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 AUGUST 31, 1999
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
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 246,590,871 Shares
- ---------------------------- ---------------------------------
CLASS OUTSTANDING AT AUGUST 31, 1999
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 ended
August 31, August 31,
1999 1998
Service revenues:
Payroll $150,919 $127,982
HRS-PEO
(Net of PEO direct costs billed
and incurred of $160,987
and $142,498, respectively (A)) 15,473 11,307
-------- --------
Total service revenues 166,392 139,289
Operating costs 39,366 35,885
Selling, general and administrative expenses 68,342 61,761
------- -------
Operating income 58,684 41,643
Investment income 3,688 2,961
------- -------
Income before income taxes 62,372 44,604
Income taxes 19,335 13,203
------- -------
Net income $ 43,037 $ 31,401
======= =======
Basic earnings per share $ .17 $ .13
======= =======
Diluted earnings per share $ .17 $ .13
======= =======
Weighted-average common shares outstanding 246,418 244,916
======= =======
Weighted-average shares assuming dilution 248,996 248,288
======= =======
Cash dividends per common share $ .06 $ .04
======= =======
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
(A) PEO direct costs billed to clients are equal to PEO direct costs incurred
for the wages and payroll taxes of worksite employees and their related
benefit premiums and claims.
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
August 31, May 31,
1999 1999
ASSETS (UNAUDITED) (AUDITED)
Cash and cash equivalents $ 69,238 $ 52,692
Investments 309,834 290,555
Interest receivable 14,014 18,045
Accounts receivable 74,720 62,941
Deferred income taxes 2,105 1,364
Prepaid expenses and other current assets 5,505 6,000
--------- ---------
Current assets before ENS investments 475,416 431,597
ENS investments 1,413,979 1,361,523
--------- ---------
Total current assets 1,889,395 1,793,120
Property and equipment - net 65,500 65,931
Deferred income taxes 2,255 1,417
Other assets 10,794 12,633
--------- ---------
Total assets $1,967,944 $1,873,101
========= =========
LIABILITIES
Accounts payable $ 11,756 $ 10,328
Accrued compensation and related items 32,566 36,574
Deferred revenue 3,286 4,643
Accrued income taxes 17,425 4,281
Other current liabilities 18,945 17,905
--------- ---------
Current liabilities before ENS client deposits 83,978 73,731
ENS client deposits 1,416,452 1,358,605
--------- ---------
Total current liabilities 1,500,430 1,432,336
Long-term liabilities 5,057 4,965
--------- ---------
Total liabilities 1,505,487 1,437,301
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
300,000 authorized shares
Issued: 246,591/August 31, 1999 and
246,326/May 31, 1999 2,466 2,463
Additional paid-in capital 71,876 68,238
Retained earnings 390,522 362,269
Accumulated other comprehensive income/(loss) (2,407) 2,830
--------- ---------
Total stockholders' equity 462,457 435,800
--------- ---------
Total liabilities and stockholders' equity $1,967,944 $1,873,101
========= =========
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the three months ended
August 31, August 31,
1999 1998
OPERATING ACTIVITIES
Net income $ 43,037 $ 31,401
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization
on depreciable and intangible assets 5,669 5,165
Amortization of premiums and
discounts on available-for-sale securities 3,091 2,301
Provision for deferred income taxes 1,391 1,398
Provision for bad debts 344 380
Net realized (gains)/losses on sales
of available-for-sale securities 343 (504)
Changes in operating assets and liabilities:
Interest receivable 4,031 1,468
Accounts receivable (12,123) (12,116)
Prepaid expenses and other current assets 495 431
Accounts payable and other current liabilities 12,471 1,317
Net change in other assets and liabilities 1,849 372
------- -------
Net cash provided by operating activities 60,598 31,613
INVESTING ACTIVITIES
Purchases of available-for-sale securities (171,248) (130,021)
Proceeds from sales of
available-for-sale securities 164,558 117,756
Proceeds from maturities of
available-for-sale securities 7,540 2,190
Net change in ENS money market securities
and other cash equivalents (84,002) 51,730
Net change in ENS client deposits 57,847 (46,700)
Purchases of property and equipment,
net of disposal proceeds (4,955) (3,157)
Purchases of other assets (425) (264)
------- -------
Net cash used in investing activities (30,685) (8,466)
FINANCING ACTIVITIES
Dividends paid (14,784) (9,799)
Proceeds from exercise of stock options 1,417 600
------- -------
Net cash used in financing activities (13,367) (9,199)
------- -------
Increase in Cash and cash equivalents 16,546 13,948
Cash and cash equivalents, beginning of period 52,692 35,571
------- -------
Cash and cash equivalents, end of period $ 69,238 $ 49,519
======= =======
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 31, 1999
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 months ended
August 31, 1999, are not necessarily indicative of the results that may be
expected for the full year ended May 31, 2000.
There is no significant seasonality to the Company's business. However, during
the third fiscal quarter, the number of new payroll segment clients and new PEO
worksite employees tends to be higher than the rest of the fiscal year.
Consequently, greater sales commission expenses are reported in the third
quarter.
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and related Notes
presented in the Company's Annual Report on Form 10-K for the year ended May
31, 1999. Certain amounts from the prior year are reclassified to conform to
current year presentations.
B) Basic and diluted earnings per share and stock split information: 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 months
ended August 31, 1998, have been adjusted to reflect a three-for-two stock
split effected in the form of 50% stock dividends on outstanding shares payable
to shareholders of record as of May 13, 1999, and distributed on May 21, 1999.
For the three months ended August 31, 1999, stock options were exercised for
265,000 shares of the Company's common stock.
For the three months ended
(In thousands, except per share amounts) August 31, August 31,
1999 1998
Basic earnings per share:
Net income $ 43,037 $ 31,401
------- -------
Weighted-average common shares outstanding 246,418 244,916
------- -------
Basic earnings per share $ .17 $ .13
======= =======
Diluted earnings per share:
Net income $ 43,037 $ 31,401
------- -------
Weighted-average common shares outstanding 246,418 244,916
Net effect of dilutive stock options at
average market price 2,578 3,372
------- -------
Weighted-average shares assuming dilution 248,996 248,288
------- -------
Diluted earnings per share $ .17 $ .13
======= =======
For the three months ended August 31, 1999 and 1998, weighted-average options
to purchase shares of common stock in the amount of 1,144,000 and 269,000,
respectively, were not included in the computation of diluted earnings per
share. These options had an exercise price that was greater than the average
market price of the common shares for the period and, therefore, the effect
would have been anti-dilutive.
C) Investments and ENS investments:
August 31, May 31,
(In thousands) 1999 1999
(UNAUDITED) (AUDITED)
---------------------- ---------------------
COST FAIR VALUE COST FAIR VALUE
Type of issue:
Money market securities and
other cash equivalents $ 854,650 $ 854,650 $ 770,648 $ 770,648
Available-for-sale
securities:
General obligation
municipal bonds 335,988 333,932 313,485 314,636
Pre-Refunded municipal
bonds 273,026 273,001 295,359 297,621
Revenue municipal bonds 261,810 260,121 266,264 267,290
Other securities 21 75 21 73
--------- --------- --------- ---------
Total available-for-sale
securities 870,845 867,129 875,129 879,620
Other 1,627 2,034 1,424 1,810
--------- --------- --------- ---------
Total Investments and
ENS investments $1,727,122 $1,723,813 $1,647,201 $1,652,078
========= ========= ========= =========
Classification of investments
on Consolidated Balance Sheets:
Investments $ 310,670 $ 309,834 $ 288,596 $ 290,555
ENS investments 1,416,452 1,413,979 1,358,605 1,361,523
--------- --------- --------- ---------
Total Investments and
ENS investments $1,727,122 $1,723,813 $1,647,201 $1,652,078
========= ========= ========= =========
The Company is exposed to credit risk from the possible inability of the
borrowers to meet the terms of their bonds. In addition, the Company is
exposed to interest rate risk as rate volatility will cause fluctuations in the
market value of held investments and the earnings potential of future
investments. The Company does not utilize derivative financial instruments to
manage interest rate risk. The Company attempts to limit these risks by
investing primarily in AAA and AA rated securities, A-1 rated short-term
securities, limiting amounts that can be invested in any single instrument, and
by investing in short- to intermediate-term instruments whose market value is
less sensitive to interest rate changes. At August 31, 1999, approximately 95%
of the available-for-sale bond securities held an AA rating or better, and all
short-term securities classified as cash equivalents held an A-1 or equivalent
rating.
D) Property and equipment - net:
August 31, May 31,
(In thousands) 1999 1999
(UNAUDITED) (AUDITED)
Land and improvements $ 2,896 $ 2,896
Buildings and improvements 24,431 26,932
Data processing equipment and software 73,507 70,000
Furniture, fixtures and equipment 58,817 59,818
Leasehold improvements 8,521 8,838
------- -------
168,172 168,484
Less accumulated depreciation and amortization 102,672 102,553
------- -------
Property and equipment - net $ 65,500 $ 65,931
======= =======
E) 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 ended
(In thousands) August 31, August 31,
1999 1998
Net income $ 43,037 $ 31,401
Unrealized gains/(losses) on securities, net of
reclassification adjustments (5,237) 2,250
------- -------
Total comprehensive income $ 37,800 $ 33,651
======= =======
F) Segment Financial Information: 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, 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-
to medium-sized businesses with cost-effective outsourcing solutions for their
employee benefits. HRS-PEO products include 401(k) plan recordkeeping
services, section 125 plan administration, Professional Employer Organization
(PEO) services, workers' compensation, group benefits, and state unemployment
insurance services, employee handbooks and management services. Corporate
expenses are primarily related to the Information Technology, Organizational
Development, Finance, Marketing and Senior Management functions of the Company.
For the three months ended
(In thousands) August 31, August 31,
1999 1998
Service revenues:
Payroll $150,919 $127,982
HRS-PEO (A) 15,473 11,307
------- -------
Total service revenues $166,392 $139,289
======= =======
Investment revenue included in Payroll revenue $ 12,207 $ 11,776
======= =======
Operating income:
Payroll $ 71,772 $ 53,888
HRS-PEO 4,916 2,611
------- -------
Segment operating income 76,688 56,499
Corporate expenses 18,004 14,856
------- -------
Total operating income 58,684 41,643
Investment income 3,688 2,961
------- -------
Income before income taxes $ 62,372 $ 44,604
======= =======
(A) Net of PEO directs costs billed and incurred of $160,987 and $142,498 for
the three months ended August 31, 1999 and 1998, respectively. PEO direct
costs billed to clients are equal to PEO direct costs incurred for the
wages and payroll taxes of worksite employees and their related benefit
premiums and claims.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis reviews the operating results for the three
months ended August 31, 1999 (fiscal 2000) and 1998 (fiscal 1999), and its
financial condition at August 31, 1999 for Paychex, Inc. and its subsidiaries
(the "Company"). 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
August 31, 1999 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 August 31, 1999 Change 1998
- ------------------------------------------------------------------------------
Service revenues $166,392 19.5% $139,289
Operating income $ 58,684 40.9% $ 41,643
Operating margin 35.3% 5.4 29.9%
Income before income taxes $ 62,372 39.8% $ 44,604
Net income $ 43,037 37.1% $ 31,401
Basic earnings per share $ .17 30.8% $ .13
Diluted earnings per share $ .17 30.8% $ .13
==============================================================================
The Company's ability to continually grow its client base, increase client
utilization of ancillary services, implement price increases, and decrease
operating expenses as a percent of service revenues has resulted in record
first quarter service revenues and net income for the three months ended
August 31, 1999.
Payroll segment
(In thousands)
For the three months ended August 31, 1999 Change 1998
- ------------------------------------------------------------------------------
Payroll service revenue $150,919 17.9% $127,982
Investment revenue included in
Payroll service revenue $ 12,207 3.7% $ 11,776
Payroll operating income $ 71,772 33.2% $ 53,888
Payroll operating margin 47.6% 5.5 42.1%
- ------------------------------------------------------------------------------
Payroll clients 331.2 10.1% 300.9
Taxpay clients 262.1 14.5% 228.9
Direct Deposit clients 141.0 25.4% 112.4
==============================================================================
Revenues: Payroll service revenue includes service fees and investment
revenue. Service fee revenue is earned primarily from Payroll, Taxpay, Direct
Deposit and other ancillary services. Investment revenue is earned during the
period between collecting client funds and remitting the funds to the
applicable tax authorities for Taxpay clients and employees of Direct Deposit
clients. Investment revenue also includes net realized gains and losses from
the sale of available-for-sale securities. Additional discussion on interest
rates and related risk is included in the Liquidity and Capital Resources
section of this review under the caption "Investments and ENS investments".
The increase in service revenue is primarily related to the growth of the
Payroll client base, including improvement in client retention, implementing
price increases and increased utilization of ancillary services such as Taxpay,
and Direct Deposit by both new and existing clients.
At August 31, 1999, 79% of Payroll clients utilized the Taxpay service, compared
with 76% at August 31, 1998. 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 43% at August 31, 1999, versus 37% at
August 31, 1998. This service is expected to provide growth opportunities for
fiscal 2000 and beyond.
Fiscal 2000's percentage growth in Payroll revenue is expected to be on the
high end of the long-term historical range of 17% to 19%.
Operating income: Operating income increased as a result of continued growth
of the client base, improving client retention, increased utilization of
ancillary services, price increases, and leveraging of the segment's operating
expense base, as evidenced by the increases in the segment's operating margin.
HRS-PEO segment
(In thousands)
For the three months ended August 31, 1999 Change 1998
- ------------------------------------------------------------------------------
HRS-PEO service revenue $15,473 36.8% $11,307
HRS-PEO operating income $ 4,916 88.3% $ 2,611
HRS-PEO operating margin 31.8% 8.7 23.1%
- ------------------------------------------------------------------------------
401(k) recordkeeping clients 11.0 64.2% 6.7
401(k) client funds managed
externally (in millions) $ 910.8 126.6% $ 401.9
Section 125 clients 21.4 23.7% 17.3
PEO worksite employees 18.3 -3.7% 19.0
==============================================================================
Revenues: The increase in service revenue is primarily related to increasing
401(k) recordkeeping and section 125 clients. The increase in 401(k) clients
reflects the expansion of the 401(k) sales force during the first half of fiscal
1999. Full-year fiscal 2000's growth in HRS-PEO service revenue is expected to
be comparable to 1999's rate and continue to grow at a rate higher than Payroll
segment revenue.
Operating income: The increase in operating income is primarily related to the
service revenue gains, and the leveraging of its operating expenses.
Full-year fiscal 2000's HRS-PEO service revenue and operating income are
expected to continue to grow at a rate that is higher than the Payroll
segment's. Fiscal 2000's quarter-over-quarter percentage comparisons in
HRS-PEO service revenue and operating income may vary significantly throughout
the year, and any one particular quarter's results may not be indicative of
expected full-year results.
Corporate expenses
(In thousands)
For the three months ended August 31, 1999 Change 1998
- ------------------------------------------------------------------------------
Corporate expenses $18,004 21.2% $14,856
==============================================================================
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. The increase in expenses is primarily due to additional
employees and other expenditures required to support the continued growth of the
Company's business segments. Full-year fiscal 2000's expenses are expected to
increase at a rate slightly lower than 1999's growth rate of 16%.
Investment income
(In thousands)
For the three months ended August 31, 1999 Change 1998
- ------------------------------------------------------------------------------
Investment income $3,688 24.6% $2,961
==============================================================================
Investment income earned from the Company's Investments does not include the
investment revenue earned from ENS investments. The increase in Investment
income is due to the increase in investment balances generated from the
increase in overall cash flows, but slightly impacted by lower comparable
interest rates. Additional discussion on interest rates and related risk is
included in the Liquidity and Capital Resources section of this review under
the caption "Investments and ENS investments". Investment income for full-year
fiscal 2000, subject to changes in market rates of interest, is expected to
grow at a rate lower than the Company's net income growth.
Income taxes
(In thousands)
For the three months ended August 31, 1999 Change 1998
- ------------------------------------------------------------------------------
Income taxes $19,335 46.4% $13,203
Effective income tax rate 31.0% 1.4 29.6%
==============================================================================
The increase in the effective income tax rate is due to the growth in taxable
income exceeding the growth in tax-exempt income. Tax-exempt income is derived
primarily from the Taxpay and Direct Deposit services that provide investment
revenue. Full-year fiscal 2000's effective income tax rate is expected to
approximate 31%.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
(In thousands)
For the three months ended August 31, 1999 Change 1998
- ------------------------------------------------------------------------------
Operating cash flows $60,598 91.7% $31,613
==============================================================================
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, forecasted growth, purchases
of property and equipment and dividend payments. Furthermore, at August 31,
1999, the Company had $379.1 million in available cash and investments and $323
million of available, uncommitted, unsecured lines of credit.
Investing activities
(In thousands)
For the three months ended August 31, 1999 Change 1998
- ------------------------------------------------------------------------------
Net Investments and ENS activities $(25,305) 401.6% $(5,045)
Purchases of P&E, net of disposal proceeds (4,955) 57.0% (3,157)
Purchases of other assets (425) 61.0% (264)
-------------------------------
Net cash used in investing activities $(30,685) 262.4% $(8,466)
==============================================================================
Investments and ENS investments: Investments are primarily available-for-sale
debt securities, and ENS investments consist of short-term funds and
available-for-sale debt securities, which are detailed in Note C of the Notes
to the Consolidated Financial Statements.
Investments have increased due to the investment of increasing cash balances
provided by operating activities less purchases of property and equipment and
dividend payments. The reported amount of ENS investments will vary
significantly based upon the timing of collecting client funds, and remitting
the funds to the applicable tax authorities for Taxpay clients and employees
of Direct Deposit clients.
Interest rate risk - The Company's available-for-sale debt securities are
exposed to market risk from changes in interest rates, as rate volatility will
cause fluctuations in the market value of held investments. Increases in
interest rates normally decrease the market value of the available-for-sale
securities, while decreases in interest rates increase the market value of the
available-for-sale securities.
In addition, the Company's available-for-sale securities and short-term funds
are exposed to earnings risk from changes in interest rates, as rate
volatility will cause fluctuations in the earnings potential of future
investments. Increases in interest rates quickly increase earnings from
short-term funds, and over time increase earnings from the available-for-sale
securities portfolio. 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 earnings effect on the available-for-sale securities and
short-term funds.
The Company does not utilize derivative financial instruments to manage
interest rate risk. The Company directs investments towards high
credit-quality, tax-exempt securities to mitigate the risk that earnings from
the portfolio could be adversely impacted by changes in interest rates in the
near term. The Company invests in short- to intermediate-term, fixed-rate
municipal and government securities, which typically have lower interest rate
volatility, and manages the securities portfolio to a benchmark duration of
2.5 to 3.0 years.
During the fiscal 1999 quarter ended November 30, 1998, the federal funds rate
was reduced by 75 basis points to 4.75%. During the fiscal 2000 quarter ended
August 31, 1999, the federal funds rate was increased by 50 basis points to
5.25%. The earnings impact of these rate changes is not precisely quantifiable
because many factors influence the return on the Company's portfolio. These
factors include, among others, daily interest rate changes, the proportional
mix of taxable and tax-exempt investments, and changes in tax- exempt and
taxable investment rates, which are not synchronized, nor do they change
simultaneously. Subject to the aforementioned factors, a 25 basis point change
normally affects the Company's tax-exempt interest rates by approximately 17
basis points.
At August 31, 1999, the Company had $854.7 million of ENS funds and
$65.0 million of Corporate cash equivalents invested in money market securities
and other cash equivalents with an average maturity of less than 30 days, and
$867.1 million invested in available-for-sale securities with an average
duration of 2.5 years. At August 31, 1999, the available-for-sale securities
portfolio had a market value less than its cost basis by $3.7 million, compared
with the portfolio at May 31, 1999, which had a market value greater than its
cost basis by $4.5 million. The decrease in the portfolio's market value is
due to the increase in relative interest rates experienced during the three
months ended August 31, 1999.
As of August 31, 1999 and May 31, 1999, the Company had $867.1 million and
$879.6 million invested in available-for-sale securities at fair value, with a
weighted-average yield to maturity of 4.2% and 4.1%, respectively. Assuming a
hypothetical increase in interest rates of 75 basis points given the August 31,
1999 and May 31, 1999 portfolio of securities, the resulting potential decrease
in fair value would be approximately $16.1 million and $16.2 million,
respectively. Conversely, a corresponding decrease in interest rates would
result in a comparable increase in fair value. This hypothetical increase or
decrease in the fair value of the portfolio would be recorded as an adjustment
to the portfolio's recorded value, with an offsetting amount recorded in
stockholders' equity, and with no related or immediate impact to the results of
operations. The Company's interest rate risk exposure has not changed
materially since May 31, 1999.
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 by limiting
amounts that can be invested in any single instrument. At August 31, 1999,
approximately 95% 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 or equivalent rating.
Purchases of property and equipment, net of disposal proceeds: To support the
Company's continued client and ancillary product growth, purchases of property
and equipment were made for data processing and personal computer equipment,
and for the expansion and upgrade of various operating facilities. During the
three months ended August 31, 1999, the Company sold an office facility in
California for approximately $1.2 million. Purchases of property and equipment
in fiscal 2000 are expected to approximate $30 million.
Through the end of 1999, the Company expensed as incurred certain costs to
develop and enhance its internal computer programs and software. Expenditures
for vendor-provided software were capitalized and amortized by the
straight-line method over their estimated useful lives, ranging from 3 to 5
years. In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP requires the
capitalization of internal use computer software costs if certain criteria are
met, including all external direct costs for materials and services and certain
payroll and related fringe benefit costs. The Company adopted the SOP effective
June 1, 1999. The effect of adopting the SOP is expected to increase net
income by approximately $2.0 million to $3.0 million for the year ended May 31,
2000.
Financing activities
(In thousands, except per share amounts)
For the three months ended August 31, 1999 Change 1998
- ------------------------------------------------------------------------------
Dividends paid $(14,784) 50.9% $(9,799)
Proceeds from exercise of stock options 1,417 136.2% 600
-------------------------------
Net cash used in financing activities $(13,367) 45.3% $(9,199)
- ------------------------------------------------------------------------------
Cash dividends per common share $ .06 50.0% $ .04
==============================================================================
Dividends paid: The Company has increased its quarterly cash dividend rate per
share by 50% in each of the last seven completed fiscal years. The Company has
distributed three-for-two stock splits effected in the form of 50% stock
dividends on outstanding shares each May in the past five fiscal years.
Proceeds from exercise of stock options: The increase in proceeds from the
exercise of stock options is primarily due to higher overall exercise prices.
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.
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 been making year 2000 changes based on
their mandates.
The Company's internal mission-critical systems were year 2000 compliant by
the end of the first quarter of calendar year 1999. The remainder of calendar
year 1999 has been and will be used to assess and address year 2000 issues for
internal desktop computers and software, complete interface testing with
external agencies and partners, enhance existing normal business contingency
plans to address any identified year 2000 issues, and 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, and expects minimal business disruption at the turn
of the century.
The Company currently anticipates expenditures for year 2000 efforts to
approximate $5 million, with approximately ninety percent spent through August
31, 1999. The remaining ten percent will be spent on desktop computers and
software, continued interface testing with external agencies and partners,
enhancing existing contingency plans, and to react to yet unknown changes
dictated by third parties. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the caption
"Investments and ENS investments" at subheading "Interest rate risk:" under
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION
The text portion on the Company's press release dated September 16, 1999,
regarding its financial results for the three months ended August 31, 1999, 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
Or
Jan Shuler 716-383-3406
Access Paychex, Inc. News Releases and related SEC filings at
http://www.paychex.com/paychex/finance/finance.html
PAYCHEX, INC. REPORTS RECORD FIRST QUARTER RESULTS
ROCHESTER, NY, September 16, 1999 -- Paychex, Inc. (NASDAQ: PAYX) today
announced record net income of $43.0 million or $.17 diluted earnings per share
for the quarter ended August 31, 1999, a 37% increase over net income of $31.4
million or $.13 diluted earnings per share for the same period last year.
Total service revenues were $166.4 million, an increase of 19% over $139.3
million for the first quarter last year.
PAYROLL SEGMENT
For the quarter ended August 31, 1999, operating income for the Payroll segment
increased 33% to $71.8 million from $53.9 million for the first quarter last
year. Payroll service revenue was $150.9 million, an increase of 18% over
$128.0 million for the first quarter last year.
The increases in service revenue and operating income were primarily the result
of a 10% year-over-year increase in the Payroll client base and continued
growth of the Taxpay and Direct Deposit ancillary services. Paychex currently
services 331,200 Payroll clients, with 262,100 utilizing Taxpay, the Company's
tax filing and payment feature, and 141,000 taking advantage of the Company's
Direct Deposit product.
HRS-PEO SEGMENT
For the quarter ended August 31, 1999, operating income for the HRS-PEO segment
increased 88% from $2.6 million to $4.9 million. HRS-PEO service revenue was
$15.5 million, an increase of 37% over $11.3 million for the first quarter last
year.
The increases in service revenue and operating income are primarily related to
increasing 401(k) recordkeeping and section 125 clients. The increase in
401(k) clients reflects the expansion of the sales force during the first half
of fiscal 1999. As of August 31, 1999, the segment serviced 11,000 401(k)
recordkeeping clients and 21,400 section 125 administration plans, representing
64% and 24% year-over-year increases in these client bases, respectively.
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 August 31, 1999, Corporate expenses
increased 21% from $14.9 million to $18.0 million. The increase is primarily
due to additional employees and other expenditures to support the continued
growth of the Company. Full-year fiscal 2000's expenses are expected to
increase at a rate slightly lower than 1999's growth rate of 16%.
B. Thomas Golisano, Chairman, President, and Chief Executive Officer of Paychex
said, "Fiscal 2000 is off to a good start and is in line with our growth
formula, which has generated consistent financial results for many years. We
continue to see numerous opportunities to increase client utilization of
ancillary services including our new Flexible Pay Package, which provides a
cost-effective bundle of payment options such as Direct Deposit, Check Signing
and Readychex. The potential for our 401(k) recordkeeping and workers'
compensation services continues to be outstanding. All Paychex internal,
mission-critical systems are year 2000 compliant. We look forward to the new
millennium and expect to continue our record of increasing client utilization
and leveraging our infrastructure."
- --------------------------------------------------------------------------------
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 22 - Published report regarding matters submitted to vote of
security holders. The Company's definitive Proxy Statement filed with the
Securities and Exchange Commission on August 13, 1999, for the Annual
Meeting of Stockholders to be held on October 7, 1999, is incorporated
herein by reference.
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 June 29, 1999, that included the
Company's press release dated June 29, 1999, with the financial results for
the year ended May 31, 1999, and preliminary Management's Discussion and
Analysis.
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: September 16, 1999 /s/ B. Thomas Golisano
-----------------------
B. Thomas Golisano
Chairman, President and
Chief Executive Officer
Date: September 16, 1999 /s/ John M. Morphy
-----------------------
John M. Morphy
Vice President, Chief
Financial Officer and
Secretary
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUGUST
31, 1999 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.
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<NAME> PAYCHEX, INC.
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 69,238
<SECURITIES> 1,723,813
<RECEIVABLES> 88,734
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<CURRENT-ASSETS> 1,889,395
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<COMMON> 2,466
<OTHER-SE> 459,991
<TOTAL-LIABILITY-AND-EQUITY> 1,967,944
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<TOTAL-REVENUES> 327,379
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<TOTAL-COSTS> 200,353
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<INCOME-PRETAX> 62,372
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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 Paychex, Inc., (the "Company")
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", "is expected to be" 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, timing of the introduction,
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.
