in the laws regulating
collection and payment of payroll taxes, professional employer organizations,
and employee benefits, including 401(k) plans, workers' compensation, and
section 125 plans; delays in the development and marketing of new products and
services; the possibility of catastrophic events that could impact the
Company's operating facilities, computer technology and communication systems;
changes in short- and long-term interest rates and the credit rating of
municipal securities held in the Company's investment portfolios.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1-3, "Financial Data Schedules" are filed electronically.
(b) Reports on Form 8-K: There were no reports filed on Form 8-K during the
three month period ended February 28, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAYCHEX, INC.
Date: April 7, 1998 /s/ B. Thomas Golisano
-----------------------
B. Thomas Golisano
Chairman, President and
Chief Executive Officer
Date: April 7, 1998 /s/ John M. Morphy
-----------------------
John M. Morphy
Vice President, Chief
Financial Officer and
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FEBRUARY
28, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES TO CONSOLIDATED FOR
FINANCIAL STATEMENTS OF PAYCHEX, INC., AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000723531
<NAME> PAYCHEX, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> MAY-31-1998 MAY-31-1997
<PERIOD-START> DEC-01-1997 DEC-01-1996
<PERIOD-END> FEB-28-1998 FEB-28-1997
<CASH> 19,072 47,097
<SECURITIES> 1,574,422<F1> 1,074,217<F1>
<RECEIVABLES> 62,807 50,608
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,663,375 1,178,257
<PP&E> 146,505 121,950
<DEPRECIATION> 83,410 68,468
<TOTAL-ASSETS> 1,733,146 1,238,583
<CURRENT-LIABILITIES> 1,416,902 996,574
<BONDS> 0 0
0 0
0 0
<COMMON> 1,087 1,085
<OTHER-SE> 310,092 237,146
<TOTAL-LIABILITY-AND-EQUITY> 1,733,146 1,238,583
<SALES> 0 0
<TOTAL-REVENUES> 725,159 531,103
<CGS> 0 0
<TOTAL-COSTS> 460,710 323,066
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 104,609 75,462
<INCOME-TAX> 30,441 21,035
<INCOME-CONTINUING> 74,168 54,427
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 74,168 54,427
<EPS-PRIMARY> .68 .50
<EPS-DILUTED> .68 .50
<FN>
<F1>SECURITIES - Includes amounts related to Electronic Network Services
investments with a balance at February 28, 1998 and 1997 of $1,357,695 and
$945,329, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
NOVEMBER 30, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS OF PAYCHEX, INC., AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000723531
<NAME> PAYCHEX, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> MAY-31-1998 MAY-31-1997
<PERIOD-START> SEP-01-1997 SEP-01-1996
<PERIOD-END> NOV-30-1997 NOV-30-1996
<CASH> 52,062 19,559
<SECURITIES> 1,121,396<F1> 843,634<F1>
<RECEIVABLES> 68,749 55,142
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,245,945 921,366
<PP&E> 139,173 117,453
<DEPRECIATION> 79,821 65,070
<TOTAL-ASSETS> 1,312,072 981,100
<CURRENT-LIABILITIES> 1,017,941 758,631
<BONDS> 0 0
0 0
0 0
<COMMON> 1,087 721
<OTHER-SE> 287,575 218,211
<TOTAL-LIABILITY-AND-EQUITY> 1,312,072 981,100
<SALES> 0 0
<TOTAL-REVENUES> 453,804 335,541
<CGS> 0 0
<TOTAL-COSTS> 258,881 203,625
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 67,408 48,676
<INCOME-TAX> 19,616 13,535
<INCOME-CONTINUING> 47,792 35,141
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 47,792 35,141
<EPS-PRIMARY> .44 .33
<EPS-DILUTED> .44 .32
<FN>
<F1>Includes amounts related to Electronic Network Services investments with a
balance at November 30, 1997 and 1996 of $968,858 and $718,306, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUGUST
31, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES TO CONSOLIDATED
FOR FINANCIAL STATEMENTS OF PAYCHEX, INC., AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000723531
<NAME> PAYCHEX, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAY-31-1998 MAY-31-1997
<PERIOD-START> JUN-01-1997 JUN-01-1996
<PERIOD-END> AUG-31-1997 AUG-31-1996
<CASH> 53,316 18,920
<SECURITIES> 1,066,627<F1> 729,240<F1>
<RECEIVABLES> 58,724 49,568
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,181,930 802,176
<PP&E> 131,509 113,789
<DEPRECIATION> 75,973 62,431
<TOTAL-ASSETS> 1,244,334 859,082
<CURRENT-LIABILITIES> 969,796 651,438
<BONDS> 0 0
0 0
0 0
<COMMON> 1,086 717
<OTHER-SE> 268,620 203,562
<TOTAL-LIABILITY-AND-EQUITY> 1,244,334 859,082
<SALES> 0 0
<TOTAL-REVENUES> 218,583 166,042
<CGS> 0 0
<TOTAL-COSTS> 135,942 101,333
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 32,545 23,582
<INCOME-TAX> 9,471 6,509
<INCOME-CONTINUING> 23,074 17,073
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23,074 17,073
<EPS-PRIMARY> .21 .16
<EPS-DILUTED> .21 .16
<FN>
<F1>SECURITIES - Includes amounts related to Electronic Network Services
investments with a balance at August 31, 1997 and 1996 of $920,565 and
$608,032, respectively.
</FN>
</TABLE>
