SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2001
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: 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. [ ].
AS OF JULY 31, 2001, SHARES HELD BY NON-AFFILIATES OF THE REGISTRANT HAD AN
AGGREGATE MARKET VALUE OF $12,838,923,000.
AS OF JULY 31, 2001, 374,216,565 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01
PAR VALUE, WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN SPECIFIED PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR
THE FISCAL YEAR ENDED MAY 31, 2001 (THE "ANNUAL REPORT") IN RESPONSE TO PART II,
ITEMS 5 THROUGH 8, INCLUSIVE.
CERTAIN SPECIFIED PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED
AUGUST 24,2001, IN RESPONSE TO PART III, ITEMS 10 THROUGH 12, INCLUSIVE.
PART I
ITEM 1. BUSINESS
Paychex, Inc. (the "Company" or "Paychex"), is a leading, national provider of
comprehensive payroll, human resource and employee benefit outsourcing solutions
for small- to medium-sized businesses. Paychex, a Delaware corporation, was
formed in 1979 through the consolidation of 17 corporations engaged in providing
computerized payroll accounting services. At the end of fiscal 2001, the Company
serviced over 375,000 clients. The Company has corporate headquarters in
Rochester, New York and more than 100 offices nationwide. The Company's fiscal
year ends May 31st.
In fiscal 2001 the Company had two reportable business segments - Payroll and
Human Resource and Benefits. Financial information about the Company's business
segments is contained in Note B - Segment Financial Information in the Notes to
Consolidated Financial Statements contained in Exhibit 13 - Portions of the
Annual Report to Stockholders for the fiscal year ended May 31, 2001 (the
"Annual Report"), which are incorporated herein by reference thereto.
The Company's strategy is to grow its client base and provide quality payroll
processing service and support. In addition, Paychex offers a comprehensive
suite of ancillary services that helps clients meet their payroll and human
resource and benefits needs. The following describes the Company's business
activitites.
PAYROLL
Paychex provides payroll processing service to over 375,000 small- to
medium-sized business within the United States, which includes the preparation
of payroll checks, internal accounting records, and federal, state, and local
tax returns.
83% of the Company's clients utilize its Taxpay(Registered Trademark) service,
which provides automatic payment of payroll taxes and filing of quarterly and
annual payroll tax returns. In connection with Taxpay, the Company collects
payroll taxes from clients on payday, files the applicable tax returns, and pays
taxes to the appropriate taxing authorities on the due date. These taxes are
typically paid between one and thirty days after receipt of collections from
clients, with some items extending to ninety days.
53% of the Company's Payroll clients utilize its Employee Pay Services, which
provides the employer the option of paying its employees by Direct Deposit,
Access Card, a check drawn on a Paychex account (Readychex (Service Mark)) or a
check drawn on the Employer's account. For the first three methods, Paychex
collects net payroll from the client's account one day before payroll and
provides payment to the employee on payday.
Taxpay and Employee Pay Services are integrated with the Company's Payroll
processing service. In addition to fees paid by clients for these services, the
Company earns interest on Taxpay and Employee Pay Services funds that are
collected before due dates and invested (funds held for clients) until
remittance to the appropriate entity. Interest on funds held for clients is
included in total revenues on the Consolidated Statements of Income as the
collection, holding and remittance of these funds is a critical component of
providing these particular product services. Payroll processing is decentralized
and performed in most Paychex branches while Taxpay, Direct Deposit, Readychex,
and Access Card services are processed at a facility in Rochester, New York.
Paychex also offers New-hire Reporting services, which comply with federal and
state requirements to report information on new employees, to aid the government
in enforcing child support orders and minimizing fraudulent unemployement and
workers' compensation insurance claims. In fiscal 2001, the Company introduced
its Garnishment Processing service, which provides deductions of appropriate
amounts from employees' payroll, forwarding the payment to the proper agency,
and accurately tracking the obligation to fulfillment. Another new product
offering in fiscal 2001 was After-the-Fact payroll, which was designed
specifically for accountants. This service allows accountants to give Paychex
information regarding net payroll, and Paychex will handle all tax calculations
and regulatory reporting "after-the-fact."
Clients can communicate their payroll information to Paychex through telephone
or fax, using the Paychex Paylink(Registered Trademark) and Preview (Service
Mark) software to transfer data from their personal computer, or via the
Internet. Paychex payroll specialists 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. The Paychex payroll system is an on-line, direct entry computer
system which enables the Paychex payroll specialist, upon receiving the
information from the client over the telephone, to enter it simultaneously.
Paychex provides delivery service for many of its client's payrolls. The revenue
earned on the delivery service is included in Payroll service revenues and the
costs for the delivery are included in operating costs on the Consolidated
Statements of Income.
The average Paychex core Payroll client employs fourteen people. The Major
Market Services (MMS) Payroll product targets companies that have outgrown the
Company's core Payroll service or new clients that have more complex payroll and
benefits needs. As of May 31, 2001 the MMS product was offered in approximately
half of the more than one hundred markets currently serviced by the core payroll
product. MMS clients communicate their payroll information primarily using the
Company's Preview software.
Paychex also offers services to its clients and their accountants via the
Paychex Online Internet Site. Clients can communicate payroll information via
Internet Timesheet and access current and historical payroll information using
the Paychex Internet Report Service. The General Ledger Reporting Service
transfers payroll information computed by Paychex to the client's general ledger
software.
HUMAN RESOURCE AND BENEFITS
The Company provides Human Resource and Benefits products and services either on
an a-la-carte basis or bundled through the Paychex Adminstrative Services or
Professional Employer Organization products.
The Paychex Administrative Services Product (PAS), which was made available
nationwide in May 2000, offers businesses a bundled package that includes
payroll, employer compliance, human resource and employee benefit
administration, and employee risk management. This comprehensive bundle of
services is designed to make it easier for small businesses to manage their
payroll and benefits costs. The Company also operates a Professional Employer
Organization (PEO), which provides small- and medium-sized businesses with the
same combined package of services. The Company's PEO is operated primarily in
Florida and Georgia, where PEO's are popular and operate under an attractive
regulatory environment. Paychex offers its PEO product through its subsidiary,
Paychex Business Solutions. Clients that utilize the bundled services offered
through the PAS and PEO products are freed to concentrate their resources on
their core businesses. As of May 31, 2001, the PAS and PEO products combined
serviced over 60,000 client employees.
The Company's 401(k) Plan Recordkeeping service, which includes 401(k) plans,
401(k) SIMPLE, IRA SIMPLE, profit sharing, and money purchase plans, was used by
over 19,000 clients at May 31, 2001. This service provides plan implementation,
ongoing compliance with government regulations, employee and employer reporting
and other administrative services.
Paychex provides Workers' Compensation Insurance Administration services
nationwide. Paychex acts, via its licensed insurance agency, as a general agent
providing workers' compensation insurance through a variety of insurance
carriers who are underwriters. The Pay-As-You-Go(Service Mark) program uses rate
and job classification information to enable clients to pay workers'
compensation premiums in regular monthly amounts rather than with large upfront
payments, which stablilizes their cash flow and minimizes year-end adjustments.
The Company also offers outsourcing of plan administration under section 125 of
the Internal Revenue Code. The Premium Only Plan allows employees to pay for
certain health insurance benefits with pre-tax dollars, which results in a
reduction in payroll taxes to employers and employees. The Flexible Spending
Account Plan allows a client's employees to pay, with pre-tax dollars, health
and dependent care expenses not covered by insurance. All required
administration, compliance and coverage tests are provided with these services.
Group health benefits are also offered in selected geographical areas, as are
state unemployment insurance services, which provide clients with a prompt
processing for all claims, appeals, determinations, change statements and
requests for separation documents. Other Human Resource and Benefits products
include Employee Handbooks, Management Manuals and Personnel Forms. These have
been designed to simplify clients' office processes and enhance their employee
benefits programs.
MARKETING AND SALES
There are about six million full-time employers in the markets the Company
serves within the United States. Of those employers, 98% have less than 100
employees and are the Company's primary customers and target market. The Company
markets its services principally through its sales force located in major
metropolitan markets serviced by the Company. The Company's direct sales force
is comprised of individuals who specialize in products within either core
Payroll, MMS Payroll, or Human Resource and Benefits products. The sales force
for Human Resource and Benefits products is primarily focused on selling these
products and services to existing payroll clients since the processed payroll
information provides the data integration necessary to provide these services.
In addition to its direct selling and marketing efforts, the Company utilizes
relationships with existing clients, Certified Public Accountants, and banks for
new client referrals.
COMPETITION
The Company's primary competition for Payroll processing includes manual payroll
systems sold by numerous vendors, traditional in-house computerized payroll
departments, other computerized payroll service providers, and Certified Public
Accountants. In addition, the Company's Human Resource and Benefits products
compete with traditional in-house human resource departments, other PEOs, and
providers of unbundled employment-related services such as payroll processing
firms, temporary employment firms, commercial insurance brokers, human resource
consultants, workers' compensation insurers, HMOs and other specialty managed
care providers. Management believes that the primary elements of competition are
quality of service, choice and quality of benefits, and price. The Company
believes it has one major national competitor that provides computerized payroll
accounting services nationwide.
SOFTWARE MAINTENANCE AND PRODUCT DEVELOPMENT
The ever-changing mandates of federal, state, and local taxing authorities
compel Paychex to continuously update its proprietary software utilized by the
Company to provide Payroll and Human Resource and Benefits services to its
clients. The Company is also engaged in developing ongoing enhancements and
maintenance to this software to meet the changing requirements of its clients
and the marketplace. The Company is continually in the processes of developing
proprietary software for new product offerings. Research and development
expenses are not significant to the Company's overall results of operations.
EMPLOYEES
As of May 31, 2001, the Company and its subsidiaries employed approximately
7,300 persons, of which approximately 7,000 are full-time and approximately 300
are part-time.
TRADEMARKS
As of May 31, 2001, the Company and its subsidiaries have a number of trademarks
and service marks filed for registration or registered with the U.S. Patent and
Trademark Office, including the names PAYCHEX, TAXPAY, PAYLINK, PREVIEW,
READYCHEX, PAY-AS-YOU-GO, and RAPID PAYROLL. The Company believes these
trademarks and service marks are important to its business.
SEASONALITY
There is no significant seasonality to the Company's business. However, during
the third fiscal quarter, the number of new Payroll clients, 401(k)
Recordkeeping clients, and new PEO worksite employees tends to be higher than
the rest of the fiscal year. Consequently, greater sales commission expenses are
reported in the third quarter.
ITEM 2. PROPERTIES
The Company's headquarters are located in a 140,000 square foot building complex
owned by the Company in Rochester, New York. In addition, the Company owns
another 62,000 square-foot facility and leases approximately 174,000 square feet
in several office complexes within the Rochester area. These facilities house
various administrative functions, certain Payroll and Human Resource and
Benefits ancillary services, and a telemarketing unit.
The Company leases approximately 1,400,000 square feet of space for its
regional, branch, data processing centers, and sales offices at various
locations throughout the United States, concentrating on major metropolitan
areas. The Company owns branch facilities located in Syracuse, New York and
Philadelphia, Pennsylvania, which together account for approximately 56,000
square feet.
In May 2001, the Company purchased a 135,000 square foot building in Rochester,
New York which will house a centralized data information center and various
other support functions.
The Company believes that adequate, suitable lease space will continue to be
available for its needs.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business and operations, the Company is subject to
various claims and litigation. Management believes the resolution of these
matters will not have a material effect on the financial position or results of
operations of the Company.
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, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the symbol
"PAYX". The quarterly high and low sales price and dividend information for the
past two years is set forth in the Company's Annual Report under the heading
"Quarterly Financial Data (Unaudited)" and is incorporated herein by reference
thereto. Dividends are normally paid in February, May, August, and November. The
level and continuation of future dividends are dependent on the Company's future
earnings and cash flows.
On July 31, 2001, there were 13,894 holders of record of the Company's common
stock which includes registered holders and participants in the Paychex, Inc.
Dividend Reinvestment and Stock Purchase Plan. There were also 6,924
participants in the Paychex, Inc. Employee Stock Purchase Plan.
ITEM 6. SELECTED FINANCIAL DATA
The information required is set forth in the Company's Annual Report under the
heading "Eleven-Year Summary of Selected Financial Data" and is incorporated
herein by reference thereto.
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 Results of Operations and
Financial Condition" and is incorporated herein by reference thereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required is set forth in the Company's Annual Report under the
heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition" under subheading "Market Risk Factors" and is incorporated
herein by reference thereto.
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
thereto. Supplementary data required is set forth in the Company's Annual Report
under the heading "Quarterly Financial Data (Unaudited)" and is incorporated
herein by reference thereto. Also, see Financial Statement Schedule II -
Valuation and Qualifying Accounts at Item 14(d).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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", the
section entitled "OTHER EXECUTIVE OFFICERS OF THE COMPANY", and the section
entitled "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and is
incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required is set forth in the Company's definitive Proxy
Statement in the section entitled "EXECUTIVE OFFICER COMPENSATION" and is
incorporated herein by reference thereto.
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
MANAGERS" and is incorporated herein by reference thereto.
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 consolidated financial statements of the Company are
incorporated herein by reference to the Company's Annual Report:
Report of Ernst & Young LLP Independent Auditors
Consolidated Statements of Income - For the Years ended May 31, 2001,
2000, and 1999
Consolidated Balance Sheets - May 31, 2001 and 2000
Consolidated Statements of Stockholders' Equity - For the Years ended
May 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows - For the Years ended May 31,
2001, 2000, and 1999
Notes to Consolidated Financial Statements
2. Financial statement schedules required to be filed by Item 8 of this
Form include Schedule II - Valuation and Qualifying Accounts, which is
included at Item 14(d). All other schedules are omitted as the
required matter is not present, the amounts are not significant or the
information is shown in the financial statements or the notes thereto.
3. Exhibits
(3) (a) Certificate of Incorporation, as amended, is incorporated herein
by reference to the Company's Registration Statement No.
2-85103, Exhibits 3.1 through 3.5, Form 8-K filed with the
Commission on October 22, 1986, Form 10-Q filed with the
Commission on January 12, 1989, Form 10-Q filed with the
Commission on January 13, 1993, Form 10-Q filed with the
Commission on January 10, 1996, Form 10-Q filed with the
Commission on October 14, 1997, and Form 10-Q filed with the
Commission on December 16, 1999.
(3) (b) By-Laws, as amended, are incorporated herein by reference to the
Company's Registration Statement No. 2-85103, Exhibit 3.6.
(10)(a) Paychex, Inc. 1987 Stock Incentive Plan is 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 is 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 is incorporated herein by
reference to the Company's Registration Statement on Form S-8, No.
33-64389.
(10)(d) Paychex, Inc. 1998 Stock Incentive Plan is incorporated herein by
reference to the Company's Registration Statement on Form S-8, No.
333-65191.
(10)(e) Paychex, Inc. Section 401(k) Incentive Retirement Plan is
incorporated herein by reference to the Company's Registration
Statement on Form S-8, No. 333-84055.
(10)(f) Paychex, Inc. - Pay-Fone Systems, Inc. 1993, 1990, 1987, 1983,
1981 Incentive Stock Option Plans and Director Non-Qualified Stock
Option Agreements are incorporated herein by reference to the
Company's Registration Statement on Form S-8, No. 33-60255.
(10)(g) Paychex, Inc. Officer Performance Incentive Program for the
year ended May 31, 2002 is filed herewith.
(13) Portions of the Annual Report to Stockholders for the Fiscal Year
ended May 31, 2001. 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.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Auditors.
(24) Power of Attorney.
(99) "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995.
(b) Reports on Form 8-K
(1) The Company filed a Form 8-K on June 25, 2001, that included the
Company's May 31, 2001 year-end earnings press release and a
preliminary Management's Discussion and Analysis of the Financial
Condition and Results of Operations for the years ended May 31, 2001,
2000, and 1999.
(d) Schedule II - Valuation and Qualifying Accounts
Paychex, Inc.
Consolidated Financial Statement Schedule
For the year ended May 31,
(In thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and End
Description of Year Expenses Deductions of Year
- ----------------------- ---------- ---------- ---------- ----------
2001
Allowance for bad debts $3,253 $1,413 $1,301* $3,365
2000
Allowance for bad debts $2,395 $1,872 $1,014* $3,253
1999
Allowance for bad debts $1,750 $1,886 $1,241* $2,395
* - Uncollectible accounts written off, net of recoveries.
Note: The Allowance for bad debts is deducted from the balance of Accounts
receivable on the Consolidated Balance Sheets.
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 24, 2001 By: /s/ B. Thomas Golisano
-----------------------------
B. Thomas Golisano, Chairman, President,
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 24, 2001 By: /s/ B. Thomas Golisano
-----------------------------
B. Thomas Golisano, Chairman, President,
and Chief Executive Officer and Director
Dated: August 24, 2001 By: /s/ Steven D. Brooks*
-------------------------------
Steven D. Brooks, Director
Dated: August 24, 2001 By: /s/ G. Thomas Clark*
-------------------------------
G. Thomas Clark, Director
Dated: August 24, 2001 By: /s/ David J.S. Flaschen*
-------------------------------
David J.S. Flaschen, Director
Dated: August 24, 2001 By: /s/ Phillip Horsley*
-------------------------------
Phillip Horsley, Director
Dated: August 24, 2001 By: /s/ Grant M. Inman*
-------------------------------
Grant M. Inman, Director
Dated: August 24, 2001 By: /s/ Harry P. Messina, Jr.*
-------------------------------
Harry P. Messina, Jr., Director
Dated: August 24, 2001 By: /s/ J. Robert Sebo*
-------------------------------
J. Robert Sebo, Director
Dated: August 24, 2001 By: /s/ Joseph M. Tucci*
-------------------------------
Joseph M. Tucci, Director
Dated: August 24, 2001 By: /s/ John M. Morphy
-------------------------------
John M. Morphy, Vice President, Chief Financial
Officer and Secretary
(Principal Accounting Officer)
*By: /s/ B. Thomas Golisano
-------------------------------
B. Thomas Golisano, as Attorney-in-Fact