SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: June 26, 2000
(Date of earliest event reported)
PAYCHEX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-11330 16-1124166
(State of incorporation) (Commission (IRS Employer
File Number) Identification Number)
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)
ITEM 5. OTHER EVENTS
The registrant's press release dated June 26, 2000, which reports its
financial results for the fiscal year ended May 31, 2000, is attached. In
addition, this report includes Management's Discussion and Analysis of
Financial Condition and Results of Operations for the three years ended May
31, 2000, 1999 and 1998, and its financial condition at May 31, 2000.
This review is not a complete and comprehensive discussion and analysis as
required by the Securities and Exchange Commission for Annual Reports filed on
Form 10-K or quarterly reports filed on Form 10-Q. The 2000 Form 10-K and the
Annual Report to Shareholders is expected to be mailed in August 2000, and
will contain a complete set of audited Consolidated Financial Statements,
Notes to Consolidated Financial Statements, and an updated Management's
Discussion and Analysis of Financial Condition and Results of Operations for
the years ended May 31, 2000, 1999 and 1998, and its financial condition at
May 31, 2000.
All information included in this Form 8-K is qualified by the cautionary
statement in Exhibit 99.
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: June 26, 2000 /s/ B. Thomas Golisano
-----------------------
B. Thomas Golisano
Chairman, President and
Chief Executive Officer
Date: June 26, 2000 /s/ John M. Morphy
-----------------------
John M. Morphy
Vice President, Chief
Financial Officer and
Secretary
FOR IMMEDIATE RELEASE
John M. Morphy, Chief Financial Officer
Or
Jan Shuler 716-383-3406
Access Paychex, Inc. News Releases, current financial information and
related SEC filings at http://www.paychex.com/paychex/finance/finance.html
PAYCHEX, INC. REPORTS RECORD YEAR-END AND
FOURTH QUARTER RESULTS
ROCHESTER, NY, June 26, 2000 -- Paychex, Inc. (NASDAQ: PAYX) today announced
record net income of $190.0 million or $.51 diluted earnings per share for the
fiscal year ended May 31, 2000, a 37% increase over net income of $139.1
million or $.37 diluted earnings per share for the prior fiscal year. Total
service revenues were $728.1 million, an increase of 22% over $597.3 million
for the previous year.
For the fourth quarter ended May 31, 2000, net income increased 36% to $51.6
million or $.14 diluted earnings per share as compared with net income of $37.9
million or $.10 diluted earnings per share for the same period last year.
Total service revenues were $197.2 million, an increase of 26% over $156.6
million for the prior year fourth quarter.
PAYROLL SEGMENT
For the year ended May 31, 2000, operating income for the Payroll segment
increased 28% to $303.4 million from $237.2 million for the prior fiscal year.
Payroll service revenue was $653.2 million, an increase of 20% over $545.2
million for the prior year.
For the fourth quarter ended May 31, 2000, operating income from Payroll
services increased 25% to $80.9 million from $64.5 million for the same period
last year. Payroll service revenue was $175.6 million, an increase of 24% over
$142.0 million for the prior year quarter.
The increases in service revenue and operating income were primarily the result
of continued growth in the Payroll client base, utilization of ancillary
services and leveraging of operating expenses. In addition, fourth quarter
payroll revenue growth benefited from higher interest rates and the timing of
billing days during the quarter.
Paychex currently services 351,900 Payroll clients, a 9.1% increase over last
year. Our Major Market Services client base increased 40% to over 6,000
clients. As of the end of the fiscal year, 285,900 clients were using the
Taxpay(Registered Trademark) product, the Company's tax filing and payment
feature, and 165,700 clients were taking advantage of the Company's Employee
Pay Services, which include Direct Deposit, ReadychexSM and Access Card
products.
HRS-PEO SEGMENT
For the year ended May 31, 2000, operating income for the HRS-PEO segment
increased 111% from $11.1 million to $23.4 million. HRS-PEO service revenue
was $74.9 million, an increase of 44% over $52.0 million for the prior fiscal
year.
For the fourth quarter ended May 31, 2000, operating income for the HRS-PEO
segment increased 67% from $3.8 million to $6.3 million. HRS-PEO service
revenue was $21.6 million, an increase of 47% over $14.7 million for the fourth
quarter last year.
The increases in service revenue and operating income are primarily related to
increasing 401(k) Recordkeeping, Workers' Compensation Insurance and Section
125 clients. As of May 31, 2000, the segment serviced 14,700 401(k)
Recordkeeping clients, 10,400 Workers' Compensation Insurance clients, and
23,900 Section 125 Administration Plans.
CORPORATE EXPENSES
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. For the year ended May 31, 2000, Corporate expenses increased
12% from $60.7 million to $67.9 million. For the quarter ended May 31, 2000,
Corporate expenses increased 10% from $15.9 million to $17.5 million. The
increases are primarily due to additional employees and other expenditures to
support the continued growth of the Company.
INVESTMENT INCOME
Investment income for fiscal year 2000 increased 31% to $16.5 million from
$12.6 million in the prior year. For the fourth quarter, investment income was
$4.9 million, an increase of 39% over $3.5 million for the fourth quarter of
fiscal 1999. The increases in investment income are due to higher average
rates of return and higher cash flows from operations invested during the
period.
B. Thomas Golisano, Chairman, President and Chief Executive Officer of Paychex
said, "We are pleased to complete another successful year. Fiscal 2000 was our
tenth consecutive year of record service revenues and net income, and our
ninth consecutive year of net income growth in excess of 36%. We look forward
to Fiscal 2001 as we continue our growth in payroll and human resource
outsourcing, expand Major Market Services and increase utilization of our
ancillary products such as Employee Pay Services, 401(K) Recordkeeping and
Workers' Compensation Insurance. At the same time we are excited to be
introducing numerous internet based product enhancements which will be utilized
by both CPAs and our clients."
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
For the three months ended For the twelve months ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
Service revenues:
Payroll $175,606 $141,975 $653,245 $545,249
HRS-PEO (A) 21,580 14,661 74,874 52,047
-------- -------- -------- --------
Total service revenues 197,186 156,636 728,119 597,296
Operating costs 46,795 38,219 173,481 151,956
Selling, general and
administrative
expenses 80,593 65,987 295,745 257,778
-------- -------- -------- --------
Operating income 69,798 52,430 258,893 187,562
Investment income 4,925 3,541 16,479 12,581
-------- -------- -------- --------
Income before income
taxes 74,723 55,971 275,372 200,143
Income taxes 23,164 18,081 85,365 61,044
-------- -------- -------- --------
Net income $ 51,559 $ 37,890 $190,007 $139,099
======== ======== ======== ========
Basic earnings
per share (B) $ .14 $ .10 $ .51 $ .38
======== ======== ======== ========
Diluted earnings
per share (B) $ .14 $ .10 $ .51 $ .37
======== ======== ======== ========
Weighted-average
common shares
outstanding (B) 371,576 369,229 370,603 368,282
======== ======== ======== ========
Weighted-average
shares assuming
dilution (B) 376,407 373,654 375,081 373,182
======== ======== ======== ========
Cash dividends per
common share (B) $ .06 $ .04 $ .22 $ .15
======== ======== ======== ========
(A) Net of PEO direct costs billed and incurred of $216,176 and $148,309 for
the three months ended May 31, 2000 and 1999, respectively and $731,266 and
$578,132 for the twelve months ended May 31, 2000 and 1999, respectively. PEO
direct costs billed to clients are equal to PEO direct costs incurred for the
wages and payroll taxes of worksite employees and their related benefit
premiums and claims.
(B) Financial information for the periods ended May 31, 1999 have been adjusted
for a three-for-two stock split distributed in May 2000.
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
May 31, 2000 1999
ASSETS
Cash and cash equivalents $ 47,136 $ 52,692
Investments 412,357 290,555
Interest receivable 22,436 18,045
Accounts receivable 87,608 62,941
Deferred income taxes 9,539 1,364
Prepaid expenses and other current assets 6,531 6,000
---------- ----------
Current assets before ENS investments 585,607 431,597
ENS investments 1,776,968 1,361,523
---------- ----------
Total current assets 2,362,575 1,793,120
---------- ----------
Property and equipment - net 75,375 65,931
Goodwill and intangible assets - net 5,584 4,418
Deferred income taxes 2,494 1,417
Other assets 9,549 8,215
---------- ----------
Total assets $2,455,577 $1,873,101
========== ==========
LIABILITIES
Accounts payable $ 17,086 $ 10,328
Accrued compensation and related items 52,631 36,574
Deferred revenue 4,719 4,643
Accrued income taxes 2,969 4,281
Other current liabilities 24,400 17,905
---------- ----------
Current liabilities before ENS client deposits 101,805 73,731
ENS client deposits 1,785,140 1,358,605
---------- ----------
Total current liabilities 1,886,945 1,432,336
Long-term liabilities 5,200 4,965
---------- ----------
Total liabilities 1,892,145 1,437,301
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
600,000 authorized shares
Issued: 371,769/May 31, 2000 and
246,326/May 31, 1999 3,718 2,463
Additional paid-in capital 98,904 68,238
Retained earnings 469,385 362,269
Accumulated other comprehensive income/(loss) (8,575) 2,830
---------- ----------
Total stockholders' equity 563,432 435,800
---------- ----------
Total liabilities and stockholders' equity $2,455,577 $1,873,101
========== ==========
PAYCHEX, INC.
BUSINESS SEGMENT INFORMATION
(In thousands)
The Company has two business segments: Payroll and Human Resource
Services-Professional Employer Organization (HRS-PEO). The Payroll segment is
engaged in the preparation of payroll checks, internal accounting records,
federal, state and local payroll tax returns, and collection and remittance of
payroll obligations for small- to medium-sized businesses. The HRS-PEO segment
specializes in providing small- to medium-sized businesses with cost-effective
outsourcing solutions for their employee benefits. HRS-PEO products include
401(k) Plan Recordkeeping, Workers' Compensation Insurance, Section 125 Plan
Administration, Paychex Administrative Services, Professional Employer
Organization (PEO), Group Benefits, State Unemployment Insurance, and Employee
Management services. Corporate expenses are primarily related to the
Information Technology, Organizational Development, Finance, Marketing and
Senior Management functions of the Company.
For the three months ended For the twelve months ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
Service revenues:
Payroll $175,606 $141,975 $653,245 $545,249
HRS-PEO (A) 21,580 14,661 74,874 52,047
-------- -------- -------- --------
Total service revenues $197,186 $156,636 $728,119 $597,296
======== ======== ======== ========
ENS investment revenue
included in Payroll
revenue $ 18,205 $ 13,800 $ 58,800 $ 52,335
======== ======== ======== ========
Operating income:
Payroll (B) $ 80,926 $ 64,536 $303,360 $237,236
HRS-PEO (B) 6,331 3,794 23,395 11,072
-------- -------- -------- --------
Segment operating income 87,257 68,330 326,755 248,308
Corporate expenses 17,459 15,900 67,862 60,746
-------- -------- -------- ---------
Total operating income 69,798 52,430 258,893 187,562
Investment income 4,925 3,541 16,479 12,581
-------- -------- -------- --------
Income before income taxes $ 74,723 $ 55,971 $275,372 $200,143
======== ======== ======== ========
(A) Net of PEO directs costs billed and incurred of $216,176 and $148,309 for
the three months ended May 31, 2000 and 1999, respectively, and $731,266 and
$578,132 for the twelve months ended May 31, 2000 and 1999, respectively. PEO
direct costs billed to clients are equal to PEO direct costs incurred for the
wages and payroll taxes of worksite employees and their related benefit
premiums and claims.
(B) In 2000, the Company began allocating a portion of operating facilities
costs from the Payroll segment to the HRS-PEO segment. Prior year's segment
results have been restated to reflect the allocation of these facilities costs
with no impact to total Segment operating income. The total amounts of these
allocations were $413,000 and $382,000 for the three months ended May 31, 2000
and 1999, respectively, and $1,650,000 and $1,526,000 for the twelve months
ended May 31, 2000 and 1999, respectively.
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, 2000 (fiscal
2000, 1999 and 1998), and its financial condition at May 31, 2000. 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
provides additional analysis and disclosure than that contained in the
Company's June 26, 2000 press release, which precedes this discussion.
This review is not a complete and comprehensive discussion and analysis as
required by the Securities and Exchange Commission for Annual Reports filed on
Form 10-K or quarterly reports filed on Form 10-Q. The 2000 Form 10-K and the
Annual Report to Shareholders is expected to be mailed in August 2000, and will
contain a complete set of audited Consolidated Financial Statements, and an
updated Management's Discussion and Analysis of Financial Condition and Results
of Operations for the years ended May 31, 2000, 1999 and 1998, and its
financial condition at May 31, 2000.
Forward-looking statements in this Management's Discussion and Analysis are
qualified by the cautionary statement in Exhibit 99, contained in this Form
8-K.
Results of Operations
In thousands,
except per share amounts 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Service revenues $728,119 21.9% $597,296 21.0% $493,704
Operating income $258,893 38.0% $187,562 39.2% $134,700
Operating margin 35.6% 31.4% 27.3%
Income before income taxes $275,372 37.6% $200,143 38.8% $144,173
Net income $190,007 36.6% $139,099 36.1% $102,219
% of service revenues 26.1% 23.3% 20.7%
Basic earnings per share $ .51 34.2% $ .38 35.7% $ .28
Diluted earnings per share $ .51 37.8% $ .37 37.0% $ .28
================================================================================
The financial results for Paychex, Inc., in 2000, reflect the tenth consecutive
year of record service revenues and net income, and the ninth consecutive year
of net income growth of 36% or more. The Company's ability to continually grow
its client base, add new services, increase client utilization of ancillary
services, implement price increases and decrease operating expenses as a
percent of service revenues has resulted in ten years of average compounded
annual growth in service revenues of 20% and net income of 36%.
The Company has two reportable business segments: Payroll and Human Resource
Services - Professional Employer Organization (HRS-PEO).
Payroll segment
In thousands 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Payroll service revenue $653,245 19.8% $545,249 19.8% $455,227
ENS investment revenue
included in Payroll
service revenue $ 58,800 12.4% $ 52,335 20.5% $ 43,429
Payroll operating income $303,360 27.9% $237,236 30.6% $181,585
Payroll operating margin 46.4% 43.5% 39.9%
- --------------------------------------------------------------------------------
Payroll clients 351.9 9.1% 322.6 9.9% 293.6
Taxpay clients 285.9 12.4% 254.3 15.2% 220.7
Employee Pay Services clients 165.7 22.4% 135.4 29.7% 104.4
================================================================================
Revenues: Payroll service revenue includes service fees and investment
revenue. Service fee revenue is earned primarily from Payroll, Taxpay,
Employee Pay Services and other ancillary services. Employee Pay Services
include the Direct Deposit, Readychex and Access Card products. ENS investment
revenue is earned during the period between collecting client funds (ENS
investments) and remitting the funds to the applicable tax authorities for
Taxpay clients and employees of Employee Pay Services clients. ENS investment
revenue also includes net realized gains and losses from the sale of
available-for-sale securities.
The increases in Payroll service revenue for 2000 and 1999 are primarily
related to the addition of new clients, new services, price increases and
increased utilization of ancillary services, such as Taxpay and Employee Pay
Services, by both new and existing clients. At May 31, 2000, 81% of Payroll
clients utilized the Taxpay service, compared with 79% at the end of 1999 and
75% at the end of 1998. Client utilization of this product is expected to
mature within a range of 82% to 87%. Client utilization of Employee Pay
Services was 47% at May 31, 2000, versus 42% and 36% at May 31, 1999 and 1998,
respectively. At May 31, 2000, only 27% of the total employees paid by the
Company's core payroll service utilized Employee Pay Services. These services
are expected to provide growth opportunities for fiscal 2001 and beyond.
ENS investment revenue, which is included in Payroll service revenue, has
increased due to more clients utilizing Taxpay and Employee Pay Services and
higher daily client balances. The growth rate in ENS investment revenue is also
affected by factors such as the maturing of the Taxpay product, volatile
interest rate movements in both fiscal 2000 and 1999, and the level of realized
gains and losses. Average daily ENS investment portfolio balances were
approximately $1.4 billion, $1.1 billion and $1.0 billion in fiscal 2000, 1999
and 1998, respectively. The first half of fiscal 2000 reflected lower
comparable rates of return while, the second half of fiscal 2000, especially
the fourth quarter, benefited from increasing interest rates. In fiscal 2000,
ENS investments incurred realized losses of $2.9 million compared with realized
gains of $2.4 million and $0.8 million in fiscal 1999 and 1998, respectively.
Payroll revenue growth for the fourth quarter of fiscal 2000 was 23.7% compared
to 19.8% for the full year. The higher than normal growth was due to higher
interest rates and the timing of billing days in the quarter. Fiscal 2001's
percentage growth in Payroll revenue is expected to be towards the upper end of
a range of 18% to 20%.
Operating income: Operating income for 2000 and 1999 increased as a result of
increased revenue and leveraging of the segment's operating expense base, as
evidenced by the increases in the segment's operating margins year-over-year.
Effective September 1, 1999, the Company increased its sales force compensation
package to increase the retention and quality of its payroll sales
representatives. This compensation increase resulted in additional annualized
pre-tax expense of approximately $6.0 million, of which $4.5 million was
reflected in fiscal 2000. Sales related expenses were also impacted in the
fourth quarter of fiscal 2000 as the Company accelerated the hiring and
training of Payroll sales representatives for fiscal 2001 selling efforts.
During fiscal 2000, the Company continued expansion of its Major Market
Services payroll product offering to include forty-four of the slightly more
than one hundred sales territories covered by its core Payroll product. The
Major Market Services product now services over 6,000 clients and generated
approximately $30 million in revenue for fiscal 2000. The Company will
continue to expand into new cities for the next several years.
HRS-PEO segment
In thousands 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
HRS-PEO service revenue $ 74,874 43.9% $52,047 35.3% $38,477
HRS-PEO operating income $ 23,395 111.3% $11,072 108.0% $ 5,322
HRS-PEO operating margin 31.2% 21.3% 13.8%
- --------------------------------------------------------------------------------
401(k) Recordkeeping
clients 14.7 45.5% 10.1 68.3% 6.0
401(k) client funds managed
externally (in millions) $1,337.5 76.5% $ 757.6 97.7% $ 383.3
Section 125 clients 23.9 18.3% 20.2 23.2% 16.4
Workers' Compensation
Insurance clients 10.4 160.0% 4.0 100.0% --
PEO worksite employees 20.2 10.4% 18.3 -4.7% 19.2
================================================================================
Revenues: The significant increases in service revenue for 2000 and 1999 are
primarily related to the benefits of growing a recurring revenue stream from
401(k) Recordkeeping clients, Workers' Compensation Insurance clients, Section
125 clients, and the number of Professional Employer Organization (PEO)
worksite employees. The increase in 401(k) clients reflects the continuing
interest of small- to medium-sized businesses to offer retirement savings
benefits to their employees. During the first quarter of fiscal 1999, the
Company began a national rollout of its Workers' Compensation Insurance
Product, which provides insurance for qualified clients through several leading
insurance providers and a method to enhance their cash flows. The decline in
PEO worksite employees in 1999 was caused by the loss of two large PEO clients
which offset additions to worksite employees. The loss of these clients did
not have a material impact on fiscal 2000 or 1999.
Operating income: For 2000 and 1999, the increases in operating income are
primarily related to gains in recurring service revenue and leveraging of
operating expenses.
In fiscal 2000, the Company began a nationwide expansion of Paychex
Administrative Services (PAS), a combined payroll and human resource
outsourcing solution designed to make it easier for small businesses to manage
their payroll and benefit costs. The Company also added SIMPLE IRA Plans to
its retirement services product line and continued to expand the Workers'
Compensation Insurance product.
Full-year fiscal 2001's HRS-PEO service revenue and operating income are
expected to grow at a rate lower than fiscal 2000's rate, but at a rate much
higher than the Payroll segment's growth rate. Fiscal 2001's
quarter-over-quarter percentage comparisons in HRS-PEO service revenue and
operating income may vary significantly throughout the year, and any one
particular quarter's results may not be indicative of expected full-year
results.
Corporate expenses
In thousands 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Corporate expenses $67,862 11.7% $60,746 16.4% $52,207
================================================================================
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing and Senior Management functions
of the Company. For 2000 and 1999, the increases in expenses are primarily due
to additional employees and other expenditures required to support the
continued growth of the Company's business segments. In fiscal 2000, the
Company also continued to invest in numerous internet-based product
enhancements which will be utilized by both CPAs and clients in fiscal 2001. In
fiscal 2000, these increases were offset by lower spending on national
marketing efforts during the last half of the year and by the internal
payroll-related costs capitalized for the development of internal-use software.
These capitalized costs are in accordance with the adoption of Statement of
Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", which became effective for the Company
on June 1, 1999.
In fiscal 2001, Corporate expenses are expected to grow at a rate lower than in
fiscal 2000.
Investment income
In thousands 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Investment income $16,479 31.0% $12,581 32.8% $9,473
================================================================================
Investment income primarily represents earnings from the Company's cash and
cash equivalents and investments in available-for-sale securities. Investment
income does not include earnings from the ENS investments, which are recorded
as ENS investment revenue within the Payroll segment. The increases in
Investment income are primarily due to the increases in the average daily
invested balances generated from increases in overall cash flows. In fiscal
2000, these increases were offset by realized losses of $0.8 million on
available-for-sale securities compared with realized gains of $0.5 million and
$0.1 million in fiscal 1999 and 1998, respectively. For fiscal 2000, the
twelve-month average long-term rate of return was slightly higher than the
average rate of return earned in fiscal 1999, reflecting lower comparable rates
of return in the first half of fiscal 2000 and higher comparable rates in the
second half of the fiscal year. Investment income for fiscal 2001, subject to
changes in market rates of interest, is expected to grow at a rate higher than
fiscal 2000, reflecting the expected benefit of higher comparable rates of
return.
Income taxes
In thousands 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Income taxes $85,365 39.8% $61,044 45.5% $41,954
Effective income tax rate 31.0% 30.5% 29.1%
================================================================================
For 2000 and 1999, the increases in the effective income tax rate are due to
the growth in taxable income exceeding the growth in tax-exempt income.
Tax-exempt income is derived primarily from income earned on municipal debt
securities. Fiscal 2001's effective income tax rate is expected to be in the
range of rates experienced in fiscal 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
In thousands 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Operating cash flows $249,028 43.0% $174,120 27.3% $136,761
================================================================================
The increases in operating cash flows resulted primarily from the consistent
achievement of record net income. Projected operating cash flows are expected
to adequately support normal business operations, forecasted growth, purchases
of property and equipment and dividend payments. Furthermore, at year-end, the
Company had $459 million in available cash and investments. The Company also
had $140 million of available, uncommitted, unsecured lines of credit and $350
million available under an uncommitted, secured line of credit which was
entered into during the third quarter of fiscal 2000.
Investing activities
In thousands 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Net investments and ENS
activities $(144,322) 74.5% $ (82,724) -6.8% $ (88,728)
Purchases of P&E, net (32,888) 48.8% (22,104) -21.6% (28,197)
Purchases of other assets (6,964) 94.0% (3,590) 599.8% (513)
- --------------------------------------------------------------------------------
Net cash used in investing
activities $(184,174) 69.9% $(108,418) -7.7% $(117,438)
================================================================================
Corporate investments and ENS investments: Corporate investments are primarily
available-for-sale debt securities. ENS investments are primarily short-term
funds and available-for-sale debt securities.
Corporate investments have increased due to the investment of increasing cash
balances provided by operating activities less purchases of property and
equipment and dividend payments. The reported amount of ENS investments will
vary significantly based upon the timing of collecting client funds, and
remitting the funds to the applicable tax authorities for Taxpay clients and
employees of clients utilizing the Employee Payment Services.
At May 31, 2000, the Company had $1,202.7 million of cost and fair value
invested in money market securities and other cash equivalents with an average
maturity of less than 30 days, and $984.3 million of fair value invested in
available-for-sale securities with an average duration of 2.4 years. At May
31, 2000, the market value of the available-for-sale securities was lower than
their cost basis by $13.4 million compared to a market value exceeding cost
basis by $4.5 million at the end of May 1999.
Additional discussion of interest rates and related risks is included in the
Market and Risk Factors section of this review.
Purchases of property and equipment, net: In fiscal 2000, the Company made net
purchases of property and equipment of $32.9 million. During the past year,
the Company sold an office facility in California for approximately $1.2
million and purchased a branch office facility in Pennsylvania for $6.1
million. Purchases of property and equipment in fiscal 2001 are expected to
range from $30 million to $35 million. In addition, the Company is in the
process of evaluating the construction of an additional facility at Corporate
headquarters with a cost ranging from $20 million to $30 million. The proposed
building would primarily be occupied by employees who are currently occupying
leased facilities and would be completed in the summer of 2002.
Effective June 1, 1999 the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires the capitalization of internal use computer
software costs if certain criteria are met, including all external direct costs
for materials and services and certain payroll and related fringe benefit
costs. Prior to fiscal 2000, the Company expensed as incurred certain payroll
and related fringe benefit costs to develop and enhance its internal computer
programs and software. The effect of adopting the SOP increased net income by
approximately $2.4 million for the year ended May 31, 2000.
Financing activities
In thousands, except
per share amounts 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Dividends paid $(81,583) 50.9% $(54,055) 50.7% $(35,871)
Proceeds from exercise of
stock options 11,242 103.1% 5,535 178.1% 1,990
Other (69) 13.1% (61) -27.4% (84)
- --------------------------------------------------------------------------------
Net cash used in
financing activities $(70,410) 44.9% $(48,581) 43.0% $(33,965)
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Cash dividends per common
share $ .22 46.7% $ .15 50.0% $ .10
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Dividends paid: The Company has increased its quarterly cash dividend rate per
share by 50% in each of the last eight fiscal years. The Company has
distributed three-for-two stock splits effected in the form of 50% stock
dividends on outstanding shares each May in the past six fiscal years.
Proceeds from exercise of stock options: The increase in proceeds from
exercise of stock options reflects the issuance of 1,532,000 shares of common
stock for stock option exercises in 2000, versus 1,032,000 shares in 1999 and
277,000 shares in 1998, on a pre-split-adjusted basis. In May 1999, 50% of
the November 1996 broad based incentive stock option grant vested, resulting in
an increase in shares available for exercise.
MARKET RISK FACTORS:
Interest rate risk: The Company's available-for-sale debt securities are
exposed to market risk from changes in interest rates, as rate volatility will
cause fluctuations in the market value of held investments. Increases in
interest rates normally decrease the market value of the available-for-sale
securities, while decreases in interest rates increase the market value of the
available-for-sale securities.
In addition, the Company's available-for-sale securities and short-term funds
are exposed to earnings risk from changes in interest rates, as rate volatility
will cause fluctuations in the earnings potential of future investments.
Increases in interest rates quickly increase earnings from short-term funds,
and over time increase earnings from the available-for-sale securities
portfolio. Earnings from the available-for-sale securities do not reflect
changes in rates until the investments are sold or mature, and the proceeds are
reinvested at current rates. Decreases in interest rates have the opposite
earnings effect on the available-for-sale securities and short-term funds.
The Company directs investments towards high credit-quality, tax-exempt
securities to mitigate the risk that earnings from the portfolio could be
adversely impacted by changes in interest rates in the near term. The Company
invests in short- to intermediate-term, fixed-rate municipal and government
securities, which typically have lower interest rate volatility, and manages
the securities portfolio to a benchmark duration of 2.5 to 3.0 years. The
Company does not utilize derivative financial instruments to manage interest
rate risk.
Over the twelve-month period of fiscal 2000, the federal funds rate increased a
total of 175 basis points. The following table summarizes the federal funds
rate activity over the last three years.
2000 1999 1998
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Federal funds rate - beginning of fiscal year 4.75% 5.50% 5.50%
Rate increase/(decrease):
First quarter .50 - -
Second quarter .25 (.75) -
Third quarter .25 - -
Fourth quarter .75 - -
- --------------------------------------------------------------------------------
Federal funds rate - end of fiscal year 6.50% 4.75% 5.50%
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The earnings impact of these rate changes is not precisely quantifiable because
many factors influence the return on the Company's portfolio. These factors
include, among others, daily interest rate changes, the proportional mix of
taxable and tax-exempt investments, and changes in tax-exempt and taxable
investment rates, which are not synchronized, nor do they change
simultaneously. Subject to the aforementioned factors, a 25 basis point change
normally affects the Company's tax-exempt interest rates by approximately 17
basis points.
As of May 31, 2000 and May 31, 1999, the Company had approximately $984.3
million and $879.6 million, respectively, invested in available-for-sale
securities at fair value, with weighted-average yields to maturity of 4.5% and
4.1%, respectively. Assuming a hypothetical increase in interest rates of 25
basis points given the May 31, 2000 and May 31, 1999 portfolios of securities,
the resulting potential decrease in fair value would be approximately $6.0
million and $5.4 million, respectively. Conversely, a corresponding decrease
in interest rates would result in a comparable increase in fair value. This
hypothetical increase or decrease in the fair value of the portfolio would be
recorded as an adjustment to the portfolio's recorded value, with an offsetting
amount recorded in stockholders' equity, and with no related or immediate
impact to the results of operations. The Company's interest rate risk exposure
has not changed materially since May 31, 1999.
Credit risk: The Company is exposed to credit risk in connection with these
investments through the possible inability of the borrowers to meet the terms
of the bonds. The Company attempts to limit credit risk by investing primarily
in AAA and AA rated securities, A-1 rated short-term securities and by limiting
amounts that can be invested in any single instrument. At May 31, 2000,
approximately 99% 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.
OTHER:
Recently Issued Accounting Standards: In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements." This SAB formalizes the SEC's position
on application of revenue recognition rules. Adoption of this SAB is for
fiscal years beginning after March 15, 2000. The Company believes that
adoption of the provisions of this SAB will not have a material impact on the
Company's results of operations.