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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, 1998
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, 1998, SHARES HELD BY NON-AFFILIATES OF THE REGISTRANT HAD AN
AGGREGATE MARKET VALUE OF $5,552,593,511.
AS OF JULY 31, 1998, 163,330,862 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, 1998 (THE "ANNUAL REPORT") IN RESPONSE TO
PART II, ITEMS 6 THROUGH 8, INCLUSIVE. CERTAIN SPECIFIED PORTIONS OF THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED AUGUST 7, 1998, IN RESPONSE TO
PART III, ITEMS 10 THROUGH 12, INCLUSIVE.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
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. The Company's corporate
headquarters is located in a suburb of Rochester, New York. The Company's
fiscal year is from June 1 through May 31.
On August 26, 1996 (fiscal 1997), the Company acquired all of the common stock
of National Business Solutions, Inc., now Paychex Business Solutions, Inc.
(PBS), a professional employer organization (PEO). In the third quarter of
fiscal 1997, PBS was combined with the Company's Human Resources Services
(HRS) division to form the HRS-PEO business segment. During fiscal 1998, the
Company completed its consolidation of PBS's administrative functions from St.
Petersburg, Florida to its HRS headquarters, located near the Corporate
headquarters.
The Company acquired the common stock of Olsen Computer Systems, Inc., and The
Payroll Service, Inc., in fiscal 1997 and Pay-Fone Systems, Inc., and The
Payroll Company, Inc. (d/b/a Payday) in fiscal 1996. The acquired entities
provided the Company with a client base and a new product offering that is
ideal for clients with fifty or more employees.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information about the Company's business segments is contained in
Note K - Segment Financial Information in the Notes to the Consolidated
Financial Statements contained in Exhibit 13, Portions of the Annual Report to
Stockholders for the fiscal year ended May 31, 1998 (the "Annual Report"),
which are incorporated herein by reference.
NARRATIVE DESCRIPTION OF BUSINESS
Payroll Segment
The Payroll segment prepares and furnishes paychecks, earnings statements and
internal accounting records such as journals, summaries and earnings
histories. The segment also prepares for its clients all required monthly,
quarterly and annual payroll tax returns for federal, state and local
governments. Over 75% of its clients nationwide utilize TAXPAY, a service
which provides automatic payment of payroll taxes and filing of quarterly and
annual payroll tax returns. The segment also provides enhanced payroll
services, including a digital check signing and inserting service and an
automatic salary deposit service, DIRECT DEPOSIT. The DIRECT DEPOSIT service
electronically transmits the net payroll for a client's employees to banks
throughout the Federal Reserve System.
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.
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 and performed in most Paychex branches while TAXPAY and DIRECT
DEPOSIT are processed at a facility in Rochester, New York.
Paychex' Payroll segment is a national payroll processing and payroll tax
preparation service provided to over 293,600 small- to medium-sized businesses
within the United States. There are over 5 million full-time employers in the
markets this segment serves. Of those employers, 98% have less than 100
employees and are the Company's primary customers and target market.
The Payroll segment direct markets its services principally through its sales
force located at its 79 branch operating centers and 25 sales offices in major
metropolitan areas. Market share in branch processing center territories
ranges from 1 to 20%, and no single client accounts for more than 1% of
segment revenue. In addition to its direct marketing efforts, the Company
utilizes relationships with many banks and accountants for client referrals.
Clients may discontinue Paychex payroll service at will. For the past three
fiscal years, approximately 80% of the businesses which were clients in one
fiscal year, continued to be clients in the succeeding fiscal year. Management
believes ownership changes or business failures common to small businesses are
the primary causes of client loss.
During fiscal 1997, the Company acquired Olsen Computer Systems, Inc. (Olsen),
now Rapid Payroll, Inc. Olsen had licensed its payroll and human resource
software to approximately 100 service bureaus who had over approximately
20,000 clients throughout the United States. The software is named RAPID
PAYROLL and is capable of generating complex wage- and job-based reports,
including labor distributions, general ledger reports, vacation accruals, job
costing, tip allocations, 401(k) plan recordkeeping and section 125
calculations and union-related calculations. The software is ideal for
companies with fifty or more employees. Since the purchase of Olsen, the
Company has not sold any new software licenses, but continues to provide
support for existing licensees of approximately 100, with over 20,000 clients
at May 31, 1998. The version of the RAPID PAYROLL software used for Paychex'
clients is called PREVIEW.
Prior to the acquisition of Olsen, the Company acquired The Payroll Service,
Inc., Pay-Fone Systems, Inc., and The Payroll Company, Inc. (d/b/a Payday).
Each of these entities provided payroll processing services using the RAPID
PAYROLL software. Currently, the PREVIEW version of this product is used at
five Paychex Major Market Service locations, and is offered through a sales
force separate from that of the Company's core Payroll product, without direct
competition to that product.
Payroll Competition
The Payroll segment competition, listed by size, include (i) manual payroll
systems sold by numerous vendors, (ii) traditional in-house computerized
payroll departments, and (iii) other computerized payroll service providers.
Management believes that the primary elements of competition are price and
service, and believes it has one major competitor that provides computerized
payroll accounting services nationwide.
HRS-PEO SEGMENT
Human Resource Services
The HRS-PEO segment provides human resource products and services through its
HRS division, on an a la carte basis to clients who choose to provide these
benefits directly or through a co-employer relationship with PBS, the
Company's PEO division.
Among the HRS products is a 401(k) recordkeeping service, used by 6,000
clients. This service provides plan implementation, ongoing compliance with
government regulations, employee and employer reporting and other
administrative services. The HRS division also offers Cafeteria Plan products
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,
with a resultant 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.
Other HRS products include employee handbooks, management manuals and
personnel forms. These have been designed to simplify clients' office
processes and enhance their employee benefits programs. Group benefits and
workers' compensation insurance services are offered in selected geographical
areas. State unemployment insurance services provide clients with a prompt
reply for all claims, appeals, determinations, change statements and requests
for separation documents.
Professional Employer Organization Services
PBS, a subsidiary of Paychex, Inc., is a leading professional employer
organization, which provides small- and medium-sized businesses with an
outsourcing solution to the complexities and costs related to employment and
human resources. PBS provides professional employer services through five
core activities: (i) human resource administration, (ii) employer regulatory
compliance management, (iii) worker compensation cost containment and safety
management, (iv) employee benefits and related administration and (v) payroll
processing and tax compliance. By engaging PBS to provide these services,
clients are freed to concentrate their resources on their core businesses. As
of May 31, 1998, PBS provided professional employer services to 19,200
employees, primarily in Florida, Georgia and southern California.
HRS-PEO Sales Process
HRS-PEO products and services are sold through a sales organization separate
from that which sells Payroll services, and in fields related to one or more
the segment's core services. The HRS division sells the majority of its
products and services to existing Payroll segment clients since the processed
payroll information provides the data integration necessary to provide the
service. PBS generates sales leads from two primary sources: direct sales
efforts and referrals, including referrals of existing Payroll segment
clients.
HRS-PEO Competition
HRS-PEO segment competitors include (i) traditional in-house human resource
departments, (ii) other PEOs, and (iii) 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.
Competition in the highly fragmented PEO industry is generally on a local or
regional basis. Management believes that the primary elements of competition
are quality of service, choice and quality of benefits, and price. PBS
management believes that name recognition, including its ownership by Paychex,
Inc., regulatory expertise, financial resources, risk management and data
processing capability distinguish Paychex and PBS from the rest of the
industry.
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 utilized by
its Payroll and HRS-PEO business segments. The Company is also engaged in
developing ongoing enhancements to this software to meet the changing
requirements of its clients and the marketplace. However, the Company is not
engaged, to any significant extent, in basic or technological software
research and development.
EMPLOYEES
As of May 31, 1998, the Company and its subsidiaries employed approximately
5,100 persons, of which 4,850 are full-time and 250 are part-time.
TRADEMARKS
As of May 31, 1998, the Company and its subsidiaries have a number of
trademarks registered with the U.S. Patent and Trademark Office, including the
names PAYCHEX, TAXPAY, PAYLINK and RAPID PAYROLL. 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 Payroll segment clients and over 40% of new PEO worksite
employees added in each of the last three fiscal years have been added during
the third fiscal quarter. Consequently, greater revenue and sales commission
expenses are reported in that quarter.
ITEM 2. PROPERTIES
The Company's headquarters for its Payroll segment and Corporate functions are
housed in a 140,000 square foot building complex owned by the Company in a
Rochester, New York suburb. In addition, approximately 80,000 square feet is
leased in several office complexes within the Rochester area. These leased
facilities house various Corporate functions, other Payroll operations and a
telemarketing unit.
The Payroll segment leases space for its branch and sales offices at various
locations throughout the United States, concentrating on major metropolitan
areas. The average size of a branch office and a sales office is
approximately 13,000 square feet and approximately 1,000 square feet,
respectively. The Major Market Services operations and sales force utilize
leased facilities in Orange County and Pleasanton, California, Chicago,
Illinois, central New Jersey, and Rochester, New York with an average of
approximately 8,000 square feet.
HRS operations are performed at the HRS-PEO headquarters, a 62,000 square foot
office facility owned by the Company within 10 miles of the Corporate
headquarters. The PEO segment operates mainly in leased facilities in Florida
and Georgia, and utilizes some leased office space at various Payroll
branches. The HRS-PEO sales force utilizes office space at the segment's
headquarters, PEO operating locations, and Payroll branches and sales offices.
The Company believes that adequate, suitable lease space will continue to be
available for its needs.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or any of its
subsidiaries is a party, that are material in relation the consolidated
financial statements.
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, 1998.
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, and the quarterly high and low sales price information and related
dividend information for the past two years is set forth below. The high and
low prices and dividends per share have been adjusted to reflect the
three-for-two stock splits effected in the form of 50% stock dividends
distributed in May 1998 and May 1997.
Years Ended
May 31, 1998 1998 1997 1997
Market Price Dividends Market Price Dividends
per Share Paid per Share per Share Paid per Share
High Low High Low
1st Quarter $27.50 $21.67 $.04 $24.89 $17.89 $.03
2nd Quarter 30.25 22.33 .06 28.28 22.11 .04
3rd Quarter 35.13 26.71 .06 25.22 18.89 .04
4th Quarter 39.83 33.13 .06 24.92 17.00 .04
On July 31, 1998, there were 5,893 holders of record of the Company's common
stock. Dividends are normally paid in February, May, August, and November.
The level and continuation of future dividends are necessarily dependent on
the Company's future earnings and cash flows.
During the fiscal years ended May 31, 1997 and 1996, the Company completed
four business combinations in which it issued shares of $.01 par value common
stock ("Common Stock") which were not registered under the Securities Act of
1933, as amended (the "Act"), in reliance on the exemption from registration
created by Section 4(2) of the Act.
1. November 21, 1996 - The Company acquired all of the issued and
outstanding stock of Olsen Computer Systems, Inc., in a merger in which
884,084 shares of Common Stock were issued to the two Olsen Shareholders. The
basis for the Section 4(2) reliance was the financial and business
sophistication of the shareholders, their non-distributive intent and the
legending of their stock certificates.
2. August 29, 1996 - The Company acquired all of issued and outstanding
stock of The Payroll Service, Inc., in a merger in which 124,172 shares of
Common Stock were issued to the sole shareholder of The Payroll Service, Inc.
The basis for the Section 4(2) reliance was the financial and business
sophistication of the shareholder, his non-distributive intent and the
legending of his stock certificates.
3. August 26, 1996 - The Company acquired all of the issued and outstanding
stock of National Business Solutions, Inc., in a merger in which 6,602,616
shares of Common Stock were issued to the four shareholders of National
Business Solutions, Inc. The basis for the Section 4(2) reliance was the
financial and business sophistication of the shareholders, their
non-distributive intent and the legending of their stock certificates.
4. September 29, 1995 - The Company acquired all of the issued and
outstanding stock of The Payroll Company, Inc. (d/b/a Payday), in a merger in
which 391,143 shares of Common Stock were issued to the two shareholders of
The Payroll Company, Inc. The basis for the Section 4(2) reliance was the
financial and business sophistication of the shareholders, their
non-distributive intent and the legending of their stock certificates.
The number of shares of Common Stock issued in each of the above-transactions
has been restated to reflect subsequent three-for-two stock splits effected in
the form of 50% stock dividends payable in each May of 1998, 1997 and 1996.
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.
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 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 Financial Condition and
Results of Operations" under subheading "Investments and ENS investments:
Interest Rate Risk and Quantitative and Qualitative Disclosures of Market
Risks" 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 (Unaudited)" and is incorporated herein
by reference.
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.
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.
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 consolidated financial statements of the Company are
incorporated herein by reference to the Company's Annual Report:
Report of Independent Auditors
Consolidated Statements of Income - For the Years ended May 31, 1998,
1997 and 1996
Consolidated Balance Sheets - May 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity - For the Years ended May
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - For the Years ended May 31, 1998,
1997 and 1996
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 and Form
10-Q filed with the Commission on October 14, 1997.
(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. 33-52838.
(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 Stockholders for the Fiscal
Year ended May 31, 1998. 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.
(27) Financial Data Schedule (filed electronically).
(99) "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995.
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 fiscal year ended May 31, 1998.
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 27, 1998 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 27, 1998 By: /s/ B. Thomas Golisano
-----------------------------
B. Thomas Golisano, Chairman, President,
and Chief Executive Officer and Director
Dated: August 27, 1998 By: /s/ Donald W. Brinckman*
-------------------------------
Donald W. Brinckman, Director
Dated: August 27, 1998 By: /s/ Steven D. Brooks*
-------------------------------
Steven D. Brooks, Director
Dated: August 27, 1998 By: /s/ G. Thomas Clark*
-------------------------------
G. Thomas Clark, Director
Dated: August 27, 1998 By: /s/ Phillip Horsley*
-------------------------------
Phillip Horsley, Director
Dated: August 27, 1998 By: /s/ Grant M. Inman*
-------------------------------
Grant M. Inman, Director
Dated: August 27, 1998 By: /s/ Harry P. Messina, Jr.*
-------------------------------
Harry P. Messina, Jr., Director
Dated: August 27, 1998 By: /s/ J. Robert Sebo*
-------------------------------
J. Robert Sebo, Director
Dated: August 27, 1998 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