Back to GetFilings.com
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, 1999
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, 1999, SHARES HELD BY NON-AFFILIATES OF THE REGISTRANT HAD AN
AGGREGATE MARKET VALUE OF $5,862,538,000
AS OF JULY 31, 1999, 246,393,828 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, 1999 (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 16, 1999, 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.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information about the Company's business segments is contained in
Note C - 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, 1999 (the "Annual Report"),
which are incorporated herein by reference.
NARRATIVE DESCRIPTION OF BUSINESS
PAYROLL SEGMENT
The Payroll segment prepares and furnishes to clients 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. 79% of the Company's payroll clients 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 to its employees' account
at financial institutions.
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 322,600 small- to medium-sized businesses
within the United States. There are about 5.4 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 markets its services principally through its sales force
located at its 89 branch operation centers and 29 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.
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
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 Paychex Business
Solutions, Inc. (PBS), a subsidiary of Paychex, which operates as a
Professional Employer Organization (PEO).
Human Resource Services
Among the HRS products is a 401(k) recordkeeping service, used by 10,100
clients at May 31, 1999. This service provides plan implementation, ongoing
compliance with government regulations, employee and employer reporting and
other administrative services.
The HRS division also offers 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 also 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 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) workers'
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, 1999, PBS provided
professional employer services to 18,300 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 of
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,
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 and maintenance 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, 1999, the Company and its subsidiaries employed approximately
5,500 persons, of which 5,200 are full-time and 300 are part-time.
TRADEMARKS
As of May 31, 1999, 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, BANKCHEX, READYCHEX, PAY-AS-YOU-GO and RAPID PAYROLL. The Company
believes these trademarks and service marks are of material importance 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 segment 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 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 112,000 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 approximately 1,100,000 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.
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. PEO operations are performed mainly in leased facilities in
Florida and Georgia, and utilize 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 to 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, 1999.
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. 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.
On July 31, 1999, there were 6,805 registered holders of record of the
Company's common stock, plus 2,769 participants in the Paychex, Inc. Dividend
Reinvestment and Stock Purchase Plan, plus 4,783 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.
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 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" under subheading "Investments and ENS
investments: Interest Rate Risk" 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. 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.
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 MANAGERS" 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, 1999,
1998, and 1997
Consolidated Balance Sheets - May 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity - For the Years
ended May 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows - For the Years ended May 31,
1999, 1998, and 1997
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, and
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) 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. 1998 Stock Incentive Plan 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,
incorporated herein by reference to the Company's Registration
Statement on Form S-8, No. 33-52838.
(10)(f) Paychex, Inc. Section 401(k) Incentive Retirement Plan,
incorporated herein by reference to the Company's Registration
Statement on Form S-8, No. 333-84055.
(10)(g) 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.
(10)(h) Paychex, Inc. Officer Performance Incentive Program for the
year ended May 31, 2000, and filed herewith. (Management contract)
(13) Portions of the Annual Report to Stockholders for the Fiscal
Year ended May 31, 1999. 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.
(b) Reports on Form 8-K - The Company filed a Form 8-K on June 29, 1999, that
included the Company's May 31, 1999 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, 1999,
1998, and 1997.
(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
- ----------------------- ---------- ---------- ---------- ----------
1999
Allowance for bad debts $1,750 $1,886 $1,241* $2,395
1998
Allowance for bad debts $1,308 $1,648 $1,206* $1,750
1997
Allowance for bad debts $ 872 $1,328 $ 892* $1,308
* - 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 27, 1999 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, 1999 By: /s/ B. Thomas Golisano
-----------------------------
B. Thomas Golisano, Chairman, President,
and Chief Executive Officer and Director
Dated: August 27, 1999 By: /s/ Steven D. Brooks*
-------------------------------
Steven D. Brooks, Director
Dated: August 27, 1999 By: /s/ G. Thomas Clark*
-------------------------------
G. Thomas Clark, Director
Dated: August 27, 1999 By: /s/ David J.S. Flaschen*
-------------------------------
David J.S. Flaschen, Director
Dated: August 27, 1999 By: /s/ Phillip Horsley*
-------------------------------
Phillip Horsley, Director
Dated: August 27, 1999 By: /s/ Grant M. Inman*
-------------------------------
Grant M. Inman, Director
Dated: August 27, 1999 By: /s/ Harry P. Messina, Jr.*
-------------------------------
Harry P. Messina, Jr., Director
Dated: August 27, 1999 By: /s/ J. Robert Sebo*
-------------------------------
J. Robert Sebo, Director
Dated: August 27, 1999 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