SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [fee required]
For the fiscal year ended May 31, 1996
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [no fee required]
Commission file number 0-11330
PAYCHEX, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-1124166
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
911 Panorama Trail South, Rochester, New York 14625 - 0397
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 385-6666
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X].
<PAGE>
The aggregate market value of the voting stock held by
nonaffiliates of the registrant as of 7/31/96 was $2,600,496,887.
The number of shares of Registrant's Common Stock, $.01 par
value, outstanding as of 7/31/96 was 68,720,244.
Documents Incorporated by Reference
- -----------------------------------
Certain specified portions of the registrant's annual report to security
holders for the fiscal year ended May 31, 1996 (the "Annual Report") are
incorporated herein by reference in response to Part II, Items 5 through 8,
inclusive. Certain specified portions of the registrant's definitive proxy
statement to be filed within 120 days after May 31, 1996 (the "Proxy
Statement") are incorporated herein by reference in response to Part III,
Items 10 through 12, inclusive. The Form 8-K filed on July 9, 1996 is
incorporated herein by reference in response to Part IV, Item 14(b).
<PAGE>
PAYCHEX, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I Page
Item 1: Business 3
Item 2: Properties 5
Item 3: Legal Proceedings 6
Item 4: Submission of Matters to a Vote of Security
Holders 6
PART II
Item 5: Market for the Registrant's Common Equity
and Related Stockholder Matters 6
Item 6: Selected Financial Data 6
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
Item 8: Financial Statements and Supplementary Data 6
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 6
PART III
Item 10: Directors and Executive Officers of the
Registrant 7
Item 11: Executive Compensation 7
Item 12: Security Ownership of Certain Beneficial
Owners and Management 7
Item 13: Certain Relationships and Related
Transactions 7
PART IV
Item 14: Exhibits, Financial Statements and Reports
on Form 8-K 7
Signatures 10
<PAGE>
PART I
Item 1. Business.
---------
General
Paychex, Inc. (the "Company" or "Paychex"), a Delaware corporation, was
formed in 1979 through the consolidation of 17 corporations engaged in
providing computerized payroll accounting services.
Principal Products, Services and Markets.
- -----------------------------------------
Paychex is primarily engaged in providing computerized payroll accounting
services to over 234,000 small to medium sized businesses nationwide.
Paychex believes that in number of clients it is the second largest payroll
accounting service company in the country. The Company prepares and
furnishes paychecks, earnings statements and internal accounting records such
as journals, summaries and earnings histories. Paychex prepares for its
clients all required monthly, quarterly and annual payroll tax returns for
federal, state and local governments. The TAXPAY feature is utilized by
over 55% of its' clients nationwide. This service provides automatic payment
of payroll taxes and electronic 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 client's employees to banks throughout the Federal Reserve
System. In addition, a digital check signing and inserting service is
offered.
Paylink, a proprietary software package, enables clients to use their
personal computers and modems to transmit their own payroll data into the
local Paychex processing center at any time without assistance of a payroll
specialist. Currently over 13,800 clients use this feature.
Paychex markets its services principally to small and medium sized businesses
through its 75 branch operating centers and 23 sales offices located in major
metropolitan areas. The Company's market share in branch processing center
territories ranges from 1% to approximately 20%. No client accounts for as
much as 1% of the Company's revenue.
Clients may discontinue Paychex service at will. Approximately 80% of the
businesses which were clients in fiscal year 1994 or 1995 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.
The Company warrants its services, agreeing to reimburse any client for
penalties and interest incurred as a result of a Paychex error. Warranty
expense paid in fiscal years 1996 and 1995 was approximately $800,000 and
$410,000, respectively.
<PAGE>
The Company 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 to simultaneously enter information from the
client while receiving it over the telephone. Payroll processing is
decentralized in the Company's branch operating centers while Taxpay
and Direct Deposit processing are centralized at the Company's headquarters.
Sales offices utilize a nearby Company branch operating center for processing.
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 client employees to pay for health and dependent care
expenses with pre-tax dollars. All administration, compliance, coverage and
discrimination 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 are
group insurance products offered in selected geographical areas.
During 1995, the HRS Division introduced a 401(K) Recordkeeping Service to
selected markets. This service provides plan design and implementation,
ongoing compliance with government regulations, employee and employer
reporting and other administrative services.
Products and services of the HRS Division are sold through a separate
sales organization located in most branch offices. Some of the products
and services are available on a nationwide basis through an inside sales
group.
Software Maintenance and Product Development.
- ---------------------------------------------
The ever-changing mandates of Federal, State and local taxing authorities
compel the Company to continuously update its proprietary software. The
Company is also engaged in developing ongoing enhancements to its software
to meet the changing requirements of its clients and the marketplace.
However, the Company is not engaged, to any significant extent, in basic
software research and development.
<PAGE>
Competition.
- ------------
The payroll accounting services industry is characterized by intense
competition. The principal competitive factors are price and service.
Paychex believes it has one major competitor that provides computerized
payroll accounting services nationwide. Although this competitor has
historically concentrated on larger employers, it has for several years
marketed directly to the small and medium sized businesses which
constitute the Paychex market. In addition, the Company competes with
other providers of computerized payroll services, including banks and
smaller independent firms.
The Company's principal competition, used by a majority of the businesses
in its market, is manual payroll systems sold by numerous vendors. Some
companies have in-house computer capability to generate their own payroll
documents and reports.
Executive Officers.
- -------------------
The information required is set forth in the Company's Proxy Statement and
is incorporated herein by reference.
Employees.
- ----------
Paychex currently employs approximately 3,950 persons, of which 3,760 are
full time and 190 are part time.
Trademarks.
- -----------
The Company has a number of trademarks registered in the U.S. Patent and
Trademark Office including the names PAYCHEX, TAXPAY and PAYLINK. The
Company believes these trademarks are of material importance to its
business.
Seasonality.
- ------------
There is no significant seasonality to the Company's business, except that
over 30% of new clients added in each of the last two fiscal years have
been added during the third fiscal quarter. Consequently, greater sales
commissions are paid in that quarter, resulting in higher selling expenses
for the third quarter.
Item 2. Properties.
-----------
The corporate headquarters, owned by the Company, occupy a 139,000 square foot
office complex in a suburb of Rochester, New York. The Company owns and
occupies a 62,000 square foot office and distribution facility located within
10 miles of corporate headquarters. The Company also owns a 20,000 square
foot office facility in Syracuse, New York. Approximately one-half of this
building is occupied by the Syracuse branch office and the remaining space is
leased. In June, 1995, the Company acquired a 38,000 square foot building (on
leased land) as part of the Company's acquisition of Pay-Fone Systems, Inc., a
payroll company located in Van Nuys, California. Paychex occupies
approximately one half of the building and the remaining space is leased.
<PAGE>
The Company leases office space for its branches and sales offices at
various locations throughout the country. On average, branch offices
contain approximately 10,000 square feet and sales offices approximately
850 square feet.
Item 3. Legal Proceedings.
------------------
There are no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year ended May 31, 1996.
Part II
Item 5. Market for Registrant's Common Equity and Related
-------------------------------------------------
Security Holder Matters.
- ------------------------
The information required is set forth in the Company's Annual Report under
the heading "Common Stock Data" and is incorporated herein by reference.
Item 6. Selected Financial Data.
------------------------
The information required is set forth in the Company's Annual Report under
the heading "Selected Financial Data" and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
- ------------------------------------
The information required is set forth in the Company's Annual Report under
the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
The financial statements required are identified in Item 14 (a), and are
set forth in the Company's Annual Report and incorporated herein by
reference. Supplementary data required is set forth in the Company's
Annual Report under the heading "Quarterly Financial Data" and is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
------------------------------------------------
Accounting and Financial Disclosure.
- ------------------------------------
There has been no change in accountants or reported disagreements on
accounting principles or practices or financial statement disclosures.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The information required is set forth in the Company's definitive Proxy
Statement in the section entitled "Proposal 1 - Election of Directors"
under the heading "Nominees for Election" and is incorporated herein by
reference.
Item 11. Executive Compensation.
-----------------------
The information required is set forth in the Company's definitive Proxy
Statement in the section entitled "Executive Compensation" and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The information required is set forth in the Company's definitive Proxy
Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
There were no relationships or related transactions required to be
reported.
Part IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K.
-------------------------------------------------------
(a) 1. Financial Statements and Supplementary Data
-------------------------------------------
The following financial statements of the Company are incorporated
herein by reference to the Company's Annual Report:
Report of Independent Auditors
Consolidated Statements of Income - Years ended May 31, 1996, 1995
and 1994
Consolidated Balance Sheets - May 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity - Years ended May 31,
1996, 1995 and 1994
<PAGE>
Consolidated Statements of Cash Flows - Years ended May 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
2. Schedules called for under Regulation S-X are not submitted because
they are not applicable or not required or because the required
information is not material or is included in the financial statements
or notes thereto.
3. Exhibits
--------
(3) (a) Articles of Incorporation, as amended, incorporated herein by
reference to the Company's Registration Statement No. 2-85103,
Exhibits 3.1 through 3.5 and Form 8-K filed with the Commission on
October 22, 1986 and Form 10-Q filed with the Commission on January
12, 1989 and Form 10-Q filed with the Commission on January 13, 1993
and Form 10-Q filed with the Commission on January 10, 1996.
(3) (b) By-Laws, as amended, incorporated herein by reference to the
Company's Registration Statement No. 2-85103, Exhibit 3.6.
(10)(a) Paychex, Inc. 1987 Stock Incentive Plan, incorporated herein by
reference to the Company's Registration Statement on Form S-8, No.
33-17780.
(10)(b) Paychex, Inc. 1992 Stock Incentive Plan incorporated herein by
reference to the Company's Registration Statement on Form S-8, No.
33-52772.
(10)(c) Paychex, Inc. 1995 Stock Incentive Plan incorporated herein by
reference to the Company's Registration Statement on Form S-8, No.
33-64389.
(10)(d) Paychex, Inc. Section 401(k) Incentive Retirement Plan, incorporated
herein by reference to the Company's Registration Statements on Form
S-8, No. 33-19153 and No. 33-52838.
(10)(e) Paychex, Inc. - Pay-Fone Systems, Inc. 1993, 1990, 1987, 1983,
1981 Incentive Stock Option Plans and Director Non-Qualified
Stock Option Agreements incorporated herein by reference to the
Company's Registration Statement on Form S-8, No. 33-60255.
(13) Portions of the Annual Report to Security Holders for the Fiscal
Year ended May 31, 1996. Such report, except for the portions
thereof which are expressly incorporated by reference in this
filing, is furnished for the information of the Commission and
is not to be deemed "filed" as part of this filing.
(19) Previously unfiled documents - none.
(21) Subsidiaries of the registrant.
(23) Consents of experts and counsel.
(24) Powers of Attorney for Directors.
<PAGE>
Item 14.(b)
Reports on Form 8-K - The Company did not file any current reports
on Form 8-K during the fourth quarter of the year ended May 31,
1996. On July 9, 1996, the Company filed a Form 8-K announcing
that on June 25, 1996, the Company reached an agreement to merge
with National Business Solutions, Inc. (NBS), headquartered in St.
Petersburg, Florida. The outstanding common stock of NBS will be
exchanged for approximately 3 million shares of Paychex common
stock valued at $140,000,000. The transaction will be accounted
for as a pooling of interests and is pending favorable judgment on
filings made under the Hart-Scott-Rodino Act and approvals required
under the Florida Business Corporations Act.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PAYCHEX, INC.
Dated: August 14, 1996 By: /s/ B. Thomas Golisano
-----------------------------
B. Thomas Golisano, Chairman,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Dated: August 14, 1996 By: /s/ B. Thomas Golisano
-----------------------------
B. Thomas Golisano, Chairman,
Chief Executive Officer and Director
Dated: August 14, 1996 By: /s/ G. Thomas Clark
-------------------------------
G. Thomas Clark, Senior Vice President
Finance, Secretary, Treasurer and
Director
Dated: August 14, 1996 By: /s/ Donald W. Brinckman*
-------------------------------
Donald W. Brinckman, Director
Dated: August 14, 1996 By: /s/ Steven D. Brooks*
-------------------------------
Steven D. Brooks, Director
Dated: August 14, 1996 By: /s/ Phillip Horsley*
-------------------------------
Phillip Horsley, Director
Dated: August 14, 1996 By: /s/ Grant M. Inman*
-------------------------------
Grant M. Inman, Director
Dated: August 14, 1996 By: /s/ Harry P. Messina, Jr.*
-------------------------------
Harry P. Messina, Jr., Director
Dated: August 14, 1996 By: /s/ J. Robert Sebo*
-------------------------------
J. Robert Sebo, Director
*By: /s/ B. Thomas Golisano
-------------------------------
B. Thomas Golisano, as Attorney-in-Fact
EXHIBIT 13: PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR
ENDED MAY 31, 1996
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS.
- --------------------------------------------------------------------------
The Company's common stock is traded in the over-the-counter market and quoted
on the NASDAQ National Market System (symbol: PAYX). The high and low prices
and dividends per share have been adjusted to reflect the three-for-two stock
splits in May 1995 and May 1996.
<TABLE>
<CAPTION>
Year Ended May 31 1996 1996 1995 1995
Market Price Dividends Market Price Dividends
Per Share Per Share Per Share Per Share
------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
High Low High Low
1st Quarter $27 7/8 $19 5/8 $.04 $15 3/8 $12 5/8 $.03
2nd Quarter 31 3/8 27 .06 17 3/8 14 3/8 .04
3rd Quarter 39 1/8 26 1/2 .06 18 5/8 15 3/8 .04
4th Quarter 47 34 3/8 .06 21 5/8 17 1/2 .04
</TABLE>
On June 27, 1996, there were 3,733 holders of record of the Company's common
shares. The level of future dividends is necessarily dependent on the
Company's future earnings and cash flow.
SELECTED FINANCIAL DATA.
- ------------------------
<TABLE>
<CAPTION>
May 31
(dollars in thousands, except per share amounts)
Operating Data 1996 1995 1994 1993 1992
- -------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $325,285 $267,176 $224,052 $190,032 $161,272
Operating costs 96,758 78,611 68,082 60,715 53,243
Selling, general & adminis-
trative expenses 161,028 137,554 119,187 102,660 89,301
Operating income 67,499 51,011 36,783 26,657 18,728
Percent of revenue 20.8 19.1 16.4 14.0 11.6
Investment income net of
interest expense 5,188 3,362 2,203 1,370 819
Income before income
taxes 72,687 54,373 38,986 28,027 19,547
Percent of revenue 22.3 20.3 17.4 14.7 12.1
Net income 52,333 39,040 28,070 19,955 13,702
Percent of revenue 16.1 14.6 12.5 10.5 8.5
<PAGE>
Financial Position - End of Year
- --------------------------------
Working capital $137,158 $ 97,558 $ 68,031 $ 46,389 $ 27,884
Total assets 220,208 168,437 129,789 106,920 86,242
Long-term debt (including
current portion) 0 728 948 1,634 2,024
Stockholders' equity 190,810 139,932 108,508 85,189 67,405
Common Stock Data
- -----------------
Net income per share .77 .58 .42 .30 .21
Cash dividends per share .22 .15 .10 .07 .05
Average shares outstanding
(in thousands) 68,352 67,389 67,184 66,893 66,419
Other Statistics
- ----------------
Number of clients 234,300 207,900 185,900 167,500 150,400
Branch service centers 75 71 70 70 70
Sales offices 23 23 24 20 17
Capital expenditures $ 17,286 $ 12,355 $ 11,583 $ 8,710 $ 13,453
Note: Per share amounts and average shares have been adjusted for
three-for-two stock splits in May 1992, August 1993, May 1995 and May 1996.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
Management's discussion and analysis reviews the Company's operating results
for each of the three years in the period ended May 31, 1996, and its
financial condition at May 31, 1996. The focus of this review is on the
underlying business reasons for significant changes and trends affecting
revenues, net income, and financial condition. This review should be read in
conjunction with the accompanying Consolidated Financial Statements, the
related Notes to Consolidated Financial Statements, and the Eleven-Year
Summary of Financial Data. Forward-looking statements in this management's
discussion and analysis are qualified by the cautionary statement at the end
of this discussion.
Results of Operations
- ---------------------
The financial results for Paychex in fiscal 1996 reflected the sixth
consecutive year of record revenues and net income. The Company's ability to
continually grow its client base, increase the utilization of ancillary
services by new and existing clients and decrease selling, general and
administrative expenses, as a percent of revenue, has resulted in compounded
revenue growth of 18.0% and compounded net income growth of 35.7% in these
record setting years.
Revenues in 1996 rose 21.7% to a record $325.3 million. This compares to
revenue growth of 19.2% in 1995 and 17.9% in 1994. The primary gains resulted
from continued growth of clients utilizing the basic payroll service ( 12.7%
in 1996, 11.8% in 1995 and 11.0% in 1994 ), and increased utilization of our
Taxpay product by both new and existing clients. Approximately 2% of the
1996 increase was attributed to revenue from Pay-Fone Systems, Inc. and The
Payroll Company, two acquisitions made during the year as discussed below.
Increased revenues were also provided by our other ancillary payroll products
including, among others, Direct Deposit and Check Signing and Inserting. The
Human Resource Services Division continues to generate yearly revenue
increases and anticipates future growth of its 401(k) recordkeeping services.
At the end of fiscal 1996, the Company provided payroll services to over
234,000 clients, of which 131,000 or 56% use Taxpay. This compares to 51% in
1995 and 43% in 1994. Taxpay and Direct Deposit revenues include fee income
on a per payroll period basis and investment income earned during the short
period between collecting client funds and remitting the funds to the
applicable tax authorities or bank accounts. Investment income, which is less
than 10% of total revenues, has grown substantially in recent years due to the
significant increase in clients utilizing Taxpay and Direct Deposit services,
inflationary increases in average daily balances and, for much of the time,
favorable trends in investment returns for the Company's investments of client
funds. During 1996, the Company was able to more than offset the effects of
slightly lower investment rates by selling fixed income municipal bonds at
realized gains.
<PAGE>
Operating costs are incurred to provide services to clients and consist
primarily of wages, forms and supplies, delivery expenses, and depreciation
and maintenance charges on data processing equipment. Operating costs were
29.7% of revenue in 1996, as compared to 29.4% and 30.4% for 1995 and 1994,
respectively. The Company anticipates fiscal 1997 operating costs, as a
percentage of revenue, to be consistent with or slightly lower than 1996.
Selling, general and administrative expenses were 49.5% of revenue in 1996,
down from 51.5% and 53.2% in 1995 and 1994, respectively. As a percentage of
revenue, sales wages and commissions for 1996 were lower than 1995. The
percent decrease in expenses in 1995 as compared to 1994 resulted from lower
general and administrative payroll and other costs. For the next fiscal year,
selling, general and administrative expenses are expected to continue the
trend established over the past few years.
In each of the last three years, the effective tax rate was approximately 28%.
The 1994 rate included a 1% increase in the Federal statutory rate. This 1994
increase was more than offset by lower State income taxes and a reduction in
expenses due to the adoption of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
In October 1995, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123, "Accounting for Stock-Based Compensation", which will
become effective for the Company in fiscal 1997. This Statement will require
a fair value approach for accounting for stock-based compensation awards
through footnote disclosure or by recognition within the financial statements.
The Company has not yet determined which method it will elect, nor has it
determined the effect of the new standard will have on net income and
earnings per share. Adoption of FAS 123 will have no effect on the
Company's cash flow.
On June 15, 1995, the stockholders of Pay-Fone Systems, Inc. received
approximately 497,900 shares of Paychex common stock in a business combination
accounted for as a pooling of interests. On September 29, 1995, the Company
acquired The Payroll Company, Inc. for approximately 173,800 shares of common
stock in a business combination accounted for as a purchase. These
acquisitions did not have a significant impact on Paychex' financial position
and results of operations.
On June 25, 1996, the Company reached an agreement to merge with National
Business Solutions, Inc. (NBS) in a business combination accounted for as a
pooling of interests. The stockholders of NBS will receive approximately 3
million shares of Paychex common stock. The transaction is pending favorable
judgement on filings made under the Hart-Scott-Rodino Act and approvals
required under the Florida Business Corporation Act.
NBS is a professional employer organization (PEO) and as a co-employer,
specializes in providing small and medium-sized businesses with cost
effective outsourcing solutions for their employee benefits. For the twelve
months ended May 31, 1996, NBS was profitable and generated approximately $240
million in revenue. Because NBS is at risk for all of its direct costs and,
consistent with PEO industry practice, revenue includes all amounts billed to
clients for gross salaries and wages, related employment taxes, health care
benefits, workers' compensation coverage and administrative fees. The
potential effect of the merger on the Company's 1997 financial position and
results of operations can not be accurately estimated at this time. However,
the Company does not anticipate the merger will have a dilutive effect upon
future earnings.
Liquidity and Capital Resources
- -------------------------------
Net cash provided from operating activities totaled $59.9 million in 1996 as
compared to $48.1 million in 1995 and $34.0 million in 1994. These increases
resulted primarily from the consistent achievement of record net income in
each of the past three years. Net income in 1996 totaled $52.3 million,
representing a 34.1% gain over 1995 net income of $39 million, which was
39.1% over 1994 net income of $28.1 million.
Company owned investments and investments of client funds held for Taxpay and
Direct Deposit consist of municipal securities issued by various governmental
agencies and short-term money market securities. The Company is exposed to
risks in connection with these investments through the possible inability of
the municipalities to meet the terms of the bond contracts and from movements
in interest rates. The Company controls these risks by investing primarily in
AAA and AA rated municipal securities, and by limiting amounts that can be
invested in any single instrument. In addition, the investments are held in
short to intermediate term instruments which limit sensitivity to interest
rate changes.
<PAGE>
The Company's own investment purchases have increased in each of the last
three years resulting from growth in the Company's cash provided from
operations. In addition, greater investment purchases and sales activity
occurred in 1996 as the Company managed its investment portfolio to realize
gains and minimize risk associated with the declining market interest rates
experienced during the year.
Included in 1996 capital expenditures of $17.3 million were upgrades to
terminals and telecommunication equipment in branch offices which promoted
operating efficiency and enhanced customer service. These purchases comprised
most of the increase in 1996 capital spending over 1995 and 1994 amounts that
totaled $12.4 million and $11.6 million, respectively. Capital expenditures
in 1997 are expected to range between $16 million and $22 million. In
addition, the Company is planning a major upgrade of its laser printing
equipment in branch offices through a five year operating lease with future
minimum lease payments of approximately $10 million.
The quarterly cash dividend payment was increased during the second quarter of
1996 to $.06 per share. This resulted in an annual dividend payment of $.22
per share as compared to $.15 in 1995 and $.10 in 1994. On April 11, 1996,
the Company declared a three-for-two stock split on outstanding shares
distributed May 23, 1996.
Projected cash flows are expected to be adequate to support normal business
operations, planned capital expenditures and dividend payments. Furthermore,
the Company has $200 million of unsecured bank lines of credit available for
its use. As of May 31, 1996, there were no outstanding borrowings under these
lines of credit.
Other
- -----
In an effort to give investors a well-rounded view of the Company's current
condition and future opportunities this Annual Report includes comments by
the Company's management about future performance and results. Because they
are forward-looking, these forecasts involve uncertainties. They include risks
of general market conditions including demand for the Company's products and
services, competition and price levels; changes in the laws regulating
collection and payment of payroll taxes and employee benefits including 401(k)
plans and Section 125 plans; delays in the development and marketing of new
products and services; the possibility of catastrophic events that could
impact the Company's operating facilities, computer technology and
communication systems; changes in short and long-term interest rates and the
credit ratings of municipal securities held in the Company's investment
portfolios.
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- --------------------------------------------
REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
Board of Directors
Paychex, Inc.
We have audited the accompanying consolidated balance sheets of Paychex,
Inc. and subsidiaries as of May 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended May 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Paychex, Inc. and subsidiaries at May 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for income taxes in fiscal year
1994 and for investments in fiscal year 1995.
Syracuse, New York /s/ERNST & YOUNG LLP
June 27, 1996
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended May 31
-----------------
1996 1995 1994
---- ---- ----
(in thousands, except per
share amounts)
<S> <C> <C> <C>
Revenue $325,285 $267,176 $224,052
Operating costs 96,758 78,611 68,082
Selling, general and
administrative expenses 161,028 137,554 119,187
------- -------- --------
OPERATING INCOME 67,499 51,011 36,783
Other income 5,188 3,362 2,203
------- -------- --------
INCOME BEFORE INCOME TAXES 72,687 54,373 38,986
INCOME TAXES 20,354 15,333 10,916
------ -------- --------
NET INCOME $ 52,333 $ 39,040 $ 28,070
======== ======== ========
EARNINGS PER SHARE $ .77 $ .58 $ .42
======== ======== ========
CASH DIVIDENDS PER SHARE $ .22 $ .15 $ .10
======== ======== ========
Weighted average shares
outstanding 68,352 67,389 67,184
======= ======== ========
Note: Per share amounts have been adjusted for three-for-two stock splits in
May 1995 and May 1996.
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31
------
1996 1995
---- ----
(in thousands, except per
share amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15,399 $ 12,942
Investments 101,845 70,753
Interest receivable 7,385 6,699
Trade accounts receivable 37,527 30,772
Prepaid expenses and other current assets 1,717 1,743
Deferred income taxes 1,419 1,310
-------- --------
TOTAL CURRENT ASSETS 165,292 124,219
PROPERTY AND EQUIPMENT
Land and improvements 2,787 2,779
Buildings 24,145 21,304
Data processing equipment 42,887 33,980
Furniture, fixtures and equipment 37,614 29,135
Leasehold improvements 2,685 1,528
-------- --------
110,118 88,726
Less allowance for depreciation and
amortization 60,120 45,019
-------- --------
NET PROPERTY AND EQUIPMENT 49,998 43,707
OTHER ASSETS 4,918 511
-------- --------
TOTAL ASSETS $220,208 $168,437
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
May 31
------
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 3,837 $ 3,519
Accrued compensation and related items 13,335 13,162
Accrued income taxes 573 682
Other accrued expenses 5,729 6,116
Deferred revenue 4,660 2,977
Current portion of long-term debt - 205
-------- -------
TOTAL CURRENT LIABILITIES 28,134 26,661
OTHER LIABILITIES
Deferred income taxes 416 764
Long term debt - 523
Other long-term liabilities 848 557
-------- -------
TOTAL LIABILITIES 29,398 28,505
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, authorized
150,000,000 shares:
Issued 68,698,154 in 1996
and 45,031,716 in 1995 687 450
Additional capital 29,985 17,727
Retained earnings 160,138 121,755
-------- --------
TOTAL STOCKHOLDERS' EQUITY 190,810 139,932
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $220,208 $168,437
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained
(in thousands) Shares Issued Amount Capital Earnings Total
--------------------- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1993 19,868 $ 199 $13,946 $71,044 $85,189
Exercise of stock options 100 1 758 759
Tax benefit from stock option
transactions 1,074 1,074
Shares issued in connection
with three-for-two stock
split 9,939 99 (111) (12)
Dividends paid (6,572) (6,572)
Net income 28,070 28,070
------ ----- ------- ------- --------
Balance at May 31, 1994 29,907 299 15,778 92,431 108,508
Exercise of stock options 116 1 1,261 1,262
Tax benefit from stock option
transactions 688 688
Shares issued in connection
with three-for-two stock
split 15,009 150 (168) ( 18)
Adjustment to the beginning balance
of investments to recognize the
net unrealized holding loss on
available-for-sale securities
(FAS 115), net of income taxes
of $140 (206) (206)
Change in unrealized gains and losses
on investments, net of
income taxes of $372 546 546
Dividends paid (9,888) (9,888)
Net income 39,040 39,040
------ ------ ------ ------- -------
Balance at May 31, 1995 45,032 450 17,727 121,755 139,932
Exercise of stock options 320 3 2,810 2,813
Tax benefit from stock option
transactions 2,671 2,671
Shares issued in connection with
three-for-two stock split 22,674 227 (272) (45)
Shares issued in connection with the
merger of Pay-Fone Systems, Inc. 498 5 2,926 1,866 4,797
Shares issued in connection with the
acquisition of The Payroll Company, Inc.
(d/b/a Payday) 174 2 3,851 3,853
Change in unrealized gains and losses
on investments, net of income taxes
of $338 (497) (497)
Dividends paid (15,047) (15,047)
Net income 52,333 52,333
------ ---- ------- -------- --------
Balance at May 31, 1996 68,698 $687 $29,985 $160,138 $190,810
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31
-----------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 52,333 $39,040 $ 28,070
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and amortization 13,940 11,040 11,205
Net change in deferred income taxes 45 (41) (745)
Provision for bad debts 1,034 847 762
Net realized gain on sales of
available-for-sale securities (737) (26) (266)
Changes in operating assets
and liabilities:
Trade accounts receivable (7,044) (8,807) (4,685)
Accrued interest receivable (686) (1,832) (1,574)
Prepaid expenses and other
current assets 306 548 321
Trade accounts payable and
other current liabilities (975) 7,173 (511)
Deferred revenue 1,683 205 1,373
NET CASH PROVIDED BY ------ ------ ------
OPERATING ACTIVITIES 59,899 48,147 33,950
INVESTING ACTIVITIES
Investment purchases of
available-for-sale securities (134,829) (51,421) (28,604)
Proceeds from sales of available-
for-sale securities 99,630 20,757 20,381
Proceeds from maturities of
available-for-sale securities 4,787 1,500 590
Additions to property
and equipment, net of disposals (17,025) (12,268) (11,321)
Net change in other assets (778) (202) 23
-------- -------- --------
NET CASH USED IN INVESTING
ACTIVITIES (48,215) (41,634) (18,931)
FINANCING ACTIVITIES
Payments on long-term debt (431) (220) (686)
Proceeds and tax benefit from exercise
of stock options 5,484 1,950 1,833
Dividends paid (15,047) (9,888) (6,572)
Payment in lieu of issuance of
fractional shares (45) (18) (12)
-------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (10,039) (8,176) (5,437)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 1,645 $(1,663) $ 9,582
--------- ------- -------
CASH & CASH EQUIVALENTS,
Beginning of Fiscal Year 12,942 14,605 5,023
Cash obtained through PayFone Acquisition 805 - -
Cash obtained through Payday Acquisition 7 - -
CASH & CASH EQUIVALENTS,
End of Fiscal Year $ 15,399 $12,942 $ 14,605
======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Business Activities: The Company is an integrated provider of automated
payroll, payroll tax payment and filing and human resource services for
small and medium-sized businesses nationwide.
In connection with Taxpay, its automated tax payment and filing
service, the Company collects payroll taxes, files the applicable tax
returns, and pays taxes due to the appropriate taxing authorities. The
Company's Direct Deposit service collects net payroll from client accounts
and provides automatic salary deposit for employees. During the short period
between collection and payment, the Company invests these client funds in
government securities, money market funds and investment grade municipal
securities without significant concentration in any one issuer. The amount
of client funds held by Paychex for the Taxpay and Direct Deposit services
fluctuates significantly during the year. At May 31, 1996 and 1995, the
total Taxpay and Direct Deposit funds held by Paychex were $590,929,000 and
$470,847,000, respectively. These client funds and the related tax and
payroll obligations are neither assets nor liabilities of the Company and,
therefore, are not included in the accompanying financial statements.
Related income earned from these investments is included in revenue.
Principles of Consolidation: The consolidated financial statements include
the accounts of Paychex, Inc. and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Cash Equivalents: Cash equivalents consist of money market and municipal
bond funds and other investments with a maturity of three months or less
when purchased. Amounts reported in the balance sheet approximate fair
value.
Investments: Investments consist of investment grade municipal securities
issued by various governmental agencies. The fair value of investments is
determined based on information received from an independent pricing
service. Realized gains and losses on sales of investments are based on
cost. No individual issue comprises greater than 1% of total assets.
<PAGE>
Effective June 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments
in Debt and Equity Securities". In accordance with the Statement, prior
period financial statements have not been restated to reflect the change in
accounting principle. Investments are classified as available-for-sale and
are recorded at fair value with unrealized gains and losses reported as a
component of stockholders' equity, net of applicable taxes. The adoption had
no effect on net income. The impact of adopting FAS 115 was to decrease
stockholders' equity by $206,000 (net of $140,000 of deferred income taxes)
at June 1, 1994 to reflect the unrealized loss on securities at the beginning
of the fiscal year.
Also effective June 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 107 (FAS 107), "Fair Value Disclosures About
Financial Instruments". This standard requires disclosure of fair value
information on financial instruments. (See Note B).
Property and Equipment: These assets are stated at cost. Major renewals and
betterments are charged to the property accounts, while replacements and
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed currently. Depreciation is computed by the
straight-line method over the estimated useful lives of related assets.
Software Development and Enhancement: The Company incurs certain costs to
enhance its computer programs and to maintain them in compliance with changes
in state and federal payroll tax requirements. All such costs are expensed as
incurred. Expenditures for major software purchases are capitalized and
amortized by the straight-line method over the estimated useful lives of the
related assets.
Deferred Revenue: The Company defers revenue on certain services billed
in advance. The revenue is recognized upon completion of these services.
Income Taxes: Effective June 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes". The cumulative effect of the accounting change was not material
to net income for the year ended May 31, 1994.
Earnings Per Share: Earnings per share are based on the weighted average
shares outstanding in each year. Common stock equivalents resulting from
stock options have not been included as their impact is not material.
Stock Based Compensation: The Company accounts for its Stock Option Plans
under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees", under which no compensation cost has been recognized.
In October, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" which defines a fair value method of accounting for stock based
compensation plans, the effects of which can either be disclosed in the notes
to the financial statements or recorded in the income statement. FAS No. 123
requires adoption no later than fiscal years beginning after December 15,
1995. Under this method, compensation is usually determined at the date of
grant and amortized over the vesting period of the grant. The Company has not
yet determined if it will elect to change to the new method, nor has it
determined the effect the new standard will have on net income and earnings
per share should the Company elect to make this change. Adoption of FAS No.
123 will have no effect on the Company's cash flows.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Reclassifications: Certain amounts from prior years are reclassified to
conform with 1996 presentations.
<PAGE>
NOTE B - INVESTMENTS
Cost, unrealized gains and losses, and estimated fair value of securities at
May 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
May 31, 1996
Municipal Securities $102,108 $ 233 $ 496 $101,845
- ------------------------------------------------------------------------------------
May 31, 1995
Municipal Securities $ 70,181 $ 681 $ 109 $ 70,753
- ------------------------------------------------------------------------------------
</TABLE>
Net realized gains and losses on sales of available-for-sale securities are
included in other income on the Consolidated Statements of Income. Gross
realized gains and losses for 1996, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $902 $ 69 $277
Gross realized losses $165 $ 43 $ 11
</TABLE>
The amortized cost and estimated fair value of debt securities at May 31,
1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
prepay obligations without prepayment penalties.
Estimated
Fair
(in thousands) Cost Value
------------------------------------------------------------------------
Maturity Date
1 Year or Less $ 2,657 $ 2,704
1 to 3 Years 44,662 44,627
3 Years and Over 54,789 54,514
----------------------------
Total $102,108 $101,845
--------------------------
<PAGE>
NOTE C -LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
May 31
------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Industrial Revenue Bonds $ - $ 728
Less current portion - 205
------ ------
$ - $ 523
------ ------
</TABLE>
During the year ended May 31, 1996, operating cash was used to repay the
remaining balance on the Internal Revenue Bonds.
At May 31, 1996, the Company has available unsecured lines of credit from
various banks totaling $200,000,000. No amounts were outstanding against the
lines of credit at May 31, 1996.
<PAGE>
NOTE D - STOCKHOLDERS' EQUITY
The Company declared three-for-two stock splits effected in the form of 50%
stock dividends on outstanding shares on various dates during the fiscal
years ended 1996, 1995 and 1994, as follows:
Stock Dividend Payable to Holders Stock Dividend
Fiscal Year Declaration Dates of Record Distribution Dates
______________________________________________________________________________
1996 April 11, 1996 May 2, 1996 May 23, 1996
1995 April 13, 1995 May 2, 1995 May 25, 1995
1994 July 8, 1993 August 2, 1993 August 26, 1993
______________________________________________________________________________
The Company reserved 1,875,000 shares of common stock for issuance under
the 1995 Stock Incentive Plan. The 1992 and 1987 Stock Incentive Plans
expired on August 31, 1995 and 1992, respectively; however, options to
purchase 1,542,508 shares under these plans remain outstanding. Incentive or
non-qualified options may be granted at prices not less than 100% of the fair
market value of the common stock at the date of the grant, unless the
employee owns more than 10% of the outstanding common stock, in which case
the option price for incentive stock options only must not be less than 110%
of the fair market value. Outstanding options are generally exercisable in
cumulative annual installments ranging from 20% to 50% and expire up to ten
years after the date of grant.
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the market value of the shares at
the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the
stock option grants.
<PAGE>
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Number of
---------
Equivalent Shares
-----------------
<S> <C>
Balance May 31, 1993 1,736,270
Issued 536,400
Exercised (236,433)
Canceled (50,994)
---------
Balance May 31, 1994 1,985,243
Issued 341,550
Exercised <256,779>
Canceled <67,074>
--------
Balance May 31, 1995 2,002,940
Issued 496,558
Exercised (480,018)
Cancelled ( 59,572)
---------
Balance May 31, 1996 1,959,908
Exercisable May 31, 1996 838,641
Prices range from $2.99 to $18.22
</TABLE>
<PAGE>
NOTE E - INCOME TAXES
Effective June 1, 1993, the Company adopted Statement of Accounting
Standards No. 109, "Accounting for Income Taxes", which recognizes deferred
tax assets and liabilities based on the future tax effects attributable to
differences between the tax basis of an asset or liability and its reported
amount in the financial statements. As allowed under the standard, prior
years' financial statements have not been restated.
Significant components of the deferred tax assets and liabilities
as of May 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
(in thousands)
Deferred tax assets: 1996 1995
---- ----
<S> <C> <C>
Allowance for bad debts $ 817 $ 677
Accrued vacation pay 1,391 1,255
Reserve for future medical claims 293 310
Other expenses not currently deductible 903 655
Unrealized loss on available-for-sale securities 106 -
------ ------
Total deferred tax assets $3,510 $2,897
Deferred tax liabilities:
Revenue not subject to current taxes $1,877 $1,297
Depreciation 554 765
Other 76 57
Unrealized gain on available-for-sale securities - 232
------ -------
Total deferred tax liabilities $2,507 $2,351
------ -------
Net deferred tax assets $1,003 $ 546
------ -------
Classification of Net Deferred Tax Assets:
Current Assets $1,419 $1,310
Other Liabilities $ (416) $ (764)
</TABLE>
<PAGE>
Income tax expense consists of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Current
<S> <C> <C> <C>
Federal $15,400 $11,404 $ 8,593
State 4,952 3,970 3,068
------- ------- -------
Total Current $20,352 $15,374 $11,661
Deferred:
Federal (18) (31) (662)
State 20 (10) (83)
------- ------- --------
Total Deferred (credit) 2 (41) (745)
------- ------- --------
$20,354 $15,333 $10,916
</TABLE>
Below is an analysis reconciling the statutory federal income tax rate to
the effective tax rates shown in the Consolidated Statements of Income:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of
federal benefit 4.5 4.7 5.0
Tax exempt municipal bond interest (11.8) (12.2) (11.5)
Other items .3 .7 ( .5)
----- ----- -----
Effective tax rate 28.0% 28.2% 28.0%
</TABLE>
<PAGE>
NOTE F - COMMITMENTS & CONTINGENCIES
The Company leases office space under the terms of various operating
leases. Certain of the underlying agreements contain incentives eliminating
or modifying lease payments at the inception of the lease. These incentives
are amortized on a straight-line basis over the entire lease term. Amounts
expected to be amortized within the next fiscal year are included in other
accrued expenses. These amounts were $314,000 and $424,000 at May 31, 1996
and 1995, respectively.
Rental expense for all leases on office facilities amounted to
approximately $12,691,000 in 1996, $10,580,000 in 1995 and $9,410,000 in
1994.
The Company also leases data processing equipment under various
operating leases. These obligations extend through 2001. Related equipment
lease payments were $2,424,000, $1,631,000 and $1,103,000 in 1996, 1995 and
1994, respectively. All leases contain purchase options at prices
representing the fair value of the equipment at the expiration of the lease
term.
Future minimum lease payments under various facilities and equipment
operating leases consist of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $11,977
1998 9,523
1999 7,084
2000 5,044
2001 2,171
Thereafter 1,158
------
Total minimum lease payments $36,957
</TABLE>
The Company is a defendant in various lawsuits as a result of normal
operations and in the ordinary course of business. Management believes the
outcome of these lawsuits will not have a material effect on the financial
position or results of operations of the Company.
The Company is contingently liable for the guaranteed appreciation of
unregistered common stock issued as consideration in the September 29, 1995
acquisition of The Payroll Company (d/b/a Payday). The Company guarantees
stock issued at $28.61 and not sold prior to September 29, 2000, will
appreciate by a minimum of 20% to $34.33, or by approximately $1,000,000,
over the five year period ending on September 29, 2000. The per share market
value of Paychex stock at May 31, 1996 was $44.00 (See Note I).
NOTE G - EMPLOYEE BENEFITS
The Company has a 401(k) Incentive Retirement Plan which allows all
employees with one or more years of service to participate. The Company
currently matches 50% of an employee's voluntary contribution up to a maximum
of 3% of eligible compensation. Company contributions were $2,127,000,
$1,815,000, and $1,516,000 for 1996, 1995, and 1994, respectively.
<PAGE>
NOTE H - SUPPLEMENTAL CASH FLOW DISCLOSURES
Income tax payments totaled $17,672,000, $13,831,000, and
$11,633,000 in 1996, 1995, and 1994, respectively.
NOTE I - MERGER AGREEMENTS
On March 20, 1995, the Company and Pay-Fone System, Inc., a payroll
service provider, agreed in principle that all of the outstanding common
stock of Pay-Fone System, Inc. would be acquired by the Company in a business
combination accounted for as a pooling of interests. Upon consummation of
the merger on June 15, 1995, the stockholders of Pay-Fone Systems, Inc.
received approximately 497,900 shares of Paychex common stock. The merger
did not have a significant impact on the Company's 1996 financial position
and results of operations. As a result, prior year financial statements were
not restated.
On September 29, 1995, the Company acquired all of the outstanding stock
of The Payroll Company, Inc. (d/b/a Payday), a payroll services company, in
exchange for approximately 173,800 unregistered shares of Company common
stock with a fair value of $5,000,000 at the date of acquisition. The
agreement included a guarantee that the stock issued in the acquisition, and
not sold prior to September 29, 2000, will appreciate by a minimum of 20%
over the five year period ending on September 29, 2000. (See Note F)
The acquisition was accounted for as a purchase and recorded at the net
present value of the guaranteed $6,000,000 purchase price. Goodwill of
approximately $4,000,000 was recorded in Other Assets and is amortized on a
straight line basis over 10 years.
The results of operations of Payday are included in the accompanying
financial statements from the date of acquisition and did not have a
significant impact on the Company's 1996 financial position and results of
operations.
<PAGE>
NOTE J - SUBSEQUENT EVENT
On June 25, 1996, the Company reached an agreement to merge with National
Business Solutions, Inc, (NBS), headquartered in St. Petersburg, Florida. The
outstanding common stock of NBS will be exchanged for approximately 3 million
shares of Paychex common stock valued at $140,000,000. The transaction will
be accounted for as a pooling of interests and is pending favorable judgement
on filings made under the Hart-Scott-Rodino Act and approvals required under
the Florida Business Corporations Act.
NBS is a professional employer organization (PEO) and as a co-employer,
specializes in providing small and medium-sized businesses with cost effective
outsourcing solutions for their employee benefits. For the twelve months
ended May 31, 1996, NBS was profitable and generated approximately $240
million in revenue. Because NBS is at risk for all of its direct costs and,
consistent with PEO industry practice, revenue includes all amounts billed to
clients for gross salaries and wages, related employment taxes, health care
benefits, workers' compensation coverage and administrative fees. Paychex does
not anticipate the merger will have a dilutive effect upon future earnings.
Pro forma unaudited Consolidated Results of Operations, assuming the
merger had occurred prior to May 31, 1996 are as follows:
Restated Financial Information
(in thousands, except per share amounts) 1996 1995 1994
__________________________________________________________________________
Revenue $ 566,443 $412,065 $323,905
Net Income $ 53,956 $ 39,849 $ 28,476
Earnings Per Share $ .76 $ .57 $ .42
<PAGE>
Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Aug. 31 Nov. 30 Feb. 29 May 31 Year
_______ _______ _______ ______ _____
<S> <C> <C> <C> <C> <C>
1996
Revenue $76,173 $78,232 $84,941 $85,939 $325,285
Operating income 15,759 16,477 16,248 19,015 67,499
Net income 12,203 12,781 12,876 14,473 52,333
Net income per share .18 .19 .19 .21 .77
Aug. 31 Nov. 30 Feb. 28 May 31 Year
_______ _______ _______ ______ _____
1995
Revenue $62,923 $63,766 $68,638 $71,849 $267,176
Operating income 12,902 12,924 11,979 13,206 51,011
Net income 9,551 9,638 9,348 10,503 39,040
Net income per share .14 .15 .14 .15 .58
</TABLE>
Note: Per share amounts have been adjusted for three-for-two stock splits in
May 1995 and May 1996.
EXHIBIT 21: SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Name of Subsidiaries Incorporation
- -------------------- -----------------
Paychex Management Corp. New York
Paychex Securities Corporation New York
Paychex Merger Corp. Delaware
EXHIBIT 23: CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Paychex, Inc. of our report dated June 27, 1996, included in
the fiscal 1996 Annual Report to Shareholders of Paychex, Inc.
We also consent to the incorporation by reference, in the registration
statements outlined below, of our report dated June 27, 1996, with
respect to the consolidated financial statements incorporated herein by
reference of Paychex, Inc. included in the Annual Report
(Form 10-K) for the year ended May 31, 1996.
a. Form S-8 - Paychex, Inc. 1987 Stock Incentive Plan - as filed
with the Securities and Exchange Commission on October 9, 1987
(No. 33-17780) together with Post Effective Amendment No. 1
filed on November 13, 1992.
b. Form S-8 - Paychex 401(k) Incentive Retirement Plan - as filed
with the Securities and Exchange Commission on December 18,
1987 (No. 33-19153) together with Post Effective Amendment No.
1 filed November 29, 1988.
c. Form S-8 - Paychex, Inc. 1992 Stock Incentive Plan - as filed
with the Securities and Exchange Commission on October 2, 1992
(No. 33-52772).
d. Form S-8 - Paychex, Inc. 401(k) Incentive Retirement Plan - as
filed with the Securities and Exchange Commission on October
2, 1992 (No. 33-52838).
e. Form S-8 - Pay-Fone Systems, Inc. 1993, 1990, 1987, 1983, 1981
Incentive Stock Option Plans and Director Non-Qualified Stock Option
Agreements, as filed with the Securities and Exchange Commission on
June 15, 1995 (No. 33-60255).
f. Form S-8 - Paychex, Inc. 1995 Stock Incentive Plan - as filed with the
Securities and Exchange Commission on November 17, 1995 (No. 33-64389).
Syracuse, New York ERNST & YOUNG LLP
August 13, 1996
EXHIBIT 24: POWERS OF ATTORNEY FOR DIRECTORS
The undersigned Directors of Paychex, Inc. do hereby constitute
and appoint B. Thomas Golisano their true and lawful attorney and agent,
to execute the Paychex, Inc. Annual Report on Form 10-K for the fiscal
year ended May 31, 1996, for us and in our names as directors, to comply
with the Securities Exchange Act of 1934, and the rules, regulations and
requirements of the Securities and Exchange Commission, in connection
therewith.
Dated: August 14, 1996
/s/ Donald W. Brinkman
-------------------------
Donald W. Brinkman
/s/ Steven D. Brooks
-------------------------
Steven D. Brooks
/s/ Phillip Horsley
-------------------------
Phillip Horsley
/s/ Grant M. Inman
-------------------------
Grant M. Inman
/s/ Harry P. Messina, Jr.
-------------------------
Harry P. Messina, Jr.
/s/ J. Robert Sebo
-------------------------
J. Robert Sebo
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MAY
31, 1996 FINANCIAL STATEMENTS OF PAYCHEX INC. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000723531
<NAME> PAYCHEX, INC.
<MULTIPLIER> 1000
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
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<CURRENT-ASSETS> 165,292
<PP&E> 110,118
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0
0
<COMMON> 687
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<SALES> 325,285
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<NET-INCOME> 52,333
<EPS-PRIMARY> .77
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