FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1997 ------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ---------------- Commission file number 0-11330 ------- PAYCHEX, INC. - -------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 16-1124166 ------------------------------ ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 911 PANORAMA TRAIL SOUTH, ROCHESTER, NEW YORK 14625-0397 - -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (716)385-6666 --------------- - -------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x . NO . ----- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value 108,701,311 Shares - ---------------------------- ----------------------------------- CLASS OUTSTANDING AT DECEMBER 31, 1997 PAYCHEX, INC. INDEX PART I. FINANCIAL INFORMATION PAGE - ------------------------------ ---- Item 1. Financial Statements Consolidated Balance Sheets - November 30, 1997 and May 31, 1997 3 Consolidated Statements of Income - For the Three Months and Six Months Ended November 30, 1997 and 1996 4 Consolidated Statements of Cash Flows - For the Six Months Ended November 30, 1997 and 1996 (Restated) 5 Notes To Consolidated Financial Statements - November 30, 1997 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION - -------------------------- Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 - ---------- PART I. FINANCIAL INFORMATION PAYCHEX, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share amounts) November 30, May 31, 1997 1997 ASSETS (UNAUDITED) (AUDITED) Current assets: Cash and cash equivalents $ 52,062 $ 50,213 Investments 152,538 132,780 Interest receivable 11,943 10,462 Accounts receivable 56,806 45,527 Deferred income taxes -- 2,560 Prepaid expenses and other current assets 3,738 2,486 --------- --------- Current assets before ENS investments 277,087 244,028 Electronic Network Services investments (1) 968,858 896,633 --------- --------- Total current assets 1,245,945 1,140,661 Property and equipment - net 59,352 54,178 Deferred income taxes 673 72 Other assets 6,102 6,412 --------- --------- Total assets $1,312,072 $1,201,323 ========= ========= LIABILITIES Current liabilities: Accounts payable $ 3,686 $ 5,649 Accrued compensation and related items 25,777 26,969 Deferred revenue 3,042 4,335 Reserve for workers' compensation 2,349 1,813 Accrued income taxes 4,911 1,774 Deferred income taxes 1,042 -- Other current liabilities 11,540 9,427 --------- --------- Current liabilities before ENS client deposits 52,347 49,967 Electronic Network Services client deposits (1) 965,594 896,080 --------- --------- Total current liabilities 1,017,941 946,047 Other liabilities: Reserve for workers' compensation 1,650 928 Other long-term liabilities 3,819 2,806 --------- --------- Total liabilities 1,023,410 949,781 STOCKHOLDERS' EQUITY Common stock, $.01 par value, authorized 150,000,000 shares; Issued: 108,693,676 and 108,518,831, respectively 1,087 1,085 Additional paid-in capital 40,898 37,531 Retained earnings 246,677 212,926 --------- --------- Total stockholders' equity 288,662 251,542 --------- --------- Total liabilities and stockholders' equity $1,312,072 $1,201,323 ========= ========= - ------------------------------------------------------------------------------ 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. PAYCHEX, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands except per share amounts) For the three months For the six months ended November 30, ended November 30, 1997 1996 1997 1996 Service revenues: Payroll $108,528 $ 87,704 $213,393 $172,011 HRS-PEO 8,645 7,562 16,727 14,528 ------- ------- ------- ------- Total service revenues 117,173 95,266 230,120 186,539 PEO direct costs billed (1) 118,048 74,233 223,684 149,002 ------- ------- ------- ------- Total revenue 235,221 169,499 453,804 335,541 PEO direct costs (1) 118,048 74,233 223,684 149,002 Operating costs 31,891 28,059 62,197 54,623 Selling, general and administrative expenses 52,710 43,858 104,994 86,470 ------- ------- ------- ------- Operating income 32,572 23,349 62,929 45,446 Investment income 2,291 1,745 4,479 3,230 ------- ------- ------- ------- Income before income taxes 34,863 25,094 67,408 48,676 Income taxes 10,145 7,026 19,616 13,535 ------ ------- ------- ------- Net income $ 24,718 $ 18,068 $ 47,792 $ 35,141 ======= ======= ======= ======= Earnings per share $ .23 $ .17 $ .44 $ .33 ======= ======= ======= ======= Cash dividends per share $ .09 $ .06 $ .15 $ .10 ======= ======= ======= ======= Weighted-average shares outstanding 108,639 107,742 108,601 107,625 ======= ======= ======= ======= - ------------------------------------------------------------------------------ See notes to consolidated financial statements. (1) Wages and payroll taxes of PEO worksite employees and their related benefit premiums and claims. PAYCHEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) For the six months ended November 30, 1997 1996 (Restated) OPERATING ACTIVITIES: Net income $ 47,792 $ 35,141 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization on depreciable and intangible assets 8,763 7,434 Amortization of premiums and discounts on securities 3,834 1,966 Net change in provision for deferred income taxes 1,719 174 Provision for bad debts 982 750 Net realized gains on sales of available-for-sale securities (165) (103) Changes in operating assets and liabilities: Accounts receivable (12,261) (4,746) Interest receivable (1,481) (1,686) Prepaid expenses and other current assets (1,252) (1,128) Accounts payable and other current liabilities 580 6,378 Net change in other assets and liabilities 1,789 280 -------- -------- Net cash provided by operating activities 50,300 44,460 INVESTING ACTIVITIES: Investment purchases of available-for-sale securities (178,892) (192,229) Proceeds from sales of available-for-sale securities 92,073 116,081 Proceeds from maturities of available-for-sale securities 300 1,500 Net change in Electronic Network Services money market funds and other cash equivalents (5,571) (62,659) Net change in Electronic Network Services client deposits 69,514 114,380 Additions to property and equipment, net of disposals (13,410) (8,811) Purchases of other assets (272) (2,756) -------- -------- Net cash used in investing activities (36,258) (34,494) FINANCING ACTIVITIES: Proceeds and tax benefit from exercise of stock options 3,369 401 Dividends paid (16,295) (11,101) Payment in lieu of issuance of fractional shares (26) - Other 759 294 -------- -------- Net cash used in financing activities (12,193) (10,406) -------- -------- Increase (decrease) in cash and cash equivalents 1,849 (440) Cash and cash equivalents, beginning of period 50,213 19,999 -------- -------- Cash and cash equivalents, end of period $ 52,062 $ 19,559 ======== ======== - ------------------------------------------------------------------------------ See notes to consolidated financial statements. PAYCHEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOVEMBER 30, 1997 A) The accompanying unaudited consolidated financial statements of Paychex, Inc., and its wholly-owned subsidiaries have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the information furnished herein reflects all adjustments (consisting of items of a normal recurring nature) which are necessary for a fair presentation of the results for the interim periods. Operating results for the three months and six months ended November 30, 1997, are not necessarily indicative of the results that may be expected for the year ended May 31, 1998. There is no significant seasonality to the Company's business, except that over 30% of new Payroll segment clients added in each of the last three fiscal years have been added during the third fiscal quarter. Consequently, greater sales commissions are earned in that quarter, resulting in higher selling expenses for the third quarter. The accompanying financial statements should be read in conjunction with the financial statements and footnotes presented in the Company's Form 10-K and Annual Report for the year ended May 31, 1997. B) In May 1997, the Company restated previously reported consolidated financial statements to reflect the Electronic Network Services 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, but required the restatement of the consolidated statement of cash flows for the six months ended November 30, 1996, contained herein. C) Earnings per share, cash dividends per share, weighted-average shares outstanding and all other applicable information for the three months and six months ended November 30, 1996, have been adjusted to reflect a three-for-two stock split effected in the form of 50% stock dividends to holders of record on May 8, 1997, and distributed on May 29, 1997. D) Net income per share of common stock is based upon the weighted-average number of shares of common stock outstanding during the period. Common stock equivalents have not been included as their impact is not materially dilutive. See Part II, Item 6, (a) Exhibit 11, "Statement re computation of per share earnings". E) Recently issued accounting standards: In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company will adopt this SFAS in the quarter ending August 31, 1998 (the first quarter of fiscal year 1999), and will reclassify its financial statements for earlier periods provided for comparative purposes. The Company's management does not believe that the difference between reported net income and pro forma comprehensive income to be significant. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of An Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Currently, management believes this SFAS will not have a significant effect on the Company's segment disclosures and related information. F) Certain amounts from the prior year are reclassified to conform to fiscal 1998 presentations. G) Property and equipment - net: November 30, May 31, 1997 1997 (In thousands) (UNAUDITED) (AUDITED) Land and improvements $ 2,798 $ 2,789 Buildings and improvements 24,725 24,672 Data processing equipment and software 58,060 50,973 Furniture, fixtures and equipment 48,231 44,251 Leasehold improvements 5,359 3,582 ------- ------- 139,173 126,267 Less accumulated depreciation and amortization 79,821 72,089 ------- ------- $ 59,352 $ 54,178 ======= ======= H) Segment financial information: The Company operates in two business segments: Payroll and Human Resource Services-Professional Employer Organization (HRS-PEO). The Payroll segment is engaged in the preparation of payroll checks, internal accounting records, all Federal, state and local payroll tax returns, and collection and remittance of payroll obligations for small- to medium-sized businesses. The HRS-PEO segment specializes in providing small- and medium-sized businesses with cost-effective outsourcing solutions for their employee benefits. HRS-PEO products include 401(k) plan recordkeeping services, group benefits and workers' compensation insurance services, section 125 plans, employee handbooks and management services. As an outsourcing solution, HRS-PEO relieves the business owner of human resource administration, employment regulatory compliance, workers' compensation coverage, health care and other employee related responsibilities. Consistent with PEO industry practice, HRS-PEO revenue includes all amounts billed to clients for the services provided. (In thousands and unaudited) For the three months For the six months ended November 30, ended November 30, 1997 1996 1997 1996 (Restated(2)) Total revenue: Payroll $108,528 $ 87,704 $213,393 $172,011 HRS-PEO revenue: Service revenue 8,645 7,562 16,727 14,528 PEO direct costs billed (1) 118,048 74,233 223,684 149,002 ------- ------- ------- ------- Total HRS-PEO revenue 126,693 81,795 240,411 163,530 ------- ------- ------- ------- Total revenue 235,221 169,499 453,804 335,541 PEO direct costs (1) 118,048 74,233 223,684 149,002 ------- ------- ------- ------- Total revenue less PEO direct costs 117,173 95,266 230,120 186,539 ======= ======= ======= ======= Operating costs: Payroll 29,589 25,744 57,838 50,125 HRS-PEO 2,302 2,315 4,359 4,498 ------- ------- ------- ------- Total operating costs 31,891 28,059 62,197 54,623 ======= ======= ======= ======= Selling, general and administrative expenses: Payroll 46,238 38,701 92,676 76,628 HRS-PEO 5,600 3,460 10,640 6,649 ------- ------- ------- ------- Total selling, general and administrative expenses 51,838 42,161 103,316 83,277 ======= ======= ======= ======= Operating income: Payroll 32,701 23,259 62,879 45,258 HRS-PEO 743 1,787 1,728 3,381 ------- ------- ------- ------- Total operating income 33,444 25,046 64,607 48,639 General corporate expenses 872 1,697 1,678 3,193 Investment income 2,291 1,745 4,479 3,230 ------- ------- ------- ------- Income before income taxes $ 34,863 $ 25,094 $ 67,408 $ 48,676 ======= ======= ======= ======= (1) Wages and payroll taxes of PEO worksite employees and their related benefit premiums and claims. (2) All financial information has been restated to reflect the formation of the HRS-PEO business segment in the third quarter of fiscal 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis reviews the Company's operating results for the three months and six months ended November 30, 1997 and 1996, and its financial condition at November 30, 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 November 30, 1997 consolidated financial statements, and the related notes to consolidated financial statements contained in this Form 10-Q. Forward-looking statements in this management's discussion and analysis are qualified by the cautionary statement at the end of this discussion. RESULTS OF CONSOLIDATED OPERATIONS (In thousands except per share amounts) For the three months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Service revenues $117,173 +23.0% $ 95,266 Total revenue $235,221 +38.8% $169,499 Operating income $ 32,572 +39.5% $ 23,349 Net income $ 24,718 +36.8% $ 18,068 Earnings per share $ .23 +35.3% $ .17 =========================================================================== For the six months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Service revenues $230,120 +23.4% $186,539 Total revenue $453,804 +35.2% $335,541 Operating income $ 62,929 +38.5% $ 45,446 Net income $ 47,792 +36.0% $ 35,141 Earnings per share $ .44 +33.3% $ .33 =========================================================================== The Company's record levels of service revenues, total revenue and net income resulted from continued growth in its client base, increased utilization of ancillary services, and decreased operating and selling, general and administrative expenses as a percent of service revenues and total revenue. PAYROLL SEGMENT (In thousands) For the three months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Payroll service revenue $108,528 +23.7% $ 87,704 Payroll operating income $ 32,701 +40.6% $ 23,259 =========================================================================== For the six months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Payroll service revenue $213,393 +24.1% $172,011 Payroll operating income $ 62,879 +38.9% $ 45,258 =========================================================================== Client statistics at November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Payroll clients 277.5 +12.6% 246.5 Taxpay clients 201.3 +28.6% 156.5 Direct Deposit clients 88.8 +43.0% 62.1 Check Signing clients 29.8 +22.1% 24.4 =========================================================================== Revenues: Payroll, Taxpay, Direct Deposit and other payroll 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 continue to be the main reason for the increased Payroll segment revenues for the three months and six months ended November 30, 1997. Operating income: Operating income for the three months and six months ended November 30, 1997, increased as a result of continued growth of the client base and utilization of ancillary services, plus continued leveraging of the segment's operating and selling, general and administrative expenses as percent of revenue. The segment's operating and selling, general and administrative expenses as a percent of revenue decreased to 69.9% and 70.5% for the three months and six months ended November 30, 1997, respectively, as compared to 73.5% and 73.7%, respectively, for same periods in the prior fiscal year. Effective July 1, 1997, the Company complied 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 the quarter was reduced by lower levels of tax-exempt municipal security investments. The Company offset these reductions by a modest price increase for its Taxpay services. HRS-PEO SEGMENT (In thousands) For the three months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- HRS-PEO service revenue $ 8,645 +14.3% $ 7,562 PEO direct costs billed 118,048 +59.0% 74,233 -------- ----- -------- Total HRS-PEO revenue 126,693 +54.9% 81,795 PEO direct costs 118,048 +59.0% 74,233 HRS-PEO operating income $ 743 -58.4% $ 1,787 =========================================================================== For the six months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- HRS-PEO service revenue $ 16,727 +15.1% $ 14,528 PEO direct costs billed 223,684 +50.1% 149,002 -------- ----- -------- Total HRS-PEO revenue 240,411 +47.0% 163,530 PEO direct costs 223,684 +50.1% 149,002 HRS-PEO operating income $ 1,728 -48.9% $ 3,381 =========================================================================== Client statistics at November 30, 1997 Change 1996 - --------------------------------------------------------------------------- 401(k) clients 4.5 +114.3% 2.1 PEO worksite employees 16.5 + 63.4% 10.1 =========================================================================== Revenues: For the three months ended November 30, 1997, the increase in HRS-PEO service revenue was a result of increases in the number of 401(k) clients, section 125 cafeteria plan clients and PEO worksite employees. For the six months ended November 30, 1997, the increase in HRS-PEO service revenue was a result of increases in the number of 401(k) clients, section 125 cafeteria plan clients and PEO worksite employees, offset by a decrease of $1.2 million in Handbook revenues. The Handbook revenue decrease was primarily due to the reallocation of resources from Handbook products to generate recurring revenues from 401(k) recordkeeping services and section 125 cafeteria plans. 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: For the three months ended November 30, 1997, the decrease in HRS-PEO operating income was due to lower average selling prices for the Company's PEO products and continued investments for the Company's PEO operations and centralization activities. For the six months ended November 30, 1997, the decrease in HRS-PEO operating income was due to the reallocation of resources from Handbook products to generate recurring revenues from 401(k) recordkeeping services and section 125 cafeteria plans, lower average selling prices for the Company's PEO products and continued investments for the Company's PEO operations and centralization activities. 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 records 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 November 30, 1997, 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 (In thousands) For the three months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Investment income $2,291 +31.3% $1,745 =========================================================================== For the six months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Investment income $4,479 +38.7% $3,230 =========================================================================== Investment income earned from the Company's Investments, which does not include the income earned from ENS investments, has grown as a result of increases in investment balances generated from successive gains in operating cash flows. Investment income for fiscal 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 The Company's effective tax rate for the three months ended November 30, 1997 and 1996 was 29.1% and 28.0%, respectively. The Company's effective tax rate for the six months ended November 30, 1997 and 1996 was 29.1% and 27.8%, respectively. The effective tax rate for the three months and six months ended November 30, 1997, was impacted by the reduction of investment income earned from lower levels of tax-exempt municipal securities and by the increase in taxable service fee revenue charged for the Company's Taxpay services. Fiscal 1998's effective tax rate is expected to approximate 29.0%. LIQUIDITY AND CAPITAL RESOURCES Consolidated operating cash flows: (In thousands) For the six months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Operating cash flows $50,300 +13.1% $44,460 =========================================================================== The increase in operating cash flows resulted primarily from the continued achievement of record net income for the six months ended November 30, 1997. 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 November 30, 1997, the Company had $204.6 million in available cash and investments and $261.7 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 that are available-for-sale. 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 November 30, 1997, the portfolio of securities had an average duration of 2.6 years. The Investments and ENS investments balances continue to increase from positive operating cash flows and increases in Taxpay and Direct Deposit client counts. Purchases of property and equipment: (In thousands) For the six months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Purchases of property and equipment $13,520 +53.4% $8,811 =========================================================================== Purchases of property and equipment for the six months ended November 30, 1997 increased over 1996 as a result of additional data processing and personal computer equipment, workstations, and leasehold improvements at the Company's expanding branches. Purchases of property and equipment in fiscal 1998 are expected to range from $21 to $26 million. Cash dividends: (In thousands except per share amounts) For the six months ended November 30, 1997 Change 1996 - --------------------------------------------------------------------------- Cash dividends $16,295 +46.8% $11,101 Cash dividends per share $ .15 +50.0% $ .10 =========================================================================== On October 2, 1997, the Company's Board of Directors declared a 50% increase in the Company's quarterly dividend from $.06 per share to $.09 per share, payable November 24, 1997 to shareholders of record October 27, 1997. On January 8, 1998, the Company's Board of Directors declared a regular quarterly dividend of $.09 per share, payable February 16, 1998 to shareholders of record February 2, 1998. The Board also established a policy of setting future dividend record dates on the 1st business day of February, May, August, and November with the dividend payable date on the 15th or first business day thereafter of the same month. OTHER Recently issued accounting standards: In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company will adopt this SFAS in the quarter ending August 31, 1998 (the first quarter of fiscal year 1999), and will reclassify its financial statements for earlier periods provided for comparative purposes. The Company's management does not believe that the difference between reported net income and pro forma comprehensive income to be significant. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of An Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Currently, management believes this SFAS will not have a significant effect on the Company's segment disclosures and related information. FORWARD-LOOKING CAUTIONARY STATEMENT In an effort to give investors a well-rounded view of the Company's current condition and future opportunities, this Form 10-Q 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on October 2, 1997. Results of that meeting were reported in the Form 10-Q filed on October 14, 1997, for the quarterly period ended August 31, 1997, and is incorporated here by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 11, "Statement re computation of per share earnings" is filed herewith at the end of this Form 10-Q. Exhibit 27, "Financial Data Schedules" are filed electronically. (b) Reports on Form 8-K: There were no reports filed on Form 8-K during the three month period ended November 30, 1997. 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: January 14, 1998 /s/ B. Thomas Golisano ----------------------- B. Thomas Golisano Chairman, President and Chief Executive Officer Date: January 14, 1998 /s/ John M. Morphy ----------------------- John M. Morphy Vice President, Chief Financial Officer and Secretary