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 FEBRUARY 28, 1999
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 163,965,059 Shares
- ---------------------------- --------------------------------
CLASS OUTSTANDING AT FEBRUARY 28, 1999
<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 nine months
ended February 28, ended February 28,
1999 1998 1999 1998
Service revenues:
Payroll $144,257 $122,239 $403,274 $335,632
HRS-PEO 14,166 9,634 37,386 26,361
------- ------- ------- -------
Total service revenues 158,423 131,873 440,660 361,993
PEO direct costs billed (A) 148,292 139,482 429,823 363,166
------- ------- ------- -------
Total revenue 306,715 271,355 870,483 725,159
PEO direct costs (A) 148,292 139,482 429,823 363,166
Operating costs 40,989 35,347 113,737 97,544
Selling, general and
administrative expenses 68,941 61,674 191,791 166,668
------- ------- ------- -------
Operating income 48,493 34,852 135,132 97,781
Investment income 3,073 2,349 9,040 6,828
------- ------- ------- -------
Income before income taxes 51,566 37,201 144,172 104,609
Income taxes 15,366 10,825 42,963 30,441
------ ------- ------- -------
Net income $ 36,200 $ 26,376 $101,209 $ 74,168
======= ======= ======= =======
Basic earnings per share $ .22 $ .16 $ .62 $ .46
======= ======= ======= =======
Diluted earnings per share $ .22 $ .16 $ .61 $ .45
======= ======= ======= =======
Weighted-average common
shares outstanding 163,795 163,079 163,541 162,959
======= ======= ======= =======
Weighted-average shares
assuming dilution 165,956 164,990 165,789 164,642
======= ======= ======= =======
Cash dividends per
common share $ .09 $ .06 $ .24 $ .16
======= ======= ======= =======
- -------------------------------------------------------------------------------
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)
February 28, May 31,
1999 1998
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 54,565 $ 35,571
Investments 264,894 214,967
Interest receivable 14,525 13,227
Accounts receivable 59,296 54,596
Deferred income taxes 949 1,525
Prepaid expenses and other current assets 5,986 4,391
--------- ---------
Current assets before ENS investments 400,215 324,277
Electronic Network Services investments 1,478,086 1,154,501
--------- ---------
Total current assets 1,878,301 1,478,778
Property and equipment - net 67,904 64,698
Deferred income taxes 1,301 517
Other assets 12,826 5,794
--------- ---------
Total assets $1,960,332 $1,549,787
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 8,171 $ 10,496
Accrued compensation and related items 31,878 33,649
Deferred revenue 5,876 4,443
Accrued income taxes 7,965 2,628
Other current liabilities 19,483 13,960
--------- ---------
Current liabilities before ENS client deposits 73,373 65,176
Electronic Network Services client deposits 1,471,233 1,150,484
--------- ---------
Total current liabilities 1,544,606 1,215,660
Other long-term liabilities 5,096 4,520
--------- ---------
Total liabilities 1,549,702 1,220,180
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
authorized 300,000 shares
Issued: 163,965/February 28, 1999 and
163,188/May 31, 1998 1,640 1,632
Additional paid-in capital 62,336 46,463
Retained earnings 340,036 278,107
Accumulated other comprehensive income 6,618 3,405
--------- ---------
Total stockholders' equity 410,630 329,607
--------- ---------
Total liabilities and stockholders' equity $1,960,332 $1,549,787
========= =========
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the nine months ended February 28, 1999 1998
OPERATING ACTIVITIES
Net income $101,209 $ 74,168
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization
on depreciable and intangible assets 16,206 13,646
Amortization of premiums and
discounts on available-for sale securities 7,557 6,013
Provision for deferred income taxes (2,058) (2,256)
Provision for bad debts 1,363 1,523
Net realized gains on sales
of available-for-sale securities (2,813) (414)
Changes in operating assets and liabilities:
Interest receivable (1,298) (1,052)
Accounts receivable (6,063) (7,289)
Prepaid expenses and other current assets (1,595) (2,490)
Accounts payable and other current liabilities 17,670 20,319
Net change in other assets and liabilities (1,496) 1,237
------- -------
Net cash provided by operating activities 128,682 103,405
INVESTING ACTIVITIES
Purchases of available-for-sale securities (571,285) (315,672)
Proceeds from sales of
available-for-sale securities 352,013 134,060
Proceeds from maturities of
available-for-sale securities 31,135 4,914
Net change in Electronic Network
Services money market securities
and other cash equivalents (184,548) (367,796)
Net change in Electronic Network
Services client deposits 320,749 456,632
Purchases of property and equipment,
net of disposals (18,482) (21,764)
Purchases of other assets (3,418) (388)
------- -------
Net cash used in investing activities (73,836) (110,014)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 3,428 1,575
Dividends paid (39,280) (26,081)
Other - (26)
------- -------
Net cash used in financing activities (35,852) (24,532)
------- -------
Increase/(decrease) in Cash and cash equivalents 18,994 (31,141)
Cash and cash equivalents, beginning of period 35,571 50,213
------- -------
Cash and cash equivalents, end of period $ 54,565 $ 19,072
======= =======
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FEBRUARY 28, 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 nine months ended
February 28, 1999, 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. 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 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
months and nine months ended February 28, 1998, 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 months and nine months ended February 28, 1999, stock options were
exercised for 347,000 shares and 777,000 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.
February 28, May 31,
1999 1998
(In thousands) (UNAUDITED) (AUDITED)
---------------------- ---------------------
COST FAIR VALUE COST FAIR VALUE
Type of issue
Money market securities and
other cash equivalents $ 899,489 $ 899,489 $ 714,941 $ 714,941
Available-for-sale
securities:
General obligation
municipal bonds 280,609 283,831 212,222 213,940
Pre-Refunded municipal
bonds 298,725 302,966 236,151 238,462
Revenue municipal bonds 251,977 254,907 199,545 200,850
Other securities 21 69 21 65
--------- --------- --------- ---------
Total available-for-sale
securities 831,332 841,773 647,939 653,317
Other 1,424 1,718 1,210 1,210
--------- --------- --------- ---------
Total Investments and
ENS investments $1,732,245 $1,742,980 $1,364,090 $1,369,468
========= ========= ========= =========
Classification of investments
on Consolidated Balance
Sheets:
Investments $ 261,012 $ 264,894 $ 213,606 $ 214,967
ENS investments 1,471,233 1,478,086 1,150,484 1,154,501
--------- --------- --------- ---------
$1,732,245 $1,742,980 $1,364,090 $1,369,468
========= ========= ========= =========
D) Property and equipment - net:
February 28, May 31,
1999 1998
(In thousands) (UNAUDITED) (AUDITED)
Land and improvements $ 2,815 $ 2,815
Buildings and improvements 26,642 24,914
Data processing equipment and software 70,284 64,247
Furniture, fixtures and equipment 58,991 52,752
Leasehold improvements 8,847 7,323
------- -------
167,579 152,051
Less accumulated depreciation and amortization 99,675 87,353
------- -------
$ 67,904 $ 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 nine months
ended February 28, ended February 28,
(In thousands) 1999 1998 1999 1998
Total revenue:
Payroll $144,257 $122,239 $403,274 $335,632
HRS-PEO revenue:
Service revenue 14,166 9,634 37,386 26,361
PEO direct costs
billed (A) 148,292 139,482 429,823 363,166
------- ------- ------- -------
Total HRS-PEO revenue 162,458 149,116 467,209 389,527
------- ------- ------- -------
Total revenue 306,715 271,355 870,483 725,159
PEO direct costs (A) 148,292 139,482 429,823 363,166
------- ------- ------- -------
Total revenue less PEO
direct costs 158,423 131,873 440,660 361,993
======= ======= ======= =======
Operating income:
Payroll 60,993 48,094 171,556 133,558
HRS-PEO 3,236 496 8,422 2,694
------- ------- ------- -------
Total operating income 64,229 48,590 179,978 136,252
Corporate expenses 15,736 13,738 44,846 38,471
Investment income 3,073 2,349 9,040 6,828
------- ------- ------- -------
Income before income taxes $ 51,566 $ 37,201 $144,172 $104,609
======= ======= ======= =======
Investment revenue included
in Payroll revenue $ 14,775 $ 12,469 $ 38,535 $ 30,805
======= ======= ======= =======
(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 nine months
ended February 28, ended February 28,
(In thousands) 1999 1998 1999 1998
Net income $36,200 $26,376 $101,209 $74,168
Unrealized gains on
securities, net of
reclassification
adjustments 253 1,625 3,213 3,879
------ ------ ------- ------
Total comprehensive
income $36,453 $28,001 $104,422 $78,047
====== ====== ======= ======
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis reviews the Company's operating results
for the three months and nine months ended February 28, 1999 (fiscal 1999) and
1998 (fiscal 1998), and its financial condition at February 28, 1999. 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 February 28,
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 February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Service revenues $ 158,423 +20.1% $ 131,873
Operating income $ 48,493 +39.1% $ 34,852
Income before income taxes $ 51,566 +38.6% $ 37,201
Net income $ 36,200 +37.2% $ 26,376
Basic earnings per share $ .22 +37.5% $ .16
Diluted earnings per share $ .22 +37.5% $ .16
===============================================================================
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Service revenues $ 440,660 +21.7% $ 361,993
Operating income $ 135,132 +38.2% $ 97,781
Income before income taxes $ 144,172 +37.8% $ 104,609
Net income $ 101,209 +36.5% $ 74,168
Basic earnings per share $ .62 +34.8% $ .46
Diluted earnings per share $ .61 +35.6% $ .45
===============================================================================
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 nine months ended February 28, 1999.
<PAGE>
Payroll segment:
(In thousands)
For the three months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Service revenue $ 144,257 +18.0% $ 122,239
Investment revenue included in
Payroll service revenue $ 14,775 +18.5% $ 12,469
Operating income $ 60,993 +26.8% $ 48,094
===============================================================================
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Service revenue $ 403,274 +20.2% $ 335,632
Investment revenue included in
Payroll service revenue $ 38,535 +25.1% $ 30,805
Operating income $ 171,556 +28.5% $ 133,558
===============================================================================
Client statistics at February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Payroll clients 316.9 +10.6% 286.6
Taxpay clients 246.7 +16.3% 212.2
Direct Deposit clients 130.1 +34.1% 97.0
Check Signing clients 38.1 +19.8% 31.8
===============================================================================
Revenues: Service revenues include Payroll, Taxpay and Direct Deposit 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 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 February 28, 1999, approximately 78% 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 41% at February 28, 1999, and is expected to provide
growth opportunities for the remainder of fiscal 1999 and beyond.
Full-year fiscal 1999's percentage growth in Payroll service revenue is
expected to be slightly less than 20%, 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. Additional discussion on interest
rates and related risk is included in the Liquidity and Capital Resources
section under the caption "Investments and ENS investments".
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 February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Service revenue $ 14,166 + 47.0% $ 9,634
Operating income $ 3,236 +552.4% $ 496
===============================================================================
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Service revenue $ 37,386 + 41.8% $ 26,361
Operating income $ 8,422 +212.6% $ 2,694
===============================================================================
Client statistics at February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
401(k) clients 9.1 + 75.0% 5.2
401(k) client funds managed
externally (in millions) $ 610.7 +102.0% $ 302.3
Section 125 clients 19.3 + 30.4% 14.8
PEO worksite employees 16.9 - 7.1% 18.2
===============================================================================
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 clients.
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,
which impacted prior year results. 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.
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.
Quarter-over-quarter percentage increases in HRS-PEO service revenue and
operating income will vary significantly throughout the year, and any one
particular quarter's results may not be indicative of expected full-year
results. Full-year fiscal 1999's HRS-PEO service revenue and operating income
are anticipated to grow at a rate higher than the Payroll segment's.
<PAGE>
Corporate expenses:
(In thousands)
For the three months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Corporate expenses $15,736 +14.5% $13,738
===============================================================================
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Corporate expenses $44,846 +16.6% $38,471
===============================================================================
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
latter part of the third quarter of fiscal 1998.
Investment income:
(In thousands)
For the three months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Investment income $ 3,073 +30.8% $ 2,349
===============================================================================
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Investment income $ 9,040 +32.4% $ 6,828
===============================================================================
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 full-year
fiscal 1999, subject to changes in market rates of interest, is expected to
grow at a rate lower than net income growth.
Income taxes:
(In thousands)
For the three months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Income taxes $15,366 +41.9% $10,825
Effective income tax rate 29.8% + .7 29.1%
===============================================================================
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Income taxes $42,963 +41.1% $30,441
Effective income tax rate 29.8% + .7 29.1%
===============================================================================
The increases in the effective income tax rate are due to the 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.
<PAGE>
Liquidity and Capital Resources
Operating cash flows:
(In thousands)
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Operating cash flows $ 128,682 +24.4% $ 103,405
===============================================================================
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,
purchases of property and equipment and dividend payments. Furthermore, at
February 28, 1999, the Company had $319.5 million in available cash and
investments and $297.5 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 purchases of property and equipment and 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.
As of February 28, 1999, the Company had approximately $899.5 million invested
in money market securities and other cash equivalents with an average maturity
of less than 30 days, and approximately $841.8 million invested in
available-for-sale securities with an average duration of 2.6 years. As of
February 28, 1999, the market value of the available-for-sale securities
exceeded their cost basis by $10.4 million compared to $5.4 million at the end
of May 1998.
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. 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 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 earnings affect on the available-for-sale securities and short-term
funds.
During the quarter ended November 30, 1998, the federal funds rate was reduced
by 75 basis points to 4.75%. The earnings impact of these rate reductions is
not precisely quantifiable because many factors influence the return on the
Company's investments. 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 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.
<PAGE>
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 February
28, 1999, 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 or equivalent rating.
Purchases of property and equipment:
(In thousands)
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Purchases of property & equipment $ 18,490 -15.7% $ 21,936
===============================================================================
Purchases of property and equipment in fiscal 1999 are expected to approximate
$30 million.
Proceeds from stock options:
(In thousands)
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Proceeds from stock options $ 3,428 +117.7% $ 1,575
===============================================================================
The increase in proceeds from stock options reflects the exercise of 777,000
shares in fiscal 1999 versus 339,000 shares in fiscal 1998. On May 3, 1999,
approximately 500,000 incentive stock options will vest for approximately
2,500 employees, with a weighted-average exercise price of $25.35 per share.
The number of grants to be exercised as a result of this vesting is not
determinable; however, the shares represent .3% of the total shares
outstanding at February 28, 1999, and less than one day's average trading
volume in the Company's common stock.
Cash dividends and stock splits:
(In thousands, except per share amounts)
For the nine months ended February 28, 1999 Change 1998
- -------------------------------------------------------------------------------
Cash dividends $ 39,280 +50.6% $ 26,081
Cash dividends per common share $ .24 +50.0% $ .16
===============================================================================
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.
During the quarter ended February 28, 1999, the Company's Board of Directors
declared a dividend which was paid February 15, 1999, to shareholders of
record on February 1, 1999. 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 majority of internal mission-critical systems were year 2000 compliant by
the end of calendar year 1998. The remainder of internal mission-critical
systems are expected to be completed near 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.
The remainder of calendar year 1999 will be used to assess and address year
2000 issues for 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.
The Company currently anticipates expenditures for year 2000 efforts to
approximate $5 million, with approximately seventy percent spent through
February 28, 1999. 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 5: OTHER INFORMATION
The text portion on the Company's press release dated March 17, 1999,
regarding its financial results for the three months and nine months ended
February 28, 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
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 THIRD QUARTER RESULTS
ROCHESTER, NY, March 17, 1999 -- Paychex, Inc. (NASDAQ: PAYX) today announced
record net income of $36.2 million or $.22 diluted earnings per share for the
third quarter ended February 28, 1999, a 37% increase over net income of $26.4
million or $.16 diluted earnings per share for the same period last year.
Total service revenues were $158.4 million, an increase of 20% over $131.9
million for the same period last year.
For the nine months ended February 28, 1999, net income increased 36% to
$101.2 million or $.61 diluted earnings per share as compared to net income of
$74.2 million or $.45 diluted earnings per share for the same period last
year. Total service revenues were $440.7 million, an increase of 22% over
$362.0 million for the same period last year.
PAYROLL SEGMENT
For the quarter ended February 28, 1999, operating income from Payroll
services increased 27% to $61.0 million from $48.1 million for the same period
last year. Payroll service revenue was $144.3 million, an increase of 18%
over $122.2 million for the same period last year.
For the nine months ended February 28, 1999, operating income from Payroll
services increased 28% to $171.6 million from $133.6 million for the same
period last year. Payroll service revenue was $403.3 million, an increase of
20% over $335.6 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 316,900 payroll clients, with 246,700 utilizing
Taxpay, the Company's tax filing and payment feature, 130,100 taking advantage
of the Company's Direct Deposit product, and 38,100 using the Company's Check
Signing option.
HRS-PEO SEGMENT
For the quarter ended February 28, 1999, operating income for the HRS-PEO
segment increased to $3.2 million from $.5 million for the same period last
year. HRS-PEO service revenue was $14.2 million, an increase of 47% over $9.6
million for the same period last year.
For the nine months ended February 28, 1999, operating income for the HRS-PEO
segment increased to $8.4 million from $2.7 million for the same period last
year. HRS-PEO service revenue was $37.4 million, an increase of 42% over
$26.4 million for the same period last year.
<PAGE>
The increases in service revenue for the quarter and nine months are primarily
related to higher revenues from 401(k) plan recordkeeping clients. The
increases in operating income for the quarter and nine months are due to
service revenue gains, and continued benefits from the February 1998
consolidation of the PEO administrative functions in Rochester, NY, which
impacted prior year results.
As of February 28, 1999, the segment had 9,100 401(k) plan recordkeeping
clients and 16,900 PEO worksite employees. The number of worksite employees
represents a 7% decline over a year ago, and is primarily due to the loss of
two large PEO clients during November 1998. 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 February 28, 1999, expenses increased
15% from $13.7 million to $15.7 million. For the nine months ended February
28, 1999, expenses increased 17% from $38.5 million to $44.8 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 latter part of the third quarter
of fiscal 1998.
B. Thomas Golisano, Chairman, President, and Chief Executive Officer of
Paychex said, "Payroll client growth, increased utilization of ancillary
services, and leveraging of the operating expense base continue to drive the
excellent financial results experienced in the third quarter and for the first
nine months of fiscal 1999. We continue to be pleased with the future growth
prospects of core payroll services, direct deposit, major market payroll
services, 401(k) recordkeeping and our workers' compensation offerings."
<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:
- There were no reports filed on Form 8-K during the three month period
ended February 28, 1999.
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: March 17, 1999 /s/ B. Thomas Golisano
-----------------------
B. Thomas Golisano
Chairman, President and
Chief Executive Officer
Date: March 17, 1999 /s/ John M. Morphy
-----------------------
John M. Morphy
Vice President, Chief
Financial Officer and
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FEBRUARY 28, 1999 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>
<RESTATED>
<CIK> 0000723531
<NAME> PAYCHEX, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> MAY-31-1999 MAY-31-1998
<PERIOD-START> JUN-01-1998 JUN-01-1997
<PERIOD-END> FEB-28-1999 FEB-28-1998
<CASH> 54,565 19,072
<SECURITIES> 1,742,980 1,574,422
<RECEIVABLES> 73,821 62,807
<ALLOWANCES> 0 0
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<CURRENT-ASSETS> 1,878,301 1,663,375
<PP&E> 167,579 146,505
<DEPRECIATION> 99,675 83,410
<TOTAL-ASSETS> 1,960,332 1,733,146
<CURRENT-LIABILITIES> 1,544,606 1,416,902
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0 0
0 0
<COMMON> 1,640 1,087
<OTHER-SE> 408,990 310,092
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<TOTAL-REVENUES> 870,483 725,159
<CGS> 0 0
<TOTAL-COSTS> 543,560 460,710
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<INCOME-PRETAX> 144,172 104,609
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<INCOME-CONTINUING> 101,209 74,168
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<NET-INCOME> 101,209 74,168
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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.
