FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
COMMISSION FILE NUMBER 0-11330
PAYCHEX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1124166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
911 PANORAMA TRAIL SOUTH, ROCHESTER, NEW YORK 14625-0397
(Address of principal executive offices) (Zip Code)
(716)385-6666
(Registrant's telephone number, including area code)
(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 163,618,400 Shares
- ---------------------------- --------------------------------
CLASS OUTSTANDING AT NOVEMBER 30, 1998
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
For the three months For the six months
ended November 30, ended November 30,
1998 1997 1998 1997
Service revenues:
Payroll $131,035 $108,528 $259,017 $213,393
HRS-PEO 11,913 8,645 23,220 16,727
------- ------- ------- -------
Total service revenues 142,948 117,173 282,237 230,120
PEO direct costs billed (A) 139,033 118,048 281,531 223,684
------- ------- ------- -------
Total revenue 281,981 235,221 563,768 453,804
PEO direct costs (A) 139,033 118,048 281,531 223,684
Operating costs 36,863 31,891 72,748 62,197
Selling, general and
administrative expenses 61,089 52,710 122,850 104,994
------- ------- ------- -------
Operating income 44,996 32,572 86,639 62,929
Investment income 3,006 2,291 5,967 4,479
------- ------- ------- -------
Income before income taxes 48,002 34,863 92,606 67,408
Income taxes 14,394 10,145 27,597 19,616
------ ------- ------- -------
Net income $ 33,608 $ 24,718 $ 65,009 $ 47,792
======= ======= ======= =======
Basic earnings per share $ .21 $ .15 $ .40 $ .29
======= ======= ======= =======
Diluted earnings per share $ .20 $ .15 $ .39 $ .29
======= ======= ======= =======
Weighted-average common
shares outstanding 163,530 162,958 163,407 162,902
======= ======= ======= =======
Weighted-average shares
assuming dilution 165,865 164,501 165,698 164,471
======= ======= ======= =======
Cash dividends per
common share $ .09 $ .06 $ .15 $ .10
======= ======= ======= =======
- -------------------------------------------------------------------------------
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 BALANCE SHEETS
(In thousands)
November 30, May 31,
1998 1998
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 29,376 $ 35,571
Investments 241,370 214,967
Interest receivable 14,160 13,227
Accounts receivable 74,065 54,596
Deferred income taxes - 1,525
Prepaid expenses and other current assets 5,403 4,391
--------- ---------
Current assets before ENS investments 364,374 324,277
Electronic Network Services investments 1,130,243 1,154,501
--------- ---------
Total current assets 1,494,617 1,478,778
Property and equipment - net 68,313 64,698
Deferred income taxes 1,107 517
Other assets 6,198 5,794
--------- ---------
Total assets $1,570,235 $1,549,787
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 7,574 $ 10,496
Accrued compensation and related items 28,071 33,649
Deferred revenue 3,637 4,443
Accrued income taxes 1,169 2,628
Deferred income taxes 4,882 -
Other current liabilities 14,443 13,960
--------- ---------
Current liabilities before ENS client deposits 59,776 65,176
Electronic Network Services client deposits 1,123,335 1,150,484
--------- ---------
Total current liabilities 1,183,111 1,215,660
Other long-term liabilities 5,215 4,520
--------- ---------
Total liabilities 1,188,326 1,220,180
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
authorized 300,000 shares
Issued: 163,618/November 30, 1998 and
163,188/May 31, 1998 1,636 1,632
Additional paid-in capital 55,314 46,463
Retained earnings 318,594 278,107
Accumulated other comprehensive income 6,365 3,405
--------- ---------
Total stockholders' equity 381,909 329,607
--------- ---------
Total liabilities and stockholders' equity $1,570,235 $1,549,787
========= =========
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the six months ended November 30, 1998 1997
OPERATING ACTIVITIES
Net income $ 65,009 $ 47,792
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization
on depreciable and intangible assets 10,576 8,763
Amortization of premiums and
discounts on available-for sale securities 4,747 3,834
Provision for deferred income taxes 4,117 1,719
Provision for bad debts 835 982
Net realized gains on sales
of available-for-sale securities (1,556) (165)
Changes in operating assets and liabilities:
Interest receivable (933) (1,481)
Accounts receivable (20,304) (12,261)
Prepaid expenses and other current assets (1,012) (1,252)
Accounts payable and other current liabilities (3,701) 2,824
Net change in other assets and liabilities 148 1,789
------- -------
Net cash provided by operating activities 57,926 52,544
INVESTING ACTIVITIES
Purchases of available-for-sale securities (270,419) (178,892)
Proceeds from sales of
available-for-sale securities 200,181 92,073
Proceeds from maturities of
available-for-sale securities 7,425 300
Net change in Electronic Network
Services money market securities
and other cash equivalents 62,330 (5,571)
Net change in Electronic Network
Services client deposits (27,149) 69,514
Purchases of property and equipment,
net of disposals (13,576) (13,410)
Other (665) (272)
------- -------
Net cash used in investing activities (41,873) (36,258)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 2,274 1,125
Dividends paid (24,522) (16,295)
Other - 733
------- -------
Net cash used in financing activities (22,248) (14,437)
------- -------
Increase/(decrease) in Cash and cash equivalents (6,195) 1,849
Cash and cash equivalents, beginning of period 35,571 50,213
------- -------
Cash and cash equivalents, end of period $ 29,376 $ 52,062
======= =======
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 30, 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 period. Operating results for the three and six
months ended November 30, 1998, are not necessarily indicative of the results
that may be expected for the full year ended May 31, 1999. There is no
significant seasonality to the Company's business, except that over 30% of new
Payroll segment clients and over 40% of new PEO worksite employees added in
each of the last three fiscal years have been added during the third fiscal
quarter. Consequently, greater revenue and sales commission expenses are
reported in that quarter.
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and Footnotes presented
in the Company's Annual Report on Form 10-K for the year ended May 31, 1998.
Certain amounts from the prior year are reclassified to conform to fiscal 1999
presentations.
B) Basic earnings per share, diluted earnings per share, cash dividends per
common share, weighted-average common shares outstanding, weighted-average
shares assuming dilution and all other applicable information for the three
and six months ended November 30, 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, 1998, and distributed on May 22, 1998. For the
three and six months ended November 30, 1998, stock options were exercised for
236,000 shares and 430,000 shares, respectively, of the Company's common
stock.
<PAGE>
C) Investments and ENS investments: Investments and ENS investments consist
of various governmental securities, investment grade municipal securities,
money market securities and other cash equivalents.
November 30, May 31,
1998 1998
(In thousands) UNAUDITED) (AUDITED)
---------------------- ---------------------
COST FAIR VALUE COST FAIR VALUE
Type of issue
Money market securities and
other cash equivalents $ 652,611 $ 652,611 $ 714,941 $ 714,941
Available-for-sale
securities:
General obligation
municipal bonds 242,710 245,900 212,222 213,940
Pre-Refunded municipal
bonds 264,678 268,753 236,151 238,462
Revenue municipal bonds 199,989 202,714 199,545 200,850
Other securities 1,394 1,635 1,231 1,275
--------- --------- --------- ---------
Total available-for-sale
securities 708,771 719,002 649,149 654,527
--------- --------- --------- ---------
Total Investments and
ENS investments $1,361,382 $1,371,613 $1,364,090 $1,369,468
========= ========= ========= =========
Classification of investments
on Consolidated Balance
Sheets:
Investments $ 238,043 $ 241,370 $ 213,606 $ 214,967
ENS investments 1,123,339 1,130,243 1,150,484 1,154,501
--------- --------- --------- ---------
Totals $1,361,382 $1,371,613 $1,364,090 $1,369,468
========= ========= ========= =========
D) Property and equipment - net:
November 30, May 31,
1998 1998
(In thousands) (UNAUDITED) (AUDITED)
Land and improvements $ 2,815 $ 2,815
Buildings and improvements 25,948 24,914
Data processing equipment and software 69,970 64,247
Furniture, fixtures and equipment 57,855 52,752
Leasehold improvements 8,052 7,323
------- -------
164,640 152,051
Less accumulated depreciation and amortization 96,327 87,353
------- -------
$ 68,313 $ 64,698
======= =======
<PAGE>
E) Segment Information: Effective May 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement requires
the Company to report segment financial information consistent with the
presentation made to the Company's management for decision-making purposes.
Prior year segment disclosures have been restated to be consistent.
The Company has 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, section 125 plans,
workers' compensation, group benefits, and state unemployment insurance
services, 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. Corporate expenses are primarily related to
the Information Technology, Organizational Development, Finance, Marketing and
Senior Management functions of the Company.
For the three months For the six months
ended November 30, ended November 30,
(In thousands) 1998 1997 1998 1997
Total revenue:
Payroll $131,035 $108,528 $259,017 $213,393
HRS-PEO revenue:
Service revenue 11,913 8,645 23,220 16,727
PEO direct costs
billed (A) 139,033 118,048 281,531 223,684
------- ------- ------- -------
Total HRS-PEO revenue 150,946 126,693 304,751 240,411
------- ------- ------- -------
Total revenue 281,981 235,221 563,768 453,804
PEO direct costs (A) 139,033 118,048 281,531 223,684
------- ------- ------- -------
Total revenue less PEO
direct costs 142,948 117,173 282,237 230,120
======= ======= ======= =======
Operating income:
Payroll 56,675 44,230 110,563 85,464
HRS-PEO 2,575 994 5,186 2,198
------- ------- ------- -------
Total operating income 59,250 45,224 115,749 87,662
Corporate expenses 14,254 12,652 29,110 24,733
Investment income 3,006 2,291 5,967 4,479
------- ------- ------- -------
Income before income taxes $ 48,002 $ 34,863 $ 92,606 $ 67,408
======= ======= ======= =======
Investment revenue included
in Payroll revenue $ 11,984 $ 8,975 $ 23,760 $ 18,336
======= ======= ======= =======
(A) Wages and payroll taxes of PEO worksite employees and their related
benefit premiums and claims.
<PAGE>
F) Comprehensive income: Comprehensive income is comprised of two
components: net income and other comprehensive income. Comprehensive income
includes all changes in equity during a period except those resulting from
transactions with owners of the Company. The unrealized gains and losses, net
of applicable taxes, related to available-for-sale securities is the only
component reported in accumulated other comprehensive income in the
Consolidated Balance Sheets for the Company. Comprehensive income, net of
related tax effects, is as follows:
For the three months For the six months
ended November 30, ended November 30,
(In thousands) 1998 1997 1998 1997
Net income $33,608 $24,718 $65,009 $47,792
Unrealized gains on
securities, net of
reclassification
adjustments 710 846 2,960 2,254
------ ------ ------ ------
Total comprehensive
income $34,318 $25,564 $67,969 $50,046
====== ====== ====== ======
<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 six months ended November 30, 1998 (fiscal 1999) and
1997 (fiscal 1998), and its financial condition at November 30, 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 accompanying November 30,
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 in Exhibit 99, contained in this Form 10-Q.
Results of operations
(In thousands, except per share amounts)
For the three months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Service revenues $ 142,948 +22.0% $ 117,173
Operating income $ 44,996 +38.1% $ 32,572
Income before income taxes $ 48,002 +37.7% $ 34,863
Net income $ 33,608 +36.0% $ 24,718
Basic earnings per share $ .21 +40.0% $ .15
Diluted earnings per share $ .20 +33.3% $ .15
===============================================================================
For the six months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Service revenues $ 282,237 +22.6% $ 230,120
Operating income $ 86,639 +37.7% $ 62,929
Income before income taxes $ 92,606 +37.4% $ 67,408
Net income $ 65,009 +36.0% $ 47,792
Basic earnings per share $ .40 +37.9% $ .29
Diluted earnings per share $ .39 +34.5% $ .29
===============================================================================
The Company's ability to continually grow its client base, increase the
utilization of ancillary services and decrease operating expenses as a percent
of service revenues, resulted in record service revenues and net income for
the three months and six months ended November 30, 1998.
<PAGE>
Payroll segment:
(In thousands)
For the three months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Payroll service revenue $ 131,035 +20.7% $ 108,528
Investment revenue included in
Payroll service revenue $ 11,984 +33.5% $ 8,975
Payroll operating income $ 56,675 +28.1% $ 44,230
===============================================================================
For the six months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Payroll service revenue $ 259,017 +21.4% $ 213,393
Investment revenue included in
Payroll service revenue $ 23,760 +29.6% $ 18,336
Payroll operating income $ 110,563 +29.4% $ 85,464
===============================================================================
Client statistics at November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Payroll clients 307.8 +10.9% 277.5
Taxpay clients 236.6 +17.5% 201.3
Direct Deposit clients 120.9 +36.1% 88.8
Check Signing clients 36.4 +22.1% 29.8
===============================================================================
Revenues: Payroll, Taxpay and Direct Deposit revenues include service fees
and investment revenue. Investment revenue is earned during the period
between collecting client funds and remitting the funds to the applicable tax
authorities for Taxpay clients and client employees for Direct Deposit
clients. Investment revenue also includes net realized gains and losses from
the sale of available-for-sale securities. The increases in service revenue
are primarily related to the continued growth of the Payroll client base,
including improvement in client retention, and increased utilization of
ancillary services such as Taxpay, Direct Deposit and Check Signing by both
new and existing clients.
At November 30, 1998, approximately 77% of Payroll clients utilize the Taxpay
service. Client utilization of this product is expected to mature within the
next several years within a range of 82% to 87%. Client utilization of Direct
Deposit was approximately 39% at November 30, 1998, and will provide
additional growth opportunities in fiscal 1999 and beyond.
Fiscal 1999's percentage growth in service revenue is expected to be on the
upper-end of the Paychex "formula" of 17-19%, as compared to fiscal 1998's
growth of 23%. The anticipated decrease in revenue growth reflects the impact
of lower interest rates and the maturing of Taxpay.
Operating income: Operating income increased as a result of continued growth
of the client base, increased utilization of ancillary services, and
leveraging of the segment's operating expense base.
<PAGE>
HRS-PEO segment:
(In thousands)
For the three months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
HRS-PEO service revenue $ 11,913 + 37.8% $ 8,645
HRS-PEO operating income $ 2,575 +159.1% $ 994
===============================================================================
For the six months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
HRS-PEO service revenue $ 23,220 + 38.8% $ 16,727
HRS-PEO operating income $ 5,186 +135.9% $ 2,198
===============================================================================
Client statistics at November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
401(k) clients 8.0 + 77.8% 4.5
401(k) client funds managed
externally (in millions) $ 519.9 +120.8% $ 235.5
Section 125 clients 18.1 + 24.8% 14.5
PEO worksite employees 15.8 - 4.2% 16.5
===============================================================================
Revenues: The increases in service revenue are primarily related to the
benefits of developing and growing a recurring revenue stream from 401(k) plan
recordkeeping and PEO clients. Fiscal 1999's service revenue is expected to
grow at a rate higher than Payroll segment revenues.
Operating income: The increases in HRS-PEO operating income are related to
gains in the service revenue and continued benefits from the February 1998
consolidation of the PEO administrative functions in Rochester, New York.
During the first half of fiscal 1999, the segment increased its 401(k) plan
recordkeeping sales force by approximately 50 individuals to facilitate the
goal of attaining more than 10,000 clients by the end of fiscal 1999.
Operating income for the full year of fiscal 1999 is expected to increase due
to continued client base growth and from efficiencies gained from centralized
operations.
The decline in the number of worksite employees is primarily due to the loss
of two large PEO clients during the month of November. The loss of these
clients is not expected to have a material impact on full-year results.
<PAGE>
Corporate expenses:
(In thousands)
For the three months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Corporate expenses $14,254 +12.7% $12,652
===============================================================================
For the six months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Corporate expenses $29,110 +17.7% $24,733
===============================================================================
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. The period increases are primarily due to additional
employees necessary to support the continued growth of the Company's business
segments, and from increased national marketing efforts, commenced in the
third quarter of fiscal 1998.
Investment income:
(In thousands)
For the three months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Investment income $ 3,006 +31.2% $ 2,291
===============================================================================
For the six months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Investment income $ 5,967 +33.2% $ 4,479
===============================================================================
Investment income earned from the Company's Investments, which does not
include the investment revenue earned from ENS investments, has grown mainly
as a result of increases in total cash and investment balances generated from
continual gains in operating cash flows. Investment income for 1999, subject
to changes in market rates of interest, is expected to grow at a rate slightly
lower than net income growth.
Income taxes:
(In thousands)
For the three months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Income taxes $14,394 +41.9% $10,145
Effective income tax rate 30.0% + .9 29.1%
===============================================================================
For the six months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Income taxes $27,597 +40.7% $19,616
Effective income tax rate 29.8% + .7 29.1%
===============================================================================
The increases in the effective income tax rate are due to expected growth in
taxable income exceeding the growth in tax-exempt income, which is derived
primarily from Taxpay and Direct Deposit products that provide investment
revenue. Fiscal 1999's quarter and annual effective income tax rates are
expected to range from 29.5% to 30.0%.
<PAGE>
Liquidity and Capital Resources
Operating cash flows:
(In thousands)
For the six months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Operating cash flows $ 57,926 +10.2% $ 52,544
===============================================================================
The increase in operating cash flows resulted primarily from the consistent
achievement of record net income. Projected operating cash flows are expected
to adequately support normal business operations and forecasted growth,
planned purchases of property and equipment and planned dividend payments.
Furthermore, at November 30, 1998, the Company had $267.7 million in available
cash and investments and $262.5 million of available, uncommitted and
unsecured lines of credit.
Investments and ENS investments: Investments and ENS investments consist of
short-term funds and available-for-sale investments which are described in
Note C of the Notes to the Consolidated Financial Statements. Investments
have increased due to the investment of cash provided by operating activities
less dividend payments. The amount of ENS investments varies significantly
based upon the timing of collecting client funds, and remitting the funds to
the applicable tax authorities for Taxpay clients and client employees for
Direct Deposit clients.
Credit risk - 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-1 rated short-term securities and
limiting amounts that can be invested in any single instrument. At November
30, 1998, approximately 97% of the available-for-sale securities held an AA
rating or better, and all short-term securities classified as cash equivalents
held an A-1 rating or an equivalent rating.
Interest rate risk - The Company's available-for-sale securities are exposed
to market risk from changes in interest rates, as rate volatility will cause
fluctuations in the market value of held investments and the earnings
potential of future investments. Increases in interest rates normally
decrease the market value of the available-for-sale securities, immediately
increase earnings from short-term funds and over time increase earnings from
available-for-sale securities. Earnings from the available-for-sale
securities do not reflect changes in rates until the investments are sold or
mature, and the proceeds are reinvested at current rates. Decreases in
interest rates have the opposite affect on the available-for-sale securities
and earnings from short-term funds. As of November 30, 1998, approximately
one-half of the total investment portfolio was invested in short-term funds
with an average duration of less than 30 days, and the available-for-sale
securities had an average duration of 2.8 years.
During the quarter ended November 30, 1998, the federal funds rate was reduced
by 75 basis points. A 25 basis point change affects the Company's tax-exempt
interest rates by approximately 17 basis points. As a result of these rate
decreases, the market value of the available-for-sale securities increased,
and unrealized gains on the Company's total available-for-sale securities were
$10.2 million at November 30, 1998, compared to $5.4 million at May 31, 1998.
<PAGE>
Purchases of property and equipment:
(In thousands)
For the six months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Purchases of property & equipment $ 13,584 +.5% $ 13,520
===============================================================================
Purchases of property and equipment in fiscal 1999 are expected to approximate
$30 million.
Cash dividends and stock splits:
(In thousands, except per share amounts)
For the six months ended November 30, 1998 Change 1997
- -------------------------------------------------------------------------------
Cash dividends $ 24,522 +50.5% $ 16,295
Cash dividends per common share $ .15 +50.0% $ .10
===============================================================================
On October 1, 1998, the Company's Board of Directors declared a 50% increase
in the Company's quarterly dividend from $.06 per share to $.09 per share, and
declared a dividend which was paid November 16, 1998, to shareholders of
record on November 2, 1998. The Company distributed a three-for-two stock
split effected and distributed in the form of a 50% stock dividend on
outstanding shares in May 1998. All financial information within this Form
10-Q has been adjusted for this stock split.
OTHER
Year 2000 readiness disclosure: The Company is actively pursuing resolution
of year 2000 issues. The year 2000 problem originated with the advent of
computers, when dates were stored without century indicators, in an effort to
reduce the need for expensive storage space used for input, output and storage
media. In order to process and calculate dates correctly, internal computer
systems must be changed to handle the year 2000 and beyond. Year 2000 efforts
extend past the Company's internal computer systems and require coordination
with clients, vendors, government entities, financial institutions and other
third parties to understand their plans for making systems and related
interfaces compliant.
In response to year 2000 issues, the Company initiated a program to manage
progress in year 2000 compliance efforts. The managers of the Company's year
2000 compliance program report directly to the Vice President of Information
Technology and provide regular reports to the Company's Senior Management and
the Board of Directors.
The Company plans to have the majority of internal mission-critical systems
year 2000 compliant by the end of calendar year 1998, and the few remaining
internal systems compliant by the end of the first quarter of calendar year
1999. Processes and procedures are in place to ensure the following: all
future internal development and testing follows year 2000 development and
testing standards, all projects undertaken in the interim deliver year 2000
compliant solutions, all future third-party hardware and software acquisitions
are year 2000 compliant, and all commercial third-party service providers are
being queried regarding their year 2000 compliance plans. In addition, the
Company is actively working with all government agency partners to determine
their year 2000 compliance plans, and has begun making year 2000 changes based
on their mandates.
<PAGE>
Calendar year 1999 will be used to react to yet unknown changes dictated by
third parties, such as government agencies, hardware and software vendors,
financial institutions, or utility companies. Third-party interface testing
and resolution of year 2000 issues with external agencies and partners is
dependent upon those third parties completing their own year 2000 remediation
efforts.
The Company expects minimal business disruption will occur as a result of year
2000 issues for systems that the Company directly controls. The Company is in
the process of enhancing existing normal business contingency plans to address
any identified year 2000 issues based on actual testing experience with third
parties and assessment of outside risks. There can be no assurance that there
will not be an adverse effect on the Company if third parties, such as
government agencies, hardware and software vendors, financial institutions or
utility companies, do not convert their systems in a timely manner and in a
way that is compatible with the Company's systems. However, management
believes that ongoing communication with and assessment of these third parties
will minimize these risks.
The Company currently anticipates expenditures for year 2000 efforts to
approximate $5 million, with approximately sixty-five percent spent through
November 30, 1998. The cost of the project and the date on which the Company
plans to complete the year 2000 modifications are based on management's best
estimates. These estimates were derived from internal assessments and
assumptions of future events. The estimates may be adversely affected by the
continued availability of personnel and system resources, as well as the
failure of third-party vendors, service providers, and agencies to properly
address year 2000 issues. There is no guarantee that these estimates will be
achieved, and actual results could differ significantly from those
anticipated.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on October 1, 1998. Results of
that meeting were reported in the Form 10-Q filed on October 15, 1998, for the
quarterly period ended August 31, 1998, and is incorporated herein by
reference.
ITEM 5: OTHER INFORMATION
The text portion on the Company's press release dated December 15, 1998,
regarding its financial results for the three months and six months ended
November 30, 1998, is attached. The related Consolidated Financial Statements
are contained in PART I. FINANCIAL INFORMATION of this Form 10-Q.
FOR IMMEDIATE RELEASE
John M. Morphy, Chief Financial Officer
Paychex, Inc. 716-383-3406
or
Jan Shuler 716-383-3406
Paychex, Inc.
Access Paychex, Inc. News Releases and SEC Form 10-Q at
http://www.paychex.com/paychex/finance/finance.html
PAYCHEX, INC. REPORTS RECORD SECOND QUARTER RESULTS
ROCHESTER, NY, December 15, 1998 -- Paychex, Inc. (NASDAQ: PAYX) today
announced record net income of $33.6 million or $.20 diluted earnings per
share for the second quarter ended November 30, 1998, a 36% increase over net
income of $24.7 million or $.15 diluted earnings per share for the same period
last year. Total service revenues were $142.9 million, an increase of 22%
over $117.2 million for the same period last year.
For the six months ended November 30, 1998, net income increased 36% to $65.0
million or $.39 diluted earnings per share as compared to net income of $47.8
million or $.29 diluted earnings per share for the same period last year.
Total service revenues were $282.2 million, an increase of 23% over $230.1
million for the same period last year.
PAYROLL SEGMENT
For the quarter ended November 30, 1998, operating income from Payroll
services increased 28% to $56.7 million from $44.2 million for the same period
last year. Payroll service revenue was $131.0 million, an increase of 21%
over $108.5 million for the same period last year.
For the six months ended November 30, 1998, operating income from Payroll
services increased 29% to $110.6 million from $85.5 million for the same
period last year. Payroll service revenue was $259.0 million, an increase of
21% over $213.4 million for the same period last year.
The increases in revenues and operating income were the result of an 11%
year-over-year increase in the Company's payroll client base, and the
continued year-over-year growth of the Taxpay and Direct Deposit products.
Paychex currently services 307,800 payroll clients, with 236,600 utilizing
Taxpay, the Company's tax filing and payment feature, 120,900 taking advantage
of the Company's Direct Deposit product, and 36,400 using the Company's Check
Signing option.
<PAGE>
HRS-PEO SEGMENT
For the quarter ended November 30, 1998, operating income for the HRS-PEO
segment increased 159% to $2.6 million from $1.0 million for the same period
last year. HRS-PEO service revenue was $11.9 million, an increase of 38% over
$8.6 million for the same period last year.
For the six months ended November 30, 1998, operating income for the HRS-PEO
segment increased 136% to $5.2 million from $2.2 million for the same period
last year. HRS-PEO service revenue was $23.2 million, an increase of 39% over
$16.7 million for the same period last year.
The increases in service revenue for the quarter and six months are primarily
related to higher revenues from 401(k) plan recordkeeping and PEO clients. As
of November 30, 1998, the segment had 8,000 401(k) plan recordkeeping clients,
15,800 PEO worksite employees and 18,100 section 125 clients. The increases
in operating income for the quarter and six months are related to the gains in
service revenues and continued benefits from the February 1998 consolidation
of the PEO administrative functions in Rochester, NY. The November 30, 1998
number of worksite employees represents a 4% decline over a year ago due to
the loss of two large PEO clients during November. The loss of these clients
is not expected to have a material impact on full-year results.
CORPORATE EXPENSES
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. For the quarter ended November 30, 1998, operating expenses
increased 13% from $12.7 million to $14.3 million. For the six months ended
November 30, 1998, operating expenses increased 18% from $24.7 million to
$29.1 million. The period increases are primarily due to additional employees
required to support the continued growth of the Company's business segments,
and from increased national marketing efforts, commenced in the third quarter
of fiscal 1998.
B. Thomas Golisano, Chairman, President, and Chief Executive Officer of
Paychex said, "We are pleased with the second quarter and first half results
for fiscal 1999. Expansion of our payroll client base and their utilization of
our ancillary services continue to generate excellent results. Profits from
our HRS-PEO segment are growing at a very good rate, and we continue to see
more opportunities for growth in this business segment."
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - "Financial Data Schedule" is filed electronically.
Exhibit 99 - "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995.
(b) Reports on Form 8-K:
- The Company filed a report on Form 8-K on September 15, 1998, that
included the Company's press release of the financial results for the
first quarter ended August 31, 1998.
- The Company filed a report on Form 8-K on October 2, 1998, that
included the Company's press release dated October 1, 1998. This
press release announced a fifty percent increase in the quarterly
dividend rate, with a quarterly dividend declaration and changes in
executive management personnel.
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: December 15, 1998 /s/ B. Thomas Golisano
-----------------------
B. Thomas Golisano
Chairman, President and
Chief Executive Officer
Date: December 15, 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
NOVEMBER 30, 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. ON MAY 22, 1998,
PAYCHEX, INC., DISTRIBUTED A THREE-FOR-TWO STOCK SPLIT EFFECTED IN THE FORM
OF A 50% STOCK DIVIDEND TO STOCKHOLDERS OF RECORD AS OF MAY 8, 1998.
THEREFORE, ALL APPLICABLE AMOUNTS FOR THE PRIOR YEAR INCLUDED IN THIS SCHEDULE
AFFECTED BY THE STOCK SPLIT HAVE BEEN ADJUSTED.
</LEGEND>
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<NAME> PAYCHEX, INC.
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<PERIOD-START> JUN-01-1998 JUN-01-1997
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EXHIBIT 99: "Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Certain written and oral statements made by the Company's management may
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are identified by
such words and phrases as "expects" and "could be." Because they are
forward-looking, they should be evaluated in light of important risk factors.
These risk factors include 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, state unemployment, 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, including Year 2000 issues; and
changes in short- and long-term interest rates and the credit rating of cash,
cash equivalents, and securities held in the Company's investment portfolios.
