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 February 28, 1998 ------------------------------- 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 108,775,265 Shares - ---------------------------- ----------------------------------- CLASS OUTSTANDING AT MARCH 31, 1998 PAYCHEX, INC. INDEX PART I. FINANCIAL INFORMATION PAGE - ------------------------------ ---- Item 1. Financial Statements Consolidated Balance Sheets - February 28, 1998 and May 31, 1997 3 Consolidated Statements of Income - For the Three Months and Nine Months Ended February 28, 1998 and 1997 4 Consolidated Statements of Cash Flows - For the Nine Months Ended February 28, 1998 and 1997 5 Notes To Consolidated Financial Statements - February 28, 1998 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 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 15 - ---------- PART I. FINANCIAL INFORMATION PAYCHEX, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share amounts) February 28, May 31, 1998 1997 ASSETS (UNAUDITED) (AUDITED) Current assets: Cash and cash equivalents $ 19,072 $ 50,213 Investments 216,727 132,780 Interest receivable 11,514 10,462 Accounts receivable 51,293 45,527 Deferred income taxes 2,098 2,560 Prepaid expenses and other current assets 4,976 2,486 --------- --------- Current assets before ENS investments 305,680 244,028 Electronic Network Services investments (A) 1,357,695 896,633 --------- --------- Total current assets 1,663,375 1,140,661 Property and equipment - net 63,095 54,178 Deferred income taxes 581 72 Other assets 6,095 6,412 --------- --------- Total assets $1,733,146 $1,201,323 ========= ========= LIABILITIES Current liabilities: Accounts payable $ 4,787 $ 5,649 Accrued compensation and related items 31,291 26,969 Deferred revenue 5,861 4,335 Reserve for workers' compensation 2,534 1,813 Accrued income taxes 8,132 1,774 Other current liabilities 11,585 9,427 --------- --------- Current liabilities before ENS client deposits 64,190 49,967 Electronic Network Services client deposits (A) 1,352,712 896,080 --------- --------- Total current liabilities 1,416,902 946,047 Other liabilities: Reserve for workers' compensation 1,124 928 Other long-term liabilities 3,941 2,806 --------- --------- Total liabilities 1,421,967 949,781 STOCKHOLDERS' EQUITY Common stock, $.01 par value, authorized 300,000,000 shares; Issued: 108,745,068 and 108,518,831, respectively 1,087 1,085 Additional paid-in capital 45,200 37,531 Retained earnings 264,892 212,926 --------- --------- Total stockholders' equity 311,179 251,542 --------- --------- Total liabilities and stockholders' equity $1,733,146 $1,201,323 ========= ========= - ------------------------------------------------------------------------------ See notes to consolidated financial statements. (A) 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 nine months ended February 28, ended February 28, 1998 1997 1998 1997 Service revenues: Payroll $122,239 $ 97,934 $335,632 $269,945 HRS-PEO 9,634 8,420 26,361 22,948 ------- ------- ------- ------- Total service revenues 131,873 106,354 361,993 292,893 PEO direct costs billed (A) 139,482 89,208 363,166 238,210 ------- ------- ------- ------- Total revenue 271,355 195,562 725,159 531,103 PEO direct costs (A) 139,482 89,208 363,166 238,210 Operating costs 35,347 30,233 97,544 84,856 Selling, general and administrative expenses 61,674 51,099 166,668 137,569 ------- ------- ------- ------- Operating income 34,852 25,022 97,781 70,468 Investment income 2,349 1,764 6,828 4,994 ------- ------- ------- ------- Income before income taxes 37,201 26,786 104,609 75,462 Income taxes 10,825 7,500 30,441 21,035 ------ ------- ------- ------- Net income $ 26,376 $ 19,286 $ 74,168 $ 54,427 ======= ======= ======= ======= Earnings per share $ .24 $ .18 $ .68 $ .50 ======= ======= ======= ======= Diluted earnings per share $ .24 $ .18 $ .68 $ .50 ======= ======= ======= ======= Cash dividends per share $ .09 $ .06 $ .24 $ .16 ======= ======= ======= ======= Weighted-average shares outstanding 108,719 108,346 108,639 107,853 ======= ======= ======= ======= Weighted-average shares assuming dilution 109,994 109,489 109,762 109,071 ======= ======= ======= ======= - ------------------------------------------------------------------------------ See notes to consolidated financial statements. (A) 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 nine months ended February 28, 1998 1997 OPERATING ACTIVITIES: Net income $ 74,168 $ 54,427 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization on depreciable and intangible assets 13,646 10,660 Amortization of premiums and discounts on securities 6,013 3,013 Net change in provision for deferred income taxes (2,256) (3,372) Provision for bad debts 1,523 1,186 Net realized gains on sales of available-for-sale securities (414) (191) Changes in operating assets and liabilities: Interest receivable (1,052) (1,147) Accounts receivable (7,289) (1,187) Prepaid expenses and other current assets (2,490) (1,148) Accounts payable and other current liabilities 14,223 17,137 Net change in other assets and liabilities 1,237 479 -------- -------- Net cash provided by operating activities 97,309 79,857 INVESTING ACTIVITIES: Investment purchases of available-for-sale securities (315,672) (249,953) Proceeds from sales of available-for-sale securities 134,060 152,909 Proceeds from maturities of available-for-sale securities 4,914 2,125 Net change in Electronic Network Services money market funds and other cash equivalents (367,796) (274,759) Net change in Electronic Network Services client deposits 456,632 342,091 Additions to property and equipment, net of disposals (21,764) (13,219) Purchases of other assets (388) (2,167) -------- -------- Net cash used in investing activities (110,014) (42,973) FINANCING ACTIVITIES: Proceeds and tax benefit from exercise of stock options 7,671 7,415 Dividends paid (26,081) (17,607) Payment in lieu of issuance of fractional shares (26) - Other - 406 -------- -------- Net cash used in financing activities (18,436) (9,786) -------- -------- Increase (decrease) in cash and cash equivalents (31,141) 27,098 Cash and cash equivalents, beginning of period 50,213 19,999 -------- -------- Cash and cash equivalents, end of period $ 19,072 $ 47,097 ======== ======== - ------------------------------------------------------------------------------ See notes to consolidated financial statements. PAYCHEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FEBRUARY 28, 1998 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 nine months ended February 28, 1998, 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) Earnings per share, diluted earnings per share, cash dividends per share, weighted-average shares outstanding, weighted-average shares assuming dilution and all other applicable information for the three months and nine months ended February 28, 1997, 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. C) Effective for the three months ended February 28, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". All earnings per share information has been restated to conform with this SFAS. In accordance with this SFAS, the Company's earnings per share is determined by dividing net income for the period by the weighted-average common shares outstanding for that period. The Company's diluted earnings per share is determined by dividing net income for the period by the sum of the weighted-average common shares outstanding plus the assumed exercise of dilutive stock options for that period, as determined under the treasury stock method. For the three and nine months ended February 28, 1998, stock options were exercised for 51,392 and 226,777 shares of the Company's common stock, respectively. D) Recently issued accounting standards: In June 1997, the Financial Accounting Standards Board (FASB) issued 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. Comprehensive income is defined as "the change in equity of a company during a period from transactions and other events and circumstances from non-owner sources." It includes all changes in equity during the period except those resulting from investments by owners and distributions to owners. The Company's management believes that adoption of this SFAS will not have an effect on the Company's future results of operations or financial position. 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. The Company's management has not yet completed its review of this SFAS. In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for Computer Software Developed For or Obtained For Internal-Use", which is effective for fiscal years beginning after December 15, 1998. The SOP requires preliminary stage project costs to be expensed as incurred. Once a project is in the application development stage, the SOP requires all external direct costs for materials and services and payroll and related fringe benefit costs to be capitalized, and subsequently amortized over the estimated useful life of the project. Currently, the Company incurs certain costs to enhance its computer programs and all such costs are expensed as incurred. In addition, expenditures for major software purchases from external sources are capitalized and amortized by the straight-line method over their estimated useful lives. The Company's management has not yet assessed what the impact of the SOP will be on the Company's future results of operations or financial position. E) Certain amounts from the prior year are reclassified to conform to fiscal 1998 presentations. F) Property and equipment - net: February 28, May 31, 1998 1997 (In thousands) (UNAUDITED) (AUDITED) Land and improvements $ 2,815 $ 2,789 Buildings and improvements 24,739 24,672 Data processing equipment and software 61,555 50,973 Furniture, fixtures and equipment 51,124 44,251 Leasehold improvements 6,272 3,582 ------- ------- 146,505 126,267 Less accumulated depreciation and amortization 83,410 72,089 ------- ------- $ 63,095 $ 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 nine months ended February 28, ended February 28, 1998 1997 1998 1997 Total revenue: Payroll $122,239 $ 97,934 $335,632 $269,945 HRS-PEO revenue: Service revenue 9,634 8,420 26,361 22,948 PEO direct costs billed (A) 139,482 89,208 363,166 238,210 ------- ------- ------- ------- Total HRS-PEO revenue 149,116 97,628 389,527 261,158 ------- ------- ------- ------- Total revenue 271,355 195,562 725,159 531,103 PEO direct costs (A) 139,482 89,208 363,166 238,210 ------- ------- ------- ------- Total revenue less PEO direct costs 131,873 106,354 361,993 292,893 ======= ======= ======= ======= Operating costs: Payroll 33,105 27,228 90,943 77,353 HRS-PEO 2,242 3,005 6,601 7,503 ------- ------- ------- ------- Total operating costs 35,347 30,233 97,544 84,856 ======= ======= ======= ======= Selling, general and administrative expenses: Payroll 53,051 44,821 145,727 121,449 HRS-PEO 7,219 4,488 17,859 11,137 ------- ------- ------- ------- Total selling, general and administrative expenses 60,270 49,309 163,586 132,586 ======= ======= ======= ======= Operating income: Payroll 36,083 25,885 98,962 71,143 HRS-PEO 173 927 1,901 4,308 ------- ------- ------- ------- Total operating income 36,256 26,812 100,863 75,451 General corporate expenses 1,404 1,790 3,082 4,983 Investment income 2,349 1,764 6,828 4,994 ------- ------- ------- ------- Income before income taxes $ 37,201 $ 26,786 $104,609 $ 75,462 ======= ======= ======= ======= (A) Wages and payroll taxes of PEO worksite employees and their related benefit premiums and claims. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis reviews the Company's operating results for the three months and nine months ended February 28, 1998 and 1997, and its financial condition at February 28, 1998. The focus of this review is on the underlying business reasons for significant changes and trends affecting revenues, net income and financial condition. This review should be read in conjunction with the February 28, 1998 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 February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Service revenues $131,873 +24.0% $106,354 Total revenue $271,355 +38.8% $195,562 Operating income $ 34,852 +39.3% $ 25,022 Net income $ 26,376 +36.8% $ 19,286 Diluted earnings per share $ .24 +33.3% $ .18 =========================================================================== For the nine months ended February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Service revenues $361,993 +23.6% $292,893 Total revenue $725,159 +36.5% $531,103 Operating income $ 97,781 +38.8% $ 70,468 Net income $ 74,168 +36.3% $ 54,427 Diluted earnings per share $ .68 +36.0% $ .50 =========================================================================== 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 February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Payroll service revenue $122,239 +24.8% $ 97,934 Payroll operating income $ 36,083 +39.4% $ 25,885 =========================================================================== For the nine months ended February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Payroll service revenue $335,632 +24.3% $269,945 Payroll operating income $ 98,962 +39.1% $ 71,143 =========================================================================== Client statistics at February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Payroll clients 286.6 +11.9% 256.1 Taxpay clients 212.2 +25.6% 169.0 Direct Deposit clients 97.0 +37.8% 70.4 Check Signing clients 31.8 +23.3% 25.8 =========================================================================== 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 nine months ended February 28, 1998. Operating income: Operating income for the three months and nine months ended February 28, 1998, 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 70.5% for both the three months and nine months ended February 28, 1998, as compared to 73.6%, 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 operating 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 February 28, 1998 Change 1997 - --------------------------------------------------------------------------- HRS-PEO service revenue $ 9,634 +14.4% $ 8,420 PEO direct costs billed 139,482 +56.4% 89,208 -------- -------- Total HRS-PEO revenue 149,116 +52.7% 97,628 PEO direct costs 139,482 +56.4% 89,208 HRS-PEO operating income $ 173 -81.3% $ 927 =========================================================================== For the nine months ended February 28, 1998 Change 1997 - --------------------------------------------------------------------------- HRS-PEO service revenue $ 26,361 +14.9% $ 22,948 PEO direct costs billed 363,166 +52.5% 238,210 -------- -------- Total HRS-PEO revenue 389,527 +49.2% 261,158 PEO direct costs 363,166 +52.5% 238,210 HRS-PEO operating income $ 1,901 -55.9% $ 4,308 =========================================================================== Client statistics at February 28, 1998 Change 1997 - --------------------------------------------------------------------------- 401(k) clients 5.2 +100.0% 2.6 PEO worksite employees 18.2 + 51.7% 12.0 =========================================================================== Revenues: For the three and nine months ended February 28, 1998, the increase in HRS-PEO service revenue was due to gains in the number of 401(k) recordkeeping clients, section 125 cafeteria plan clients and PEO worksite employees, but was somewhat offset by decreased revenues from Handbook products. Fiscal 1998 revenues are expected to grow as the Company continues to increase 401(k) clients, section 125 cafeteria plan clients, PEO worksite employees and other HRS-PEO ancillary product sales. Operating income: For the three and nine months ended February 28, 1998, the decrease in HRS-PEO operating income was primarily due to lower average selling prices for the Company's PEO products and continued investments for the Company's PEO operations and centralization activities. These factors were somewhat offset by strong sales growth of the Company's 401(k) recordkeeping services. 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 February 28, 1998, 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 February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Investment income $2,349 +33.2% $1,764 =========================================================================== For the nine months ended February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Investment income $6,828 +36.7% $4,994 =========================================================================== Investment income earned from the Company's Investments, which does not include the income earned from ENS investments, has grown primarily 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 February 28, 1998 and 1997 was 29.1% and 28.0%, respectively. The Company's effective tax rate for the nine months ended February 28, 1998 and 1997 was 29.1% and 27.9%, respectively. The effective tax rate for the three months and nine months ended February 28, 1998, 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 29.1%. LIQUIDITY AND CAPITAL RESOURCES Consolidated operating cash flows: (In thousands) For the nine months ended February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Operating cash flows $97,309 +21.9% $79,857 =========================================================================== The increase in operating cash flows resulted primarily from the continued achievement of record net income for the nine months ended February 28, 1998. 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 February 28, 1998, the Company had $235.8 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 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 February 28, 1998, the portfolio of securities had an average duration of 2.7 years. The Investments and ENS investments balances continue to increase from positive operating cash flows and increases in Taxpay and Direct Deposit client counts. In addition, the Company redirected over $25.0 million of excess available Corporate cash balances into municipal securities during the three months ended February 28, 1998, in order to increase the return earned on these available funds. Purchases of property and equipment: (In thousands) For the nine months ended February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Purchases of property and equipment $21,936 +60.0% $13,745 =========================================================================== Purchases of property and equipment for the nine months ended February 28, 1998 increased over 1997 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 $25 to $30 million. Cash dividends: (In thousands except per share amounts) For the nine months ended February 28, 1998 Change 1997 - --------------------------------------------------------------------------- Cash dividends $26,081 +48.1% $17,607 Cash dividends per share $ .24 +50.0% $ .16 =========================================================================== 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. On January 8, 1998, the Board 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 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. Comprehensive income is defined as "the change in equity of a company during a period from transactions and other events and circumstances from non-owner sources." It includes all changes in equity during the period except those resulting from investments by owners and distributions to owners. The Company's management believes that adoption of this SFAS will not have an effect on the Company's future results of operations or financial position. 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. The Company's management has not yet completed its review of this SFAS. In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for Computer Software Developed For or Obtained For Internal-Use", which is effective for fiscal years beginning after December 15, 1998. The SOP requires preliminary stage project costs to be expensed as incurred. Once a project is in the application development stage, the SOP requires all external direct costs for materials and services and payroll and related fringe benefit costs to be capitalized, and subsequently amortized over the estimated useful life of the project. Currently, the Company incurs certain costs to enhance its computer programs and all such costs are expensed as incurred. In addition, expenditures for major software purchases from external sources are capitalized and amortized by the straight-line method over their estimated useful lives. The Company's management has not yet assessed what the impact of the SOP will be on the Company's future results of operations or financial position. 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 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27.1-3, "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 February 28, 1998. 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: April 7, 1998 /s/ B. Thomas Golisano ----------------------- B. Thomas Golisano Chairman, President and Chief Executive Officer Date: April 7, 1998 /s/ John M. Morphy ----------------------- John M. Morphy Vice President, Chief Financial Officer and Secretary