EXHIBIT 13: PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR
ENDED MAY 31, 1997
SELECTED FINANCIAL DATA
- -----------------------
SUMMARY OF SELECTED FINANCIAL DATA
(In thousands except per share amounts and other statistics)
For the years ended or at May 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Service revenues:
Payroll $ 368,855 $ 309,517 $ 254,093 $ 215,663 $ 184,004
HRS-PEO 30,878 23,791 18,020 11,290 7,700
Total service revenues 399,733 333,308 272,113 226,953 191,704
PEO direct costs billed (1) 334,966 233,135 139,953 96,952 60,434
Total revenue 734,699 566,443 412,066 323,905 252,138
PEO direct costs (1) 334,966 233,135 139,953 96,952 60,434
Operating costs 115,034 101,235 81,663 70,034 61,877
Selling, general and administrative expenses 188,074 162,151 138,186 119,477 102,893
Operating income 96,625 69,922 52,264 37,442 26,934
% of total service revenues 24.2% 21.0% 19.2% 16.5% 14.0%
Investment income, net of interest expense 7,031 5,467 3,458 2,220 1,379
Income before income taxes 103,656 75,389 55,722 39,662 28,313
% of total service revenues 25.9% 22.6% 20.5% 17.5% 14.8%
Net income 75,150 55,035 40,389 28,746 20,241
% of total service revenues 18.8% 16.5% 14.8% 12.7% 10.6%
FINANCIAL POSITION
Working capital $ 194,614 $ 138,639 $ 100,009 $ 68,888 $ 46,776
Purchases of property and equipment 18,536 17,806 12,535 11,667 8,822
Total assets 1,201,323 831,585 647,366 474,786 322,214
Total debt (including current portion) - - 728 948 1,634
Stockholders' equity 251,542 191,072 141,976 109,124 85,365
Return on stockholders' equity 33.9% 32.3% 32.2% 29.6% 26.5%
COMMON STOCK
Earnings per share $ .70 $ .51 $ .38 $ .27 $ .19
Cash dividends per share .22 .17 .10 .07 .04
Weighted-average number of shares outstanding 108,001 106,929 105,486 105,177 104,742
OTHER STATISTICS
Payroll segment:
Payroll clients 262,700 234,300 207,900 185,900 167,500
Branch service centers 79 75 71 70 70
Sales offices 23 23 23 24 20
HRS-PEO segment:
PEO worksite employees 13,800 9,200 5,300 3,400 1,800
401(k) clients 3,000 1,300 200 - -
- ------------------------------------------------------------------------------------------------------------------------
Note: Per share and weighted-average share amounts have been adjusted for
three-for-two stock splits in May 1997, May 1996, May 1995 and August 1993.
All financial information has been restated to reflect the August 1996 merger
of Paychex, Inc. and National Business Solutions, Inc. as well as the
formation of the HRS-PEO business segment in the third quarter of fiscal 1997.
Prior to 1997, all financial information has been restated to report the
Electronic Network Services investments and related client deposits as current
assets and current liabilities on the consolidated balance sheets, with no
effect on previously reported net income or earnings per share. (1) Wages and
payroll taxes of PEO worksite employees and their related benefit premiums and
claims.
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 years in the period ended May 31, 1997, and its
financial condition at May 31, 1997. The focus of this review is on the
underlying business reasons for significant changes and trends affecting
revenues, net income and financial condition. This review should be read in
conjunction with the 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 end of this discussion.
NOTABLE EVENTS
- --------------
Business Combinations
- ---------------------
During 1997, Paychex identified certain strategic products that should support
the strong growth and exceptional returns that Paychex shareholders have
enjoyed for many years. The acquisition of National Business Solutions, Inc.
(NBS), now Paychex Business Solutions, Inc. (PBS), recognized the opportunity
to provide ongoing benefits management to small- to medium-sized businesses.
PBS, a professional employer organization (PEO), was combined with the
Company's Human Resources Services (HRS) to form the HRS-PEO business segment,
which will develop and market its combined portfolio of products -- 401(k)
recordkeeping, insurance services, section 125 plans, employee handbooks and
PEO services. All financial information has been restated to reflect the
results of the NBS merger, accounted for as a pooling of interests.
The Company acquired the common stock of 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. (d/b/a Payday), 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.
Balance Sheet Presentation
- --------------------------
Prior to May 1997, the Company did not report the Electronic Network Services
(ENS) funds generated from Taxpay and Direct Deposit products as assets and
liabilities based on its understanding of the nature of the funds and industry
practices. The amount of funds held and related investments were disclosed in
the Notes to previously issued consolidated financial statements. Due to
recent changes in case law, the Company restated the previously reported
consolidated financial statements to reflect the ENS funds and related client
deposit liabilities as current assets and current liabilities on the
consolidated balance sheets. This restatement had no effect on previously
reported net income or earnings per share.
RESULTS OF CONSOLIDATED OPERATIONS
For the years ended May 31, 1997 Change 1996 Change 1995
(In thousands except per share amounts)
- --------------------------------------------------------------------------------------------------
Total revenue $ 734,699 +29.7% $ 566,443 +37.5% $ 412,066
Operating income $ 96,625 +38.2% $ 69,922 +33.8% $ 52,264
Net income $ 75,150 +36.5% $ 55,035 +36.3% $ 40,389
Earnings per share $ .70 +37.3% $ .51 +34.2% $ .38
- --------------------------------------------------------------------------------------------------
The financial results for Paychex, Inc., in 1997 reflected the seventh
consecutive year of record revenues and net income. The Company's ability to
continually grow its client base, increase the utilization of ancillary
services and decrease selling, general and administrative expenses as a
percent of revenue, resulted in seven years of average compounded annual
growth in revenue of 29.5% and net income of 36.4%. Fiscal 1998 is expected
to show continued growth in revenue, client base and resulting net income.
PAYROLL SEGMENT:
For the years ended May 31, 1997 Change 1996 Change 1995
(In thousands)
- ----------------------------------------------------------------------------------------------------
Payroll services revenue $368,855 +19.2% $309,517 +21.8% $254,093
Payroll operating income $ 99,422 +36.6% $ 72,763 +30.1% $ 55,931
Client statistics at May 31,
Payroll clients 262.7 +12.1% 234.3 +12.7% 207.9
Taxpay clients 180.9 +38.0% 131.1 +24.5% 105.3
Direct Deposit clients 76.5 +49.1% 51.3 +39.8% 36.7
Check Signing clients 27.2 +21.4% 22.4 +24.4% 18.0
- ----------------------------------------------------------------------------------------------------
Revenues: Payroll, Taxpay and Direct Deposit revenues include service fees
and investment income. Investment income is earned during the period between
collecting client funds and remitting the funds to the applicable tax
authorities or client employees from Taxpay and Direct Deposit products.
Client base gains increased service revenues and investment income over the
past two years. During 1997, the Taxpay client base benefited from the
Federal mandate requiring small businesses to file payroll taxes
electronically as of July 1, 1997. This benefit is expected to increase the
Taxpay client base in 1998 as more Payroll clients will take advantage of this
service to meet the Federal mandate.
Operating income: Operating income for 1997 and 1996 increased as a result of
continued growth of the client base and utilization of ancillary services,
plus continued leveraging of the segment's operating expense base.
Effective July 1, 1997, the Company will comply with the Internal Revenue
Service's Electronic Funds Transfer Payment Service by making client tax
payments "good funds" one business day earlier. Therefore, revenue and income
for 1998 will be reduced by approximately $3 million because of lower levels
of tax-exempt municipal security investments. The Company has implemented a
modest price increase for its Taxpay services which is expected to offset
these reductions.
Payroll revenues and operating income for 1998 are expected to increase from
the growth of the number of clients, plus continued leveraging of the
operating expense base and selling, general and administrative expenses as a
percent of revenue.
HRS-PEO SEGMENT:
For the years ended May 31, 1997 Change 1996 Change 1995
(In thousands)
- -----------------------------------------------------------------------------------------
HRS-PEO service revenue $ 30,878 + 29.8% $ 23,791 + 32.0% $ 18,020
PEO direct costs billed 334,966 + 43.7% 233,135 + 66.6% 139,953
-------- ------- -------- --------- --------
Total HRS-PEO revenue 365,844 + 42.4% 256,926 + 62.6% 157,973
PEO direct costs 334,966 + 43.7% 233,135 + 66.6% 139,953
HRS-PEO operating income $ 4,474 +164.6% $ 1,691 +7,952.4% $ 21
Client statistics at May 31,
401(k) clients 3.0 +130.8% 1.3 + 550.0% .2
PEO worksite employees 13.8 + 50.0% 9.2 + 73.6% 5.3
- -----------------------------------------------------------------------------------------
Revenues: The growth in revenue is largely attributable to the increases in
the number of 401(k) clients and PEO worksite employees. Fiscal 1998 revenues
are expected to grow as the Company continues to increase 401(k) clients, PEO
worksite employees and other HRS-PEO ancillary product sales.
Operating income: Improvements in HRS-PEO operating income for 1997 and 1996
resulted from significant increases in sales of 401(k) recordkeeping services,
growth in PEO worksite employees and processing efficiencies. Operating
income for 1997 has been reduced by start-up costs for a PEO branch in
Southern California, costs of continued HRS-PEO expansion and costs to
centralize administrative functions in Rochester, New York. Operating income
for 1998 is expected to increase, but will continue to be impacted by costs of
expansion and centralization of administrative functions.
PEO direct costs billed and direct costs: Consistent with industry practices
and generally accepted accounting principles, PEO revenues reported in the
consolidated statements of income include the service fee, plus the direct
costs billed to clients for the wages and payroll taxes of worksite employees,
their related benefit premiums and claims and other direct costs. The Company
continually manages the costs related to employee benefits, including workers'
compensation liabilities. The Company recorded reserves for workers'
compensation claims costs at the expected liability amount based on the
estimated loss exposure considering the maximum potential exposure under the
workers' compensation deductible insurance policies. At May 31, 1997 and
1996, the recorded reserve is at the maximum exposure under these insurance
policies. The increases in PEO direct costs billed and direct costs are
reflective of the increases in the number of PEO worksite employees.
Investment income:
For the years ended May 31, 1997 Change 1996 Change 1995
(In thousands)
- ---------------------------------------------------------------------------
Investment income $7,031 +28.6% $5,467 +58.1% $3,458
- ---------------------------------------------------------------------------
Investment income earned from the Company's Investments, which does not
include the income earned from ENS investments, has grown mainly as a result
of increases in investment balances generated from successive gains in
operating cash flows. Investment income for 1998 is expected to grow as a
result of increased net income and investment of subsequent operating cash
flows, but will be impacted by typical changes in market rates of interest.
Income taxes: In each of the past three years, the Company's effective tax
rate ranged from 27.0% to 27.5%. Fiscal years 1996 and 1995 have been
impacted by the restatement for the merger with NBS, taxed as a subchapter S
corporation, which resulted in a benefit of 1.3% and 0.9%, respectively.
Fiscal 1998's effective tax rate is expected to range from 28.5% to 29.5%.
Liquidity and Capital Resources
- -------------------------------
Consolidated operating cash flows:
For the years ended May 31, 1997 Change 1996 Change 1995
(In thousands)
- -------------------------------------------------------------------------------
Operating cash flows $101,819 +50.2% $67,773 +27.7% $53,082
- -------------------------------------------------------------------------------
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 be adequate to
support normal business operations and continued growth, planned purchases of
property and equipment and dividend payments. Furthermore, at May 31, 1997,
the Company had $183.0 million in available cash and investments and $262.5
million of available, unsecured and unused lines of credit.
Investments and ENS investments: Investments and ENS investments consist of
various government securities, investment grade municipal securities, money
market funds and other cash equivalents. The Company is exposed to credit
risk in connection with these investments through the possible inability of
the borrowers to meet the terms of the bonds. The Company attempts to limit
credit risk by investing primarily in AAA- and AA-rated securities, A-rated or
better money market funds and by limiting amounts that can be invested in any
single instrument. The Company invests in short- to intermediate-term
securities as they are less sensitive to interest rate fluctuations. At May
31, 1997, the portfolio of securities had an average duration of 2.6 years.
During 1996, greater investment purchases and sales activity occurred as the
Company managed its investment portfolio to minimize risks associated with
declining market interest rates experienced during that year.
Purchases of property and equipment:
For the years ended May 31, 1997 Change 1996 Change 1995
(In thousands)
- -----------------------------------------------------------------------------
Purchases of P&E $18,536 +4.1% $17,806 +42.1% $12,535
- -----------------------------------------------------------------------------
A major portion of the increase in 1996 purchases over 1995 included upgrades
to terminals and telecommunications equipment in branch offices which enhanced
operating efficiency and customer service. Purchases for 1997 were comprised
of additional upgrades to data processing equipment and workstations. During
1997, the Company implemented a major upgrade of its laser printing equipment
in branch offices through a five-year operating lease with future minimum
lease payments of approximately $10.0 million. Purchases of property and
equipment in 1998 are expected to range from $19 to $23 million.
Cash dividends and stock splits:
For the years ended May 31, 1997 Change 1996 Change 1995
(In thousands except per
share amounts)
- ------------------------------------------------------------------------------
Cash dividends $24,117 +36.4% $17,685 +67.9% $10,531
Cash dividends per share $ .22 +29.4% $ .17 +70.0% $ .10
- ------------------------------------------------------------------------------
Cash dividends per share have been restated for the year ended May 31, 1996,
to include the effects of $2.6 million in distributions made to stockholders
of NBS. Cash dividends per share as previously reported by the Company for
the year ended May 31, 1996, were $.15 per share. The Company has distributed
three-for-two stock splits effected in the form of 50% stock dividends on
outstanding shares each month of May for the years of 1997, 1996 and 1995.
All financial information within this Annual Report has been adjusted for
these stock splits.
Other
- -----
Recently issued accounting standards: In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share," which will be adopted by the Company for
interim and annual periods after December 15, 1997. This Statement will not
impact the Company's currently reported earnings per share. The Company will
be required to change the method currently used to compute fully diluted
earnings per share, but the impact is not expected to be material.
Year 2000 date conversion: During 1997, the Company established a team to
coordinate the identification, evaluation and implementation of changes to
computer systems and software necessary to achieve a year 2000 date
conversion. The team's efforts are necessary to ensure that systems and
software will recognize and process the year 2000 and beyond with no effect on
clients or disruptions to business operations. The total cost of the team's
efforts and its effect on the Company's future results of operations is not
expected to be material.
Forward-looking cautionary statement
- ------------------------------------
In an effort to give investors a well-rounded view of the Company's current
condition and future opportunities, this Annual Report includes comments by
the Company's management about future performance and results. Because they
are forward-looking, these forecasts involve uncertainties. They include
risks of general market conditions, including demand for the Company's
products and services, competition and price levels; changes in the laws
regulating collection and payment of payroll taxes, professional employer
organizations, and employee benefits, including 401(k) plans, workers'
compensation, and section 125 plans; delays in the development and marketing
of new products and services; the possibility of catastrophic events that
could impact the Company's operating facilities, computer technology and
communication systems; changes in short- and long-term interest rates and the
credit rating of municipal securities held in the Company's investment
portfolios.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------------------------------------------
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, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended May 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for investments in fiscal year 1995.
Syracuse, New York /s/ERNST & YOUNG LLP
June 25, 1997
CONSOLIDATED STATEMENTS OF INCOME
For the years ended May 31, 1997 1996 1995
- -----------------------------------------------------------------------------
(In thousands except per share amounts)
Service revenues:
Payroll $368,855 $309,517 $254,093
HRS-PEO 30,878 23,791 18,020
-------- -------- --------
Total service revenues 399,733 333,308 272,113
PEO direct costs billed (1) 334,966 233,135 139,953
-------- -------- --------
Total revenue 734,699 566,443 412,066
PEO direct costs (1) 334,966 233,135 139,953
Operating costs 115,034 101,235 81,663
Selling, general and
administrative expenses 188,074 162,151 138,186
-------- -------- --------
Operating income 96,625 69,922 52,264
Investment income 7,031 5,467 3,458
-------- -------- --------
Income before income taxes 103,656 75,389 55,722
Income taxes 28,506 20,354 15,333
-------- -------- --------
Net income $ 75,150 $ 55,035 $ 40,389
======== ======== ========
Earnings per share $ .70 $ .51 $ .38
======== ======== ========
Cash dividends per share $ .22 $ .17 $ .10
======== ======== ========
Weighted-average shares outstanding 108,001 106,929 105,486
======== ======== ========
- -----------------------------------------------------------------------------
See notes to consolidated financial statements.
(1) Wages and payroll taxes of PEO worksite employees and their related
benefit premiums and claims.
CONSOLIDATED BALANCE SHEETS
May 31, 1997 1996
(Restated)
- ----------------------------------------------------------------------------
(In thousands except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 50,213 $ 19,999
Investments 132,780 102,967
Interest receivable 10,462 7,385
Accounts receivable 45,527 42,076
Deferred income taxes 2,560 2,180
Prepaid expenses and other current assets 2,486 1,903
---------- --------
Current assets before ENS investments 244,028 176,510
Electronic Network Services investments (1) 896,633 599,475
---------- --------
Total current assets 1,140,661 775,985
Property and equipment - net 54,178 50,655
Deferred income taxes 72 -
Other assets 6,412 4,945
---------- --------
Total assets $1,201,323 $831,585
========== ========
LIABILITIES
Current liabilities:
Accounts payable $ 5,649 $ 4,183
Accrued compensation and related items 26,969 19,120
Deferred revenue 4,335 4,934
Reserve for workers' compensation 1,813 1,235
Accrued income taxes 1,774 573
Other current liabilities 9,427 5,941
---------- --------
Current liabilities before ENS client deposits 49,967 35,986
Electronic Network Services client deposits (1) 896,080 601,360
---------- --------
Total current liabilities 946,047 637,346
Other liabilities:
Reserve for workers' compensation 928 865
Deferred income taxes - 416
Other long-term liabilities 2,806 1,886
---------- --------
Total liabilities 949,781 640,513
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized
150,000,000 shares 1,085 716
Issued: 108,518,831 in 1997 and
71,632,456 in 1996
Additional paid-in capital 37,531 30,112
Retained earnings 212,926 160,244
---------- --------
Total stockholders' equity 251,542 191,072
---------- --------
Total liabilities and stockholders' equity $1,201,323 $831,585
========== ========
- ----------------------------------------------------------------------------
See notes to consolidated financial statements.
(1) Electronic Network Services (ENS) investments and related client
deposits result from the collection of funds for Taxpay and Direct Deposit
products.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common stock
------------
Additional
Paid-in Retained
Shares Amount Capital Earnings Total
- ---------------------------------------------------------------------------------------------------------
(In thousands)
Balance at May 31, 1994 31,212 $ 312 $15,894 $ 92,918 $109,124
Exercise of stock options 116 1 1,261 1,262
Tax benefit from stock option transactions 688 688
Shares issued in connection with
three-for-two stock split 15,660 157 (175) (18)
Adjustment to the beginning balance of
investments and ENS investments to
recognize the net unrealized holding loss
on available-for-sale securities upon
adoption of SFAS No. 115, net of
income taxes of $606 (892) (892)
Change in unrealized gains and losses on
investments and ENS investments, net of
income taxes of $1,370 1,954 1,954
Dividends paid (10,531) (10,531)
Net income 40,389 40,389
------- ------ ------- -------- --------
Balance at May 31, 1995 (Restated) 46,988 470 17,843 123,663 141,976
Exercise of stock options 320 3 2,810 2,813
Tax benefit from stock option transactions 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
Change in unrealized gains and losses on
investments and ENS investments, net of
income taxes of $1,631 (2,354) (2,354)
Dividends paid (17,685) (17,685)
Net income 55,035 55,035
Other 11 11
------- ------ ------- -------- --------
Balance at May 31, 1996 (Restated) 71,632 716 30,112 160,244 191,072
Exercise of stock options 267 3 2,177 2,180
Tax benefit from stock option transactions 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
Change in unrealized gains and losses on
investments and ENS investments, net of
income taxes of $1,220 1,831 1,831
Dividends paid (24,117) (24,117)
Net income 75,150 75,150
------- ------ ------- -------- --------
Balance at May 31, 1997 108,519 $1,085 $37,531 $212,926 $251,542
======= ====== ======= ======== ========
- ---------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended May 31, 1997 1996 1995
(Restated) (Restated)
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 75,150 $ 55,035 $ 40,389
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization on depreciable and
intangible assets 15,329 13,940 11,040
Amortization of premiums and discounts on securities 6,115 3,225 2,422
Net change in provision for deferred income taxes (2,053) 2 (41)
Provision for bad debts 1,328 1,034 847
Net realized (gains)/losses on sales of available-for-sale
securities (164) (2,696) 298
Changes in operating assets and liabilities:
Accounts receivable (4,779) (7,455) (10,062)
Interest receivable (3,077) (686) (1,832)
Prepaid expenses and other current assets (583) 228 631
Accounts payable and other current liabilities 13,981 4,882 9,111
Net change in other assets and liabilities 572 264 279
---------- ---------- ----------
Net cash provided by operating activities 101,819 67,773 53,082
INVESTING ACTIVITIES:
Investment purchases of available-for-sale securities (306,488) (565,557) (196,756)
Proceeds from sales of available-for-sale securities 185,161 479,087 110,427
Proceeds from maturities of available-for-sale securities 2,125 12,882 10,775
Net change in Electronic Network Services money market
funds and other cash equivalents (210,669) (88,676) (86,903)
Net change in Electronic Network Services client deposits 294,720 129,836 130,597
Additions to property and equipment, net of disposals (18,008) (17,511) (12,448)
Purchases of other assets (1,935) (793) (202)
---------- ---------- ----------
Net cash used in investing activities (55,094) (50,732) (44,510)
FINANCING ACTIVITIES:
Payments on long-term debt - (431) (220)
Proceeds and tax benefit from exercise of stock options 7,388 5,484 1,950
Dividends paid (24,117) (17,685) (10,531)
Payment in lieu of issuance of fractional shares (27) (45) (18)
Other 245 11 -
---------- ---------- ----------
Net cash used in financing activities (16,511) (12,666) (8,819)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,214 4,375 (247)
Cash and cash equivalents, beginning of fiscal year 19,999 14,812 15,059
Cash obtained from merger and acquisition - 812 -
---------- ---------- ----------
Cash and cash equivalents, end of fiscal year $ 50,213 $ 19,999 $ 14,812
========== ========== ==========
Supplemental cash flow information:
Income taxes paid $ 24,256 $ 17,672 $ 13,831
========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Business activities and segments: The Company operates in two major business
segments: Payroll and Human Resource Services-Professional Employer
Organization (HRS-PEO).
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
Taypay, 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 are invested in various financial instruments,
without significant concentration in any one issuer. 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 service revenue. The amount of ENS funds
held may vary significantly during the year.
Prior to May 1997, the Company did not report the ENS funds as assets and
liabilities based on its understanding of the nature of the funds and industry
practices. The amount of funds held and related investments were disclosed in
the notes to previously issued consolidated financial statements. Due to
recent changes in case law, the Company restated the previously reported
consolidated financial statements to reflect the ENS funds and related client
deposit liabilities as current assets and current liabilities on the
consolidated balance sheets. This restatement had no effect on previously
reported net income or earnings per share.
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., and is engaged
primarily in providing human resource management and personnel administration
services to a diverse client base of small- to medium-sized businesses through
a network of branch offices located in Florida, Georgia and California. 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, 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.
Principles of consolidation: The consolidated financial statements include
the accounts of Paychex, Inc., and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents: Cash and cash equivalents consist of available
cash, money market and municipal bond funds and other investments with a
maturity of three months or less when purchased. Amounts reported in the
consolidated balance sheets approximate fair value.
Investments: Investments and ENS investments are classified as
available-for-sale and are recorded at estimated fair values with unrealized
gains and losses reported as a component of retained earnings in stockholders'
equity, net of applicable income taxes. Realized gains and losses on sales of
investments are determined by specific identification of the investment's cost
basis.
Effective June 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." In accordance with the Statement, prior period financial
statements have not been restated to reflect the change in accounting
principle. The adoption had no effect on net income. The impact of adopting
SFAS No. 115 was to decrease stockholders' equity by $892,000 (net of $606,000
of deferred income taxes) at June 1, 1994 to reflect the unrealized loss on
securities at the beginning of the fiscal year.
Accounts receivable: Accounts receivable consists primarily of amounts billed
to clients for services rendered. In addition, PEO accounts receivable
includes certain unbilled receivables representing fees and direct costs for
worksite employees from the last pay period ending date through the financial
statement date. At May 31, 1997 and 1996, the PEO unbilled receivables were
$6,516,000 and $4,040,000, respectively.
Property and equipment - net: Property and equipment - net is stated at cost,
less accumulated depreciation and amortization. Major renewals and
betterments are charged to the property accounts, while replacements and
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed currently. 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 incurs certain costs to
enhance its computer programs. All such costs are expensed as incurred.
Expenditures for major software purchases are capitalized and amortized by the
straight-line method over the estimated useful lives of the related assets.
Reserve for workers' compensation: Workers' compensation for PEO worksite
employees is provided under a deductible insured plan whereby the maximum
individual claims exposure is $350,000 and the aggregate claims exposure is
limited to a percentage of workers' compensation payroll. The Company
recorded reserves for workers' compensation claims cost at the expected
liability amount based on the estimated loss exposure considering the maximum
potential exposure under the insurance policies. At May 31, 1997 and 1996,
the recorded reserve is at the maximum exposure under the insurance policies.
The portion of the reserve not expected to be paid within one year has been
classified as a non-current liability.
Revenue recognition: Revenues from Payroll activities include those amounts
billed for services rendered, as well as investment income earned from ENS
products. 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.
Deferred revenue: The Company defers revenue on certain services billed in
advance. The revenue is recognized upon completion of these services.
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.
Stock-based compensation costs: The Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," effective June 1, 1996. As permitted by that
Statement, the Company elected to continue to follow Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for employee stock-based compensation
costs. Under APB No. 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
Earnings per share: Earnings per share are based on the weighted-average
common shares outstanding in each year. Common stock equivalents have not
been included as their impact is not material.
Cash dividends per share: Cash dividends per share have been restated for the
year ended May 31, 1996, to include the effects of distributions made to the
stockholders of National Business Solutions, Inc. Cash dividends per share as
restated for the year ended May 31, 1996, were $.17 as compared to $.15 as
originally reported. The restatement had no effect for the years ended May
31, 1997 and 1995.
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.
Recently issued accounting standards: In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which
will be adopted for interim and annual periods ending after December 15, 1997.
This Statement will not impact the Company's currently reported earnings per
share. The Company will be required to change the method currently used to
compute fully diluted earnings per share, but the impact is not expected to be
material.
Reclassifications: Certain amounts from prior years are reclassified to
conform to 1997 presentations.
NOTE B - BUSINESS COMBINATIONS
- --------------------------------
On November 21, 1996, the Company acquired all of the common stock of Olsen
Computer Systems, Inc., now Paychex Computer Systems, Inc., in exchange for
589,389 shares of Paychex common stock in a business combination accounted for
as a pooling of interests. Results of operations prior to the completion of
the merger have not been restated as the effects are not material. Olsen
Computer Systems, Inc., is a leading developer and provider of PC-based
software to payroll service bureaus offering automated payroll and human
resource records management.
On August 29, 1996, the Company acquired all of the common stock of The
Payroll Service, Inc., a payroll services company, in exchange for
approximately 82,781 shares of Paychex common stock in a business combination
accounted for as a pooling of interests. Results of operations prior to the
completion of the merger have not been restated as the effects are not
material.
On August 26, 1996, the Company acquired all of the common stock of National
Business Solutions, Inc. (NBS), now Paychex Business Solutions, Inc. (PBS), a
professional employer organization headquartered in St. Petersburg, Florida,
in exchange for 4,401,744 shares of Paychex common stock in a business
combination accounted for as a pooling of interests. Information included in
these consolidated financial statements and footnotes has been restated to
reflect this merger.
The following is a reconciliation of the amounts of revenue and net income
previously reported with restated amounts:
For the years ended May 31, 1996 1995
- -------------------------------------------------------------------------
(In thousands except per share amounts)
Revenue
Consolidated Paychex, as previously reported $325,285 $267,176
National Business Solutions, Inc. 241,158 144,890
-------- --------
Consolidated Paychex, as restated $566,443 $412,066
======== ========
Net income
Consolidated Paychex, as previously reported $ 52,333 $ 39,040
National Business Solutions, Inc. 2,702 1,349
-------- --------
Consolidated Paychex, as restated $ 55,035 $ 40,389
======== ========
Earnings per share $ .51 $ .38
======== ========
- -------------------------------------------------------------------------
On September 29, 1995, the Company acquired all of the outstanding stock of
The Payroll Company, Inc. (d/b/a Payday), a payroll services company, in
exchange for approximately 260,700 shares of Paychex common stock with a fair
value of $5,000,000 at the date of acquisition. The agreement included a
guarantee that stock issued at $19.07 and not sold prior to September 29,
2000, will appreciate by a minimum of 20% to $22.87 or by approximately
$1,000,000 over the five-year period ending on September 29, 2000. The per
share market value of Paychex common stock at May 31, 1997 was $36.75.
The Payday acquisition was accounted for as a purchase and recorded at the net
present value of the guaranteed $6,000,000 purchase price. Goodwill of
approximately $4,000,000 was recorded in Other assets and is amortized on a
straight-line basis over 10 years. The results of operations of Payday are
included in the accompanying financial statements from the date of acquisition
and did not have a significant impact on the consolidated financial
statements.
On June 15, 1995, the Company acquired all of the common stock of Pay-Fone
Systems, Inc., a payroll services company, in exchange for approximately
746,850 shares of Paychex common stock in a business combination accounted for
as a pooling of interests. Results of operations prior to the completion of
the merger have not been restated as the effects are not material.
NOTE C - INVESTMENTS
- ---------------------
Investments consist of various governmental securities, investment grade
municipal securities, money market funds and other cash equivalents. No
individual issue comprises greater than 1% of total assets. The estimated
fair value of these investments is determined based on information received
from an independent pricing service. Investments are as follows:
May 31, 1997 1996
Cost Fair value Cost Fair value
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
Type of issue
Money market funds and other cash equivalents $ 555,172 $ 555,172 $344,503 $344,503
Securities:
General obligation municipal bonds 178,571 178,797 145,830 145,076
Pre-Refunded municipal bonds 193,135 193,635 130,192 129,639
Revenue municipal bonds 97,931 98,182 72,953 72,611
U.S. Treasury bonds and other 3,712 3,627 11,123 10,613
---------- ---------- -------- --------
Total securities 473,349 474,241 360,098 357,939
---------- ---------- -------- --------
Total investments $1,028,521 $1,029,413 $704,601 $702,442
========== ========== ======== ========
Classification of investments on consolidated balance sheets:
Investments $ 132,780 $102,967
Electronic Network Services investments 896,633 599,475
---------- --------
$1,029,413 $702,442
========== ========
- -----------------------------------------------------------------------------------------------------------------------
The Company is exposed to credit risks 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 interest rate volatility may cause
fluctuations in the market value and earnings potential of investments. The
Company attempts to limit these risks by investing primarily in AAA- and
AA-rated securities, A-rated or better money market funds, 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.
Cost, unrealized gains and losses, and the estimated fair value of securities
are as follows:
Gross Gross
unrealized unrealized Fair
May 31, Cost gains losses value
- -----------------------------------------------------------------------
(In thousands)
1997 $473,349 $1,642 $ 750 $474,241
1996 $360,098 $ 691 $2,850 $357,939
- -----------------------------------------------------------------------
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, 1997 1996 1995
- ------------------------------------------------------------
(In thousands)
Gross realized gains $602 $3,770 $299
Gross realized losses $438 $1,074 $597
- ------------------------------------------------------------
The amortized cost and estimated fair value of securities at May 31, 1997, 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.
Fair
May 31, 1997 Cost value
- --------------------------------------------------------------------
(In thousands)
Maturity date:
Due in one year or less $ 17,723 $ 17,778
Due after one year through three years 240,467 240,954
Due after three years through five years 186,977 187,246
Due after five years 28,182 28,263
-------- --------
Total securities $473,349 $474,241
======== ========
- --------------------------------------------------------------------
NOTE D - PROPERTY AND EQUIPMENT - NET
- -------------------------------------
May 31, 1997 1996
- ---------------------------------------------------------------------------
(In thousands)
Land and improvements $ 2,789 $ 2,787
Buildings and improvements 24,672 24,145
Data processing equipment and software 50,973 43,439
Furniture, fixtures and equipment 44,251 37,921
Leasehold improvements 3,582 2,718
-------- --------
126,267 111,010
Less accumulated depreciation and amortization 72,089 60,355
-------- --------
$ 54,178 $ 50,655
======== ========
- ---------------------------------------------------------------------------
NOTE E - STOCKHOLDERS' EQUITY
- -----------------------------
The Company declared three-for-two stock splits effected in the form of 50%
stock dividends on outstanding shares on various dates as follows:
Stock dividend Payable to Stock dividend
declaration holders of distribution
Fiscal year date record dates
- -----------------------------------------------------------------
1997 April 10, 1997 May 8, 1997 May 29, 1997
1996 April 11, 1996 May 2, 1996 May 23, 1996
1995 April 13, 1995 May 2, 1995 May 25, 1995
- -----------------------------------------------------------------
Earnings per share, cash dividends per share, weighted-average shares
outstanding and all applicable footnotes have been adjusted to reflect the
stock splits noted above.
NOTE F - STOCK OPTION PLANS
- ---------------------------
The Company reserved 2,812,500 shares authorized to be granted to employees in
the form of non-qualified and incentive stock options under the 1995 Stock
Incentive Plan, with 1,097,496 shares available for future grants at May 31,
1997. In addition to grants awarded to the Company's management, a
broad-based grant of 1,047,242 incentive stock options was made to more than
4,000 employees in 1997. The 1992 and 1987 Stock Incentive Plans expired on
August 13, 1995 and 1992, respectively; however, options to purchase 1,821,978
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. If a grantee owns more
than 10% of the Company's outstanding common stock, the exercise price for the
shares subject to incentive stock options must not be less than 110% of the
fair market value on the date of grant. Stock option grants have a
contractual life of ten years, and 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. No employee stock-based compensation costs have been
recognized for the years ended May 31, 1997, 1996 and 1995.
The following table summarizes stock option activity for the three years ended
May 31, 1997:
Shares subject Weighted-average
to options exercise price
- --------------------------------------------------------------------------
Outstanding at May 31, 1994 2,977,992 $ 5.18
Granted 512,332 $10.65
Exercised (385,191) $ 3.28
Forfeited (100,650) $ 9.42
---------
Outstanding at May 31, 1995 3,004,483 $ 6.22
Granted 744,866 $17.83
Exercised (720,061) $ 3.92
Forfeited (89,567) $ 8.57
---------
Outstanding at May 31, 1996 2,939,721 $ 9.65
Granted 1,316,042 $38.46
Exercised (399,652) $ 5.45
Forfeited (319,129) $24.71
---------
Outstanding at May 31, 1997 3,536,982 $19.49
=========
Exercisable at May 31, 1995 1,562,627 $ 3.27
Exercisable at May 31, 1996 1,257,948 $ 4.66
Exercisable at May 31, 1997 1,311,371 $ 6.10
- --------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
May 31, 1997:
Options outstanding Options exercisable
------------------------------------------------ ----------------------------
Shares Weighted- Weighted-average Shares Weighted-
Range of subject average remaining subject average
exercise prices to options exercise price contractual life to options exercise price
- --------------- ---------- -------------- ---------------- ---------- --------------
$ 1.99 - 5.68 914,528 $ 3.94 4.0 years 841,419 $ 3.78
$ 7.23 - 12.15 907,450 $10.19 6.8 years 466,202 $10.14
$20.17 - 22.61 537,975 $20.27 8.4 years 3,750 $22.60
$29.42 - 40.67 1,177,029 $38.38 9.5 years - $ -
--------- ---------
$ 1.99 - 40.67 3,536,982 $19.49 7.2 years 1,311,371 $ 6.10
========= =========
- ---------------------------------------------------------------------------------------------------
Pro forma information regarding net income and 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 and earnings per share for future years, because stock
options 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 and earnings
per share are as follows:
For the years ended May 31, 1997 1996
- ---------------------------------------------------------------------
(In thousands except per share amounts)
Pro forma net income $72,060 $54,523
Pro forma earnings per share $ .67 $ .51
- ---------------------------------------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The fair value of
those 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, 1997 1996
- ----------------------------------------------------------------
Risk-free interest rate 6.2% 5.9%
Dividend yields .9% 1.6%
Volatility factors .28 .29
Expected option term life in years 4.9 4.5
- ----------------------------------------------------------------
The weighted-average grant-date estimated fair value of stock options granted
for the years ended May 31, 1997 and 1996 were $12.58 and $5.89 per share,
respectively.
NOTE G - INCOME TAXES
- ---------------------
The net deferred tax asset components are as follows:
May 31, 1997 1996
- --------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Accrued vacation pay $1,330 $1,391
Reserve for workers' compensation claims 1,105 -
Allowance for bad debts 987 817
Accrual for future medical claims 809 293
Unrealized losses on available-for-sale securities - 867
Other 1,338 903
------ ------
Gross deferred tax assets 5,569 4,271
------ ------
Deferred tax liabilities:
Revenue not subject to current taxes 1,931 1,877
Depreciation 629 554
Unrealized gains on available-for-sale securities 353 -
Other 24 76
------ ------
Gross deferred tax liabilities 2,937 2,507
------ ------
Net deferred tax asset $2,632 $1,764
====== ======
- --------------------------------------------------------------------------
The components of the provision for income taxes are as follows:
For the years ended May 31, 1997 1996 1995
- ----------------------------------------------------------------
(In thousands)
Current:
Federal $24,699 $15,400 $11,404
State 5,860 4,952 3,970
------- ------- -------
Total current 30,559 20,352 15,374
------- ------- -------
Deferred:
Federal (1,719) (18) (31)
State (334) 20 (10)
------- ------- -------
Total deferred (2,053) 2 (41)
------- ------- -------
Provision for income taxes $28,506 $20,354 $15,333
======= ======= =======
- ----------------------------------------------------------------
NBS elected to be taxed as a subchapter S corporation under Federal and state
provisions for the years ended May 31, 1996 and 1995. Accordingly, no tax
provision was recorded for that corporation in these restated consolidated
financial statements, resulting in a reduction of the Company's overall
effective tax rate. 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, 1997 1996 1995
- -----------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of Federal benefit 3.5 4.3 4.6
Tax-exempt municipal bond interest (10.9) (11.3) (11.9)
Benefit from NBS income not subject
to income taxes - (1.3) (.9)
Other items (.1) .3 .7
----- ----- -----
Effective tax rate 27.5% 27.0% 27.5%
===== ===== =====
- -----------------------------------------------------------------------
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, 1997, 1996
and 1995 were $2,712,000, $2,264,000 and $1,913,000, respectively.
The Company's PEO sponsors and administers a 401(k) plan and a money purchase
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 & CONTINGENCIES
- ------------------------------------
At May 31, 1997, the Company has available unsecured lines of credit from
various banks totaling $262,500,000. No amounts were outstanding against the
lines of credit at May 31, 1997.
In January 1997, the Company issued an uncollaterallized fixed letter of
credit for $3,692,000 as required by workers' compensation insurance policies.
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. All data processing equipment leases contain
purchase options at prices representing the fair value of the equipment at
expiration of the lease term. Rent expense is as follows:
For the years ended May 31, 1997 1996 1995
- ----------------------------------------------------------------
(In thousands)
Office space $14,135 $12,888 $10,707
Data processing equipment 3,179 2,455 1,640
------- ------- -------
Total rent expense $17,314 $15,343 $12,347
======= ======= =======
- ----------------------------------------------------------------
The future minimum lease payments under various noncancelable operating leases
consist of the following:
- ----------------------------------------------------
(In thousands)
1998 $15,694
1999 13,561
2000 10,865
2001 7,641
2002 2,967
Thereafter 1,199
-------
Total future minimum lease payments $51,927
=======
- ----------------------------------------------------
NOTE J - SEGMENT FINANCIAL INFORMATION
- --------------------------------------
See Note A for a description of the Company's business segments.
For the years ended May 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(In thousands)
OPERATING RESULTS
Total revenue:
Payroll $ 368,855 $309,517 $254,093
HRS-PEO revenue:
Service revenue 30,878 23,791 18,020
PEO direct costs billed (1) 334,966 233,135 139,953
---------- -------- --------
Total HRS-PEO revenue 365,844 256,926 157,973
---------- -------- --------
Total revenue 734,699 566,443 412,066
PEO direct costs (1) 334,966 233,135 139,953
---------- -------- --------
Total revenue less PEO direct costs 399,733 333,308 272,113
---------- -------- --------
Operating costs:
Payroll 104,118 93,333 75,837
HRS-PEO 10,916 7,902 5,826
---------- -------- --------
Total operating costs 115,034 101,235 81,663
---------- -------- --------
Selling, general and administrative expenses:
Payroll 165,315 143,421 122,325
HRS-PEO 15,488 14,198 12,173
---------- -------- --------
Total selling, general and administrative expenses 180,803 157,619 134,498
---------- -------- --------
Operating income:
Payroll 99,422 72,763 55,931
HRS-PEO 4,474 1,691 21
---------- -------- --------
Total operating income 103,896 74,454 55,952
General corporate expenses 7,271 4,532 3,688
Investment income 7,031 5,467 3,458
---------- -------- --------
Income before income taxes $ 103,656 $ 75,389 $ 55,722
========== ======== ========
(1) Wages and payroll taxes of PEO worksite employees and their related
benefit premiums and claims.
OTHER FINANCIAL INFORMATION
Purchases of property and equipment:
Payroll $ 16,438 $ 16,790 $ 11,334
HRS-PEO 1,736 661 626
Corporate 362 355 575
---------- -------- --------
Total purchases of property and equipment $ 18,536 $ 17,806 $ 12,535
========== ======== ========
Depreciation and amortization expense:
Payroll $ 13,980 $ 11,827 $ 9,460
HRS-PEO 585 453 281
Corporate 6,879 4,885 3,721
---------- -------- --------
Total depreciation and amortization expense $ 21,444 $ 17,165 $ 13,462
========== ======== ========
Identifiable assets at May 31,
Payroll $ 971,814 $666,943 $529,680
HRS-PEO 25,197 17,050 9,683
Corporate 204,312 147,592 108,003
---------- -------- --------
Total identifiable assets $1,201,323 $831,585 $647,366
========== ======== ========
- ------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------
1997 August 31, November 30, February 28, May 31, Year
- ------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
Total revenue $166,042 $169,499 $195,562 $203,596 $734,699
Operating income 22,097 23,349 25,022 26,157 96,625
Net income 17,073 18,068 19,286 20,723 75,150
Earnings per share .16 .17 .18 .19 .70
Dividends per share .04 .06 .06 .06 .22
Market value per share:
High 37.38 42.38 37.88 37.38 42.38
Low 26.88 33.13 28.38 25.50 25.50
- ------------------------------------------------------------------------------------------------
1996 August 31, November 30, February 29, May 31, Year
- ------------------------------------------------------------------------------------------------
Total revenue $123,487 $129,911 $153,475 $159,570 $566,443
Operating income 16,283 17,080 17,108 19,451 69,922
Net income 12,781 13,475 13,789 14,990 55,035
Earnings per share .12 .12 .13 .14 .51
Dividends per share .03 .04 .04 .06 .17
Market value per share:
High 18.58 20.92 26.08 31.33 31.33
Low 13.08 18.00 17.67 22.92 13.08
- ------------------------------------------------------------------------------------------------
Note: Per share amounts have been adjusted for three-for-two stock splits in
May 1997 and May 1996.