As filed with the Securities and Exchange Commission on April 14, 1995
Registration No. 33-_______________
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PAYCHEX, INC.
(Exact name of registrant as specified in its charter)
Delaware 8721 16-1124166
(State or other (Primary Standard Industrial) (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
911 Panorama Trail South
Rochester, New York 14625
(716) 385-6666
(Address, including zip code and telephone number, including area code,
of registrant's principal executive offices)
G. Thomas Clark
Vice President of Finance
911 Panorama Trail South
Rochester, New York 14625
(716) 385-6666
(Name, address, including zip code and telephone number, including area
code, of agent for service)
Copies To:
Harry P. Messina, Jr., Esq. Alan D. Jacobson, Esq.
Woods, Oviatt, Gilman, Sturman 2029 Century Park East
& Clarke LLP Suite 2600
44 Exchange Street Los Angeles, California
Rochester, New York 14614 90067
(716) 987-2821 (310) 277-5974
Approximate date of commencement of proposed sale of the securities
to the public: As soon as practicable after the effective date of
this Registration Statement.
<PAGE>
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Title of each class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be registered Registered (1) Offering price per share(2) Aggregate offering price(2) Registration fee
Common Stock, $.01 par value 308,089 $31.31 $9,446,665 $3,257.47
</TABLE>
(1) Represents the maximum number of shares of Common Stock, $.01 par
value, of the Registrant ("Paychex Common Stock") issuable to
stockholders of Pay-Fone Systems, Inc. ("Pay-Fone") upon consummation
of the merger of Registrant's subsidiary with and into Pay-Fone.
(2) Determined in accordance with Rule 457(f)(1) and based on the average
of the high and low sales prices of Pay-Fone Shares on the American
Stock Exchange on April 10, 1995.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this registration statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until this
Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PAYCHEX, INC.
CROSS-REFERENCE SHEET TO FORM S-4 REGISTRATION STATEMENT
(Pursuant to Item 501(b) of Regulation S-K)
Part I - INFORMATION REQUIRED IN THE PROSPECTUS
Forms S-4 Item Numbers Location in Proxy Statement/
and Captions Prospectus
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page Prospectus... Facing Page of Registration
Statement; Cross-Reference
Sheet; Outside Front Cover
Page of Proxy Statement/
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front Cover Page of
Proxy Statement/Prospectus;
Available Information; In-
corporation by Reference;
Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other Information.. Summary
4. Terms of the Transaction............. Summary; The Merger; Certain
Provisions of the Merger
Agreement and Other Agree-
ments; Comparison of Rights
of Holders of Pay-Fone Shares
and Paychex Common Stock;
Description of Paychex Common
Stock
5. Pro Forma Financial Information...... Not Applicable
6. Material Contacts with the Company
Being Acquired....................... The Merger - Background of
the Merger
7. Additional Information Required for
Reoffering By Persons and Parties
Deemed to be Underwriters............ Not Applicable
8. Interests of Named Experts and
Counsel.............................. Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants.......................... Not Applicable
11. Incorporation of Certain Information
by Reference......................... Not Applicable
<PAGE>
12. Information with Respect to S-2 or S-3
Registrants.......................... Available Information; In-
corporation by Reference;
Summary; The Companies -
Paychex
13. Incorporation of Certain Information
by Reference......................... Incorporation by Reference
14. Information with Respect to Registrants
Other than S-3 or S-2 Companies...... Not Applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies............................ Not Applicable
16. Information with Respect to S-2 or
S-3 Companies........................ Not Applicable
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies...... Available Information;
Summary; The Companies-Pay-
Fone; Management's Discussion
and Analysis of Financial
Condition and Results of
Operations of Pay-Fone;
Ownership of Pay-Fone Shares;
Pay-Fone Consolidated
Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited... Outside Front Cover Page of
Proxy Statement/Prospectus;
Incorporation by Reference;
Summary; The Special Meeting;
The Merger
19. Information if Proxies, Consents
or Authorizations are not to be
Solicited or in an Exchange Offer.... Not Applicable
<PAGE>
PAY-FONE SYSTEMS, INC.
8100 Balboa Boulevard
Van Nuys, California 91406
CHAIRMAN'S LETTER TO SHAREHOLDERS
May 17, 1995
To Our Shareholders:
You are cordially invited to attend a Special Meeting of
Shareholders of Pay-Fone Systems, Inc. ("Pay-Fone") at Pay-Fone's
executive offices located at 8100 Balboa Boulevard, Van Nuys,
California, on June 14, 1995, at 10:00 a.m. local time.
At the Special Meeting, shareholders will be asked to
approve and adopt an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which a newly-formed, wholly owned
subsidiary of Paychex, Inc. ("Paychex") will merge into Pay-Fone
and Pay-Fone will become a wholly owned subsidiary of Paychex
(the "Merger").
Pursuant to the Merger Agreement, upon consummation of the
Merger outstanding shares of Pay-Fone Common Stock will be
converted into shares of Paychex Common Stock based on an
Exchange Ratio specified in a formula set forth in the Merger
Agreement which will be calculated at the time of the Merger.
The Exchange Ratio will be calculated primarily on the basis of a
total value for Pay-Fone of $10,475,000 (subject to possible
reduction) and the market price of Paychex Common Stock during a
period prior to the Merger. The formula by which the Exchange
Ratio will be determined and other terms of the proposed Merger
are described in the accompanying Proxy Statement/Prospectus,
which you are urged to read carefully.
The Board of Directors believes that the Merger is fair to,
and in the best interests of, Pay-Fone and its shareholders. The
Board has unanimously approved the terms of the Merger and
recommends that you vote in favor of the Merger.
Whether or not you plan to attend the Special Meeting,
please be sure to date, sign and return the proxy card in the
enclosed envelope as promptly as possible so that your shares may
be represented at the Meeting and voted in accordance with your
wishes. This will not prevent you from voting your shares in
person if you subsequently choose to attend the Special Meeting.
Sincerely,
Richard Kelton
Chairman of the Board
<PAGE>
Pay-Fone Systems, Inc.
8100 Balboa Boulevard
Van Nuys, CA 91406
Notice of Special Meeting of Shareholders
to be Held June 14, 1995
To The Shareholders:
Notice is hereby given that a Special Meeting of
Shareholders of Pay-Fone Systems, Inc. ("Pay-Fone") will be held
at 8100 Balboa Boulevard, Van Nuys, California, on June 14, 1995,
at 10:00 a.m. local time, to vote with respect to the approval
and adoption of the Agreement and Plan of Merger (the "Merger
Agreement") described in the attached Proxy Statement/Prospectus
pursuant to which Pay-Fone would become a wholly owned subsidiary
of Paychex, Inc. ("Paychex").
Pursuant to the Merger Agreement, outstanding shares of Pay-
Fone Common Stock will be converted into shares of Paychex Common
Stock based on an Exchange Ratio specified in a formula set forth
in the Merger Agreement which will be calculated at the time of
the Merger. The Exchange Ratio will be calculated primarily on
the basis of a total value for Pay-Fone of $10,475,000 (subject
to possible reduction) and the market price of Paychex Common
Stock during a period prior to the Merger. The formula by which
the Exchange Ratio will be determined and other terms of the
proposed Merger are described in the accompanying Proxy
Statement/Prospectus, which you are urged to read carefully.
Only shareholders of record at the close of business on May
8, 1995, are entitled to notice of and to vote at the Special
Meeting. Dissenters' rights may be available to Pay-Fone
shareholders if certain conditions are satisfied. All actions to
perfect dissenters' rights must be taken only by the record
holder of the shares. See "The Merger - Rights of Dissenting
Shareholders"
We hope you will be represented at the meeting by signing
and returning the enclosed proxy card in the accompanying
envelope as promptly as possible, whether or not you expect to be
present in person. Your proxy may be revoked at any time by
following the procedures set forth in the accompanying Proxy
Statement/Prospectus.
By Order of the Board of Directors
David Kelton
Secretary
May 17, 1995
<PAGE>
PROXY STATEMENT
OF
PAY-FONE SYSTEMS, INC.
For Special Meeting of Shareholders to be held on June 14, 1995
PROSPECTUS OF
PAYCHEX, INC.
Shares of
Common Stock, $.01 Par Value
This Proxy Statement/Prospectus is being furnished by Pay-
Fone Systems, Inc., a California corporation ("Pay-Fone"), and
Paychex, Inc., a Delaware corporation ("Paychex"), to holders of
shares of Pay-Fone's Common Stock $.10 par value ("Pay-Fone
Shares"), in connection with the solicitation of proxies by the
Board of Directors of Pay-Fone (the "Pay-Fone Board") for use at
a Special Meeting of shareholders to be held at the time and
place and for the purposes set forth in the accompanying Notice
of Special Meeting of Shareholders, and any adjournment or
postponement thereof (the "Special Meeting"). This Proxy
Statement/Prospectus and the accompanying proxy card are first
being mailed to shareholders of Pay-Fone on or about May 17,
1995.
At the Special Meeting, the shareholders of Pay-Fone will
consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of March 17, 1995 (the
"Merger Agreement") by and among Paychex, Paychex Merger Corp., a
wholly-owned subsidiary of Paychex ("Merger Sub") and Pay-Fone.
A copy of the Merger Agreement is attached to this Proxy
Statement/Prospectus as Annex I and is incorporated herein by
reference.
Under the terms of the Merger Agreement, upon completion of
the merger of Merger Sub with and into Pay-Fone (the "Merger"),
all outstanding Pay-Fone Shares, other than shares owned by
Paychex and shares owned by Pay-Fone shareholders who perfect
dissenters' rights as hereinafter described, will be converted
into the right to receive and become exchangeable for shares of
$.01 par value Paychex Common Stock ("Paychex Common Stock").
<PAGE>
The number of shares or fraction of a share of Paychex Common
Stock into which a Pay-Fone Share will be converted (the
"Exchange Ratio") will be determined by dividing $10,475,000,
subject to certain possible adjustments, by the product of (i)
the average of the last reported sale prices of Paychex Common
Stock on the NASDAQ National Market for the 20 consecutive
trading days ending on the second day immediately preceding, but
not including, the date of the closing (the "Closing") of the
transactions contemplated by the Merger Agreement (the "Closing
Date"), which average may be adjusted by up to $3.00 as specified
in the Merger Agreement, and (ii) the sum of the number of Pay-
Fone Shares outstanding and the number of Pay-Fone Shares
issuable pursuant to options exercisable at the date on which the
Merger becomes effective. See "THE MERGER - Merger
Consideration."
This Proxy Statement/Prospectus also constitutes the
prospectus of Paychex with respect to a maximum of 308,089 shares
of Paychex Common Stock to be issued in connection with the
Merger in exchange for the outstanding Pay-Fone Shares. On
________________, 1995, the last reported sale price of a share
of Paychex Common Stock on the NASDAQ National Market was
$_____________.
All information concerning Paychex contained in this Proxy
Statement/Prospectus has been furnished by Paychex; and all
information concerning Pay-Fone prior to the Merger contained in
this Proxy Statement/Prospectus has been furnished by Pay-Fone.
This Proxy Statement/Prospectus does not cover any resales of
shares of Paychex Common Stock that will be received by Pay-Fone
shareholders in connection with the Merger, and no person is
authorized to make any use of this Proxy Statement/Prospectus in
connection with any such resale.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is May 17, 1995.
<PAGE>
AVAILABLE INFORMATION
Paychex and Pay-Fone are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith file reports,
proxy statements and other information with the Securities and
Exchange Commission ("SEC"). Copies of such reports, proxy
statements and other information can be inspected and copied at
the public reference facilities maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the following regional offices of the SEC: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549.
Paychex has filed with the SEC a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act") with respect to the
shares of Paychex Common Stock to be issued pursuant to the
Merger Agreement. This Proxy Statement/Prospectus does not
contain all the information set forth in the Registration
Statement, certain portions of which have been omitted pursuant
to the rules and regulations of the SEC. Such additional
information may be obtained from the SEC's principal office in
Washington, D.C.
Reports, proxy statements and other information concerning
Paychex can be inspected at the NASDAQ Stock Market, 1735 K
Street, N.W., Washington, D.C. 20006 on which the Paychex Common
Stock is listed. Reports, proxy statements and other information
concerning Pay-Fone can be inspected at the American Stock
Exchange, 86 Trinity Place, New York, New York 10006, on which
exchange the Pay-Fone Shares are listed.
No person is authorized to give any information or to make
any representations other than those contained or incorporated by
reference in this Proxy Statement/Prospectus, and if given or
made, such information or representations should not be relied
upon as having been authorized. This Proxy Statement/Prospectus
does not constitute an offer to sell, or a solicitation of an
offer to purchase, the securities offered by this Proxy
Statement/Prospectus, or the solicitation of a proxy, in any
jurisdiction to or from any person to whom or from whom it is
unlawful to make such offer, solicitation of an offer or proxy
solicitation in such jurisdiction. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of securities
pursuant to this Proxy Statement/Prospectus shall, under any
circumstances, create any implication that there has been no
change in the information set forth or incorporated herein by
<PAGE>
reference or in the affairs of Paychex or Pay-Fone since the date
of this Proxy Statement/Prospectus. However, if any material
change occurs during the period that this Proxy
Statement/Prospectus is required to be delivered, this Proxy
Statement/Prospectus will be amended and supplemented
accordingly.
<PAGE>
INCORPORATION BY REFERENCE
The following documents are delivered herewith: the Paychex
1994 Annual Report to Stockholders ("Annual Report"), the
Paychex Proxy Statement for the 1994 Annual Meeting of
Stockholders ("Paychex 1994 Proxy Statement") and the Paychex
Form 10-Q for the quarterly period ended February 28, 1995.
The following documents, which have been filed by Paychex
with the SEC pursuant to the Exchange Act, are incorporated
herein by reference:
(a) Paychex Annual Report on Form 10-K for the year ended
May 31, 1994 which includes:
(i) Market for Registrant's Common Equity and
Related Security Holder Matters (Exhibit 13
and Part II, Item 5);
(ii) Selected Financial Data (Exhibit 13 and Part
II, Item 6);
(iii) Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Exhibit 13 and Part II, Item 7); and
(iv) Supplementary financial data (Exhibit 13 and
Part II, Item 8);
(b) The Paychex 1994 Proxy Statement;
(c) Paychex Quarterly Reports on Form 10-Q for the quarters
ended August 31, 1994, November 30, 1994, February 28, 1995; and
(d) Paychex Current Report on Form 8-K dated March 17,
1995.
All documents subsequently filed by Paychex pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement/Prospectus and prior to the date of
the Special Meeting shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such
documents. All information appearing in this Proxy
Statement/Prospectus or in any document incorporated herein by
reference is not necessarily complete and is qualified in its
entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by
reference and should be read together with such information and
documents.
<PAGE>
Any statement contained in a document incorporated or deemed
to be incorporated herein by reference shall be deemed to be
modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document that is deemed
to be incorporated herein by reference modifies or supersedes
such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates documents by
reference which are not presented herein or delivered herewith.
Copies of any such documents, other than exhibits to such
documents which are not specifically incorporated by reference
therein, are available without charge to any person, including
any beneficial owner, to whom this Proxy Statement/Prospectus is
delivered upon written or oral request to Paychex, 911 Panorama
Trail South, Rochester, New York 14625, Attention Secretary's
Department, telephone (716) 385-3406); to ensure timely delivery
of the documents, any request should be made before
_____________________, 1995.
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Companies. . . . . . . . . . . . . . . . . . . . . . . . 9
The Special Meeting. . . . . . . . . . . . . . . . . . . . . 9
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . 10
Selected Financial Data. . . . . . . . . . . . . . . . . . . 18
Comparative Market Prices and Dividend Data. . . . . . . . . 20
THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . 21
Purpose of the Meeting . . . . . . . . . . . . . . . . . . . 21
Voting Rights; Record Date . . . . . . . . . . . . . . . . . 21
Solicitation of Proxies. . . . . . . . . . . . . . . . . . . 22
THE COMPANIES. . . . . . . . . . . . . . . . . . . . . . . . . 23
Paychex. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Merger Sub . . . . . . . . . . . . . . . . . . . . . . . . . 24
Pay-Fone . . . . . . . . . . . . . . . . . . . . . . . . . . 25
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . 29
General. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Background of the Merger . . . . . . . . . . . . . . . . . . 29
Pay-Fone's Reasons for the Merger. . . . . . . . . . . . . . 31
Paychex' Reasons for the Merger. . . . . . . . . . . . . . . 32
Merger Consideration . . . . . . . . . . . . . . . . . . . . 32
Fractional Shares. . . . . . . . . . . . . . . . . . . . . . 34
Procedures for Exchange of Certificates. . . . . . . . . . . 34
Certain Federal Income Tax Consequences. . . . . . . . . . . 35
Accounting Treatment . . . . . . . . . . . . . . . . . . . . 39
Rights of Dissenting Shareholders. . . . . . . . . . . . . . 39
Effect on Pay-Fone Stock Options . . . . . . . . . . . . . . 42
Interests of Certain Persons in the Merger . . . . . . . . . 42
Resale of Paychex Common Stock . . . . . . . . . . . . . . . 44
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
AND OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . 46
Representations and Warranties . . . . . . . . . . . . . . . 46
Business of Pay-Fone Pending the Merger. . . . . . . . . . . 46
Certain Covenants of Paychex . . . . . . . . . . . . . . . . 47
No Solicitation. . . . . . . . . . . . . . . . . . . . . . . 47
Conditions/Waivers . . . . . . . . . . . . . . . . . . . . . 48
Amendment/Termination. . . . . . . . . . . . . . . . . . . . 50
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . 51
Expenses and Fees. . . . . . . . . . . . . . . . . . . . . . 51
Affiliates Agreement . . . . . . . . . . . . . . . . . . . . 51
Escrow and Indemnity Agreement . . . . . . . . . . . . . . . 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PAY-FONE. . . . . . . . . . . . . . . . . . . . 54
Results of Operations. . . . . . . . . . . . . . . . . . . . 54
Liquidity and Capital Resources. . . . . . . . . . . . . . . 56
<PAGE>
OWNERSHIP OF PAY-FONE SHARES . . . . . . . . . . . . . . . . . 58
DESCRIPTION OF PAYCHEX COMMON STOCK. . . . . . . . . . . . . . 60
COMPARISON OF RIGHTS OF HOLDERS OF PAY-FONE SHARES
AND PAYCHEX COMMON STOCK . . . . . . . . . . . . . . . . . . . 61
Indemnification. . . . . . . . . . . . . . . . . . . . . . . 61
Limitation of Director Liability . . . . . . . . . . . . . . 62
Cumulative Voting. . . . . . . . . . . . . . . . . . . . . . 62
Super-Majority Voting. . . . . . . . . . . . . . . . . . . . 63
Size of Board of Directors . . . . . . . . . . . . . . . . . 63
Special Meetings of Shareholders . . . . . . . . . . . . . . 63
Vote Required for Certain Mergers or Reorganizations . . . . 64
Class Vote for Certain Reorganizations . . . . . . . . . . . 65
Fairness Opinion for Certain Reorganizations . . . . . . . . 65
Delaware Anti-Takeover Law . . . . . . . . . . . . . . . . . 65
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . 66
Inspection of Shareholder List . . . . . . . . . . . . . . . 66
Loans to Directors, Officers and Employees . . . . . . . . . 67
Interested Director Transactions . . . . . . . . . . . . . . 67
Voting by Ballot . . . . . . . . . . . . . . . . . . . . . . 67
Payment of Dividends and Repurchase of Shares of Common Stock68
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . 69
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
PAY-FONE CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . 69
ANNEXES
I. Agreement and Plan of Merger
Exhibit A. Affiliates Agreement
Exhibit B. Escrow and Indemnity Agreement
II. California General Corporation Law, Sections 1300 et
seq.
DOCUMENTS DELIVERED HEREWITH
A. Paychex 1994 Annual Report to Stockholders
B. Paychex Proxy Statement for 1994 Annual Meeting of
Stockholders
C. Paychex Form 10-Q Quarterly Report for Quarterly
Period Ended February 28, 1995
<PAGE>
SUMMARY
The following is a summary of certain information contained
elsewhere in this Proxy Statement/Prospectus. Reference is made
to, and this summary is qualified in its entirety by, the more
detailed information contained, or incorporated by reference, in
this Proxy Statement/Prospectus and the Annexes hereto. Unless
otherwise defined herein, capitalized terms used in this summary
have the respective meanings ascribed to them elsewhere in this
Proxy Statement/Prospectus. Shareholders are urged to read this
Proxy Statement/Prospectus and the Annexes hereto in their
entirety.
THE COMPANIES
Paychex, Inc . . . . Paychex provides automated payroll and tax
reporting and payment services and human
resource services nationwide to over
200,000 businesses with one to 200
employees. Its principal executive
offices are at 911 Panorama Trail South,
Rochester, New York 14625; its telephone
number is (716) 385-6666
Pay-Fone Systems,
Inc. . . . . . . . . Pay-Fone provides automated payroll and
tax reporting and payment services to over
3,500 small-to-medium sized businesses
through five offices in California. Its
principal executive offices are at 8100
Balboa Boulevard, Van Nuys, California
92406; its telephone number is (818) 997-
0808.
Paychex Merger
Corp. . . . . . . . Merger Sub is a wholly owned subsidiary of
Paychex formed solely for the purpose of
the Merger. Its principal executive
offices and telephone number are the same
as Paychex'.
THE SPECIAL MEETING
Time, Date, Place. . The Special Meeting will be held at 10:00
a.m., local time, on June 14, 1995, at the
executive offices of Pay-Fone, 8100 Balboa
Boulevard, Van Nuys, California 92406.
<PAGE>
Record Date, Shares
Entitled to Vote . . Holders of record of Pay-Fone Shares at
the close of business on May 8, 1995 are
entitled to notice of, and to vote at, the
Special Meeting. At such date there were
outstanding ______________ Pay-Fone
Shares, each of which will be entitled to
one vote on each matter to be acted upon
or which may properly come before the
Special Meeting.
Purpose of Special
Meeting. . . . . . . The purpose of the Special Meeting is to
consider and vote upon a proposal to
approve and adopt the Merger Agreement
pursuant to which Pay-Fone will become a
wholly owned subsidiary of Paychex and
Pay-Fone shareholders will become
stockholders of Paychex.
Vote Required. . . . . Approval and adoption of the Merger
Agreement will require the affirmative
vote of the holders of a majority of the
outstanding Pay-Fone Shares. On the
record date, Pay-Fone directors,
executive officers and their affiliates
as a group had the power to vote 76% of
the Pay-Fone Shares entitled to vote at
the Special Meeting and such persons
have agreed to vote such Pay-Fone Shares
in favor of the approval and adoption of
the Merger Agreement. See "OWNERSHIP OF
PAY-FONE SHARES."
THE MERGER
Terms of the Merger. . At the Effective Time (as defined
below), pursuant to the Merger Agreement
(i) Merger Sub will be merged with and
into Pay-Fone, which will continue as
the surviving corporation and become a
wholly owned subsidiary of Paychex, and
(ii) the issued and outstanding Pay-Fone
Shares will be converted into the right
to receive shares of Paychex Common
Stock at the Exchange Ratio.
<PAGE>
Pursuant to the Merger Agreement, each
Pay-Fone Share outstanding at the
Effective Time will be converted into
the right to receive that number of
shares of Paychex Common Stock
calculated by dividing (a) $10,475,000,
subject to certain possible adjustments,
by (b) the product of (i) a price (the
"Formula Price") based on the average of
the last reported sale prices of Paychex
Common Stock on the NASDAQ National
Market for the 20 consecutive trading
days ending on the second trading day
immediately preceding, but not
including, the Closing Date (the "Actual
Price") which average may be adjusted by
up to $3.00 as specified in the Merger
Agreement and (ii) the sum of the number
of Pay-Fone Shares then outstanding and
the number of Pay-Fone Shares issuable
upon exercise of then exercisable stock
options granted by Pay-Fone.
The $10,475,000 may be reduced by (a)
the sum of all amounts expended by Pay-
Fone between March 17, 1995 and the
Closing Date in contesting and resolving
claims asserted by the Internal Revenue
Service against Pay-Fone for the fiscal
years 1987 through 1991 and California
state tax claims based on the same facts
and for the same periods (the "Tax Claim
Adjustment") and (b) the sum of all
losses (other than those taken into
account in (a) above), each of which
exceeds $25,000 and is calculable
without regard to materiality standards
in the Merger Agreement, which would be
suffered by Paychex upon consummation of
the Merger as a result of a breach of a
representation, warranty or covenant
made by Pay-Fone in the Merger Agreement
and which in the aggregate exceed
$175,000 (the "General Adjustment"),
which reductions may be offset by (c)
the sum of all benefits that would be
enjoyed by Paychex upon consummation of
the Merger as a result of conditions
more favorable or performance more
beneficial than represented or promised
by Pay-Fone under the Merger Agreement
<PAGE>
(the "Positive Adjustment"). Pay-Fone
has the right to terminate the Merger
Agreement in the event the net negative
adjustment as a result of the General
Adjustment and the Positive Adjustment
exceeds $360,000, upon payment to
Paychex of $70,000.
The Formula Price and the Actual Price
will be the same so long as the Actual
Price is no less than $37 and no more
than $43. In the event the Actual Price
is (a) greater than $43 but no more than
$46 or (b) less than $37 but no less
than $34, the Formula Price shall be $43
and $37, respectively. In the event the
Actual Price is (a) greater than $46 or
(b) less than $34, the Formula Price
shall be the Actual Price less $3 or
plus $3, respectively. In the event the
Actual Price is (a) more than $49 or (b)
less than $31, Pay-Fone and Paychex,
respectively, shall have the right to
terminate the Agreement unless (a)
Paychex agrees to a Formula Price of $46
or (b) Pay-Fone agrees to a Formula
Price of $34, respectively.
Fractional shares of Paychex Common
Stock will not be issued. Pay-Fone
shareholders otherwise entitled to
fractional shares will be paid cash in
lieu of such fraction.
See "THE MERGER - Merger Consideration."
Background of the
Merger . . . . . . . . See "THE MERGER - Background of the
Merger."
Reasons for the
Merger . . . . . . . . See "THE MERGER - Pay-Fone's Reasons for
the Merger" and "THE MERGER - Paychex'
Reasons for the Merger."
Recommendation of the
Pay-Fone Board . . . . The Pay-Fone Board of Directors believes
the Merger is fair and in the best
interests of Pay-Fone and its
shareholders. The Board unanimously
approved the Merger Agreement and
recommends a vote in favor of the
<PAGE>
approval and adoption of the Merger
Agreement by the shareholders of Pay-
Fone.
Effective Time of the
Merger . . . . . . . . It is anticipated that the Merger will
become effective as promptly as
practicable after Pay-Fone shareholder
approval has been obtained, assuming all
other conditions to the consummation of
the Merger have been satisfied or
waived. The Merger will become
effective when appropriate certificates
have been filed by the Secretaries of
State of California and Delaware (the
"Effective Time").
Conditions to the Merger;
Termination of the
Merger Agreement . . . The obligations of Paychex and Pay-Fone
to consummate the Merger are subject to
the satisfaction of certain conditions,
including (in addition to approval by
Pay-Fone shareholders) approval for
listing the shares of Paychex Common
Stock to be issued in the Merger on the
NASDAQ National Market, the absence of
any injunction prohibiting the Merger,
the receipt of an accountant's letter
with respect to qualification of the
Merger as a pooling of interests and the
receipt of certain legal opinions from
respective counsel. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT AND
OTHER AGREEMENTS - Conditions/Waiver."
The Merger Agreement may be terminated
(i) by mutual written consent of the
parties or (ii) by either party if (a)
the Merger is not consummated by August
31, 1995 (unless caused by the action or
inaction of the party seeking
termination) (b) any permanent
injunction or other order preventing
consummation of the Merger has become
final and nonappealable, or (c) a party
acquires verified information regarding
the other party not known when the
Merger Agreement was signed which has or
would reasonably be expected to have a
material adverse effect on the other
party, or (iii) by Paychex if the Board
<PAGE>
Pay-Fone shall have withdrawn or amended
its recommendation of the Merger and 5%
or more of the Pay-Fone shareholders
shall have elected to exercise
dissenters' rights, or (iv) by Pay-Fone
if the net reduction of the $10,475,000
numerator in the Exchange Ratio formula
by reason of the General Adjustment and
the Positive Adjustment exceeds
$360,000. See "CERTAIN PROVISIONS OF
THE MERGER AGREEMENT AND OTHER
AGREEMENTS - Amendment/Termination."
Dissenters' Rights . . Under California law, record holders of
Pay-Fone Shares who comply with certain
procedures are entitled to receive
payment in cash for the fair market
value of their Pay-Fone Shares,
provided, however, that such dissenters'
rights will be available only with
respect to Pay-Fone Shares which are
subject to a restriction on transfer
imposed by Pay-Fone or by any law or
regulation or if holders of 5% or more
of the outstanding Pay-Fone Shares
demand payment in accordance with
California law. See "THE MERGER -
Rights of Dissenting Shareholders."
Certain Federal Income
Tax Consequences . . . The federal income tax consequences of
the Merger will depend on whether, among
other things, the Merger qualifies as a
"tax-free" reorganization under the
Internal Revenue Code of 1986, as
amended. If the Merger so qualifies,
tax counsel has advised that no gain or
loss generally would be recognized by
Pay-Fone shareholders upon the exchange
of their Pay-Fone Shares for Paychex
Common Stock (except for cash received
in lieu of a fractional share). If the
Merger does not so qualify, tax counsel
has advised that the exchange would be a
taxable transaction. Because certain
actions by Pay-Fone or its historic
shareholders occurring after the Merger
could violate the continuity of business
enterprise or continuity of interest
requirements for a "tax-free"
reorganization, tax counsel has
expressed no opinion as to whether the
<PAGE>
Merger will so qualify. No ruling from
the Internal Revenue Service has been
requested or obtained regarding any of
the federal income tax consequences of
the Merger. Accordingly, Pay-Fone
shareholders should consult their own
tax advisors as to the tax consequences
of the Merger. See "THE MERGER -
Certain Federal Income Tax
Consequences."
Accounting Treatment . The Merger is intended to qualify as a
pooling of interests for accounting and
financial reporting purposes.
Consummation of the Merger is
conditional upon Paychex' receipt of a
letter to that effect from Ernst & Young
LLP, its independent auditors. See "THE
MERGER - Accounting Treatment."
Affiliates Agreement . Paychex and Pay-Fone have entered into
an agreement with certain affiliates of
Pay-Fone, including its directors,
officers and a principal shareholder
(the "Affiliates Agreement") whereby
each such affiliate agreed to vote Pay-
Fone Shares owned by him (an aggregate
of approximately 76% of the Pay-Fone
Shares outstanding on the record date
for the Special Meeting) in favor of the
approval and adoption of the Merger
Agreement. The Affiliates Agreement
also contains certain provisions
relating to the treatment of the Merger
as a pooling of interests which limit
transfer of Pay-Fone Shares and Paychex
Common Stock by such affiliates. See
"CERTAIN PROVISIONS OF THE MERGER
AGREEMENT AND OTHER AGREEMENTS -
Affiliates Agreement."
Escrow and Indemnity
Agreement. . . . . . . . In order to satisfy a Paychex
requirement that Paychex not bear any
substantial economic risk with respect
to certain claims asserted against Pay-
Fone by the Internal Revenue Service
and related claims as a result of the
Merger, the directors of Pay-Fone and
Allied Contractors, Inc., a shareholder
of Pay-Fone (collectively, the "EIA
Shareholders"), have executed an Escrow
<PAGE>
and Indemnity Agreement pursuant to
which the EIA Shareholders have agreed
under certain conditions to indemnify
Paychex and Pay-Fone against certain
specifically identified losses suffered
after the Merger resulting from pending
and possible tax claims that have been
or may be asserted by the Internal
Revenue Service and by the California
Franchise Tax Board for income or
franchise taxes due from Pay-Fone for
fiscal years 1987 through 1995. See
"CERTAIN PROVISIONS OF THE MERGER
AGREEMENT AND OTHER AGREEMENTS - Escrow
and Indemnity Agreement."
Interests of Certain Persons
In the Merger. . . . . . In considering the recommendation of
the Pay-Fone Board with respect to the
Merger Agreement and the transactions
contemplated thereby, shareholders
should be aware that the Pay-Fone Board
and management have certain interests
in the Merger which arise from, among
other things, certain compensation and
employment arrangements. In addition,
in the event certain tax claims against
Pay-Fone are not resolved prior to the
Merger, on approved terms, certain
affiliates and directors of Pay-Fone
would provide indemnification with
respect thereto. See "THE MERGER -
Interests of Certain Persons in the
Merger."
Comparison of Shareholder
Rights . . . . . . . . . If the Merger is consummated,
shareholders of Pay-Fone, a California
corporation, will become stockholders
of Paychex, a Delaware corporation.
The rights of Paychex stockholders
differ in certain respects from the
rights of Pay-Fone shareholders, with
respect to, among other things,
limitations on director liability,
cumulative voting, super-majority
voting, the right of shareholders to
call meetings of shareholders, and
votes required for certain mergers and
reorganizations. The state laws also
differ with respect to their affect on
parties who may seek to take control of
<PAGE>
corporations. See "COMPARISON OF
RIGHTS OF HOLDERS OF PAY-FONE SHARES
AND PAYCHEX COMMON STOCK."
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA AND PER SHARE DATA
(In thousands, except percentages and per share data)
The following tables set forth certain historical consolidated financial information and per share data of Paychex and Pay-Fone,
respectively, for the periods indicated. The financial data for the nine month periods for 1995 and 1994 are derived from
unaudited financial statements. This information should be read in conjunction with the consolidated financial statements and
related notes of Paychex and Pay-Fone appearing elsewhere in this Proxy Statement/Prospectus or incorporated herein by reference.
Paychex and Pay-Fone proforma combined financial data giving effect to the Merger under the pooling of interests
accounting method is not considered to be significant, as defined by S-X Rule 1-02(v), to the consolidated financial statements
of Paychex. Accordingly, such pro forma combined financial data is not presented.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA AND PER SHARE DATA OF PAYCHEX
Nine Months Ended
February 28, Year Ended May 31,
----------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Summary
of Operations
Revenue $195,327 $165,212 $224,052 $190,032 $161,272 $137,081 $120,200
Operating costs 57,358 50,633 68,082 60,715 53,243 49,982 45,031
Selling, general and
administrative expenses 100,164 87,248 119,187 102,660 89,301 73,816 63,042
Operating income 37,805 27,331 36,783 26,657 18,728 13,283 12,127
Percent of revenue 19.4 16.5 16.4 14.0 11.6 9.7 10.1
Net income 28,537 20,671 28,070 19,955 13,702 9,623 8,566
Percent of revenue 14.6 12.5 12.5 10.5 8.5 7.0 7.1
------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet
Data - End of Period
Working capital $ 89,036 $ 62,124 $ 68,031 $ 46,389 $ 27,884 $ 19,221 $ 21,257
Total assets 158,765 127,996 129,789 106,920 86,242 70,413 62,109
Long term debt (including
current portion) 948 1,260 948 1,634 2,024 2,408 2,137
Stockholders' equity 131,066 102,816 108,508 85,189 67,405 54,491 47,160
------------------------------------------------------------------------------------------------------------------------------
Common Stock Data (1)
Net income per share .95 .69 .94 .67 .46 .33 .29
Cash dividends per share .24 .16 .22 .15 .10 .09 .07
Net book value per share(2) 4.37 3.44 3.63 2.86 2.27 1.85 1.60
Weighted average shares
outstanding 29,933 29,846 29,860 29,730 29,519 29,376 29,339
- -------------------------------------------------------------------------------------------------------------------------------
(1) Per share amounts and average shares outstanding have been adjusted for three-for-two stock splits in May 1992 and August
1993.
(2) Based on shares outstanding at period-end.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA AND PER SHARE DATA OF PAY-FONE
Six Months Ended
December 31, Year Ended June 30,
----------------- --------------------------------------------------------------
1994 1993 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Summary
of Operations
Revenue $ 2,265 $ 2,106 $ 4,460 $ 4,505 $ 5,186 $ 5,248 $ 5,504
Operating costs 950 788 1,696 1,637 2,021 2,146 2,267
Selling, general and
administrative expenses 1,631 1,259 2,542 2,680 3,110 3,410 3,587
Operating income (loss) (316) 59 222 188 55 (308) (350)
Percent of revenue - 2.8 5.0 4.2 1.1 - -
Net income(loss) (207) 62 189 151 111 (195) (202)
Percent of revenue - 2.9 4.2 3.4 2.1 - -
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet
Data - End of Period
Working capital $ 2,376 $ 2,759 $ 2,739 $ 2,667 $ 2,257 $ 2,078 $ 1,993
Total assets 5,325 5,517 5,600 5,374 5,324 5,442 5,785
Long term debt (including
current portion) - - - - - - -
Shareholders' equity 5,010 5,080 5,208 5,019 4,868 4,882 5,076
------------------------------------------------------------------------------------------------------------------------------
Common Share Data
Net income (loss) per share (.14) .04 .13 .10 .07 (.13) (.13)
Cash dividends per share - - - - - - -
Net book value per share(1) 3.38 3.46 3.55 3.42 3.32 3.24 3.37
Weighted average shares
outstanding 1,484 1,468 1,469 1,488 1,484 1,506 1,506
------------------------------------------------------------------------------------------------------------------------------
(1)Based on shares outstanding at period-end.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPARATIVE MARKET PRICES AND DIVIDEND DATA
Paychex Common Stock is listed and principally traded in the over-the-counter market and quoted on NASDAQ National Market
System under the symbol "PAYX". The Pay-Fone Shares are traded on the American Stock Exchange and are reported under the symbol
"PYF". The following table sets forth, for the periods indicated, the range of high and low closing sale prices per share of
Paychex Common Stock as reported on the NASDAQ National Market, and per Pay-Fone Share as reported on the American Stock
Exchange. The Paychex fiscal year ends on May 31, and the Pay-Fone fiscal year ends on June 30. The high and low sales prices
of Paychex Common Stock have been adjusted to give retroactive effect to the three-for-two stock split in August 1993. The
following table also shows the cash dividends declared by Paychex. Pay-Fone has not paid any cash dividends. Pursuant to the
Merger Agreement, Pay-Fone is prohibited from declaring, setting aside or paying dividends on Pay-Fone Shares, except with the
consent of Paychex.
Paychex Pay-Fone
Common Stock Common Shares
------------------------------ ---------------------------------
Cash Cash
High Low Dividend High Low Dividends
---- --- -------- ---- --- ---------
<S>
Fiscal Year 1993 <C> <C> <C> <C> <C> <C>
First Quarter $19 3/8 $14 1/2 .027 $3 5/8 $2 3/4 -
Second Quarter 26 5/8 17 7/8 .040 3 3/8 2 7/8 -
Third Quarter 25 5/8 21 1/2 .040 3 3/8 2 7/8 -
Fourth Quarter 28 5/8 23 7/8 .040 3 3/8 2 7/8 -
Fiscal Year 1994
First Quarter 33 25 3/4 .04 3 1/4 2 5/8 -
Second Quarter 37 3/4 30 3/4 .06 3 2 3/8 -
Third Quarter 40 1/2 32 .06 2 7/8 2 3/8 -
Fourth Quarter 39 1/4 31 3/4 .06 2 7/8 2 1/4 -
Fiscal Year 1995
First Quarter 34 1/2 28 1/2 .06 5 2 3/8 -
Second Quarter 39 1/4 32 1/2 .09 4 1/2 3 3/4 -
Third Quarter 42 34 3/4 .09 6 1/8 3 7/8 -
Fourth Quarter 47 3/4 39 9/16 - 6 1/8 4 1/4 -
through April 11, 1995
On March 17, 1995, the last full trading day prior to the public announcement of the proposed Merger, the closing price for a
share of Paychex Common Stock was $45.00 and the closing price of a Pay-Fone Share was $4.50.
On , the last full trading day prior to the printing of this Proxy Statement/Prospectus, the closing sales prices
for a share of Paychex Common Stock and a Pay-Fone Share were $ and $ , respectively. Shareholders are urged to
obtain current market quotations for the Paychex Common Stock and Pay-Fone Shares. See "THE MERGER-Merger Consideration".
</TABLE>
<PAGE>
THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the
shareholders of Pay-Fone in connection with solicitation of
proxies by the Board of Directors of Pay-Fone for use at a
Special Meeting of Shareholders to be held at 8100 Balboa
Boulevard, Van Nuys, California, on June 14, 1995, at 10:00 a.m.
local time, and at any adjournment or postponement thereof.
Purpose of the Meeting
At the Special Meeting, the shareholders of Pay-Fone will be
asked to consider and vote upon a proposal to approve and adopt
the Merger Agreement pursuant to which Pay-Fone would become a
wholly-owned subsidiary of Paychex and the shareholders of Pay-
Fone would become stockholders of Paychex. See "THE MERGER."
The Pay-Fone Board has unanimously approved the Merger
Agreement and recommends a vote FOR approval and adoption of the
Merger Agreement. See "THE MERGER - Pay-Fone's Reasons for the
Merger." The members of the Pay-Fone Board, together with Pay-
Fone's executive officers and Allied Contractors, Inc., a
principal shareholder of Pay-Fone and an affiliate of three Pay-
Fone directors (collectively, the "Affiliates"), have agreed to
vote their Pay-Fone Shares in favor of the approval and adoption
of the Merger Agreement. See "THE MERGER - Interests of Certain
Persons in the Merger."
Voting Rights; Record Date
The Pay-Fone Board has established May 1, 1995 as the date
to determine those record holders of Pay-Fone Shares entitled to
notice of and to vote at the Special Meeting. On that date,
there were ________________ Pay-Fone Shares outstanding, with
each Share entitled to one vote.
The presence, in person or by proxy, of the holders of a
majority of the outstanding Pay-Fone Shares at the Special
Meeting is necessary to constitute a quorum. Shares represented
in person or by proxy at Special Meeting but abstaining with
respect to the approval and adoption of the Merger Agreement will
be treated as present with respect to determination of a quorum.
The affirmative vote of the holders of a majority of the
outstanding Pay-Fone Shares is required to approve and adopt the
Merger Agreement. The Affiliates hold approximately 76% of the
Pay-Fone Shares entitled to vote at the Special Meeting, and they
have agreed with Paychex to vote for approval and adoption of the
Merger Agreement. Accordingly, approval of the Merger Agreement
<PAGE>
is assured. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND
OTHER AGREEMENTS - Affiliates Agreement" and "OWNERSHIP OF PAY-
FONE SHARES." Abstentions have the effect of a vote against the
Merger Agreement for purposes of the required vote, but not for
the purpose of perfecting dissenters' rights. See "THE MERGER --
Rights of Dissenting Shareholders."
Shares represented by all properly executed proxies received
in time for the Special Meeting will be voted in the manner
specified by the holders thereof. Proxies that do not contain
voting instructions will be voted FOR approval of the Merger
Agreement. It is not expected that any other matter will be
brought before the Special Meeting. If, however, other matters
are properly presented, the persons named as proxies will vote in
accordance with their judgment with respect to such matters.
Any shareholder has the right to revoke his or her proxy at
any time prior to the voting thereof at the Special Meeting by
(i) filing a written revocation with the Secretary of Pay-Fone
prior to the voting of such proxy, (ii) giving a duly executed
proxy bearing a later date, or (iii) attending the Special
Meeting and voting in person. Attendance by a shareholder at the
Special Meeting will not itself revoke his or her proxy.
Solicitation of Proxies
Pay-Fone will bear the cost of the solicitation of proxies
from its shareholders. In addition to solicitation by mail, the
directors, officers and employees of Pay-Fone, without additional
compensation, may solicit proxies by telephone, telecopy or
telegram or in person. Pay-Fone has requested banking
institutions, brokerage firms, custodians, trustees, nominees and
fiduciaries to forward solicitation materials to the beneficial
owners of Common Stock held of record by such entities, and Pay-
Fone will, upon the request of such record holders, reimburse
reasonable forwarding expenses.
<PAGE>
THE COMPANIES
Paychex
Paychex is a national payroll processing and payroll tax
preparation company which provides its services to over 200,000
small-to-medium size businesses. Paychex believes that in number
of clients it is the second largest payroll accounting service
company in the country. Paychex prepares and furnishes
paychecks, earnings statements and internal accounting records
such as journals, summaries and earnings histories. Paychex also
prepares for its clients all required monthly, quarterly and
annual payroll tax returns for federal, state and local
governments. Over 48% of its' clients nationwide utilize
TAXPAY, a service which provides automatic payment of payroll
taxes and filing of quarterly and annual tax returns. Paychex
also provides enhanced payroll services, including an automatic
salary deposit service (Direct Deposit) which electronically
transmits the net payroll for a client's employees to banks
throughout the Federal Reserve System and a digital check signing
and inserting service.
Paychex markets its services principally to small and medium
sized businesses through its 70 branch operating centers and 25
sales offices located in major metropolitan areas. Its market
share in branch processing center territories ranges from 1% to
approximately 20%. No client accounts for as much as 1% of its
revenue.
Clients may discontinue Paychex service at will.
Approximately 80% of the businesses which were clients in fiscal
year 1993 or 1994 continued to be clients in the succeeding
fiscal year. Ownership changes or business failures common to
small businesses are the primary causes of client loss.
Paychex warrants its services, agreeing to reimburse any
client for penalties and interest incurred as a result of a
Paychex error. Warranty expense in fiscal years 1993 and 1994
was approximately $130,000 and $400,000 respectively and warranty
expense for fiscal year 1995 to date is not materially different.
Paychex employs payroll specialists who communicate
primarily by telephone with their assigned clients each payroll
period to record the hours worked by each employee and any
personnel or compensation changes. These specialists are trained
by Paychex in all facets of payroll preparation and applicable
tax regulations. All information furnished by a client is
handled by someone who is "payroll intelligent" and familiar with
that client's payroll.
The Paychex payroll system is an on-line, direct entry
computer system which enables the payroll specialist, upon
<PAGE>
receiving the information from the client over the telephone to
enter it simultaneously. Payroll processing is decentralized in
each Paychex branch operating center while Taxpay and Direct
Deposit processing are centralized at its headquarters. Sales
offices utilize a nearby branch operating center for processing.
During 1993, Paychex introduced Paylink, a proprietary
software package which enables clients to use their personal
computers and modems to transmit their payroll data to the local
Paychex processing center at any time, without assistance of a
payroll specialist. Currently over 9,000 clients use this
feature.
While payroll is its core business, Paychex also provides
human resource products and services through its HRS division.
HRS markets Cafeteria Plan products approved under Section 125 of
the Internal Revenue Code. The Premium Only Plan allows
employees to pay for certain fringe benefits with pre-tax
dollars, with a resultant reduction of payroll taxes to employers
and employees. The Flexible Spending Account Plan allows a
client's employees to pay for health and dependent care expenses
with pre-tax dollars. All administration, compliance and
coverage tests are provided with these services.
The HRS Division's employee management services and products
include customized employee handbooks, management manuals, job
descriptions and personnel forms. These have been designed to
simplify clients' office processes and enhance their employee
benefits programs. Also available is a measurement and
evaluation tool to assist clients in the process of hiring,
training and developing employees. Group insurance products are
offered in selected geographical areas.
Products and services of the HRS Division are sold through a
separate sales organization located in 44 branch offices. Some
of the products and services are available on a nationwide basis
through a central telemarketing group. Paychex employs over
3,400 persons. The mailing address of Paychex' principal
executive offices is 911 Panorama Trail South, Rochester, New
York 14625, and its telephone number is (716) 385-6666.
Merger Sub
Merger Sub, a wholly owned subsidiary of Paychex, was formed
by Paychex solely for the purpose of effecting the Merger. The
mailing address of Merger Sub's principal executive offices is
c/o Paychex, 911 Panorama Trail South, Rochester, New York 14625
and its telephone number is (716) 385-6666.
<PAGE>
Pay-Fone
Pay-Fone, originally founded in 1955, provides automated
payroll services to businesses located primarily in California.
Since 1988, Pay-Fone has operated under the name "Precision
Payroll." Pay-Fone operates from three offices in Southern
California and two offices in Northern California.
In fiscal year 1993 Pay-Fone sold its New York payroll
business. On April 30, 1992, Pay-Fone and the Greenville, South
Carolina franchise terminated their relationship. Pay-Fone and
its Mobile, Alabama franchise terminated their relationship in
September of 1992.
On February 1, 1994, Pay-Fone acquired Concentric Computer
Corporation of Aptos, California. This acquisition added 270 new
clients to Pay-Fone's customer base and positively impacted
revenues in the fourth quarter of fiscal year 1994. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PAY-FONE."
Pay-Fone was incorporated in the state of California on
July 2, 1970. Its principal executive offices are located at
8100 Balboa Boulevard, Van Nuys, California 91406, telephone
(818) 997-0808.
Payroll Services
Pay-Fone offers a range of payroll services to meet the
needs of its more than 3,500 clients. From 1987 until 1994,
Pay-Fone had offered a payroll tax filing and payment service in
conjunction with independent contractors. In 1994, Pay-Fone
introduced its Precision Tax Service, a payroll tax filing
offering which enables Pay-Fone to perform these services
in-house. As part of the Precision Tax Service, Pay-Fone
collects funds for federal, state and local employment taxes from
clients, files applicable monthly, quarterly and annual tax
returns, handles all regulatory correspondence and amendments,
and remits payment to the appropriate tax agencies. The service
also includes year-end reconciliation and filing of W-2 and 1099
forms.
Pay-Fone's Premium Only Plan is a benefit plan which enables
clients and their employees to obtain tax benefits with respect
to certain payroll deductions. Pay-Fone's services include plan
documentation, administration and preparation of compliance
reports.
Clients provide their payroll data to Pay-Fone by one of
four means:
<PAGE>
Call-A-Check - The customer's data is communicated to Pay-
Fone by telephone each pay period. The client speaks with a
trained specialist who enters the appropriate information
for each of the client's employees, including salary, number
of hours worked and changes in employee status.
Fax-A-Check - The client's data is transmitted by facsimile
machine using worksheets prepared from the prior pay period.
This method is popular with small to medium size businesses.
PayMate - The client enters its payroll data on an IBM
compatible computer using Pay-Fone's proprietary software
program. At the end of the pay period the information is
transmitted via modem to Pay-Fone's computer center. Pay-
Mate also allows the client to prepare personnel statistic
reports and is popular with Pay-Fone's larger clients.
Rapid-PC - This software, designed for large employers and
those with more specialized payroll requirements, allows the
client to calculate and post manual checks from the client's
personal computer. Rapid-PC also provides import/export
capabilities, general ledger reporting, 401(k) next day
transmission, workers' compensation premium calculations,
accruals based on hire dates, print back capability, and a
user friendly report writer. It allows the client to view
its payroll by individual, department and/or grand totals
before transmitting the data to Pay-Fone.
Pay-Fone typically provides clients with processed payroll
documents, including payroll checks, management reports and tax
information, within 24 hours after receipt of the client data.
Pay-Fone also offers direct deposit services by which a client's
employees can have their net payroll electronically deposited to
their bank accounts.
Data is received at each of Pay-Fone's offices. The
information is then processed at the Van Nuys location and
printed at either the Van Nuys or Burlingame location. Pay-Fone
stores client records on magnetic media and maintains duplicate
records in off-site storage to protect against loss due to
computer or power failure.
Pay-Fone enters into a standard service agreement with each
client which describes the services to be performed. This
agreement limits Pay-Fone's liability to the client to the
replacement of a defective check in the event of any errors or
omissions by Pay-Fone in the documentation provided to the
client. To date, Pay-Fone's liability with respect to errors and
omissions has not been significant. With respect to tax filing
services, Pay-Fone agrees to be responsible for certain penalties
and interest which may be imposed by the regulatory agencies.
<PAGE>
Either Pay-Fone or the client may terminate the standard service
agreement on reasonably short notice. Pay-Fone provides payroll
services on a weekly, bi-weekly, semi-monthly or monthly basis,
and bills the customer on a monthly basis.
Personal service is an important aspect of Pay-Fone's
business. Pay-Fone places a strong emphasis on a commitment to
customer service.
Software and Equipment
Pay-Fone develops and owns computer software and related
equipment, in addition to software and hardware Pay-Fone leases
from third parties. Pay-Fone continually updates its proprietary
software to reflect changes in Federal, state and local laws and
regulations. Pay-Fone also designs system enhancements and
equipment devices which are intended to enlarge and improve the
capabilities of its payroll services. In fiscal years 1994, 1993
and 1992, Pay-Fone spent $148,528, $182,255 and $172,784,
respectively, on research and development which related to such
software and equipment modifications and enhancements.
Pay-Fone owns the terminals and computer equipment required
to perform its payroll services. The majority of equipment is
purchased from equipment manufacturers such as IBM and is
serviced under maintenance contracts. Other equipment is
maintained by Company personnel.
The materials, supplies, equipment and computer hardware
used by Pay-Fone, or substantially equivalent alternatives, are
available from several commercial sources, and Pay-Fone is not
dependent on any single source.
Sales and Marketing
Pay-Fone markets is services through its own sales force
from its headquarters and branch offices. Pay-Fone has
historically targeted small to medium size businesses (up to 200
employees) as those which would have the most use for Pay-Fone's
services. With the introduction of Rapid-PC, in February 1994,
Pay-Fone has expanded its marketing to the large employer market,
generally businesses with more than 200 employees.
Proprietary Rights
Pay-Fone uses the service marks MICRO/HOST, CALL-A-CHECK,
FAX-A-CHECK, Precision Payroll, Precision Package, and PayMate in
its business. Pay-Fone believes it has protectable rights to
such marks under common law principles.
<PAGE>
Pay-Fone considers its software, customer lists and trade
practices to be proprietary trade secrets, which it intends to
protect to the full extent permitted by law, and material to its
business. Primary to this protection is Pay-Fone's standard
employment agreement which each employee signs at the inception
of his or her employment and in which, in addition to other
restrictions, the employee agrees that he or she will not
directly or indirectly divulge such proprietary trade secrets to
any firm, person or corporation either during his employ or for a
period of two years after the termination of employment.
In February, 1994, Pay-Fone licensed the Rapid PC software,
which allows Pay-Fone to provide full service to the large
employer market, from a third party.
Competition
The business in which Pay-Fone is engaged is highly
competitive, and Pay-Fone competes with numerous entities which
provide similar services, including national data processing
companies, local businesses and banks. Pay-Fone believes that
important competitive factors are price, speed and quality of
service. Pay-Fone believes that it competes effectively in each
of these areas. Many of Pay-Fone's competitors have greater
financial and personnel resources than does Pay-Fone. Since the
majority of businesses prepare their own payroll in-house, the
major source of competition is manual payroll systems sold by
numerous vendors and the availability of low-priced computers and
software programs which enable businesses to perform computerized
payroll in-house.
Employees
As of February 15, 1995, Pay-Fone had 92 full-time employees
and 4 part-time employees.
Properties
Pay-Fone's principal executive offices, which include local
customer service and sales activities and house the central
computer processing facility, are located in Van Nuys,
California. The 39,663 square foot building is owned by Pay-Fone
and the ground is leased under a lease expiring June 2025.
Approximately 13,000 square feet of this building are subleased,
most for a term which expires in February 1996. Pay-Fone also
leases offices in four locations in California which house local
customer service and sales operations. Pay-Fone believes that
its facilities are adequate for its needs.
<PAGE>
THE MERGER
This section of the Proxy Statement/Prospectus and the next
section entitled "CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND
OTHER AGREEMENTS" describe certain aspects of the proposed
Merger. The following descriptions do not purport to be complete
and are qualified in their entirety by reference to the Merger
Agreement and the Exhibits thereto which are attached as Annex I
to this Proxy Statement/Prospectus and incorporated herein by
reference. All shareholders are urged to read the Merger
Agreement and the Exhibits thereto in their entirety.
General
Pursuant to the Merger Agreement, Merger Sub will merge into
Pay-Fone with Pay-Fone surviving the merger, and Pay-Fone will
become a wholly owned subsidiary of Paychex. The Merger
Agreement provides that the Merger will be consummated if the
approval of the shareholders of Pay-Fone is obtained and all
other conditions to the Merger are satisfied or waived.
The Effective Time of the Merger will occur upon the filing
of the appropriate documents with the Secretaries of State of the
States of Delaware and California. These filings will occur as
soon as practicable after the closing of the transactions
contemplated by the Merger Agreement on the Closing Date. The
Merger Agreement generally may be terminated by either Pay-Fone
or Paychex if the Merger is not consummated on or before August
31, 1995 and under certain other conditions. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT AND OTHER AGREEMENTS --
Conditions/Waivers; Amendment/Termination; and Expenses and
Fees."
Background of the Merger
Paychex and Pay-Fone have been familiar to each other for a
period of years as competitors in a number of markets,
principally southern California. Both companies express a
commitment to providing superior customer services, and they have
a number of other similar characteristics which suggested a high
potential for compatibility.
Acting at the request of the Pay-Fone Board, David Malcolm,
who became a director of Pay-Fone on July 12, 1994, contacted
Paychex in early July 1994. This initial contact was made to
determine whether Paychex had an interest in pursuing a business
combination with Pay-Fone. The Pay-Fone Board believed that Pay-
Fone lacked the critical mass necessary in its industry to
<PAGE>
maximize shareholder values in the near term and that its various
constituencies would be better served if Pay-Fone were able to
effect a business combination. Paychex expressed a serious
interest in entering into acquisition discussions. To facilitate
these discussions Paychex entered into a Confidentiality and Non-
Disclosure Agreement with Pay-Fone on July 13, 1994.
During the next two and one-half months, selected
confidential information regarding Pay-Fone was provided to
Paychex, and a series of discussions were held, primarily between
G. Thomas Clark, Vice President of Finance of Paychex, and Mark
Kelton, a Pay-Fone director. These preliminary conversations
explored the feasibility of a merger and included issues such as
valuation and possible deal structures.
Mr. Kelton reviewed these discussions in depth with the Pay-
Fone Board during a meeting held on September 30, 1994 and the
Board authorized the continuation of discussions. Mr. Kelton
also from time to time had meetings with, and made calls to, the
other Pay-Fone directors to keep them appraised of the
discussions and to solicit their advice.
In early October 1994, Paychex retained its attorneys and
accountants to advise it in the evaluation and possible
structuring of a transaction with Pay-Fone since it appeared that
a transaction favorable to the shareholders of Paychex could
possibly be arranged. An initial visit was made to Pay-Fone by
Mr. Clark, Francis Provino, Paychex' Controller, and Donald
Mersh, a Regional Manager of Paychex, on October 11 and 12 to
meet with Mr. Kelton and Pay-Fone President Mark Leekley, visit
Pay-Fone's corporate headquarters and main processing facility,
review confidential information, and discuss issues regarding
deal structure and consideration. During October 1994, Paychex
had the opportunity to review a meaningful amount of confidential
information concerning Pay-Fone. Both parties desired to
continue discussions with a view towards reaching an agreement of
merger.
Throughout this period, Pay-Fone reviewed and evaluated the
public information available regarding Paychex, and Messrs.
Kelton and Leekley discussed the business of Paychex with senior
Paychex officials, principally Mr. Clark.
In early November it was decided to defer further
discussions and negotiations to permit Pay-Fone and Paychex to
attend to the increased level of business activity associated
with the end of the calendar year. At a December 16, 1994
meeting of the Pay-Fone Board, Mr. Kelton briefed the directors
on the status of the negotiations, and the matter was considered
at length by the Pay-Fone Board.
<PAGE>
Discussions between Paychex and Pay-Fone resumed in mid-
January, 1995, and Messrs. Clark and Provino made a second trip
to meet with Messrs. Kelton and Leekley on January 28, 29 and 30,
1995. Subsequent thereto, drafting of agreements commenced while
further negotiations and due diligence examinations continued.
At various times between late January and mid-March, 1995, Mr.
Kelton sent drafts of the agreements to each of Pay-Fone's
directors and solicited their questions and comments in telephone
conversations and personal meetings.
The Paychex Board of Directors (the "Paychex Board") was
advised of the negotiations and proposed terms of agreement at
regular meetings on October 5, 1994 and January 12, 1995. At the
earlier meeting, the Board authorized the Paychex Executive
Committee to pursue, approve and conclude the transaction within
specified price limits. The Executive Committee conferred on
February 8, 1995 to consider various developments and issues in
the negotiations and the results of management's due diligence
investigations to date. Minutes of their deliberations were
provided to the full Board. On March 5, 1995, each of the
members of the Executive Committee reviewed in detail the
agreements prepared by counsel and, after conferring, approved
said agreements and authorized Paychex officers to sign and
deliver them with such changes as the officers shall have
approved. The full Board then ratified all agreements as signed
at its meeting on April 13, 1995.
On March 17, 1995, the Pay-Fone Board of Directors held a
meeting at which it considered the final negotiated terms of the
proposed transaction with Paychex and reviewed and unanimously
approved the draft agreements.
The Merger Agreement and related agreements were signed on
March 17, 1995.
Pay-Fone's Reasons for the Merger
The Pay-Fone Board has believed that it would be beneficial
for Pay-Fone to increase the scope of its operations and revenue
substantially in order to obtain economies of scale which would
be likely to enhance shareholder values. With that objective,
various Pay-Fone officers and directors have held discussions
with the managements of a number of other payroll processing
companies with a view towards increasing the scope of Pay-Fone's
operations. Pay-Fone has been unable to arrange transact"ions
that would have enabled Pay-Fone to achieve the desired scale.
However, the Pay-Fone Board and management believe they have kept
themselves well informed regarding prices, terms and other
aspects of merger and acquisition activities in the payroll
processing industry.
<PAGE>
The principal reason for the approval of the terms of the
Merger Agreement by the Pay-Fone Board is that, in the opinion of
the Pay-Fone Board, the consummation of the Merger will result in
greater value to the Pay-Fone shareholders than would likely have
been achieved in the foreseeable future through continued
independent operations. In addition, the Pay-Fone Board believes
that the relative compatibility of the two companies including
such important areas as their corporate culture and their
commitment to customer service is likely to have beneficial
effects for Pay-Fone's current clients and employees. In
comparing the economic effect of the Merger to the stock market
performance it believed could be achieved by Pay-Fone
independently and taking into account among other things Pay-
Fone's expected financial performance, the possibility of
effecting acquisitions in which Pay-Fone would be the surviving
company, and the risks associated therewith, the Pay-Fone Board
determined that the Merger would be the superior alternative for
the Pay-Fone shareholders from a financial point of view.
Paychex' Reasons for the Merger
Paychex believes that the Merger is the best interests of
Paychex and its stockholders because it enables Paychex to expand
at a more rapid rate than possible through the normal acquisition
of clients. The cost to Paychex and its stockholders in terms of
shares of Paychex Common Stock issued in connection with the
Merger is deemed reasonable by the Paychex Board in light of the
net assets acquired and the expenses normally incurred by Paychex
in connection with obtaining new clients and selling additional
services. In addition, Pay-Fone provides Paychex the opportunity
to increase its California payroll client base by approximately
3,500 or 10%. The Pay-Fone client base is very compatible to the
Paychex client base in terms of size and payroll features
delivered. Moreover, Paychex would have significant
opportunities to sell the Pay-Fone client base additional add-on
products such as TaxPay, Direct Deposit and Human Resource
products and services. Pay-Fone has a very limited number of
clients utilizing services comparable to TaxPay and Direct
Deposit. Finally, Pay-Fone has an experienced group of customer
service managers and employees that can provide additional
quality personnel to Paychex' southern California business.
Merger Consideration
Pursuant to the Merger Agreement, at the Effective Time each
Pay-Fone Share will be converted into that number of shares of
Paychex Common Stock calculated by dividing (a) $10,475,000,
subject to certain adjustments, by (b) the product of (i) a price
(the Formula Price) based on the average of the last reported
sales price of Paychex Common Stock on the NASDAQ National Market
<PAGE>
for the 20 consecutive trading days ending on the second trading
day immediately preceding, but not including, the Closing Date
(the Actual Price), which average may be adjusted by up to $3.00
as specified in the Merger Agreement and (ii) the sum of the
number of Pay-Fone Shares then outstanding and the number of Pay-
Fone Shares issuable upon exercise of then exercisable stock
options granted by Pay-Fone (the Exchange Ratio).
The $10,475,000 may be reduced by (a) the Tax Claim
Adjustment, which is the sum of all amounts expended by Pay-Fone
between March 17, 1995 and the Closing Date in contesting and
resolving claims asserted by the Internal Revenue Service against
Pay-Fone for the fiscal years 1987 through 1991 and California
state tax claims based on the same facts and for the same periods
(the "Tax Claims") and (b) the General Adjustment, which is the
sum of all losses (other than those taken into account in the Tax
Claim Adjustments), each of which exceeds $25,000 and is
calculable without regard to materiality standards in the Merger
Agreement, which would be suffered by Paychex upon consummation
of the Merger as a result of a breach of a representation,
warranty or covenant made by Pay-Fone in the Merger Agreement and
which in the aggregate exceed $175,000, which reductions may be
offset by (c) the Positive Adjustment, which is the sum of all
benefits that would be enjoyed by Paychex upon consummation of
the Merger as a result of conditions more favorable or
performance more beneficial than represented or promised by Pay-
Fone under the Merger Agreement. Pay-Fone has the right to
terminate the Merger Agreement in the event the aggregate
negative adjustment under (b) and (c) above exceeds $360,000,
upon payment to Paychex of $70,000.
The Formula Price and the Actual Price will be the same so
long as the Actual Price is no less than $37 and no more than
$43. In the event the Actual Price is greater than $43 but no
more than $46, the Formula Price shall be $43, and if the Actual
Price is greater than $46, the Formula Price shall be an amount
equal to the Actual Price less $3. In the event the Actual Price
is greater than $49, Pay-Fone shall have the right to terminate
the Merger Agreement unless Paychex agrees to a Formula Price of
$46. In the event the Actual Price is less than $37 but no less
than $34, the Formula Price shall be $37, and if the Actual Price
is less than $34, the Formula Price shall be an amount equal to
the Actual Price plus $3. In the event the Actual Price is less
than $31, Paychex shall have the right to terminate the Merger
Agreement unless Pay-Fone agrees to a Formula Price of $34.
For purposes of illustration only, the following chart sets
forth various calculations of the Exchange Ratio based on a total
of 1,607,943 Pay-Fone Shares outstanding and issuable upon
exercise of exercisable options, and certain assumptions as to
the Actual Price and adjustments to $10,475,000.
<PAGE>
<TABLE>
<CAPTION>
Value of
Exchange Ratio
Adjustment to Actual Formula Exchange based on
$10,475,000 Price Price Ratio Actual Price
<S> <C> <C> <C> <C>
$ 0 $45 $43 .1515 $6.82
100,000 45 43 .1501 6.75
360,000 45 43 .1463 6.58
0 35 37 .1761 6.16
100,000 35 37 .1744 6.10
360,000 35 37 .1700 5.95
</TABLE>
On _______________, 1995, the latest available date before
the printing of this Proxy Statement/Prospectus, the closing
price of a share of Paychex Common Stock on the NASDAQ National
Market was $____________, and the closing price of a Pay-Fone
Share on AMEX was $_____________.
The Exchange Ratio will be adjusted to give effect to any
stock split or other similar change in Paychex Common Stock which
occurs prior to the Effective Time.
Fractional Shares
No fractional shares of Paychex Common Stock will be issued
in the Merger. In lieu of any fractional share, each holder of
Pay-Fone Shares who would otherwise be entitled to a fraction of
a share of Paychex Common Stock will be paid an amount in cash
equivalent to such holder's proportionate interest in the net
proceeds from the open market sale of the aggregate of all
fractional shares to which holders of Pay-Fone Shares would
otherwise have been entitled, which sales shall be made by an
exchange agent to be appointed by Paychex to facilitate the
exchange of Pay-Fone Shares for shares of Paychex Common Stock in
the Merger (the "Exchange Agent"). Such sales shall be executed
by the Exchange Agent on the NASDAQ National Market and in round
lots to the extent possible. The expenses associated with the
sale of such shares will be deducted from the gross proceeds
therefrom.
Procedures for Exchange of Certificates
At the Effective Time, the outstanding Pay-Fone Shares
(other than dissenting shares, if any) will be automatically
converted at the Exchange Ratio into full shares of Paychex
Common Stock. It is a condition to the Merger that all shares of
Paychex Common Stock to be issued in the Merger are listed on the
NASDAQ National Market.
<PAGE>
As soon as practicable after the Effective Time, a
transmittal letter will be mailed by the Exchange Agent to each
record shareholder of Pay-Fone informing such shareholder of the
procedures to follow in forwarding his or her Pay-Fone stock
certificates to the Exchange Agent. Upon receipt of such stock
certificates, the Exchange Agent will deliver full shares of
Paychex Common Stock to such shareholder in accordance with the
Exchange Ratio and cash in lieu of fractional shares pursuant to
the terms of the Merger Agreement and in accordance with the
transmittal letter, together with any dividends or other
distributions to which such shareholder is entitled.
There will be no further transfers of Common Stock on Pay-
Fone's stock transfer books after the Effective Time. If a
certificate representing Pay-Fone Shares is presented for
transfer, it will be canceled and a certificate representing the
appropriate number of full shares of Paychex Common Stock and
cash in lieu of fractional shares and any dividends and
distributions will be issued in exchange therefor.
After the Effective Time and until surrendered, Pay-Fone
Shares will be deemed for all corporate purposes, other than the
payment of dividends and distributions, to evidence ownership of
the number of full shares of Paychex Common Stock into which such
Pay-Fone Shares were converted in the Merger. No dividends or
other distributions, if any, payable to holders of Paychex Common
Stock will be paid to the holders of any certificates for Pay-
Fone Shares until such certificates are surrendered. Upon
surrender of such certificates, all such declared dividends and
distributions which shall have become payable with respect to
such Paychex Common Stock in respect of a record date after the
Effective Time will be paid to the holder of record of the full
shares of Paychex Common Stock represented by the certificate
issued in exchange therefor, without interest.
SHAREHOLDERS OF PAY-FONE SHOULD NOT FORWARD STOCK
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED
TRANSMITTAL LETTERS. SHAREHOLDERS OF PAY-FONE SHOULD NOT RETURN
STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Certain Federal Income Tax Consequences
The following is a summary of certain federal income tax
consequences of the Merger that are generally applicable to
Paychex, Pay-Fone and the Pay-Fone shareholders. This summary is
based on the Internal Revenue Code of 1986, as amended (the
"Code"), regulations promulgated thereunder, and applicable
rulings and decisions, as currently in effect, all of which are
subject to change. This summary does not discuss any aspect of
state, local or foreign taxation and does not discuss all of the
<PAGE>
tax consequences that may be relevant to particular Pay-Fone
shareholders in light of their personal investment circumstances,
or to certain types of shareholders that may be subject to
special tax rules, such as financial institutions, tax-exempt
organizations, insurance companies, dealers in securities,
foreign corporations, individuals who are not citizens or
residents of the United States and individuals who acquired their
Pay-Fone Shares in connection with stock option plans or in other
compensatory transactions. In addition, the discussion does not
address the effects of the Merger on holders of Pay-Fone Options.
The discussion with respect to Pay-Fone shareholders is limited
to those shareholders who have held the Pay-Fone Shares and who
will hold the Paychex Common Stock received in the Merger as
"capital assets" within the meaning of Section 1221 of the Code.
This summary is based upon an opinion of Hughes Hubbard &
Reed, tax counsel for Pay-Fone. It should be noted that tax
counsel's opinion does not address all of the federal income tax
consequences of the Merger, and neither this summary nor tax
counsel's opinion is binding on the Internal Revenue Service
("IRS"). Pay-Fone has not requested and will not request a
ruling from the IRS with regard to any of the federal income tax
consequences of the Merger.
Accordingly, Pay-Fone shareholders and others affected by
the Merger should consult their own tax advisors as to the
consequences of the Merger, including the application to their
particular situation of the tax consequences discussed below, as
well as the application of state, local, foreign or other tax
laws.
The federal income tax consequences of the Merger will
depend on whether, among other things, the Merger satisfies the
requirements for a "tax-free" reorganization ("Reorganization")
under Code Sections 368(a)(1)(A) and 368(a)(2)(E). Among the
requirements for a Reorganization are that: (1) Pay-Fone after
the Merger will have continued its historic business or will have
used a significant portion of its historic business assets in a
business; and (ii) the significant historic shareholders of Pay-
Fone will not have had a plan or intention, existing at or prior
to the Effective Time of the Merger, to dispose of the Paychex
Common Stock to be received in the Merger such that they would
not have retained a significant continuing interest in Pay-Fone
after the Merger through their continued ownership of Paychex
Common Stock. Pay-Fone will not be obligated after the Merger to
continue its historic business or to use a significant portion of
its historic assets in a business. Moreover, while the
Affiliates of Pay-Fone have represented that they do not
currently have and at the Closing Date will not have a present
plan or intention to dispose of more than 50 percent of the
Paychex Common Stock to be received in the Merger, they will not
be obligated to continue to hold any Paychex Common Stock, apart
<PAGE>
from: (i) a contractual commitment with Paychex to hold all of
the Paychex Common Stock received by them until results covering
at least 30 days of combined operations of Pay-Fone and Paychex
have been publicly disseminated by Paychex; and (ii) restrictions
on resale, if any, imposed by the federal securities laws. Each
of the Affiliates has expressly reserved the right at any time
after the Closing Date to evaluate his or her investment
portfolio, including Paychex Common Stock, and to make such
investment decision with respect to such securities as such
Affiliate shall deem to be in his or her interest.
Because certain actions by Pay-Fone or its historic
shareholders occurring after the Merger could violate the
continuity of business enterprise or continuity of interest
requirements for a Reorganization, tax counsel has expressed no
opinion as to whether the Merger will satisfy the requirements
for a Reorganization. Accordingly, there can be no assurance
that the Merger will satisfy the requirements for a
Reorganization or that the IRS would not challenge the status of
the Merger as a Reorganization based on events which take place
after the Merger.
If the Merger qualifies as a Reorganization, tax counsel has
advised that the following federal income tax consequences will
result from the Merger.
(a) No gain or loss would be recognized by a holder of
Pay-Fone Shares upon the receipt of the Paychex Common
Stock in exchange for his Pay-Fone Shares (except for
cash received in lieu of a fractional share).
(b) The aggregate tax basis of the Paychex Common Stock
received by a Pay-Fone shareholder in the Merger
(including a fractional share interest, if any) would
be the same as the aggregate tax basis of the Pay-Fone
Shares surrendered in exchange therefor.
(c) The holding period of the Paychex Common Stock
(including a fractional share interest, if any)
received by a Pay-Fone shareholder in the Merger would
include the holding period of the Pay-Fone Shares
surrendered in exchange therefor, provided that the
Pay-Fone Shares so surrendered are held as a capital
asset at the Effective Time of the Merger.
(d) A Pay-Fone shareholder who receives cash in lieu of a
fractional share of Paychex Common Stock in connection
with the Merger would recognize gain or loss equal to
the difference between the cash received and the basis
of such fractional share. Such gain or loss would be
capital gain or loss, provided that the Pay-Fone
Shares are held as a capital asset at the Effective
<PAGE>
Time of the Merger, and would be long-term capital
gain or loss if the Pay-Fone Shares had been held for
more than one year.
(e) No gain or loss would be recognized by Paychex, Merger
Sub or Pay-Fone in connection with the Merger.
If the Merger does not satisfy the requirements for a
Reorganization, tax counsel has advised that a Pay-Fone
shareholder would be treated as if he sold his Pay-Fone Shares in
a taxable transaction. In such event, a Pay-Fone shareholder
would recognize capital gain or loss in an amount equal to the
difference between the fair market value, as of the Effective
Time of the Merger, of the Paychex Common Stock (and the amount
of cash received in lieu of a fractional share) and the tax basis
of the Pay-Fone Shares surrendered in exchange therefor, provided
that the Pay-Fone Shares so surrendered are held as a capital
asset at the Effective Time of the Merger. Such capital gain or
loss would be long-term capital gain or loss if the Pay-Fone
Shares have been held for more than one year. A Pay-Fone
shareholder's aggregate basis in the Paychex Common Stock
received in the Merger would equal its fair market value as of
the Effective Time of the Merger, and the Pay-Fone shareholder's
holding period of such Paychex Common Stock would begin the day
after the Merger.
Whether or not the Merger qualifies as a Reorganization, tax
counsel has advised that a Pay-Fone shareholder who exercises
dissenters' rights and receives cash in the Merger in lieu of
Paychex Common Stock will be treated as having received the cash
as a distribution in redemption of his Pay-Fone Shares as
provided in Code Section 302. Such shareholder generally will
recognize capital gain or loss measured by the difference between
the amount of cash received and his aggregate adjusted tax basis
in the Pay-Fone Shares, provided the Pay-Fone Shares were held as
a capital asset at the Effective Time of the Merger. Such
capital gain or loss will be long-term capital gain or loss if
the Pay-Fone Shares have been held for more than one year. A
shareholder exercising dissenters' rights who also owns Paychex
Common Stock, or who is deemed for federal income tax purposes to
own constructively Paychex Common Stock actually owned by other
persons or entities, may recognize dividend income, taxable as
ordinary income, equal to the amount of the cash received.
The discussion set forth above is included for general
information only. It does not address the state, local or
foreign tax aspects of the Merger. The discussion is based on
currently existing provisions of the Code, existing and proposed
treasury regulations thereunder and current administrative
rulings and court decisions. All of the foregoing are subject to
change and any such change could affect the continuing validity
<PAGE>
of this discussion. Each shareholder should consult his or her
own tax advisor with respect to the specific tax consequences of
the Merger to him or her, including the application and effect of
state, local and foreign tax laws.
Accounting Treatment
The Merger is intended to be treated as a pooling of
interests transaction for accounting and financial reporting
purposes. Under the pooling of interests method of accounting,
the recorded assets and liabilities of Paychex and Pay-Fone will
be carried forward to Paychex's consolidated financial statements
at their recorded amounts, the consolidated earnings of Paychex
will include earnings of Paychex and Pay-Fone for the entire
fiscal year in which the Merger occurs and the reported retained
earnings of Paychex and Pay-Fone for prior periods will be
combined and restated as consolidated retained earnings of
Paychex. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND
OTHER AGREEMENTS -- Conditions/Waiver."
Paychex and Pay-Fone have agreed that during the period from
the date of the Merger Agreement through the Effective Time,
unless the parties shall have otherwise agreed in writing,
neither of them will take any action that such party knows or has
been advised would prevent Paychex from accounting for the Merger
as a pooling of interests. Paychex and Pay-Fone have also agreed
to use all reasonable efforts to cause their respective
affiliates, and each of Pay-Fone's Affiliates (its officers and
directors and Allied Contractors, Inc.) has agreed, not to take
certain actions, including transfers of Pay-Fone Shares, that
would impair Paychex's ability to account for the Merger as a
pooling of interests. The Merger Agreement provides that a
condition to the consummation of the Merger is the receipt by
Paychex of an opinion of its independent auditors that the Merger
will qualify for pooling of interests accounting treatment.
Rights of Dissenting Shareholders
Sections 1300-1312 of the California General Corporation Law
(the "CGCL"), contain provisions which permit the shareholders of
Pay-Fone who comply with the procedures specified therein to
receive payment in cash for the fair market value of their shares
instead of shares of Paychex Common Stock in the Merger.
Sections 1300-1312 are set forth in full in Annex II to this
Proxy Statement/Prospectus. The following is a brief summary of
the provisions of those sections.
The Pay-Fone Shares are listed on the American Stock
Exchange. Under the CGCL, dissenters' rights are not available
with respect to shares listed on the American Stock Exchange
unless (i) the shares are subject to a restriction on transfer
<PAGE>
imposed by Pay-Fone or by any law or regulation ("Restricted
Shares"), or (ii) 5% or more of the outstanding shares demand
payment in accordance with the procedures described below. A
condition to Paychex's obligation to consummate the Merger is
that Demands (as defined below) shall not have been filed with
respect to 5% or more of outstanding Pay-Fone Shares.
Only record holders of Pay-Fone Shares may exercise
dissenters' rights. Accordingly, in any case in which Pay-Fone
Shares are held in the name of a nominee or agent, such as Shares
held in "street name" by a broker, the beneficial owner of such
Shares must make arrangements for the record holder of the Pay-
Fone Shares to take all actions and to exercise and deliver all
documents required to perfect the beneficial owner's dissenters'
rights.
To exercise dissenters' rights, a record shareholder (the
"dissenting shareholder") must vote against the Merger, Pay-Fone
or its transfer agent must timely receive a written statement
from such dissenting shareholder demanding that Pay-Fone pay in
cash the fair market value of the dissenting shareholder's Pay-
Fone Shares (the "dissenting shares") and there must be a timely
and proper submission to Pay-Fone or its transfer agent of the
certificates representing the dissenting shares. A vote against
the Merger will not satisfy the requirements with respect to the
demand for payment in cash or other actions required to perfect
dissenters' rights. Shareholders who vote in favor of the
Merger, abstain from voting or provide no direction on their
proxy cards to vote against the Merger will lose their
dissenters' rights. Except as expressly limited in Sections
1300-1312 of the CGCL, dissenting shareholders have all the
rights otherwise incident to Pay-Fone Shares until the dissenting
shares' fair market value is agreed upon or determined.
For purposes of determining Pay-Fone's purchase price for
dissenting shares, fair market value shall be determined as of
the day before the first announcement of the terms of the
proposed Merger, excluding any appreciation or depreciation in
consequence of the proposed Merger, but adjusted for any stock
split or stock dividend which later becomes effective. On March
17, 1995, the day before the issuance of Pay-Fone's press release
announcing the proposed Merger, the closing sale price for Pay-
Fone Common Stock on AMEX was $4.50. See "SUMMARY - Comparative
Market Prices and Dividend Data."
By June 14, 1995, a dissenting shareholder must make, and
Pay-Fone or its transfer agent must receive, a written demand
(the "Demand") for Pay-Fone to purchase the dissenting shares in
cash at their fair market value. The Demand must state the
number and class of the shares held of record which the
dissenting shareholder demands that Pay-Fone purchase and must
contain a statement of what such shareholder claims to be the
<PAGE>
fair market value of the dissenting shares as of the day before
the announcement of the proposed Merger. Once made, dissenting
shareholder may not withdraw a Demand without the consent of Pay-
Fone.
Within ten days after the approval of the Merger by the
shareholders, Pay-Fone will give written notice (the "Notice") by
mail of such approval to those shareholders who voted against the
Merger and who timely delivered a Demand; provided, however, that
the Notice shall be mailed to dissenting shareholders other than
holders of Restricted Shares only if Demands were timely
delivered with respect to 5% or more of the outstanding Pay-Fone
Shares. The Notice shall be accompanied by a copy of Sections
1300-1304 of the CGCL relating to dissenters' rights, a statement
of the price Pay-Fone considers to represent the fair market
value of the dissenting shares and a brief description of the
procedure to be followed to exercise dissenters' rights. Within
30 days of the mailing of the Notice, a dissenting shareholder
must submit to Pay-Fone at its principal office or at the office
of its transfer agent the certificates representing the
dissenting shares for endorsement thereon of a statement that the
shares are dissenting shares or for an exchange for certificates
so endorsed.
Within 30 days after Pay-Fone and the dissenting shareholder
agree that the shares are dissenting shares and agree as to the
price of the shares, Pay-Fone must pay the agreed price plus
interest thereon from the date of agreement. If, however, there
is disagreement as to the status of the shares as dissenting
shares or as to the fair market value of the shares or both, the
shareholder may, within six months of the mailing of the Notice,
seek a judicial determination of the status of the shares as
dissenting shares or of the dissenting shares' fair market value.
A dissenting shareholder loses dissenters' rights if (i)
Pay-Fone abandons the Merger (upon such abandonment Pay-Fone
shall pay on demand to any dissenting shareholder who has
initiated proceedings in good faith all necessary expenses
incurred in such proceeding and reasonable attorneys' fees), (ii)
the shares are transferred prior to their submission for
endorsement as dissenting shares or are surrendered for
conversion into shares of another class, (iii) there is
disagreement as to the status of the shares as dissenting shares
or as to the purchase price thereof and such shareholder fails to
seek a judicial determination thereof within six months of the
date on which the Notice was mailed, or (iv) such shareholder's
Demand is withdrawn with the consent of Pay-Fone. No shareholder
who has a right to demand payment of cash for his Pay-Fone Shares
shall have any right at law or in equity to attack the validity
of the Merger or have it set aside or rescinded except in an
action to test whether a sufficient number of Pay-Fone Shares
were legally voted in favor of the Merger.
<PAGE>
All written communications from shareholders with respect to
the exercise of dissenters' rights should be mailed to
_______________.
The foregoing summary does not purport to be a complete
statement of the provisions of the CGCL relating to the rights of
dissenting shareholders and is qualified in its entirety by
reference to Annex II hereto.
Effect on Pay-Fone Stock Options
At the Effective Time each outstanding option to purchase
Pay-Fone Shares ("Pay-Fone Option") shall be deemed to constitute
an option to acquire, on the same terms and conditions as were
applicable under such Pay-Fone Option, a number of shares of
Paychex Common Stock equal to the product of the Exchange Ratio
and the number of Pay-Fone Shares subject to the Pay-Fone Option
at a price per share equal to the aggregate exercise price for
the Pay-Fone Shares subject to such option divided by the number
of full shares of Paychex Common Stock deemed purchasable
pursuant to such option; the terms of the conversion of any
incentive stock option shall be determined in a manner that
complies with applicable provisions of the Internal Revenue Code;
and the number of shares of Paychex Common Stock that may be
purchased upon exercise of any Pay-Fone Option shall not include
any fractional share and, upon exercise of such option as to all
remaining shares of Paychex Common Stock, a cash payment shall be
made for any fractional share based upon the closing price of a
share of Paychex Common Stock on the trading day next preceding
the date of exercise and the exercise price.
Paychex has agreed to take all corporate action necessary to
reserve a sufficient number of shares of Paychex Common Stock for
issuance and delivery upon exercise of the Pay-Fone Options and
to register such shares under the Securities Act.
Interests of Certain Persons in the Merger
The obligation of Paychex to consummate the Merger is
subject to the condition that the employment agreement between
Paychex and Mark Leekley, President and Chief Executive Officer
of Pay-Fone, executed on March 17, 1995, shall have become
effective. Pursuant to such employment agreement, Mr. Leekley
will be employed commencing at the Effective Time for a term of
one year for an annual salary of $93,000, plus a bonus of up to
$21,000 and certain other benefits. Mr. Leekley will also be
awarded stock options to purchase 1,500 shares of Paychex Common
Stock at the closing price thereof at the Effective Time.
<PAGE>
As an incentive for remaining with Pay-Fone from the date of
the Merger Agreement until the end of a period not to exceed
eight months after the Effective Time, Pay-Fone will pay bonuses
to its executive officers and other key employees in amounts
ranging from $15,000 to $25,000 with respect to executive
officers. A total of 17 employees (including five executive
officers) are eligible for the bonuses, and the total bonus pool
equals $175,500. Such employees will also be paid additional
severance compensation (up to $10,263 with respect to executive
officers) if they are terminated by Paychex for any reason other
than for cause in the first 12 months after the Effective Time.
In consideration for such payments, each employee must agree to
release Pay-Fone from any claims relating to his or her
employment and must execute Paychex' standard employee
confidentiality agreement.
In recognition of extraordinary services rendered in
negotiating the Merger, the Board of Directors of Pay-Fone (with
Mark Kelton and David Malcolm abstaining) has approved and Pay-
Fone has paid bonuses to Mark Kelton, Mark Leekley and David
Malcolm of $50,000, $25,000 and $25,000, respectively.
Pursuant to an Affiliates Agreement dated as of March 17,
1995 with Paychex, Pay-Fone directors and executive officers and
Allied Contractors, Inc. (the Affiliates) have agreed to vote
their Pay-Fone Shares in favor of the Merger. The Affiliates
collectively own 76% of the Pay-Fone Shares outstanding and
entitled to vote as of the record date for the Special Meeting
and, accordingly, will be able to approve the Merger without the
vote of any other shareholder. See "CERTAIN PROVISIONS OF THE
MERGER AGREEMENT AND OTHER AGREEMENTS - Affiliates Agreement" and
"OWNERSHIP OF PAY-FONE SHARES."
The Merger Agreement prohibits Pay-Fone from, directly or
indirectly, soliciting or engaging in any discussions or
negotiations with any third party, other than Paychex, concerning
a transfer of control of Pay-Fone. Consistent with their
fiduciary duties, Affiliates who are also directors of Pay-Fone
are required to act in good faith and in the best interests of
Pay-Fone and its shareholders. Accordingly, notwithstanding the
terms of the Affiliates Agreement or the Merger Agreement, Pay-
Fone's directors, in the exercise of their fiduciary duties, may
withdraw their approval and recommendation of, or abandon, the
Merger if, for example, a third party proposed a transaction
which the directors determined to be more favorable to Pay-Fone
and its shareholders. The Merger Agreement provides that if the
Pay-Fone Board takes a position contrary to the Merger, the
holders of 5% or more of Pay-Fone Shares exercise dissenters'
rights and Paychex elects to terminate the Merger Agreement, or
if Pay-Fone fails to cooperate as required by the Merger
Agreement in presenting the Merger to the Pay-Fone shareholders
<PAGE>
for their vote, then Pay-Fone will be required to pay $300,000 to
Paychex as liquidated damages within ten days after written
demand.
In order to satisfy a Paychex requirement that Paychex not
bear any substantial economic risk with respect to the Tax Claims
and certain related claims as a result of the Merger, the six
individuals serving as directors of Pay-Fone and Allied
Contractors, Inc., a shareholder of Pay-Fone (collectively, the
"EIA Shareholders"), have executed an Escrow and Indemnity
Agreement with Paychex, Pay-Fone and an escrow agent which under
certain circumstances will become effective at the Effective
Time. Pursuant to the Escrow and Indemnity Agreement, the EIA
Shareholders will indemnify Paychex and Pay-Fone against expenses
and deficiencies paid after the Effective Time with respect to
the Tax Claims and certain related claims. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT AND OTHER AGREEMENTS - Escrow
and Indemnity Agreement." The formula for the Exchange Ratio in
the Merger Agreement provides for an adjustment which would
reduce the Exchange Ratio based on amounts expended by Pay-Fone
between the date of the Merger Agreement and the Effective Time
in contesting and resolving the Tax Claims. As a result of this
provision in the Merger Agreement, expenses and deficiencies paid
with respect to the Tax Claims prior to the Merger will
negatively affect the Exchange Ratio and thereby all shareholders
of Pay-Fone, while such expenses and deficiencies paid after the
Merger may instead be borne by the EIA Shareholders.
Resale of Paychex Common Stock
The shares of Paychex Common Stock to be issued to the
shareholders of Pay-Fone pursuant to the Merger Agreement are
being registered under the Securities Act pursuant to the
Registration Statement of which this Proxy Statement/Prospectus
is a part. However, persons who are affiliates of Pay-Fone will
not be able to resell the Paychex Common Stock received by them
in the Merger unless the Paychex Common Stock is registered for
resale under the Securities Act, is sold in compliance with an
exemption from the registration requirements of the Securities
Act or is sold in compliance with Rule 145 under the Securities
Act.
Pursuant to Rule 145 under the Securities Act, the sale of
Paychex Common Stock acquired by former affiliates of Pay-Fone
pursuant to the Merger will be subject to certain restrictions.
For two years after the Effective Date such persons may sell
Paychex Common Stock under Rule 145 only if (i) Paychex has filed
all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding twelve months, (ii) the Paychex
Common Stock is sold in a "broker's transaction," which is
defined in Rule 144 under the Securities Act as a sale in which
<PAGE>
(a) the seller does not solicit or arrange for orders to buy the
securities, (b) the seller does not make any payment other than
to the broker, (c) the broker does no more than execute the order
and receive a nominal commission and (d) the broker does not
solicit customer orders to buy the securities, and (iii) such
sale and all other sales made by such person within the preceding
three months do not collectively exceed the greater (x) 1% of the
outstanding shares of Paychex Common Stock and (y) the average
weekly trading volume of Paychex Common Stock on all national
securities exchanges during the four-week period preceding the
sale.
The Affiliates have agreed to certain other restrictions
with respect to the transferability of their Paychex Common Stock
as described in "CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND
OTHER AGREEMENTS - Affiliates Agreement."
<PAGE>
CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND OTHER AGREEMENTS
The following description does not purport to be complete
and is qualified in its entirety by reference to the Merger
Agreement, including exhibits thereto, a copy of which is
attached as Annex I to the Proxy Statement/Prospectus and is
incorporated herein by reference.
Representations and Warranties
The Merger Agreement contains various representations and
warranties of the parties thereto. The Merger Agreement includes
representations and warranties by Pay-Fone and Paychex as to (i)
the corporate organization, standing and power of Pay-Fone and
Paychex and their subsidiaries, (ii) approvals by their
respective Boards of Directors or Committees thereof, (iii) their
capitalization, (iv) the authorization of the Merger Agreement,
(v) pending or threatened litigation, (vi) the Merger Agreement's
non-contravention of any agreement, law, charter or by-law
provision and the absence of the need (except as specified) for
governmental or third-party consents to the Merger, (vii) the
terms, existence, operations, liabilities and compliance with
applicable laws of Pay-Fone employee plans, and certain other
matters relating to the Employment Retirement Income Security Act
of 1974, as amended, (viii) certain tax matters, (ix) ownership
of and rights to use certain intellectual property, (x) the
accuracy of financial statements and filings with the SEC, (xi)
the conduct of business in the ordinary and usual course and the
absence of any material adverse change in financial condition,
business, results of operations, properties, assets, liabilities
or prospects, (xii) certain contracts and leases, (xiii) certain
transactions with affiliates, (xiv) brokers and finders, and (xv)
the accuracy of information supplied for inclusion in this Proxy
Statement/Prospectus and in the Registration Statement.
Business of Pay-Fone Pending the Merger
Pay-Fone has agreed that, among other things, prior to the
Effective Time or earlier termination of the Merger Agreement, it
will conduct its operations according to its ordinary course of
business consistent with its past practice and that it will seek
to preserve its current business organizations, keep available
the service of its current officers and employees and preserve
its relationships with customers, suppliers and others having
business dealings with it. Pay-Fone further agrees that, except
with the consent of Paychex or as otherwise permitted pursuant to
the Merger Agreement, prior to the Effective Time it will refrain
<PAGE>
from taking certain actions with respect to, among other things,
its securities, employee benefits, corporate existence, or form
thereof, assets, indebtedness, and major transactions.
Certain Covenants of Paychex
Paychex has agreed that, prior to the Effective Time or
earlier termination of the Merger Agreement, except as permitted
in the Merger Agreement or with Pay-Fone's prior written consent,
Paychex will not (i) adopt a plan of complete or partial
liquidation, dissolution, merger or consolidation (other than a
merger or consolidation in which Paychex would not become a
subsidiary of any other person); (ii) adopt any amendments to the
Certificate of Incorporation of Paychex or take any other action
requiring a vote of the other holders of Paychex Common Stock,
which would adversely effect the terms and provisions of the
Paychex Common Stock or the rights of the holders thereof, (iii)
authorize, recommend, propose or announce an intention, or enter
into any contract, agreement, commitment or arrangement to do any
of the foregoing, or (iv) during the 60 days prior to the Closing
purchase shares of Paychex Common Stock or take other actions a
principal purpose of which is to affect the Actual Price of
Paychex Common Stock or the Exchange Ratio.
No Solicitation
Under the Merger Agreement, Pay-Fone has agreed that, prior
to the closing, Pay-Fone will not, and it will not authorize any
of its officers, employees, representatives, agents or affiliates
to, directly or indirectly, encourage, solicit or engage in
discussions or negotiations with any third party (other than
Paychex) concerning any merger, consolidation, share exchange or
similar transaction involving Pay-Fone or any purchase of all or
a significant portion of the assets of or equity interest in Pay-
Fone, or any other transaction that would involve a transfer or
potential transfer of control of Pay-Fone, other than the
transactions contemplated by the Merger Agreement, provided,
however, that the Pay-Fone Board may take and disclose to Pay-
Fone shareholders a position under applicable Exchange Act rules
with respect to a tender offer for Pay-Fone Shares commenced by a
third party and otherwise act in a manner consistent with its
fiduciary duties. Pay-Fone has agreed to notify Paychex
immediately of any inquiries or proposals with respect to any
such transactions that are received by, or any such negotiations
or discussions that are sought to be initiated with, Pay-Fone.
Pay-Fone has agreed that, in the event that its Board takes
a position contrary to the proposed Merger and the holders of 5%
or more of the Pay-Fone Shares elect dissenters' rights and
Paychex elects to terminate the Merger Agreement in accordance
<PAGE>
with the provisions thereof, then Pay-Fone will pay Paychex the
sum of $300,000. Similarly, Paychex has agreed that, in the
event it fails to cooperate as required by the Merger Agreement
or unreasonably fails to provide its consent or unreasonably
employs an immaterial breach or failure to terminate the Merger
Agreement, it will pay Pay-Fone the sum of $300,000. In both
instances the payment represents liquidated damages which shall
extinguish all other claims.
Conditions/Waivers
Conditions to Each Party's Obligations to Effect the Merger.
It is a condition of each party's obligations under the
Merger Agreement that the following conditions be satisfied or
waived: (i) the Merger shall have been approved by the holders
of a majority of the outstanding Pay-Fone Shares, (ii) all
governmental authorizations required for performance of the
obligations under the Merger Agreement have been obtained, (iii)
there shall be no judgment, writ, order, injunction or decree of
any court or governmental body enjoining or otherwise preventing
consummation of the transactions contemplated by the Merger
Agreement, (iv) there shall be no stop order suspending the
effectiveness of, or any action by the SEC to suspend the
effectiveness of the Registration Statement, (v) the Paychex
Common Stock to be issued in the Merger shall have been approved
for listing on the NASDAQ National Market, (vi) Paychex shall
have received all state securities or blue sky authorizations for
issuance of Paychex Common Stock pursuant to the Merger and (vii)
all required authorizations, consents or approvals (other than
those described in clause (ii) of this sentence) for the
performance of the obligations under the Merger Agreement, the
failure of which would have a material adverse affect on Paychex
and its subsidiaries taken as a whole, shall have been obtained.
Conditions to Paychex' and Merger Sub's Obligations.
The obligations of Paychex and Merger Sub under the Merger
Agreement are subject to the fulfillment or waiver of the
following additional conditions: (i) each of the representations
and warranties of Pay-Fone contained in the Merger Agreement or
otherwise expressly required by the Merger Agreement to be made
after the execution thereof (A) shall have been true in all
material respects when made and (B) in some cases shall be true
in all material respects at the time of the Closing with the same
effect as though such representations and warranties had been
made at such time, (ii) at or prior to the Closing, Pay-Fone
shall have performed or complied in all material respects with
all agreements and conditions required of it pursuant to the
Merger Agreement, (iii) Pay-Fone shall have delivered to Paychex
<PAGE>
a certificate, dated the date of the Closing and signed by the
President or any Vice President of Pay-Fone, certifying as to the
fulfillment of the conditions specified in clauses (i) and (ii)
of this sentence, (iv) Paychex shall have received a legal
opinion from counsel for Pay-Fone satisfactory to Paychex, (v)
all corporate proceedings taken by Pay-Fone in connection with
the transactions contemplated by the Merger Agreement shall be
reasonably satisfactory to Paychex and Paychex' counsel, (vi)
Paychex shall have received a tax opinion of Woods, Oviatt,
Gilman, Sturman & Clarke LLP, counsel for Paychex, as
contemplated by the Merger Agreement, (vii) Paychex shall have
received an opinion from Ernst & Young LLP that the Merger will
qualify for pooling-of-interests accounting treatment, (viii) no
suit, action, investigation, inquiry or other proceeding by any
United States governmental body or other material governmental
body shall have been instituted and be pending which imposes or
which would be reasonably expected to impose any condition or
restriction unacceptable to Paychex in its reasonable judgment,
(ix) the Registration Statement shall disclose no information in
existence on the date of the execution of the Merger Agreement
which is materially adverse to Pay-Fone's business, properties,
operations, condition or prospects not previously disclosed in
reports of Pay-Fone filed with the SEC or in the Merger
Agreement, (x) the Employment Agreement between Paychex and Mark
Leekley, Pay-Fone's President, shall have become effective, (xi)
Pay-Fone shareholders holding 5% or more of the outstanding Pay-
Fone Shares shall not have exercised appraisal rights, (xii) all
persons required so to sign shall have signed the Affiliates
Agreement, (xiii) the Escrow Agreement shall have become
effective, if required, and (xiv) the Paychex Closing Price shall
not be less than $31.00, unless Pay-Fone agrees that the Formula
Price will be $34.00.
Conditions to Pay-Fone's Obligations.
Pay-Fone's obligations under the Merger Agreement are
subject to the fulfillment or waiver of the following additional
conditions: (i) each of the representations and warranties of
Paychex and Merger Sub contained in the Merger Agreement or
otherwise expressly required by the Merger Agreement to be made
after the execution thereof (A) shall have been true in all
material respects when made and (B) in some cases shall be true
in all material respects at the time of the Closing with the same
effect as though such representations and warranties had been
made at such time, (ii) at or prior to the Closing, Paychex shall
have performed or complied in all material respects with all
agreements and conditions required of it pursuant to the Merger
Agreement, (iii) Paychex shall have delivered to Pay-Fone a
certificate, dated the date of the Closing and signed by the
President or any Vice President of Paychex certifying as to the
fulfillment of the conditions specified in clauses (i) and (ii)
<PAGE>
of this sentence, (iv) Pay-Fone shall have received a legal
opinion from Woods, Oviatt, Gilman, Sturman & Clarke LLP counsel
for Paychex satisfactory to Pay-Fone, (v) all corporate
proceedings taken by Paychex in connection with the transactions
contemplated by the Merger Agreement shall be reasonably
satisfactory to Pay-Fone and Pay-Fone's counsel, (vi) the
Registration Statement shall disclose no information in existence
on the date of the execution of the Merger Agreement which is
materially adverse to Paychex' business, properties, operations,
condition or prospects not previously disclosed in reports of
Paychex filed with the SEC or in the Merger Agreement, (vii) the
Paychex Closing Price shall not be more than $49.00 (unless
Paychex agrees that the Formula Price will be $46.00), and (viii)
the aggregate amount subtracted from $10,475,000 in the Exchange
Ratio calculation by reason of the provisions relating to General
Adjustment and Positive Adjustment do not exceed $360,000. If
Pay-Fone elects to terminate the Merger Agreement because
condition (viii) is not satisfied, Pay-Fone has agreed to pay
Paychex $70,000.
Amendment/Termination
The parties to the Merger Agreement may amend it by a
writing signed by both parties.
The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, before or
after the approval of Pay-Fone shareholders, either by the mutual
written consent of Paychex and Pay-Fone or by the mutual action
of their respective Boards of Directors.
The Merger Agreement may also be terminated by action of
either the Paychex Board or the Pay-Fone Board if (i) the Merger
has not been consummated by August 31, 1995 (provided that the
right to terminate under this clause (i) will not be available to
any party whose failure to fulfill any obligation under the
Merger Agreement or whose action or inaction, even though not
prohibited by the Merger Agreement, has been the cause of or
resulted in the failure of the Merger to occur on or before such
date), (ii) any court or governmental body in the United States
has issued a final and nonappealable order, decree or ruling or
taken any other final and nonappealable action permanently
restraining, enjoining or otherwise prohibiting the Merger, or
(iii) a party acquires verified information regarding the other
party not known to the first party when the Merger Agreement was
signed which has or would reasonably be expected (so far as can
be foreseen at the time) to have a material adverse effect on the
business, properties, operations, condition (financial and other)
or prospects of the other party.
<PAGE>
In the event of termination of the Merger Agreement and
abandonment of the Merger, neither Paychex nor Pay-Fone (or any
of their directors or officers) will have any liability or
further obligation to any party to the Merger Agreement, except
with respect to certain confidentiality requirements as provided
for in the Merger Agreement. Nevertheless, each party to the
Merger Agreement will remain liable for any breach thereof.
Regulatory Approvals
There are no federal or state regulatory requirements which
must be complied or approval which must be obtained in connection
with the transaction.
Expenses and Fees
Paychex and Pay-Fone will each pay their own expenses in
connection with the Merger, whether or not consummated. However,
in the event that the aggregate adjustments to the $10,475,000
numerator in the Exchange Ratio formula exceeds $360,000 and Pay-
Fone terminates the Merger Agreement, Pay-Fone must pay Paychex
$70,000. See "THE MERGER - Merger Consideration."
In the event that the Pay-Fone Board of Directors takes a
position contrary to the proposed Merger, the holders of 5% or
more of Pay-Fone Shares elect dissenters' rights and Paychex
elects to terminate the Merger Agreement, then Pay-Fone must pay
Paychex $300,000. Similarly, if Paychex fails to cooperate as
required by the Merger Agreement or unreasonably fails to provide
its consent or unreasonably employs an immaterial breach or
failure to terminate the Merger Agreement, it must pay Pay-Fone
$300,000. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND
OTHER AGREEMENTS."
Affiliates Agreement
Concurrently with the execution of the Merger Agreement,
Paychex and the Pay-Fone Affiliates entered into the Affiliates
Agreement, pursuant to which each Affiliate agreed to attend the
Special Meeting in person or by proxy and to vote all Pay-Fone
Shares owned by such Affiliate for approval and adoption of the
Merger Agreement.
The Affiliates Agreement also contains certain provisions
relating to the treatment of the Merger as a pooling of interests
for accounting purposes. Certain of the Affiliates (the
"Members"), who own more than 70% of the outstanding Pay-Fone
Shares, have agreed to continue to own their Pay-Fone Shares at
<PAGE>
all times prior to the Effective Time; while the remaining
Affiliates have agreed not to sell, transfer or otherwise dispose
of Pay-Fone securities only from and after the date which is 30
days prior to the Special Meeting. All Affiliates have agreed to
hold their Pay-Fone Shares or the shares of Paychex Common Stock
received in exchange therefor from the applicable date until
after such time as results covering at least 30 days of combined
operations of Pay-Fone and Paychex have been published by Paychex
(the "Publication Date").
Each Member has represented that such Member does not have,
and as of the Closing Date such Member will not have, any present
plan to sell more than 50% of the shares of Paychex Common Stock
issued to such Member in connection with the Merger, but no
Member has undertaken any obligation to hold any amount of such
shares of Paychex Common Stock beyond the Publication Date.
Escrow and Indemnity Agreement
Concurrently with the execution of the Plan and Agreement of
Merger and the Affiliates Agreement, Paychex and certain owners
of more than 70% of the outstanding Pay-Fone Shares (the "EIA
Shareholders") executed an Escrow and Indemnity Agreement with
Mara Escrow Company ("Escrow Agent"). The EIA Shareholders are
the six Pay-Fone directors and a shareholder, Allied Contractors,
Inc. The EIA Shareholders agreed under certain circumstances to
deposit with the Escrow Agent at Closing that number of shares of
Paychex Common Stock (the "Escrow Shares") as shall be equal to
the quotient (rounded to the nearest whole number) derived by
dividing $400,000 by the Formula Price. The Escrow Shares are to
secure Pay-Fone and Paychex against loss resulting from Internal
Revenue Service ("IRS") claims against Pay-Fone for the fiscal
years ended June 30, 1987 through 1991 (the "Federal Tax
Claims"), which currently aggregate $471,000, to the extent they
are unresolved at the Closing Date. The EIA Shareholders (along
with qualified professionals designated by them and approved by
Paychex) would be authorized to negotiate and litigate to a final
resolution the Federal Tax Claims and under certain circumstances
claims asserted by the California Franchise Tax Board ("CFTB")
for state income or franchise taxes with respect to the same
periods and based on the same facts in the event the EIA
Shareholders are responsible therefor. The authorization may
also extend to similar IRS and CFTB claims relating to subsequent
periods through June 30, 1995 for which the EIA Shareholders may
also be responsible.
Upon a final resolution of the Federal Tax Claims, Paychex
will cause Pay-Fone to pay to the IRS the amounts still due with
respect to the Federal Tax Claims and to pay to the EIA
Shareholders the amount of the expenses incurred by them for
which they seek reimbursement. The EIA Shareholders and Paychex
<PAGE>
will then agree upon (or accountants will determine) the net
economic cost to Paychex and Pay-Fone ("Federal Tax Claim Cost")
after reasonably anticipated tax benefits (taking deferred
benefits into account by discounting them at the prime rate then
in effect) of such resolution including reimbursement of EIA
Shareholders' expenses.
The Escrow Agent will release to Paychex that number of
Escrow Shares as results from dividing the Federal Tax Claim Cost
by the Formula Price and release to the EIA Shareholders the
remaining Escrow Shares. If the quotient of such division is
greater than the number of Escrow Shares, then the EIA
Shareholders (in proportion) shall deliver to Paychex shares of
Paychex Common Stock equal to the amount by which such quotient
exceeds the number of Escrow Shares. If an EIA Shareholder no
longer holds shares of Paychex Common Stock, he shall deliver in
lieu of any such share cash in an amount equal to the Formula
Price. The liability of the EIA Shareholders is several and not
joint and is proportional.
Upon delivery of all Escrow Shares, the escrow shall
terminate. However, if the amount paid the IRS with respect to
the Federal Tax Claims is more than $25,000, the EIA Shareholders
agree to indemnify Paychex and Pay-Fone against the net economic
cost of any claim, loss, liability or expense arising out of any
IRS claim for fiscal years 1992 through 1995, and for CFTB claims
for fiscal years 1987 through 1995 which claims are based on the
same issues or facts as the Federal Tax Claims. If the amount
paid the IRS with respect to the Federal Tax Claims is $25,000 or
less, but includes some liability with respect to accumulated
earnings claims, the EIA Shareholders agree to indemnify Paychex
and Pay-Fone from the net economic cost of any claim, loss,
liability or expense arising out of any IRS claim for fiscal
years 1992 through 1995 and CFTB claims for fiscal years 1987
through 1995 which claims are based on the same issues and facts
that result in liability in connection with the accumulated
earnings claim.
The EIA Shareholders agree to pay the Escrow Agent's fees
for standard services; and Paychex and Pay-Fone on the one hand,
and EIA Shareholders on the other, agree to share equally the
fees of the Escrow Agent for extraordinary services required.
The EIA Shareholders agreed to enter into the Escrow and
Indemnity Agreement in order to satisfy a requirement of Paychex
that Paychex not bear any substantial economic risk with respect
to the Federal Tax Claims and related claims as a result of the
Merger. Amounts paid by Pay-Fone with respect to the Federal Tax
Claims and certain CFTB claims prior to the Effective Time could
have the effect of reducing the Exchange Ratio. See "THE MERGER
- -Merger Consideration."
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATION OF PAY-FONE
The following discussion should be read in conjunction with
the consolidated financial statements of Pay-Fone contained
elsewhere in this Proxy Statement/Prospectus.
Results of Operations
Three and Six Months ended December 31, 1994 and 1993.
Pay-Fone experienced net losses of $104,817 and $206,521,
respectively, for the three and six months ended December 31,
1994 compared to net income of $69,136 and $61,866, respectively,
for the three and six months ended December 31, 1993. These
losses were primarily due to expenditures associated with Pay-
Fone's introduction of in-house tax filing services and entrance
into the large-employer market. Management anticipated that the
increased expenditures in these areas and increased marketing
expenses would have a negative impact on earnings in the first
half of the fiscal year, but that the expenditures would position
Pay-Fone for continued revenue growth in fiscal 1995.
Gross revenues for the three and six months ended December
31, 1994 increased $107,628 (10.2%) and $158,879 (7.5%),
respectively, compared to the three and six months ended December
31, 1993. This increase in revenues is attributable primarily to
Pay-Fone's acquisition of Concentric Computer Corporation in
February 1994 and additional revenues generated by Pay-Fone's
introduction of in-house tax filing services and entrance into
the large-employer market.
Direct operating costs as a percentage of revenues increased
to 42% in the six months ended December 31, 1994 as compared to
37% in the same six months in the prior year due to the costs
associated with the establishment of Pay-Fone's second branch
location in Northern California and Pay-Fone's introduction of
in-house tax filing services and entrance into the large-employer
market.
Selling, general and administrative expenses as a percentage
of revenues increased to 72% and 72% in the three and six month
periods ended December 31, 1994, respectively, as compared to 54%
and 60%in the same periods of the prior year. Again, this
increase is due to the expenditures related to the introduction
of in-house tax filing services and entrance into the
large-employer market, including increased staffing and marketing
<PAGE>
expenses. The general and administrative expenses are expected
to increase in dollar amount during the balance of the fiscal
year due to the legal and other costs associated with the Merger.
Fiscal Years ended June 30, 1994, 1993 and 1992.
Net income for the fiscal year ended June 30, 1994 was
$188,966 as compared to net income of $151,015 for the fiscal
year ended June 30, 1993 and net income of $110,596 for the
fiscal year ended June 30, 1992. The 25% improvement in net
income in fiscal 1994 compared to fiscal 1993 was primarily due
to Pay-Fone's ongoing program of cost controls, a $38,000
increase in rent earned in fiscal 1994 by leasing excess space in
its corporate headquarters building, a $20,976 credit to earnings
arising from the change in the method of accounting for income
taxes, and a reduction in legal expenses. This improvement
occurred despite a slight reduction in revenues and additional
expenses incurred with the establishment of a second branch
office in Northern California.
Pay-Fone's gross revenues declined 1% in fiscal 1994 after
declining 13.1% in fiscal 1993 and 1.2% in fiscal 1992. Despite
the slight decline in revenues in fiscal 1994, in the fourth
quarter revenues increased 7.6% as compared to the same quarter
in the prior fiscal year. In fiscal 1994, it was management's
objective to improve Pay-Fone's sales and marketing results and
to continue to actively pursue acquisition opportunities so as to
increase Pay-Fone's gross revenues, net income and shareholder
value. Pay-Fone's acquisition of Concentric Computer Corporation
on February 1, 1994 contributed significantly to the increase in
fourth quarter revenues above 1993 levels. Additionally, Pay-
Fone continued to add new services and enhancements to its
operating segments, including the introduction of in-house tax
filing services and entrance into the large-employer market in
the third quarter of fiscal 1994. While management expects that
the increased expenditures in these areas and in marketing
expenses will have a negative impact on earnings in the first
half of the fiscal year, it believes that these expenditures will
position Pay-Fone for continued revenue growth in fiscal 1995.
The decline in Pay-Fone's revenues over the past several
years was due to several factors, including the sale or
discontinuation of portions of Pay-Fone's business outside
California which were not profitable. In fiscal 1993, Pay-Fone
sold its New York payroll business and terminated its Mobile,
Alabama franchise, and in fiscal 1992 Pay-Fone terminated its
franchise in Greenville, South Carolina, which in the aggregate
contributed .5% and 5.5% of Pay-Fone's revenues in fiscal 1993
and 1992, respectively.
Also, although the number of clients in fiscal 1993 and 1992
remained approximately the same, the average revenue per client
<PAGE>
declined because of a decrease in the number of employees which
resulted in reduced payroll services. Management believes this
was due, at least in part, to prevailing economic and employment
conditions in California, Pay-Fone's main market. With the
acquisition of Concentric Computer Corporation and Pay-Fone's
increased sales efforts, the number of clients at June 30, 1994
increased approximately 9% over the number at June 30, 1993.
Direct operating costs as a percentage of revenues increased
from 36% in fiscal 1993 to 38% in fiscal 1994 due to the decrease
in revenues and the expenses incurred with the establishment of
Pay-Fone's second branch location in Northern California. Direct
operating costs as a percentage of revenues decreased to 36% in
fiscal 1993 as compared to 39% in fiscal 1992 due to the
Company's cost controls.
Selling, general and administrative costs as a percentage of
revenues decreased to 57% in fiscal 1994 compared to 59% in
fiscal 1993 and 60% in fiscal 1992 due to Pay-Fone's program of
cost controls and a reduction in legal expenses in fiscal 1994.
Combined marketing and advertising expenditures for fiscal 1994
increased approximately $62,000 to $1,032,571 as compared to
$970,304 in fiscal 1993 and $1,088,090 in fiscal 1992.
Research and development expenses in fiscal 1994 totaled
$148,527 as compared to $182,255 in fiscal 1993 and $172,784 in
fiscal 1992. Research and development expenditures are for
payroll system enhancements and improvements to service and
output to clients.
Income from operations for fiscal 1994 increased $34,124
over fiscal 1993 after increasing $133,277 over fiscal 1992 due
primarily to the reduction in selling, general and administrative
costs.
Pay-Fone adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (Statement 109) in fiscal
year 1994 and applied the provisions of Statement 109
retroactively to July 1, 1993. The cumulative effect of the
change in the method of accounting for income taxes as of July 1,
1993 was reported separately in fiscal 1994 as a $20,976 credit
to earnings.
Liquidity and Capital Resources
Pay-Fone relies on cash flow from operations and working
capital to finance its business and operations. Pay-Fone's
overall financial position continues to be strong with a current
ratio of 10.9 at December 31, 1994. This compares to a current
ratio of 8.4 at December 31, 1993. At December 31, 1994, Pay-
Fone had $2.4 million in working capital. Pay-Fone has no legal
<PAGE>
obligation for material capital commitments. In management's
opinion, current working capital together with normal positive
operating cash flow are sufficient to meet its normal operating
requirements. Pay-Fone does not have any long-term debt, lines
of credit or other material financing arrangements.
<PAGE>
OWNERSHIP OF PAY-FONE SHARES
The following table sets forth information as of May 1,
1995, as to Pay-Fone Shares owned by (a) persons known to Pay-
Fone to be the beneficial holders of more than 5% of the
outstanding Pay-Fone Shares, (b) each director and the chief
executive officer of Pay-Fone, and (c) all executive officers and
directors of Pay-Fone as a group.
<TABLE>
<CAPTION>
Beneficial Owner* Number of Shares Percent
Beneficially Owned of Class
<S> <C> <C>
Allied Contractors, Inc.
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207 386,669 (1) 26.05%
Richard Kelton
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207 629,436 (2) 42.06%
David Kelton
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207 229,688 (3) 15.42%
Allen Kahn, M.D.
55 East Washington Street
Chicago, IL 60602-2174 253,400 (4) 16.91%
Mark Kelton 114,596 (5) 7.69%
Edwin Johnson 43,700 (6) 2.92%
David L. Malcolm 23,100 (7) 1.56%
Mark Leekley 17,100 (8) 1.14%
All Executive Officers and
Directors as a Group
(11 persons) 1,228,920 (9) 77.92%
</TABLE>
* Includes the address of more than 5% shareholders.
(1) Allied Contractors, Inc. ("Allied") is a California
corporation owned by members of the Kelton family. Richard
Kelton, David Kelton and Mark Kelton each serve as officers and
directors of Allied. As President of Allied, Richard Kelton has
<PAGE>
the sole power to vote and dispose of all Pay-Fone Shares owned
by Allied. Allied has granted each of Richard, David and Mark
Kelton an option to purchase 54,000 Pay-Fone Shares owned by
Allied.
(2) Includes 386,669 shares owned by Allied (see Note 1)
and exercisable options to purchase 12,200 shares from the
Company.
(3) Includes exercisable options to purchase 5,000 shares
from the Company and exercisable options to purchase 54,000
shares from Allied.
(4) Includes exercisable options to purchase 14,000 shares
from the Company.
(5) Includes exercisable options to purchase 5,000 shares
from the Company and exercisable options to purchase 54,000
shares from Allied.
(6) Includes 1,000 shares owned by Mr. Johnson's wife,
10,000 shares owned by Economy Service Station, Inc., a
corporation of which Mr. Johnson is the sole stockholder, and
exercisable options to purchase 14,000 shares from the Company.
(7) Includes 5,500 shares owned by Suncoast Financial
Corporation, a corporation wholly-owned by Mr. Malcolm and his
wife.
(8) Includes exercisable options to purchase 16,800 shares
from the Company.
(9) Includes exercisable options to purchase 25,900 shares
held by executive officers not named in the foregoing table.
Also includes the shares identified in Notes (2) through (8)
except that all of the shares owned by Allied, all of which have
been attributed to Richard Kelton and some of which have also
been attributed to David and Mark Kelton by reason of options
granted by Allied, have been counted only once.
Allied Contractors, Inc. and each of Pay-Fone's executive
officers and directors have agreed to vote all voting securities
of Pay-Fone owned by them, representing 76.47% of the Pay-Fone
Shares outstanding and entitled to vote at the Special Meeting,
for approval and adoption of the Merger Agreement.
<PAGE>
DESCRIPTION OF PAYCHEX COMMON STOCK
The holders of Paychex Common Stock are entitled to one vote
per share on all matters voted on by stockholders, including
elections of directors, and, except as otherwise required by law,
the holders of such shares exclusively possess all voting power.
The Paychex Certificate of Incorporation does not provide for
cumulative voting in the election of directors. The holders of
Paychex Common Stock are entitled to such dividends as may be
declared from time to time by the Paychex Board from funds
available therefore, and upon liquidation, are entitled to
receive pro rata all assets of Paychex available for distribution
to such holders. All shares of Paychex Common Stock, when
issued, are fully paid and non-assessable and the holders thereof
do not have preemptive rights. As of ________________, 1995,
there were ___________ shares of Paychex Common Stock issued and
outstanding.
<PAGE>
COMPARISON OF RIGHTS OF
HOLDERS OF PAY-FONE SHARES AND
PAYCHEX COMMON STOCK
Pay-Fone is a California corporation and, accordingly, the
rights of its shareholders are governed by California law. If
the Merger is consummated, Pay-Fone shareholders will become
shareholders of Paychex and their rights as such will be governed
by the Delaware General Corporation Law ("Delaware Law"), the
Certificate of Incorporation, as amended, of Paychex (the
"Paychex Certificate") and the Bylaws of Paychex, (the "Paychex
Bylaws"). The following is a summary of certain material
differences between the Delaware Law, Paychex Certificate and
Paychex Bylaws, on the one hand, and the California Corporations
Code ("California Law"), Pay-Fone's Articles of Incorporation, as
amended (the "Pay-Fone Articles"), and Pay-Fone's Bylaws, as
amended (the "Pay-Fone Bylaws"), on the other.
Indemnification
Although generally similar, Delaware Law permits a
corporation to indemnify its directors, officers, employees and
agents (collectively "agents") against liabilities and expenses
arising out of legal proceedings brought against them by reason
of their service as agents under a broader range of circumstances
than does California Law. For example, under Delaware Law a
corporation has the power to indemnify its directors and officers
for expenses incurred or amounts paid in connection with a
proceeding that is settled. California Law does not permit
indemnification for expenses incurred or amounts paid in
connection with a proceeding that is settled without court
approval. Delaware Law allows a corporation to include in its
bylaws, and in agreements between the corporation and its agents,
provisions which expand the scope of indemnification beyond that
otherwise provided by law. Under California Law, on the other
hand, expanded indemnification is permitted only to the extent
the additional rights to indemnification are authorized in the
articles of incorporation. Pay-Fone has no such authorization in
its Articles.
The Pay-Fone Bylaws require Pay-Fone to indemnify its
directors and officers to the extent permitted by law. The
Paychex Bylaws require Paychex to indemnify its agents to the
full extent permitted by law. In addition, Paychex has entered
into separate indemnification agreements with its directors which
may afford greater indemnification rights than Delaware Law.
Paychex also maintains directors' and officers' liability
insurance.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted pursuant to the foregoing
<PAGE>
provisions, the SEC has taken the position that such
indemnification is against public policy as expressed in the
Securities Act and is therefor unenforceable.
Limitation of Director Liability
As permitted by Delaware Law, the Paychex Certificate
includes a provision which eliminates the personal liability of
directors for monetary damages for breach of fiduciary duty as a
director. Thus, no director of Paychex may be personally liable
for monetary damages for negligence or gross negligence,
including grossly negligent business decisions in the case of a
takeover attempt under Delaware Law; however, each director
remains personally liable for failure to act in good faith, for
breach of his duty of loyalty, for engaging in a transaction from
which the director derives an improper personal benefit, for
engaging in intentional misconduct or a knowing violation of law,
or for the improper payment of a dividend or repurchase of
shares. Paychex or any stockholder may seek an injunction or any
other non-monetary relief in the event of a breach of a
director's fiduciary duty. The limitation of liability applies
only to claims against a director arising out of his role as a
director and does not extend to the liability of a person who is
a director for acts or omissions in his capacity as an officer.
Furthermore, a director's liability under, and duty to comply
with, the federal securities laws or other obligations unrelated
to his fiduciary duty remain unaffected.
California Law authorizes a corporation to adopt a provision
in its articles of incorporation which similarly limits a
director's personal liability for breach of his duties to the
corporation (although Delaware Law limits director liability in a
broader range of circumstances), but the Pay-Fone Articles do not
contain such a provision.
Cumulative Voting
Under California Law, cumulative voting in the election of
directors is available to shareholders unless specifically
eliminated in the articles of incorporation of a listed
corporation (a corporation whose shares are listed on the New
York Stock Exchange or American Stock Exchange, or whose shares
are listed on the NASDAQ National Market and which has 800 or
more shareholders). The Pay-Fone Articles do not eliminate
cumulative voting. Under Delaware Law, cumulative voting in the
election of directors is not available unless the corporation's
certificate of incorporation so provides. The Paychex
Certificate does not provide for cumulative voting.
<PAGE>
Super-Majority Voting
Delaware Law permits a corporation to include in its
certificate of incorporation a provision requiring for any
corporate action the vote of a larger proportion of the
outstanding shares, or any class or series thereof, than required
by Delaware Law ("super-majority vote"). Under California Law, a
corporation may provide for a super-majority vote in its articles
of incorporation for any corporate action except with respect to
the election of directors, the removal of directors without
cause, and the approval of the voluntary dissolution of a
corporation. In the case of a corporation which has more than
100 shareholders of record (with certain exceptions not
applicable to Pay-Fone), such corporation may not provide for a
super-majority vote which exceeds 66-2/3% of the outstanding
shares or any class or series thereof. Such super-majority vote
provision must be approved by the same proportion of the
outstanding shares as is required in the super-majority vote
provision and such provision is effective only for a period of
two years, subject to readoption by the shareholders for
additional two-year periods. Neither the Pay-Fone Articles nor
the Paychex Certificate contains a super-majority vote provision.
Size of Board of Directors
Under California Law, although changes in the number of
directors must in general be approved by the shareholders, the
board of directors may fix the exact number of directors within a
stated range set forth in the articles of incorporation or
bylaws, provided that such provision has been approved by the
shareholders. The Pay-Fone Articles provide that the Board of
Directors shall consist of not less than four nor more than seven
members and that the exact number shall be fixed by the Board of
Directors or the shareholders. The current number of directors
of Pay-Fone is six.
Delaware Law permits the Board of Directors to change the
authorized number of directors by amendment of the bylaws or in
the manner provided in the bylaws, unless the number of directors
is fixed in the certificate of incorporation, in which case the
number of directors may be changed only by an amendment to the
certificate of incorporation. The Paychex Certificate does not
fix the number of directors, nor do the Paychex By-Laws which
provide that the Paychex Board may fix the number by resolution
adopted prior to the annual meeting of stockholders. The Paychex
Board has currently fixed the number of directors at seven.
Special Meetings of Shareholders
Under California Law, a special meeting of shareholders may
be called by the board of directors, the chairman of the board,
the president, the holders of shares entitled to cast not less
<PAGE>
than 10% of the votes at a meeting or such other persons as may
be provided in the articles of incorporation or bylaws. The Pay-
Fone Articles and Bylaws do not provide for any additional
persons who may call a special meeting of shareholders. Under
Delaware Law, a special meeting of stockholders may be called by
the board of directors or such other persons as may be provided
in the certificate of incorporation or bylaws. The Paychex
Bylaws provide that the President, the Board of Directors or
stockholders owning a majority of the outstanding shares may call
a special meeting of stockholders.
Vote Required for Certain Mergers and Reorganizations
Delaware Law relating to mergers and other corporate
reorganizations differs from California Law in a number of
respects. Generally, California Law requires a shareholder vote
in more situations than does Delaware Law.
Both California and Delaware Law generally provide for a
shareholder vote of both the acquiring and acquired corporation
in a merger and of the selling corporation for the sale of all or
substantially all of its assets. In addition, with certain
exceptions, California Law requires the affirmative vote of a
majority of the outstanding shares of each class of (i) the
acquiring corporation in a share-for-share exchange; (ii) the
acquiring corporation (if it issues its securities) and acquired
corporation in a sale-of-assets reorganization; and (iii) any
parent corporation whose equity securities are issued or
transferred in connection with a corporate reorganization.
Delaware Law generally does not require a shareholder vote
of the surviving corporation in a merger if the number of shares
to be issued by the surviving corporation in the merger does not
exceed 20 percent of the shares outstanding immediately prior to
such issuance. California law contains a similar exception to
its voting requirements for reorganizations where any corporation
or its shareholders or both immediately before the reorganization
own (immediately after the reorganization) more than five-sixths
of the voting power of the surviving or acquiring corporation (or
its parent).
Under California Law, a sale of all or substantially all of
a corporation's assets to a buyer in control of, or under common
control with, the selling corporation requires the approval of at
least 90 percent of the voting power of the selling corporation,
unless the sale is in consideration of the nonredeemable common
shares of the buying corporation or its parent, or the selling
corporation obtains the approval of the Commissioner of
Corporations, in either of which cases the sale must instead be
approved by a majority of the outstanding shares. Under Delaware
Law, a corporation may sell all or substantially all of its
assets with the approval of a majority of the outstanding stock
<PAGE>
entitled to vote thereon, and there is no required super-majority
stockholder approval for such a sale to a buyer that controls the
selling corporation.
Class Vote for Certain Reorganizations
With certain exceptions, California Law requires that
reorganizations (mergers, certain sales and purchases of assets
and similar transactions) be approved by a majority vote of each
class of shares outstanding, and provides for separate series
votes in certain circumstances. In contrast, the Delaware Law
generally does not require such class voting, except in certain
circumstances if the transaction involves an amendment to the
certificate of incorporation which affects a class of shares
adversely.
Fairness Opinion for Certain Reorganizations
California Law provides that if a proposal for a tender
offer, merger or other reorganization (including a share-exchange
tender offer) or for certain sales of assets (a "Proposal") is
made by a party who (i) directly or indirectly controls the
target corporation, (ii) is, or is directly or indirectly
controlled by, an officer or director of the target, or (iii) is
an entity in which a material financial interest is held by any
director or executive officer of the target, then an independent
affirmative opinion as to fairness of the consideration to the
shareholders of the target corporation must be delivered to the
shareholders. The fairness opinion requirement does not apply if
the target does not have shares held of record by 100 or more
persons or if the transaction has been qualified under the
California securities laws. If any other proposal for a
reorganization (the "Later Offer") is received at least ten days
prior to the date for acceptance of the tender offer or vote on
the reorganization, the directors must inform the shareholders of
the Later Offer, and must forward any Later Offer written
material to the shareholders. In such event, the shareholders
must be given a reasonable opportunity to withdraw any shares
tendered or any vote, consent, or proxy given in connection with
the Proposal. Delaware Law does not contain a similar provision.
Delaware Anti-Takeover Law
Delaware Law prevents an "Interested Stockholder" (defined
as any person that owns 15 percent or more of the outstanding
voting securities of a corporation), from engaging in certain
business combinations with a Delaware corporation for three years
following the date such person became an Interested Stockholder
unless certain conditions (such as approval by the board of
directors or shareholders) are met. California Law has no
comparable provision, although California Law regulates certain
<PAGE>
tender offers or proposals for reorganization by persons who
directly or indirectly control the corporation. See "Fairness
Opinion for Certain Reorganizations" above.
This Delaware Law may have the effect of deterring an
attempt to take control of Paychex or significantly delaying a
purchaser's ability to acquire the entire interest in Paychex if
such acquisition is not approved by Paychex' Board of Directors.
The Paychex Certificate and Bylaws do not contain any additional
anti-takeover provisions.
Appraisal Rights
Delaware Law provides dissenters' rights of appraisal
(statutory rights of dissenting shareholders to demand that, upon
consummation of certain reorganizations, the corporation purchase
their shares at an appraised fair market value) generally in
connection with mergers and consolidations, but not with respect
to (a) a sale-of-assets reorganization, (b) a merger by a
corporation, the shares of which are either listed on a national
securities exchange or the NASDAQ National Market System, or
widely held (by more than 2,000 record shareholders) if such
shareholders receive shares of the surviving corporation or of a
listed or widely held corporation, and (c) shares of a
corporation which survives the merger if no vote of such
corporation's shareholders is required to approve the merger.
California Law affords dissenters' rights in a reorganization
which requires shareholder approval, including in a sale-of-
assets reorganization, but excluding a share-exchange tender
offer. California Law does not afford dissenters' rights in the
case of shares that are listed on a national securities exchange
or are on the list of OTC margin stocks, unless such shares are
subject to restrictions on transfer or at least five percent (5%)
of the outstanding shares claim dissenters' rights. See "THE
MERGER - Rights of Dissenting Shareholders."
Inspection of Shareholder List
California Law provides for an absolute right of inspection
of the shareholder list for persons holding 5% or more of a
corporation's voting shares or persons holding 1% or more of such
shares who have filed a Schedule 14B with the SEC relating to the
election of directors. Both California Law and Delaware Law
allow any shareholder to inspect the shareholder list and certain
corporate books and records for a purpose reasonably related to
such person's interest as a shareholder. Delaware Law contains
no provisions comparable to the absolute right to inspect the
shareholder list provided by California Law to certain
shareholders. California Law, however, purports to apply such
provision to any foreign corporation if its principal executive
office is in California or if it customarily holds meetings of
its board of directors in California. Paychex may be considered
<PAGE>
to be within the penumbra of this provision of California Law
since currently one of the four quarterly meetings of its board
of directors is annually held in California.
Loans to Directors, Officers and Employees
Under Delaware Law, a corporation may make loans to or
guarantee the obligations of its officers or other employees,
including officers or employees who are also directors, when such
action, in the judgment the directors, may reasonably be expected
to benefit the corporation. Under California Law, a corporation
may not make any loan to, or guarantee the obligation of, a
director or officer without shareholder approval. Although
California Law would permit Pay-Fone's shareholders to adopt a
bylaw permitting a disinterested majority of the directors to
approve such loans or guarantees without shareholder approval,
the Pay-Fone Bylaws do not contain such a provision.
Interested Director Transactions
Under both California Law and Delaware Law certain contracts
or transactions in which one or more of a corporation's directors
has an interest are not void or voidable because of such interest
or because such director was present at the meeting where such
contract or transaction was authorized, approved or ratified by
the shareholders or the board of directors if certain conditions
are met, such as obtaining the required approval and fulfilling
the requirement of good faith and full disclosure. Generally,
with certain exceptions, the conditions are similar under
California Law and Delaware. Generally, under both Laws
shareholder or board approval of such contracts or transactions
is required, except that pursuant to California Law, if
shareholder approval is sought, the interested director is not
entitled to vote his shares at a shareholder meeting with respect
to any action regarding such contract or transaction. Under
California Law, the contract or transaction must be approved by a
majority vote of a quorum of the directors without counting the
vote of the interested director (except for purposes of
establishing a quorum) while under Delaware Law, the contract or
transaction must be approved by a majority of the disinterested
directors (even though less than a quorum).
Voting by Ballot
California Law grants to each shareholder the right to
require a vote by written ballot for the election of directors.
Delaware Law provides that all actions of stockholders must be by
written ballot unless otherwise provided in the certificate of
incorporation. The Paychex Certificate does not require ballot
voting, nor do the Paychex By-Laws.
<PAGE>
Payment of Dividends and Repurchase of Shares of Common Stock
Under Delaware Law, a corporation may pay dividends only out
of surplus (generally the shareholders' equity of the corporation
less the par value of the capital stock outstanding) or, if there
exists no surplus, out of the net profits of the corporation for
the fiscal year in which the dividend is declared and/or the
preceding fiscal year (provided that provision must be made for
outstanding stock having a liquidation preference). In general,
shares of a corporation's capital stock may only be repurchased
or redeemed by the corporation out of surplus.
Under California Law, a corporation may pay dividends and
may purchase or redeem outstanding shares of its capital stock
only if the retained earnings of the corporation immediately
prior thereto equal or exceed the amount of the proposed
distribution or, in general, if immediately after giving effect
to such distribution the assets of the corporation (excluding
certain intangible assets) equal at least 125% of the liabilities
of the corporation and the current assets of the corporation
equal at least 100% or 125% (depending on whether certain
financial tests are met) of the current liabilities.
<PAGE>
LEGAL OPINIONS
The legality of the Paychex Common Stock to be issued in
connection with the Merger is being passed upon for Paychex by
Woods, Oviatt, Gilman, Sturman & Clarke LLP. As of
_____________, 1995, the attorneys in that firm owned __________
shares of Paychex Common Stock and held options to purchase an
additional ___________ shares. A member of the firm also serves
as a director of Paychex.
Certain of the tax consequences of the Merger to Pay-Fone
shareholders at the Effective Time will be passed upon by Hughes
Hubbard & Reed, Los Angeles, California, on behalf of Pay-Fone.
See "THE MERGER - Certain Federal Income Tax Consequences."
Attorneys in that firm beneficially owned as of ______________,
1995, approximately _________ shares of Paychex Common Stock and
_________ Pay-Fone Shares.
EXPERTS
The consolidated financial statements of Paychex, Inc.
incorporated by reference in Paychex' Annual Report (Form 10-K)
for the year ended May 31, 1994, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference.
Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Pay-Fone Systems,
Inc. as of June 30, 1994 and 1993, and for each of the years then
ended, have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in
accounting and auditing.
The report of KPMG Peat Marwick LLP covering the June 30,
1994 consolidated financial statements refers to a change in the
method of accounting for income taxes.
The financial statements of Pay-Fone for the fiscal year
ended June 30, 1992, included in this Proxy Statement/Prospectus
have been audited by Clumeck, Stern, Phillips and Schwartz,
independent public accountants given on the authority of that
firm as experts in accounting and auditing.
<PAGE>
PAY-FONE CONSOLIDATED FINANCIAL STATEMENTS
CLUMECK, STERN, PHILLIPS & SCHWARTZ
Certified Public Accounts
15910 Ventura Blvd. Suite 1633
Encino, CA 91436
August 21, 1992
INDEPENDENT AUDITORS' REPORT
To the Shareholders and The Board of Directors
of Pay-Fone Systems, Inc.
We have audited the accompanying statements of operations,
shareholders' investment and cash flows of Pay-Fone Systems, Inc. for the
year ended June 30, 1992. 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 audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of its operations and cash
flows of Pay-Fone Systems, Inc. for the year ended June 30, 1992, in
conformity with generally accepted accounting principles.
/s/ CLUMECK, STERN, PHILLIPS & SCHWARTZ
Certified Public Accountants
<PAGE>
KPMG PEAT MARWICK LLP
Independent Auditors' Report
The Board of Directors and Shareholders
of Pay-Fone Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Pay-Fone
Systems, Inc. and subsidiary as of June 30, 1994 and 1993, and the related
consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated 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 financial position of
Pay-Fone Systems, Inc. and subsidiary as of June 30, 1994 and 1993 and the
results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
As discussed in notes 1 and 3 to the consolidated financial statements,
effective July 1, 1993, the company changed its method of accounting for
income taxes.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
September 1, 1994
<PAGE>
PAY-FONE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993 1994
(Unaudited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 740,734 $ 1,116,949 $ 268,732
Short term investments 1,382,203 1,100,714 1,478,040
Accounts receivable, less $8,000 allowance
for doubtful accounts 516,704 476,285 533,491
Prepaid supplies and other 347,824 266,792 336,619
TOTAL CURRENT ASSETS 2,987,465 2,960,740 2,616,881
PROPERTY AND EQUIPMENT, at cost:
Building 3,001,540 3,001,540 3,001,540
Terminals and computer equipment 2,020,258 2,580,377 2,024,671
Other 1,231,633 999,851 1,409,701
6,253,431 6,581,768 6,435,912
Less: Accumulated depreciation
and amortization (3,753,268) (4,168,114) (3,863,517)
2,500,163 2,413,654 2,572,395
Intangible assets, net of amortization 111,920 -- 136,074
$ 5,599,548 $ 5,374,394 $ 5,325,351
=========== =========== ===========
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 76,892 $ 41,341 $ 82,121
Accrued wages and other related costs 111,152 105,965 133,521
Other accrued liabilities 25,118 70,782 20,021
Customer security deposits 35,785 65,577 5,395
Income taxes payable -- 9,653 --
TOTAL CURRENT LIABILITIES 248,947 293,318 241,058
Deferred income taxes 143,047 62,488 74,047
SHAREHOLDERS' EQUITY:
Common stock $.10 par value
Authorized - 10,000,000 shares
Issued and Outstanding - 1,467,813
at June 30, 1994 and 1993; and
1,484,233 (unaudited) at December 31, 1994 90,781 90,781 91,803
Additional paid-in capital 2,755,826 2,755,826 2,764,017
Retained earnings 2,360,947 2,171,981 2,154,426
TOTAL SHAREHOLDERS' EQUITY 5,207,554 5,018,588 5,010,246
COMMITMENTS AND CONTINGENCIES
$ 5,599,548 $ 5,374,394 $ 5,325,351
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PAY-FONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Years Ended June 30, Ended December 31,
1994 1993 1992 1994 1993
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $4,459,935 $4,505,111 $5,185,819 $2,265,044 $2,106,165
Direct costs 1,695,727 1,636,677 2,021,492 950,471 788,294
Gross profit 2,764,208 2,868,434 3,164,327 1,314,574 1,317,871
Selling, general and administrative expenses 2,541,995 2,680,345 3,109,515 1,630,984 1,258,517
Income (loss) from operations 222,213 188,089 54,812 (316,410) 59,354
Interest income 61,369 58,108 67,584 40,889 34,512
Income (loss) before income taxes, extraordinary
item and cumulative effect of change in method
of accounting for income taxes 283,582 246,197 122,396 (275,521) 93,866
Income tax expense (benefit) 115,592 95,182 40,000 (69,000) 32,000
Income (loss) before extraordinary item
and cumulative effect of change in method of
accounting for income taxes 167,990 151,015 82,396 (206,521) 61,866
Extraordinary item --
income tax benefit resulting from utilization
of net operating loss carryforward -- -- 28,200 -- --
Cumulative effect of change in method
of accounting for income taxes 20,976 -- -- -- --
Net income (loss) $ 188,966 $ 151,015 $ 110,596 $ (206,521) $ 61,866
========== ========== ========== =========== ==========
Per share amounts:
Income (loss) before extraordinary item
and cumulative effect of change in method of
accounting for income taxes $ 0.12 $ 0.10 $ 0.05 $ (0.14) $ 0.04
Extraordinary item --
income tax benefit resulting from utilization
of net operating loss carryforward -- -- 0.02 -- --
Cumulative effect of change in method
of accounting for income taxes 0.01 -- -- -- --
Net income (loss) per common share $ 0.13 $ 0.10 $ 0.07 $ (0.14) $ 0.04
========== ========== ========== =========== ==========
Weighted average shares
and common stock equivalents 1,468,813 1,488,416 1,483,780 1,484,233 1,467,813
========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PAY-FONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Years Ended June 30, Ended December 31,
1994 1993 1992 1994 1993
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 188,966 $ 151,015 $ 110,596 $ (206,521) $ 61,867
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 278,852 290,170 376,815 121,095 129,186
Deferred income taxes 80,559 18,736 (65,200) (69,000) --
Change in assets and liabilities, net
of effects from acquisition:
Accounts receivables (18,892) 37,345 29,067 (16,787) (26,292)
Prepaid supplies and other (77,162) 23,028 (47,337) 11,205 (291,958)
Accounts payable 35,274 (10,458) (6,014) 5,229 (34,180)
Accrued wages and other related costs 5,187 (16,992) (44,860) 22,369 (1,222)
Other accrued liabilities (94,883) (16,446) (18,658) (5,097) 109,919
Customer security deposits (29,792) (8,448) (45,275) (30,390) (19,075)
Income taxes payable (9,653) (66,547) 76,200 -- 24,878
Total adjustments 169,490 250,388 254,288 38,624 (108,744)
Net cash provided by (used in)
operating activities 358,456 401,403 364,884 (167,897) (46,877)
Cash flows from investing activities:
Short term investments (281,489) (626,463) 405,869 (95,837) 303,280
Capital expenditures (309,297) (49,698) (95,518) (182,481) (99,510)
Payments for acquired company
(net of cash acquired) (143,885) -- -- (35,000) --
Net cash provided by (used in)
investing activities (734,671) (676,161) 310,351 (313,318) 203,769
Cash flows from financing activities --
Repurchase of common stock -- -- (124,540) -- --
Net increase (decrease)
in cash and cash equivalents (376,215) (274,758) 550,695 (481,215) 156,893
Cash and cash equivalents at beginning of period 1,116,949 1,391,707 841,012 740,734 1,116,949
Cash and cash equivalents at end of period $ 740,734 $1,116,949 $1,391,707 $ 268,732 $1,273,842
========== ========== ========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 69,600 $ 146,800 $ 1,681 $ -- $ 13,600
========== ========== ========== ========== ==========
Interest $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PAY-FONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1991 1,506,133 $ 94,613 $2,876,535 $1,910,370 $4,881,518
Net Income -- -- -- 110,596 110,596
Common Stock Redeemed (38,320) (3,832) (120,709) -- (124,541)
---------------------------------------------------------
Balance, June 30, 1992 1,467,813 90,781 2,755,826 2,020,966 4,867,573
Net Income -- -- -- 151,015 151,015
---------------------------------------------------------
Balance, June 30, 1993 1,467,813 90,781 2,755,826 2,171,981 5,018,588
Net Income -- -- -- 188,966 188,966
---------------------------------------------------------
Balance, June 30, 1994 1,467,813 90,781 2,755,826 2,360,947 5,207,554
Net Loss (Unaudited) -- -- -- (206,521) (206,521)
Options Exercised
(Unaudited) 16,420 1,022 8,191 -- 9,213
---------------------------------------------------------
Balance, December 31, 1994
(Unaudited) 1,484,233 $ 91,803 $2,764,017 $2,154,426 $5,010,246
=========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PAY-FONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of December 31, 1994 and for the six month periods ended
December 31, 1994 and 1993 is unaudited.)
Note 1 - Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the financial statements of
Pay-Fone Systems, Inc. and its wholly-owned subsidiary (collectively the
"Company"). All significant inter-Company balances and transactions have
been eliminated in consolidation.
Business
The Company operates in the data processing service industry. It provides
automated payroll services for businesses located primarily in California.
Revenue Recognition
Revenues are recognized as the services are performed.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
Short-Term Investments
Short-term investments at June 30, 1994 consist primarily of certificates
of deposit with original maturities between three and six months,
adjustable-rate preferred stock and treasury instruments and are carried
at cost which approximates market.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which adopts changes that
apply to all companies holding short- or long-term investments. Adoption
of Standard No. 115 is required for the Company's 1995 fiscal year. The
Company plans to adopt Statement No. 115 in the first quarter of fiscal
1995 and believes the application of Statement No. 115 will have no
material effect on the Company's consolidated financial statements.
Property and Equipment
The Company follows the policy of capitalizing expenditures that
materially increase the life or serviceability of equipment and charging
ordinary maintenance and repairs to operations as incurred. When property
is sold or otherwise disposed of, the cost and related accumulated
depreciation or amortization are removed from the accounts and any gain or
loss resulting from sales or abandonments is recorded on the consolidated
statements of operations.
<PAGE>
The depreciation and amortization of property is provided over the
estimated useful life of the asset using straight-line and accelerated
methods as follows:
Building 38 Years
Terminals and Computer Equipment 5 - 12 Years
Other 5 - 10 Years
Intangible Assets
Intangible assets consist of a covenant not to compete and goodwill
arising from an acquisition in fiscal 1994 (see Note 2). The values
assigned to intangible assets are being amortized on a straight-line
basis. The covenant is being amortized over its contractual life, five
years. Goodwill, representing the excess of the purchase price over the
estimated fair value of the net assets of the acquired business, is being
amortized over the period of expected benefit, ten years. Amortization
expense for the year ended June 30, 1994 and accumulated amortization at
June 30, 1994 aggregated $5,000.
Research and Development Costs:
For financial reporting purposes, research and development costs related
to the designing, developing and testing of new and existing software
products are charged to expense as incurred. Accordingly, for the years
ended June 30, 1994, 1993 and 1992 the Company expensed $148,527,
$182,255, and $172,784, respectively.
Net Income Per Common Share
Net income per common share has been computed based on the weighted
average number of outstanding shares and common stock equivalents, if
dilutive.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (Statement 109). Statement 109 requires a change from the
deferred method of accounting for income taxes under APB Opinion 11 to the
asset and liability method of accounting for income taxes. Under the
asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Further, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company adopted Statement 109 in fiscal year 1994 and has applied the
provisions of Statement 109 retroactively to July 1, 1993. The cumulative
effect of the change in the method of accounting for income taxes as of
July 1, 1993 has been reported separately in the fiscal year 1994
consolidated statement of operations.
<PAGE>
Interim Financial Statements
The accompanying consolidated balance sheet as of December 31, 1994 and
the consolidated statements of operations and cash flows for the six month
periods ended December 31, 1994 and 1993 are unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring accruals
necessary for a fair presentation of the results for the periods presented
were made. The operating results for the six month period ended December
31, 1994 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1995.
Note 2 - Acquisition:
On February 1, 1994, the Company acquired Concentric Computer Corporation
of Aptos, California ("Concentric"), a provider of automated payroll
services, for cash plus a percentage of future net revenues, as defined.
The acquisition was accounted for as a purchase with the results of
Concentric included from the acquisition date. The excess of the payments
made in fiscal 1994 over the fair value of the net assets acquired has
been allocated to goodwill. Additional payments made in subsequent fiscal
years, if any, will be allocated to goodwill. Proforma financial
information is not presented as the acquisition, for accounting purposes,
is not deemed significant.
Note 3 - Income Taxes:
As discussed in Note 1, the Company adopted Statement 109 in fiscal year
1994 and has applied the provisions of the Statement retroactively to July
1, 1993. The cumulative effect of this change in accounting for income
taxes as of July 1, 1993 is reported separately in the accompanying
consolidated statement of operations as a $20,976 credit to earnings.
The provision for income taxes, which excludes the Statement 109
cumulative effect adjustment, consists of the following:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Current:
Federal $ 23,089 $ 47,351 $ 54,500
State 3,775 28,931 22,500
26,864 75,282 77,000
Deferred:
Federal 68,029 24,529 (26,300)
State 20,699 (5,629) (10,000)
88,728 18,900 (37,000)
115,592 95,182 40,000
Extraordinary item - tax benefit resulting from
utilization of net operating loss carryforwards -- -- (28,200)
$ 115,592 $ 95,182 $ 11,800
========= ========= =========
</TABLE>
<PAGE>
Actual income tax expense differs from the expected income tax expense
determined by applying the Federal tax rate of 34% to income before income
taxes and cumulative effect of a change in the method of accounting for
income taxes as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Expected income tax expense $ 96,418 $ 83,700 $ 31,000
State income taxes, net of Federal benefit 16,153 15,380 7,000
Other 3,021 (3,898) 2,000
$ 115,592 $ 95,182 $ 40,000
========= ========= =========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities is as
follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Deferred tax assets:
Tax credits $ 28,700 $ 40,200
State loss carryforwards -- 14,600
Amortization of intangible assets 10,400 --
Other 4,500 12,400
Total gross deferred tax assets 43,600 67,200
Deferred tax liabilities:
Depreciation 105,000 104,000
Capitalized software development costs 71,500 --
Other 10,147 25,688
Total gross deferred tax liability 186,647 129,688
Net deferred tax liability $ 143,047 $ 62,488
========= =========
</TABLE>
At June 30, 1994, the Company had a general business credit carryforward
totaling $ 5,500, which is available to reduce federal taxes otherwise
payable in future years. This carryforward expires in the year 2001.
The Company is currently undergoing an examination by the Internal Revenue
Service of its June 30, 1989, 1990 and 1991 income tax returns. The audit
is not yet complete. It is the opinion of management that no assessments
are proper and the audit will not have a material impact on the
consolidated financial statements.
<PAGE>
Note 4 - Stock Options:
At June 30, 1994, 51,650 shares of common stock were reserved for issuance
under the Company's Incentive and Executive Stock Option Plans. Options
to purchase common stock may be granted at exercise prices not less than
fair market value and in no event less than $1 per share at the grant
date, and are subject to certain conditions with respect to continuous
employment, and are exercisable within a one to ten-year period from the
date of grant in such manner as set forth in the option agreements. The
following is a summary of stock option activity for the years ended June
30, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Option Price
1981 1983 1987 1990 1993 Per Share
Incentive Incentive Incentive Incentive Incentive (Range)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at June 30, 1991 88,000 69,950 45,600 -- -- $2.13-$5.25
Options terminated (40,000) (20,100) (19,400) -- -- $2.50-$4.75
Options granted 40,000 26,750 2,250 -- -- $2.13-$2.75
Options outstanding at June 30, 1992 88,000 76,600 28,450 -- -- $2.13-$5.25
Options terminated (45,000) (8,650) (4,900) (2,000) -- $2.13-$5.25
Options granted -- 15,900 26,850 45,800 -- $3.13-$3.44
Options outstanding at June 30, 1993 43,000 83,850 50,400 43,800 -- $2.13-$4.75
Options terminated -- (4,750) (9,850) (1,000) (500) $2.50-$4.50
Options granted -- 3,150 -- 1,850 63,650 $2.88-$3.30
Options outstanding at June 30, 1994 43,000 82,250 40,550 44,650 63,150 $2.13-$4.75
====== ====== ====== ====== ======
Options exercisable at June 30, 1994 28,400 44,290 16,770 8,560 --
====== ====== ====== ====== ======
</TABLE>
Note 5 - Related Party Transactions:
Richard Kelton, who is shareholder, officer and member of the Board of
Directors, also acts in the capacity of Company attorney from time to
time. Fees for legal and executive services paid to Richard Kelton for
the years ended June 30, 1994, 1993 and 1992 amounted to $10,990, $18,562,
and $24,077, respectively.
<PAGE>
Note 6 - Payroll and Payroll Tax Filing Services:
During fiscal 1994, the Company developed the ability to perform tax
filing in-house. As part of its integrated payroll and payroll tax filing
services, the Company collects funds for Federal, state and local
employment taxes from clients, files applicable tax returns, handles all
regulatory correspondence and amendments, absorbs regulatory charges for
certain penalties and interest, and remits the funds to the appropriate
tax agencies. In addition to fees paid by clients for these services, the
Company receives interest during the interval between the receipt and
disbursement of funds by investing the funds in savings accounts. The
amount of collected but unremitted funds varies significantly during the
year. At June 30, 1994, the amount of such funds was $194,662. Such
funds and the related tax obligations are neither assets nor liabilities
of the Company and, therefore, are not included in the accompanying
consolidated financial statements. Related income earned from these
investments is included in revenue.
Note 7 - Commitments and Contingencies:
The Company occupies certain of its facilities under non-cancellable
operating leases expiring at various dates through fiscal year ended June
30, 2025.
The non-cancellable ground lease for the corporate offices, expiring in
2025, calls for a rent readjustment every five years with the midpoint of
each five year period subject to Producer Price Index changes. The
current ground lease payments amount to $2,948 per month.
Minimum annual commitments under all non-cancellable leases are as follows:
Fiscal Year Ended June 30:
1995 $ 151,473
1996 151,473
1997 143,770
1998 38,382
1999 36,504
2000 - 2025 912,600
$ 1,434,202
===========
For the years ended June 30, 1994, 1993, and 1992, the total rental
expense charged to operations under these leases totaled $170,049,
$199,478, and $298,712, respectively.
The Company also subleases a portion of its corporate offices and records
rental income based on square footage leased. Sublease income recognized
by the Company in fiscal 1994, 1993 and 1992 totaled $126,930, $88,992,
and $63,306, respectively.
<PAGE>
Note 8 - Subsequent Event (Unaudited):
On March 17, 1995, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Paychex, Inc., a Delaware corporation
("Paychex"), and Paychex Merger Corp., a wholly owned subsidiary of
Paychex ("Merger Sub"), pursuant to which, subject to approval by the
Company's shareholders and the satisfaction of certain other conditions,
Merger Sub will merge into the Company and the Company will become a
wholly owned subsidiary of Paychex (the "Merger"). Pursuant to the Merger
Agreement, outstanding shares of the Company's Common Stock will be
converted into shares of Paychex Common Stock in accordance with a formula
set forth in the Merger Agreement based on a total value of $10,475,000
(subject to certain reductions) and the market price of Paychex Common
Stock during a period prior to the Merger. The Merger will be accounted
for as a pooling of interests.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rochester, State of New York, on April
____, 1995.
PAYCHEX, INC.
By: /s/ G. Thomas Clark
G. Thomas Clark, Vice President
of Finance
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Name Title Date
/s/B. Thomas Golisano Chairman of the Board, April 14, 1995
B. Thomas Golisano Chief Executive Officer,
President and Director
/s/ G. Thomas Clark Vice President April 14, 1995
G. Thomas Clark of Finance and
Director (principal
financial and
accounting officer)
*Donald W. Brinckman Director April 14, 1995
Donald W. Brinckman
*Phillip Horsley Director April 14, 1995
Phillip Horsley
*Grant M. Inman Director April 14, 1995
Grant M. Inman
*Harry P. Messina, Jr. Director April 14, 1995
Harry P. Messina, Jr.
*J. Robert Sebo Director April 14, 1995
J. Robert Sebo
*By: /s/ G. Thomas Clark
G. Thomas Clark, as Attorney-in-Fact
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Pursuant to the Delaware General Corporation Law, the
Paychex, Inc. Certificate of Incorporation exculpates directors
from liability to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, but
not for (1) breach of the duty of loyalty, (2) acts or omissions
not in good faith or which involve intentional misconduct or
knowing violation of law, (3) paying a dividend or approving a
stock repurchase which was illegal, or (4) any transaction from
which the director derived improper personal benefit.
Paychex has also entered into an Indemnity Agreement with
each of its directors and executive officers whereby the
corporation agrees (a) to indemnify the other party against all
expenses, judgments, fines or penalties, actually and reasonably
incurred in connection with the defense or settlement of a
proceeding to the fullest extent permitted by law and (b) to
advance expenses (which the other party undertakes to repay if
otherwise reimbursed or if ultimately determined that he is not
entitled to reimbursement.
In addition, Paychex has purchased an insurance policy which
provides coverage for its directors and officers in certain
situations where Paychex cannot directly indemnify such directors
and officers.
Item 21. Exhibits and Financial Statement Schedules
Exhibit No. Description
2 Agreement and Plan of Merger, dated as of
March 17, 1995, by and among Paychex, Inc.,
Paychex Merger Corp. and Pay-Fone Systems, Inc.
(attached as Annex 1 to the Proxy
Statement/Prospectus included in this
Registration Statement) and Exhibits A
and B thereto, being the Affiliates Agreement
and the Escrow and Indemnity Agreement.
3.1 Certificate of Incorporation, as amended,
incorporated herein by reference to the
Registrant's Registration Statement No.
2-85103, Exhibits 3.1 through 3.5,
<PAGE>
Form 8-K filed with the Commission on
October 22, 1986, Form 10-Q filed with
the Commission on January 12, 1989 and
Form 10-Q filed with the Commission on
January 13, 1993.
3.2 By-Laws, as amended, incorporated herein
by reference to the Registrant's Registration
Statement No. 2-85103, Exhibit 5.6.
5 Opinion of Woods, Oviatt, Gilman, Sturman
& Clarke LLP regarding the legality of the
securities being registered.
8.1 Opinion of Hughes, Hubbard and Reed regarding
certain tax consequences.
13 Registrant's Quarterly Reports on Form 10-Q
for the quarters ended August 31, 1994,
November 30, 1994 and February 28, 1995,
incorporated herein by reference.
21 Subsidiaries of Registrant
A. Paychex Management Corp.
incorporated November 26, 1993
in the State of New York.
B. Paychex Merger Corp. incorporated
February 24, 1995 in the State
of Delaware.
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Hughes Hubbard & Reed
contained in Exhibit 8.1.
23.4 Consent of Clumeck, Stern, Phillips
& Schwartz
23.5 Consent of Woods, Oviatt, Gilman, Sturman
& Clarke LLP contained in Exhibit 5.1
24 Powers of Attorney
99.1 Form of Proxy to be used in soliciting
shareholders of Pay-Fone Systems, Inc.
<PAGE>
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) The undersigned Registrant hereby undertakes to
deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in
the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information
required to be presented by Article 3 of Regulation S-X are not
set forth in the prospectus, to deliver, or cause to be delivered
to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial
information.
(c) The undersigned Registrant hereby undertakes as
follows: That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration
form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other items of the applicable form.
(d) The Registrant undertakes that every prospectus (i)
that is filed pursuant to Paragraph (c) immediately preceding, or
(ii) that purports to meet the requirements of Section 10(a)(3)
of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a
part of an amendment to the Registration Statement and will not
be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
<PAGE>
(e) Insofar as indemnification for liabilities arising
under the Securities Act of 1993 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(f) The undersigned Registrant hereby undertakes to
respond to requests for information that is incorporated by
reference into the Proxy Statement/Prospectus pursuant to Items
4.10(b), 11 or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of
responding to the request.
(g) The undersigned Registrant hereby undertakes to supply
by means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration
Statement when it became effective.
<PAGE>
ANNEX II
CALIFORNIA GENERAL CORPORATION LAW
Chapter 13
DISSENTERS' RIGHTS
1300. Right to Require Purchase - "Dissenting Shares" and
"Dissenting Shareholder" Defined
(a) If the approval of the outstanding shares (Section 152)
of a corporation is required for a reorganization under
subdivisions (a) and (b) or subdivision (e) or (f) of Section
1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase
for cash at their fair market value the shares owned by the
shareholder which are dissenting shares as defined in subdivision
(b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation
or depreciation in consequence of the proposed action, but
adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means
shares which come within all of the following descriptions:
(1) Which were not immediately prior to the
reorganization or short-form merger either (A) listed on any
national securities exchange certified by the Commissioner of
Corporations under subdivision (o) of Section 25100 or (B) listed
on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided,
however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed
by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of
shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the
determination of shareholders entitled to vote on the
reorganization and (A) were not voted in favor of the
reorganization, or (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of
<PAGE>
record on the effective date of a short-form merger; provided,
however, that subparagraph (A) rather than subparagraph (B) of
this paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a
meeting.
(3) Which the dissenting shareholder has demanded that
the corporation purchase at their fair market value, in
accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means
the recordholder of dissenting shares and includes a transferee
of record.
1301 Demand for Purchase
(a) If, in the case of a reorganization, any shareholders
of a corporation have a right under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b)
thereof, to require the corporation to purchase their shares for
cash, such corporation shall mail to each such shareholder a
notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such
approval, accompanied by a copy of Sections 1300, 1302, 1303,
1304 and this section, a statement of the price determined by the
corporation to represent the fair market value of the dissenting
shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer
by the corporation to purchase at the price stated any dissenting
shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the
corporation to purchase the shareholder's shares for cash under
Section 1300, subject to compliance with paragraphs (3) and (4)
of subdivision (b) thereof, and who desires the corporation to
purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the
shareholder in cash of their fair market value. The demand is
not effective for any purpose unless it is received by the
corporation or any transfer agent thereof (1) in the case of
shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos
in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case
within 30 days after the date on which the notice of the approval
by the outstanding shares pursuant to subdivision (a) or the
<PAGE>
notice pursuant to subdivision (i) of Section 1110 was mailed to
the shareholder.
(c) The demand shall state the number and class of the
shares held of record by the shareholder which the shareholder
demands that the corporation purchase and shall contain a
statement of what such shareholder claims to be the fair market
value of those shares as of the day before the announcement of
the proposed reorganization or short-form merger. The statement
of fair market value constitutes an offer by the shareholder to
sell the shares at such price.
1302. Endorsement of Shares
Within 30 days after the date on which notice of the
approval by the outstanding shares or the notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder,
the shareholder shall submit to the corporation at its principal
office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder
demands the corporation purchase, to be stamped or endorsed with
a statement that the shares are dissenting shares or to be
exchanged for certificates of appropriate denomination so stamped
or endorsed or (b) if the shares are uncertificated securities,
written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers
of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together
with the name of the original dissenting holder of the shares.
1303 Agreed Price - Time For Payment
(a) If the corporation and the shareholder agree that the
shares are dissenting shares and agree upon the price of the
shares, the dissenting shareholder is entitled to the agreed
price with interest thereon at the legal rate on judgments from
the date of the agreement. Any agreements fixing the fair market
value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the
corporation.
(b) Subject to the provisions of Section 1306, payment of
the fair market value of dissenting shares shall be made within
30 days after the amount thereof has been agreed or within 30
days after any statutory or contractual conditions to the
reorganization are satisfied, whichever is later, and in the case
of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
<PAGE>
1304 Dissenter's Action to Enforce Payment.
(a) If the corporation denies that the shares are
dissenting shares, or the corporation and the shareholder fail to
agree upon the fair market value of the shares, then the
shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section
1110 was mailed to the shareholder, but not thereafter, may file
a complaint in the superior court of the proper county praying
the court to determine whether the shares are dissenting shares
or the fair market value of the dissenting shares or both or may
intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as
plaintiffs or be joined as defendants in any such action and two
or more such actions may be consolidated.
(c) On the trial of the action, the court shall determine
the issues. If the status of the shares as dissenting shares is
in issue, the court shall first determine that issue. If the
fair market value of the dissenting shares is in issue, the court
shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. Appraisers' Report - Payment - Costs
(a) If the court appoints an appraiser or appraisers, they
shall proceed forthwith to determine the fair market value per
share. Within the time fixed by the court, the appraisers, or a
majority of them, shall make and file a report in the office of
the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the
report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make
and file a report within 10 days from the date of their
appointment or within such further time as may be allowed by the
court or the report is not confirmed by the court, the court
shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment
shall be rendered against the corporation for payment of an
amount equal to the fair market value of each dissenting share
multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is
<PAGE>
entitled to require the corporation to purchase, with interest
thereon at the legal rate from the date on which judgment was
entered.
(d) Any such judgement shall be payable forthwith with
respect to uncertificated securities and, with respect to
certificated securities, only upon the endorsement and delivery
to the corporation of the certificates for the shares described
in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable
compensation to the appraisers to be fixed by the court, shall be
assessed or apportioned as the court considers equitable, but, if
the appraisal exceeds the price offered by the corporation, the
corporation shall pay the costs (including in the discretion of
the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with
Sections 1300, 1301 and 1302 if the value awarded by the court
for the shares is more than 125% of the price offered by the
corporation under subdivision (a) of Section 1301).
1306. Dissenting Shareholder's Status as Creditor
To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market
value, they shall become creditors of the corporation for the
amount thereof together with interest at the legal rate on
judgments until the date of payment, but subordinate to all other
creditors in any liquidation proceeding, such debt to be payable
when permissible under the provisions of Chapter 5.
1307. Dividends Paid as Credit Against Payment
Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the
reorganization by the outstanding shares (Section 152) and prior
to payment for the shares by the corporation shall be credited
against the total amount to be paid by the corporation therefor.
1308. Continuing Rights and Privileges of Dissenting
Shareholders
Except as expressly limited in this chapter, holders of
dissenting shares continue to have all the rights and privileges
incident to their shares, until the fair market of their shares
is agreed upon or determined. A dissenting shareholder may not
withdraw a demand for payment unless the corporation consents
thereto.
<PAGE>
1309. Termination of Dissenting Shareholder Status
Dissenting shares lose their status as dissenting shares and
the holders thereof cease to be dissenting shareholders and cease
to be entitled to require the corporation to purchase their
shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon
abandonment of the reorganization, the corporation shall pay on
demand to any dissenting shareholder who has initiated
proceedings in good faith under this chapter all necessary
expenses incurred in such proceedings and reasonable attorneys'
fees.
(b) The shares are transferred prior to their submission
for endorsement in accordance with Section 1302 or are
surrendered for conversion into shares of another class in
accordance with the articles.
(c) The dissenting shareholder and the corporation do not
agree upon the status of the shares as dissenting shares or upon
the purchase price of the shares, and neither files a complaint
or intervenes in a pending action as provided in Section 1304,
within six months after the date on which notice of the approval
by the outstanding shares or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the
corporation, withdraws the shareholder's demand for purchase of
the dissenting shares.
1310. Suspension of Proceedings For Payment Pending
Litigation
If litigation is instituted to test the sufficiency or
regularity of the votes of the shareholders in authorizing a
reorganization, any proceedings under Sections 1304 and 1305
shall be suspended until final determination of such litigation.
1311. Exempt Shares
This chapter, except Section 1312, does not apply to classes
of shares whose terms and provisions specifically set forth the
amount to be paid in respect to such shares in the event of a
reorganization or merger.
<PAGE>
1312. Attacking Validity of Reorganization or Merger.
(a) No shareholder of a corporation who has a right under
this chapter to demand payment of cash for the shares held by the
shareholder shall have any right at law or in equity to attack
the validity of the reorganization or short-form merger, or to
have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of
shares required to authorize or approve the reorganization have
been legally voted in favor thereof; but any holder of shares of
a class whose terms and provisions specifically set forth the
amount to be paid in respect to them in the event of a
reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal
terms of the reorganization are approved pursuant to subdivision
(b) of Section 1202, is entitled to payment in accordance with
the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form
merger is directly or indirectly controlled by, or under common
control with, another party to the reorganization or short-form
merger, subdivision (a) shall not apply to any shareholder of
such party who has not demanded payment of cash for such
shareholder's shares pursuant to this chapter; but if the
shareholder institutes an action to attack the validity of the
reorganization or short-form merger or to have the reorganization
or short-form merger set aside or rescinded, the shareholder
shall not thereafter have any right to demand payment of cash for
the shareholder's shares pursuant to this chapter. The court in
any action attacking the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger
set aside or rescinded shall not restrain or enjoin the
consummation of the transaction except upon 10 days' prior notice
to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining
shareholder or the class of shareholders of which such
shareholder is a member.
(c) If one of the parties to a reorganization or short-form
merger is directly or indirectly controlled by, or under common
control with, another party to the reorganization or short-form
merger, in any action to attack the validity of the
reorganization or short-form merger or to have the reorganization
or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party
to the reorganization or short-form merger shall have the burden
of proving that the transaction is just and reasonable as to the
shareholders of the controlled party, and (2) a person who
controls two or more parties to a reorganization shall have the
burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
<PAGE>
EXHIBIT 2
---------
AGREEMENT
AND
PLAN OF MERGER
Among
Paychex, Inc,.
Paychex Merger Corp.
and
Pay-Fone Systems, Inc.
March 17, 1995
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS . . . . . . . . . . . . . . . . . . .1
ARTICLE II - THE MERGER; EFFECTIVE TIME; CLOSING. . . . . . .6
The Merger . . . . . . . . . . . . . . . . . . . . . . .6
Effective Time . . . . . . . . . . . . . . . . . . . . .6
Closing. . . . . . . . . . . . . . . . . . . . . . . . .6
ARTICLE III - TERMS OF MERGER. . . . . . . . . . . . . . . .7
Articles of Incorporation. . . . . . . . . . . . . . . .7
The By-Laws. . . . . . . . . . . . . . . . . . . . . . .7
Directors. . . . . . . . . . . . . . . . . . . . . . . .7
Officers . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE IV - MERGER CONSIDERATION; CONVERSION OF
CANCELLATION OF SHARES IN THE MERGER. . . . . . . . . . . .7
Share Consideration; Conversion or
Cancellation of Shares in the Merger . . . . . . . . .7
Payment for Shares in the Merger . . . . . . . . . . . 11
Fractional Shares. . . . . . . . . . . . . . . . . . . 13
Transfer of Shares after the Effective Time. . . . . . 13
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF PAY-FONE. . . 13
Organization, Etc. of Pay-Fone . . . . . . . . . . . . 13
Operations of Subsidiary . . . . . . . . . . . . . . . 14
Agreement. . . . . . . . . . . . . . . . . . . . . . . 15
Capital Stock. . . . . . . . . . . . . . . . . . . . . 15
Litigation . . . . . . . . . . . . . . . . . . . . . . 16
Compliance with Other Instruments, Etc.. . . . . . . . 16
Employee Benefit Plans . . . . . . . . . . . . . . . . 17
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 19
Intellectual Property. . . . . . . . . . . . . . . . . 19
Documents, Reports and Financial Statements. . . . . . 19
Absence of Certain Changes or Events . . . . . . . . . 20
Contracts and Leases . . . . . . . . . . . . . . . . . 20
Affiliated Transactions. . . . . . . . . . . . . . . . 21
Brokers and Finders. . . . . . . . . . . . . . . . . . 21
Registration Statement and
Proxy Statement/Prospectus . . . . . . . . . . . . . 21
Tax Matters. . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VI - REPRESENTATIONS AND WARRANTIES OF
PAYCHEX AND MERGER SUB. . . . . . . . . . . . . . . . . . 22
Organization, Etc. of Paychex. . . . . . . . . . . . . 22
Operations of Subsidiaries . . . . . . . . . . . . . . 23
Agreement. . . . . . . . . . . . . . . . . . . . . . . 23
Capital Stock. . . . . . . . . . . . . . . . . . . . . 24
Authorization for Paychex Common Stock . . . . . . . . 24
Litigation . . . . . . . . . . . . . . . . . . . . . . 24
Compliance with Other Instruments, Etc.. . . . . . . . 25
Intellectual Property. . . . . . . . . . . . . . . . . 25
Documents, Reports and Financial Statements. . . . . . 26
Absence of Certain Changes or Events . . . . . . . . . 27
<PAGE>
Contracts and Leases . . . . . . . . . . . . . . . . . 26
Brokers and Finders. . . . . . . . . . . . . . . . . . 26
S-4 Registration Statement and
Proxy Statement/Prospectus . . . . . . . . . . . . . 26
Tax Matters. . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE VII - ADDITIONAL COVENANTS AND AGREEMENTS. . . . . 27
Conduct of Business of Pay-Fone and Its Subsidiary . . 27
Transactions . . . . . . . . . . . . . . . . . . . . . 30
Meeting of Shareholders. . . . . . . . . . . . . . . . 31
Registration Statement . . . . . . . . . . . . . . . . 32
Reasonable Efforts . . . . . . . . . . . . . . . . . . 32
Access to Information. . . . . . . . . . . . . . . . . 34
Registration and Listing of Paychex Common Stock . . . 35
Affiliates of Paychex and Pay-Fone . . . . . . . . . . 35
Certain Covenants of Paychex . . . . . . . . . . . . . 36
Amendment to Disclosure Statement. . . . . . . . . . . 36
ARTICLE VIII - CONDITIONS . . . . . . . . . . . . . . . . . 37
Conditions to Each Party's Obligations . . . . . . . . 37
Shareholder Approval. . . . . . . . . . . . . . . 37
Governmental Consents, Etc. . . . . . . . . . . . 37
No Injunction . . . . . . . . . . . . . . . . . . 37
Registration Statement. . . . . . . . . . . . . . 38
Listing of Paychex Common Stock on NASDAQ . . . . 38
Blue Sky Approvals. . . . . . . . . . . . . . . . 38
Third Party Consents. . . . . . . . . . . . . . . 38
Conditions to Obligations of Paychex and Merger Sub. . 38
Representations and Warranties True . . . . . . . 38
Performance . . . . . . . . . . . . . . . . . . . 39
Compliance Certificate. . . . . . . . . . . . . . 39
Opinion of Counsel for Pay-Fone . . . . . . . . . 39
Proceedings . . . . . . . . . . . . . . . . . . . 39
Tax Opinion . . . . . . . . . . . . . . . . . . . 39
Pooling Opinion . . . . . . . . . . . . . . . . . 40
No Government Proceeding or Litigation. . . . . . 40
Certain Disclosures . . . . . . . . . . . . . . . 40
Employment of Leekley . . . . . . . . . . . . . . 40
Dissenting Shares . . . . . . . . . . . . . . . . 40
Affiliates Agreement. . . . . . . . . . . . . . . 40
Escrow and Indemnity Agreement. . . . . . . . . . 41
Paychex Closing Price . . . . . . . . . . . . . . 41
Conditions to Obligations of Pay-Fone. . . . . . . . . 41
Representations and Warranties True . . . . . . . 41
Performance . . . . . . . . . . . . . . . . . . . 42
Compliance Certificate. . . . . . . . . . . . . . 42
Opinion of Counsel for Paychex. . . . . . . . . . 42
Proceedings . . . . . . . . . . . . . . . . . . . 42
Paychex Closing Price . . . . . . . . . . . . . . 42
Certain Disclosures . . . . . . . . . . . . . . . 42
Certain Adjustments . . . . . . . . . . . . . . . 42
ARTICLE IX - TERMINATION. . . . . . . . . . . . . . . . . . 43
Termination by Mutual Consent. . . . . . . . . . . . . 43
Termination by Either Paychex or Pay-Fone. . . . . . . 43
Effect of Termination and Abandonment. . . . . . . . . 43
<PAGE>
ARTICLE X - MISCELLANEOUS AND GENERAL . . . . . . . . . . . 44
Expenses . . . . . . . . . . . . . . . . . . . . . . . 44
Notices, Etc.. . . . . . . . . . . . . . . . . . . . . 44
Amendment, Waivers, Etc. . . . . . . . . . . . . . . . 45
No Assignment. . . . . . . . . . . . . . . . . . . . . 45
Entire Agreement . . . . . . . . . . . . . . . . . . . 45
Specific Performance . . . . . . . . . . . . . . . . . 45
Remedies Cumulative. . . . . . . . . . . . . . . . . . 45
No Waivers . . . . . . . . . . . . . . . . . . . . . . 46
No Third Party Beneficiaries . . . . . . . . . . . . . 46
Jurisdiction . . . . . . . . . . . . . . . . . . . . . 46
Public Announcements . . . . . . . . . . . . . . . . . 46
Governing Law. . . . . . . . . . . . . . . . . . . . . 46
Name, Captions, Etc. . . . . . . . . . . . . . . . . . 46
Counterparts . . . . . . . . . . . . . . . . . . . . . 46
Knowledge. . . . . . . . . . . . . . . . . . . . . . . 47
EXHIBITS
Pay-Fone Disclosure Statement
Pay-Fone Systems, Inc. Tax Matters Certificate
Paychex, Inc. Disclosure Statement
Paychex, Inc. Tax Matters Certificate
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER (hereinafter called this
"Agreement") dated March _____, 1995, between PAYCHEX, INC. a
Delaware corporation ("Paychex"), PAYCHEX MERGER CORP., a
Delaware corporation and a direct Wholly Owned Subsidiary of
Paychex ("Merger Sub") and PAY-FONE SYSTEMS, INC., a California
corporation ("Pay-Fone").
R E C I T A L S:
WHEREAS, the Boards of Directors of Paychex, Merger Sub and
Pay-Fone each have determined that it is in the best interests of
their respective stockholders for Merger Sub to merge with and
into Pay-Fone, upon the terms and subject to the conditions of
this Agreement;
WHEREAS, it is intended that the Merger shall be recorded
for accounting purposes as a pooling of interests; and
WHEREAS, Paychex, Merger Sub and Pay-Fone desire to make
certain representations, warranties, covenants and agreements in
connection with the Merger.
NOW, THEREFORE, in consideration of the mutual
representations, warranties, covenants and agreements set forth
herein, Paychex, Merger Sub and Pay-Fone hereby agree as follows:
ARTICLE I
---------
DEFINITIONS
As used in this Agreement, the following terms shall have
the respective meanings set forth below:
"Affiliate": as defined in Rule 12b-2 under the Exchange
Act.
"Affiliates Agreement": the agreement, referred to in
Section 7.8 hereof, among Paychex, Merger Sub, Pay-Fone, and
Affiliates of Pay-Fone, executed by Paychex, Merger Sub, Pay-Fone
and some of said Affiliates simultaneously with this Agreement.
"Affiliates Block": Allied Contractors, Inc., Richard
Kelton, David Kelton, Mark Kelton, Allen Kahn, M.D., Edwin
Johnson and David L. Malcolm who, as shareholders of Pay-Fone,
own in the aggregate in excess of 70% of the outstanding Shares
of Pay-Fone.
"Amex": the American Stock Exchange.
<PAGE>
"Authorization": Any consent, approval or authorization of,
expiration or termination of any waiting period requirement
(including pursuant to the Hart-Scott-Rodino Antitrust
Improvement Act of 1976) by, or filing, registration,
qualification, declaration or designation with, any Governmental
Body.
"Benefit Arrangement": As defined in Section 5.7(a).
"CGCL": The California General Corporation Law.
"Certificate of Merger": The certificate of merger with
respect to the merger of Merger Sub with and into Pay-Fone,
containing the provisions required by, and executed in accordance
with, Section 1103 of the CGCL and Section 252 of the DGCL.
"Certificates": As defined in Section 4.2(b).
"Closing": The closing of the Merger.
"Closing Date": The date on which the Closing occurs.
"Closing Price": On any day, the last reported sale price
of one share of Paychex Common Stock on NASDAQ or such other
market as may from time to time be the principal market for
Paychex Common Stock.
"Code": The Internal Revenue Code of 1986, as amended, and
all regulations promulgated thereunder, as in effect from time to
time.
"DGCL": The Delaware General Corporation Law.
"Dissenting Share": Share held by any Pay-Fone stockholder
who exercises and perfects dissenters rights under CGCL Sections
1300 et seq.
"Effective Time": As defined in Section 2.2.
"Employee Plan": As defined in Section 5.7(a).
"Employees": As defined in Section 5.7(a).
"ERISA": The Employee Retirement Income Security Act of
1974, as amended, and all regulations promulgated thereunder, as
in effect from time to time.
"ERISA Affiliates": Any trade or business, whether or not
incorporated, that is now or has at any time in the past been
treated as a single employer with Pay-Fone or any of its
<PAGE>
Subsidiaries under Section 414(b) or (c) of the Code and the
Treasury Regulations thereunder.
"Excess Shares": As defined in Section 4.3.
"Exchange Act": The Securities Exchange Act of 1934, as
amended.
"Exchange Agent": As defined in Section 4.2(a).
"Exchange Fund": As defined in Section 4.2(a).
"Exchange Ratio": As defined in Section 4.1(a).
"General Adjustment": As defined in Section 4.1(a).
"Fractional Securities Fund": As defined in Section 4.3.
"Governmental Body": Any Federal, state, municipal,
political subdivision or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign.
"Intellectual Property": All industrial and intellectual
property rights including, but not limited to, Proprietary
Technology, patents, patent applications, trademarks, trademark
applications and registrations, service marks, service mark
applications and registrations, copyrights, know-how, licenses,
trade secrets, proprietary processes, formulae and customer
lists. "Proprietary Technology" means all proprietary processes,
formulae, inventions, trade secrets, know-how, development tools
and other proprietary rights used by Pay-Fone or Paychex and its
Subsidiaries, as the case may be, pertaining to any product,
software or service manufactured, marketed, licensed or sold by
Pay-Fone or Paychex and its Subsidiaries, as the case may be, in
the conduct of their business or used, employed or exploited in
the development, license, sale, marketing, distribution or
maintenance thereof, and all documentation and media
constituting, describing or relating to the above, including, but
not limited to, manuals, memoranda, know-how, notebooks,
software, records and disclosures.
"Merger Sub": Paychex Merger Corp., a Delaware corporation.
"Merger": The merger of Merger Sub with and into Pay-Fone.
"NASD": The National Association of Securities Dealers,
Inc.
"NASDAQ": The NASD Automated Quotation System.
"Option": As defined in Section 4.1(f).
<PAGE>
"Pay-Fone": Pay-Fone Systems, Inc., a California
corporation.
"Pay-Fone Disclosure Statement": The disclosure statement
dated the date of this Agreement delivered by Pay-Fone to
Paychex.
"Pay-Fone SEC Reports": As defined in Section 5.10.
"Pay-Fone Stock Option Plans": Pay-Fone Systems, Inc. 1981
Incentive Stock Option Plan; Pay-Fone Systems, Inc. 1983
Incentive Stock Option Plan; Pay-Fone Systems, Inc. 1987
Incentive Stock Option Plan; Pay-Fone Systems, Inc. 1990
Incentive Stock Option Plan; Pay-Fone Systems, Inc. 1993
Incentive Stock Option Plan; and stock option agreements with
various directors covering an aggregate of 90,000 Shares.
"Pay-Fone Subsidiary": Concentric Computer Corp., a Wholly-
Owned Subsidiary of Pay-Fone.
"Pay-Fone Tax Matters Certificate": As defined in Section
5.16.
"Paychex": Paychex, Inc., a Delaware corporation.
"Paychex Closing Price": With respect to one share of
Paychex Common Stock, the average Closing Price for such a share
during the period of the first twenty of the twenty-two trading
days preceding but not including the Closing Date; provided,
however, that:
(i) if the Paychex Closing Price is greater than Forty-
Three Dollars but no more than Forty-Six Dollars
(subject in each case to appropriate adjustment to
reflect any event described in the final sentence of
Section 4.1(a)), Paychex Closing Price shall be deemed
for purposes of Section 4.1(a) of this Agreement to be
Forty-Three Dollars;
(ii) if the Paychex Closing Price is greater than
Forty-Six Dollars (subject to appropriate adjustment to
reflect any event described in the final sentence of
Section 4.1(a)), the Paychex Closing Price shall be
deemed for purposes of Section 4.1(a) of this Agreement
to be the remainder calculated by subtracting (x) Three
Dollars from (y) the Paychex Closing Price;
<PAGE>
(iii) if the Paychex Closing Price is less than Thirty-
Seven Dollars but not less then Thirty-Four Dollars
(subject in each case to appropriate adjustment to
reflect any event described in the final sentence of
Section 4.1(a)), the Paychex Closing Price shall be
deemed for purposes of Section 4.1(a) of this Agreement
to be Thirty-Seven Dollars; and
(iv) if the Paychex Closing Price is less than Thirty-
Four Dollars (subject to appropriate adjustment to
reflect any event described in the final sentence of
Section 4.1(a)), the Paychex Closing Price shall be
deemed for purposes of Section 4.1(a) of this Agreement
to be the sum of (r) Three Dollars and (s) the Paychex
Closing Price.
"Paychex Common Stock": Shares of Common Stock, par value
$.01 per share, of Paychex.
"Paychex Companies": Paychex and any Wholly-Owned
Subsidiary of Paychex.
"Paychex Disclosure Statement": The disclosure statement
dated the date of this Agreement delivered by Paychex to Pay-
Fone.
"Paychex SEC Reports": As defined in Section 6.9(a).
"Paychex Tax Matters Certificate": As defined in Section
6.14.
"Person": Any individual or corporation, company,
partnership, trust, incorporated or unincorporated association,
joint venture or other entity of any kind.
"Positive Adjustment": As defined in Section 4.1(a).
"Proxy Statement/Prospectus": As defined in Section 7.4.
"Respective Representatives": As defined in Section 7.6.
"S-4 Registration Statement": As defined in Section 7.4.
"SEC": The Securities and Exchange Commission.
"Securities Act": The Securities Act of 1933, as amended.
"Share Consideration": As defined in Section 4.1(b).
"Shareholders Meeting": As defined in Section 7.3.
<PAGE>
"Shares": The shares of Common Stock, par value $.10 per
share, of Pay-Fone.
"Significant Subsidiary": As defined under Rule 12b-2 of
the Exchange Act.
"Subsidiary": As to any Person, any other Person of which
at least 50% of the equity or voting interests are owned,
directly or indirectly, by such first Person.
"Surviving Corporation": The surviving corporation in the
Merger.
"Tax Claim Adjustment": As defined in Section 4.1(a).
"Wholly-Owned Subsidiary": A Subsidiary of which 100% of
the equity interest is owned directly or indirectly by the parent
company.
ARTICLE II
----------
THE MERGER; EFFECTIVE TIME; CLOSING
2.1 The Merger. Subject to the terms and conditions of
this Agreement, at the Effective Time, Merger Sub shall be merged
with and into Pay-Fone in accordance with the provisions of
Section 252 of the DGCL and with the effect provided in Section
1107 of the CGCL. The separate corporate existence of Merger Sub
shall thereupon cease and Pay-Fone shall be the Surviving
Corporation and shall continue to be governed by the laws of the
State of California. At the election of Paychex, any other
Wholly-Owned Subsidiary of Paychex may be substituted for Merger
Sub as a constituent corporation in the Merger, provided that the
parties shall have executed an appropriate amendment to this
Agreement in form and substance reasonably satisfactory to Pay-
Fone and Paychex in order to reflect such substitution.
2.2 Effective Time. The Merger shall become effective on
the date and at the time (the "Effective Time") that the
Certificate of Merger shall have been accepted for filing by the
Secretary of State of the State of Delaware (or such later date
and time as may be specified in the Certificate of Merger), and
an Agreement of Merger, with officers' certificates of the
constituent corporations attached shall have been accepted for
filing by the Secretary of State of the State of California,
which shall be the Closing Date or as soon as practicable
thereafter.
<PAGE>
2.3 Closing. Subject to the fulfillment or waiver of the
conditions set forth in Article VIII, the Closing shall take
place (i) at the offices of Woods, Oviatt, Gilman, Sturman and
Clarke, Rochester, New York, at 10:00 a.m. on the fifth business
day following the date of receipt of the last Authorization
required by Section 8.1(a) and (b) or (ii) at such other place
and/or time and/or on such other date as Paychex and Pay-Fone may
agree or as may be necessary to permit the fulfillment or waiver
of the conditions set forth in Article VIII. Paychex and Pay-
Fone agree to take such actions as may be reasonably necessary
and appropriate in order to obtain each Authorization so required
and to fulfill such conditions.
ARTICLE III
-----------
TERMS OF MERGER
3.1 Articles of Incorporation. The Articles of
Incorporation of Pay-Fone as in effect immediately prior to the
Effective Time shall be the Articles of Incorporation of the
Surviving Corporation, until duly amended in accordance with the
terms thereof and of the CGCL.
3.2 The By-Laws. The By-Laws of Pay-Fone in effect at the
Effective Time shall be the By-Laws of the Surviving Corporation,
until duly amended in accordance with the terms thereof, of the
Articles of Incorporation of the Surviving Corporation and of the
CGCL.
3.3 Directors. The directors of Merger Sub at the
Effective Time shall, from and after the Effective Time, be the
directors of the Surviving Corporation until their successors
have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the
surviving Corporation's Articles of Incorporation and By-Laws.
To that end, Pay-Fone agrees to increase the number of directors
which comprise its entire Board of Directors, effective at the
Effective Time, from six to seven.
3.4 Officers. The officers of Merger Sub at the Effective
Time shall, from and after the Effective Time, be the officers of
the Surviving Corporation until their successors have been duly
elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving
Corporation's Articles of Incorporation and By-Laws and the CGCL.
<PAGE>
ARTICLE IV
----------
MERGER CONSIDERATION; CONVERSION OR
CANCELLATION OF SHARES IN THE MERGER
4.1 Share Consideration; Conversion or Cancellation of
Shares in the Merger. Subject to the provisions of this Article
IV, at the Effective Time, by virtue of the Merger and without
any action on the part of the holders thereof, the Shares of Pay-
Fone shall be converted as follows:
(a) Each Share issued and outstanding immediately
prior to the Effective Time (other than Shares owned by Paychex
and any Dissenting Share) shall be converted into the right to
receive and become exchangeable for that number of shares of
Paychex Common Stock equal to ER ("Exchange Ratio") determined in
accordance with the following formula:
ER = TV
------------------
PCP x OSO
where
ER is the Exchange Ratio so computed;
TV is the total value calculated by subtracting from
$10,475,000 the sum of the (i) Tax Claim Adjustment, and (ii)
General Adjustment, which sum shall be offset (but not to a
negative number) by the Positive Adjustment.
PCP is the Paychex Closing Price; and
OSO is the sum of (i) the number of Shares issued and
outstanding immediately prior to the Effective Time, excluding,
however, any such Shares owned by Paychex, and (ii) the number of
Shares issuable upon exercise of then immediately exercisable
options outstanding under Pay-Fone Stock Option Plans immediately
prior to the Effective Time.
For purposes of this Agreement and this Section 4.1(a) in
particular:
"Tax Claim Adjustment" is the sum of all amounts
expended by Pay-Fone between the date hereof and the
Closing Date (other than time spent by regular
employees of Pay-Fone in the ordinary discharge of
their responsibilities) in contesting and resolving
claims asserted by the Internal Revenue Service against
Pay-Fone for fiscal years 1987 through 1991 and
described more fully in the Pay-Fone Tax Matters
Certificate delivered to Paychex and Merger Sub
pursuant hereto, and claims for California state
<PAGE>
income or franchise tax based on the same facts and for the
same periods, including without limitation professional
fees, taxes, interest and penalties, if any;
"General Adjustment" is the amount by which (A)
the aggregate of all losses, costs, damages or expenses
(excluding, however, all losses, costs, damages or
expenses which have been or are to be taken into
account in calculating the Tax Claim Adjustment), each
of which exceeds in amount $25,000 and would be
suffered by Paychex absent the adjustment contemplated
by the definition of "TV" in Section 4.1(a) hereof,
resulting from any breach of warranty,
misrepresentation, omission or failure to perform any
covenant contained herein by Pay-Fone exceeds (B)
$175,000; provided, however, that for purposes of this
General Adjustment only, the determination of whether
there has been a breach of warranty, misrepresentation,
omission or failure to perform shall be made without
regard to whether the relevant warranty, representation
or covenant requires that the consequences of a breach,
misrepresentation, omission or failure be material or
materially adverse in order to be considered to be in
violation of this Agreement. Pay-Fone undertakes to
advise Paychex of all matters of which it becomes aware
prior to the Closing Date which should be taken into
account in computing the General Adjustment hereunder;
and
"Positive Adjustment" is the sum of all of the
benefits (including tax benefits arising out of issues
other than those asserted by the Internal Revenue
Service against Pay-Fone for the fiscal years 1987
through 1991), each of which exceeds in amount $25,000
and would be enjoyed by Paychex upon the Closing of the
Merger which relate to or arise out of (i) conditions
or circumstances which are better or more favorable to
a company acquiring Pay-Fone than the conditions or
circumstances warranted or represented by Pay-Fone
hereunder or (ii) a performance of an obligation by
Pay-Fone hereunder that is more beneficial to a company
acquiring Pay-Fone than the performance that is
required hereunder. Paychex undertakes to advise Pay-
Fone of all matters of which it becomes aware prior to
the Closing Date which should be taken into account in
computing the Positive Adjustment hereunder.
If, prior to the Effective Time, Paychex should split or
combine the Paychex Common Stock, or pay a stock dividend or
other stock distribution in Paychex Common Stock, or otherwise
change the Paychex Common Stock into any other securities, or
make any other dividend or distribution on the Paychex Common
<PAGE>
Stock (other than normal quarterly cash dividends as the same may
be adjusted from time to time in the ordinary course), or
establish a record date prior to the Effective Time with respect
to any of the foregoing, then the Exchange Ratio will be
appropriately adjusted to reflect such split, combination,
dividend or other distribution or change.
(b) All Shares to be converted into Paychex Common
Stock pursuant to this Section 4.1 shall cease to be outstanding,
shall be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such Shares shall
thereafter cease to have any rights with respect to such Shares,
except the right to receive for each of the Shares, upon the
surrender of such certificate in accordance with Section 4.2, the
amount of Paychex Common Stock specified above (the "Share
Consideration") and cash in lieu of fractional shares of Paychex
Common Stock as contemplated by Section 4.3.
(c) Each Share, if any, issued and outstanding and
owned by Paychex immediately prior to the Effective Time shall
cease to be outstanding, shall be canceled and retired without
payment of any consideration therefor and shall cease to exist.
(d) Each Dissenting Share shall be converted into the
right to receive payment from Pay-Fone with respect thereto in
accordance with the provisions of the CGCL.
(e) The outstanding shares of capital stock of the
Merger Sub shall not be changed or converted as a result of the
Merger and shall, at the Effective Time, be the only issued and
outstanding capital stock of the Surviving Corporation.
(f) Each outstanding option to purchase Shares (each,
an "Option") issued pursuant to the Pay-Fone Stock Option Plans
(collectively, the "Option Plans") set forth in the Pay-Fone SEC
Reports or the Pay-Fone Disclosure Schedule, whether or not
vested or exercisable, shall be assumed by Paychex and shall
constitute an option to acquire, on the same terms and conditions
as were applicable under such assumed Option, a number of shares
of Paychex Common Stock equal to the product of the Exchange
Ratio and the number of Shares subject to such Option, at a price
per share equal to the aggregate exercise price for the Shares
subject to such Option divided by the number of full shares of
Paychex Common Stock deemed to be purchasable pursuant to such
Option; provided, however, that (i) subject to the provisions of
clause (ii) below, the number of shares of Paychex Common Stock
that may be purchased upon exercise of such Option shall not
include any fractional shares and, upon the exercise of such
Option for the final whole share that may be acquired thereunder,
a cash payment shall be made for any fractional share based upon
the Closing Price of Paychex Common Stock on the trading day next
preceding such exercise, and (ii) in the case of any Option to
<PAGE>
which Section 421 of the Code applies by reason of its
qualification under Section 422 or Section 423 of the Code
("qualified stock options), the option price, the number of
shares purchasable pursuant to such Option and the terms and
conditions of exercise of such Option shall be determined in
order to comply with Section 424 of the Code.
Paychex shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of Paychex Common
Stock for delivery upon exercise of the Options assumed in
accordance with this Section 4.1(f). Paychex shall file a
registration statement on Form S-8 (or any successor form) or
another appropriate form, effective as of the Effective Time,
with respect to Paychex Common Stock subject to such Options and
shall use all reasonable efforts to maintain the effectiveness of
such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses
contained therein) for so long as such Options remain
outstanding.
4.2 Payment for Shares in the Merger. The manner of making
payment for Shares in the Merger shall be as follows:
(a) At the Effective Time, Paychex shall make
available to an exchange agent selected by Paychex and reasonably
acceptable to Pay-Fone (the "Exchange Agent") through or on
behalf of Merger Sub, for the benefit of those Persons who
immediately prior to the Effective Time were the holders of
Shares, certificates representing a sufficient number of shares
of Paychex Common Stock to effect the delivery of the aggregate
Share Consideration required to be issued pursuant to Section 4.1
(the certificates representing Paychex Common Stock comprising
such aggregate Share Consideration being hereinafter referred to
as the "Exchange Fund"). The Exchange Agent shall, pursuant to
irrevocable instructions, deliver the Paychex Common Stock
contemplated to be issued pursuant to Section 4.1 and this
Section 4.2 and effect the sales provided for in Section 4.3 out
of the Exchange Fund. The Exchange Fund shall not be used for
any other purpose.
(b) Promptly after the Effective Time, the Exchange
Agent shall mail to each holder of record (other than holders of
certificates for Shares referred to in Section 4.1(c)) of a
certificate or certificates which immediately prior to the
Effective Time represented outstanding Shares (the
"Certificates") (i) a form of letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon proper delivery
of the Certificates to the Exchange Agent) and (ii) instructions
for use in effecting the surrender of the Certificates for
payment therefor. Upon surrender of Certificates for
cancellation to the Exchange Agent, together with such letter of
<PAGE>
transmittal duly executed and any other required documents, the
holder of such Certificates shall be entitled to receive for each
of the Shares represented by such Certificates the Share
Consideration, and the Certificates so surrendered shall
forthwith be canceled. Until so surrendered, Certificates shall
represent solely the right to receive the Share Consideration and
any cash in lieu of fractional shares of Paychex Common Stock as
contemplated by Section 4.3 with respect to each of the Shares
represented thereby.
No dividends or other distributions that are
declared after the Effective Time on Paychex Common Stock and
payable to the holders of record thereof after the Effective Time
will be paid to Persons entitled by reason of the Merger to
receive Paychex Common Stock until such Persons surrender their
Certificates. Upon such surrender, there shall be paid to the
Person in whose name the shares of Paychex Common Stock are
issued any dividends or other distributions having a record date
after the Effective Time and payable with respect to such Paychex
Common Stock between the Effective Time and the time of such
surrender. After such surrender there shall be paid to the
Person in whose name the shares of Paychex Common Stock are
issued any dividends or other distributions on such Paychex
Common Stock which shall have a record date after the Effective
Time and prior to such surrender and a payment date after such
surrender, and such payment shall be made on such payment date.
In no event shall the persons entitled to receive such dividends
or other distributions be entitled to receive interest on such
dividends or other distributions.
If any cash or any certificate representing
Paychex Common Stock is to be paid to or issued in a name other
than that in which the Certificate surrendered in exchange
therefor is registered, it shall be a condition of such exchange
that the Certificate so surrendered shall be properly endorsed
and otherwise in proper form for transfer and that the Person
requesting such exchange shall pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of
certificates for such Paychex Common Stock in a name other than
that of the registered holder of the Certificate surrendered, or
shall establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not applicable.
Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto shall be liable to a holder
of Shares for any shares of Paychex Common Stock or dividends
thereon or, in accordance with Section 4.3, proceeds of the sale
of fractional interests, delivered to a public official pursuant
to applicable escheat law. The Exchange Agent shall not be
entitled to vote or exercise any rights of ownership with respect
to the Paychex Common Stock held by it from time to time
<PAGE>
hereunder, except that it shall receive and hold all dividends or
other distributions paid or distributed with respect to such
Paychex Common Stock for the account of the Persons entitled
thereto.
(c) Certificates surrendered for exchange by any
Person constituting an Affiliate of Pay-Fone at the Effective
Time shall not be exchanged for certificates representing Paychex
Common Stock until Paychex has received a written agreement from
such Person as provided in Section 7.8 or, if no such written
agreement is received, the third anniversary of the Effective
Time.
(d) Any portion of the Exchange Fund and the
Fractional Securities Fund which remains unclaimed by the former
shareholders of Pay-Fone for one year after the Effective Time
shall be delivered to Pay-Fone upon demand of Pay-Fone, and any
former shareholders of Pay-Fone shall thereafter look only to
Pay-Fone for payment of their claim for the Share Consideration
for the Shares or for any cash in lieu of fractional shares of
Paychex Common Stock.
(e) Any portion of the Exchange Fund and the
Fractional Securities Fund which is attributable to Dissenting
Shares shall be delivered to Pay-Fone upon demand of Pay-Fone.
4.3 Fractional Shares. No fractional shares of Paychex
Common Stock shall be issued in the Merger. In lieu of any such
fractional securities, each holder of Shares who would otherwise
have been entitled to a fraction of a share of Paychex Common
Stock upon surrender of the Certificates for exchange pursuant to
this Article IV will be paid an amount in cash (without interest)
equal to such holder's proportionate interest in the net proceeds
from the sale or sales in the open market by the Exchange Agent,
on behalf of all such holders, of the aggregate fractional shares
of Paychex Common Stock issued pursuant to this Article IV. As
soon as practicable following the Effective Time, the Exchange
Agent shall determine the excess of (i) the number of full shares
of Paychex Common Stock delivered to the Exchange Agent by
Paychex over (ii) the aggregate number of full shares of Paychex
Common Stock to be distributed to holders of Shares (such excess
being herein called the "Excess Shares"), and the Exchange Agent,
as agent for the former holders of Shares, shall sell the Excess
Shares at the prevailing prices on NASDAQ. The sale of the
Excess Shares by the Exchange Agent shall be executed on NASDAQ
through one or more market makers of Paychex Common Stock on
NASDAQ and shall be executed in round lots to the extent
practicable. All commissions, transfer taxes and other out-of-
pocket transaction costs, including the expenses and compensation
of the Exchange Agent, incurred in connection with such sale of
Excess Shares shall be deducted from the proceeds of sale. Until
<PAGE>
the net proceeds of such sale have been distributed to the former
shareholders of Pay-Fone, the Exchange Agent will hold such
proceeds in trust for such former shareholders (the "Fractional
Securities Fund"). As soon as practicable after the
determination of the amount of cash to be paid to former
shareholders of Pay-Fone in lieu of any fractional interests, the
Exchange Agent shall make available in accordance with this
Agreement such amounts to such former shareholders.
4.4 Transfer of Shares after the Effective Time. No
transfers of Shares shall be made on the stock transfer books of
Pay-Fone after the Effective Time.
ARTICLE V
---------
REPRESENTATIONS AND WARRANTIES OF PAY-FONE
Pay-Fone hereby represents and warrants to Paychex that,
except as set forth in the Pay-Fone Disclosure Statement:
5.1 Organization, Etc. of Pay-Fone. Pay-Fone is a
corporation duly organized, validly existing and in good standing
under the laws of the State of California and has all requisite
corporate power and authority to own and operate its properties,
to carry on its business as now conducted and proposed by Pay-
Fone to be conducted, to enter into this Agreement and to carry
out the provisions of the Agreement and consummate the
transactions contemplated hereby. Pay-Fone is duly qualified and
in good standing in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary and where the
failure to be so qualified has or would be reasonably expected
(so far as can be foreseen at the time) to have a material
adverse effect on the business, properties, operations, condition
(financial or other) or prospects of Pay-Fone and its Subsidiary
taken as a whole. Pay-Fone has obtained from the appropriate
Governmental Bodies all approvals and licenses necessary for the
conduct of its business and operations as currently conducted,
which approvals and licenses are valid and remain in full force
and effect, except where the failure to have obtained such
approvals or licenses or the failure of such licenses and
approvals to be valid and in full force and effect does not have
and would not be reasonably expected (so far as can be foreseen
at the time) to have a material adverse effect on the business,
properties, operations, condition (financial or other) or
prospects of Pay-Fone and its Subsidiary taken as a whole. Pay-
Fone is not subject to any order, complaint, proceeding or
investigation pending or, to the knowledge of Pay-Fone,
threatened, which affects or would be reasonably expected (so far
as can be foreseen at the time) to affect the validity of any
such approvals or licenses or impair the renewal thereof, except
where the invalidity of any such approvals or licenses or the
<PAGE>
non-renewal thereof does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations,
condition (financial or other) or prospects of Pay-Fone and its
Subsidiary taken as a whole.
5.2 Operations of Subsidiary. The Subsidiary of Pay-Fone
(a) is a corporation or other legal entity duly organized,
validly existing and (if applicable) in good standing under the
laws of the jurisdiction of its organization and has the full
power and authority to own its properties and conduct its
business and operations as currently conducted, except where the
failure to be duly organized, validly existing and in good
standing does not have, and would not be reasonably expected (so
far as can be foreseen at the time) to have a material adverse
effect on the business, properties, operations, condition
(financial or other) or prospects of Pay-Fone and its Subsidiary
taken as a whole, (b) is duly qualified and in good standing in
each jurisdiction in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so
qualified does not have and would not be reasonably expected (so
far as can be foreseen at the time) to have a material adverse
effect on the business, properties, operations, condition
(financial or other) or prospects of Pay-Fone and its Subsidiary
taken as a whole, (c) has obtained from the appropriate
Governmental Bodies all approvals and licenses necessary for the
conduct of its business and operations as currently conducted,
which licenses and approvals are valid and remain in full force
and effect, except where the failure to have obtained such
approvals and licenses or the failure of such licenses and
approvals to be valid and in full force and effect does not have
and would not be reasonably expected (so far as can be foreseen
at the time) to have a material adverse effect on the business,
properties, operations, condition (financial or other) or
prospects of Pay-Fone and its Subsidiary taken as a whole and (d)
is subject to no order, complaint, proceeding or investigation
pending or, to the knowledge of Pay-Fone or its Subsidiary,
threatened, which would be reasonably expected (so far as can be
foreseen at the time) to affect the validity of any such
approvals or licenses or impair the renewal thereof, except where
the invalidity of any such approvals or licenses or the non-
renewal thereof does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations,
condition (financial or other) or prospects of Pay-Fone and its
Subsidiary taken as a whole.
5.3 Agreement. This Agreement and the consummation of the
transactions contemplated hereby have been unanimously approved
by the Board of Directors of Pay-Fone and have been duly
<PAGE>
authorized by all other necessary corporate action on the part of
Pay-Fone (except for the approval of Pay-Fone's shareholders
contemplated by Section 7.3). This Agreement has been duly
executed and delivered by a duly authorized officer of Pay-Fone
and constitutes a valid and binding agreement of Pay-Fone,
enforceable against Pay-Fone in accordance with its terms, except
as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general
applicability which may affect the enforcement of creditors'
rights generally and by general equitable principles. Pay-Fone
has delivered to Paychex true and correct copies of resolutions
adopted by the Board of Directors of Pay-Fone approving this
Agreement.
5.4 Capital Stock. The authorized capital stock of Pay-
Fone consists of 10,000,000 shares of Common Stock $.10 par
value, of which 1,484,233 shares are outstanding as of the date
hereof. All outstanding Shares are duly authorized, validly
issued, fully paid and nonassessable, and no class of capital
stock of Pay-Fone is entitled to preemptive rights. All
outstanding shares of capital stock of Pay-Fone Subsidiary are
owned by Pay-Fone, free and clear of all liens, charges, claims,
encumbrances, and options of any nature. Pay-Fone has initiated
action to merge the Pay-Fone Subsidiary with and into Pay-Fone
pursuant to Section 1110 of the CGCL. In the event such merger
occurs prior to the Effective Time, from and after the time the
merger of the Pay-Fone Subsidiary with and into Pay-Fone is
effective all references herein to the Pay-Fone Subsidiary shall
be considered to be references to Pay-Fone.
There are outstanding on the date hereof no options,
warrants or other rights to acquire capital stock from Pay-Fone,
except options representing in the aggregate the right to
purchase up to 282,855 Shares pursuant to the Pay-Fone Stock
Option Plans and there are no other Shares reserved for issuance.
The Pay-Fone options outstanding on the date of this Agreement
are exercisable with respect to 123,710 Shares and will not be
exercisable as to more Shares until July 17, 1995 when (if
outstanding) they shall be exercisable as to an additional 4,110
Shares.
5.5 Litigation. Except as disclosed in Pay-Fone SEC
Reports, there are no actions, suits, investigations or
proceedings (adjudicatory, rulemaking or otherwise) pending or,
to the knowledge of Pay-Fone, threatened against Pay-Fone or its
Subsidiary (or any Employee Plan or Benefit Arrangement), or any
property of Pay-Fone or its Subsidiary (including Intellectual
Property), in any court or before any arbitrator of any kind or
before or by any Governmental Body, except actions, suits,
investigations or proceedings which, in the aggregate, (a) do not
have and would not be reasonably expected (so far as can be
foreseen at the time) to have a material adverse effect on (i)
<PAGE>
the business, properties, operations, condition (financial or
other) or prospects of Pay-Fone and its Subsidiary taken as a
whole or (ii) the ability of Pay-Fone to perform its obligations
under this Agreement.
5.6 Compliance with Other Instruments, Etc. Neither Pay-
Fone nor its Subsidiary is in violation of any term of (a) its
charter, by-laws or other organizational documents, (b) any
agreement or instrument related to indebtedness for borrowed
money or any other agreement to which it is a party or by which
it is bound, (c) any applicable law, ordinance, rule or
regulation of any Governmental Body, or (d) any applicable order,
judgment or decree of any court, arbitrator or Governmental Body,
the consequences of which violation, whether individually or in
the aggregate, have or would be reasonably expected (so far as
can be foreseen at the time) to have a material adverse effect on
(i) the business, properties, operations, condition (financial or
other) or prospects of Pay-Fone and its Subsidiary taken as a
whole or (ii) the ability of Pay-Fone to perform its obligations
under this Agreement. The execution, delivery and performance of
this Agreement by Pay-Fone will not result in any violation of or
conflict with, constitute a default under, or require any consent
under any term of the charter, by-laws or other organizational
document of Pay-Fone or any such agreement, instrument, law,
ordinance, rule, regulation, order, judgment or decree or result
in the creation of (or impose any obligation on Pay-Fone or its
Subsidiary to create) any mortgage, lien, charge, security
interest or other encumbrance upon any of the properties or
assets of Pay-Fone or its Subsidiary pursuant to any such term,
except where such violation, conflict or default, or the failure
to obtain such consent, individually or in the aggregate, does
not have and would not be reasonably expected (so far as can be
foreseen at the time) to have a material adverse effect on (i)
the business, properties, operations, condition (financial or
other) or prospects of Pay-Fone and its Subsidiary taken as a
whole or (ii) the ability of Pay-Fone to perform its obligations
under this Agreement.
5.7 Employee Benefit Plans.
(a) The Pay-Fone SEC Reports or the Pay-Fone
Disclosure Statement sets forth as to Pay-Fone and its Subsidiary
a true and complete list of all the following: (i) each
"employee benefit plan," as such term is defined in Section 3(3)
of ERISA, pursuant to which Pay-Fone has (A) any material
liability with respect to current or former employees, agents,
directors, or independent contractors of Pay-Fone and its
Subsidiary ("Employees") or (B) any obligation to issue capital
stock of Pay-Fone or its Subsidiary (each, an "Employee Plan"),
and (ii) each other plan, program, policy, contract or
arrangement providing for bonuses, pensions, deferred pay, stock,
or stock related awards, severance pay, salary continuation or
<PAGE>
similar benefits, hospitalization, medical, dental or disability
benefits, life insurance or other employee benefits, or
compensation to or for any Employees or any beneficiaries or
dependents of any Employees (other than directors' and officers'
liability insurance policies), whether or not insured or funded
(A) pursuant to which Pay-Fone or its Subsidiary has any material
liability or (B) constituting an employment or severance
agreement or arrangement with any officer or director of Pay-Fone
or its Subsidiary (each, a "Benefit Arrangement"). No such
Benefit Arrangements constituting employment or severance
agreements are in the aggregate material to Pay-Fone and its
Subsidiary taken as a whole. Pay-Fone has used its reasonable
efforts to provide to Paychex with respect to each Employee Plan
and Benefit Arrangement, (i) a true and complete copy of all
written documents comprising such Employee Plan or Benefit
Arrangement (including amendments and agreements or forms of
agreement relating thereto) or, if there is no such written
document, an accurate and complete description of such Employee
Plan or Benefit Arrangement; (ii) the most recent Form 5500 or
Form 5500-C (including all schedules thereto), if applicable;
(iii) the most recent financial statements and actuarial reports,
if any; (iv) the summary plan description currently in effect and
all material modifications thereof, if any; and (v) the most
recent Internal Revenue Service determination letter, if any.
Any such Employee Plans and Benefit Arrangements with respect to
which such materials are not so provided are not in the aggregate
material to Pay-Fone and its Subsidiary taken as a whole.
(b) Each Employee Plan and Benefit Arrangement has
been established and maintained in all material respects in
accordance with its terms and in material compliance with all
applicable laws, including, but not limited to, ERISA and the
Code. Neither Pay-Fone nor its Subsidiary nor any current or
former directors, officers, or employees, nor, to the best
knowledge of Pay-Fone, any other disqualified person or party-in-
interest with respect to any Employee Plan, have engaged directly
or indirectly in any "prohibited transaction," as such term is
defined in Section 4975 of the Code or Section 406 of ERISA, with
respect to which Pay-Fone or its Subsidiary could have or has any
material liability. All contributions required to be made to the
Employee Plans and Benefit Arrangements have been made in a
timely fashion. Each Employee Plan that is intended to be
qualified under Section 401(a) of the Code is so qualified, and
each related trust is exempt from taxation under Section 501(a)
of the Code.
(c) Neither the execution or delivery of this
Agreement, nor the consummation of the transactions contemplated
hereby (either alone or together with any additional or
subsequent events), constitutes an event under any Employee Plan,
Benefit Arrangement, loan to, or individual agreement or contract
with, an Employee that may result in any material payment
<PAGE>
(whether of severance pay or otherwise), restriction or
limitation upon the assets of any Employee Plan or Benefit
Agreement, acceleration of payment or vesting, increase in
benefits or compensation, or required funding, with respect to
any Employee, or forgiveness of any loan or other commitment of
any Employees.
(d) There are no actions, suits, arbitrations,
inquiries, investigations or other proceedings (other than
routine claims for benefits) pending or, to Pay-Fone's knowledge,
threatened, with respect to any Employee Plan or Benefit
Arrangement.
(e) No amounts paid or payable by Pay-Fone or its
Subsidiary to or with respect to any Employee will fail to be
deductible for federal income tax purposes by reason of Section
280G of the Code.
(f) No Employees and no beneficiaries or dependents of
Employees are or may become entitled under any Employee Plan or
Benefit Arrangement to post-employment welfare benefits of any
kind, including, without limitation, death or medical benefits,
other than coverage mandated by Section 4980B of the Code.
(g) There are no agreements with, or pending petitions
for recognition of, a labor union or association as the exclusive
bargaining agent for any of the employees of Pay-Fone or its
Subsidiary; no such petitions have been pending at any time
within two years of the date of this Agreement and, to the best
knowledge of Pay-Fone, there has not been any organizing effort
by any union or other group seeking to represent any employees of
Pay-Fone or its Subsidiary as their exclusive bargaining agent at
any time within two years of the date of this Agreement. There
are no labor strikes, work stoppage or other labor troubles,
other than routine grievance matters, now pending, or, to Pay-
Fone's knowledge, threatened against Pay-Fone or its Subsidiary,
nor have there been any such labor strikes, work stoppages or
other labor troubles, other than routine grievance matters, with
respect to Pay-Fone or its Subsidiary at any time within two
years of this Agreement.
5.8 Taxes. Except as set forth in the Pay-Fone Tax Matters
Certificate, each of Pay-Fone and its Subsidiary has filed all
federal, state, county, local and foreign tax returns required to
be filed by it and has paid all taxes shown to be due thereon,
other than taxes appropriate reserves for which have been made in
Pay-Fone's or its Subsidiary's financial statements (and, to the
extent material, such reserves have been accurately described to
Paychex); there are no assessments or adjustments that have been
asserted in writing against Pay-Fone or its Subsidiary for any
period for which Pay-Fone or its Subsidiary has not made
appropriate reserves (if any are appropriate) in Pay-Fone's
<PAGE>
financial statements; and Pay-Fone has established on its books
and records reserves appropriate in all material respects for the
payment of all taxes not yet due and payable.
5.9 Intellectual Property. Pay-Fone owns or has the
defensible right to use, the Intellectual Property used in Pay-
Fone's business, except where the failure to own or have the
right to use such Intellectual Property, in the aggregate, does
not have and would not be reasonably expected (so far as can be
foreseen at the time) to have a material adverse effect on the
business, properties, operations, condition (financial or other)
or prospects of Pay-Fone and its Subsidiary taken as a whole.
5.10 Documents, Reports and Financial Statements.
(a) Pay-Fone has filed all reports (including, without
limitation, proxy statements) required to be filed with the SEC
since July 1, 1991 (collectively, the "Pay-Fone SEC Reports"),
and has previously furnished or made available to Paychex true
and complete copies thereof, amended through the date hereof.
None of the Pay-Fone SEC Reports, as of their respective dates
(as amended through the date hereof), contained any untrue
statement of material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading. Each of the balance sheets (including the
related notes) included in Pay-Fone SEC Reports presents fairly,
in all material respects, the financial position of Pay-Fone as
of the respective dates thereof, and the other related statements
(including the related notes) included therein present fairly, in
all material respects, the results of operations and the changes
in financial position of Pay-Fone for the respective periods set
forth therein, all in conformity with generally accepted
accounting principles consistently applied during the periods
involved, except as otherwise noted therein and subject, in the
case of the unaudited interim financial statements, to normal
year-end adjustments and any other adjustments described therein.
All of Pay-Fone SEC Reports, as of their respective dates (as
amended through the date hereof), complied in all material
respects with the requirements of the Exchange Act and the
applicable rules and regulations thereunder.
(b) Pay-Fone has not made any misstatements of fact,
or omitted to disclose any fact, to any federal or state
regulatory authority, or taken or failed to take any action,
which misstatements or omissions, actions or failures to act,
individually or in the aggregate, subject or would be reasonably
expected (so far as can be foreseen at the time) to subject any
licenses or approvals referred to in Section 5.1 to revocation or
failure to renew, except where such revocation or failure to
renew, individually or in the aggregate, does not have and would
not be reasonably expected to have a material adverse effect on
<PAGE>
the business, properties, operations, condition (financial or
other) or prospects of Pay-Fone.
(c) Each of the documents, agreements and records
delivered by Pay-Fone to Paychex or its advisors is true and
complete in all material respects, and no written information
delivered by Pay-Fone to Paychex, including, but not limited to,
the Pay-Fone Disclosure Statement, contains any untrue statement
of material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading.
5.11 Absence of Certain Changes or Events. During the
period since December 31, 1994, (a) the business of Pay-Fone and
its Subsidiary has been conducted only in the ordinary course,
consistent with past practice, (b) neither Pay-Fone nor its
Subsidiary has entered into any material transaction other than
in the ordinary course, consistent with past practice, and (c)
there has not been any material adverse change in the business,
financial condition, results of operations, properties, assets,
liabilities or prospects of Pay-Fone and its Subsidiary taken as
a whole (other than as a result of economic or political
developments of general applicability).
5.12 Contracts and Leases. The Pay-Fone SEC Reports contain
an accurate and complete listing of all material contracts,
leases, agreements or understandings, whether written or oral,
required to be described therein or filed as exhibits thereto
pursuant to the Exchange Act and the applicable rules and
regulations thereunder. Pay-Fone has provided Paychex a list of
all material contracts, leases, agreements or understandings,
whether written or oral, to which the Pay-Fone Subsidiary is a
party. Each of such contracts, leases, agreements and
understandings which has not expired or otherwise terminated is
in full force and effect and (a) neither Pay-Fone, its Subsidiary
nor, to Pay-Fone's best knowledge, any other party thereto, has
materially breached or is in material default thereunder, (b) no
event has occurred which, with the passage of time or the giving
of notice would constitute such a material breach or default, (c)
no claim of material default thereunder has, to Pay-Fone's best
knowledge, been asserted or threatened and (d) neither Pay-Fone,
its Subsidiary nor, to Pay-Fone's best knowledge any other party
thereto is seeking the renegotiation thereof or substitute
performance thereunder, except where such breach or default, or
attempted renegotiation or substitute performance, individually
or in the aggregate, does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations,
condition (financial or other) or prospects of Pay-Fone.
<PAGE>
5.13 Affiliated Transactions. The Pay-Fone SEC Reports
contain an accurate and complete listing of all contracts,
leases, agreements or understandings, whether written or oral,
with or on behalf of any Affiliate of Pay-Fone, to which Pay-Fone
or its Subsidiary is a party or is otherwise bound and which is
required to be described in or filed as an exhibit to any Pay-
Fone SEC Report pursuant to the Exchange Act and the applicable
rules and regulations thereunder. There are no transactions
between the Pay-Fone Subsidiary and any Affiliate of such
Subsidiary, other than Pay-Fone.
5.14 Brokers and Finders. Neither Pay-Fone nor its
Subsidiary has employed any investment banker, broker, finder,
consultant or intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to any
investment banking, brokerage, finder's or similar fee or
commission in connection with this Agreement or the transactions
contemplated hereby.
5.15 S-4 Registration Statement and Proxy
Statement/Prospectus. None of the information supplied by Pay-
Fone which is contained in the S-4 Registration Statement or the
Proxy Statement/Prospectus will (a) in the case of the S-4
Registration Statement, at the time it becomes effective, contain
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order
to make the statements therein not misleading or (b) in the case
of the Proxy Statement/Prospectus, at the time of the mailing of
the Proxy Statement/Prospectus and at the time of the Shareholder
Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If,
at any time prior to the Effective Time any event with respect to
Pay-Fone or its officers and directors should occur which is
required to be described in an amendment of, or a supplement to,
the Proxy Statement/Prospectus or the S-4 Registration Statement,
Pay-Fone shall notify Paychex thereof by reference to this
Section 5.15 and shall provide appropriate information regarding
such event for inclusion in such amendment or supplement. Any
such amendment or supplement shall be considered to be part of
the S-4 Registration Statement or the Proxy Statement/Prospectus
for purposes of this Section. The Proxy Statement/Prospectus
will (with respect to Pay-Fone) comply as to form in all material
respects with the requirements of the Exchange Act.
5.16 Tax Matters. The representations set forth in the
numbered paragraphs of the form of Tax Matters Certificate of
Pay-Fone attached to the Pay-Fone Disclosure Statement (the "Pay-
Fone Tax Matters Certificate") are true and correct in all
material respects and such representations are hereby
<PAGE>
incorporated herein by reference with the same effect as if set
forth herein in their entirety.
ARTICLE VI
----------
REPRESENTATIONS AND WARRANTIES OF PAYCHEX AND MERGER SUB
Paychex and Merger Sub each represents and warrants to Pay-
Fone that, except as set forth in the Paychex Disclosure
Statement:
6.1 Organization, Etc. of Paychex. Paychex is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite
corporate power and authority to own and operate its properties,
to carry on its business as now conducted and proposed by Paychex
to be conducted, to enter into this Agreement and to carry out
the provisions of this Agreement and consummate the transactions
contemplated hereby. Paychex is duly qualified and in good
standing in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it
makes such qualification necessary and where the failure to be so
qualified has or would be reasonably expected (so far as can be
foreseen at the time) to have a material adverse effect on the
business, properties, operations, condition (financial or other)
or prospects of Paychex and its Subsidiaries taken as a whole.
Paychex has obtained from the appropriate Governmental Bodies all
approvals and licenses necessary for the conduct of its business
and operations as currently conducted, which approvals and
licenses are valid and remain in full force and effect, except
where the failure to have obtained such approvals or licenses or
the failure of such licenses and approvals to be valid and in
full force and effect does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations,
condition (financial or other) or prospects of Paychex and its
Subsidiaries taken as a whole. Paychex is not subject to any
order, complaint, proceeding or investigation pending or, to the
knowledge of Paychex, threatened, which affects or would be
reasonably expected (so far as can be foreseen at the time) to
affect the validity of any such approvals or licenses or impair
the renewal thereof, except where the invalidity of any such
approvals or licenses or the non-renewal thereof does not have
and would not be reasonably expected (so far as can be foreseen
at the time) to have a material adverse effect on the business,
properties, operations, condition (financial or other) or
prospects of Paychex and its Subsidiaries taken as a whole.
6.2 Operations of Subsidiaries. Each Subsidiary of Paychex
(a) is a corporation or other legal entity duly organized,
validly existing and in good standing under the laws of the
<PAGE>
jurisdiction of its organization and has the full power and
authority to own its properties and conduct its business and
operations as currently conducted, except where the failure to be
duly organized, validly existing and in good standing does not
have, and would not be reasonably expected (so far as can be
foreseen at the time) to have a material adverse effect on the
business, properties, operations, condition (financial or other)
or prospects of Paychex and its Subsidiaries taken as a whole,
(b) is duly qualified and in good standing in each jurisdiction
in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification
necessary, except where the failure to be so qualified does not
have and would not be reasonably expected (so far as can be
foreseen at the time( to have a material adverse effect on the
business, properties, operations, condition (financial or other)
or prospects of Paychex and its Subsidiaries taken as a whole,
(c) has obtained from the appropriate Governmental Bodies all
approvals and licenses necessary for the conduct of its business
and operations as currently conducted, which licenses and
approvals are valid and remain in full force and effect, except
where the failure to have obtained such approvals and licenses or
the failure of such licenses and approvals to be valid and in
full force and effect does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations,
condition (financial or other) or prospects of Paychex and its
Subsidiaries taken as a whole and (d) is subject to no order,
complaint, proceeding or investigation pending or, to the
knowledge of Paychex or such Subsidiary, threatened, which would
be reasonably expected (so far as can be foreseen at the time) to
affect the validity of any such approvals or licenses or impair
the renewal thereof, except where the invalidity of any such
approvals or licenses or the non-renewal thereof does not have
and would not be reasonably expected (so far as can be foreseen
at the time) to have a material adverse effect on the business,
properties, operations, condition (financial or other) or
prospects of Paychex and its Subsidiaries taken as a whole.
6.3 Agreement. This Agreement and the consummation of the
transactions contemplated hereby have been approved by the
respective Boards of Directors or Executive Committees of Paychex
and Merger Sub and have been duly authorized by all other
necessary corporate action on the part of Paychex and Merger Sub.
This Agreement has been duly executed and delivered by a duly
authorized officer of each of Paychex and Merger Sub and
constitutes a valid and binding agreement of Paychex and Merger
Sub, enforceable against Paychex and Merger Sub in accordance
with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other
similar laws of general application which may affect the
enforcement of creditors' rights generally and by general
<PAGE>
equitable principles. Paychex has delivered to Pay-Fone true and
correct copies of resolutions adopted by the Board of Directors
of each of Paychex and Merger Sub approving this Agreement.
6.4 Capital Stock. The authorized capital stock of Paychex
consists of 50,000,000 shares of Paychex Common Stock, $.01 par
value per share. All of the outstanding shares of capital stock
of Paychex are duly authorized, validly issued, fully paid and
nonassessable, and no class of capital stock Paychex is entitled
to preemptive rights. As of the close of business on January 31,
1995, 29,987,596 shares of Paychex Common Stock were issued and
outstanding. Except as disclosed in the Paychex SEC Reports, all
outstanding shares of capital stock of Merger Sub and the
Significant Subsidiaries of Paychex are owned by Paychex or a
Wholly-Owned Subsidiary of Paychex, free and clear of all liens,
charges, encumbrances, claims and options of any nature. As of
the closing of business on January 31, 1995, there were 941,340
shares of Paychex Common Stock reserved for issuance pursuant to
Paychex Stock Option Plans and there were no other shares
reserved for issuance.
6.5 Authorization for Paychex Common Stock. Prior to the
Effective Time, Paychex will have taken all necessary action to
permit it to issue the number of shares of Paychex Common Stock
required to be issued pursuant to Article IV. The Paychex Common
Stock issued pursuant to Article IV will, when issued, be duly
authorized, validly issued, fully paid and nonassessable, and no
stockholder of Paychex will have any preemptive right of
subscription or purchase in respect thereof. The Paychex Common
Stock will, when issued, be registered under the Securities Act
and the Exchange Act and registered or exempt from registration
under any applicable state securities laws.
6.6 Litigation. Except as disclosed in the Paychex SEC
Reports, there are no actions, suits, investigations or
proceedings (adjudicatory, rulemaking or otherwise) pending or,
to the knowledge of Paychex, threatened against Paychex or any of
its Subsidiaries, or any property of Paychex or any such
Subsidiary (including Intellectual Property), in any court or
before any arbitrator of any kind or before or by any
Governmental Body, except actions, suits, investigations or
proceedings which, in the aggregate, do not have and would not be
reasonably expected (so far as can be foreseen at the time) to
have a material adverse effect on (i) the business, properties,
operations, condition (financial or other) or prospects of
Paychex and its Subsidiaries taken as a whole or (ii) the ability
of Paychex to perform its obligations under this Agreement.
6.7 Compliance with Other Instruments, Etc. Neither
Paychex nor any Subsidiary of Paychex is in violation of any term
of (a) its charter, by-laws or other organizational documents (b)
any agreement or instrument related to indebtedness for borrowed
<PAGE>
money or any other agreement to which it is a party or by which
it is bound, (c) any applicable law, ordnance, rule or regulation
of any Governmental Body, or (d) any applicable order, judgment
or decree of any court, arbitrator or Governmental Body, the
consequences of which violation, whether individually or in the
aggregate, have or would be reasonably expected (so far as can be
foreseen at the time) to have a material adverse effect on (i)
the business, properties, operations, condition (financial or
other) or prospects of Paychex and its Subsidiaries taken as a
whole or (ii) the ability of Paychex to perform its obligations
under this Agreement. The execution, delivery and performance of
this Agreement by Paychex will not result in any violation of or
conflict with, constitute a default under, or require any consent
under any term of the charter or by-laws of Paychex (or any of
its Subsidiaries) or any such agreement, instrument, law,
ordinance, rule, regulation, order, judgment or decree of result
in the creation of (or impose any obligation on Paychex or any of
its Subsidiaries to create) any mortgage, lien, charge, security
interest or other encumbrance upon any of the properties or
assets of Paychex or any of its subsidiaries pursuant to any such
term, except where such violation, conflict or default, or the
failure to obtain such consent, individually or in the aggregate,
does not have and would not be reasonably expected (so far as can
be foreseen at the time) to have a material adverse effect on (i)
the business, properties, operations, condition (financial or
other) or prospects of Paychex and its Subsidiaries taken as a
whole or (ii) the ability of Paychex to perform its obligations
under this Agreement.
6.8 Intellectual Property. Paychex and its Subsidiaries
own, or have the defensible right to use, the Intellectual
Property used in Paychex' business, except where the failure to
own or have the right to use such Intellectual Property, in the
aggregate, does not have and would not be reasonably expected (so
far as can be foreseen at the time) to have a material adverse
effect on the business, properties, operations, condition
(financial or other) or prospects of Paychex and its Subsidiaries
taken as a whole.
6.9 Documents, Reports and Financial Statements.
(a) Paychex has filed all reports (including, without
limitation, proxy statements) required to be filed with the SEC
since June 1, 1991 (collectively, the "Paychex SEC Reports"), and
has previously furnished or made available to Pay-Fone true and
complete copies of all Paychex SEC Reports. None of the Paychex
SEC Reports, as of their respective dates (as amended through the
date hereof), contained any untrue statement of material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each
of the balance sheets (including the related notes) included in
<PAGE>
the Paychex SEC Reports presents fairly, in all material
respects, the consolidated financial position of Paychex and its
Subsidiaries as of the respective dates thereof, and the other
related statements (including the related notes) included therein
present fairly, in all material respects, the results of
operations and the changes in financial position of Paychex and
Subsidiaries for the respective periods set forth therein, all in
conformity with generally accepted accounting principles
consistently applied during the periods involved, except as
otherwise noted therein and subject, in the case of the unaudited
interim financial statements to normal year-end adjustments and
any other adjustments described therein. All of the Paychex SEC
Reports, as of their respective dates (as amended through the
date hereof), complied in all material respects with the
requirements of the Exchange Act and the applicable rules and
regulations thereunder.
(b) Paychex and its Subsidiaries have not made any
misstatements of fact, or omitted to disclose any fact, to any
federal or state regulatory authority, or taken or failed to take
any action, which misstatements or omissions, actions, or
failures to act, individually or in the aggregate, subject or
would be reasonably expected (so far as can be foreseen at the
time) to subject any licenses or approvals referred to in Section
6.1 or 6.2 to revocation or failure to renew, except where such
revocation of failure to renew, individually or in the aggregate,
does not have and would not be reasonably expected to have a
material adverse effect on the business, properties, operations,
condition (financial or other) or prospects of Paychex and its
Subsidiaries taken as a whole.
(c) Each of the documents, agreements and records
delivered by Paychex to Pay-Fone or its advisors is true and
complete in all material respects and no written information
delivered by Paychex to Pay-Fone, including, but not limited to,
the Paychex Disclosure contains any untrue statement of material
fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
6.10 Absence of Certain Changes or Events. During the
period since November 30, 1994, there has not been any material
adverse change in the business, financial condition, results of
operations, properties, assets, liabilities or prospects of
Paychex and its Subsidiaries taken as a whole (other than as a
result of economic or political developments of general
applicability).
6.11 Contracts and Leases. The Paychex SEC Reports contain
an accurate and complete listing of all material contracts,
leases, agreements or understandings, whether written or oral,
required to be described therein or filed as exhibits thereto
<PAGE>
pursuant to the Exchange Act and the applicable rules and
regulations thereunder. Each of such contracts, leases,
agreements and understandings which has not expired or otherwise
terminated is in full force and effect and (a) none of Paychex or
its Subsidiaries or, to Paychex' best knowledge, any other party
thereto, has materially breached or is in material default
thereunder, (b) no event has occurred which, with the passage of
time or the giving of notice would constitute such a material
breach or default, (c) no claim of material default thereunder
has, to Paychex' best knowledge, been asserted or threatened and
(d) none of Paychex or its Subsidiaries or, to Paychex' best
knowledge, any other party thereto is seeking the renegotiation
thereof or substitute performance thereunder, except where such
breach or default, or attempted renegotiation or substitute
performance, individually or in the aggregate, does not have and
would not be reasonably expected (so far as can be foreseen at
the time) to have a material adverse effect on the business,
properties, operations, condition (financial or other) or
prospects of Paychex and its Subsidiaries taken as a whole.
6.12 Brokers and Finders. Paychex has not employed any
investment banker, broker, finder, consultant or intermediary in
connection with the transactions contemplated by this Agreement
which would be entitled to any investment banking, brokerage,
finder's or similar fee or commission in connection with this
Agreement or the transactions contemplated hereby.
6.13 S-4 Registration Statement and Proxy
Statement/Prospectus. None of the information supplied by
Paychex which is contained or incorporated by reference in the S-
4 Registration Statement or the Proxy Statement/Prospectus will
(a) in the case of the S-4 Registration Statement, at the time it
becomes effective, contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading or (b) in the case of the Proxy Statement/Prospectus,
at the time of the mailing of the Proxy Statement/Prospectus and
at the time of the Shareholder Meeting, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they are made, not misleading. If, at any time prior to the
Effective Time any event with respect to Paychex, its officers
and directors or any of its Subsidiaries shall occur which is
required to be described in the Proxy Statement/Prospectus or the
S-4 Registration Statement, Paychex shall notify Pay-Fone thereof
by reference to this Section 6.13 and shall provide appropriate
information regarding such event for inclusion in such amendment
or supplement. Any such amendment or supplement shall be
considered to be part of the S-4 Registration Statement or the
Proxy Statement/Prospectus for purposes of this Section. The S-4
Registration Statement will comply (with respect to Paychex) as
<PAGE>
to form in all material respects with the provisions of the
Securities Act.
6.14 Tax Matters. The representations set forth in the
numbered paragraphs of the form of Tax Matters Certificate of
Paychex attached to the Paychex Disclosure Statement (the
"Paychex Tax Matters Certificate") are true and correct in all
respects, and such representations are hereby incorporated herein
by reference with the same effect as if set forth herein in their
entirety.
ARTICLE VII
-----------
ADDITIONAL COVENANTS AND AGREEMENTS
7.1 Conduct of Business of Pay-Fone and Its Subsidiary.
Except as contemplated by this Agreement, as set forth in the
Pay-Fone Disclosure Statement, or with the prior written consent
of Paychex, during the period from the date of this Agreement to
the Effective Time, (i) each of Pay-Fone and its Subsidiary will
conduct its operations according to its ordinary course of
business consistent with past practice, (ii) neither Pay-Fone nor
its Subsidiary will enter into any material transaction other
than in the ordinary course of business consistent with past
practice and (iii) to the extent consistent with the foregoing,
with no less diligence and effort than would be applied in the
absence of this Agreement, each of Pay-Fone and its Subsidiary,
to the same extent as it would in the absence of the Agreement,
will seek to preserve its current business organizations, keep
available the service of its current officers and employees and
preserve its relationships with customers, suppliers and others
having business dealings with it with the objective that the
goodwill and going concern value of Pay-Fone and its Subsidiary
shall not be materially impaired at the Effective Time. Without
limiting the generality of the foregoing, and except as otherwise
permitted in this Agreement, prior to the Effective Time, or the
termination of this Agreement, neither Pay-Fone nor its
Subsidiary will, without the prior written consent of Paychex
which shall not be unreasonably withheld or delayed (except to
the extent set forth in the Pay-Fone Disclosure Statement):
(a) except for Shares issued upon exercise of options
outstanding as of the date hereof under Pay-Fone's Stock Option
Plans, as set forth in Section 5.7, issue, deliver, sell, dispose
of, pledge or otherwise encumber, or authorize or propose the
issuance, sale, disposition or pledge or other encumbrance of any
additional shares of its capital stock of any class (including
the Shares), or any securities or rights convertible into,
exchangeable for, or evidencing the right to subscribe for any
shares of its capital stock, or any rights, warrants, options,
calls, commitments or any other agreements of any character to
<PAGE>
purchase or acquire any shares of its capital stock or any
securities or rights convertible into, exchangeable for, or
evidencing the right to subscribe for, any shares of its capital
stock, or (b) any other securities in respect of, in lieu of, or
in substitution for, Shares outstanding on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose
to redeem, purchase or otherwise acquire, any of its outstanding
securities (including the Shares);
(c) split, combine, subdivide or reclassify any shares
of its capital stock or declare, set aside for payment or pay any
dividend, or make any other actual, constructive or deemed
distribution in respect of any shares of its capital stock or
otherwise make any payments to shareholders in their capacity as
such;
(d)(i)grant any material increases in the compensation
of any of its directors, officers or key employees, except in the
ordinary course of business consistent with the past practice,
(ii) pay or agree to pay pension, retirement allowance or other
material employee benefit not required or contemplated by any of
the existing benefit, severance, pension or employment plans,
agreements or arrangements as in effect on the date hereof to any
such director, officer or key employees, whether past or present,
(iii) enter into any new or materially amend any existing
employment agreement with any such director, officer, or key
employee, except for employment agreements with new employees
entered into in the ordinary course of business consistent with
past practice, (iv) enter into any new or materially amend any
existing severance agreement with any such director, officer, or
key employee, or (v) except as may be required to comply with
applicable law, become obligated under any new pension plan or
arrangement, welfare plan or arrangement, multi-employer plan or
arrangement, employee benefit plan or arrangement, severance plan
or arrangement, benefit plan or arrangement, or similar plan or
arrangement, which was not in existence on the date hereof, or
amend any such plan or arrangement in existence on the date
hereof if such amendment would have the effect of enhancing or
accelerating any benefits thereunder;
(e) adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring,
recapitalization, or other reorganization of Pay-Fone (other than
the Merger);
(f) make any acquisition, by means of merger,
consolidation or otherwise, of (i) any direct or indirect
ownership interest in any other business enterprise or operation
or (ii) except in the ordinary course and consistent with past
practice, any other material assets;
<PAGE>
(g)(i) dispose of any direct or indirect ownership
interest or make any other disposition of any direct or indirect
ownership in or assets comprising any business enterprise or
operation or (ii) except in the ordinary course and consistent
with past practice, dispose of any other material assets;
(h) except for advances to employees which do not
exceed $1,000 per individual or $10,000 in the aggregate, incur
any indebtedness for borrowed money or guarantee any such
indebtedness or make any loans, advances or capital contributions
to, or investments in, any other Person;
(i) engage in the conduct of business other than
payroll preparation and processing and related services;
(j) enter into any agreement providing for
acceleration of payment or performance or other adverse
consequences as a result of a change of control of Pay-Fone;
(k) enter into any lease of real property or equipment
or enter into any contract, arrangement or understanding
requiring the purchase of equipment, materials, supplies or
services for the expenditure in any individual or related series
of transactions of more than $25,000; or
(l) authorize, recommend, propose (other than to
Paychex) or announce an intention to do any of the foregoing, or
enter into any contract, agreement, commitment or arrangement to
do any of the foregoing.
7.2 Transactions. Prior to the Closing, or the termination
of this Agreement, Pay-Fone will not, and Pay-Fone will not
authorize any of its officers, employees, representatives, agents
or Affiliates to, directly or indirectly, encourage, solicit, or
engage in discussions or negotiations with any third party (other
than Paychex) concerning any merger, consolidation, share
exchange or similar transaction involving Pay-Fone or any
purchase of all or a significant portion of the assets of or
equity interest in Pay-Fone or any other transaction that would
involve the transfer or potential transfer of control of Pay-
Fone, other than the transactions contemplated hereby. Pay-Fone
will notify Paychex immediately of any inquiries or proposals
with respect to any such transaction that are received by, or any
such negotiations or discussions that are sought to be initiated
with, Pay-Fone. Nothing contained in this Agreement shall
prohibit or restrict Pay-Fone's Board of Directors from taking
and disclosing to Pay-Fone's shareholders a position in
accordance with Rules 14d-9 and 14e-2 under the Exchange Act with
respect to a tender offer or an exchange offer for shares of Pay-
Fone Common Stock commenced by a third party or otherwise acting
in a manner consistent with its fiduciary duties. However, if
<PAGE>
the Pay-Fone Board of Directors takes a position contrary to the
Merger and the holders of five percent or more of the Shares
issued and outstanding exercise their appraisal rights under CGCL
Section 1300 et seq. and Paychex elects to terminate this
Agreement as allowed by Section 8.2(k), or if Pay-Fone fails to
cooperate as required by this Agreement in presenting the Merger
to the Pay-Fone shareholders for their vote, then Pay-Fone shall
pay to Paychex within ten days after written demand the sum of
$300,000.
Paychex represents and warrants to Pay-Fone that
Paychex has been advised by Ernst & Young, LLP that the
transactions contemplated by this Agreement as presently
disclosed to it by Paychex and by Pay-Fone's accountants, KPMG
Peat Marwick LLP qualify for pooling of interests accounting and
that in the absence of some change in the transactions so
contemplated, Ernst & Young, LLP will be able to deliver at the
Closing the opinion referred to in Section 8.2(g).
In the event Paychex fails to cooperate as required by
this Agreement in consummating the Merger or unreasonably fails
to provide its consent to some matter necessary to permit the
consummation of the Merger or unreasonably employs an immaterial
failure of a condition to Closing, an immaterial breach of a
representation, warranty or covenant or an immaterial addition to
or alteration of the Pay-Fone Disclosure Statement to cause the
termination of this Agreement or otherwise by breach of the
Agreement causes the Merger not to be consummated, then Paychex
shall pay to Pay-Fone within ten days after written demand the
sum of $300,000.
The parties agree that the sum of $300,000 is a reasonable
approximation of the amount of damages each of them would sustain
if damages were readily ascertainable. Thus, in each case, the
$300,000 payment specified in this Section 7.2 shall be deemed
liquidated damages (and not a penalty) such that the receiving
party, upon being tendered such payment, shall have no further
claim against the paying party, under this Agreement or
otherwise.
7.3 Meeting of Shareholders. Pay-Fone will take all action
necessary in accordance with applicable law and its Articles of
Incorporation and By-Laws to convene a meeting of its
shareholders (the "Shareholders Meeting") as promptly as
reasonably practicable to consider and vote upon the approval of
the Merger. Subject to the fiduciary duties of Pay-Fone's Board
of Directors under applicable law as advised in writing by
counsel, the Board of Directors of Pay-Fone shall recommend and
declare advisable such approval, and Pay-Fone shall take
reasonable action to solicit, and use reasonable efforts to
obtain, such approval. By agreement dated the date hereof, each
of the members of the Affiliates Block executing the Affiliates
<PAGE>
Agreement has agreed to vote Shares owned by such member in favor
of approval of the Merger at the Shareholders Meeting. Pay-Fone
represents and warrants that the favorable vote of such Shares by
members of the Affiliates Block shall be sufficient to obtain the
requisite approval of the Merger at the Shareholders Meeting.
7.4 Registration Statement. Paychex will, as promptly as
practicable, prepare and file with the SEC a registration
statement on Form S-4 (the "S-4 Registration Statement"),
containing a proxy statement/prospectus, in connection with the
registration under the Securities Act of the Paychex Common Stock
issuable upon conversion of the Shares and the other transactions
contemplated hereby. The S-4 Registration Statement will, if
required by the Securities Act, contain pro forma financial
statements accounting for the Merger as a pooling of interests
(unless Paychex shall have irrevocably and unconditionally waived
in writing the condition set forth in Section 8.2(g)). Pay-Fone
will, as promptly as practicable, prepare and file with the SEC a
proxy statement that will be the same proxy statement/prospectus
contained in the S-4 Registration Statement and a form of proxy,
in connection with the vote of Pay-Fone's shareholders with
respect to the Merger (such proxy statement/prospectus, together
with any amendments thereof or supplements thereto, in each case
in the form or forms mailed to Pay-Fone's shareholders, is herein
called the "Proxy Statement/Prospectus"). The Proxy
Statement/Prospectus shall be in form and substance reasonably
satisfactory to Paychex, Pay-Fone and their respective counsel.
Paychex and Pay-Fone will use all reasonable efforts to cause the
S-4 Registration Statement to be declared effective as promptly
as practicable and also will take any other action reasonably
required to be taken under federal or state securities laws to
consummate the Merger, and Pay-Fone will use all reasonable
efforts to cause the Proxy Statement/Prospectus to be mailed to
shareholders of Pay-Fone at the earliest reasonably practicable
date.
7.5 Reasonable Efforts. Pay-Fone and Paychex shall in good
faith (i) promptly make all filings and seek and use all
reasonable efforts to obtain all Authorizations required under
all applicable laws with respect to the Merger and the other
transactions contemplated hereby and will cooperate with each
other with respect thereto; (ii) use all reasonable efforts to
promptly take, or cause to be taken, all other actions and do, or
cause to be done, all other things necessary, proper or
appropriate to satisfy the conditions set forth in Article VIII
and to consummate and make effective the transactions
contemplated by this Agreement on the terms and conditions set
forth herein as soon as reasonably practicable (including seeking
to remove promptly any injunction or other legal barrier that may
prevent such consummation); (iii) not take any action (including,
without limitation, effecting or agreeing to effect or announcing
an intention or proposal to effect, any acquisition, business
<PAGE>
combination or other transaction) which might reasonably be
expected to impair the ability of the parties to consummate the
Merger at the earliest reasonably possible time (regardless of
whether such action would otherwise be permitted or not
prohibited hereunder); (iv) not unreasonably withhold any
consents requested hereunder; (v) not refuse to proceed with the
transactions contemplated hereby because of an immaterial failure
of a condition, an immaterial breach of a representation,
warranty or covenant or an immaterial addition to or alteration
of the Pay-Fone Disclosure Schedule; (vi) not take any action
(regardless of whether such action would otherwise be permitted
or not prohibited hereunder) that at the time of taking the
action it knows or has reason to believe will prevent Paychex
from accounting for the Merger as a pooling of interests, it
being understood that Pay-Fone may rely upon the response it
receives in writing from Paychex with respect to whether any
contemplated Pay-Fone action has such an effect and that Pay-Fone
will consult with Paychex before taking any action affecting its
securities; provided, however, that in connection with any filing
or submission required or action to be taken by either Pay-Fone
or Paychex or any of their Subsidiaries to effect the Merger and
to consummate the other transactions contemplated hereby, (A)
Pay-Fone shall not, without Paychex' prior written consent,
commit to any divestiture or hold separate or similar transaction
and (B) neither Paychex nor any of its Subsidiaries shall be
required to divest or hold separate or otherwise take or commit
to take any action that limits its freedom of action with respect
to, or its ability to retain, Pay-Fone or any material portion of
the assets of Pay-Fone or any of the existing (as of the date
hereof) businesses, product lines or assets of Pay-Fone. Each
party hereby agrees that it will not, and it will direct its
accountants not to, discuss with or make any written
presentations to the SEC concerning the application of pooling
treatment accounting to transactions engaged in by the other
parties hereto or the Affiliates thereof, unless such party has
provided to the other parties a reasonable opportunity to
participate fully in any such discussion or presentation.
Paychex represents and warrants to Pay-Fone that Paychex has been
advised by Ernst & Young, LLP that the transactions contemplated
by this Agreement as presently disclosed to it qualify for
pooling of interests accounting and that in the absence of some
change in the transactions so contemplated, Ernst & Young, LLP
will be able to deliver at the Closing the opinion referenced to
in Section 8.2(g). Paychex shall promptly notify Pay-Fone if at
any time it has reason to believe that Ernst & Young, LLP will
not be able to deliver the opinion referred to in Section 8.2(g)
at the Closing, and each of Paychex and Pay-Fone shall promptly
advise the other of any fact or circumstance of which it becomes
aware (and which has not theretofore been disclosed to the other)
which it believes would adversely impact the ability to satisfy
such condition set forth in Section 8.2(g).
<PAGE>
During the period of 60 days prior to the Closing,
neither Paychex nor any Affiliate of Paychex will repurchase or
otherwise acquire in the public market any shares of its capital
stock (other than immaterial numbers of shares in the ordinary
course and consistent with past practice), nor will Paychex take
any other action a principal purpose of which is to affect the
Paychex Closing Price and the calculation of the Exchange Ratio,
nor will Paychex or any Affiliate of Paychex take any other
action a purpose of which is to affect or, other than actions
taken in good faith in furtherance of its business or in
compliance with its statutory or regulatory obligations, which
could reasonably be expected to affect materially the Paychex
Closing Price and the Exchange Ratio. Except for acquisitions by
trustees or agents under employee benefit plans maintained by or
for the benefit of Paychex and its employees, no such repurchases
or acquisitions shall be made during the final hour of trading,
and Paychex shall request such trustees or agents, to the extent
consistent with their fiduciary duties, to refrain from making
such acquisitions during the final hour of trading.
7.6 Access to Information. Subject to currently existing
contractual and legal restrictions applicable to Pay-Fone (which
Pay-Fone represents and warrants are not material) or to Paychex
(which Paychex represents and warrants are not material), and
upon reasonable notice, each of Pay-Fone and Paychex shall (and
shall cause each of its Subsidiaries to) afford to officers,
employees, counsel, accountants and other authorized
representatives of the other party ("Respective Representatives")
access, during normal business hours throughout the period prior
to the Effective Time, to its properties, books and records
(including, without limitation, the work papers of independent
accountants) and, during such period, shall (and shall cause each
of its Subsidiaries to) furnish promptly to such Respective
Representatives all information concerning its business,
properties and personnel as may reasonably be requested, provided
that no investigation pursuant to this Section 7.6 shall affect
or be deemed to modify any of the respective representations or
warranties made by Paychex or Pay-Fone. In particular, Pay-Fone
agrees to provide to Paychex promptly upon completion thereof
(and not later than 25 days after month end), detailed monthly
financial statements. Each of Pay-Fone and Paychex agrees that
it will not, and will cause its Respective Representatives not
to, use any information obtained pursuant to this Section 7.6 for
any purpose unrelated to the consummation of the transactions
contemplated by this Agreement. Subject to the requirements of
law, each party hereto will keep confidential, and will cause its
Respective Representatives to keep confidential, all information
and documents obtained pursuant to this Section 7.6 except as
otherwise consented to by the other party, provided, however,
that neither Paychex nor Pay-Fone shall be precluded from making
any disclosure which it deems required by law in connection with
<PAGE>
the Merger. In the event any party is required to disclose any
information or documents pursuant to the immediately preceding
sentence, such party shall promptly give written notice of such
disclosure that is proposed to be made to the other party so that
parties can work together to limit the disclosure to the greatest
extent possible and, in the event that either party is legally
compelled to disclose any information to seek a protective order
or other appropriate remedy or both. Upon any termination of
this Agreement, each of Pay-Fone and Paychex will collect and
deliver to the other party all documents obtained pursuant to
this Section 7.6 or otherwise from such party or its Respective
Representatives by it or any of its Respective Representatives
then in their possession and any copies thereof. All requests
for access to Pay-Fone or Paychex and their Subsidiaries pursuant
to this Section 7.6 shall be made through their Respective
Representatives named in the Paychex Disclosure Statement or the
Pay-Fone Disclosure Statement, as the case may be. In the event
that either Paychex or Pay-Fone, pursuant to this Section 7.6,
requests more than incidental consultation with the independent
accountants or other professional advisors of the other party,
the party requesting such consultation shall pay the fees of such
professional advisors for such consultation.
7.7 Registration and Listing of Paychex Common Stock.
(a) Paychex will use all reasonable efforts to
register the Paychex Common Stock to be issued pursuant to this
Agreement, under the applicable provisions of the Securities Act.
(b) Paychex will use all reasonable efforts to cause
the Paychex Common Stock to be issued pursuant to this Agreement
to be listed for trading on the NASDAQ.
7.8 Affiliates of Paychex and Pay-Fone. Pay-Fone shall
use all reasonable efforts to cause each Person who is an
Affiliate of Pay-Fone at the time of the execution of this
Agreement to execute and deliver to Paychex and Pay-Fone
contemporaneously with the execution hereof or as soon thereafter
as practicable a counterpart of the Affiliates Agreement, which
shall also be executed by Paychex and Pay-Fone. In the event any
Person other than Paychex becomes an Affiliate of Pay-Fone
between the date hereof and the Effective Time, Pay-Fone shall
use all reasonable efforts to cause such Person to execute and
deliver to Paychex and Pay-Fone a counterpart of the Affiliates
Agreement.
Each of Paychex and Pay-Fone shall use all reasonable
efforts to cause their respective Affiliates not to take any
action that would impair Paychex's ability to account for the
Merger as a pooling of interests. Without limiting the
foregoing, Paychex and Pay-Fone shall use all reasonable efforts
<PAGE>
to cause their respective Affiliates to refrain from selling or
in any other way reducing such Affiliate's risk relative to any
shares of Paychex Common Stock held at the time of or received in
the Merger (within the meaning of the SEC's Codification of
Financial Reporting Policies 201.01) until such time as
financial results, including combined sales and net income,
covering at least 30 days of post-Merger combined operations have
been published, except as permitted by SEC Staff Accounting
Bulletin No. 76. Furthermore, Pay-Fone shall use all reasonable
efforts to enable its accountants, KPMG Peat Marwick, LLP to
issue an opinion in form and substance sufficient to enable
Paychex' accountants Ernst & Young, LLP, to issue the pooling
opinion referred to in Section 8.2(g).
In the event the Effective Time is prior to July 1, 1995,
Paychex agrees to publish financial results covering at least 30
days of post-Merger combined operations concurrently with the
filing with the SEC of its Annual Report on Form 10-K for the
fiscal year ending May 31, 1995 but in any event no later than
August 29, 1995. In the event the Effective Time is during July
or August, 1995, Paychex agrees to publish such financial results
no later than October 5, 1995. In the event Effective Time is
after August 31, 1995, Paychex agrees to publish such financial
results within 35 days after the completion of the fiscal quarter
during which the 30 days of post-Merger combined operations is
completed.
7.9 Certain Covenants of Paychex. Except as otherwise
permitted in this Agreement, prior to the Effective Time, Paychex
will not, without the prior written consent of Pay-Fone:
(a) adopt a plan of complete or partial liquidation,
dissolution, merger or consolidation (other than the Merger and
any other merger or consolidation in which Paychex would be the
surviving entity);
(b) adopt any amendments to its Certificate of
Incorporation, or take any other action requiring a vote of the
holders of Paychex Common Stock (other than approval of the
Paychex, Inc. 1995 Stock Incentive Plan), which would adversely
affect the terms and provisions of the Paychex Common Stock or
the rights of the holders of such shares; or
(c) authorize, recommend, propose or announce an
intention to do any of the foregoing, or enter into any contract,
agreement, commitment or arrangement to do any of the foregoing
or take any other action that would materially decrease the
likelihood that the Merger will be consummated as contemplated
hereunder, except as to the timing of the Effective Date.
7.10 Amendment to Disclosure Statement. At any time prior
to the Closing, Paychex and Pay-Fone shall amend the Paychex
<PAGE>
Disclosure Schedule and the Pay-Fone Disclosure Schedule,
respectively, to reflect additional information that has become
known.
ARTICLE VIII
------------
CONDITIONS
8.1 Conditions to Each Party's Obligations. The respective
obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at
or prior to the Effective Time of each of the following
conditions, any or all of which may be waived in whole or in part
by the party being benefitted thereby, to the extent permitted by
applicable law:
(a) Shareholder Approval. This Agreement and the
transactions contemplated hereby shall have been duly approved or
ratified by the requisite holders of Shares in accordance with
applicable law and the Articles of Incorporation and By-Laws of
Pay-Fone.
(b) Government Consents, Etc. All Authorizations
required in connection with the execution and delivery of this
Agreement and the performance of the obligations hereunder shall
have been made or obtained, in each case without limitation or
restriction unacceptable to Paychex in its reasonable judgment
(which reasonable judgment shall take into account, without
limitation, the size and scope of the transactions contemplated
hereby and the benefits anticipated to be derived by Paychex from
its rights and obligations hereunder), except where the failure
to have obtained such Authorizations would not be reasonably
expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations,
condition (financial or other) or prospects of Pay-Fone and
Paychex and its Subsidiaries taken as a whole.
(c) No Injunction. There shall not be in effect any
judgment, writ, order, injunction or decree of any court or
Governmental Body of competent jurisdiction, restraining,
enjoining or otherwise preventing consummation of the
transactions contemplated by this Agreement or permitting such
consummation only subject to any condition or restriction
unacceptable to Paychex in its reasonable judgment (which
reasonable judgment shall take into account, without limitation,
the size and scope of the transactions contemplated hereby and
the benefits anticipated to be derived by Paychex from its rights
and obligations hereunder); except where the condition or
restriction would not be reasonably expected (so far as can be
foreseen at the time) to have a material adverse effect on the
<PAGE>
business, properties, operations, conditions (financial or other)
or prospects of Pay-Fone and Paychex and its Subsidiaries taken
as a whole.
(d) Registration Statement. The S-4 Registration
Statement shall have been declared effective and shall be
effective at the Effective Time, and no stop order suspending
effectiveness shall have been issued, no action, suit, proceeding
or investigation by the SEC to suspend the effectiveness thereof
shall have been initiated and be continuing, and all necessary
approvals under state securities laws or the Securities Act or
Exchange Act relating to the issuance or trading of the Paychex
Common Stock shall have been received.
(e) Listing of Paychex Common Stock on NASDAQ. The
Paychex Common Stock required to be issued hereunder shall have
been approved for listing on the NASDAQ subject only to official
notice of issuance.
(f) Blue Sky Approvals. Paychex shall have received
all state securities or blue sky permits or other authorizations
necessary to issue the shares of Paychex Common Stock pursuant to
the Merger.
(g) Third Party Consents. All required
authorizations, consents or approvals of any third party (other
than a Governmental Body), the failure to obtain which would have
a material adverse effect on Paychex and its Subsidiaries taken
as a whole (assuming the Merger had taken place), shall have been
obtained, including, but not limited to, the consents of the
landlord of premises on which Pay-Fone's headquarters building is
located, if required by the lease.
8.2 Conditions to Obligations of Paychex and Merger Sub.
The respective obligations of Paychex and Merger Sub to
consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of
each of the following conditions, any or all of which may be
waived in whole or part by Paychex and Merger Sub to the extent
permitted by applicable law:
(a) Representations and Warranties True. The
representations and warranties of Pay-Fone contained in Article V
and Section 7.6 or otherwise required hereby to be made after the
date hereof in a writing expressly referred to herein by or on
behalf of Pay-Fone pursuant to this Agreement shall have been
true in all material respects when made. The representations and
warranties of Pay-Fone set forth in Sections 5.1 through 5.4,
(except for an increase in outstanding Shares as a result of the
exercise of options outstanding on the date of the Agreement),
Section 5.5 (excluding any such pending or threatened actions,
suits, investigations or proceedings brought by or on behalf of
<PAGE>
Pay-Fone's shareholders insofar as they relate to the
transactions contemplated by this Agreement), Section 5.6,
Sections 5.8 through 5.11, Sections 5.14 through 5.16, and
Section 7.6 shall be true in all material respects at the time of
the Closing with the same effect as though such representations
and warranties had been made at such time, except for changes
resulting from the consummation of the transactions contemplated
by this Agreement, and except for changes which would not be
reasonably expected (so far as can be foreseen at the time) to
have a material adverse effect on the business, properties,
operations, condition (financial or other) or prospects of Pay-
Fone. The omission of any representations and warranties from
the condition set forth in the preceding sentence shall not be
construed to mean that the matters covered by such omitted
representations and warranties are necessarily excluded from
coverage under one or more representations or warranties
specified in such sentence.
(b) Performance. Pay-Fone shall have performed or
complied in all material respects with all agreements and
conditions contained herein required to be performed or complied
with by it prior to or at the time of the Closing, including,
without limitation, arranging for the delivery to Paychex of a
Phase One Environmental Report with respect to the premises at
8100 Balboa Boulevard, Van Nuys, California, and, if said Phase
One Environmental Report either discloses the presence of
environmental problems or recommends further action, a Phase Two
Environmental Report with respect to such premises; provided that
Paychex shall reimburse Pay-Fone for the cost of any Phase Two
Environmental Report.
(c) Compliance Certificate. Pay-Fone shall have
delivered to Paychex a certificate, dated the date of the
Closing, signed by the President or any Vice President of Pay-
Fone, certifying as to the fulfillment of the conditions
specified in Section 8.2(a) and (b).
(d) Opinion of Counsel for Pay-Fone. Paychex shall
have received from Shapiro, Rosenfeld & Close or other counsel
for Pay-Fone satisfactory to Paychex an opinion, dated the
Closing Date.
(e) Proceedings. All corporate proceedings taken by
Pay-Fone in connection with the transactions contemplated hereby
and all documents incident thereto shall be reasonably
satisfactory in all respects to Paychex and Paychex's counsel,
and Paychex and Paychex's counsel shall have received all such
counterpart originals or certified or other copies of such
documents as they amy reasonably request.
(f) Tax Opinion. Paychex shall have received an
opinion of Woods, Oviatt, Gilman, Sturman and Clarke LLP dated
<PAGE>
the Effective Time, regarding the tax consequences of the
transactions contemplated by this Agreement. In rendering such
opinion, Woods, Oviatt, Gilman, Sturman and Clarke LLP may
receive and rely upon representations contained in certificates
of Pay-Fone, Paychex and others, including, without limitation,
the Paychex Tax Matters Certificate and Pay-Fone Tax Matters
Certificate.
(g) Pooling Opinion. Paychex shall have received
subsequent to the effectiveness of the Registration Statement, an
opinion of Ernst & Young, LLP in form and substance reasonably
satisfactory to Paychex, that the Merger will qualify for
pooling-of-interests accounting treatment; provided, that this
condition shall be deemed satisfied if the inability or failure
of Ernst & Young, LLP to deliver such an opinion is attributable
to actions taken or omitted by Paychex or Affiliates of Paychex.
(h) No Government Proceeding or Litigation. No suit,
action, investigation, inquiry or other proceeding by any U.S.
Federal Governmental Body or any other material Governmental Body
shall have been instituted and be pending, or which imposes or
would be reasonably expected (so far as can be foreseen at the
time) to impose any remedy, condition or restriction unacceptable
to Paychex in its reasonable judgment (which reasonable judgment
shall take into account, without limitation, the size and scope
of the transactions contemplated hereby and the benefits
anticipated to be derived by Paychex from its rights and
obligations hereunder), except remedies, conditions and
restrictions which would not be reasonably expected (so far as
can be foreseen at the time) to have a material adverse effect on
the business, properties, operations, condition (financial or
other) or properties of Paychex and its Subsidiaries (assuming
the Merger had taken place).
(i) Certain Disclosures. The S-4 Registration
Statement, at the time it shall have been declared effective,
shall disclose no information in existence on the date hereof
materially adverse to Pay-Fone's business, properties,
operations, condition (financial or other) or prospects not
previously disclosed in Pay-Fone SEC Reports or this Agreement
(including the Pay-Fone Disclosure Statement provided hereunder).
(j) Employment of Leekley. The written employment
agreement between Paychex and Mark Leekley, President and CEO of
Pay-Fone, the effectiveness of which is contingent on the
Closing, shall have become effective.
(k) Dissenting Shares. Demands for payment, as
contemplated by Section 1301(b) of the CGCL, shall not have been
filed with respect to five (5%) percent or more of the Shares
outstanding and entitled to vote on the Merger.
<PAGE>
(l) Affiliates Agreement. All of the Persons
identified by Pay-Fone to Paychex as Affiliates shall have
executed and delivered to Paychex the Affiliates Agreement and
the same shall not have been breached by any such Person.
(m) Escrow and Indemnity Agreement. Allied
Contractors, Inc., Richard Kelton, David Kelton, Mark Kelton,
Allen Kahn, David Malcolm and Edwin Johnson, shall have executed
and delivered to Paychex (along with the Escrow Agent therein
named) the Escrow and Indemnity Agreement attached hereto as
Exhibit B and the Escrow Shares described therein shall have been
deposited with the Escrow Agent; provided, however, that the
Escrow and Indemnity Agreement shall not be executed and
delivered and the foregoing shall not be a condition if the
Federal income tax dispute described in the Pay-Fone Tax Matters
Certificate has been resolved by a payment to the Internal
Revenue Service of an amount no greater than $25,000, no portion
of which was attributable to claims related to the unreasonable
accumulation of earnings.
(n) Paychex Closing Price. The Paychex Closing Price,
without regard to any proviso relating to Section 4.1(a), is not
less than Thirty-One Dollars, provided that this condition shall
be deemed satisfied in the event Pay-Fone agrees in writing that
for purposes of Section 4.1(a) the Paychex Closing Price shall be
deemed to be Thirty-Four Dollars or such other lesser amount as
may be approved in writing by Paychex.
8.3 Conditions to Obligations of Pay-Fone. The obligations
of Pay-Fone to consummate the transactions contemplated by this
Agreement are subject to the fulfillment at or prior to the
Effective Time of each of the following conditions, any or all of
which may be waived in whole or in part by Pay-Fone to the extent
permitted by applicable law:
(a) Representations and Warranties True. The
representations and warranties of Paychex contained in Article VI
and Section 7.6 or otherwise required hereby to be made after the
date hereof in a writing expressly referred to herein by or on
behalf of Paychex pursuant to this Agreement shall have been true
in all material respects when made; and the representations
contained in Section 6.1 through 6.3, Section 6.5, Section 6.6
(excluding any such pending or threatened actions, suits,
investigations or proceedings brought by or on behalf of Pay-
Fone's stockholders insofar as they relate to the transactions
contemplated by this Agreement), Section 6.7, Sections 6.8
through 6.10, Sections 6.12 through 6.14 and Section 7.6 shall be
true in all material respects at the time of the Closing with the
same effect as though such representations and warranties had
been made at such time, except for changes resulting from the
consummation of the transactions contemplated by this Agreement,
<PAGE>
and, except for changes which would not be reasonably expected
(so far as can be foreseen at the time) to have a material
adverse effect on the business, properties, operations, condition
(financial and other) or prospects of Paychex. The omission of
any representations and warranties from the condition set forth
in the preceding sentence hall not be construed to mean that the
matters covered by such omitted representations and warranties
are necessarily excluded from coverage under one or more
representations or warranties specified in such sentence.
(b) Performance. Paychex shall have performed or
complied in all material respects with all agreements and
conditions contained herein required to be performed or complied
with by it prior to or at the time of the Closing.
(c) Compliance Certificate. Paychex shall have
delivered to Pay-Fone a certificate, dated the date of the
Closing, signed by the President or any Vice President of
Paychex, certifying as to the fulfillment of the conditions
specified in Section 8.3(a) and (b).
(d) Opinion of Counsel for Paychex. Pay-Fone shall
have received from Woods, Oviatt, Gilman, Sturman & Clarke LLP or
other counsel for Paychex satisfactory to Pay-Fone an opinion,
dated the Closing Date.
(e) Proceedings. All corporate proceedings taken by
Paychex in connection with the transactions contemplated hereby
and all documents incident thereto shall be reasonably
satisfactory in all respects to Pay-Fone and Pay-Fone's special
counsel, and Pay-Fone and Pay-Fone's special counsel shall have
received all such counterpart originals or certified or other
copies of such documents as they may reasonably request.
(f) Paychex Closing Price. The Paychex Closing Price,
without regard to the proviso relating to Section 4.1(a), is not
more than Forty-Nine Dollars, provided that this condition shall
be deemed satisfied in the event Paychex agrees in writing that
for purposes of Section 4.1(a) the Paychex Closing Price shall be
deemed to be Forty-Six Dollars or such other greater amount as
may be approved in writing by Pay-Fone.
(g) Certain Disclosures. The S-4 Registration
Statement, at the time it shall have been declared effective and
on the Closing Date, shall disclose no information materially
adverse to Paychex's business, properties, operations, condition
(financial or other) or prospects not previously disclosed in the
Paychex SEC Reports or this Agreement.
(h) Certain Adjustments. The aggregate amount
subtracted from $10,475,000 in calculating the "TV" for purposes
of the formula set forth in Section 4.1(a) hereof by reason of
<PAGE>
the provisions relating to the General Adjustment and Positive
Adjustment in the definition of "TV" in said Section 4.1(a) does
not exceed $360,000. In the event this condition is not
satisfied or waived and Pay-Fone elects to terminate this
Agreement, then Pay-Fone agrees to pay to Paychex simultaneously
with delivery of its notice of termination the sum of $70,000.
ARTICLE IX
----------
TERMINATION
9.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to
the Effective Time, before or after the approval by holders of
Shares, either by the mutual written consent of Paychex and Pay-
Fone, or by mutual action of their respective Boards of
Directors.
9.2 Termination by Either Paychex or Pay-Fone. This
Agreement may be terminated (upon notice from the terminating
party to the other parties) and the Merger may be abandoned by
action of the Board of Directors of either Paychex or Pay-Fone if
(a) the Merger shall not have been consummated by August 31, 1995
(provided that the right to terminate this Agreement under this
clause (a) shall not be available to any party whose failure to
fulfill any obligation under this Agreement or whose action or
inaction, even though not prohibited by this Agreement, has been
the cause of or resulted in the failure of the Merger to occur on
or before such date, unless such party has agreed to a reasonable
extension of such date and the Merger is not consummated by such
later date through no fault of such party), (b) any court of
competent jurisdiction in the United States or Governmental Body
in the United States shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling
or other action shall have become final and nonappealable, (c)
the S-4 Registration Statement shall not have been declared
effective by July 31, 1995 (provided that the right to terminate
this Agreement under this clause (c) shall not be available to
any party whose failure to fulfill any obligation under this
Agreement or whose action or inaction, even though not prohibited
by this Agreement, has been the cause of or resulted in the
failure of the S-4 Registration Statement to be declared
effective on or before such date, unless such party has agreed to
a reasonable extension of such date and the S-4 Registration
Statement is not declared effective by such later date through no
fault of such party), or (d) subsequent to the date hereof
through the amendment of the Pay-Fone Disclosure Schedule or the
Paychex Disclosure Schedule, the preparation or amendment of the
S-4 Registration Statement or otherwise, a party hereto acquires
verified information regarding the other party not known to the
<PAGE>
first party on the date hereof which has or would reasonably be
expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations,
condition (financial and other) or prospects of the other party.
9.3 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger
pursuant to this Article IX, no party hereto (or any of its
directors or officers) shall have any liability or further
obligation to any other party to this Agreement, except as
provided in Sections 7.2 and 7.6 and except that nothing herein
will relieve any party from liability for any breach of this
Agreement.
ARTICLE X
---------
MISCELLANEOUS AND GENERAL
10.1 Expenses. Each party shall bear its own expenses,
including the fees and expenses of any attorneys, accountants,
investment bankers, brokers, finders or other intermediaries or
other Persons engaged by it, incurred in connection with this
Agreement and the transactions contemplated hereby.
10.2 Notices, Etc.. All notices, requests, demands or
other communications required by or otherwise with respect to
this Agreement shall be in writing and shall be deemed to have
been duly given to any party when delivered personally (by
courier service or otherwise), when delivered by telecopy with
confirmed delivery (that is, the sender's telecopier produced
written evidence of receipt by the other party's telecopier), or
seven days after being mailed by first-class mail, postage
prepaid and return receipt requested in each case to the
applicable addresses set forth below:
If to Pay-Fone:
Pay-Fone Systems, Inc.
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, California 90405-5207
Attn: Mark Kelton, Director
Telecopy: (310) 399-0062
with a copy to:
Alan Jacobson, Esq.
Shapiro, Rosenfeld & Close
2029 Century Park East - Suite 2600
Los Angeles, California 90067
Telecopy: (310) 277-1804
<PAGE>
If to Paychex:
Paychex, Inc.
911 Panorama Trail South
Rochester, New York 14625
ATTN: G. Thomas Clark
Vice President of Finance
Telecopy: (716) 383-3428
with a copy to:
Harry P. Messina, Jr., Esq.
Woods, Oviatt, Gilman, Sturman & Clarke LLP
44 Exchange Street
Rochester, New York 14614
Telecopy: (716) 454-3968
or to such other address as such party shall have designated by
notice so given to each other party.
10.3 Amendments, Waivers, Etc.. This Agreement may not be
amended, changed, supplemented, waived or otherwise modified
except by an instrument in writing signed by the party against
whom enforcement is sought.
10.4 No Assignment. This Agreement shall be binding upon
and shall inure to the benefit of and be enforceable by the
parties and their respective successors and assigns; provided
that, except as otherwise expressly set forth in this Agreement,
neither the rights nor the obligations of any party may be
assigned or delegated without the prior written consent of the
other party.
10.5 Entire Agreement. Except as otherwise provided
herein, this Agreement embodies the entire agreement and
understanding between the parties relating to the subject matter
hereof and supersedes all prior agreements and understandings
relating to such subject matter. There are no representations,
warranties or covenants by the parties hereto relating to such
subject matter other than those expressly set forth in this
Agreement (including the Pay-Fone Disclosure Statement and the
Paychex Disclosure Statement) and any writings expressly required
hereby.
10.6 Specific Performance. The parties acknowledge that
money damages are not an adequate remedy for violations of this
Agreement and that any party may, in its sole discretion, apply
to a court of competent jurisdiction for specific performance or
injunctive or such other relief as such court may deem just and
proper in order to enforce this Agreement or prevent any
<PAGE>
violation hereof and, to the extent permitted by applicable law,
each party waives any objection to the imposition of such relief.
10.7 Remedies Cumulative. All rights, powers and remedies
provided under this Agreement or otherwise available in respect
hereof at law or in equity shall be cumulative and not
alternative, and the exercise or beginning of the exercise of any
thereof by any party shall not preclude the simultaneous or later
exercise of any other such right, power or remedy by such party.
10.8 No Waivers. The failure of any party hereto to
exercise any right, power or remedy provided under this Agreement
or otherwise available in respect hereof at law or in equity, or
to insist upon compliance by any other party hereto with its
obligations hereunder, and any custom or practice of the parties
at variance with the terms hereof, shall not constitute a waiver
by such party of its right to exercise any such or other right,
power or remedy or to demand such compliance.
10.9 No Third Party Beneficiaries. This Agreement is not
intended to be for the benefit of and shall not be enforceable by
any Person or entity who or which is not a party hereto.
10.10 Jurisdiction. Each party hereby irrevocably submits
to the exclusive jurisdiction of the United States District Court
for the Central District of California or any court of the State
of California located in Los Angeles County, California in any
action, suit or proceeding arising in connection with this
Agreement, and agrees that any such action, suit or proceeding
shall be brought only in such court (and waives any objection
based on forum non conveniens or any other objection to venue
therein); provided, however, that such consent to jurisdiction is
solely for the purpose referred to in this section 10.10 and
shall not be deemed to be a general submission to the
jurisdiction of said Courts or in the State of California other
than for such purpose. Paychex and Pay-Fone hereby waive any
right to a trial by jury in connection with any such action, suit
or proceeding
10.11 Public Announcements. Paychex and Pay-Fone will
agree upon the timing and content of the initial and each
subsequent press release to be issued describing the transactions
contemplated by this Agreement, and will not make any public
announcement thereof prior to reaching such agreement unless
required to do so by applicable law or regulation.
10.12 Governing Law. This Agreement and all disputes
hereunder shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York,
without regard to principles of conflict of laws.
<PAGE>
10.13 Name, Captions, Etc.. The name assigned this
Agreement and the section captions used herein are for
convenience of reference only and shall not affect the
interpretation or construction hereof. Unless otherwise
specified, (a) the terms "hereof", "herein" and similar terms
refer to this Agreement as a whole and (b) references herein to
Articles or Sections refer to articles or sections of this
Agreement.
10.14 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one
instrument. Each counterpart may consist of a number of copies
each signed by less than all, but together signed by all, the
parties hereto.
10.15 Knowledge. The term "knowledge" or "best knowledge"
and any derivatives thereof when applied to any party to this
Agreement shall refer only to the actual knowledge of that party
(or in the case of a corporation, partnership or other entity,
the actual knowledge of its executive officers) after reasonable
investigation, but no information known by any other employee, or
any attorney, accountant or other representative, of such party
shall be imputed to such party.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties set forth below.
PAY-FONE SYSTEMS, INC.
By: /s/Mark Leekley
---------------------------------
Name: Mark Leekley
Title: President
PAYCHEX, INC.
By:/s/G. Thomas Clark
---------------------------------
Name: G. Thomas Clark
Title: Vice President -Finance
PAYCHEX MERGER CORP.
By:/s/G. Thomas Clark
---------------------------------
Name: G. Thomas Clark
Title: Vice President -Finance
<PAGE>
AFFILIATES AGREEMENT
MADE as of March 17, 1995, by and among PAYCHEX, INC., a
Delaware corporation ("Paychex"), PAYCHEX MERGER CORP., a
Delaware corporation and a wholly-owned subsidiary of Paychex
("Merger Sub") and PAY-FONE SYSTEMS, INC., a California
corporation ("Pay-Fone" and together with Paychex and Merger Sub,
the "Companies") on the one hand, and ALLIED CONTRACTORS, INC.,
RICHARD KELTON, DAVID KELTON, MARK KELTON, ALLEN KAHN, M.D, EDWIN
JOHNSON and DAVID MALCOLM (collectively the "D Members"), and
those other persons whose names are set forth on and who have
executed the signature page hereto (collectively, including the D
Members, the "Affiliates Block" and individually a "Member"), on
the other hand.
WHEREAS, concurrently herewith, Paychex, Merger Sub and Pay-
Fone are entering into an Agreement and Plan of Merger (the
"Merger Agreement"); capitalized terms used without definition
herein having the meanings ascribed thereto in the Merger
Agreement;
WHEREAS, the Members are the record owners, respectively, of
the number of Pay-Fone Shares set forth opposite the name of each
in Schedule I hereto (the "Affiliates' Shares");
WHEREAS, approval of the Merger Agreement by Pay-Fone's
shareholders is a condition to the consummation of the Merger;
and
WHEREAS, as a condition to its entering into the Merger
Agreement, Paychex has required that the Members of the
Affiliates Block agree, and the Members of the Affiliates Block
have agreed, to enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements set forth herein, the parties
hereto agree as follows:
SECTION 1. Agreement to Vote.
(a) Each Member hereby agrees to attend the
Shareholders Meeting, in person or by proxy, and to vote (or
cause to be voted) all Affiliates' Shares then owned by such
Member, and any other voting securities of Pay-Fone, whether
issued heretofore or hereafter, that such Member then owns, for
approval and adoption of the Merger Agreement and the Merger,
such agreement to attend and vote to apply also to any
adjournment or adjournments of the Shareholders Meeting.
(b) Each D Member hereby agrees that at all times
<PAGE>
prior to the Effective Time, such D Member shall continue to own
the number of Affiliates' Shares set opposite his name in
Schedule I hereto.
(c) To the extent inconsistent with the foregoing
provisions of this Section 1, each Member hereby revokes any and
all previous proxies with respect to such Member's Affiliates'
Shares.
SECTION 2. Securities Act Covenants and Representations.
Each Member hereby agrees and represents to the Companies as
follows:
(a) Such Member has been advised that the offering,
sale and delivery of Paychex Common Stock pursuant to the Merger
will be registered under the Securities Act on a Registration
Statement on Form S-4. Such Member has also been advised,
however, that to the extent such Member is considered an
"affiliate" of Pay-Fone at the time the Merger Agreement is
submitted for a vote of the shareholders of Pay-Fone, any sale or
transfer by such Member of any shares of Paychex Common Stock
received by such Member in the Merger will, under current law,
require either (i) the further registration under the Securities
Act of any Paychex Common Stock to be sold or transferred by such
Member, (ii) compliance with Rule 145 promulgated by the SEC
under the Securities Act or (iii) the availability of another
exemption from such registration under the Securities Act.
(b) Such Member has read this Agreement and the Merger
Agreement and has discussed such Member's requirements and the
applicable limitations upon such Member's ability to sell,
transfer or otherwise dispose of shares of Paychex Common Stock,
to the extent such Member believed necessary, with such Member's
counsel or counsel for Pay-Fone.
(c) Such Member also understands that stop transfer
instructions will be given to Paychex's transfer agent with
respect to shares of Paychex Common Stock issued to such Member
and that a legend will be placed on the certificates for the
shares of Paychex Common Stock issued to such Member, or any
substitutions therefor, in the event such Member is considered an
"affiliate" of Pay-Fone at the time the Merger Agreement is
submitted for a vote of the shareholders of Pay-Fone as
hereinafter provided.
SECTION 3. Pooling Covenants and Representations. Each
Member hereby agrees and represents to the Companies that from
and after 30 days prior to the date fixed for the vote on the
Merger by the shareholders of Pay-Fone, which date shall be
identified to each Member by the Companies at the earliest
<PAGE>
practicable time, such Member will not sell, transfer or
otherwise dispose of any securities of Pay-Fone other than in the
Merger or of any shares of Paychex Common Stock received by such
Member in the Merger or other shares of capital stock of Paychex
until after such time as results covering at least 30 days of
combined operations of Pay-Fone and Paychex have been published
by Paychex, in the form of a quarterly earnings report, an
effective registration statement filed with the SEC, a report to
the SEC on Form 10-K, 10-Q or 8-K, or any other public filing or
announcement which includes the combined results of operations.
SECTION 4. Additional Covenants and Representations. In
addition to, and not in lieu of, the representations and
covenants set forth in Sections 2 and 3 hereof, each Member
agrees and represents to Paychex as follows, each of which
representations and covenants may be relied upon by counsel to
Paychex and to Pay-Fone in connection with their opinions and
other matters.
(a) Such Member will not sell, transfer, exchange,
pledge or otherwise dispose of, or in any other way reduce his
risk of ownership or investment in or make any offer or agreement
relating to any of the foregoing with respect to, any shares of
Paychex Common Stock or any rights, options or warrants to
purchase shares of Paychex Common Stock, or any securities that
may be paid as a dividend or otherwise distributed on such shares
of Paychex Common Stock or with respect thereto or issued or
delivered in exchange or substitution therefor or upon exercise
of options held by such Member to acquire Paychex Common Stock
(all such shares and other securities of Paychex being herein
sometimes collectively referred to as "Subject Securities"), or
other securities of Paychex during the period commencing 30 days
prior to the date fixed for the vote on the Merger by the Pay-
Fone shareholders and terminating on the Closing Date.
(b) Such Member has, and as of the Closing Date will
have, no present plan or intention (a "Plan") to sell, transfer,
exchange, pledge (other than in a preexisting bona fide margin
account) or otherwise dispose of, including a distribution by a
partnership to its partners, or a corporation to its
shareholders, or any other transaction which results in a
reduction in the risk of ownership (any of the foregoing, a
"Sale") of more than fifty percent (50%) of the shares of Paychex
Common Stock issued to such Member in connection with the Merger,
or any securities that may be paid as a dividend or otherwise
distributed thereon or with respect thereto or issued or
delivered in exchange or substitution therefor or upon exercise
of options held by such Member. For purposes of the preceding
sentence, Pay-Fone Shares (or the portion thereof) (i) with
<PAGE>
respect to which dissenters' rights are exercised, (ii) which are
exchanged for cash in lieu of fractional shares of Paychex Common
Stock, or (iii) with respect to which a Sale will occur prior to
the Merger, shall be considered to be Pay-Fone Shares that are
exchanged for Paychex Common Stock in the Merger and then
disposed of pursuant to a Plan. Such Member is not aware of, or
participating in, any Plan on the part of Pay-Fone shareholders
to engage in sales of shares of Paychex Common Stock to be issued
in the Merger such that the aggregate fair market value, as of
the Closing Date, of the shares subject to such Plan would exceed
fifty percent (50%) of the aggregate fair market value of all
outstanding Pay-Fone Shares immediately prior to the Merger. For
purposes of the preceding sentence, Pay-Fone Shares (i) with
respect to which dissenters' rights are exercised (ii) which are
exchanged for cash in lieu of fractional shares of Paychex Common
Stock, or (iii) with respect to which a pre-Merger Sale occurs in
a related transaction shall be considered to be Pay-Fone Shares
that are exchanged for Paychex Common Stock in the Merger and
then disposed of pursuant to a Plan. A Sale of Paychex Common
Stock shall be considered to have occurred pursuant to a Plan if,
among other things, such Sale occurs in a Related Transaction.
For purposes of this Section, a "Related Transaction" shall mean
a transaction that is in contemplation of, or related or pursuant
to, the Merger or the Merger Agreement. If any representations
of such Member of Affiliates Group in this Section ceases to be
true at any time prior to the Closing Date, such Member will
deliver to each of Pay-Fone and Paychex, prior to the Closing
Date, a written statement to that effect, signed by such Member.
Each Member reserves the right at any time after the Closing Date
to evaluate such Member's investment portfolio, including Paychex
Common Stock and any other securities issued by Paychex, and to
make such investment decision with respect to such securities as
such Member and his investment advisors, if any, shall deem to be
in such Member's interest. Each Member specifically disavows any
undertaking, except as set forth in Section 3 hereof, to hold any
securities issued by Paychex for any specific period.
(c) Such Member has filed, or prior to the Effective
Time will have filed (whether timely or late), with the SEC all
reports required of such Member as an Affiliate of Pay-Fone and
such Member has not violated the relevant provisions of the
Securities Exchange Act of 1934, as amended, and such Member
represents and warrants that the foregoing representations shall
be true as of the Effective Time. Such Member agrees to
indemnify Paychex and Pay-Fone and to hold them harmless from and
against any loss, damage, claim or expense (including reasonable
attorneys' fees) arising out of a breach of the foregoing
representations and warranties.
SECTION 5. Further Assurances. In addition to this
Agreement, each Member shall execute and deliver such additional
<PAGE>
instruments and other documents in form and substance reasonably
acceptable to such Member and his counsel, and shall take or
refrain from taking such further reasonable actions as may be
necessary or appropriate to effectuate, carry out and comply with
all of such Member's obligations under this Agreement. Without
limiting the generality of the foregoing, none of the parties
hereto shall enter into any agreement or arrangement (or alter,
amend or terminate any existing agreement or arrangement) if such
action would materially impair the ability of any party to
effectuate, carry out or comply with all the terms of this
Agreement. If requested by Paychex, each Member agrees to
execute a letter to Paychex representing that such Member has
complied with such Member's obligations hereunder as of the date
of such letter.
SECTION 6. Representations and Warranties of the Members of
the Affiliates Block. Each Member, as to such Member, represents
and warrants to Paychex as follows: This Agreement has been duly
executed and delivered by such Member. This Agreement
constitutes the valid and binding agreement of such Member,
enforceable against such Member in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general
application which may affect the enforcement of creditors' rights
generally and by general equitable principles. The Shares listed
next to the name of such Member on Schedule I hereto are the only
voting securities of Pay-Fone owned (beneficially or of record)
by such Member other than in a fiduciary capacity.
SECTION 7. Representations and Covenants of Paychex.
(a) Paychex represents and warrants to each Member as
follows: Each of this Agreement and the Merger Agreement has
been approved by the Board of Directors or Executive Committee of
Paychex representing all necessary corporate action on the part
of Paychex (no action by the stockholders of Paychex being
required). Each of this Agreement and the Merger Agreement has
been duly executed and delivered by a duly authorized officer of
Paychex. Each of this Agreement and the Merger Agreement
constitutes a valid and binding agreement of Paychex, enforceable
against Paychex in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws of general application which
may affect the enforcement of creditors' rights generally and by
general equitable principles.
(b) From and after the Closing Date and for so long as
is necessary in order to permit a Member to sell pursuant to Rule
145 and, to the extent applicable, Rule 144 promulgated under the
<PAGE>
Securities Act, the Subject Securities owned by such Member,
Paychex will use its best efforts to file on a timely basis all
reports required to be filed by it pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended, referred to in
paragraph (c)(1) of Rule 144 promulgated under the Securities
Act, in order to permit him to sell the Subject Securities held
by him pursuant to the terms and conditions of Rule 145 and the
applicable provisions of Rule 144.
SECTION 8. Legends. Each Member of Affiliate Group
understands and agrees that stop transfer instructions will be
given to Paychex' transfer agent with respect to certificates
evidencing the Subject Securities and that there will be placed
on the certificates evidencing the Subject Securities legends
stating in substance:
"The shares represented by this certificate may
not be offered, sold, pledged, exchanged,
transferred or otherwise disposed of except in
accordance with the requirements of the Securities
Act of 1933, as amended, and the other conditions
specified in that certain Affiliates Agreement
dated as of March _____, 1995, among Paychex,
Inc., the shareholder and other parties thereto, a
copy of which Affiliates Agreement may be
inspected by the holder of this Certificate at the
offices of Paychex, Inc. which will furnish,
without charge, a copy thereof to the holder of
this Certificate upon written request therefor."
After release of the report described in Section 3(b)
hereof, certificates evidencing Subject Securities may be
surrendered for cancellation and reissuance with the following
legend referring only to the applicability of Rule 145(d)
restrictions:
"The shares represented by the certificate on
which this legend is endorsed may be
transferred or otherwise disposed of only in
compliance with the terms of Rule 145
promulgated under the Securities Act of 1933,
as amended, pursuant to another applicable
exemption from the registration requirements
of said Act, or upon registration under said
Act."
Paychex agrees to remove promptly such stop transfer
instructions and to transfer Subject Securities presented for
transfer after the release of the report described in Section
3(b) promptly in accordance with securities industry practices so
<PAGE>
long as the Subject Securities are accompanied by documentation
certifying compliance with Rule 145. The certificates issued to
transferees of Subject Securities (other than affiliates of
Paychex) shall bear no restrictive legends and shall be subject
to no stop transfer instructions. At the request of a Member at
any time after the second anniversary of the Closing Date,
Paychex shall reissue any certificate representing Subject
Securities without endorsing any restrictive legends thereon.
SECTION 9. Effectiveness and Termination. It is a
condition precedent to the effectiveness of this Agreement that
the Merger Agreement shall have been executed and delivered and
be in full force and effect. In the event the Merger Agreement
is terminated in accordance with its terms, this Agreement shall
automatically terminate and be of no further force or effect.
Upon such termination, except for any rights any party may have
in respect of any breach by any other party of its or his
obligations hereunder, none of the parties hereto shall have any
further obligation or liability hereunder.
SECTION 10. Miscellaneous.
(a) Notices, Etc. All notices, requests, demands or
other communications required by or otherwise with respect to
this Agreement shall be in writing and shall be deemed to have
been duly given to any party when delivered personally (by
courier service or otherwise), when delivered by telecopy and
confirmed by return telecopy, or one day after being sent by
overnight courier service (Federal Express, etc.) or seven days
after being mailed by first-class mail, postage prepaid in each
case to the applicable addresses set forth below:
If to the Companies:
Paychex, Inc.
911 Panorama Trail South
Rochester, New York 14625
Attn: G. Thomas Clark, Vice President - Finance
Telecopy: (716) 383-3428
with a copy to:
Harry P. Messina, Jr., Esq.
Woods, Oviatt, Gilman, Sturman & Clarke LLP
44 Exchange Boulevard
Rochester, New York 14614
Telecopy: (716) 454-3968
<PAGE>
and
Mark Kelton
2716 Ocean Park Boulevard
Santa Monica, California 90405-5207
Telecopy: (310) 399-0062
If to any Member:
To his address, as set forth in Schedule I
with a copy to:
Alan Jacobson, Esq.
Shapiro, Rosenfeld & Close
2029 Century Park East, Suite 2600
Los Angeles, California 90067
Telecopy: (310) 277-1804
and
Pay-Fone Systems Affiliates
2716 Ocean Park Boulevard, Suite 3006
Santa Monica, California 90405-5207
ATTN: Mark Kelton
Telecopy: (310) 399-0062
or to such other address as such party shall have designated by
notice so given to each other party.
(b) Amendments, Waivers, Etc. This Agreement may not
be amended, changed, supplemented, waived or otherwise modified
or terminated except by an instrument in writing signed by the
Companies and each Member; provided that: without the consent of
any party no such amendment, change, supplement, waiver,
modification or termination shall in any way further restrict the
transferability of any Shares held by a party hereto, impose any
obligation on such party, diminish the benefits of such party
hereunder or restrict the rights of such party as set forth
herein (in each case, other than in a de minimis respect),
without the consent of such party.
(c) Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of and be enforceable
by the parties and their respective successors and assigns,
including without limitation in the case of any corporate party
hereto any corporate successor by merger or otherwise, and in the
case of any individual party hereto any trustee, executor, heir,
legatee or personal representative succeeding to the ownership of
such party's Shares or other securities subject to this
Agreement. Notwithstanding any transfer of Shares, the
<PAGE>
transferor shall remain liable for the performance of all
obligations under this Agreement of transferor.
(d) Entire Agreement. This Agreement (together with
the Merger Agreement) embodies the entire agreement and
understanding among the parties relating to the subject matter
hereof and supersedes all prior agreements and understandings
relating to such subject matter. There are no representations,
warranties or covenants by the parties hereto relating to such
subject matter other than those expressly set forth in this
Agreement and the Merger Agreement.
(e) Severability. If any term of this Agreement or
the application thereof to any party or circumstance shall be
held invalid or unenforceable to any extent, the remainder of
this Agreement and the application of such term to the other
parties or circumstances shall not be affected thereby and shall
be enforced to the greatest extent permitted by applicable law,
provided that in such event the parties shall negotiate in good
faith in an attempt to agree to another provision (in lieu of the
term or application held to be invalid or unenforceable) that
will be valid and enforceable and will carry out the parties'
intentions hereunder.
(f) Specific Performance. The parties acknowledge
that money damages are not an adequate remedy for violations of
this Agreement and that any party may, in its sole discretion,
apply to a court of competent jurisdiction for specific
performance or injunctive or such other relief as such court may
deem just and proper in order to enforce this Agreement or
prevent any violation hereto and, to the extent permitted by
applicable law, each party waives any objection to the imposition
of such relief.
(g) Remedies Cumulative. All rights, powers and
remedies provided under this Agreement or otherwise available in
respect hereof at law or in equity shall be cumulative and not
alternative, and the exercise or beginning of the exercise of any
thereof by any party shall not preclude the simultaneous or later
exercise of any other such right, power or remedy by such party.
(h) No Waiver. The failure of any party hereto to
exercise any right, power or remedy provided under this Agreement
or otherwise available in respect hereof at law or in equity, or
to insist upon compliance by any other party hereto with its
obligations hereunder, and any custom or practice of the parties
at variance with the terms hereof, shall not constitute a waiver
by such party of its right to exercise any such or other right,
power or remedy or to demand such compliance.
<PAGE>
(i) No Third Party Beneficiaries. This Agreement is
not intended to be for the benefit of and shall not be
enforceable by any person or entity who or which is not a party
hereto.
(j) Jurisdiction. Each party hereby irrevocably
submits to the exclusive jurisdiction of the United States
District Court for the Central District of California or any
court of the State of California located in Los Angeles County,
California in any action, suit or proceeding arising in
connection with this Agreement, and agrees that any such action,
suit or proceeding shall be brought only in such court (and
waives any objection based on forum non conveniens or any other
objection to venue therein); provided, however, that such consent
to jurisdiction is solely for the purpose referred to in this
paragraph (j) and shall not be deemed to be a general submission
to the jurisdiction of said Courts or in the State of California
other than for such purposes. Each party hereto hereby waives
any right to a trial by jury in connection with any such action,
suit or proceeding.
(k) Governing Law. This Agreement and all disputes
hereunder shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York
without regard to principles of conflicts of law.
(l) Name, Captions, Gender. The name assigned this
Agreement and the section captions used herein are for
convenience of reference only and shall not affect the
interpretation or construction hereof. Whenever the context may
require, any pronoun used herein shall include the corresponding
masculine, feminine or neuter forms.
(m) Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be
an original, but all of which together shall constitute one
instrument. Each counterpart may consist of a number of copies
each signed by less than all, but together signed by all, the
parties hereto.
(n) Limitation on Liability. No Member shall have any
liability hereunder for any actions or omissions of any other
Members of the Affiliates Block. All representations and
agreements of Member hereunder and any liability attaching to
actions by Member shall be several and not joint.
(o) Expenses. Paychex shall bear its own expenses,
and Pay-Fone shall bear the expenses of the Affiliates Block,
incurred in connection with this Agreement and the transactions
contemplated hereby, except that in the event of a dispute
concerning the terms or enforcement of this Agreement, the
prevailing party in any such dispute shall be entitled to
<PAGE>
reimbursement of reasonable legal fees and disbursements from the
other party or parties to such dispute.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
PAYCHEX, INC.
By:/s/G. Thomas Clark
------------------------------
G. Thomas Clark,
Vice President-Finance
ALLIED CONTRACTORS, INC.
By:/s/Richard Kelton
------------------------------
Richard Kelton, President
/s/Richard Kelton
---------------------------------
Richard Kelton
/s/David Kelton
---------------------------------
David Kelton
/s/Mark Kelton
---------------------------------
Mark Kelton
/s/Allen Kahn, M.D.
---------------------------------
Allen Kahn, M.D.
/s/Edwin Johnson
---------------------------------
Edwin Johnson
/s/David L. Malcolm
---------------------------------
David L. Malcolm
/s/Mark Leekley
---------------------------------
Mark Leekley
---------------------------------
Michele Kehoe
<PAGE>
---------------------------------
Adam A. Rodriguez
---------------------------------
Thomas A. Zachary
---------------------------------
Kim Spaulding
<PAGE>
SCHEDULE I
Share Ownership
No. Shares Pay-Fone Options
Affiliate Owned Beneficially Currently Exercisable
- --------- ------------------ ---------------------
Allied Contractors, Inc. 386,669 -0-
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Richard Kelton 230,567 12,200
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
David Kelton 170,688 5,000
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Mark Kelton 55,596 5,000
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Allen Kahn, M.D. 239,400 14,000
55 East Washington Street
Chicago, IL 60602-2174
Edwin Johnson 29,700 14,000
P.O. Box 288
Hazelcrest, IL 60429
David L. Malcolm 23,100 -0-
750 "B" Street - Suite 3130
San Diego, California 92101
Mark Leekley
Michele Kehoe
Alan A. Rodriguez
Thomas A. Zachary
Kim Spaulding
<PAGE>
ESCROW AND INDEMNITY AGREEMENT
ESCROW AND INDEMNITY AGREEMENT, dated as o March 17, 1995
among PAYCHEX, INC., a Delaware corporation ("Paychex") PAY-FONE
SYSTEMS, INC., a California corporation ("Pay-Fone"), each of the
individuals whose names appear on the signature page of this
Agreement (collectively, the "KL Shareholders"), and MARA ESCROW
COMPANY, an escrow company licensed by the state of California,
as escrow agent (the "Escrow Agent"). This Agreement shall
become effective at the Effective Time, as defined (as are all
other capitalized terms not defined herein) in that certain
Agreement and Plan of Merger dated March 17, 1995, by and among
Paychex, Paychex Merger Corp., a Delaware corporation and wholly-
owned subsidiary of Paychex ("Subsidiary"), and Pay-Fone (the
"Merger Agreement");
WHEREAS, at the Effective Time, subsidiary will be merged
with and into Pay-Fone (the "Merger") pursuant to the terms of
the Merger Agreement;
WHEREAS, at the Effective Time, pursuant to Section 4.1(b)
of the Merger Agreement, the outstanding shares issued by Pay-
Fone (except for those owned by Paychex or held by shareholders
who perfect dissenters' rights under CGCL Section 1300 et seq.)
shall be converted into shares of Paychex Common stock;
WHEREAS, certain claims asserted by the Internal Revenue
service against Pay-Fone for fiscal years 1987 through 1991 and
described in the Pay-Fone Tax Matters Certificate (the "Tax
Claims"), including claims described therein under the heading
Unreasonable Accumulation of Earnings (the "Accumulated Earnings
Claims") are pending, and the Shareholders are willing to assume
certain responsibilities with respect to the Tax Claims and
related claims and to deposit certain shares of Paychex Common
Stock they are receiving pursuant to the Merger Agreement in
order to indemnify Paychex against certain net losses it may
suffer as a result of the resolution of such Tax Claims; and
WHEREAS, as set forth in Section 8.2(l) of the Merger
Agreement, the obligations of Paychex and subsidiary to
consummate the transactions contemplated by the Merger Agreement
are subject, among other things, to the parties hereto entering
into this Agreement.
NOW, THEREFORE, the KL Shareholders, Pay-Fone, Paychex and
the Escrow Agent hereby agree as follows:
1. Appointment of the Escrow Agent; Deposit of Escrow
Amount. Paychex, Pay-Fone and the KL Shareholders hereby
constitute and appoint the Escrow Agent as, and the Escrow Agent
hereby agrees to assume and perform the duties of, the escrow
<PAGE>
agent under and pursuant to this Agreement. The Escrow Agent
acknowledges receipt of an executed copy of the Merger Agreement
and of a certificate or certificates representing that aggregate
number of shares of Paychex common Stock registered in the name
of Escrow Agent (such shares being referred to herein as the
"Escrow Shares" and reflecting the deposit, beneficially, by each
of the KL Shareholders of the number of shares set forth opposite
such shareholders' name on schedule 1 attached hereto) equal to
the quotient (rounded to the nearest whole number) derived by
dividing (a) $400,000 by (b) the Paychex Closing Price as applied
pursuant to Section 4.1(a) of the Merger Agreement (the "Merger
Agreement Price").
2. Holding of the Escrow Shares. The Escrow Agent shall
hold the Escrow shares in escrow for the benefit of, and for
distribution to, the parties hereto in accordance with the terms
hereof. The Escrow shares shall not be subject to lien or
attachment by any creditor of any party hereto and shall be held
and transferred solely in the manner and for the purpose set
forth in this Agreement. The Escrow Shares or any proceeds
thereof shall not be available to, and shall not be used by, the
Escrow Agent to set off any obligations of any KL Shareholder,
Pay-Fone, subsidiary or Paychex owing to the Escrow Agent in any
capacity.
3. Dividends and Other Distributions. As soon as
practicable after receipt of any dividends paid on or in respect
of the Escrow shares, the Escrow Agent shall remit the same to
the KL Shareholders in proportion to the number of Escrow shares
beneficially deposited by the KL Shareholders, respectively (the
"Proportion").
Upon receipt of any other distributions made in respect
of the Escrow Shares (including shares of Paychex Common stock
resulting from stock splits), the Escrow Agent shall add such
distributions to, and hold the same as, Escrow Shares.
4. Voting. Prior to the Termination Date, the Escrow
Agent will vote the Escrow Shares then held by Escrow Agent
hereunder as directed by the KL Shareholders, respectively, in
writing and will execute any written consents to shareholder
action or proxies as so directed in writing by the KL
Shareholders, respectively, in each case in Proportion. In the
absence of such written direction, the Escrow Agent shall not
vote the Escrow Shares for any purpose and will not execute any
consents to shareholder action or proxies.
5. Resolution of Tax Claims; Delivery of Escrow Shares
(a) Following the Merger, Paychex shall cause Pay-Fone
(or any successor in interest to Pay-Fone) to authorize and
<PAGE>
empower, and Pay-Fone shall take all appropriate action and
execute all appropriate documents to authorize and empower, the
KL Shareholders, or any one or more of them designated by the KL
Shareholders, and any qualified professionals the KL Shareholders
may designate (subject to the prior written approval of Paychex,
which shall not be unreasonably withheld or delayed.), to
negotiate or litigate the Tax Claims, and any claims asserted by
the California Franchise Tax Board for state income or franchise
tax liability with respect to the same periods and based on the
same facts for which the KL Shareholders have responsibility
hereunder (the "California Claims") to a final resolution. such
authorization and empowerment shall also extend to such claims,
if any, similar to the Tax Claims and the California Claims but
relating to subsequent periods for which the KL Shareholders are
responsible pursuant to the terms hereof. The KL Shareholders
agree diligently to pursue a settlement or other resolution of
the Tax Claims and, when and if they are asserted, the California
Claims and any other claims for which the KL Shareholders are so
responsible. The authorization, empowerment and responsibility
of the KL Shareholders hereunder with respect to the Tax Claims,
the California Claims and any other claims shall be effective
only while the KL Shareholders remain liable for payment of
amounts related thereto hereunder. Any settlement or other final
consensual resolution of the Tax Claims, California Claims and
such other claims for which the KL Shareholders are responsible
must be approved by KL Shareholders who beneficially deposited in
excess of fifty (50%) percent of the Escrow Shares.
(b) Upon settlement or other final resolution of the
Tax Claims (including the expiration of any applicable statute of
limitations), the KL Shareholders shall deliver to Paychex and
Pay-Fone a notice describing the resolution (a "Resolution
Notice"), to which Notice shall be attached (i) a copy of the
settlement agreement, final judgment or other document embodying
the resolution, (ii) an accounting of the expenses incurred by
the KL Shareholders subsequent to the Effective Time with respect
to the Tax Claims for which the KL Shareholders seek
reimbursement (the "KL Expenses"), and (iii) the KL Shareholders'
estimate (with supporting detail) of the net economic cost to
Paychex and Pay-Fone (the "Tax Claim Cost"), after reasonably
anticipated tax benefits and taking deferred benefits into
account by discounting such benefits at the prime rate then in
effect, of such resolution including reimbursement of the KL
expenses referred to in item (ii) above.
(c) Promptly upon receipt of the Resolution Notice,
Paychex shall cause Pay-Fone to pay, and Pay-Fone shall promptly
pay, all amounts still due to the Internal Revenue Service with
respect to the Tax Claims in accordance with the resolution
thereof. within thirty days after receipt of the Resolution
Notice, Paychex shall respond to the KL Shareholders' estimate of
<PAGE>
the Tax Claim Cost. If Paychex agrees with the KL Shareholders'
estimate, such amount shall be the Tax Claim Cost. If Paychex
does not so agree, Paychex and the KL Shareholders shall attempt
during the ensuing thirty days to negotiate a mutually acceptable
Tax Claim Cost. If they are unable to negotiate a mutually
acceptable amount, Paychex and the KL Shareholders shall each
promptly appoint a firm of independent public accountants, and
the two firms so appointed shall attempt during the ensuing
thirty days to determine jointly the Tax Claim Cost. Sf they are
unable to make such a joint determination, such firms shall
promptly select a third firm of independent public accountants,
which third firm shall have a national reputation, to determine
in consultation with the first two firms the Tax Claim Cost, and
such determination shall be binding on the parties hereto.
(d) Paychex and the KL Shareholders shall jointly
notify the Escrow Agent of the Tax Claim Cost promptly upon its
determination. Following such determination:
(i) the Escrow Agent shall promptly deliver to
Paychex that number of Escrow Shares (rounded to the nearest
whole share) determined by dividing (x) the Tax Claim Cost
by (y) the Merger Agreement Price;
(ii) the Escrow Agent shall promptly deliver to
the KL Shareholders, in Proportion, all Escrow Shares
remaining after delivery to Paychex of Escrow Shares as
contemplated in Section 5(d) (i) above; and
(iii) Paychex shall cause Pay-Fone to reimburse, and
Pay-Fone shall promptly reimburse, the KL Shareholders for
the KL Expenses.
(e) If the quotient derived by dividing the Tax Claim
Cost by the Merger Agreement Price is greater than the number of
Escrow Shares, then the KL Shareholders, in Proportion, shall
deliver to Paychex that aggregate number of shares of Paychex
Common Stock equal to the amount by which such quotient exceeds
the number of Escrow Shares or, in the event any of the KL
Shareholders no longer holds shares of Paychex Common Stock with
which to satisfy such KL Shareholder's proportionate obligation,
in lieu of any such share of Paychex Common Stock such KL
Shareholder shall deliver cash in an amount equal to said Merger
Agreement Price.
6. Termination of Escrow; Continuing Obligations.
(a) Upon the delivery of the final Escrow Shares held
hereunder, this Escrow shall terminate.
(b) The KL Shareholders agree that any distributions
to the KL Shareholders and any exercise of rights or powers by
<PAGE>
the KL Shareholders under this Agreement shall be pro rata in
proportion to the number of Escrow Shares beneficially deposited
by the KL Shareholders hereunder, respectively.
(c) Notwithstanding the termination of the Escrow as
contemplated above, in the event and only in the event that the
amount paid to the Internal Revenue Service with respect to the
Tax Claims was in excess of $25,000, the KL Shareholders agree to
indemnify Paychex and Pay-Fone and hold them harmless from and
against the net economic cost of any claim, loss, liability or
expense (including reasonable attorneys fees) arising out of any
claim by the Internal Revenue Service for fiscal years ended June
30, 1992 through 1995 or the California Franchise Tax Board for
fiscal years ended June 30, 1987 through 1995 for federal or
state income or franchise taxes owed by Pay-Fone, which claims
are based upon the same issues or facts that result in liability
in connection with the Tax Claims. The net economic cost to
Paychex shall be calculated after taking into account reasonably
anticipated tax benefits and taking deferred benefits into
account by discounting such benefits at the prime rate then in
effect.
In addition, in the event and only in the event that
the amount paid to the Internal Revenue Service with respect to
the Tax Claims was no greater than $25,000 but included some
liability with respect to the Accumulated Earnings Claims, the KL
Shareholders agree to indemnify Paychex and Pay-Fone and hold
them harmless from and against the net economic cost of any
claim, loss, liability or expense (including reasonable attorneys
fees) arising out of any claim by the Internal Revenue Service
for fiscal years ended June 30, 1992 through 1995 or the
California Franchise Tax Board for fiscal years ended June 30,
1987 through 1995 for federal or state income or franchise taxes
owed by Pay-Fone, which claims are based upon the same issues or
facts that result in liability in connection with the Accumulated
Earnings Claims. The net economic cost to Paychex shall be
calculated after taking into account reasonably anticipated tax
benefits and taking deferred benefits into account by discounting
such benefits at the prime rate then in effect.
Such indemnity obligation shall be satisfied by the
delivery of that number of shares of Paychex Common Stock equal
to the quotient derived by dividing the net economic cost for
which indemnification is to be made by the Merger Agreement
Price, provided in the event any of the KL Shareholders no longer
holds shares of Paychex Common Stock with which to satisfy such
KL Shareholder's proportionate indemnification obligation, in
lieu of any such share of Paychex Common stock such KL
Shareholder shall deliver cash in an amount equal to said Merger
Agreement Price.
<PAGE>
(d) The obligations of the respective KL Shareholders
hereunder shall be several and not joint and shall be in
Proportion.
7. Duties and Obligations of the Escrow Agent. The duties
and obligations of the Escrow Agent shall be limited to and
determined solely by the provisions of this Agreement, and the
Escrow Agent is not charged with knowledge of or any duties or
responsibilities in respect of any other agreement or document.
In furtherance and not in limitation of the foregoing:
(i) the Escrow Agent shall be fully protected in
relying in good faith upon any written certification,
notice, direction, request, waiver, consent, receipt or
other document that the Escrow Agent reasonably believes to
be genuine and duly authorized, executed and delivered;
(ii) the Escrow Agent shall not be liable for any
error of judgment, or for any act done or omitted by it, or
for any mistake in fact or law, or for anything that it may
do or refrain from doing in connection herewith; provided,
however, that notwithstanding any other provision in this
Agreement, the Escrow Agent shall be liable for its willful
misconduct or gross negligence or breach of this Agreement;
(iii) the Escrow Agent may seek the advice of legal
counsel selected with reasonable care in the event of any
dispute or question as to the construction of any of the
provisions of this Agreement or its duties hereunder, and it
shall incur no liability and shall be fully protected in
respect of any action taken, omitted or suffered by it in
good faith in accordance with the written opinion of such
counsel; and
(iv) in the event that the Escrow Agent shall in
any instance, after seeking the advice of legal counsel
pursuant to the immediately preceding clause, in good faith
be uncertain as to its duties or rights hereunder, it shall
be entitled to refrain from taking any action in that
instance and its sole obligation, in addition to those of
its duties hereunder as to which there is no such
uncertainty, shall be to keep safely all property held in
escrow until it shall be directed otherwise in writing by
all of the parties hereto or by a final, nonappealable order
of a court of competent jurisdiction; provided, however, in
the event that the Escrow Agent has not received such
written direction or court order within one hundred eighty
(180) calendar days after requesting the same, it shall have
the right to interplead the KL Shareholders, Pay-Fone and
Paychex in any court of competent jurisdiction and request
that such court determine its rights and duties hereunder.
<PAGE>
8. Cooperation. Each of the KL Shareholders, Pay-Fone and
Paychex shall provide to the Escrow Agent all instruments and
documents within their respective powers to provide that are
necessary for the Escrow Agent to perform its duties and
responsibilities hereunder.
9. Fees and Expenses; Indemnity.The KL Shareholders shall
pay the fees of the Escrow Agent for its standard services in
administering the Escrow hereunder as and when billed by the
Escrow Agent. Paychex and Pay-Fone, on the one hand, and the KL
Shareholders, on the other, shall in equal shares pay the fees of
the Escrow Agent for any extraordinary services required
hereunder and shall reimburse and indemnify the Escrow Agent for,
and hold it harmless against, any loss, damages, cost or expense,
including but not limited to reasonable attorneys' fees,
reasonably incurred by the Escrow Agent in connection with the
Escrow Agent's performance of its duties and obligations under
this Agreement, as well as the reasonable costs and expenses of
defending against any claim or liability relating to this
Agreement; provided that notwithstanding the foregoing, Paychex,
Pay-Fone and the KL Shareholders shall not be required to
indemnify the Escrow Agent for any such loss, liability, cost or
expense arising as a result of the Escrow Agent's willful
misconduct or gross negligence or breach of this Agreement.
10. Resignation and Removal of the Escrow Agent.
(a) The Escrow Agent may resign as such thirty (30)
calendar days following the giving of prior written notice
thereof to Paychex, Pay-Fone and the KL Shareholders. In
addition, the Escrow Agent may be removed and replaced on a date
designated in a written instrument signed by Paychex, Pay-Fone
and the KL Shareholders and delivered to the Escrow Agent.
Notwithstanding the foregoing, no such resignation or removal
shall be effective until a successor escrow agent has
acknowledged its appointment as such as provided in paragraph (c)
below. In either event, upon the effective date of such
resignation or removal, the Escrow Agent shall deliver the Escrow
Shares, any dividends and other distributions received in respect
of the Escrow Shares and not previously distributed to the KL
Shareholders, to such successor escrow agent, together with such
records maintained by the Escrow Agent in connection with its
duties hereunder and other information with respect to the Escrow
Shares as such successor may reasonably request.
(b) If a successor escrow agent shall not have
acknowledged its appointment as such as provided in paragraph (c)
below, in the case of a resignation, prior to the expiration of
thirty (30) calendar days following the date of a notice of
resignation or, in the case of a removal, on the date designated
for the Escrow Agent's removal, as the case may be, because
<PAGE>
Paychex and Pay-Fone, on the one hand, and the KL Shareholders,
on the other, are unable to agree on a successor escrow agent, or
for any other reason, the Escrow Agent may select a successor
escrow agent and any such resulting appointment shall be binding
upon all of the parties to this Agreement.
(c) Upon written acknowledgment by a successor
escrow agent appointed in accordance with the foregoing
provisions of this Section 10 of its agreement to serve as escrow
agent hereunder and the receipt of the Escrow shares, dividends
and other distributions received in respect of the Escrow Shares
and not previously distributed to the KL Shareholders, the Escrow
Agent shall be fully released and relieved of all duties,
responsibilities and obligations under this Agreement, subject to
the proviso contained in clause (ii) of Section 7, and such
successor escrow agent shall for all purposes hereof be the
Escrow Agent.
11. Notices. All notices, requests and other
communications hereunder must be in writing and will be deemed to
have been duly given if delivered personally or by facsimile
transmission or mailed (first class postage prepaid) to the
parties at the following addresses or facsimile numbers:
If to the KL Shareholders, to:
The address of each as set forth on Schedule 1
attached
with a copy to:
Alan Jacobson, Esq.
Shapiro, Rosenfeld & Close
2029 Century Park East - Suite 2600
Los Angeles, California 90067
Facsimile No.: (310) 277-1804
If to Paychex or Pay-Fone, to:
G. Thomas Clark,
Vice President of Finance
Paychex, Inc.
911 Panorama Trail South
Rochester, New York 14625
Facsimile No.: (716) 383-3428
<PAGE>
with a copy to:
Harry P. Messina, Jr., Esq.
Woods, Oviatt, Gilman, Sturman & Clarke LLP
44 Exchange Boulevard
Rochester, New York 14614
Facsimile No.: (716) 454-3968
If to the Escrow Agent, to:
Mara Escrow Company
All such notices, requests and other communications will (i)
if delivered personally to the address as provided in this
Section, be deemed given upon delivery, (ii) if delivered by
facsimile -transmission to the facsimile number as provided in
this Section, be deemed given upon receipt, and (iii) if
delivered by mail in the manner described above to the address as
provided in this Section, be deemed given upon receipt (in each
case regardless of whether such notice, request or other
communication is received by any other Person to whom a copy of
such notice is to be delivered pursuant to this Section). Any
party from time to time may change its address, facsimile number
or other information for the purpose of notices to that party by
giving notice specifying such change to the other parties hereto.
12. Amendments. Etc. This Agreement may be amended or
modified, and any of the terms hereof may be waived, only by a
written instrument duly executed by or on behalf of each of the
KL Shareholders, Pay-Fone and Paychex and, with respect to any
amendment that could adversely affect the Escrow Agent, the
Escrow Agent. No waiver by any party of any term or condition
contained of this Agreement, in any one or more instances, shall
be deemed to be or construed as a waiver of the same or any other
term or condition of this Agreement on any future occasion.
13. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California
applicable to a contract executed and performed in such State,
without giving effect to the conflicts of laws principles
thereof.
14. Anti-Dilution. Any computation hereunder involving the
Merger Agreement Price shall be appropriately adjusted to give
effect to any change in the capital structure of Paychex having a
record date after the Effective Date and prior to the application
of such computation, including without limitation stock splits,
reverse stock splits, recapitalizations, reorganizations,
mergers, and consolidations, such that the Merger Agreement Price
shall relate to the securities into which a share of Paychex
Common Stock outstanding on the Effective Date would have been
transformed.
<PAGE>
15. Miscellaneous. This Agreement is binding upon and will
inure to the benefit of the parties hereto and their respective
successors and permitted assigns. The headings used in this
Agreement have been inserted for convenience of reference only
and do not define or limit the provisions hereof. This Agreement
may be executed in any number of counterparts, each of which will
be deemed an original, but all of which together will constitute
one and the same instrument.
16. Absence of Escrow. In the event (a) the Tax Claims are
resolved before the Effective Time, so that no escrow is to be
established hereunder, but Pay-Fone either paid more than $25,000
to the Internal Revenue Service with respect to the Tax Claims or
paid some amount to the Internal Revenue Service with respect to
the Accumulated Earnings Claims so that obligations are imposed
upon the KL Shareholders pursuant to Section 6(c) hereof or (b)
the Escrow is terminated in accordance with Section 6(a) hereof
and Pay-Fone either paid more than $25,000 to the Internal
Revenue Service with respect to the Tax Claims or paid some
amount to the Internal Revenue Service with respect to the
Accumulated Earnings Claims so that obligations are imposed upon
the KL Shareholders pursuant to Section 6(c) hereof, then this
agreement shall be entered into or continued, as the case may be,
among Paychex, Pay-Fone and the shareholders without the
involvement of the Escrow Agent or the imposition or
continuation, as the case may be, of any rights and obligations
on the part of the Escrow Agent.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written.
PAYCHEX,INC.
By:/s/G. Thomas Clark
---------------------------------
Name: G. Thomas Clark
Title: Vice President
PAY-FONE SYSTEMS, INC.
By:/s/Mark Kelton
---------------------------------
Name: Mark Kelton
Title: President
<PAGE>
KL SHAREHOLDERS:
ALLIED CONTRACTORS, INC.
By:/s/Richard Kelton
---------------------------------
Name: Richard Kelton
Title: President
/s/Richard Kelton
------------------------------------
Richard Kelton
/s/David Kelton
------------------------------------
David Kelton
/s/Mark Kelton
------------------------------------
Mark Kelton
/s/Allen Kahn, M.D.
------------------------------------
Allen Kahn, M.D.
/s/Edwin Johnson
------------------------------------
Edwin Johnson
/s/David L. Malcolm
------------------------------------
David L. Malcolm
ESCROW AGENT:
Mara Escrow Company
By:
--------------------------------
Name:
Title:
<PAGE>
SCHEDULE I
ESCROW SHARES
KL SHAREHOLDERS Shares
--------------- ------
Deposited
- ---------
Allied Contractors, Inc.
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Richard Kelton
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
David Kelton
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Mark Kelton
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Allen Kahn, M.D.
55 East Washington Street
Chicago, IL 60602-2174
Edwin Johnson
P.O. Box 288
Hazelcrest, IL 60429
David L. Malcolm
750 "B" Street - Suite 3130
San Diego, California 92101
EXHIBIT 5
---------
Woods, Oviatt, Gilman, Sturman and Clark
44 Exchange Street
Rochester, NY 14614
April 12, 1995
Paychex, Inc.
911 Panorama Trail South
Rochester, New York 14625
Re: Paychex, Inc.
Registration Statement on Form S-4
Gentlemen:
We are acting as counsel for Paychex, Inc. (the
"Company"), a Delaware corporation, in connection with the
proposed merger of Paychex Merger Corp., a wholly owned
subsidiary of the Company with and into Pay-Fone Systems, Inc.
(the "Merger") and the issuance of not more than 308,089 shares
of the $.01 par value common stock of the Company to be issued at
the Effective Time of the Merger, which shares are covered by the
above captioned registration statement (the "Registration
Statement").
We are familiar with the Certificate of Incorporation
of the Company, as amended, the by-laws of the Company and the
corporate proceedings taken to authorize the issuance of the
aforesaid common stock.
Based upon the foregoing, we are of the opinion that:
1. The Company has been duly organized and is validly
existing as a corporation under the laws of the State of
Delaware.
2. All necessary action has been taken by the Board
of Directors of the Company to authorize the issuance of the
shares of common stock to be issued at the Effective Time of the
Merger.
3. When certificates for the shares of common stock
being issued by the Company in the Merger have been delivered in
accordance with the terms of the Merger, such shares of common
stock will be legally issued, fully paid and non-assessable.
<PAGE>
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference made
to this firm under the heading "Experts" in the Proxy
Statement/Prospectus constituting a part of the Registration
Statement.
Very truly yours,
WOODS, OVIATT, GILMAN, STURMAN & CLARKE LLP
/s/ Harry P. Messina, Jr.
-----------------------------------
Harry P. Messina, Jr.
<PAGE>
EXHIBIT 8.1
-----------
HUGHES HUBBARD AND REED
350 South Grand Ave.
Los Angeles, CA 90071
April 10, 1995
Pay-Fone Systems, Inc.
8100 Balboa Boulevard
Van Nuys, California 91406
Dear Sirs:
You have asked us to render our opinion concerning certain federal
income tax consequences of the proposed transaction described below.
Facts
- -----
Pay-Fone Systems, Inc. ("Pay-Fone") is a California corporation
engaged in the business of providing automated payroll and tax reporting
and payment services through five offices in California. Pay-Fone has
issued and outstanding one class of voting common stock (the
"Pay-Fone Shares").
Paychex, Inc. ("Paychex") is a Delaware corporation engaged in the
business of providing automated payroll and tax reporting and payment
services and human resource services nationwide. Paychex has issued and
outstanding one class of voting common stock (the "Paychex Common
Stock").
Paychex Merger Corp. ("Merger Sub") is a Delaware corporation
formed for the purpose of engaging in the transaction described below.
All of the outstanding stock of Merger Sub is owned by Paychex.
The Proposed Transaction
- ------------------------
It is proposed that subject to the satisfaction of certain
conditions, Merger Sub will be merged with and into Pay-Fone in a
statutory merger pursuant to the corporation laws of the states of
Delaware and California (the "Merger"). The terms upon which the Merger
will be effected are set forth in an Agreement and Plan of Merger dated as
of March 17, 1995 (the "Merger Agreement") by and among Merger Sub,
Paychex and Pay-Fone. At the Effective Time (as defined in the Merger
Agreement) of the Merger, the Pay-Fone Shares will be converted into
shares of Paychex Common Stock at the Exchange Ratio (as defined in the
"Merger Agreement"), except that (i) a holder who is entitled to receive a
fractional share of Paychex Common Stock will receive cash in lieu of such
fractional share; and (ii) a holder who exercises dissenters' rights will
receive cash in lieu of Paychex Common Stock.
We understand that no rulings have been sought from the Internal
Revenue Service concerning the federal income tax consequences of the
Merger.
<PAGE>
Opinions
- --------
For purposes of rendering the opinions set forth below, we have made
such investigations of law, and have examined such documents and made such
inquiries, as we have deemed relevant or proper.
Based upon the foregoing, it is our opinion that under current law,
if the Merger qualifies as a "tax-free" reorganization (a
"Reorganization") under Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended (the "Code"), the following
federal income tax consequences will result from the Merger.
(a) No gain or loss would be recognized by a holder of Pay-Fone
Shares upon the receipt of the Paychex Common Stock in exchange for his
Pay-Fone Shares (except for cash received in lieu of a fractional share).
(b) The aggregate tax basis of the Paychex Common Stock received by
a Pay-Fone shareholder in the Merger (including a fractional share
interest, if any) would be the same as the aggregate tax basis of the
Pay-Fone Shares surrendered in exchange therefor.
(c) The holding period of the Paychex Common Stock (including a
fractional share interest, if any) received by a Pay-Fone shareholder in
the Merger would include the holding period of the Pay-Fone Shares
surrendered in exchange therefor, provided that the Pay-Fone Shares so
surrendered are held as a capital asset at the Effective Time of the
Merger.
(d) A Pay-Fone shareholder who receives cash in lieu of a fractional
share of Paychex Common Stock in connection with the Merger would
recognize gain or loss equal to the difference between the cash received
and the basis of such fractional share. Such gain or loss would be
capital gain or loss, provided that the Pay-Fone Shares are held as a
capital asset at the Effective Time of the Merger, and would be long-term
capital gain or loss if the Pay-Fone Shares had been held for more than
one year.
(e) No gain or loss would be recognized by Paychex, Merger Sub or
Pay-Fone in connection with the Merger.
If the Merger does not satisfy the requirements for a Reorganization,
a Pay-Fone shareholder would be treated as if he sold his Pay-Fone Shares
in a taxable transaction. In such event, a Pay-Fone shareholder would
recognize capital gain or loss in an amount equal to the difference
between the fair market value, as of the Effective Time of the Merger, of
the Paychex Common Stock (and the amount of cash received in lieu of a
fractional share) and the tax basis of the Pay-Phone Shares surrendered in
exchange therefor, provided that the Pay-Fone Shares so surrendered are
held as a capital asset at the Effective Time of the Merger. Such capital
gain or loss would be long-term capital gain or loss if the Pay-Fone
Shares have been held for more than one year. A Pay-Fone shareholder's
aggregate basis in the Paychex Common Stock received in the Merger would
equal its fair market value as of the Effective Time of the Merger, and
the Pay-Fone shareholder's holding period of such Paychex Common Stock
would begin the day after the Merger.
<PAGE>
Whether or not the Merger qualifies as a Reorganization, a Pay-Fone
shareholder who exercises dissenters' rights and receives cash in the
Merger in lieu of Paychex Common Stock will be treated as having received
the cash as a distribution in redemption of his Pay-Fone Shares as
provided in Code Section 302. Such shareholder generally will recognize
capital gain or loss measured by the difference between the amount of cash
received and his aggregate adjusted tax basis in the Pay-Fone Shares,
provided the Pay-Fone Shares were held as a capital asset at the Effective
Time of the Merger. Such capital gain or loss will be long-term capital
gain or loss if the Pay-Fone Shares have been held for more than one year.
A shareholder exercising dissenters' rights who also owns Paychex Common
Stock, or who is deemed for federal income tax purposes to own
constructively Paychex Common Stock actually owned by other persons or
entities, may recognize dividend income, taxable as ordinary income, equal
to the amount of the cash received.
In order to qualify as a "tax-free" reorganization under Code
Sections 368(a)(1)(A) and 368(a)(2)(E), the Merger would be required,
among other things, to satisfy the continuity of business enterprises and
continuity of interest requirements. Since certain actions by Pay-Fone or
its historic shareholders occurring after the Merger could violate the
continuity of business enterprise or continuity of interest requirements,
we express no opinion herein as to whether the Merger will qualify as a
reorganization under Code Sections 368(a)(1)(A) and 368(a)(2)(E).
This opinion is furnished by us solely for your benefit and may not
be relied upon for any other purpose. We understand that this opinion
will be summarized in Pay-Fone's Proxy Statement for a Special Meeting of
Shareholders to be held on June 14, 1995, for the information of the
Pay-Fone shareholders, and will be filed with the Securities and Exchange
Commission as an Exhibit to the Registration Statement on Form S-4 of
Paychex to be filed on or about April 12, 1995. We consent to the filing
of this opinion as an Exhibit to the Registration Statement and to the use
of our name under the caption "Legal Matters" in the Prospectus which is a
part thereof. Except to this extent, this opinion may not be furnished
to, used by, circulated to, quoted to or otherwise referred to by any
other person without our prior written consent in each instance.
Very truly yours,
/s/ Hughes Hubbard & Reed
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Paychex, Inc.
for the registration of 308,089 shares of its common stock and to the
incorporation by reference therein of our reports dated July 1, 1994, with
respect to the consolidated financial statements of Paychex, Inc.
incorporated by reference in its Annual Report (Form 10-K) for the year
ended May 31, 1994 and the related financial statement schedules included
therein, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
April 14, 1995
<PAGE>
EXHIBIT 23.2
------------
The Board of Directors
Pay-Fone Systems, Inc.:
We consent to the inclusion of our report dated September 1, 1994, with
respect to the consolidated balance sheets of Pay-Fone Systems, Inc. and
subsidiary as of June 30, 1994 and 1993, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the
years then ended, which report appears in the Form S-4 of Paychex, Inc.
dated April 14, 1995.
Our report refers to a change in the method of accounting for income
taxes.
/s/ KPMG Peat Marwick, LLP
Los Angles, California
April 11, 1995
<PAGE>
EXHIBIT 23.3
-----------
HUGHES HUBBARD AND REED
350 South Grand Ave.
Los Angeles, CA 90071
April 10, 1995
Pay-Fone Systems, Inc.
8100 Balboa Boulevard
Van Nuys, California 91406
Dear Sirs:
You have asked us to render our opinion concerning certain federal
income tax consequences of the proposed transaction described below.
Facts
- -----
Pay-Fone Systems, Inc. ("Pay-Fone") is a California corporation
engaged in the business of providing automated payroll and tax reporting
and payment services through five offices in California. Pay-Fone has
issued and outstanding one class of voting common stock (the
"Pay-Fone Shares").
Paychex, Inc. ("Paychex") is a Delaware corporation engaged in the
business of providing automated payroll and tax reporting and payment
services and human resource services nationwide. Paychex has issued and
outstanding one class of voting common stock (the "Paychex Common
Stock").
Paychex Merger Corp. ("Merger Sub") is a Delaware corporation
formed for the purpose of engaging in the transaction described below.
All of the outstanding stock of Merger Sub is owned by Paychex.
The Proposed Transaction
- ------------------------
It is proposed that subject to the satisfaction of certain
conditions, Merger Sub will be merged with and into Pay-Fone in a
statutory merger pursuant to the corporation laws of the states of
Delaware and California (the "Merger"). The terms upon which the Merger
will be effected are set forth in an Agreement and Plan of Merger dated as
of March 17, 1995 (the "Merger Agreement") by and among Merger Sub,
Paychex and Pay-Fone. At the Effective Time (as defined in the Merger
Agreement) of the Merger, the Pay-Fone Shares will be converted into
shares of Paychex Common Stock at the Exchange Ratio (as defined in the
"Merger Agreement"), except that (i) a holder who is entitled to receive a
fractional share of Paychex Common Stock will receive cash in lieu of such
fractional share; and (ii) a holder who exercises dissenters' rights will
receive cash in lieu of Paychex Common Stock.
We understand that no rulings have been sought from the Internal
Revenue Service concerning the federal income tax consequences of the
Merger.
<PAGE>
Opinions
- --------
For purposes of rendering the opinions set forth below, we have made
such investigations of law, and have examined such documents and made such
inquiries, as we have deemed relevant or proper.
Based upon the foregoing, it is our opinion that under current law,
if the Merger qualifies as a "tax-free" reorganization (a
"Reorganization") under Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended (the "Code"), the following
federal income tax consequences will result from the Merger.
(a) No gain or loss would be recognized by a holder of Pay-Fone
Shares upon the receipt of the Paychex Common Stock in exchange for his
Pay-Fone Shares (except for cash received in lieu of a fractional share).
(b) The aggregate tax basis of the Paychex Common Stock received by
a Pay-Fone shareholder in the Merger (including a fractional share
interest, if any) would be the same as the aggregate tax basis of the
Pay-Fone Shares surrendered in exchange therefor.
(c) The holding period of the Paychex Common Stock (including a
fractional share interest, if any) received by a Pay-Fone shareholder in
the Merger would include the holding period of the Pay-Fone Shares
surrendered in exchange therefor, provided that the Pay-Fone Shares so
surrendered are held as a capital asset at the Effective Time of the
Merger.
(d) A Pay-Fone shareholder who receives cash in lieu of a fractional
share of Paychex Common Stock in connection with the Merger would
recognize gain or loss equal to the difference between the cash received
and the basis of such fractional share. Such gain or loss would be
capital gain or loss, provided that the Pay-Fone Shares are held as a
capital asset at the Effective Time of the Merger, and would be long-term
capital gain or loss if the Pay-Fone Shares had been held for more than
one year.
(e) No gain or loss would be recognized by Paychex, Merger Sub or
Pay-Fone in connection with the Merger.
If the Merger does not satisfy the requirements for a Reorganization,
a Pay-Fone shareholder would be treated as if he sold his Pay-Fone Shares
in a taxable transaction. In such event, a Pay-Fone shareholder would
recognize capital gain or loss in an amount equal to the difference
between the fair market value, as of the Effective Time of the Merger, of
the Paychex Common Stock (and the amount of cash received in lieu of a
fractional share) and the tax basis of the Pay-Phone Shares surrendered in
exchange therefor, provided that the Pay-Fone Shares so surrendered are
held as a capital asset at the Effective Time of the Merger. Such capital
gain or loss would be long-term capital gain or loss if the Pay-Fone
Shares have been held for more than one year. A Pay-Fone shareholder's
aggregate basis in the Paychex Common Stock received in the Merger would
equal its fair market value as of the Effective Time of the Merger, and
the Pay-Fone shareholder's holding period of such Paychex Common Stock
would begin the day after the Merger.
<PAGE>
Whether or not the Merger qualifies as a Reorganization, a Pay-Fone
shareholder who exercises dissenters' rights and receives cash in the
Merger in lieu of Paychex Common Stock will be treated as having received
the cash as a distribution in redemption of his Pay-Fone Shares as
provided in Code Section 302. Such shareholder generally will recognize
capital gain or loss measured by the difference between the amount of cash
received and his aggregate adjusted tax basis in the Pay-Fone Shares,
provided the Pay-Fone Shares were held as a capital asset at the Effective
Time of the Merger. Such capital gain or loss will be long-term capital
gain or loss if the Pay-Fone Shares have been held for more than one year.
A shareholder exercising dissenters' rights who also owns Paychex Common
Stock, or who is deemed for federal income tax purposes to own
constructively Paychex Common Stock actually owned by other persons or
entities, may recognize dividend income, taxable as ordinary income, equal
to the amount of the cash received.
In order to qualify as a "tax-free" reorganization under Code
Sections 368(a)(1)(A) and 368(a)(2)(E), the Merger would be required,
among other things, to satisfy the continuity of business enterprises and
continuity of interest requirements. Since certain actions by Pay-Fone or
its historic shareholders occurring after the Merger could violate the
continuity of business enterprise or continuity of interest requirements,
we express no opinion herein as to whether the Merger will qualify as a
reorganization under Code Sections 368(a)(1)(A) and 368(a)(2)(E).
This opinion is furnished by us solely for your benefit and may not
be relied upon for any other purpose. We understand that this opinion
will be summarized in Pay-Fone's Proxy Statement for a Special Meeting of
Shareholders to be held on June 14, 1995, for the information of the
Pay-Fone shareholders, and will be filed with the Securities and Exchange
Commission as an Exhibit to the Registration Statement on Form S-4 of
Paychex to be filed on or about April 12, 1995. We consent to the filing
of this opinion as an Exhibit to the Registration Statement and to the use
of our name under the caption "Legal Matters" in the Prospectus which is a
part thereof. Except to this extent, this opinion may not be furnished
to, used by, circulated to, quoted to or otherwise referred to by any
other person without our prior written consent in each instance.
Very truly yours,
/s/ Hughes Hubbard & Reed
<PAGE>
EXHIBIT 23.4
------------
CLUMECK, STERN, PHILLIPS & SCHWARTZ
15910 Ventura Boulevard, Suite 1633
Encino, CA 91436
The Board of Directors
Pay-Fone Systems, Inc.:
We consent to incorporation in the registration statement on Form S-4 of
Paychex, Inc. of our report dated August 21, 1992 relating to the
statement of operations, shareholders' equity and cash flows of Pay-Fone
Systems, Inc. for the year ended June 30, 1992.
/s/ CLUMECK, STERN, PHILLIPS & SCHWARTZ
Los Angeles, California
April 11, 1995
<PAGE>
EXHIBIT 23.5
------------
Woods, Oviatt, Gilman, Sturman and Clark
44 Exchange Street
Rochester, NY 14614
April 12, 1995
Paychex, Inc.
911 Panorama Trail South
Rochester, New York 14625
Re: Paychex, Inc.
Registration Statement on Form S-4
Gentlemen:
We are acting as counsel for Paychex, Inc. (the
"Company"), a Delaware corporation, in connection with the
proposed merger of Paychex Merger Corp., a wholly owned
subsidiary of the Company with and into Pay-Fone Systems, Inc.
(the "Merger") and the issuance of not more than 308,089 shares
of the $.01 par value common stock of the Company to be issued at
the Effective Time of the Merger, which shares are covered by the
above captioned registration statement (the "Registration
Statement").
We are familiar with the Certificate of Incorporation
of the Company, as amended, the by-laws of the Company and the
corporate proceedings taken to authorize the issuance of the
aforesaid common stock.
Based upon the foregoing, we are of the opinion that:
1. The Company has been duly organized and is validly
existing as a corporation under the laws of the State of
Delaware.
2. All necessary action has been taken by the Board
of Directors of the Company to authorize the issuance of the
shares of common stock to be issued at the Effective Time of the
Merger.
3. When certificates for the shares of common stock
being issued by the Company in the Merger have been delivered in
accordance with the terms of the Merger, such shares of common
stock will be legally issued, fully paid and non-assessable.
<PAGE>
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference made
to this firm under the heading "Experts" in the Proxy
Statement/Prospectus constituting a part of the Registration
Statement.
Very truly yours,
WOODS, OVIATT, GILMAN, STURMAN & CLARKE LLP
/s/ Harry P. Messina, Jr.
-----------------------------------
Harry P. Messina, Jr.
<PAGE>
EXHIBIT 24
----------
Power of Attorney
The undersigned director of Paychex, Inc. does hereby
constitute and appoint B. Thomas Golisano and G. Thomas Clark,
and each of them, his true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities,
to execute the S-4 Registration Statement with respect to the
registration of not more than 308,089 shares of common stock, and
any amendments thereto, and to file the same with all exhibits
thereto and any other documents in connection therewith with the
Securities and Exchange Commission ("Commission") and to
otherwise comply with the Securities Act of 1933, and the rules
and regulations and requirements of the Commission in connection
therewith, granting unto said attorneys-in-fact and agents, and
each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either
of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Dated: April 10, 1995 /s/ Phillip Horsley
------------------------------
Phillip Horsley
<PAGE>
EXHIBIT 24
----------
Power of Attorney
The undersigned director of Paychex, Inc. does hereby
constitute and appoint B. Thomas Golisano and G. Thomas Clark,
and each of them, his true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities,
to execute the S-4 Registration Statement with respect to the
registration of not more than 308,089 shares of common stock, and
any amendments thereto, and to file the same with all exhibits
thereto and any other documents in connection therewith with the
Securities and Exchange Commission ("Commission") and to
otherwise comply with the Securities Act of 1933, and the rules
and regulations and requirements of the Commission in connection
therewith, granting unto said attorneys-in-fact and agents, and
each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either
of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Dated: April 7, 1995 /s/ Grant M. Inman
------------------------------
Grant M. Inman
<PAGE>
EXHIBIT 24
----------
Power of Attorney
The undersigned director of Paychex, Inc. does hereby
constitute and appoint B. Thomas Golisano and G. Thomas Clark,
and each of them, his true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities,
to execute the S-4 Registration Statement with respect to the
registration of not more than 308,089 shares of common stock, and
any amendments thereto, and to file the same with all exhibits
thereto and any other documents in connection therewith with the
Securities and Exchange Commission ("Commission") and to
otherwise comply with the Securities Act of 1933, and the rules
and regulations and requirements of the Commission in connection
therewith, granting unto said attorneys-in-fact and agents, and
each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either
of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Dated: April 10, 1995 /s/ Donald W. Brinckman
------------------------------
Donald W. Brinckman
<PAGE>
EXHIBIT 24
----------
Power of Attorney
The undersigned director of Paychex, Inc. does hereby
constitute and appoint B. Thomas Golisano and G. Thomas Clark,
and each of them, his true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities,
to execute the S-4 Registration Statement with respect to the
registration of not more than 308,089 shares of common stock, and
any amendments thereto, and to file the same with all exhibits
thereto and any other documents in connection therewith with the
Securities and Exchange Commission ("Commission") and to
otherwise comply with the Securities Act of 1933, and the rules
and regulations and requirements of the Commission in connection
therewith, granting unto said attorneys-in-fact and agents, and
each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either
of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Dated: April 8, 1995 /s/ J. Robert Sebo
-----------------------------
J. Robert Sebo
<PAGE>
EXHIBIT 24
----------
Power of Attorney
The undersigned director of Paychex, Inc. does hereby
constitute and appoint B. Thomas Golisano and G. Thomas Clark,
and each of them, his true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities,
to execute the S-4 Registration Statement with respect to the
registration of not more than 308,089 shares of common stock, and
any amendments thereto, and to file the same with all exhibits
thereto and any other documents in connection therewith with the
Securities and Exchange Commission ("Commission") and to
otherwise comply with the Securities Act of 1933, and the rules
and regulations and requirements of the Commission in connection
therewith, granting unto said attorneys-in-fact and agents, and
each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either
of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Dated: April 11, 1995 /s/ Harry P. Messina, Jr.
------------------------------
Harry P. Messina, Jr.
<PAGE>
EXHIBIT 99.1
------------
PAY-FONE SYSTEMS, INC.
PROXY FOR
SPECIAL MEETING OF SHAREHOLDERS
__________, 1995
KNOW ALL MEN BY THESE PRESENTS that the undersigned hereby constitutes
and appoints RICHARD KELTON and MARK KELTON and each of them, the attorneys
and proxies of the undersigned with full power of substitution to appear
and to vote all of the shares of Common Stock of Pay-Fone Systems, Inc.
("Pay-Fone") held of record by the undersigned on _______________, 1995 at
the Special Meeting of Shareholders to be held on _______________, 1995 or
any adjournment thereof, as designated below:
(1) To approve an Agreement and Plan of Merger pursuant to which Pay-Fone
will become a wholly owned subsidiary of Paychex, Inc. and Pay-Fone
shareholders will become stockholders of Paychex, Inc.
_____ FOR _____ AGAINST _____ ABSTAIN
(2) IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE ON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT
THEREOF.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
PAY-FONE SYSTEMS, INC. IF NO VOTE IS INDICATED, THIS PROXY WILL BE VOTED
FOR PROPOSAL (1).
YOU ARE URGED TO DATE, SIGN AND RETURN PROMPTLY THIS PROXY IN THE
ENVELOPE PROVIDED. IT IS IMPORTANT FOR YOU TO BE REPRESENTED AT THE
MEETING. THE EXECUTION OF YOUR PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE
IN PERSON IF YOU ARE PRESENT AT THE MEETING.
IMPORTANT: Please sign exactly as your name or names appear on the
share certificates, and when signing as an attorney, executor,
administrator, trustee or guardian, give your full title as such. If the
signatory is a corporation, sign the full corporate name by duly authorized
officer, or if a partnership, sign in partnership name by authorized
person.
Date: _______________, 1995 Signature: ____________________
____________________
