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 November 30, 1997
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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 108,701,311 Shares
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CLASS OUTSTANDING AT DECEMBER 31, 1997
<PAGE>
PAYCHEX, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets - November 30, 1997 and
May 31, 1997 3
Consolidated Statements of Income - For the Three Months
and Six Months Ended November 30, 1997 and 1996 4
Consolidated Statements of Cash Flows - For the Six Months
Ended November 30, 1997 and 1996 (Restated) 5
Notes To Consolidated Financial Statements -
November 30, 1997 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 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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<PAGE>
PART I. FINANCIAL INFORMATION
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
November 30, May 31,
1997 1997
ASSETS (UNAUDITED) (AUDITED)
Current assets:
Cash and cash equivalents $ 52,062 $ 50,213
Investments 152,538 132,780
Interest receivable 11,943 10,462
Accounts receivable 56,806 45,527
Deferred income taxes -- 2,560
Prepaid expenses and other current assets 3,738 2,486
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Current assets before ENS investments 277,087 244,028
Electronic Network Services investments (1) 968,858 896,633
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Total current assets 1,245,945 1,140,661
Property and equipment - net 59,352 54,178
Deferred income taxes 673 72
Other assets 6,102 6,412
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Total assets $1,312,072 $1,201,323
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 3,686 $ 5,649
Accrued compensation and related items 25,777 26,969
Deferred revenue 3,042 4,335
Reserve for workers' compensation 2,349 1,813
Accrued income taxes 4,911 1,774
Deferred income taxes 1,042 --
Other current liabilities 11,540 9,427
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Current liabilities before ENS client deposits 52,347 49,967
Electronic Network Services client deposits (1) 965,594 896,080
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Total current liabilities 1,017,941 946,047
Other liabilities:
Reserve for workers' compensation 1,650 928
Other long-term liabilities 3,819 2,806
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Total liabilities 1,023,410 949,781
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized
150,000,000 shares; Issued: 108,693,676
and 108,518,831, respectively 1,087 1,085
Additional paid-in capital 40,898 37,531
Retained earnings 246,677 212,926
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Total stockholders' equity 288,662 251,542
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Total liabilities and stockholders' equity $1,312,072 $1,201,323
========= =========
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See notes to consolidated financial statements.
(1) Electronic Network Services (ENS) investments and related client
deposits result from the collection of funds for Taxpay and Direct Deposit
products.
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,
1997 1996 1997 1996
Service revenues:
Payroll $108,528 $ 87,704 $213,393 $172,011
HRS-PEO 8,645 7,562 16,727 14,528
------- ------- ------- -------
Total service revenues 117,173 95,266 230,120 186,539
PEO direct costs billed (1) 118,048 74,233 223,684 149,002
------- ------- ------- -------
Total revenue 235,221 169,499 453,804 335,541
PEO direct costs (1) 118,048 74,233 223,684 149,002
Operating costs 31,891 28,059 62,197 54,623
Selling, general and
administrative expenses 52,710 43,858 104,994 86,470
------- ------- ------- -------
Operating income 32,572 23,349 62,929 45,446
Investment income 2,291 1,745 4,479 3,230
------- ------- ------- -------
Income before income taxes 34,863 25,094 67,408 48,676
Income taxes 10,145 7,026 19,616 13,535
------ ------- ------- -------
Net income $ 24,718 $ 18,068 $ 47,792 $ 35,141
======= ======= ======= =======
Earnings per share $ .23 $ .17 $ .44 $ .33
======= ======= ======= =======
Cash dividends per share $ .09 $ .06 $ .15 $ .10
======= ======= ======= =======
Weighted-average shares
outstanding 108,639 107,742 108,601 107,625
======= ======= ======= =======
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See notes to consolidated financial statements.
(1) 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 six months ended November 30, 1997 1996
(Restated)
OPERATING ACTIVITIES:
Net income $ 47,792 $ 35,141
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization
on depreciable and intangible assets 8,763 7,434
Amortization of premiums and
discounts on securities 3,834 1,966
Net change in provision for deferred
income taxes 1,719 174
Provision for bad debts 982 750
Net realized gains on sales
of available-for-sale securities (165) (103)
Changes in operating assets and liabilities:
Accounts receivable (12,261) (4,746)
Interest receivable (1,481) (1,686)
Prepaid expenses and other current assets (1,252) (1,128)
Accounts payable and other current liabilities 580 6,378
Net change in other assets and liabilities 1,789 280
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Net cash provided by operating activities 50,300 44,460
INVESTING ACTIVITIES:
Investment purchases of
available-for-sale securities (178,892) (192,229)
Proceeds from sales of
available-for-sale securities 92,073 116,081
Proceeds from maturities of
available-for-sale securities 300 1,500
Net change in Electronic Network
Services money market funds
and other cash equivalents (5,571) (62,659)
Net change in Electronic Network
Services client deposits 69,514 114,380
Additions to property and equipment,
net of disposals (13,410) (8,811)
Purchases of other assets (272) (2,756)
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Net cash used in investing activities (36,258) (34,494)
FINANCING ACTIVITIES:
Proceeds and tax benefit from
exercise of stock options 3,369 401
Dividends paid (16,295) (11,101)
Payment in lieu of issuance
of fractional shares (26) -
Other 759 294
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Net cash used in financing activities (12,193) (10,406)
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Increase (decrease) in cash and cash equivalents 1,849 (440)
Cash and cash equivalents, beginning of period 50,213 19,999
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Cash and cash equivalents, end of period $ 52,062 $ 19,559
======== ========
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See notes to consolidated financial statements.
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 30, 1997
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 six months ended November 30, 1997, 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) In May 1997, the Company restated previously reported consolidated
financial statements to reflect the Electronic Network Services funds and
related client deposit liabilities as current assets and current liabilities
on the consolidated balance sheets. This restatement had no effect on
previously reported net income or earnings per share, but required the
restatement of the consolidated statement of cash flows for the six months
ended November 30, 1996, contained herein.
C) Earnings per share, cash dividends per share, weighted-average shares
outstanding and all other applicable information for the three months and six
months ended November 30, 1996, 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.
D) Net income per share of common stock is based upon the
weighted-average number of shares of common stock outstanding during the
period. Common stock equivalents have not been included as their impact is
not materially dilutive. See Part II, Item 6, (a) Exhibit 11, "Statement re
computation of per share earnings".
E) Recently issued accounting standards: In June 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (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. The Company will adopt
this SFAS in the quarter ending August 31, 1998 (the first quarter of fiscal
year 1999), and will reclassify its financial statements for earlier periods
provided for comparative purposes. The Company's management does not believe
that the difference between reported net income and pro forma comprehensive
income to be significant.
<PAGE>
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. Currently, management believes this SFAS will not have a
significant effect on the Company's segment disclosures and related
information.
F) Certain amounts from the prior year are reclassified to conform to
fiscal 1998 presentations.
G) Property and equipment - net:
November 30, May 31,
1997 1997
(In thousands) (UNAUDITED) (AUDITED)
Land and improvements $ 2,798 $ 2,789
Buildings and improvements 24,725 24,672
Data processing equipment and software 58,060 50,973
Furniture, fixtures and equipment 48,231 44,251
Leasehold improvements 5,359 3,582
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139,173 126,267
Less accumulated depreciation and amortization 79,821 72,089
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$ 59,352 $ 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 six months
ended November 30, ended November 30,
1997 1996 1997 1996
(Restated(2))
Total revenue:
Payroll $108,528 $ 87,704 $213,393 $172,011
HRS-PEO revenue:
Service revenue 8,645 7,562 16,727 14,528
PEO direct costs billed (1) 118,048 74,233 223,684 149,002
------- ------- ------- -------
Total HRS-PEO revenue 126,693 81,795 240,411 163,530
------- ------- ------- -------
Total revenue 235,221 169,499 453,804 335,541
PEO direct costs (1) 118,048 74,233 223,684 149,002
------- ------- ------- -------
Total revenue less
PEO direct costs 117,173 95,266 230,120 186,539
======= ======= ======= =======
Operating costs:
Payroll 29,589 25,744 57,838 50,125
HRS-PEO 2,302 2,315 4,359 4,498
------- ------- ------- -------
Total operating costs 31,891 28,059 62,197 54,623
======= ======= ======= =======
Selling, general and
administrative expenses:
Payroll 46,238 38,701 92,676 76,628
HRS-PEO 5,600 3,460 10,640 6,649
------- ------- ------- -------
Total selling, general and
administrative expenses 51,838 42,161 103,316 83,277
======= ======= ======= =======
Operating income:
Payroll 32,701 23,259 62,879 45,258
HRS-PEO 743 1,787 1,728 3,381
------- ------- ------- -------
Total operating income 33,444 25,046 64,607 48,639
General corporate expenses 872 1,697 1,678 3,193
Investment income 2,291 1,745 4,479 3,230
------- ------- ------- -------
Income before income taxes $ 34,863 $ 25,094 $ 67,408 $ 48,676
======= ======= ======= =======
(1) Wages and payroll taxes of PEO worksite employees and their related
benefit premiums and claims.
(2) All financial information has been restated to reflect the formation
of the HRS-PEO business segment in the third quarter of fiscal 1997.
<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, 1997 and 1996, and its
financial condition at November 30, 1997. 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 November 30, 1997 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 November 30, 1997 Change 1996
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Service revenues $117,173 +23.0% $ 95,266
Total revenue $235,221 +38.8% $169,499
Operating income $ 32,572 +39.5% $ 23,349
Net income $ 24,718 +36.8% $ 18,068
Earnings per share $ .23 +35.3% $ .17
===========================================================================
For the six months ended November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
Service revenues $230,120 +23.4% $186,539
Total revenue $453,804 +35.2% $335,541
Operating income $ 62,929 +38.5% $ 45,446
Net income $ 47,792 +36.0% $ 35,141
Earnings per share $ .44 +33.3% $ .33
===========================================================================
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 November 30, 1997 Change 1996
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Payroll service revenue $108,528 +23.7% $ 87,704
Payroll operating income $ 32,701 +40.6% $ 23,259
===========================================================================
For the six months ended November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
Payroll service revenue $213,393 +24.1% $172,011
Payroll operating income $ 62,879 +38.9% $ 45,258
===========================================================================
Client statistics at November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
Payroll clients 277.5 +12.6% 246.5
Taxpay clients 201.3 +28.6% 156.5
Direct Deposit clients 88.8 +43.0% 62.1
Check Signing clients 29.8 +22.1% 24.4
===========================================================================
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 six months ended November
30, 1997.
Operating income: Operating income for the three months and six months ended
November 30, 1997, 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 69.9% and 70.5%
for the three months and six months ended November 30, 1997, respectively, as
compared to 73.5% and 73.7%, respectively, 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 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 November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
HRS-PEO service revenue $ 8,645 +14.3% $ 7,562
PEO direct costs billed 118,048 +59.0% 74,233
-------- ----- --------
Total HRS-PEO revenue 126,693 +54.9% 81,795
PEO direct costs 118,048 +59.0% 74,233
HRS-PEO operating income $ 743 -58.4% $ 1,787
===========================================================================
For the six months ended November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
HRS-PEO service revenue $ 16,727 +15.1% $ 14,528
PEO direct costs billed 223,684 +50.1% 149,002
-------- ----- --------
Total HRS-PEO revenue 240,411 +47.0% 163,530
PEO direct costs 223,684 +50.1% 149,002
HRS-PEO operating income $ 1,728 -48.9% $ 3,381
===========================================================================
Client statistics at November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
401(k) clients 4.5 +114.3% 2.1
PEO worksite employees 16.5 + 63.4% 10.1
===========================================================================
Revenues: For the three months ended November 30, 1997, the increase in
HRS-PEO service revenue was a result of increases in the number of 401(k)
clients, section 125 cafeteria plan clients and PEO worksite employees. For
the six months ended November 30, 1997, the increase in HRS-PEO service
revenue was a result of increases in the number of 401(k) clients, section 125
cafeteria plan clients and PEO worksite employees, offset by a decrease of
$1.2 million in Handbook revenues. The Handbook revenue decrease was
primarily due to the reallocation of resources from Handbook products to
generate recurring revenues from 401(k) recordkeeping services and section 125
cafeteria plans. Fiscal 1998 revenues are expected to grow as the Company
continues to increase 401(k) clients, PEO worksite employees and other HRS-PEO
ancillary product sales.
Operating income: For the three months ended November 30, 1997, the decrease
in HRS-PEO operating income was due to lower average selling prices for the
Company's PEO products and continued investments for the Company's PEO
operations and centralization activities. For the six months ended November
30, 1997, the decrease in HRS-PEO operating income was due to the reallocation
of resources from Handbook products to generate recurring revenues from 401(k)
recordkeeping services and section 125 cafeteria plans, lower average selling
prices for the Company's PEO products and continued investments for the
Company's PEO operations and centralization activities.
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 November 30, 1997,
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 November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
Investment income $2,291 +31.3% $1,745
===========================================================================
For the six months ended November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
Investment income $4,479 +38.7% $3,230
===========================================================================
Investment income earned from the Company's Investments, which does not
include the income earned from ENS investments, has grown 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 November 30, 1997
and 1996 was 29.1% and 28.0%, respectively. The Company's effective tax rate
for the six months ended November 30, 1997 and 1996 was 29.1% and 27.8%,
respectively. The effective tax rate for the three months and six months
ended November 30, 1997, 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 29.0%.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated operating cash flows:
(In thousands)
For the six months ended November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
Operating cash flows $50,300 +13.1% $44,460
===========================================================================
The increase in operating cash flows resulted primarily from the continued
achievement of record net income for the six months ended November 30, 1997.
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 November 30, 1997, the
Company had $204.6 million in available cash and investments and $261.7
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 November 30, 1997, the portfolio of securities had an
average duration of 2.6 years. The Investments and ENS investments balances
continue to increase from positive operating cash flows and increases in
Taxpay and Direct Deposit client counts.
<PAGE>
Purchases of property and equipment:
(In thousands)
For the six months ended November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
Purchases of property and equipment $13,520 +53.4% $8,811
===========================================================================
Purchases of property and equipment for the six months ended November 30, 1997
increased over 1996 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 $21 to $26 million.
Cash dividends:
(In thousands except per share amounts)
For the six months ended November 30, 1997 Change 1996
- ---------------------------------------------------------------------------
Cash dividends $16,295 +46.8% $11,101
Cash dividends per share $ .15 +50.0% $ .10
===========================================================================
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,
payable November 24, 1997 to shareholders of record October 27, 1997.
On January 8, 1998, the Company's Board of Directors declared a regular
quarterly dividend of $.09 per share, payable February 16, 1998 to
shareholders of record February 2, 1998. The Board also 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.
<PAGE>
OTHER
Recently issued accounting standards: In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(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. The Company will adopt
this SFAS in the quarter ending August 31, 1998 (the first quarter of fiscal
year 1999), and will reclassify its financial statements for earlier periods
provided for comparative purposes. The Company's management does not believe
that the difference between reported net income and pro forma comprehensive
income to be significant.
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. Currently, management believes this SFAS will not have a
significant effect on the Company's segment disclosures and related
information.
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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on October 2, 1997. Results of
that meeting were reported in the Form 10-Q filed on October 14, 1997, for the
quarterly period ended August 31, 1997, and is incorporated here by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11, "Statement re computation of per share earnings" is filed
herewith at the end of this Form 10-Q.
Exhibit 27, "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 November 30, 1997.
<PAGE>
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: January 14, 1998 /s/ B. Thomas Golisano
-----------------------
B. Thomas Golisano
Chairman, President and
Chief Executive Officer
Date: January 14, 1998 /s/ John M. Morphy
-----------------------
John M. Morphy
Vice President, Chief
Financial Officer and
Secretary
EXHIBIT 11
PAYCHEX, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands except per share data)
For the three months For the six months
ended November 30, ended November 30,
1997 1996 1997 1996
A. Net income $ 24,718 $ 18,068 $ 47,792 $ 35,141
B. Actual weighted-average number
of common shares outstanding 108,639 107,742 108,601 107,625
C. Earnings per
common share (A/B)(1) $ .23 $ .17 $ .44 $ .33
PRIMARY DILUTED EARNINGS PER SHARE(2):
D. Net effect of dilutive stock
options based on Treasury Stock
Method using average market price
for the three months and six
months ended November 30, 1,028 1,274 1,047 1,254
E. Adjusted weighted-average
shares outstanding (B+D) 109,667 109,016 109,648 108,879
F. Primary diluted earnings
per share (A/E) $ .23 $ .17 $ .44 $ .32
G. Dilutive effect on earnings
per share (C-F) $ .00 $ .00 $ .00 $ .01
FULLY DILUTED EARNINGS PER SHARE(2):
H. Net effect of dilutive stock
options based on Treasury Stock
Method using the period end market
price, if greater than the average
market price for the three months
and six months ended November 30, 1,114 1,274 1,090 1,280
I. Adjusted weighted-average shares
outstanding (B+H) 109,753 109,016 109,691 108,905
J. Fully diluted earnings
per share (A/I) $ .23 $ .17 $ .44 $ .32
K. Dilutive effect on earnings
per share (C-J) $ .00 $ .00 $ .00 $ .01
(1) Earnings per common share information is based on weighted-average number
of shares of common stock outstanding during each period. No effect has been
given to stock options outstanding under the Company's Stock Incentive Plans
as no material dilutive effect would result from the exercise of these
options.
(2) This calculation is submitted in accordance with The Securities and
Exchange Act of 1934, although not required by Accounting Principles Board
Opinion No. 15, since no material dilutive effect would result from the
exercise of these options.
<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-END> NOV-30-1997 NOV-30-1996<F2>
<CASH> 52,062 19,559
<SECURITIES> 1,121,396<F1> 843,634<F2>
<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 .33
<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.
<F2>Prior to May 1997, the Company did not report the Electronic Network
Services (ENS) funds as assets and liabilities based on its understanding of
the nature of funds and industry practices. Due to recent changes in case
law, the Company restated previously reported consolidated financial
statements to reflect the ENS funds and related client deposits as current
assets and current liabilities on the consolidated balance sheets. This
restatement had no effect on previously reported net income or earnings per
share.
</FN>
</TABLE>
