<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration No. 33-58619
PAY-FONE SYSTEMS, INC.
8100 BALBOA BOULEVARD
VAN NUYS, CALIFORNIA 91406
CHAIRMAN'S LETTER TO SHAREHOLDERS
May 24, 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 15, 1995, at 10:00 a.m.
local time.
At the Special Meeting, shareholders will be asked to approve and adopt a
Restated 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 prior to the Special Meeting.
The Exchange Ratio will be calculated primarily on the basis of a total value
for Pay-Fone of $10,475,000 (subject to reduction for certain events) and the
market price of Paychex Common Stock during a period prior to the Special
Meeting. By way of example, a share of Pay-Fone Common Stock would be converted
into Paychex Common Stock having a value of $6.95 based on the average closing
price of Paychex Common Stock during the five trading days through May 19, 1995
(the first five days of the seventeen trading day period during which the market
price of Paychex Common Stock will be measured) and other events through that
date. This example may not be indicative of the final application of the formula
because of different closing prices of Paychex Common Stock during the remainder
of the measuring period and events which could cause a further decrease in the
$10,475,000 total value. Other examples of possible applications of the formula
are set forth on page 24 of the accompanying Proxy Statement/Prospectus. The
formula by which the Exchange Ratio will be determined and other terms of the
proposed Merger are also 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.
PAY-FONE HAS ESTABLISHED TWO SPECIAL EXTENSIONS ON ITS TOLL-FREE NUMBER,
800-472-9765, FOR USE BY SHAREHOLDERS IN CONNECTION WITH THE MERGER. EXTENSION
160, THE EXCHANGE RATIO INFORMATION EXTENSION, WILL PROVIDE CURRENT INFORMATION
REGARDING THE PROVISIONAL EXCHANGE RATIO AND AFTER JUNE 7TH, THE DEFINITIVE
EXCHANGE RATIO. EXTENSION 180, THE PROXY SERVICE EXTENSION, WILL ENABLE
SHAREHOLDERS TO DELIVER PROXIES TELEPHONICALLY. MORE DETAILED INFORMATION
REGARDING THESE SPECIAL TELEPHONE SERVICES IS CONTAINED IN THE ACCOMPANYING
PROXY STATEMENT/PROSPECTUS.
Sincerely,
Richard Kelton
Chairman of the Board
<PAGE> 2
PAY-FONE SYSTEMS, INC.
8100 BALBOA BOULEVARD
VAN NUYS, CA 91406
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 15, 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 15, 1995, at 10:00 a.m. local time, to vote with respect to
the approval and adoption of the Restated 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 prior to the Special Meeting. The Exchange Ratio will be calculated
primarily on the basis of a total value for Pay-Fone of $10,475,000 (subject to
reduction) and the market price of Paychex Common Stock during a period prior to
the Special Meeting. 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 24, 1995
<PAGE> 3
PROXY STATEMENT
OF
PAY-FONE SYSTEMS, INC.
FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JUNE 15, 1995
------------------------
PROSPECTUS OF
PAYCHEX, INC.
462,134 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 24, 1995.
At the Special Meeting, the shareholders of Pay-Fone will consider and vote
upon a proposal to approve and adopt the Restated Agreement and Plan of Merger
which amends and restates as of May 8, 1995 the Agreement and Plan of Merger,
dated as of March 17, 1995 (as so amended and restated, 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"). The number of shares or
fraction of a share of Paychex Common Stock, as constituted after May 25, 1995,
into which a Pay-Fone Share will be converted (the "Exchange Ratio") will be
determined by dividing $10,475,000, subject to certain adjustments, by the
product of (i) the seventeen trading day average of the last reported sale
prices for a share of Paychex Common Stock on the NASDAQ National Market during
the eight trading days commencing with May 26, 1995 and terminating on June 7,
1995 and two-thirds ( 2/3) of the last reported sale prices of a share of
Paychex Common Stock (as then constituted) on the NASDAQ National Market for the
nine trading days commencing on May 15, 1995 and terminating on May 25, 1995,
which average may be adjusted by up to $2.00 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 on June 7,
1995. See "THE MERGER -- Merger Consideration."
The Merger Agreement, as originally entered into, provided that the
Exchange Ratio would be appropriately adjusted to reflect a stock split or
similar transaction affecting Paychex Common Stock prior to the date on which
the Merger becomes effective. The Board of Directors of Paychex (the "Paychex
Board")
<PAGE> 4
has declared a 3-for-2 stock split of Paychex Common Stock (the "Paychex 1995
Stock Split") in the form of a stock dividend payable on May 25, 1995 to
shareholders of record on May 2, 1995. The date of the Special Meeting and the
date on which the Merger would become effective will both be subsequent to May
25, 1995, the effective date of the Paychex 1995 Stock Split. Accordingly, the
parties to the Merger Agreement amended and restated the Merger Agreement in
order, among other things, to take the Paychex 1995 Stock Split into account
and, except as specifically noted in this Proxy Statement/Prospectus, all
references to Paychex Common Stock and shares thereof will refer to Paychex
Common Stock as it will be constituted after the Paychex 1995 Stock Split is
effective.
This Proxy Statement/Prospectus also constitutes the prospectus of Paychex
with respect to a maximum of 462,134 shares of Paychex Common Stock to be issued
in connection with the Merger in exchange for the outstanding Pay-Fone Shares.
On May 19, 1995, the last reported sale price on the NASDAQ National Market of a
share of Paychex Common Stock, as constituted before the effectiveness of the
Paychex 1995 Stock Split, was $48.13. The equivalent price for a share of
Paychex Common Stock as it will be constituted after the effective date of the
Paychex 1995 Stock Split would be $32.08.
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 24, 1995.
2
<PAGE> 5
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
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.
3
<PAGE> 6
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.
Information on a per share basis and information as to shares or options
held by management presented in the foregoing documents has not been
restated to give effect to the Paychex 1995 Stock Split.
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.
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 OF PAY-FONE SHARES, 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 JUNE 7, 1995.
4
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY............................................................................... 7
The Companies....................................................................... 7
The Special Meeting................................................................. 7
The Merger.......................................................................... 8
Selected Financial and Per Share Data............................................... 13
Comparative Market Prices and Dividend Data......................................... 15
THE SPECIAL MEETING................................................................... 16
Purpose of the Meeting.............................................................. 16
Voting Rights; Record Date.......................................................... 16
Solicitation of Proxies............................................................. 17
THE COMPANIES......................................................................... 17
Paychex............................................................................. 17
Merger Sub.......................................................................... 18
Pay-Fone............................................................................ 18
THE MERGER............................................................................ 21
General............................................................................. 21
Background of the Merger............................................................ 21
Pay-Fone's Reasons for the Merger................................................... 22
Paychex' Reasons for the Merger..................................................... 23
Merger Consideration................................................................ 23
Fractional Shares................................................................... 24
Procedures for Exchange of Certificates............................................. 25
Certain Federal Income Tax Consequences............................................. 25
Accounting Treatment................................................................ 27
Rights of Dissenting Shareholders................................................... 27
Effect on Pay-Fone Stock Options.................................................... 29
Interests of Certain Persons in the Merger.......................................... 29
Resale of Paychex Common Stock...................................................... 30
CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND OTHER AGREEMENTS....................... 31
Representations and Warranties...................................................... 31
Business of Pay-Fone Pending the Merger............................................. 31
Certain Covenants of Paychex........................................................ 32
No Solicitation..................................................................... 32
Conditions/Waivers.................................................................. 32
Amendment/Termination............................................................... 34
Regulatory Approvals................................................................ 34
Expenses and Fees................................................................... 34
Affiliates Agreement................................................................ 34
Escrow and Indemnity Agreement...................................................... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PAY-FONE......................................................................... 37
Results of Operations............................................................... 37
Liquidity and Capital Resources..................................................... 38
OWNERSHIP OF PAY-FONE SHARES.......................................................... 39
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF PAYCHEX COMMON STOCK................................................... 40
COMPARISON OF RIGHTS OF HOLDERS OF PAY-FONE SHARES AND PAYCHEX COMMON STOCK........... 41
Indemnification..................................................................... 41
Limitation of Director Liability.................................................... 41
Cumulative Voting................................................................... 42
Super-Majority Voting............................................................... 42
Size of Board of Directors.......................................................... 42
Special Meetings of Shareholders.................................................... 42
Vote Required for Certain Mergers or Reorganizations................................ 43
Class Vote for Certain Reorganizations.............................................. 43
Fairness Opinion for Certain Reorganizations........................................ 43
Delaware Anti-Takeover Law.......................................................... 44
Appraisal Rights.................................................................... 44
Inspection of Shareholder List...................................................... 44
Loans to Directors, Officers and Employees.......................................... 44
Interested Director Transactions.................................................... 45
Voting by Ballot.................................................................... 45
Payment of Dividends and Repurchase of Shares of Common Stock....................... 45
LEGAL OPINIONS........................................................................ 45
EXPERTS............................................................................... 46
PAY-FONE CONSOLIDATED FINANCIAL STATEMENTS............................................ 47
ANNEXES
I. Restated 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
</TABLE>
6
<PAGE> 9
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 91406; 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 15, 1995, at the executive
offices of Pay-Fone, 8100 Balboa Boulevard, Van
Nuys, California 91406.
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 1,495,023 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 approximately 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."
7
<PAGE> 10
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.
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
adjustments, by (b) the product of (i) a price
(the "Formula Price") based on the seventeen
trading day average of the last reported sale
prices of Paychex Common Stock on the NASDAQ
National Market during the eight trading days
commencing with May 26, 1995 and terminating on
June 7, 1995 and two-thirds ( 2/3) of the last
reported sale prices of a share of Paychex Common
Stock (as then constituted) on the NASDAQ
National Market for the nine trading days
commencing on May 15, 1995 and terminating on May
25, 1995 (the "Actual Price"), which average may
be adjusted by up to $2.00 as specified in the
Merger Agreement and (ii) the sum of the number
of Pay-Fone Shares outstanding at the close of
business on June 7, 1995 and the number of
Pay-Fone Shares issuable upon exercise of then
exercisable stock options granted by Pay-Fone.
The Merger Agreement, as originally entered into,
provided that the Exchange Ratio would be
appropriately adjusted to reflect a stock split
or similar transaction affecting Paychex Common
Stock prior to the date on which the Merger
becomes effective. The Paychex Board has declared
a 3-for-2 stock split of Paychex Common Stock
(the Paychex 1995 Stock Split) in the form of a
stock dividend payable on May 25, 1995 to
shareholders of record on May 2, 1995. The date
of the Special Meeting and the date on which the
Merger would become effective will both be
subsequent to May 25, 1995, the effective date of
the Paychex 1995 Stock Split. When amending and
restating the Merger Agreement, the parties
thereto explicitly took the Paychex 1995 Stock
Split into account and, except as specifically
noted in this Proxy Statement/Prospectus, all
references to Paychex Common Stock and shares
thereof refer to Paychex Common Stock as it will
be constituted after the Paychex 1995 Stock Split
is effective.
The $10,475,000 will be reduced by (a) the sum of
all amounts expended by Pay-Fone between March
17, 1995 and June 7, 1995 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 were
specified in a notice from Paychex to Pay-
8
<PAGE> 11
Fone given prior to June 8, 1995 and in the
aggregate exceed $175,000 (the "General
Adjustment"), which reductions will be offset by
(c) the sum of all benefits, each of which
exceeds $25,000, 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 and were
specified in a notice from Pay-Fone to Paychex
given prior to June 8, 1995 (the "Positive
Adjustment"). Through May 19, 1995, no notice had
been given relating to losses or benefits that
would be taken into account in calculating the
General Adjustment or the Positive Adjustment,
and the Tax Claim Adjustment through that date
amounted to approximately $2,000. 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
$24.67 and no more than $28.67. In the event the
Actual Price is (a) greater than $28.67 but no
more than 30.67 or (b) less than $24.67 but no
less than $22.67, the Formula Price shall be
$28.67 and $24.67, respectively. In the event the
Actual Price is (a) greater than $30.67 or (b)
less than $22.67, the Formula Price shall be the
Actual Price less $2 or plus $2, respectively. In
the event the Actual Price is (a) more than
$32.67 or (b) less than $20.67, Pay-Fone and
Paychex, respectively, shall have the right to
terminate the Agreement unless (a) Paychex agrees
to a Formula Price of $30.67 or (b) Pay-Fone
agrees to a Formula Price of $22.67,
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 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 with the Secretaries
of State of California and Delaware (the
"Effective Time").
9
<PAGE> 12
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 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 such 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 Merger
will so qualify. No ruling from the Internal
10
<PAGE> 13
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 an opinion
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
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."
11
<PAGE> 14
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 corporations. See
"COMPARISON OF RIGHTS OF HOLDERS OF PAY-FONE
SHARES AND PAYCHEX COMMON STOCK."
12
<PAGE> 15
SELECTED FINANCIAL 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 interim 1995 and 1994 periods 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 are not considered to be
significant to the consolidated financial statements of Paychex. Accordingly,
such pro forma combined financial data are not presented.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND PER SHARE DATA OF PAYCHEX
<TABLE>
<CAPTION>
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............. $ .63 $ .46 $ .63 $ .45 $ .31 $ .22 $ .19
Cash dividends per share......... .16 .11 .15 .10 .07 .06 .05
Net book value per share(2)...... 2.91 2.29 2.42 1.91 1.51 1.23 1.07
Weighted average number of shares
outstanding.................... 44,900 44,769 44,790 44,595 44,279 44,064 44,009
-------- -------- -------- -------- -------- -------- --------
</TABLE>
---------------
(1) Per share amounts and average shares outstanding have been adjusted for
three-for-two stock splits in May 1992 and August 1993 and for the Paychex
1995 Stock Split. Paychex' 1994 Annual Report, Proxy Statement and February
28, 1995 Form 10-Q delivered herewith have not been restated to reflect the
Paychex 1995 Stock Split.
(2) Based on shares outstanding at period-end.
13
<PAGE> 16
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND PER SHARE DATA OF PAY-FONE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
------------------- ------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF OPERATIONS
Revenue.................................. $3,612 $3,371 $4,460 $4,505 $5,186 $5,248 $5,504
Operating costs.......................... 1,653 1,248 1,696 1,637 2,021 2,146 2,267
Selling, general and administrative
expenses............................... 2,278 1,890 2,542 2,680 3,110 3,410 3,587
Operating income (loss).................. (436) 233 222 188 55 (308) (350)
Percent of revenue..................... -- 6.9 5.0 4.2 1.1 -- --
Net income (loss)........................ (287) 167 189 151 111 (195) (202)
Percent of revenue..................... -- 5.0 4.2 3.4 2.1 -- --
------ ------ ------ ------ ------ ------ ------
CONSOLIDATED BALANCE SHEET DATA -- END OF
PERIOD
Working capital.......................... $2,357 $2,734 $2,739 $2,667 $2,257 $2,078 $1,993
Total assets............................. 5,395 5,697 5,600 5,374 5,324 5,442 5,785
Long term debt (including current
portion)............................... -- -- -- -- -- -- --
Shareholders' equity..................... 4,931 5,186 5,208 5,019 4,868 4,882 5,076
------ ------ ------ ------ ------ ------ ------
COMMON SHARE DATA
Net income (loss) per share.............. $(.19) $ .11 $ .13 $ .10 $ .07 $(.13) $(.13)
Cash dividends per share................. -- -- -- -- -- -- --
Net book value per share(1).............. 3.32 3.53 3.55 3.42 3.32 3.24 3.37
Weighted average number of shares
outstanding............................ 1,475 1,468 1,469 1,488 1,484 1,506 1,506
------ ------ ------ ------ ------ ------ ------
</TABLE>
---------------
(1) Based on shareholders' equity and shares outstanding at period-end.
14
<PAGE> 17
COMPARATIVE MARKET PRICES AND DIVIDEND DATA
Paychex Common Stock is listed and principally traded in the
over-the-counter market and quoted on NASDAQ National Market under the symbol
"PAYX". The Pay-Fone Shares are traded on the American Stock Exchange and are
reported under the symbol "PYF". The following table sets forth, for the periods
indicated, the range of high and low closing sale prices per share of Paychex
Common Stock as reported on the NASDAQ National Market, and per Pay-Fone Share
as reported on the American Stock Exchange. The Paychex fiscal year ends on May
31, and the Pay-Fone fiscal year ends on June 30. The high and low sales prices
of Paychex Common Stock have been adjusted to give effect to the Paychex 1995
Stock Split and a three-for-two stock split in August 1993. The following table
also shows the cash dividends declared by Paychex. Pay-Fone has not paid any
cash dividends. Pursuant to the Merger Agreement, Pay-Fone is prohibited from
declaring, setting aside or paying dividends on Pay-Fone Shares, except with the
consent of Paychex.
<TABLE>
<CAPTION>
PAYCHEX PAY-FONE
COMMON STOCK COMMON SHARES
-------------------------- ------------------------
CASH CASH
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
---- ---- -------- --- --- --------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR 1993
First Quarter...........................$ 12 7/8 $ 9 5/8 $ .018 $3 5/8 $2 3/4 --
Second Quarter.......................... 17 3/4 11 7/8 .027 3 3/8 2 7/8 --
Third Quarter........................... 17 1/8 14 3/8 .027 3 3/8 2 7/8 --
Fourth Quarter.......................... 19 1/8 15 7/8 .027 3 3/8 2 7/8 --
FISCAL YEAR 1994
First Quarter........................... 22 17 1/8 .027 3 1/4 2 5/8 --
Second Quarter.......................... 25 1/8 20 1/2 .04 3 2 3/8 --
Third Quarter........................... 27 21 3/8 .04 2 7/8 2 3/8 --
Fourth Quarter.......................... 26 1/8 21 1/8 .04 2 7/8 2 1/4 --
FISCAL YEAR 1995
First Quarter........................... 23 19 .04 5 3/4 2 3/8 --
Second Quarter.......................... 26 1/8 21 5/8 .06 4 5/8 3 3/4 --
Third Quarter........................... 28 23 1/8 .06 6 1/4 3 7/8 --
Fourth Quarter through 5/19/95.......... 32 3/8 26 3/8 .06 6 5 3/4 --
</TABLE>
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 after giving effect to the Paychex 1995 Stock Split was $30.00 and
the closing price of a Pay-Fone Share was $4.50.
On May 19, 1995, 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 (after giving effect to the Paychex 1995 Stock Split) and a
Pay-Fone Share were $32.08 and $5.88, respectively. Shareholders are urged to
obtain current market quotations for the Paychex Common Stock and Pay-Fone
Shares. See "THE MERGER -- Merger Consideration".
15
<PAGE> 18
THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the shareholders of
Pay-Fone in connection with the 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 15, 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 8, 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 1,495,023 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 the Special Meeting but
abstaining with respect to the approval and adoption of the Merger Agreement
will be treated as present with respect to the determination of the presence 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
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 or transmitted 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 or transmitted 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.
In addition to signing, dating and returning the enclosed proxy card or
another appropriate form of proxy, a shareholder may telephonically deliver a
proxy, including a proxy given for the purpose of revoking or changing the
voting instructions provided in an earlier dated proxy, by telephoning (800)
472-9765 and asking for the special "proxy service" extension, which is
extension 180. In order to deliver a proxy in this manner, a
16
<PAGE> 19
shareholder or the shareholders' attorney-in-fact will need to submit
information that will enable Pay-Fone to determine that the proxy is authorized.
For this purpose, Pay-Fone will utilize certain information that appears on the
proxy card that accompanies this Proxy Statement/Prospectus. To the right of the
shareholder's name and address on the proxy card are three short series of
numbers or numbers and letters, and a shareholder will be required to provide to
the official answering the "proxy service" extension those three series of
numbers and letters as well as the complete name in which the shareholder's
Pay-Fone shares are registered, which also appears on the proxy card. Please
record and retain this information so that you will be able to avail yourself of
this shareholder service should you desire to deliver a proxy telephonically.
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.
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(R), 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 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.
17
<PAGE> 20
During 1993, Paychex introduced Paylink(R), 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.
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 has positively impacted revenues since 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.
18
<PAGE> 21
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:
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 statistical 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. 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 PayFone 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
$148,527, $182,255 and $172,784, respectively, on research and development which
related to such software and equipment modifications and enhancements.
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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.
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 May 8, 1995, Pay-Fone had 81 full-time employees and 1 part-time
employee.
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.
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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
completion of the transactions contemplated by the Merger Agreement following
the Special Meeting of Pay-Fone shareholders. 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 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
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<PAGE> 24
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.
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 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 Agreement and Plan of Merger and related agreements were originally
signed on March 17, 1995. The Agreement and Plan of Merger was amended and
restated as of May 8, 1995 primarily to set prior to the date of the Special
Meeting the time at which the Exchange Ratio would be determined and to reflect
explicitly the effect of the Paychex 1995 Stock Split on various matters
considered in the Agreement and Plan of Merger. The Restated Agreement and Plan
of Merger is attached hereto as Annex I.
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 transactions 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.
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
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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 managers and employees who 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 the right to receive 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
seventeen trading day average of the last reported sales price of Paychex Common
Stock on the NASDAQ National Market during the eight trading days commencing
with May 26, 1995 and terminating on June 7, 1995 and two-thirds ( 2/3) of the
last reported sales prices of Paychex Common Stock (as then constituted) on the
NASDAQ National Market for the nine trading days commencing on May 15, 1995 and
terminating on May 25, 1995 (the Actual Price), which average may be adjusted by
up to $2.00 as specified in the Merger Agreement and (ii) the sum of the number
of Pay-Fone Shares outstanding at the close of business on June 7, 1995 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 will be reduced by (a) the Tax Claim Adjustment, which is
the sum of all amounts expended by Pay-Fone between March 17, 1995 and June 7,
1995 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 Adjustment), 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 are identified in notices given by Paychex to
Pay-Fone prior to June 8, 1995 and which in the aggregate exceed $175,000, which
reductions will be offset by (c) the Positive Adjustment, which is the sum of
all benefits, each of which exceeds $25,000, 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 and which are identified in notices given by Pay-Fone to
Paychex prior to June 8, 1995.
As of May 19, 1995, no notices regarding losses or benefits which would
enter into the calculation of the General Adjustment and the Positive Adjustment
had been given by Paychex or Pay-Fone, respectively. As of that date, $2,000,
which would enter into calculation of the Tax Claim Adjustment, had been
expended by Pay-Fone. Pay-Fone has the right to terminate the Merger Agreement
in the event the aggregate negative adjustment arising from 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 $24.67 and no more than $28.67. In the event the
Actual Price is greater than $28.67 but no more than $30.67,
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<PAGE> 26
the Formula Price shall be $28.67, and if the Actual Price is greater than
$30.67, the Formula Price shall be an amount equal to the Actual Price less $2.
In the event the Actual Price is greater than $32.67, Pay-Fone shall have the
right to terminate the Merger Agreement unless Paychex agrees to a Formula Price
of $30.67. In the event the Actual Price is less than $24.67 but no less than
$22.67, the Formula Price shall be $24.67, and if the Actual Price is less than
$22.67, the Formula Price shall be an amount equal to the Actual Price plus $2.
In the event the Actual Price is less than $20.67, Paychex shall have the right
to terminate the Merger Agreement unless Pay-Fone agrees to a Formula Price of
$22.67.
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.
<TABLE>
<CAPTION>
VALUE OF EXCHANGE
ACTUAL FORMULA ADJUSTMENT TO EXCHANGE RATIO BASED ON
PRICE PRICE $10,475,000 RATIO ACTUAL PRICE
------ ------- ------------- -------- -----------------
<S> <C> <C> <C> <C>
$31.68 $29.68 $ 0 .2195 $6.95
31.68 29.68 (100,000) .2174 6.89
31.68 29.68 (360,000) .2119 6.71
30.00 28.67 0 .2272 6.82
30.00 28.67 (100,000) .2251 6.75
30.00 28.67 (360,000) .2194 6.58
28.00 28.00 0 .2327 6.51
28.00 28.00 (100,000) .2304 6.45
28.00 28.00 (360,000) .2247 6.29
22.67 24.67 0 .2641 5.99
22.67 24.67 (100,000) .2615 5.93
22.67 24.67 (360,000) .2550 5.78
</TABLE>
On May 19, 1995, the latest trading date before the printing of this Proxy
Statement/Prospectus, the closing price of a share of Paychex Common Stock (as
then constituted) on the NASDAQ National Market was $48.13, and the closing
price of a Pay-Fone Share on the American Stock Exchange was $5.88. On that
date, the equivalent price for a share of Paychex Common Stock as it will be
constituted after the effective date of the Paychex 1995 Stock Split was $32.08,
and the average closing price of a share of Paychex Common Stock, as it will
constituted after the Paychex 1995 Stock Split, during the five trading days
ended May 19, 1995 was $31.68.
The Exchange Ratio will be adjusted to give effect to any stock split or
other similar change in Paychex Common Stock in addition to the Paychex 1995
Stock Split which occurs prior to the Effective Time.
THE EXCHANGE RATIO WILL BE CALCULATED PURSUANT TO A FORMULA IN WHICH ALL OF
THE VARIABLES WILL BE FINALLY DETERMINED PRIOR TO JUNE 8, 1996. PAY-FONE HAS A
TOLL-FREE NUMBER WHICH PAY-FONE SHAREHOLDERS MAY CALL BETWEEN THE DATE OF THIS
PROXY STATEMENT/PROSPECTUS AND THE DATE OF THE SPECIAL MEETING TO ASCERTAIN WHAT
THE PROVISIONAL EXCHANGE RATIO AND PROVISIONAL MARKET VALUE IN PAYCHEX COMMON
STOCK DELIVERABLE IN EXCHANGE FOR A PAY-FONE SHARE WOULD BE BASED ON INFORMATION
AVAILABLE THROUGH THE CLOSE OF BUSINESS ON THE PRIOR DAY. COMMENCING ON JUNE 8,
1995, SHAREHOLDERS CALLING THIS NUMBER WILL BE PROVIDED WITH THE DEFINITIVE
EXCHANGE RATIO AND THE MARKET VALUE IN PAYCHEX COMMON STOCK REPRESENTED THEREBY
BASED ON THE LAST REPORTED SALE PRICE OF PAYCHEX COMMON STOCK ON THE NASDAQ
NATIONAL MARKET ON THE PRIOR TRADING DAY. THE TELEPHONE NUMBER TO CALL FOR THIS
INFORMATION REGARDING THE EXCHANGE RATIO AND THE MARKET VALUE IN PAYCHEX COMMON
STOCK REPRESENTED THEREBY IS (800) 472-9765, EXTENSION 160, THE "EXCHANGE RATIO
INFORMATION" EXTENSION.
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 the same fraction of the Formula Price.
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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 the right to receive full shares of Paychex Common Stock, plus cash in lieu
of any fractional share. It is a condition to the Merger that all shares of
Paychex Common Stock to be issued in the Merger are registered under the
Securities Act and listed on the NASDAQ National Market.
As soon as practicable after the Effective Time, a transmittal letter will
be mailed by an exchange agent appointed by Paychex to facilitate the exchange
of Pay-Fone Shares for shares of Paychex Common Stock in the Merger (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 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").
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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 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 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.
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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 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' 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' 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
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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 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' obligation to consummate
the Merger is that Demands (as defined below) shall not have been filed with
respect to 5% or more of the 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 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 the American Stock
Exchange was $4.50. See "SUMMARY -- Comparative Market Prices and Dividend
Data."
By June 15, 1995, the date of the Special Meeting, 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 fair market
value of the dissenting shares as of the day before the announcement of the
proposed Merger. Once made, a 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.
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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.
All written communications from shareholders with respect to the exercise
of dissenters' rights should be delivered to Mark Leekley, President of Pay-Fone
Systems, Inc., 8100 Balboa Avenue, Van Nuys, California 91406. For purposes of
the foregoing discussion regarding dissenters' rights, the terms "written" and
"in writing" include facsimile or telegraphic communications.
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.
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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 $2,500 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 $170,500. 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's 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 approximately 76% of the Pay-Fone Shares
outstanding as of the record date for and entitled to vote at 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 were to propose 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 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
March 17, 1995 and June 7, 1995 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 June 7, 1995 will 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 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
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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 Time 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 (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 usual
and customary 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 of (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."
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, WHICH IS ATTACHED AS ANNEX I TO THIS 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. PayFone 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 from taking certain actions with respect to, among other
things, its securities, employee benefits, corporate existence, or form thereof,
assets, indebtedness, and major transactions.
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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 affect 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 consummation of the Merger 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
consummation of the Merger, 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 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.
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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 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 Actual Price shall not be less than $20.67, unless
Pay-Fone agrees that the Formula Price will be $22.67.
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) 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 Actual Price shall not be more
than $32.67 (unless Paychex agrees that the Formula Price will be $30.67), and
(viii) the aggregate amount subtracted from $10,475,000 in the Exchange Ratio
calculation by reason of the provisions relating to the 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.
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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.
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 prior breach thereof.
REGULATORY APPROVALS
There are no federal or state regulatory requirements which must be
complied with or approvals which must be obtained in connection with the Merger.
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 by reason
of the provisions relating to the General Adjustment and Positive Adjustment
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 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 -- No Solicitation."
AFFILIATES AGREEMENT
Concurrently with the original execution of the Agreement and Plan of
Merger, Paychex , Merger Sub, Pay-Fone and the 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 all times prior to the Effective Time; while the remaining Affiliates
have agreed not to sell, transfer or otherwise dispose
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<PAGE> 37
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 original execution of the Agreement and Plan of
Merger and the Affiliates Agreement, Paychex, Pay-Fone 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 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.
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<PAGE> 38
The EIA Shareholders agree to pay the Escrow Agent's fees for standard
services; and Paychex and Pay-Fone on the one hand, and the 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 June 8, 1995 will have the
effect of reducing the Exchange Ratio. See "THE MERGER -- Merger Consideration."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 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
NINE MONTHS ENDED MARCH 31, 1995 AND 1994.
Pay-Fone experienced a net loss of $287,425 for the nine months ended March
31, 1995 compared to net income of $167,440 for the nine months ended March 31,
1994. The 1995 loss was primarily due to expenditures associated with Pay-Fone's
introduction of in-house tax filing services and entrance into the
large-employer market as well as approximately $117,500 of expenses incurred in
the third quarter of fiscal 1995 attributed to the proposed Paychex Merger.
Management anticipated that the increased expenditures related to the in-house
tax filing services and entry into the large-employer market and increased
marketing expenses would have a negative impact on earnings in the first half of
fiscal 1995, but that the expenditures would position Pay-Fone for continued
revenue growth in fiscal 1995 and beyond.
Revenues for the nine months ended March 31, 1995 increased $240,655
(7.1%), over the nine months ended March 31, 1994. 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 46% in the
nine months ended March 31, 1995 as compared to 37% in the same nine 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 63% in the nine month period ended March 31, 1995, as compared to
56% in the same period 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 expenses.
Pay-Fone incurred approximately $117,500 of Merger related costs in the
third quarter of fiscal 1995. Pay-Fone expects to incur additional legal and
other costs associated with the Merger during the balance of the fiscal year.
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-
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<PAGE> 40
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 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 8.3 at March 31, 1995. This compares to a
current ratio of 12 at June 30, 1994. At March 31, 1995, Pay-Fone had $2.4
million in working capital. Pay-Fone has no legal obligation for material
capital commitments. In management's opinion, current working capital together
with cash flow from operations 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.
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<PAGE> 41
OWNERSHIP OF PAY-FONE SHARES
The following table sets forth information as of May 8, 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>
NUMBER OF SHARES PERCENT
BENEFICIAL OWNER* BENEFICIALLY OWNED OF CLASS
--------------------------------------------------- ------------------ --------
<S> <C> <C>
Allied Contractors, Inc............................ 386,669(1) 25.86%
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Richard Kelton..................................... 629,436(2) 41.76%
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
David Kelton....................................... 229,688(3) 15.31%
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Allen Kahn, M.D.................................... 253,400(4) 16.79%
55 East Washington Street
Chicago, IL 60602-2174
Mark Kelton........................................ 114,596(5) 7.64%
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Edwin Johnson...................................... 43,700(6) 2.90%
David L. Malcolm................................... 23,100(7) 1.55%
Mark Leekley....................................... 17,000(8) 1.13%
All Executive Officers and Directors as a Group (11
persons)......................................... 1,228,820(9) 77.39%
</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 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.
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<PAGE> 42
(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 75.98% of the Pay-Fone Shares outstanding and entitled to vote at
the Special Meeting, for approval and adoption of the Merger Agreement.
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 May 2, 1995, there were 30,011,946 shares of Paychex
Common Stock (as then constituted) issued and outstanding. The Paychex Board has
declared the Paychex 1995 Stock Split, a 3-for-2 stock split of Paychex Common
Stock in the form of a stock dividend payable on May 25, 1995 to stockholders of
record on May 2, 1995.
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<PAGE> 43
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 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.
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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.
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 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.
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<PAGE> 45
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 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.
43
<PAGE> 46
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 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, 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 to be within the penumbra of this provision of California Law
since currently one of the four quarterly meetings of the Paychex Board 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.
44
<PAGE> 47
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 eliminate
this requirement.
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.
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 May 2, 1995, the attorneys in that firm owned 49,444 shares of
Paychex Common Stock and held options to purchase an additional 10,500 shares. A
member of the firm also serves as a director of Paychex.
Hughes Hubbard & Reed, Los Angeles, California, has rendered an opinion
with respect to certain of the tax consequences of the Merger to Pay-Fone
shareholders. See "THE MERGER -- Certain Federal Income Tax Consequences." As of
May 2, 1995, attorneys in that firm did not beneficially own any shares of
Paychex Common Stock or Pay-Fone Shares.
45
<PAGE> 48
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 Systems, Inc. for the fiscal year
ended June 30, 1992, included in this Proxy Statement/Prospectus have been
audited by Clumeck, Stern, Phillips & Schwartz, independent public accountants,
whose report given on the authority of that firm as experts in accounting and
auditing, is included herein.
46
<PAGE> 49
PAY-FONE SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
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 for the
year ended June 30, 1992, in conformity with generally accepted accounting
principles.
CLUMECK, STERN, PHILLIPS & SCHWARTZ
Certified Public Accountants
August 21, 1992
47
<PAGE> 50
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 financials 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.
KPMG PEAT MARWICK LLP
Los Angeles, California
September 1, 1994
48
<PAGE> 51
PAY-FONE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------- MARCH 31,
1994 1993 1995
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 740,734 $1,116,949 $ 399,182
Short term investments............................... 1,382,203 1,100,714 1,256,941
Accounts receivable, less $8,000 allowance for
doubtful accounts................................. 516,704 476,285 567,429
Prepaid supplies and other........................... 347,824 266,792 454,392
---------- ---------- ----------
TOTAL CURRENT ASSETS......................... 2,987,465 2,960,740 2,677,944
---------- ---------- ----------
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 1,484,724
---------- ---------- ----------
6,253,431 6,581,768 6,510,935
Less: Accumulated depreciation and amortization........ (3,753,268) (4,168,114) (3,925,789)
---------- ---------- ----------
2,500,163 2,413,654 2,585,146
---------- ---------- ----------
Intangible assets, net of amortization................. 111,920 -- 131,920
---------- ---------- ----------
$5,599,548 $5,374,394 $5,395,010
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 76,892 $ 41,341 $ 40,560
Accrued wages and other related costs................ 111,152 105,965 138,474
Other accrued liabilities............................ 25,118 70,782 141,977
Customer security deposits........................... 35,785 65,577 400
Income taxes payable................................. -- 9,653 --
---------- ---------- ----------
TOTAL CURRENT LIABILITIES.................... 248,947 293,318 321,411
---------- ---------- ----------
Deferred income taxes.................................. 143,047 62,488 143,047
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
March 31, 1995.................................. 90,781 90,781 92,423
Additional paid-in capital........................... 2,755,826 2,755,826 2,804,607
Retained earnings.................................... 2,360,947 2,171,981 2,073,522
---------- ---------- ----------
Unrealized loss on debt and equity marketable
securities........................................ -- -- (40,000)
TOTAL SHAREHOLDERS' EQUITY................... 5,207,554 5,018,588 4,930,552
---------- ---------- ----------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT
EVENT
$5,599,548 $5,374,394 $5,395,010
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 52
PAY-FONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED JUNE 30, ENDED MARCH 31,
------------------------------------ -----------------------
1994 1993 1992 1995 1994
---------- ---------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $4,459,935 $4,505,111 $5,185,819 $3,612,130 $3,371,475
Direct costs......................... 1,695,727 1,636,677 2,021,492 1,652,861 1,248,252
---------- ---------- ---------- ---------- ----------
Gross profit......................... 2,764,208 2,868,434 3,164,327 1,959,269 2,123,223
Selling, general and administrative
expenses........................... 2,541,995 2,680,345 3,109,515 2,277,914 1,890,318
Miscellaneous merger costs........... -- -- -- 117,500 --
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 222,213 188,089 54,812 (436,145) 232,905
Interest income...................... 61,369 58,108 67,584 53,220 39,535
---------- ---------- ---------- ---------- ----------
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 (382,925) 272,440
Income tax expense (benefit)......... 115,592 95,182 40,000 (95,500) 105,000
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item
and cumulative effect of change in
method of accounting for income
taxes.............................. 167,990 151,015 82,396 (287,425) 167,440
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 $ (287,425) $ 167,440
========== ========== ========== ========== ==========
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 $ (0.19) $ 0.11
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 $ (0.19) $ 0.11
========== ========== ========== ========== ==========
Weighted average shares and
common stock equivalents...... 1,468,813 1,488,416 1,483,780 1,475,054 1,467,813
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE> 53
PAY-FONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED LOSS
ON DEBT AND
COMMON STOCK ADDITIONAL EQUITY TOTAL
------------------- PAID-IN RETAINED MARKETABLE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SECURITIES EQUITY
--------- ------- ---------- ---------- --------------- -------------
<S> <C> <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)..... -- -- -- (287,425) -- (287,425)
Options Exercised
(Unaudited)........... 16,420 1,642 48,781 -- -- 50,423
Unrealized Loss on Debt
and Equity Marketable
Securities
(Unaudited)........... -- -- -- -- (40,000) (40,000)
--------- ------- ---------- ---------- ---------- -----------
Balance, March 31, 1995
(Unaudited).............. 1,484,233 $92,423 $2,804,607 $2,073,522 $ (40,000) $ 4,930,552
========= ======= ========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE> 54
PAY-FONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED JUNE 30, ENDED MARCH 31,
--------------------------------- ---------------------
1994 1993 1992 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................. $ 188,966 $ 151,015 $ 110,596 $(287,425) $ 167,440
---------- ---------- ---------- --------- ----------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization... 278,852 290,170 376,815 182,522 219,021
Deferred income taxes........... 80,559 18,736 (65,200) -- --
Change in net assets and liabilities,
net of effects from acquisition:
Accounts receivable............. (18,892) 37,345 29,067 (50,725) (72,218)
Prepaid supplies and other...... (77,162) 23,028 (47,337) (106,568) (146,853)
Accounts payable................ 35,274 (10,458) (6,014) (36,332) 12,357
Accrued wages and other related
costs......................... 5,187 (16,992) (44,860) 27,322 15,706
Other accrued liabilities....... (94,883) (16,446) (18,658) 116,859 (11,518)
Customer security deposits...... (29,792) (8,448) (45,275) (35,385) (20,076)
Income taxes payable............ (9,653) (66,547) 76,200 -- 192,401
---------- ---------- ---------- --------- ----------
Total adjustments.......... 169,490 250,388 254,288 97,693 188,820
---------- ---------- ---------- --------- ----------
Net cash provided by (used in)
operating activities............... 358,456 401,403 364,884 (189,732) 356,260
Cash flows from investing activities:
Short term investments............. (281,489) (626,463) 405,869 85,262 649,934
Capital expenditures............... (309,297) (49,698) (95,518) (257,505) (256,375)
Payments for acquired company
(net of cash acquired).......... (143,885) -- -- (30,000) --
---------- ---------- ---------- --------- ----------
Net cash provided by (used in)
investing activities............... (734,671) (676,161) 310,351 202,243 393,559
Cash flows from financing activities:
Repurchase of common stock......... -- -- (124,540) -- --
Options exercised.................. -- -- -- 50,423 --
---------- ---------- ---------- --------- ----------
Net cash provided by (used in)
financing activities............... -- -- (124,540) 50,423 --
Net increase (decrease) in cash and
cash equivalents................... (376,215) (274,758) 550,695 (341,552) 749,819
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 $ 399,182 $1,866,768
========== ========== ========== ========= ==========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes.................... $ 69,600 $ 146,800 $ 1,681 $ -- $ 33,980
========== ========== ========== ========= ==========
Interest........................ $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========= ==========
</TABLE>
Noncash transaction (unaudited) -- during the nine months ended March 31, 1995
the Company wrote down its short-term investments and recorded an
unrealized loss of $40,000.
See accompanying notes to consolidated financial statements.
52
<PAGE> 55
PAY-FONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1995 AND FOR THE NINE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1994 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.
The depreciation and amortization of property is provided over the
estimated life of the asset using straight-line and accelerated methods as
follows:
<TABLE>
<S> <C>
Building....................................... 38 Years
Terminals and Computer Equipment............... 5 - 12 Years
Other.......................................... 5 - 10 Years
</TABLE>
53
<PAGE> 56
PAY-FONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1995 AND FOR THE NINE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1994 IS UNAUDITED.)
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 developments 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.
Interim Financial Statements
The accompanying consolidated balance sheet as of March 31, 1995 and the
consolidated statements of operations and cash flows for the nine month periods
ended March 31, 1995 and 1994 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 nine month period ended March 31, 1995 are not necessarily
indicative of the results that may be expected for the year ending June 30,
1995.
In fiscal 1995, the Company adopted SFAS No. 115. Such adoption had no
cumulative effect on retained earnings at July 1, 1994 and reduced the net loss
for the nine months ended March 31, 1995 by $40,000. The fair market value and
gross unrealized holding losses for available-for-sale debt and marketable
equity securities aggregated approximately $760,000 and $40,000, respectively,
at March 31, 1995.
54
<PAGE> 57
PAY-FONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1995 AND FOR THE NINE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1994 IS UNAUDITED.)
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 year, 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 76,282 77,000
Deferred:
Federal................................... 68,029 24,529 (26,300)
State..................................... 20,699 (5,629) (10,700)
-------- ------- --------
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>
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>
55
<PAGE> 58
PAY-FONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1995 AND FOR THE NINE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1994 IS UNAUDITED.)
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.
56
<PAGE> 59
PAY-FONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1995 AND FOR THE NINE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1994 IS UNAUDITED.)
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.
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.
57
<PAGE> 60
PAY-FONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1995 AND FOR THE NINE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1994 IS UNAUDITED.)
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:
<TABLE>
<S> <C>
1995........................ $ 151,473
1996........................ 151,473
1997........................ 143,770
1998........................ 38,382
1999........................ 36,504
2000-2025................... 912,600
----------
$1,434,202
==========
</TABLE>
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.
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.
58
<PAGE> 61
ANNEX I
RESTATED AGREEMENT
AND
PLAN OF MERGER
AMONG
PAYCHEX, INC.,
PAYCHEX MERGER CORP.
AND
PAY-FONE SYSTEMS, INC.
MAY 8, 1995
I-1
<PAGE> 62
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE I -- DEFINITIONS............................................................. I-5
ARTICLE II -- THE MERGER; EFFECTIVE TIME; CLOSING.................................... I-8
The Merger......................................................................... I-8
Effective Time..................................................................... I-8
Closing............................................................................ I-8
ARTICLE III -- TERMS OF MERGER....................................................... I-9
Articles of Incorporation.......................................................... I-9
The By-Laws........................................................................ I-9
Directors.......................................................................... I-9
Officers........................................................................... I-9
ARTICLE IV -- MERGER CONSIDERATION; CONVERSION OF CANCELLATION OF SHARES IN THE
MERGER............................................................................. I-9
Share Consideration; Conversion or Cancellation of Shares in the Merger............ I-9
Payment for Shares in the Merger................................................... I-11
Fractional Shares.................................................................. I-12
Transfer of Shares after the Effective Time........................................ I-13
ARTICLE V -- REPRESENTATIONS AND WARRANTIES OF PAY-FONE.............................. I-13
Organization, Etc. of Pay-Fone..................................................... I-13
Operations of Subsidiary........................................................... I-13
Agreement.......................................................................... I-14
Capital Stock...................................................................... I-14
Litigation......................................................................... I-14
Compliance with Other Instruments, Etc............................................. I-14
Employee Benefit Plans............................................................. I-15
Taxes.............................................................................. I-16
Intellectual Property.............................................................. I-16
Documents, Reports and Financial Statements........................................ I-16
Absence of Certain Changes or Events............................................... I-17
Contracts and Leases............................................................... I-17
Affiliated Transactions............................................................ I-17
Brokers and Finders................................................................ I-17
S-4 Registration Statement and Proxy Statement/Prospectus.......................... I-17
Tax Matters........................................................................ I-18
ARTICLE VI -- REPRESENTATIONS AND WARRANTIES OF PAYCHEX AND MERGER SUB............... I-18
Organization, Etc. of Paychex...................................................... I-18
Operations of Subsidiaries......................................................... I-18
Agreement.......................................................................... I-19
Capital Stock...................................................................... I-19
Authorization for Paychex Common Stock............................................. I-19
Litigation......................................................................... I-19
Compliance with Other Instruments, Etc............................................. I-19
Intellectual Property.............................................................. I-20
</TABLE>
I-2
<PAGE> 63
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Documents, Reports and Financial Statements........................................ I-20
Absence of Certain Changes or Events............................................... I-20
Contracts and Leases............................................................... I-21
Brokers and Finders................................................................ I-21
S-4 Registration Statement and Proxy Statement/Prospectus.......................... I-21
Tax Matters........................................................................ I-21
ARTICLE VII -- ADDITIONAL COVENANTS AND AGREEMENTS................................... I-21
Conduct of Business of Pay-Fone and Its Subsidiary................................. I-21
Transactions....................................................................... I-23
Meeting of Shareholders............................................................ I-24
Registration Statement............................................................. I-24
Reasonable Efforts................................................................. I-24
Access to Information.............................................................. I-25
Registration and Listing of Paychex Common Stock................................... I-26
Affiliates of Paychex and Pay-Fone................................................. I-26
Certain Covenants of Paychex....................................................... I-26
Amendment to Disclosure Statement.................................................. I-27
ARTICLE VIII -- CONDITIONS........................................................... I-27
Conditions to Each Party's Obligations............................................. I-27
Shareholder Approval............................................................ I-27
Governmental Consents, Etc...................................................... I-27
No Injunction................................................................... I-27
Registration Statement.......................................................... I-27
Listing of Paychex Common Stock on NASDAQ....................................... I-27
Blue Sky Approvals.............................................................. I-27
Third Party Consents............................................................ I-27
Conditions to Obligations of Paychex and Merger Sub................................ I-28
Representations and Warranties True............................................. I-28
Performance..................................................................... I-28
Compliance Certificate.......................................................... I-28
Opinion of Counsel for Pay-Fone................................................. I-28
Proceedings..................................................................... I-28
Tax Opinion..................................................................... I-28
Pooling Opinion................................................................. I-28
No Government Proceeding or Litigation.......................................... I-28
Certain Disclosures............................................................. I-29
Employment of Leekley........................................................... I-29
Dissenting Shares............................................................... I-29
Affiliates Agreement............................................................ I-29
Escrow and Indemnity Agreement.................................................. I-29
Paychex Closing Price........................................................... I-29
Conditions to Obligations of Pay-Fone.............................................. I-29
Representations and Warranties True............................................. I-29
Performance..................................................................... I-30
Compliance Certificate.......................................................... I-30
Opinion of Counsel for Paychex.................................................. I-30
</TABLE>
I-3
<PAGE> 64
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proceedings..................................................................... I-30
Paychex Closing Price........................................................... I-30
Certain Disclosures............................................................. I-30
Certain Adjustments............................................................. I-30
ARTICLE IX -- TERMINATION............................................................ I-30
Termination by Mutual Consent...................................................... I-30
Termination by Either Paychex or Pay-Fone.......................................... I-30
Effect of Termination and Abandonment.............................................. I-31
ARTICLE X -- MISCELLANEOUS AND GENERAL............................................... I-31
Expenses........................................................................... I-31
Notices, Etc....................................................................... I-31
Amendment, Waivers, Etc............................................................ I-32
No Assignment...................................................................... I-32
Entire Agreement................................................................... I-32
Specific Performance............................................................... I-32
Remedies Cumulative................................................................ I-32
No Waivers......................................................................... I-32
No Third Party Beneficiaries....................................................... I-32
Jurisdiction....................................................................... I-32
Public Announcements............................................................... I-33
Governing Law...................................................................... I-33
Name, Captions, Etc................................................................ I-33
Counterparts....................................................................... I-33
Knowledge.......................................................................... I-33
EXHIBITS
A. Affiliates Agreement
B. Escrow and Indemnity Agreement
</TABLE>
I-4
<PAGE> 65
RESTATED AGREEMENT AND PLAN OF MERGER
This Restated Agreement and Plan of Merger hereby amends and restates as of
May 8, 1995 in its entirety that certain Agreement and Plan of Merger dated
March 17, 1995 (as so amended and restated, hereinafter called this "Agreement")
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").
RECITALS:
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, being Exhibit A hereto.
"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.
"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 PayFone, 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.
I-5
<PAGE> 66
"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 shareholder 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 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).
I-6
<PAGE> 67
"Pay-Fone": Pay-Fone Systems, Inc., a California corporation.
"Pay-Fone Disclosure Statement": The disclosure statement dated March 17,
1995 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
as constituted upon and after payment of the Paychex 1995 Stock Split, the
seventeen trading day average of the Closing Prices for a share of Paychex
Common Stock during the eight trading days commencing with May 26, 1995 and
terminating on June 7, 1995 and two-thirds ( 2/3) of the Closing Prices for a
share of Paychex Common Stock (as then constituted) during the nine trading days
commencing on May 15, 1995 and terminating on May 25, 1995; provided, however,
that:
(i) if the Paychex Closing Price is greater than Twenty-Eight Dollars
and Sixty-Seven Cents ($28.67), but no more than Thirty Dollars and
Sixty-Seven Cents ($30.67), subject in each case to appropriate adjustment
to reflect any event described in the final sentence of Section 4.1(a),
other than the Paychex 1995 Stock Split, the Paychex Closing Price shall be
deemed for purposes of Section 4.1(a) of this Agreement to be Twenty-Eight
Dollars and Sixty-Seven Cents ($28.67);
(ii) if the Paychex Closing Price is greater than Thirty Dollars and
Sixty-Seven Cents ($30.67), subject to appropriate adjustment to reflect
any event described in the final sentence of Section 4.1(a), other than the
Paychex 1995 Stock Split, 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) Two Dollars ($2.00) from (y) the Paychex Closing Price;
(iii) if the Paychex Closing Price is less than Twenty-Four Dollars
and Sixty-Seven Cents ($24.67), but not less then Twenty-Two Dollars and
Sixty-Seven Cents ($22.67), subject in each case to appropriate adjustment
to reflect any event described in the final sentence of Section 4.1(a),
other than the Paychex 1995 Stock Split, the Paychex Closing Price shall be
deemed for purposes of Section 4.1(a) of this Agreement to be Twenty-Four
Dollars and Sixty-Seven Cents ($24.67); and
(iv) if the Paychex Closing Price is less than Twenty-Two Dollars and
Sixty-Seven Cents ($22.67), subject to appropriate adjustment to reflect
any event described in the final sentence of Section 4.1(a), other than the
Paychex 1995 Stock Split, the Paychex Closing Price shall be deemed for
purposes of Section 4.1(a) of this Agreement to be the sum of (r) Two
Dollars ($2.00) 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 March 17,
1995 delivered by Paychex to Pay-Fone.
"Paychex 1995 Stock Split": A 3-for-2 stock split of Paychex Common Stock
in the form of a stock dividend declared by the Board of Directors of Paychex
and payable on May 25, 1995 to stockholders of record on May 2, 1995.
"Paychex SEC Reports": As defined in Section 6.9(a).
I-7
<PAGE> 68
"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.
"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.
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
Pay-Fone, 8100 Balboa Drive, Van Nuys, California 91406, following adjournment
of the meeting of Pay-Fone shareholders called to consider this Agreement,
provided that the parties have received 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
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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.
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 at
the close of business on June 7, 1995, 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 at the close of business on June 7, 1995.
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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 June 7, 1995 (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 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 and which
are identified in notices given by Paychex to Pay-Fone prior to June 8,
1995, 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 June 8, 1995 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 are identified
in notices given by Pay-Fone to Paychex prior to June 8, 1995 and 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 June 8, 1995 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 Stock (other than normal quarterly cash dividends as the
same may be adjusted from time to time in the ordinary course and other
than the Paychex 1995 Stock Split which has already been taken into account
hereunder), 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.
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(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 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 consideration
required to be issued pursuant to Section 4.1 (the certificates
representing Paychex Common Stock comprising such aggregate 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 redemption 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 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
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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 representing 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 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 proceeds from the redemption by Paychex
at the Paychex Closing Price as applied for purposes of Section 4.1(a) of this
Agreement from 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
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the "Excess Shares"), and the Exchange Agent, as agent for the former holders of
Shares, shall deliver the Excess Shares to Paychex for redemption against
receipt of an amount equal to the Paychex Closing Price as applied for purposes
of Section 4.1(a) hereof for each Excess Share. Until such proceeds 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 receipt 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 as of March 17, 1995
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
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
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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 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) 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
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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 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 (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.
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(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 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
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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 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.
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
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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
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 as of March
17, 1995 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 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
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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
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 of 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 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
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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 or 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 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 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.
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,
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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 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 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
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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 PayFone 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 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, multiemployer 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;
(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;
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(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;
(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; or
(m) between June 8, 1995 and the Effective Date, expend any amounts
that would have entered into the calculation of the Tax Claim Adjustment if
expended prior to June 8, 1995.
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
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.
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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 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 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 Statement; (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
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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).
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 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
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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 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 Section 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.
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7.10 Amendment to Disclosure Statement. At any time prior to the Closing,
Paychex and Pay-Fone shall amend the Paychex Disclosure Statement and the
Pay-Fone Disclosure Statement, 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 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.
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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 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 may reasonably request.
(f) Tax Opinion. Paychex shall have received an opinion of Woods,
Oviatt, Gilman, Sturman and Clarke LLP dated 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
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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.
(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 Twenty Dollars
and Sixty-Seven Cents ($20.67), 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
Twenty-Two Dollars and Sixty-Seven Cents ($22.67) 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
shareholders 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
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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 and other) or prospects of
Paychex. 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. 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 Thirty-Two
Dollars and Sixty-Seven Cents ($32.67), 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
Thirty Dollars and Sixty-Seven Cents ($30.67) 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 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
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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
Statement or the Paychex Disclosure Statement, the preparation or amendment of
the S-4 Registration Schedule or otherwise, a party hereto acquires verified
information regarding the other party not known to the 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
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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 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
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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.
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
By: /s/ Richard Kelton
------------------------------------
Name: Richard Kelton
Title: Chairman
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
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EXHIBIT A
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 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
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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' 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 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 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
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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 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 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
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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 17, 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 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.
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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
and
Mark Kelton
2716 Ocean Park Boulevard, Suite 3006
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.
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(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 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.
(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
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<PAGE> 100
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 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
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/s/ David L. Malcolm
-----------------------------
David L. Malcolm
/s/ Mark Leekley
-----------------------------
Mark Leekley
/s/ Michele Kehoe
-----------------------------
Michele Kehoe
/s/ Adam A. Rodriguez
-----------------------------
Adam A. Rodriguez
/s/ Thomas A. Zachary
-----------------------------
Thomas A. Zachary
/s/ Kim Spaulding
-----------------------------
Kim Spaulding
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SCHEDULE I
SHARE OWNERSHIP
<TABLE>
<CAPTION>
NO. SHARES PAY-FONE OPTIONS
AFFILIATE OWNED BENEFICIALLY CURRENTLY EXERCISABLE
---------------------------------------------------------- ------------------ ---------------------
<S> <C> <C>
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.............................................. 200 16,800
Michele Kehoe............................................. -0- 4,800
Adam A. Rodriguez......................................... -0- 5,300
Thomas A. Zachary......................................... -0- 10,600
Kim Spaulding............................................. -0- 5,200
</TABLE>
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<PAGE> 103
EXHIBIT B
ESCROW AND INDEMNITY AGREEMENT
ESCROW AND INDEMNITY AGREEMENT, dated as of 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 KL 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 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").
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<PAGE> 104
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 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 PayFone (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 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. If 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.
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<PAGE> 105
(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 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.
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<PAGE> 106
(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.
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
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<PAGE> 107
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 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
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
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<PAGE> 108
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 in 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.
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.
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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 Leekley
---------------------------------
Name: Mark Leekley
Title: President
By /s/ Richard Kelton
---------------------------------
Name: Richard Kelton
Title: Chairman
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:
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<PAGE> 110
ANNEX II
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
SEC. 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 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.
SEC. 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
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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 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.
SEC. 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.
SEC. 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.
SEC. 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
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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.
SEC. 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 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).
SEC. 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.
SEC. 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.
SEC. 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.
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SEC. 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.
SEC. 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.
SEC. 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.
SEC. 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.
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(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.
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PAY-FONE SYSTEMS, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
June 15, 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 May 8, 1995 at the Special Meeting of Shareholders
to be held on June 15, 1995 or any adjournment thereof, as designated below:
(1) To approve and adopt a Restated 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.
Date: ___________, 1995
_______________________
Signature
_______________________
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.
