EXHIBIT 13: PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL
YEAR ENDED MAY 31, 1998 (PAGES 16 THROUGH 39).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis reviews the Company's operating results
for each of the three fiscal years in the period ended May 31, 1998, and its
financial condition at May 31, 1998. The focus of this review is on the
underlying business reasons for significant changes and trends affecting
revenues, net income and financial condition. This review should be read in
conjunction with the accompanying Consolidated Financial Statements, the
related Notes to Consolidated Financial Statements, and the Eleven-Year
Summary of Selected Financial Data. Forward-looking statements in this
Management's Discussion and Analysis are qualified by the cautionary statement
at the beginning of this Annual Report.
Results of Operations
For the years
ended May 31, 1998 Change 1997 Change 1996
(In thousands,
except per share amounts)
- -------------------------------------------------------------------------------
Service revenues $ 493,704 +23.5% $ 399,733 +19.9% $ 333,308
Operating income $ 134,700 +39.4% $ 96,625 +38.2% $ 69,922
Income before
income taxes $ 144,173 +39.1% $ 103,656 +37.5% $ 75,389
Net income $ 102,219 +36.0% $ 75,150 +36.5% $ 55,035
Basic earnings
per share $ .63 +37.0% $ .46 +35.3% $ .34
Diluted earnings
per share $ .62 +34.8% $ .46 +35.3% $ .34
- -------------------------------------------------------------------------------
The financial results for Paychex, Inc., in 1998 reflected the eighth
consecutive year of record revenues and net income, and the seventh
consecutive year of net income growth of 36% or more. 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 eight years of average compounded annual growth in service
revenues of 19% and net income of 36%.
Business and reportable segments: In May 1998, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The Company has two business
segments: Payroll and Human Resource Services-Professional Employer
Organization (HRS-PEO). 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 with the year ended May 31, 1998.
Payroll segment:
For the years
ended May 31, 1998 Change 1997 Change 1996
(In thousands)
- -------------------------------------------------------------------------------
Payroll service revenue $455,227 +23.4% $368,855 +19.2% $309,517
Payroll operating income $180,265 +33.2% $135,364 +25.4% $107,957
Investment revenue included
in Payroll service revenue $ 43,429 +27.3% $ 34,105 +26.2% $ 27,025
Client statistics at May 31,
Payroll clients 293.6 +11.8% 262.7 +12.1% 234.3
Taxpay clients 220.7 +22.0% 180.9 +38.0% 131.1
Direct Deposit clients 104.4 +36.5% 76.5 +49.1% 51.3
Check Signing clients 33.5 +23.2% 27.2 +21.4% 22.4
- -------------------------------------------------------------------------------
Revenues: Payroll, Taxpay and Direct Deposit revenues include service fees
and investment revenue. Investment revenue is earned during the period
between collecting client funds and remitting the funds to the applicable tax
authorities for Taxpay clients and client employees for Direct Deposit
clients. The increase in service revenue for 1998 and 1997 is primarily
related to the continued growth of the Payroll client base and increased
utilization of ancillary services such as Taxpay, Direct Deposit and Check
Signing by both new and existing clients. During 1998 and 1997, the growth of
the Taxpay client base was accelerated by the Internal Revenue Service's
Electronic Federal Tax Payment System (EFTPS) mandate, which required many
small businesses to remit payroll tax payments electronically as of July 1,
1997. Remitting payroll tax payments electronically resulted in the payments
becoming "good funds" one day earlier, which reduced tax-exempt investment
revenue in 1998. The revenue loss was offset by a modest price increase for
Taxpay services. As of May 31, 1998, approximately 75% 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 at the end of fiscal 1998 was approximately 36%,
and will provide additional growth opportunities in fiscal 1999 and beyond.
During the second quarter of fiscal 1998, the Payroll segment also began to
earn new revenues from the reporting of clients' newly hired employees to meet
federal and state requirements. Fiscal 1999's percentage growth in revenue is
expected to approximate 1997's rate, as the growth benefits from EFTPS
diminish.
Operating income: Operating income for 1998 and 1997 increased as a result of
continued growth of the client base, record levels of client retention,
increased utilization of ancillary services and leveraging of the segment's
operating expense base.
HRS-PEO segment:
For the years
ended May 31, 1998 Change 1997 Change 1996
(In thousands)
- -------------------------------------------------------------------------------
HRS-PEO service revenue $ 38,477 + 24.6% $ 30,878 + 29.8% $ 23,791
PEO direct costs billed 499,741 + 49.2% 334,966 + 43.7% 233,135
-------- ------- -------- ------- --------
Total HRS-PEO revenue 538,218 + 47.1% 365,844 + 42.4% 256,926
PEO direct costs 499,741 + 49.2% 334,966 + 43.7% 233,135
HRS-PEO operating income $ 6,642 + 18.7% $ 5,596 +109.4% $ 2,672
Client statistics at May 31,
401(k) clients 6.0 +100.0% 3.0 +130.8% 1.3
401(k) client funds
managed externally
(in millions) $ 383.3 +177.2% $ 138.3 +295.1% $ 35.0
Section 125 clients 16.4 + 24.2% 13.2 + 15.8% 11.4
PEO worksite employees 19.2 + 39.1% 13.8 + 50.0% 9.2
- -------------------------------------------------------------------------------
Revenues: The growth in service revenue for 1998 and 1997 was due to gains in
the number of 401(k) recordkeeping clients, section 125 cafeteria plan clients
and Professional Employer Organization (PEO) worksite employees. Fiscal 1999
revenues are expected to grow at a rate higher than Payroll segment revenues.
Operating income: Improvements in HRS-PEO operating income for 1998 and 1997
resulted primarily from revenue growth. Operating income for 1998 and 1997
was also impacted by start-up costs for continued HRS-PEO expansion and costs
to centralize PEO administrative functions in Rochester, New York, which were
completed in February 1998. During the first half of fiscal 1999, the Company
will increase its 401(k) sales force by approximately 40 individuals to
facilitate the goal of attaining 10,000 clients by the end of that fiscal
year. Operating income for the full year of fiscal 1999 is expected to
increase due to continued client base growth and from efficiencies gained from
centralized operations.
PEO direct costs billed and direct costs: Consistent with industry practices
and generally accepted accounting principles, total PEO revenues reported in
the Consolidated Statements of Income include the service fee, plus the PEO
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 increases in PEO direct costs billed and direct costs are reflective of
the increases in the number of PEO worksite employees.
Corporate expenses:
For the years
ended May 31, 1998 Change 1997 Change 1996
(In thousands)
- -------------------------------------------------------------------------------
Corporate expenses $ 52,207 +17.8% $ 44,335 +8.9% $ 40,707
- -------------------------------------------------------------------------------
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance and Senior Management functions of the
Company. For fiscal 1998 and 1997, the increases in expenses are primarily
related to additional employees and other expenditures necessary to support
the continued growth of the Company's business. In addition, fiscal 1998
expenses reflect increased national marketing efforts which began during the
third quarter. Fiscal 1999's expenses are expected to increase at a rate
similar to fiscal 1998's.
Investment income:
For the years
ended May 31, 1998 Change 1997 Change 1996
(In thousands)
- -------------------------------------------------------------------------------
Investment income $ 9,473 +34.7% $ 7,031 +28.6% $ 5,467
- -------------------------------------------------------------------------------
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 investment balances generated from continual gains
in operating cash flows. Investment income for 1999, subject to changes in
market rates of interest, is expected to grow at a rate slightly lower than
net income growth.
Income taxes: The Company's effective tax rate for fiscal 1998, 1997 and 1996
was 29.1%, 27.5% and 27.0%, respectively. The increase in the 1998 effective
tax rate is due to the implementation of EFTPS in July 1997, which reduced
tax-exempt investment revenue. Fiscal 1999's effective tax rate is expected
to range from 29.5% to 30.0%, as taxable income before income taxes is
expected to grow at a faster rate than tax-exempt income.
Liquidity and Capital Resources
Operating cash flows:
For the years
ended May 31, 1998 Change 1997 Change 1996
(In thousands)
- -------------------------------------------------------------------------------
Operating cash flows $ 136,761 +27.8% $ 107,027 +51.9% $ 70,444
- -------------------------------------------------------------------------------
The continued increases in operating cash flows resulted primarily from the
consistent achievement of record net income in each of the three years
presented. Projected operating cash flows are expected to adequately support
normal business operations and forecasted growth, planned purchases of
property and equipment and planned dividend payments. Furthermore, at May 31,
1998, the Company had $250.5 million in available cash and investments and
$262.5 million of available, uncommitted, 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 securities and other short-term cash equivalents. The Company's
Investments increased from year-over-year gains in operating cash flows. ENS
investment balances increased from greater client utilization of the Company's
Taxpay and Direct Deposit services.
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 May 31,
1998, approximately 97% of the available-for-sale securities held an AA rating
or better, and all short-term securities classified as cash equivalents held
an A-1 rating or an equivalent rating.
Interest Rate Risk and Quantitative and Qualitative Disclosures of Market
Risks: The Company's available-for-sale securities (See Note C of the Notes to
the Consolidated Financial Statements for a breakdown of the
available-for-sale securities) are exposed to market risk from changes in
interest rates, as rate volatility will cause fluctuations in the market value
of held investments and the earnings potential of future investments. The
Company's objective in managing interest rate risk is 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, as they are
less sensitive to interest rate fluctuations, and manages the portfolio to a
benchmark duration of 2.5 to 3.0 years.
The Company has classified the debt securities portions of Investments and ENS
investments as available-for-sale. Accordingly, these securities are reported
on the Company's Consolidated Balance Sheets at fair value. Changes in market
interest rates result in an unrealized gain or loss, which is included in the
reported fair value of the recorded securities, with an offsetting amount
recorded in stockholders' equity, and no related or immediate impact to the
results of operations. During 1998, the balance of unrealized gains
fluctuated from a low of $1.9 million to a high of $7.2 million. While this
balance during 1998 was an unrealized gain, the fair value of the securities
could potentially decrease to an unrealized loss position, depending upon
changes in market rates. As of May 31, 1998, the Company had $654.5 million
invested in available-for-sale securities at fair value, with a
weighted-average yield to maturity of 4.5%. Assuming a hypothetical increase
in interest rates of 75 basis points given the May 31, 1998 portfolio of
securities, the resulting potential decrease in fair value would be
approximately $13.4 million, or approximately 2.0% of the portfolio.
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 no related or immediate impact to the results of
operations.
Purchases of property and equipment:
For the years
ended May 31, 1998 Change 1997 Change 1996
(In thousands)
- -------------------------------------------------------------------------------
Purchases of P&E $ 28,386 +53.1% $ 18,536 +4.1% $ 17,806
- -------------------------------------------------------------------------------
Due to the Company's continued client growth in 1998, significant purchases
were made for upgrades to data processing equipment, including personal
computers, and expansion and relocation of various facilities. During 1997,
the Company implemented an upgrade of its laser printing equipment in branch
offices through a five-year operating lease with future minimum lease payments
of approximately $10 million. Purchases of property and equipment in fiscal
1999 are expected to be in the range of $30 million.
Cash dividends and stock splits:
For the years
ended May 31, 1998 Change 1997 Change 1996
(In thousands, except
per share amounts)
- -------------------------------------------------------------------------------
Cash dividends $ 35,871 +48.7% $ 24,117 +36.4% $ 17,685
Cash dividends
per share $ .22 +46.7% $ .15 +36.4% $ .11
- -------------------------------------------------------------------------------
The Company has increased the quarterly cash dividend rate per share each
October by 50% for the past three fiscal years. Fiscal 1996's cash dividends
include the effect of $2.6 million in distributions to stockholders of
National Business Solutions, Inc. (NBS), prior to its merger with the Company
in August 1996. The Company has distributed three-for-two stock splits
effected in the form of 50% stock dividends on outstanding shares each May for
the past three fiscal years. All financial information within this Annual
Report has been adjusted for these stock splits.
Other
Business combinations: During 1997, Paychex merged with NBS, which now
operates as Paychex Business Solutions, Inc., in a pooling of interests
transaction with results of operations restated prior to completion of the
transaction.
The Company merged with Olsen Computer Systems, Inc., and the Payroll Service,
Inc., in 1997 and Pay-Fone Systems, Inc., in 1996, in business combinations
accounted for as pooling of interests. During 1996, the Company acquired the
common stock of The Payroll Company, Inc., in a business combination accounted
for as a purchase transaction. Each of these business combinations involved
the issuance of Paychex common stock and did not have a significant impact on
the Company's financial position and results of operations.
Recently issued accounting standards: Effective June 1, 1997, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its
components. 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 income taxes,
related to available-for-sale securities, is the only component reported in
other comprehensive income in the Consolidated Statements of Stockholders'
Equity for the Company. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130. The adoption of
SFAS No. 130 did not have an effect on the Company's results of operations or
financial position.
The Company expenses as incurred certain costs to develop and enhance its
computer programs. Expenditures for vendor-provided software are 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 Computer
Software Developed for or Obtained for Internal Use," which is effective for
fiscal years beginning after December 15, 1998. The SOP requires preliminary
stage project costs to be expensed as incurred. Once a project is in the
application development stage, the SOP requires all external direct costs for
materials and services and payroll and related fringe benefit costs to be
capitalized, and subsequently amortized over the estimated useful life of the
project. The Company's management has not completed its assessment of what
impact the SOP will have on future results of operations or financial
position.
Year 2000 date conversion: 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.
The Company plans to have all internal mission-critical systems year 2000
compliant by the end of calendar year 1998. 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.
Calendar year 1999 will be used to react to yet unknown changes dictated by
third parties, such as government agencies, hardware and software vendors, and
financial institutions. Third-party interface testing with external agencies
and partners is dependent upon those third parties completing their own year
2000 remediation efforts.
The Company currently anticipates expenditures for year 2000 efforts to
approximate $5 million. 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.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Paychex, Inc.
We have audited the accompanying consolidated balance sheets of Paychex,
Inc. and subsidiaries as of May 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended May 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Paychex, Inc. and subsidiaries at May 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Syracuse, New York
June 25, 1998
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
For the years ended May 31, 1998 1997 1996
Service revenues:
Payroll $ 455,227 $ 368,855 $ 309,517
HRS-PEO 38,477 30,878 23,791
------- ------- -------
Total service revenues 493,704 399,733 333,308
PEO direct costs billed (A) 499,741 334,966 233,135
------- ------- -------
Total revenue 993,445 734,699 566,443
PEO direct costs (A) 499,741 334,966 233,135
Operating costs 131,731 115,034 101,235
Selling, general and
administrative expenses 227,273 188,074 162,151
------- ------- -------
Operating income 134,700 96,625 69,922
Investment income 9,473 7,031 5,467
------- ------- -------
Income before income taxes 144,173 103,656 75,389
Income taxes 41,954 28,506 20,354
------- ------- -------
Net income $ 102,219 $ 75,150 $ 55,035
======= ======= =======
Basic earnings per share $ .63 $ .46 $ .34
======= ======= =======
Diluted earnings per share $ .62 $ .46 $ .34
======= ======= =======
Weighted-average common
shares outstanding 163,009 162,002 160,394
======= ======= =======
Weighted-average shares
assuming dilution 164,813 163,757 162,190
======= ======= =======
Cash dividends per common share $ .22 $ .15 $ .11
======= ======= =======
See Notes to Consolidated Financial Statements.
(A) Wages and payroll taxes of PEO worksite employees and their related
benefit premiums and claims.
CONSOLIDATED BALANCE SHEETS
In thousands
May 31, 1998 1997
Assets
Current assets:
Cash and cash equivalents $ 35,571 $ 50,213
Investments 214,967 132,780
Interest receivable 13,227 10,462
Accounts receivable 54,596 45,527
Deferred income taxes 1,525 2,560
Prepaid expenses and other current assets 4,391 2,486
--------- ---------
Current assets before ENS investments 324,277 244,028
--------- ---------
Electronic Network Services investments 1,154,501 896,633
--------- ---------
Total current assets 1,478,778 1,140,661
Property and equipment--net 64,698 54,178
Deferred income taxes 517 72
Other assets 5,794 6,412
--------- ---------
Total assets $1,549,787 $1,201,323
========= =========
Liabilities
Current liabilities:
Accounts payable $ 10,496 $ 5,649
Accrued compensation and related items 33,649 26,969
Deferred revenue 4,443 4,335
Accrued income taxes 2,628 1,774
Other current liabilities 13,960 11,240
--------- ---------
Current liabilities before ENS client deposits 65,176 49,967
--------- ---------
Electronic Network Services client deposits 1,150,484 896,080
--------- ---------
Total current liabilities 1,215,660 946,047
Other long-term liabilities 4,520 3,734
--------- ---------
Total liabilities 1,220,180 949,781
Stockholders' Equity
Common stock, $.01 par value, authorized
300,000 shares
Issued: 163,188/1998 and 108,519/1997 1,632 1,085
Additional paid-in capital 46,463 37,531
Retained earnings 278,107 212,387
Accumulated other comprehensive income 3,405 539
--------- ---------
Total stockholders' equity 329,607 251,542
--------- ---------
Total liabilities and stockholders' equity $1,549,787 $1,201,323
========= =========
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
In thousands
Common Stock Accumulated
------------- Other
Additional Compre-
paid-in Retained hensive
Shares Amount capital earnings income Total
------- ----- -------- -------- ------- ---------
Balance at May 31, 1995 46,988 $ 470 $ 17,843 $122,601 $ 1,062 $ 141,976
Exercise of stock options 320 3 2,810 2,813
Tax benefit from exercise
of stock options 2,671 2,671
Shares issued in
connection with three-
for-two stock split 23,652 236 (281) (45)
Shares issued in
connection with merger
and acquisition 672 7 6,777 1,866 8,650
Comprehensive income:
Net income 55,035
Other comprehensive
income, net of tax:
Unrealized losses
on securities, net
of reclassification
adjustments (2,354)
Total comprehensive income 52,681
Cash dividends declared (17,685) (17,685)
Other 11 11
------- ----- ------ ------- ------ -------
Balance at May 31, 1996 71,632 716 30,112 161,536 (1,292) 191,072
Exercise of stock options 267 3 2,177 2,180
Tax benefit from exercise
of stock options 5,208 5,208
Shares issued in
connection with three-
for-two stock split 36,172 362 (389) (27)
Shares issued in
connection with mergers 448 4 34 207 245
Comprehensive income:
Net income 75,150
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
reclassification
adjustments 1,831
Total comprehensive income 76,981
Cash dividends declared (24,117) (24,117)
------- ----- ------ ------- ----- -------
Balance at
May 31, 1997 108,519 1,085 37,531 212,387 539 251,542
Exercise of stock
options 277 3 1,987 1,990
Tax benefit from
exercise of stock
options 6,945 6,945
Shares issued in
connection with three-
for-two stock split 54,392 544 (628) (84)
Comprehensive income:
Net income 102,219
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
reclassification
adjustments 2,866
Total comprehensive income 105,085
Cash dividends declared (35,871) (35,871)
------- ----- ------ ------- ----- -------
Balance at
May 31, 1998 163,188 $1,632 $46,463 $278,107 $3,405 $329,607
======= ===== ====== ======= ===== =======
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
For the years ended May 31, 1998 1997 1996
Operating Activities
Net income $102,219 $ 75,150 $ 55,035
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization on
depreciable and intangible assets 18,764 15,329 13,940
Amortization of premiums and discounts
on available-for-sale securities 8,497 6,115 3,225
Provision for deferred income taxes (1,030) (2,053) 2
Provision for bad debts 1,648 1,328 1,034
Net realized gains on sales of
available-for-sale securities (934) (164) (2,696)
Changes in operating assets and liabilities:
Interest receivable (2,765) (3,077) (686)
Accounts receivable (10,717) (4,779) (7,455)
Prepaid expenses and other current assets (1,905) (583) 228
Accounts payable and other current liabilities 22,154 19,189 7,553
Net change in other assets and liabilities 830 572 264
------- ------- -------
Net cash provided by operating activities 136,761 107,027 70,444
======= ======= =======
Investing Activities
Purchases of available-for-sale securities (529,413) (306,488) (565,557)
Proceeds from sales of available-for-sale
securities 338,818 185,161 479,087
Proceeds from maturities of available-for-
sale securities 7,232 2,125 12,882
Net change in Electronic Network Services
money market securities and other
cash equivalents (159,769) (210,669) (88,676)
Net change in Electronic Network Services
client deposits 254,404 294,720 129,836
Purchases of property and equipment,
net of disposals (28,197) (18,008) (17,511)
Purchases of other assets (513) (1,935) (793)
------- ------- -------
Net cash used in investing activities (117,438) (55,094) (50,732)
======= ======= =======
Financing Activities
Dividends paid (35,871) (24,117) (17,685)
Proceeds from exercise of stock options 1,990 2,180 2,813
Other (84) 218 (465)
------- ------- -------
Net cash used in financing activities (33,965) (21,719) (15,337)
======= ======= =======
Increase (decrease) in Cash and cash equivalents (14,642) 30,214 4,375
Cash and cash equivalents,
beginning of fiscal year 50,213 19,999 14,812
Cash obtained from merger and acquisition - - 812
------- ------- -------
Cash and cash equivalents, end of fiscal year $ 35,571 $ 50,213 $ 19,999
======= ======= =======
Supplemental cash flow information
Income taxes paid $ 35,191 $ 24,256 $ 17,672
======= ======= =======
Non-cash financing transaction
Tax benefit from exercise of stock options $ 6,945 $ 5,208 $ 2,671
======= ======= =======
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The Consolidated Financial Statements include
the accounts of Paychex, Inc., and its wholly-owned subsidiaries (the
"Company"). All intercompany accounts and transactions have been eliminated
in consolidation.
Business activities and reportable segments: The Company has two business and
reportable segments: Payroll and Human Resource Services-Professional
Employer Organization (HRS-PEO). Effective May 31, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) 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 with the
year ended May 31, 1998.
Payroll segment: 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 Payroll segment collects and remits funds as
part of its Electronic Network Services (ENS) products. In connection with
Taxpay, the automated tax payment and filing service, the segment collects
payroll taxes, files the applicable tax returns and pays taxes to the
appropriate taxing authorities. The Direct Deposit product collects net
payroll from client accounts and provides automatic salary deposit for
employees. The ENS funds and related client deposit liabilities are included
in the Consolidated Balance Sheets as current assets and current liabilities.
Related income earned from these investments is included in Payroll service
revenue. The amount of ENS funds held will vary significantly during the
year.
HRS-PEO segment: The HRS portion of the HRS-PEO segment provides businesses
with 401(k) plan recordkeeping services, group benefits and workers'
compensation insurance services, section 125 plans, employee handbooks and
management services. The 401(k) recordkeeping service provides plan
implementation, ongoing compliance with government regulations, employee and
employer reporting and other administrative services.
The PEO portion of the HRS-PEO segment operates as Paychex Business Solutions,
Inc. (PBS), previously National Business Solutions, Inc. (NBS), before its
merger with the Company in August 1996, and is engaged primarily in providing
human resource management and personnel administration services to a diverse
client base of small- to medium-sized businesses. The PEO provides certain
managed care services, including managed health care, employee assistance
programs, drug-free workplace programs, comprehensive workers' compensation
management, risk management and loss containment services. Consistent with
PEO industry practice, PEO direct costs billed include the wages and payroll
taxes of worksite employees, their related benefit premiums and claims,
including workers' compensation, and other direct costs.
Cash and cash equivalents: Cash and cash equivalents consist of available
cash, money market and municipal securities and other investments with a
maturity of three months or less when purchased. The Company deposits
available cash with creditworthy financial institutions. Amounts reported in
the Consolidated Balance Sheets are approximate fair values.
Investments and ENS Investments: Debt securities included in Investments and
ENS investments are classified as available-for-sale and are recorded at fair
value based on market prices obtained from an independent pricing service.
Unrealized gains and losses are reported as a component of other comprehensive
income in stockholders' equity, net of applicable income taxes. Realized
gains and losses on sales of securities are determined by specific
identification of the security's cost basis.
Property and equipment--net: Property and equipment--net is stated at cost,
less accumulated depreciation and amortization. Depreciation is computed by
the straight-line method over the estimated useful lives. The typical
estimated useful lives of depreciable assets are 35 years for buildings and
improvements and 3 to 5 years for all others.
Software development and enhancement: The Company expenses as incurred
certain costs to develop and enhance its computer programs. Expenditures for
vendor-provided software are 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 Computer Software Developed for or
Obtained for Internal Use," which is effective for fiscal years beginning
after December 15, 1998. The SOP requires preliminary stage project costs to
be expensed as incurred. Once a project is in the application development
stage, the SOP requires all external direct costs for materials and services
and payroll and related fringe benefit costs to be capitalized, and
subsequently amortized over the estimated useful life of the project. The
Company's management has not completed its assessment of what impact the SOP
will have on future results of operations or financial position.
Revenue recognition: Revenues from Payroll activities include those amounts
billed for services rendered, as well as investment revenue earned from ENS
investments. Revenues and the related costs of wages, salaries and employment
taxes from PEO activities of worksite employees are recognized in the period
in which the employee performs the service.
Income taxes: The Company accounts for deferred taxes by recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company accounts for the tax benefit
from the exercise of stock options by reducing its accrued income tax
liability and increasing additional paid-in capital.
Stock-based compensation costs: SFAS No. 123, "Accounting for Stock-Based
Compensation," establishes accounting and reporting standards for stock-based
employee compensation plans. As permitted by that Statement, the Company
continues to account for such arrangements under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense is recognized for
stock-option grants because the exercise price of the stock options equals the
market price of the underlying stock on the date of grant.
Stock splits effected in the form of stock dividends: The Company declared
three-for-two stock splits effected in the form of 50% stock dividends on
outstanding shares payable to shareholders of record as of May 8, 1998, May 8,
1997, and May 2, 1996, with respective distribution dates of May 22, 1998, May
29, 1997, and May 23, 1996. Basic and diluted earnings per share, cash
dividends per share, weighted-average shares outstanding and all applicable
footnotes have been adjusted to reflect the aforementioned stock splits.
Comprehensive income: Effective June 1, 1997, the Company adopted SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components.
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 income taxes,
related to available-for-sale securities is the only component reported in
other comprehensive income in the Consolidated Statements of Stockholders'
Equity for the Company. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130. The adoption of
SFAS No. 130 did not have an effect on the Company's results of operations or
financial position.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses during the reporting period. Actual amounts and results could
differ from those estimated.
Reclassifications: Certain amounts from prior years are reclassified to
conform to fiscal year 1998 presentations.
NOTE B - BASIC AND DILUTED EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," effective for periods
ending after December 15, 1997. All earnings per share amounts have been
restated to present basic and diluted earnings per share. The following table
sets forth the computation of basic earnings per share and diluted earnings
per share:
For the years ended May 31, 1998 1997 1996
In thousands, except per share amounts
-------- -------- --------
Basic earnings per share:
Net income $102,219 $ 75,150 $ 55,035
------- ------- -------
Weighted-average common shares outstanding 163,009 162,002 160,394
------- ------- -------
Basic earnings per share $ .63 $ .46 $ .34
======= ======= =======
Diluted earnings per share:
Net income $102,219 $ 75,150 $ 55,035
------- ------- -------
Weighted-average common shares outstanding 163,009 162,002 160,394
Effect of dilutive stock options
at average market price 1,804 1,755 1,796
------- ------- -------
Weighted-average shares assuming dilution 164,813 163,757 162,190
------- ------- -------
Diluted earnings per share $ .62 $ .46 $ .34
======= ======= =======
For the years ended May 31, 1998, 1997 and 1996, weighted-average options to
purchase shares of common stock in the amount of 960,000, 1,019,000 and
142,000, 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 antidilutive.
NOTE 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. Investments and ENS investments are as follows:
May 31, 1998 1997
In thousands ---------------------- ----------------------
Type of issue Cost Fair Cost Fair
value value
Money market securities and
other cash equivalents $ 714,941 $ 714,941 $ 555,172 $ 555,172
Available-for-sale securities:
General obligation municipal
bonds 212,222 213,940 178,571 178,797
Pre-Refunded municipal bonds 236,151 238,462 193,135 193,635
Revenue municipal bonds 199,545 200,850 97,931 98,182
Other securities 1,231 1,275 3,712 3,627
--------- --------- --------- ---------
Total available-for-sale
securities 649,149 654,527 473,349 474,241
========= ========= ========= =========
Total Investments and
ENS investments $1,364,090 $1,369,468 $1,028,521 $1,029,413
========= ========= ========= =========
Classification of investments on
Consolidated Balance Sheets:
Investments $ 213,606 $ 214,967 $ 132,441 $ 132,780
ENS investments 1,150,484 1,154,501 896,080 896,633
--------- --------- --------- ---------
$1,364,090 $1,369,468 $1,028,521 $1,029,413
========= ========= ========= =========
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 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 May 31, 1998, no individual issue comprises
greater than 1% of total assets, approximately 97% of the available-for-sale
securities held an AA rating or better, and all short-term securities
classified as cash equivalents held an A-1 rating or an equivalent rating.
Cost, gross unrealized gains and losses, and the fair value of the
available-for-sale securities are as follows:
Gross Gross
May 31, unrealized unrealized Fair
In thousands Cost gains losses value
-------- ---------- ---------- --------
1998 $649,149 $ 5,524 $ 146 $654,527
1997 $473,349 $ 1,642 $ 750 $474,241
Net realized gains and losses on sales of available-for-sale securities are
included in Payroll revenue and Investment income on the Consolidated
Statements of Income. Gross realized gains and losses were as follows:
For the years ended May 31, 1998 1997 1996
In thousands ------ ------ ------
Gross realized gains $1,481 $ 602 $3,770
Gross realized losses $ 547 $ 438 $1,074
The cost and fair value of available-for-sale securities at May 31, 1998, by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to prepay
obligations without prepayment penalties.
May 31, 1998 Fair
Cost value
In thousands -------- --------
Maturity date:
Due in one year or less $ 33,968 $ 34,123
Due after one year through three years 276,378 279,065
Due after three years through five years 207,813 209,455
Due after five years 130,990 131,884
------- -------
Total available-for-sale securities $649,149 $654,527
======= =======
NOTE D - PROPERTY AND EQUIPMENT--NET
May 31, 1998 1997
In thousands -------- --------
Land and improvements $ 2,815 $ 2,789
Buildings and improvements 24,914 24,672
Data processing equipment and software 64,247 50,973
Furniture, fixtures and equipment 52,752 44,251
Leasehold improvements 7,323 3,582
------- -------
152,051 126,267
Less accumulated depreciation and
amortization 87,353 72,089
------- -------
$ 64,698 $ 54,178
======= =======
NOTE E - STOCK OPTION PLANS
The Company reserved 4,218,750 shares to be granted to employees in the form
of non-qualified and incentive stock options under the 1995 Stock Incentive
Plan, with 773,000 shares available for future grants at May 31, 1998. The
1992 and 1987 Stock Incentive Plans expired in August 1995 and 1992,
respectively; however, options to purchase 2,346,000 shares under these plans
remain outstanding. The exercise price for the shares subject to options of
the Company's common stock may not be less than 100% of the fair market value
on the date of grant. Stock option grants have a contractual life of ten
years, and generally vest after a minimum two years of service from the date
of grant, with annual vesting ranging from 33.3% to 50% of the original award
granted. The following table summarizes stock option activity for the three
years ended May 31, 1998:
Shares
subject Weighted-
In thousands, except per share amounts to average
options exercise
price
------- ---------
Outstanding at May 31, 1995 4,507 $ 4.15
Granted 1,117 $ 11.89
Exercised (1,080) $ 2.61
Forfeited (134) $ 5.71
------ --------
Outstanding at May 31, 1996 4,410 $ 6.44
Granted 1,974 $ 25.64
Exercised (600) $ 3.64
Forfeited (479) $ 16.48
------ --------
Outstanding at May 31, 1997 5,305 $ 12.99
Granted 1,192 $ 27.61
Exercised (433) $ 5.91
Forfeited (311) $ 24.59
------ --------
Outstanding at May 31, 1998 5,753 $ 15.93
====== ========
Exercisable at May 31, 1996 1,887 $ 3.11
Exercisable at May 31, 1997 1,967 $ 4.07
Exercisable at May 31, 1998 2,379 $ 5.28
The following table summarizes information about stock options outstanding at
May 31, 1998:
Options outstanding Options exercisable
------------------------------------ ------------------------
Shares Weighted- Weighted- Shares
subject average average subject Weighted-
Range to exercise remaining to average
of exercise options price contractual options exercise
prices per (In per life (In price per
share thousands) share in years thousands) share
- -------------- ----------- ----------- ----------- ----------- -----------
$ 1.33 - 4.80 1,237 $ 2.63 3.0 1,232 $ 2.62
$ 6.57 - 8.10 1,109 $ 6.85 5.9 919 $ 6.80
$13.44 - 19.61 879 $14.38 7.6 228 $13.52
$25.94 - 39.17 2,528 $26.95 8.9 - -
----------- ----------
$ 1.33 - 39.17 5,753 $15.93 6.8 2,379 $ 5.28
=========== ==========
Pro forma information regarding net income, basic and diluted earnings per
share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
that Statement. This disclosure is not likely to be representative of the
effects on reported pro forma net income, basic and diluted earnings per share
for future years, because stock options generally vest over a range of 33.3%
to 50% per year and additional awards generally are made each year. The
Company's pro forma net income, basic and diluted earnings per share are as
follows:
For the years ended May 31, 1998 1997 1996
In thousands, except per share amounts ------- ------- -------
Pro forma net income $97,448 $72,060 $54,523
Pro forma basic earnings per share $.60 $.44 $.34
Pro forma diluted earnings per share $.59 $.44 $.34
For purposes of pro forma disclosures, the estimated fair value of the stock
option is amortized to expense over the option's vesting period. The fair
value of these stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
For the years ended May 31, 1998 1997 1996
---- ---- ----
Risk-free interest rate 5.8% 6.2% 5.9%
Dividend yield .9% .9% 1.6%
Volatility factor .29 .28 .29
Expected option term life in years 4.5 4.9 4.5
The weighted-average grant-date estimated fair value of stock options granted
for the years ended May 31, 1998, 1997 and 1996 were $8.81, $8.39 and $3.92
per share, respectively.
NOTE F - INCOME TAXES
The net deferred tax asset components are as follows:
May 31, 1998 1997
In thousands ------ ------
Deferred tax assets:
Accrued vacation pay $1,170 $1,330
Reserve for workers' compensation claims 1,186 1,105
Allowance for bad debts 1,355 987
Accrual for future medical claims 1,169 809
Other 1,940 1,338
------ ------
Gross deferred tax assets 6,820 5,569
====== ======
Deferred tax liabilities:
Revenue not subject to current taxes 2,388 1,931
Depreciation 357 629
Unrealized gains on available-for-sale
securities 1,973 353
Other 60 24
----- -----
Gross deferred tax liabilities 4,778 2,937
===== =====
Net deferred tax asset $2,042 $2,632
===== =====
The components of the provision for income taxes are as follows:
For the years ended May 31, 1998 1997 1996
In thousands ------- ------- -------
Current:
Federal $34,888 $24,699 $15,400
State 8,096 5,860 4,952
------ ------ ------
Total current 42,984 30,559 20,352
====== ====== ======
Deferred:
Federal (857) (1,719) (18)
State (173) (334) 20
------ ------ ------
Total deferred (1,030) (2,053) 2
====== ====== ======
Provision for income taxes $41,954 $28,506 $20,354
====== ====== ======
Reconciliations of the U.S. federal statutory tax rate with effective tax
rates reported for income before income taxes were as follows:
For the years ended May 31, 1998 1997 1996
----- ----- -----
Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of federal benefit 3.6 3.5 4.3
Tax-exempt municipal bond interest (10.4) (10.9) (11.3)
Benefit from NBS income not
subject to income taxes - - (1.3)
Other items .9 (.1) .3
---- ---- ----
Effective tax rate 29.1% 27.5% 27.0%
==== ==== ====
Prior to its merger with the Company, NBS elected to be taxed as a subchapter
S corporation under federal and state provisions for the year ended May 31,
1996. Accordingly, no tax provision was recorded for that corporation in the
restated Consolidated Financial Statements, resulting in a reduction of the
Company's overall effective tax rate.
NOTE G - OTHER COMPREHENSIVE INCOME
The following table sets forth the related tax effects allocated to unrealized
gains and losses on available-for-sale securities, the only component of other
comprehensive income:
For the years ended May 31, 1998 1997 1996
In thousands ------- ------- -------
Unrealized holding gains/(losses) $ 5,420 $ 3,215 $(1,289)
Less: Income tax expense/(benefit) related
to unrealized holding gains/(losses) 1,955 1,279 (661)
Gain on sale of securities realized
in net income 934 164 2,696
Plus: Income tax expense on gain on sale of
securities realized in net income 335 59 970
------ ------ ------
Other comprehensive income $ 2,866 $ 1,831 $(2,354)
====== ====== ======
NOTE H - EMPLOYEE BENEFITS
The Company's 401(k) Incentive Retirement Plans allow employees with one or
more years of service to participate. The Company currently matches 50% of an
employee's voluntary contribution, up to a maximum of 3% of eligible
compensation. Company contributions for the years ended May 31, 1998, 1997
and 1996 were $3,239,000, $2,712,000 and $2,264,000, respectively.
The Company's PEO sponsors and administers a 401(k) plan and a profit-sharing
plan on behalf of its worksite employees. PEO clients, at their discretion,
may contribute a matching contribution on behalf of each participant for whom
an elective contribution was made during the plan year.
NOTE I - COMMITMENTS AND CONTINGENCIES
At May 31, 1998, the Company has available, uncommitted, unsecured lines of
credit from various banks totaling $262,500,000 at market rates of interest.
No amounts were outstanding against the lines of credit at May 31, 1998.
The Company is a defendant in various lawsuits as a result of normal
operations and in the ordinary course of business. Management believes the
outcome of these lawsuits will not have a material effect on the financial
position or results of operations of the Company.
The Company leases office space and data processing equipment under terms of
various operating leases, with most data processing equipment leases
containing a purchase option at prices representing the fair value of the
equipment at expiration of the lease term. Rent expense for the year ended
May 31, 1998, 1997 and 1996 was $20,336,000, $17,314,000 and $15,343,000,
respectively. At May 31, 1998, future minimum lease payments under various
noncancelable operating leases are $17,925,000 in fiscal 1999, $16,018,000 in
fiscal 2000, $13,608,000 in fiscal 2001, $8,471,000 in fiscal 2002, $4,411,000
in fiscal 2003, and $2,685,000 thereafter.
NOTE J - BUSINESS COMBINATIONS
The following table summarizes business combinations completed in the years
ended May 31, 1997 and 1996:
Common
Shares
Issued (In Method of
Entity Name Business Date thousands) Accounting
- ------------------ ---------------- -------------- ---------- ----------
Olsen Computer
Systems, Inc. Payroll software November 1996 884 Pooling
The Payroll
Service, Inc. Payroll services August 1996 124 Pooling
National Business
Solutions, Inc. PEO August 1996 6,603 Pooling
The Payroll
Company, Inc. Payroll services September 1995 391 Purchase
Pay-Fone
Systems, Inc. Payroll services June 1995 1,120 Pooling
Results of operations prior to completion of the pooling of interests
transaction with NBS were restated. For the year ended May 31, 1996,
previously reported total revenue and net income for the Company was
$325,285,000 and $52,333,000, respectively. For the year ended May 31, 1996,
total revenue and net income reported by NBS was $241,158,000 and $2,702,000,
respectively. Results of operations prior to completion of the other pooling
of interests transactions were not restated as the effects were not material.
The Payroll Company, Inc., acquisition was recorded at a fair value of
$5,000,000, with goodwill of approximately $4,000,000, which is amortized on a
straight-line basis over 10 years. The purchase agreement included a
guarantee that stock issued and not sold prior to September 29, 2000, would
appreciate to $15.26 per share, at a minimum.
NOTE K - SEGMENT FINANCIAL INFORMATION
See Note A for a description of the Company's Payroll and HRS-PEO business and
reporting segments. The Company's reportable segments are business units that
offer different services and products. The reportable segments are each
managed separately because they offer and provide services and products
through different means. The Company's Information Technology, Organizational
Development, Finance and Senior Management functions are combined into the
Corporate expenses.
The Company evaluates segment performance and allocates resources based on
profit and loss from operations before income taxes. The accounting policies
of the reportable segments are the same as those described in the summary of
significant accounting policies in Note A. There are no intersegment sales.
OPERATING RESULTS
For the years ended May 31, 1998 1997 1996
In thousands -------- -------- --------
Total revenue:
Payroll $455,227 $368,855 $309,517
HRS-PEO revenue:
Service revenue 38,477 30,878 23,791
PEO direct costs billed (A) 499,741 334,966 233,135
------- ------- -------
Total HRS-PEO revenue 538,218 365,844 256,926
======= ======= =======
Total revenue 993,445 734,699 566,443
PEO direct costs (A) 499,741 334,966 233,135
------- ------- -------
Total revenue less PEO direct costs $493,704 $399,733 $333,308
======= ======= =======
Operating income:
Payroll $180,265 $135,364 $107,957
HRS-PEO 6,642 5,596 2,672
------- ------- -------
Total operating income 186,907 140,960 110,629
Corporate expenses 52,207 44,335 40,707
Investment income 9,473 7,031 5,467
------- ------- -------
Income before income taxes $144,173 $103,656 $ 75,389
======= ======= =======
Investment revenue included in Payroll revenue $ 43,429 $ 34,105 $ 27,025
======= ======= =======
(A) Wages and payroll taxes of PEO worksite employees and their related
benefit premiums and claims.
OTHER FINANCIAL INFORMATION 1998 1997 1996
---------- ---------- ----------
Purchases of long-lived assets
Payroll $17,146 $12,984 $13,055
HRS-PEO 2,015 1,747 644
Corporate 9,591 5,716 5,052
------ ------ ------
Total purchases of long-lived assets $28,752 $20,447 $18,751
====== ====== ======
Depreciation and amortization expense:
Payroll $17,187 $13,128 $11,081
HRS-PEO 1,078 585 453
Corporate 8,996 7,731 5,631
------ ------ ------
Total depreciation and amortization expense $27,261 $21,444 $17,165
====== ====== ======
Identifiable assets at May 31,
Payroll $1,244,272 $ 967,688 $ 663,081
HRS-PEO 30,726 24,477 17,784
Corporate 274,789 209,158 150,720
--------- --------- ---------
Total identifiable assets $1,549,787 $1,201,323 $ 831,585
========== ========= =========
QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands, except per share amounts
1998 August 31, November 30, February 28, May 31, Year
--------- ----------- ----------- --------- --------
Service revenues $112,947 $117,173 $131,873 $131,711 $493,704
Total revenue 218,583 235,221 271,355 268,286 993,445
Operating income 30,357 32,572 34,852 36,919 134,700
Income before
income taxes 32,545 34,863 37,201 39,564 144,173
Net income 23,074 24,718 26,376 28,051 102,219
Basic earnings
per share .14 .15 .16 .17 .63
Diluted earnings
per share .14 .15 .16 .17 .62
Cash dividends
per share .04 .06 .06 .06 .22
Market value
per share:
High 27.50 30.25 35.13 39.83 39.83
Low 21.67 22.33 26.71 33.13 21.67
1997 August 31, November 30, February 28, May 31, Year
--------- ----------- ----------- --------- --------
Service revenues $ 91,273 $ 95,266 $106,354 $106,840 $399,733
Total revenue 166,042 169,499 195,562 203,596 734,699
Operating income 22,097 23,349 25,022 26,157 96,625
Income before
income taxes 23,582 25,094 26,786 28,194 103,656
Net income 17,073 18,068 19,286 20,723 75,150
Basic earnings
per share .11 .11 .12 .13 .46
Diluted earnings
per share .10 .11 .12 .13 .46
Cash dividends
per share .03 .04 .04 .04 .15
Market value
per share:
High 24.89 28.28 25.22 24.92 28.28
Low 17.89 22.11 18.89 17.00 17.00
Note: Each quarter is a discrete period and the sum of the four quarters'
basic and diluted earnings per share amounts may not equal the full year
amount. Per share amounts have been adjusted for three-for-two stock splits
in May 1998 and May 1997.
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
In thousands, except per share amounts and other statistics
For the years ended or at May 31, 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Results of Operations
Service revenues:
Payroll $455,227 $368,855 $309,517 $254,093 $215,663 $184,004 $156,652 $133,886 $118,157 $100,488 $ 79,168
HRS-PEO 38,477 30,878 23,791 18,020 11,290 7,700 5,253 3,289 2,043 666 265
Total service revenues 493,704 399,733 333,308 272,113 226,953 191,704 161,905 137,175 120,200 101,154 79,433
PEO direct costs billed (A) 499,741 334,966 233,135 139,953 96,952 60,434 21,775 2,617 - - -
Total revenue 993,445 734,699 566,443 412,066 323,905 252,138 183,680 139,792 120,200 101,154 79,433
PEO direct costs (A) 499,741 334,966 233,135 139,953 96,952 60,434 21,775 2,617 - - -
Operating costs 131,731 115,034 101,235 81,663 70,034 61,877 53,700 50,054 45,031 35,557 27,860
Selling, general
& administrative
expenses 227,273 188,074 162,151 138,186 119,477 102,893 89,393 73,854 63,042 51,480 40,820
Operating income 134,700 96,625 69,922 52,264 37,442 26,934 18,812 13,267 12,127 14,117 10,753
% of total service revenues 27.3% 24.2% 21.0% 19.2% 16.5% 14.0% 11.6% 9.7% 10.1% 14.0% 13.5%
Investment income 9,473 7,031 5,467 3,458 2,220 1,379 821 764 1,081 857 477
Income before income taxes 144,173 103,656 75,389 55,722 39,662 28,313 19,633 14,031 13,208 14,974 11,230
% of total service revenues 29.2% 25.9% 22.6% 20.5% 17.5% 14.8% 12.1% 10.2% 11.0% 14.8% 14.1%
Net income 102,219 75,150 55,035 40,389 28,746 20,241 13,788 9,606 8,566 9,446 6,935
% of total service revenues 20.7% 18.8% 16.5% 14.8% 12.7% 10.6% 8.5% 7.0% 7.1% 9.3% 8.7%
Basic earnings
per share $ .63 $ .46 $ .34 $ .26 $ .18 $ .13 $ .09 $ .06 $ .06 $ .06 $ .05
Diluted earnings
per share .62 .46 .34 .26 .18 .13 .09 .06 .06 .06 .05
Weighted-average common
shares outstanding 163,009 162,002 160,394 158,229 157,766 157,113 156,026 155,318 148,532 148,170 147,392
Weighted-average shares
assuming dilution 164,813 163,757 162,190 159,584 159,149 158,355 156,917 155,550 148,832 148,598 148,379
Cash dividends per share $ .22 $ .15 $ .11 $ .07 $ .05 $ .03 $ .02 $ .02 $ .01 $ .01 $ -
Financial Position
Working capital $263,118 $194,614 $138,639 $100,009 $ 68,888 $ 46,776 $ 28,245 $ 19,230 $ 21,257 $ 22,951 $ 17,311
Purchases of property
& equipment 28,386 18,536 17,806 12,535 11,667 8,822 13,580 18,420 15,447 9,132 8,050
Total assets 1,549,787 1,201,323 831,585 647,366 474,786 322,214 221,771 133,342 74,501 55,638 42,485
Total debt - - - 728 948 1,634 2,024 2,431 2,137 2,770 3,322
Stockholders' equity 329,607 251,542 191,072 141,976 109,124 85,365 67,623 54,512 47,160 40,245 31,506
Return on stockholders' equity 36.0% 33.9% 32.3% 32.2% 29.6% 26.5% 22.6% 18.9% 19.6% 26.3% 25.0%
Other Statistics
Payroll segment:
Payroll clients 293,600 262,700 234,300 207,900 185,900 167,500 150,400 135,200 120,600 105,600 87,300
Branch service centers 79 79 75 71 70 70 70 70 74 68 64
Sales offices 25 23 23 23 24 20 17 16 15 16 15
HRS-PEO segment:
401(k) clients 6,000 3,000 1,300 200 - - - - - - -
401(k) client funds
managed externally
(in millions) $ 383.3 $ 138.3 $ 35.0 - - - - - - - -
Section 125 clients 16,400 13,200 11,400 8,800 7,400 5,000 2,800 500 - - -
PEO worksite employees 19,200 13,800 9,200 5,300 3,400 1,800 500 - - - -
Note: Per share and weighted-average share amounts have been adjusted for
three-for-two stock splits in May 1998, May 1997, May 1996, May 1995, August
1993, May 1992 and November 1987.
(A) Wages and payroll taxes of PEO worksite employees and their related
benefit premiums and claims.