UNITED STATES
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, 2004
Commission file number 0-11330
Paychex, Inc.
Delaware
|
16-1124166 | |
(State or other jurisdiction of
incorporation or organization) |
(IRS Employer
Identification Number) |
|
911 Panorama Trail South
Rochester, New York (Address of principal executive offices) |
14625-2396
(Zip Code) |
(585) 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
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 þ No o .
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 registrants 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. o .
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o .
As of November 30, 2003, shares held by nonaffiliates of the registrant had an aggregate market value of $12,742,795,000.
As of June 30, 2004, 378,093,104 shares of the registrants common stock, $.01 par value, were outstanding.
Documents Incorporated By Reference
Portions of the registrants Definitive Proxy Statement for its Annual Meeting to be held on October 6, 2004, are incorporated herein by reference thereto in response to Part III, Items 10 through 14, inclusive.
PART I
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain written and oral statements made by
Paychex, Inc. (the Company) management may
constitute forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are identified by such words and
phrases as we expect, expected to,
estimates, current outlook, we
look forward to, would equate to,
projects, projections, projected
to be, anticipates, anticipated,
we believe, could be, and other similar
phrases. All statements addressing operating performance,
events, or developments that the Company expects or anticipates
will occur in the future, including statements relating to
revenue growth, earnings, earnings-per-share growth, or similar
projections, are forward-looking statements within the meaning
of the Reform Act. Because they are forward-looking, they should
be evaluated in light of important risk factors. These risk
factors include, but are not limited to, the following and those
that are described in the Risk Factors Section of
Item 1 of this Form 10-K: general market and economic
conditions, including demand for the Companys products and
services, competition, price levels, availability of internal
and external resources, execution of expansion plans, and
effective integration of acquisitions; changes in the laws
regulating collection and payment of payroll taxes, professional
employer organizations, and employee benefits, including 401(k)
plans, workers compensation, state unemployment, and
section 125 plans; delays in the development, timing of the
introduction, and marketing of new products and services;
changes in technology, including use of the Internet; the
possibility of catastrophic events that could impact the
Companys operating facilities, computer systems, and
communication systems; the possibility of third-party service
providers failing to perform their functions; the possibility of
penalties and losses resulting from errors and omissions in
performing services; the possibility that internal control
weaknesses may be identified during control reviews; potential
unfavorable outcomes related to pending legal matters; potential
damage to the Companys business reputation due to these
and other operational risks; the possible inability of clients
to meet payroll obligations; stock volatility; and changes in
short- and long-term interest rates, changes in the market value
of available-for-sale securities, and the credit rating of cash,
cash equivalents, and securities held in the Companys
investment portfolios, all of which could cause actual results
to differ materially from anticipated results. The information
provided in this document is based upon the facts and
circumstances known at this time.
Paychex, Inc. (the Company or
Paychex) is a leading, national provider of
comprehensive payroll and integrated human resource and employee
benefits outsourcing solutions for small- to medium-sized
businesses. Paychex, a Delaware corporation, was formed in 1979
through the consolidation of seventeen corporations engaged in
providing computerized payroll accounting services. As of the
end of fiscal 2004, the Company serviced approximately 505,000
clients and had approximately 9,400 employees. The Company has
its corporate headquarters in Rochester, New York, and more than
100 offices nationwide. The Companys fiscal year ends
May 31.
Information about the Companys products and
services, shareholder information, press releases, and filings
with the Securities and Exchange Commission (SEC) can be
found on the Companys Web site at www.paychex.com. The
Companys annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and
other SEC filings, and any amendments to such reports, are made
available, free of charge, on the Investor Relations section of
this Web site as soon as reasonably practical after such
material is filed with, or furnished to the SEC. Also, copies of
the Companys annual report to shareholders and proxy
statement will be made available, free of charge, upon written
request submitted to Paychex, Inc., c/o Secretary, 911
Panorama Trail South, Rochester, New York 14625-2396.
1
Company Strategy
As part of its continuing growth strategy,
Paychex is focused on the following:
During fiscal 2003, Paychex acquired two
comprehensive payroll service providers servicing small- to
medium-sized businesses. Advantage Payroll Services, Inc.
(Advantage) was acquired September 20, 2002,
for $314 million in cash, including the redemption of
preferred stock and repayment of outstanding debt of Advantage.
InterPay, Inc. (InterPay), a wholly owned subsidiary
of FleetBoston Financial Corporation (Fleet®),
was acquired April 1, 2003, for $182 million in cash.
These acquisitions provided Paychex with over 80,000 new clients
and geographic coverage into some areas that were not previously
served by the Company. In addition, the integration of these
companies provides Paychex the opportunity to achieve economies
of scale in providing services to its clients.
During fiscal 2003 and fiscal 2004, the Company
has been actively integrating Advantage and InterPay into the
operations of Paychex. By the end of fiscal 2003, the sales
forces of these companies were combined with the Paychex sales
force, and the responsibility for their operations and corporate
support had been integrated into the management structure of
Paychex. In addition, by the end of fiscal 2004, most branch
operations were combined into existing Paychex locations. The
Companys focus has been on client service and retention.
The Advantage payroll system will be retained to service clients
affiliated with the independently owned associate offices and
Advantage co-branded products. Approximately one-half of the
Interpay clients were converted to Paychex software platforms by
the end of fiscal 2004, with the remainder expected to be
converted by December 2004.
In October 2003, Paychex purchased the Time In A
Box® product, a time and attendance solution for small- to
medium-sized businesses, from Stromberg LLC
(Stromberg). Effective April 12, 2004, Paychex
acquired substantially all the assets and certain liabilities of
Stromberg, a provider of time and attendance software solutions,
for $13.6 million. These product line acquisitions allow
Paychex to offer value-added products and services to payroll
and non-payroll clients.
In the fourth quarter of fiscal 2004, Paychex
began a start-up payroll sales and operations facility in
Germany, representing the first expansion of Paychex outside of
the United States. By the end of the fiscal 2004, this location
had acquired a small number of clients.
Market Opportunities
The outsourcing of business processes is a
growing trend within the United States. Outsourcing of the
payroll and human resource functions allows small-to
medium-sized businesses to minimize the compliance risks
associated with increasingly complex and changing administrative
requirements and federal, state, and local tax regulations. By
utilizing the expertise of outsourcing service providers,
businesses are able to reduce processing costs and
administrative burdens while, at the same time, adding
competitive benefits for their
2
There are approximately 7.5 million
employers in the payroll markets that Paychex currently serves
within the United States. Of those employers, 99% have fewer
than 100 employees and are the Companys primary customers
and target market. Based on industry data, the Company estimates
that all payroll processors combined serve somewhere between 15%
to 20% of the potential businesses, with much of the
unpenetrated market in businesses with ten or fewer employees.
Paychex remains focused on servicing small- to medium-sized
businesses based upon this growth potential that management
believes exists in this market segment.
Clients
Paychex serves a diverse base of small- to
medium-sized clients operating in a broad range of industries
located throughout the continental United States. At
May 31, 2004, the Company serviced approximately 505,000
clients. The Company utilizes service agreements and
arrangements with clients that are generally terminable by the
client at any time or upon relatively short notice.
Paychexs client losses have historically been slightly
higher than 20% of the beginning client base. The most
significant factor contributing to client losses is companies
going out of business. No single client has a material impact on
total service revenues or results of operations.
The composition of the market and the client base
serviced by the Company (in the United States) by employee size
is as follows:
Products and Services
Paychex offers a comprehensive portfolio of
payroll, payroll-related, and human resource products to meet
the diverse needs of its client base. These include payroll
processing, tax filing and payment, employee payment, time and
attendance solutions, regulatory compliance (new-hire reporting
and garnishment processing), retirement services administration,
employee benefits administration, workers compensation
insurance, and comprehensive bundled human resource
administrative services. By offering ancillary services that
leverage the information gathered in the base payroll processing
service, Paychex is able to provide comprehensive outsourcing
services that allow employers to expand their employee benefits
offerings at an affordable cost. The Company earns its revenues
primarily through recurring fees for repetitive services
performed related to these products. Service revenues are
largely driven by the number of clients, utilization of
ancillary services, and checks or transactions per client per
pay period.
Payroll
Processing:
Payroll processing is
the backbone of the Paychex product portfolio. The Paychex
Payroll service includes the calculation, preparation, and
delivery of employee payroll checks; production of internal
accounting records and management reports; and the preparation
of federal, state, and local payroll tax returns. Payroll
processing clients are charged a base fee each period that
payroll is processed, plus a fee per employee check processed.
The Core Payroll product is generally targeted
for clients with one to forty-nine employees, although many
clients with fifty or more employees utilize this service. The
Companys average Core Payroll client (including Advantage
and InterPay clients) employs approximately thirteen people and
processes approximately thirty-one payrolls each year. Core
Payroll clients communicate their payroll information, including
3
Paychex also offers Core Payroll services to its
clients and their accountants via Paychex Online. This secure
Internet site offers clients a suite of interactive,
self-service products and services twenty-four hours a day,
seven days a week. These include Paychex Online
Payroll
SM
, Internet Time Sheet, Internet Report
Service, and General Ledger Reporting Service. Clients can
communicate payroll information via Internet Time Sheet or use
the Online Payroll service, as well as access current and
historical payroll information using the Paychex Internet Report
Service. The General Ledger Reporting Service transfers payroll
information calculated by Paychex to the clients general
ledger accounting software, eliminating manual entries and
improving the accuracy of bookkeeping. Over 100,000 clients are
currently utilizing some type of online service.
The Companys Major Market Services
(MMS) Payroll product primarily targets companies that have
outgrown the Companys Core Payroll service or new clients
that have fifty or more employees or more complex payroll and
benefits needs. Due to expansion efforts in recent years, the
Company currently offers this product in all of its significant
markets. Approximately one-third of new MMS clients are
conversions from the Companys Core Payroll product.
Most MMS clients communicate their payroll
information to Paychex using the Companys Preview®
software. Preview provides clients in-house control of payroll
and human resource information because the software and the
payroll and human resource database reside on the clients
personal computer or personal computer network. Clients can
produce reports and checks at their convenience. Paychex handles
the software maintenance and provides the client ancillary
services as requested.
Ancillary Products and
Services:
Paychex provides its
clients with a portfolio of ancillary products and services that
have been developed and refined over many years. Ancillary
products provide the Company with additional recurring revenue
streams and increased service efficiencies as these products are
integrated with payroll processing services. Paychex offers the
following ancillary products and services:
Tax Filing and Payment
Services:
As of May 31, 2004,
89% of the Companys clients utilized its tax filing and
payment services (including Taxpay®), which provide
accurate preparation and timely filing of quarterly and year-end
tax returns, as well as the electronic transfer of funds to the
appropriate agencies (federal, state, and local). More than 90%
of new clients purchase the Companys tax filing and
payment services. The Company believes that the client
utilization percentage of these services is near maturity. In
connection with these services, the Company electronically
collects payroll taxes from clients bank accounts,
typically on payday, files the applicable tax returns, and pays
taxes to the appropriate taxing authorities on the respective
due dates. These taxes are typically paid between one and thirty
days after receipt of collections from clients, with some items
extending to ninety days. The Company handles all regulatory
correspondence, amendments, and penalty and interest disputes,
and is subject to cash penalties imposed by tax authorities for
late filings and late or underpayments of taxes. Clients
utilizing the tax filing and payment services are charged a base
fee each period that payroll is processed. In addition to fees
paid by clients, the Company earns interest on client funds that
are collected before due dates and invested until remittance to
the appropriate taxing authority.
Employee Payment
Services:
As of May 31, 2004,
63% of the Companys clients utilized its employee payment
services, which provide the employer the option of paying their
employees by Direct Deposit, Paychex Access Visa® Card, a
check drawn on a Paychex account (Readychex®), or a check
drawn on the employers account. More than 70% of new
clients purchase some form of employee payment services. For the
first three methods, Paychex electronically collects net payroll
from the clients bank account, typically one day before
payroll, and provides payment to the employee on payday. The
Company offers flexible payment
4
The tax filing and payment services and employee
payment services are integrated with the Companys Payroll
processing service. Interest earned on funds held for clients is
included in total revenues on the Consolidated Statements of
Income because the collection, holding, and remittance of these
funds are critical components of providing these services.
Time and Attendance
Solutions:
Paychex offers Time In
A Box and other time and attendance solutions, which help
minimize the time spent compiling time sheet information. These
computer-based systems allow the employer flexibility to handle
multiple payroll scenarios and result in improved productivity,
accuracy, and reliability in the payroll process. Certain
clients are charged a monthly fee for use of hardware, software,
and support. Clients also have the option to purchase the
hardware and software with annual maintenance contracts.
Regulatory Compliance
Services:
Paychex offers New-Hire
Reporting services, which enable clients to comply with federal
and state requirements to report information on newly hired
employees, to aid the government in enforcing child support
orders, and to minimize fraudulent unemployment and
workers compensation insurance claims. The Companys
Garnishment Processing service provides deductions from
employees pay, forwards payments to third-party agencies,
including those that require electronic payments, and tracks the
obligation to fulfillment. These services enable employers to
comply with legal requirements and reduce the risk of penalties.
Comprehensive Administrative
Services:
The Paychex
Administrative Services (PAS) product provides businesses a
full-service approach to the outsourcing of employer and
employee administrative needs. PAS offers businesses a package
of services that includes payroll, employer compliance, human
resource and employee benefits administration, and employee risk
management. This comprehensive bundle of services is designed to
make it easier for businesses to manage their payroll and
benefit costs while providing a benefits package equal to that
of larger companies. The Company also operates a Professional
Employer Organization (PEO), which provides businesses with the
same combined package of services as the PAS product, but with
Paychex acting as a co-employer of the clients employees.
The Companys PEO is operated primarily in Florida and
Georgia, where PEOs are more prevalent. Paychex offers its PEO
product through its subsidiary, Paychex Business Solutions, Inc.
For these two products, the client pays a fee per employee per
processing period. As of May 31, 2004, the PAS and PEO
products combined serviced over 157,000 client employees.
Retirement
Services:
The Companys
Retirement Services product line offers a variety of options to
clients, including 401(k) plans, 401(k) SIMPLE, SIMPLE IRA,
401(k) plans with Safe Harbor provisions, profit sharing, and
money purchase plans. These services provide plan
implementation, ongoing compliance with government regulations,
employee and employer reporting, participant access online,
electronic funds transfer, and other administrative services.
Selling efforts for these products are focused primarily on the
Companys existing payroll client base, as the processed
payroll information allows for data integration necessary to
provide these services efficiently. Retirement Services products
were utilized by over 29,000 clients at May 31, 2004. This
demonstrates the continuing interest of small- to medium-sized
businesses in providing retirement savings benefits to their
employees. Paychex is now one of the largest 401(k)
recordkeepers for small businesses in the United States. Clients
utilizing this service are charged a monthly fee and a fee per
employee. Client employee 401(k) funds externally managed
totaled approximately $3.9 billion at May 31, 2004.
The Company earns a fee approximating thirty basis points from
the external managers based on the total of client employee
401(k) funds.
Workers Compensation
Services:
Most employers are
required to carry workers compensation insurance, which
provides payments to employees who are unable to work because of
job-related injuries. Paychex provides Workers
Compensation Insurance Administration services by serving, via
its licensed insurance agency, as a general agent providing
qualified workers compensation insurance through a variety
of insurance
5
Section 125
Plans:
The Company offers the
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 pretax dollars,
which can result in a reduction in payroll taxes for employers
and employees. The Flexible Spending Account Plan allows a
clients employees to pay, with pretax dollars, health and
dependent care expenses not covered by insurance. All required
implementation, administration, compliance, claims processing
and reimbursement, and coverage tests are provided with these
services.
Other Human Resource
Products:
Group health benefits
are offered in select geographic areas, as are state
unemployment insurance services, which provide clients with
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 products are
designed to simplify clients office processes and enhance
their employee benefits programs.
Sales and Marketing
The Company markets its services primarily
through its direct sales force based in major metropolitan
markets serviced by the Company. The Companys sales
representatives specialize in Core Payroll, Major Market
Services Payroll, or Human Resource and Benefits product lines.
For fiscal 2005, the Companys sales force is expected to
total approximately 1,625, with 1,045 focused on Core Payroll,
175 focused on Major Market Services Payroll, and 405 focused on
various Human Resource and Benefits products. The Human Resource
and Benefits sales force is comprised of 220 401(k)
recordkeeping sales representatives, 135 PAS/ PEO sales
representatives, and 50 licensed agents selling Workers
Compensation Insurance services. In addition to its direct
selling and marketing efforts, the Company utilizes
relationships with existing clients, certified public
accountants (CPAs), and banks for new client referrals.
Approximately two-thirds of the Companys new clients
(excluding acquisitions) come from these referral sources. To
further enhance its strong relationship with CPAs, during fiscal
2004, Paychex partnered with the American Institute of Certified
Public Accountants (AICPA) as the preferred payroll
provider for its AICPA Business Solutions Partner Program. The
sales force for Human Resource and Benefits products is
primarily focused on selling products and services to existing
payroll clients as their processed payroll information provides
the data integration necessary to provide these services.
The Companys Web site at www.paychex.com,
which includes online payroll sales presentations and product
information, is a cost-efficient tool that serves as a source of
leads and new sales while complementing the efforts of the field
sales force. This online tool allows Paychex to market to
clients in more geographically remote areas. The Companys
sales representatives are also supported by marketing,
advertising, public relations, trade shows, and telemarketing
programs. The Company has grown and expects to continue to grow
its direct sales force. In recent years, the Company has
increased its emphasis on the selling of ancillary services to
both new clients and its existing client base.
The acquisitions of Advantage and InterPay
provided Paychex with additional sales channels. Paychex,
through its acquisition of Advantage, has license agreements
with fifteen independently owned associate offices, which are
responsible for selling and marketing payroll services and
performing certain operational functions, while Paychex provides
all centralized back-office payroll processing and tax filing
services. In addition, as a result of the Advantage acquisition,
Paychex has a relationship with NEBS® (New England
Business Service, Inc.) whereby Paychex performs all
client functions other than sales and marketing. As part of the
InterPay acquisition, Fleet entered into a referral relationship
with Paychex.
6
Competition
The market for payroll processing and human
resource services is highly competitive and fragmented. The
Company believes its primary national competitor, ADP®
(Automatic Data Processing), is the largest
U.S. third-party provider of payroll processing and human
resource services in terms of revenue. Paychex competes with
other national, regional, local, and online service providers,
all of which have significantly smaller client bases.
In addition to traditional payroll processing and
human resource service providers, the Company competes with
in-house payroll and human resource systems and departments.
Payroll and human resource systems and software are sold by many
vendors. The Companys Human Resource and Benefits products
also compete with a variety of providers of unbundled human
resource services, such as retirement services companies,
insurance companies, and human resources and benefits consulting
firms.
Competition in the payroll processing and human
resource services industry is primarily based on service
responsiveness, product quality and reputation, breadth of
product offering, and price. Paychex believes it is competitive
in each of these areas.
Software Maintenance and Product
Development
The ever-changing mandates of federal, state, and
local taxing authorities require Paychex to update the
proprietary software utilized by the Company to provide Payroll
and Human Resource and Benefits services to its clients. The
Company is continually engaged in developing enhancements and
maintenance to its various software platforms to meet the
changing requirements of its clients and the marketplace.
Research and development expenses are not significant to the
Companys overall results of operations.
Employees
As of May 31, 2004, the Company employed
approximately 9,400 people. None of the employees are covered by
collective bargaining agreements.
Intellectual Property
The Company owns or licenses and uses a number of
trademarks, trade names, copyrights, service marks, trade
secrets, computer programs and software, and other intellectual
property rights. Taken as a whole, the Companys
intellectual property rights are material to the conduct of the
Companys business. Where it is determined to be
appropriate, the Company takes measures to protect its
intellectual property rights, including by way of example,
through confidentiality/non-disclosure agreements or policies
with employees, vendors and others, use of license agreements
with licensees and licensors of intellectual property, and
registration of certain trademarks. Paychex believes that the
Paychex name, trademark, and logo are of material
importance to the Company.
Seasonality
There is no significant seasonality to the
Companys business. However, during the Companys
third fiscal quarter, which ends in February, the number of new
Payroll clients, Retirement Services clients, and new PAS and
PEO worksite employees tends to be higher than in the rest of
the fiscal year, primarily because a majority of new clients
start using services in the beginning of a calendar year. In
addition, calendar year-end transaction processing and client
funds activity are traditionally higher during the third fiscal
quarter due to clients paying year-end bonuses and requesting
additional year-end services. Historically, as a result of these
factors, the Companys total revenue has been slightly
higher in the third and fourth fiscal quarters, with greater
sales commission expenses also reported in these quarters.
Risk Factors
The Companys future results of operations
are subject to a number of risks and uncertainties. These risks
and uncertainties could cause actual results to differ
materially from historical and current results and from
7
The Company may make errors and omissions
in providing services:
Processing,
tracking, collecting, and remitting client funds to the various
taxing authorities, client employees, and other third parties
are complex operations. Errors have occurred in the past and are
likely to occur in the future. These errors could include, but
are not limited to, late filing with tax agencies, underpayment
of taxes, and failure to comply with applicable banking
regulations and laws relating to employee benefits
administration, which could result in significant penalties and
liabilities that would adversely affect the Companys
results of operations. The Company could also transfer funds in
error to an incorrect party or for the wrong amount, and may be
unable to correct the error or recover the funds, resulting in a
loss to the Company.
Changes in government regulations and
policies could adversely impact the
business:
Many of the
Companys services, particularly tax filing and payment
services and benefit plan administration services, are designed
according to government regulations that continue to change.
Changes in regulations could affect the extent and type of
benefits employers are required, or may choose, to provide
employees or the amount and type of taxes employers and
employees are required to pay. Such changes could reduce or
eliminate the need for some of the Companys services and
substantially decrease its revenue. Added requirements could
also increase the cost of doing business. Failure by the Company
to modify its services in a timely fashion in response to
regulatory changes could have adverse effects on the
Companys results of operations.
Failure of third-party service providers to
perform their functions could harm the
business:
As part of providing
services to clients, Paychex relies on a number of third-party
service providers. These providers include, but are not limited
to, couriers used to deliver client payroll checks and banks,
which electronically transfer funds from clients to their
employees. Failure by these providers, for any reason, to
deliver their services in a timely manner could result in
material interruptions to Company operations, impact client
relations, and result in significant penalties or liabilities to
the Company.
Failure of the Companys Business
Continuity Plan in the event of a catastrophe could result in
the loss of client data and adversely interrupt
operations:
The Companys
operations are dependent on its ability to protect its
infrastructure against damage from catastrophe or natural
disaster, security breach, power loss, telecommunications
failure, terrorist attack, or similar event. The Company has a
Business Continuity Plan in place in the event of system failure
due to any of these events. If the Business Continuity Plan was
unsuccessful in a disaster recovery scenario, the Company could
potentially lose client data or experience material adverse
interruptions to its operations.
Integration of
acquisitions:
The effective
integration of acquired companies may be difficult to achieve.
It is also possible that the Company may not realize any or all
expected benefits from recent acquisitions or achieve benefits
from acquisitions in a timely manner. In addition, the Company
may incur significant costs and impact existing internal
resources in connection with the integration of acquisitions.
Failure to effectively integrate recent and future acquisitions
could affect the Companys results of operations.
Legal
matters:
The Company is subject to
various claims and legal matters that arise in the normal course
of business. These include disputes related to breach of
contract, employment-related claims, intellectual property
infringement, and other matters. In light of the legal reserve
recorded, the Companys management currently believes that
resolution of these matters will not have a material adverse
effect on the Companys financial position or results of
operations. However, these matters are subject to inherent
uncertainties and there exists the possibility that their
ultimate resolution could have a material adverse impact on the
Companys financial position and results of operations in
the period in which any such effect is recorded.
8
Any of the above risk factors could cause damage
to the Companys business reputation, which is important to
the Companys ability to attract new clients and retain
existing clients. Other risk factors include the following:
Paychex clients could have insufficient
funds to cover payments the Company has made on their behalf to
taxing authorities and employees:
As part of the payroll processing service, Paychex is authorized
by its clients to transfer money from their bank accounts to
fund amounts owed to their employees and various taxing
authorities. It is possible that the Company would be held
liable for such amounts in the event the client has insufficient
funds to cover them. The Company has in the past, and may in the
future, make payments on its clients behalf for which it
is not reimbursed, resulting in a loss to the Company.
Interest earned on funds held for clients
could be impacted by changes in government regulations mandating
the amount of tax withheld or timing of
remittance:
The Company receives
interest income from investing client funds collected but not
yet remitted to taxing authorities or to client employees. A
change in regulations either decreasing the amount of taxes to
be withheld or allowing less time to remit taxes to government
authorities would adversely impact this interest income.
Stock price
volatility:
The market price of
the Companys common stock may be influenced by factors
such as quarterly variations in operating results, announcements
of new services or technological innovations by the Company or
its competitors, market conditions in the business process
outsourcing industry, changes in ratings or financial estimates
by securities analysts, general economic conditions,
fluctuations in the stock market that are not directly related
to the Companys operating performance, and other factors
and events that are beyond the Companys control. These and
other factors can lead to fluctuations in the price of the
Companys stock.
Quantitative and qualitative disclosures
about market risk:
Refer to
Item 7A of this Form 10-K for discussion on Market
Risk Factors.
The Companys headquarters are located at
911 Panorama Trail South, Rochester, New York 14625 in a
140,000-square-foot building complex owned by the Company. In
addition, within the Rochester area, the Company owns four
facilities, which account for a combined total of
435,000 square feet, and leases approximately
67,000 square feet in two office complexes. These
facilities house various administrative and technology
functions, certain ancillary service functions, and a
telemarketing unit.
In addition, outside of Rochester, New York, the
Company leases approximately 1,768,000 square feet of space
for its regional, branch, and sales offices, and data processing
centers at various locations throughout the United States,
concentrating on major metropolitan areas. The Company owns
branch facilities located in Syracuse, New York; Philadelphia,
Pennsylvania; Auburn, Maine; and Rock Hill, South Carolina,
which together account for approximately 105,000 square
feet. The Company leases approximately 3,500 square feet of
space for an office in Germany. The Company believes that
adequate, suitable lease space will continue to be available for
its needs.
The Company is subject to various claims and
legal matters that arise in the normal course of business. These
include disputes related to breach of contract,
employment-related claims, intellectual property infringement,
and other matters.
The Company and its wholly owned subsidiary,
Rapid Payroll, Inc., are defendants in twenty-two lawsuits
pending in Los Angeles Superior Court and the United States
District Court for the Central District of California brought by
licensees of payroll processing software owned by Rapid Payroll.
In August of 2001, Rapid Payroll informed seventy-six licensees
that it intended to stop supporting the software in August of
2002. Thereafter, thirty lawsuits were commenced by licensees
asserting various claims, including breach of contract and
related tort and fraud causes of action. These lawsuits seek
compensatory damages, punitive damages, and injunctive relief
against Rapid Payroll, the Company, its Chief Executive Officer,
and its Senior
9
On June 18, 2004, a Superior Court jury
found that Rapid Payroll had breached its license agreement with
Payroll Partnership, L.P. and two related entities. The jury
awarded approximately $6.4 million in compensatory damages
against Rapid Payroll, which plans to file post-trial motions
and, if necessary, to appeal. The Superior Court dismissed other
claims against Rapid Payroll, the Company, and the individual
defendants, including fraud and tort causes of action. The six
remaining state court cases are to be tried one after the other
in Superior Court, beginning with a jury trial currently
scheduled to begin on August 23, 2004. Discovery and
motions are continuing in the federal court cases, with the
first trial currently scheduled to start in January 2005.
Based on the application of Statement of
Financial Accounting Standard (SFAS) No. 5,
Accounting for Contingencies, the Company is
required to record a reserve if it believes an unfavorable
outcome is probable and the amount of the probable loss can be
reasonably estimated. During the third and fourth quarters of
fiscal 2004, the Company recorded $9.2 million and
$26.6 million, respectively, in expense to increase the
reserve for the estimated costs associated with the resolution
of pending legal matters. The legal reserve totaled
$35.0 million and $1.1 million at May 31, 2004
and May 31, 2003, respectively, and is included in other
current liabilities on the Consolidated Balance Sheets. This
reserve may change in the future due to new developments or
changes in the Companys strategies.
In light of the legal reserve recorded, the
Companys management currently believes that resolution of
these matters will not have a material adverse effect on the
Companys financial position or results of operations.
However, these matters are subject to inherent uncertainties and
there exists the possibility that the ultimate resolution of
these matters could have a material adverse impact on the
Companys financial position and the results of operations
in the period in which any such effect is recorded.
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,
2004.
PART II
The Companys common stock trades on The
NASDAQ Stock Market® under the symbol PAYX.
Dividends have historically been paid in August, November,
February, and May. The level and continuation of future
dividends are dependent on the Companys future earnings
and cash flows, and are subject to the discretion of the Board
of Directors.
On June 30, 2004, there were 19,201 holders
of record of the Companys common stock, which includes
registered holders and participants in the Paychex, Inc.
Dividend Reinvestment and Stock Purchase Plan. There were also
8,222 participants in the Paychex, Inc. Employee Stock Purchase
Plan and 6,045 participants in the Paychex, Inc. Employee Stock
Ownership Plan.
10
The high and low sale prices for the
Companys common stock as reported on The NASDAQ Stock
Market and dividends for the two fiscal years ended May 31,
2004 and 2003, are as follows:
The closing price of the Companys common
stock on May 28, 2004, as reported on The NASDAQ Stock
Market, was $37.51 per share.
Managements Discussion and Analysis of
Financial Condition and Results of Operations reviews the
Companys operating results for each of the three fiscal
years in the period ended May 31, 2004 (fiscal 2004, 2003,
and 2002), and its financial condition at May 31, 2004.
This review should be read in conjunction with the accompanying
Consolidated Financial Statements and the related Notes to
Consolidated Financial Statements contained in Item 8 of
this Form 10-K and risk factors discussed in Item 1 of
this Form 10-K. Forward-looking statements in this review
are qualified by the cautionary statement under the heading
Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995 contained at the beginning of this
Form 10-K.
Overview
Paychex is a leading, national provider of
comprehensive payroll and integrated human resource and employee
benefits outsourcing solutions for small-to medium-sized
businesses. The Company has a broad portfolio of products and
services that allows its clients to meet their diverse payroll
and human resource needs. These include payroll processing, tax
filing and payment, employee payment, time and attendance
systems, regulatory compliance (new-hire reporting and
garnishment processing), retirement services administration,
employee benefits administration, workers compensation
insurance, and comprehensive bundled human resource
administrative services. The Companys strategy is focused
on growing its client base, increasing utilization of ancillary
services, and leveraging its technological and operating
infrastructure. The Company earns its revenues primarily through
recurring fees for repetitive services performed related to
these products. Service revenues are largely driven by the
number of clients, utilization of ancillary services, and
11
In fiscal 2004, the Company completed its
fourteenth consecutive year of record total revenues, net
income, and diluted earnings per share. For fiscal 2004, total
revenues grew 18% year-over-year to $1,294.3 million. This
in turn generated net income of $303.0 million, or $.80
diluted earnings per share. In comparison, revenues for fiscal
2003 increased 15% year-over-year to $1,099.1 million. Net
income in fiscal 2003 was $293.5 million, or $.78 diluted
earnings per share. Year-over-year growth in net income was 3%
and 7% for fiscal 2004 and fiscal 2003, respectively. Operating
income increased 8% year-over-year in fiscal 2004 to
$433.3 million, compared with a year-over-year increase in
fiscal 2003 of 10% to $401.0 million.
During fiscal 2004, the Companys results of
operations were impacted by expense charges to increase the
reserve for pending legal matters of Rapid Payroll, Inc. (a
wholly owned subsidiary of the Company). These charges totaled
$35.8 million, reflecting $9.2 million recorded in the
third quarter and $26.6 million recorded in the fourth
quarter. The expense charges reduced diluted earnings per share
for fiscal 2004 by approximately $.06 per share.
The fiscal 2004 results of operations were also
impacted by approximately $6.4 million of net incremental
PEO revenue resulting from a refund of PEO workers
compensation insurance premiums and a reduction of the estimated
claims loss exposure under the fiscal 2003 insurance policy,
which was recorded in the third quarter.
The Companys results of operations for
fiscal 2004 and fiscal 2003 were also impacted by the
acquisitions in fiscal 2003 of two payroll service providers
servicing small- to medium-sized businesses in the United
States. On September 20, 2002, Paychex acquired Advantage
Payroll Services, Inc. (Advantage) for
$314 million in cash. On April 1, 2003, Paychex
acquired InterPay, Inc. (InterPay) for
$182 million in cash. These two acquisitions provided
Paychex with over 80,000 new clients. The Companys results
of operations for fiscal 2004 include the results of Advantage
and InterPay for the entire period. The results of operations
for fiscal 2003 include the results of Advantage and InterPay
from the respective dates of acquisition. In April 2004, the
Company acquired substantially all of the assets and certain
liabilities of Stromberg LLC (Stromberg), a provider
of time and attendance software solutions, for
$13.6 million. The Company paid $12.6 million in the
fourth quarter of fiscal 2004 and an additional
$1.0 million is expected to be paid in the fourth quarter
of fiscal 2005. The Stromberg acquisition did not have a
material impact on the results of operations of the Company for
fiscal 2004. For additional information related to these
acquisitions refer to Note B in the Notes to Consolidated
Financial Statements, contained in Item 8 of this
Form 10-K.
During fiscal 2002, fiscal 2003, and fiscal 2004,
the Company, and the industry as a whole, experienced lower
growth rates as a result of challenging economic conditions and
the effect of lower interest rates. The downturn in the economy
impacted payroll service revenues as a result of lower checks
per client as existing clients reduced their work forces. Checks
per client (excluding Advantage and InterPay) decreased 3.0% and
.5% year-over-year in fiscal 2002 and fiscal 2003, respectively.
For fiscal 2004, checks per client (excluding Advantage and
InterPay) were relatively comparable with the prior year period.
In response to economic conditions, the Federal
Reserve lowered the Federal Funds rate thirteen times from
January 2001 through May 31, 2004 to 1.00%, for a
cumulative 550-basis-point reduction. Lower interest rates have
adversely impacted income earned on the Companys funds
held for clients and corporate investment portfolios. During the
last three fiscal years, the Company was able to offset some of
the impact of lower interest rates by realizing gains from the
sale of available-for-sale investments in both the client funds
and corporate investment portfolios.
Due to the impact of fluctuations in interest
rates earned on funds held for clients and corporate
investments, the Company also focuses on operating income
excluding interest on funds held for clients in evaluating the
results of operations. Operating income excluding interest on
funds held for clients experienced year-over-year growth of 9%
in fiscal 2004 and 16% in fiscal 2003, increasing to
$379.1 million and $347.9 million, respectively.
Operating income was also impacted by the $35.8 million of
expense charges to increase the reserve for pending legal
matters and the $6.4 million of net incremental PEO
revenue. Operating
12
Paychex continues to make investments in the
business as part of its growth strategy. Some of these
investments include the following:
Growing the client base and increasing
utilization of ancillary services:
In fiscal 2004, the Company reached a milestone as its client
base increased to approximately 505,000 clients at May 31,
2004. This compares with approximately 490,000 clients at
May 31, 2003, and over 390,000 clients at May 31,
2002. The acquisitions of Advantage and InterPay in fiscal 2003
accounted for over 80,000 clients. Year-over-year client growth
was approximately 3% for fiscal 2004. Client growth excluding
the impact of the acquisitions was approximately 7% for fiscal
2004 and slightly less than 5% for fiscal 2003.
Paychex has continued to invest in its direct
sales force, as the Company believes there is opportunity for
growth within the target market of small- to medium-sized
businesses. The approximate composition of the Companys
direct sales force is summarized in the following table:
The Company believes there are opportunities for
growth within the current client base, as well as with new
clients, through increased utilization of the Companys
payroll-related and human resource ancillary services. Ancillary
services effectively leverage the payroll processing data and,
therefore, are beneficial to the Companys operating
margin. Penetration of the Companys tax filing and payment
services and employee payment services has continued to
increase, and totals 89% and 63%, respectively, at May 31,
2004. Client bases in the human resource and employee benefits
areas have continued to grow, as shown in the following table:
Effective integration of acquired
businesses:
During fiscal 2003 and
fiscal 2004, the Company has been integrating Advantage and
InterPay into the operations of Paychex. These integration
efforts will lead to efficiencies in operations and services
provided to clients. By the end of fiscal 2003, the sales forces
of these companies were combined with the Paychex sales force,
and the responsibility for their operations and corporate
support had been integrated into the management structure of
Paychex. By the end of fiscal 2004, most branch operations had
been integrated into existing Paychex locations. The
Companys primary integration focus continues to be on
client service and retention. The Advantage payroll system is
being retained for the foreseeable future in order to service
clients affiliated with independently owned associate offices
and Advantage co-branded products. Approximately one-half of the
InterPay clients were converted to Paychex software platforms by
the end of May 2004, with the remaining clients expected to be
converted by December 2004.
Focus on customer
service:
The Company has always
focused on customer service and minimizing client losses, and in
fiscal 2004, client satisfaction survey results improved over
fiscal 2003. Client losses, which are slightly higher than 20%
of the beginning client base, are near historical lows. The most
significant factor contributing to client losses is companies
going out of business. In addition, Paychex has invested in
efforts to reduce turnover of payroll specialists, who are the
primary contact with the clients, through improvements in
13
Other
initiatives:
Other initiatives
during fiscal 2004 include the following:
None of these initiatives, either individually or
in the aggregate, had a material impact on the Companys
results of operations.
In fiscal 2003, the Company placed into service a
$30 million consolidated data center in Rochester, New
York. This data center was designed to enhance data processing
and disaster recovery capabilities.
At May 31, 2004, the Company maintains a
strong financial position with total cash and corporate
investments of $523.8 million. The Companys primary
source of cash is its ongoing operations. Cash flow from
operations was $390.1 million in fiscal 2004 and
$373.7 million in fiscal 2003, year-over-year increases of
4% and 23%, respectively. Historically, the Company has funded
its operations, capital purchases, purchases of corporate
investments, and dividend payments from its operating
activities. The acquisitions of Advantage and InterPay in fiscal
2003 and Stromberg in fiscal 2004, were funded from the
Companys cash and corporate investments. It is anticipated
that current cash and corporate investment balances, along with
projected operating cash flows, will support normal business
operations, capital purchases, and current dividend payments for
the foreseeable future.
For further analysis of the Companys
results of operations for fiscal years 2004, 2003, and 2002, and
financial position at May 31, 2004, refer to the discussion
of Critical Accounting Policies and the charts and
analysis in the Results of Operations and
Liquidity and Capital Resources sections of this
review.
Critical Accounting Policies
Note A to the Consolidated Financial
Statements, included in Item 8 of this Form 10-K,
discusses the significant accounting policies of Paychex, Inc.
The Companys discussion and analysis of its financial
condition and results of operations are based upon its
Consolidated Financial Statements, which have been prepared in
accordance with U.S. generally accepted accounting
policies. The preparation of these financial statements requires
the Companys management to make estimates, judgments, and
assumptions that affect reported amounts of assets, liabilities,
revenues, and expenses. On an ongoing basis, the Company
evaluates the accounting policies and estimates used to prepare
the Consolidated Financial Statements, including, but not
limited to, those related to revenue recognition, PEO
workers compensation insurance, investments, goodwill and
intangible assets, fixed assets, potential losses resulting from
its clients inability to meet their payroll obligations,
contingencies, allowance for doubtful accounts, and income
taxes. The Company bases its estimates on historical experience,
future expectations, and assumptions believed to be reasonable
under current facts and circumstances. Actual amounts and
results could differ from these estimates. Certain accounting
policies that are deemed critical to the Companys results
of operations or financial position are discussed below.
Revenue
recognition:
Service revenues are
recognized in the period services are rendered and earned under
service arrangements with clients where service fees are fixed
or determinable and collectibility is reasonably assured.
Certain processing services are provided under annual service
arrangements with revenue recognized ratably over the annual
service period. The Companys service revenues are largely
attributable to payroll-related processing services where the
fee is based on a fixed amount per processing period or a fixed
amount per processing period plus a fee per employee or
transaction processed. Paychex provides delivery service for the
distribution of certain client payroll checks and reports. The
revenue earned from delivery
14
Professional Employer Organization
(PEO) revenues are included in service revenues and are
reported net of direct costs billed and incurred, which include
wages, taxes, benefit premiums, and claims of PEO worksite
employees. Direct costs billed and incurred for PEO worksite
employees were $1,846.1 million, $1,460.7 million, and
$1,056.9 million for fiscal 2004, 2003, and 2002,
respectively.
Interest on funds held for clients is earned
primarily on funds that are collected from clients before due
dates, for payroll tax filing and payment services and employee
payment services, and invested (funds held for clients) until
remittance to the applicable tax agencies or client employees.
These collections from clients are typically remitted between
one and thirty days after receipt, with some items extending to
ninety days. The interest earned on these funds is included in
total revenues on the Consolidated Statements of Income because
the collection, holding, and remittance of these funds are
critical components of providing these services. Interest on
funds held for clients also includes net realized gains and
losses from the sale of available-for-sale securities.
PEO workers compensation
insurance:
In fiscal 2003,
workers compensation insurance for PEO worksite employees
was provided under a pre-funded, deductible workers
compensation policy with a national insurance company. Under
this policy, the Companys maximum individual claims
liability was $250,000 and the aggregate claims exposure was
based on a percentage of premium rates as applied to
workers compensation payroll.
Based on claims experience, during the third
quarter of fiscal 2004, the Company recorded approximately
$6.4 million of net incremental PEO revenue resulting from
a refund of insurance premiums and a reduction in estimated
claims loss exposure under the fiscal 2003 policy. The fiscal
2004 policy is similar to the fiscal 2003 policy, except that
the Companys maximum individual claims liability is
$500,000. At May 31, 2004, the Company has recorded
$1.8 million in current liabilities for workers
compensation claims cost based on the estimated loss exposure
under the fiscal 2003 policy, and an estimated prepayment of
$5.0 million under the fiscal 2004 policy in prepaid
expenses and other current assets. These estimates may change in
the future based on claims experience trends.
Valuation of
investments:
The Companys
investments in debt securities are reported at fair value.
Unrealized gains related to increases in the fair value of
investments and unrealized losses related to decreases in the
fair value are included in comprehensive income as reported on
the Companys Consolidated Statements of Stockholders
Equity. However, changes in the fair value of investments impact
the Companys net income only when such investments are
sold or impairment is recognized. Realized gains and losses on
the sale of securities are determined by specific identification
of the securitys cost basis. On the Consolidated
Statements of Income, realized gains and losses from funds held
for clients are included in interest on funds held for clients,
whereas realized gains and losses from corporate investments are
included in investment income, net.
The Company is exposed to credit risk in
connection with these investments through the possible inability
of the borrowers to meet the terms of the bonds. The Company
attempts to mitigate this risk by investing primarily in
high-credit-quality securities. The Company periodically reviews
its investment portfolio to determine if any investment is
other-than-temporarily impaired due to changes in credit risk or
other potential valuation concerns, which would require the
Company to record an impairment charge in the period any such
determination is made. In making this judgment, the Company
evaluates, among other things, the duration and extent to which
the fair value of an investment is less than its cost, the
credit rating and any changes in credit rating for the
investment, and its ability and intent to hold the investment
until the earlier of market price recovery or maturity. The
Companys assessment that an investment is not
other-than-temporarily impaired could change in the future due
to new developments or changes in the Companys strategies
or assumptions related to any particular investment.
Goodwill and intangible
assets:
For business combinations,
Paychex assigns estimated fair values to all assets and
liabilities acquired, including intangible assets such as
customer lists, certain license agreements,
15
The Company has $405.7 million of goodwill
recorded on its Consolidated Balance Sheet at May 31, 2004,
resulting from acquisitions in fiscal 2003 and fiscal 2004.
Statement of Financial Accounting Standard
(SFAS) No. 142, Goodwill and Other Intangible
Assets, requires that goodwill not be amortized, but
instead tested for impairment on an annual basis and at interim
periods if an event occurs or circumstances change in a way to
indicate that there has been a potential decline in the fair
value of the reporting unit. Impairment is determined by
comparing the estimated fair value of the reporting unit to its
carrying amount, including goodwill. The Company performs its
annual review at the beginning of the fourth fiscal quarter. The
Companys business is largely homogeneous and, as a result,
substantially all of the goodwill is associated with one
reporting unit. Based on the results of the Companys
goodwill impairment review, no impairment charge was recognized.
Subsequent to this review, there have been no events or
circumstances that indicate any potential impairment of the
goodwill balance.
The Company also tests intangible assets for
potential impairment when events or changes in circumstances
indicate that the carrying value may not be recoverable.
Fixed assets:
The carrying value of fixed assets, including costs for acquired
software and software developed for internal use, reflects
estimates, assumptions, and judgments relative to capitalized
costs, useful lives, utilization, and salvage value. For
software developed for internal use, all external direct costs
for materials and services and certain payroll and related
fringe costs are capitalized in accordance with Statement of
Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.
The Company reviews the carrying value of fixed assets for
impairment when events or changes in circumstances indicate that
the carrying value of such assets may not be recoverable.
Accrual for client fund
losses:
The Company maintains an
accrual for estimated losses associated with its clients
inability to meet their payroll obligations. As part of
providing payroll, tax filing and payment services, and employee
payment services, Paychex is authorized by the client to
initiate money transfers from the clients account for the
amount of tax obligations and employees direct deposits.
Electronic money fund transfers from client bank accounts are
subject to potential risk of loss resulting from clients
insufficient funds to cover such transfers. The Company
evaluates certain uncollected amounts on a specific basis and
analyzes historical experience for amounts not specifically
reviewed to determine the likelihood of recovery from the
clients.
Contingent
liabilities:
The Company is
subject to various claims and legal matters. During the third
and fourth quarters of fiscal 2004, the Company recorded
$9.2 million and $26.6 million, respectively, in
expense charges to increase the reserve for pending legal
matters. At May 31, 2004, the Company has recorded
approximately $35.0 million in the reserve for pending
legal matters based on the application of SFAS No. 5,
Accounting for Contingencies, which requires the
Company to record a reserve if it believes an unfavorable
outcome is probable and the amount of the probable loss can be
reasonably estimated. The determination of whether any
particular matter involves a probable loss or if the amount of a
probable loss can be reasonably estimated requires considerable
judgment. This reserve may change in the future due to new
developments or changes in the Companys strategies or
assumptions related to any particular matter. In light of the
legal reserve recorded, the Companys management currently
believes that resolution of these matters will not have a
material adverse effect on the Companys financial position
or results of operations. However, these matters are subject to
inherent uncertainties and there exists the possibility that the
ultimate resolution of these matters could have a material
adverse impact on the Companys financial position and the
results of operations in the period in which any such effect is
recorded. For additional information regarding pending legal
matters refer to Note L in the Notes to Consolidated
Financial Statements, contained in Item 8 of this
Form 10-K, which is incorporated herein by reference
thereto.
16
Results of Operations
Summary of Results of Operations for the
Fiscal Years Ended May 31:
17
Details regarding the Companys combined
funds held for clients and corporate investment portfolios are
as follows:
Revenues:
Total service revenues are comprised of revenues from the
Payroll and Human Resource and Benefits product lines. Payroll
service revenues are earned primarily from payroll processing,
tax filing and payment services, employee payment services, and
other ancillary services. Human Resource and Benefits service
revenues are earned primarily from Retirement Services,
Workers Compensation Insurance Administration,
Section 125 Plan Administration, and Paychex Administrative
Services and Professional Employer Organization bundled
services. The company estimates that year-over-year organic
service revenue growth was approximately 13% for fiscal 2004 and
approximately 11% for fiscal 2003.
The increase in Payroll service revenues in
fiscal 2004 compared with fiscal 2003 is due to the acquisitions
of Advantage and InterPay, organic client base growth, increased
utilization of ancillary services, and price increases. The
increase in Payroll service revenues in fiscal 2003 compared
with fiscal 2002 is attributable to the same factors.
As of May 31, 2004, 89% of all clients
utilized the Companys tax filing and payment services,
compared with 87% at May 31, 2003, and 85% at May 31,
2002. The Company believes the client utilization percentage of
the tax filing and payment services is near maturity. The
Companys employee payment services were utilized by 63% of
its clients at May 31, 2004, compared with 60% at
May 31, 2003, and 57% at May 31, 2002. More than 90%
of new clients purchase the Companys tax filing and
payment services and more than 70% of new clients purchase
employee payment services. Major Market Services revenues
totaled $139.7 million,
18
The increases in Human Resource and Benefits
service revenues in fiscal 2004 and fiscal 2003 are primarily
related to increases in the number of clients utilizing
Retirement Services products and increases in Paychex
Administrative Services (PAS) and Professional Employer
Organization (PEO) client employees serviced. Fiscal 2004
also benefited from improving net PEO workers compensation
revenue under the fiscal 2004 insurance policy and higher
workers compensation Pay-As-You-Go
SM
revenue.
In the third quarter of fiscal 2004, the Company recorded
approximately $6.4 million of net incremental PEO revenue
resulting from a refund of PEO workers compensation
insurance premiums and a reduction of the estimated claims loss
exposure under the fiscal 2003 insurance policy. Excluding this
item, Human Resource and Benefits service revenues increased 29%
for fiscal 2004. Human Resource and Benefits service revenues
excluding total PEO revenue increased 24% in fiscal 2004.
Retirement Services revenues totaled $79.0 million,
$66.7 million, and $56.5 million in fiscal 2004, 2003,
and 2002, respectively. This represents year-over-year revenue
growth of 18% for both fiscal 2004 and fiscal 2003. The Company
serviced over 29,000 and over 26,000 Retirement Services clients
at May 31, 2004 and 2003, respectively.
The PAS product is a combined package of payroll,
employer compliance, employee benefit administration, and risk
management outsourcing services designed to make it easier for
businesses to manage their payroll and benefit costs. The
Companys PEO product provides primarily the same bundled
services as the PAS product, but with Paychex acting as a
co-employer of the clients employees. The PEO service is
available primarily in the states of Florida and Georgia, where
PEOs are more prevalent. Sales of the PAS and PEO products have
been strong, with administrative fee revenues from these
products increasing 34% and 40% for fiscal 2004 and 2003,
respectively. The PAS and PEO products serviced over 157,000 and
over 103,000 client employees as of May 31, 2004 and 2003,
respectively.
The increase in interest on funds held for
clients in fiscal 2004 compared with fiscal 2003 is the result
of higher net realized gains on the sale of available-for-sale
securities and higher average portfolio balances, offset by
lower average interest rates earned in fiscal 2004. In fiscal
2003, interest on funds held for clients declined when compared
to fiscal 2002 due to lower average interest rates earned and a
decrease in net realized gains, offset somewhat by higher
average portfolio balances. The higher average portfolio
balances in both fiscal 2004 and fiscal 2003 were driven by the
acquisitions of Advantage and InterPay in fiscal 2003 and from
organic client base growth.
Expenses:
The
following table summarizes total consolidated operating,
selling, general, and administrative expenses:
The increases in most expense categories in
fiscal 2004 and fiscal 2003 were due in part to the acquisitions
of Advantage and InterPay in fiscal 2003. This includes the
additional investment the Company made in its direct sales force
in the second and fourth quarters of fiscal 2003, as it
integrated the sales forces of Advantage and InterPay. The
remaining increases are primarily due to investments in
personnel, information technology, and facility costs to support
the organic growth of the Company. At May 31, 2004, the
Company had
19
Depreciation expense is primarily related to
buildings, furniture and fixtures, data processing equipment,
and software. In addition to the impact from the acquisitions,
depreciation expense in fiscal 2004 and fiscal 2003 was higher
due in part to the purchase of a 220,000-square-foot facility in
Rochester, New York, and the placement of a $30 million
consolidated data center into service, both of which occurred
during the first half of fiscal 2003. Amortization of intangible
assets is primarily related to client lists obtained from the
acquisitions. Other expenses include items such as delivery,
forms and supplies, communications, travel and entertainment,
professional services, and other costs incurred to support the
business. Fiscal 2004s expense growth was also impacted by
higher legal and professional service fees. During fiscal 2004,
the Company recorded approximately $35.8 million in expense
charges to increase the reserve for pending legal matters.
Excluding this amount, consolidated expenses grew 18% in fiscal
2004.
Operating
Income:
As a result of the above
factors, operating income increased 8% and 10% in fiscal 2004
and fiscal 2003 to $433.3 million and $401.0 million,
respectively.
Investment
Income:
Investment income, net
primarily represents earnings from the Companys cash and
cash equivalents and investments in available-for-sale
investment securities. Investment income does not include
interest on funds held for clients, which is included in total
revenues. The decrease in investment income in fiscal 2004
compared with fiscal 2003 is mainly due to a decrease in average
daily invested balances, lower average interest rates earned,
and lower net realized gains on the sale of available-for-sale
investments. The decrease in investment income in fiscal 2003
compared with fiscal 2002 is mainly due to a decrease in average
daily invested balances and lower average interest rates earned,
offset by higher net realized gains on the sale of
available-for-sale securities. The decrease in average daily
invested balances in fiscal 2004 and fiscal 2003, and higher net
realized gains in fiscal 2003, are primarily the result of the
sale of corporate investments to fund the Advantage and InterPay
acquisitions in fiscal 2003. The Company estimates that
year-over-year reductions in investment income due to the use of
corporate investments to fund the two acquisitions in fiscal
2003 were approximately $7.4 million and $7.6 million,
respectively, in fiscal 2004 and fiscal 2003.
Income Taxes:
The effective income tax rate was 32.6% in fiscal 2004, compared
with 32.0% in fiscal 2003 and 30.5% in fiscal 2002. The
increases in the effective income tax rate are primarily the
result of lower levels of tax-exempt income, which is derived
primarily from municipal debt securities in the funds held for
clients and corporate investment portfolios. Fiscal 2005s
effective income tax rate is expected to approximate 33.0%. See
Note H of the Notes to Consolidated Financial Statements,
contained in Item 8 of this Form 10-K, for additional
disclosures on income taxes.
Outlook
The Companys current outlook for the full
fiscal year 2005 is summarized as follows:
20
These projections are based on current economic
and interest rate conditions continuing with no significant
changes.
Liquidity and Capital Resources
At May 31, 2004, the Companys
principal source of liquidity was $523.8 million of cash
and corporate investment balances. Current cash and corporate
investments and projected operating cash flows are expected to
support normal business operations, purchases of property and
equipment, and current dividend payments for the foreseeable
future.
Commitments and Contractual
Obligations
The Company has unused borrowing capacity
available under three uncommitted, short-term lines of credit
with financial institutions at market rates of interest as
follows:
The primary uses of the lines of credit would be
to meet short-term funding requirements related to client fund
deposit obligations or to fund normal business operations, if
necessary. The secured line of credit is collateralized
primarily by securities in the Companys investment
portfolios. No amounts were outstanding against these lines of
credit during fiscal 2004 or at May 31, 2004. The Company
intends to renew the short-term line of credit, which expires at
the end of July 2004.
At May 31, 2004, the Company had letters of
credit outstanding totaling $8.4 million, required to
secure commitments for certain insurance policies. These letters
of credit expire at various dates between December 2004 and
December 2005. In June 2004, the Company entered into a
$24.5 million letter of credit arrangement to secure a
commitment for an insurance policy. The letters of credit are
secured by securities held in the Companys investment
portfolios.
At May 31, 2004, the Company had recorded
$1.0 million in other current liabilities for the
additional purchase price expected to be paid for the Stromberg
acquisition in the fourth quarter of fiscal 2005.
The Company has entered into various operating
leases and purchase obligations that, under U.S. generally
accepted accounting principles, are not reflected on the
Consolidated Balance Sheets at May 31, 2004. The table
below summarizes the Companys estimated annual payment
obligations under these commitments, as well as other
contractual obligations shown as other long-term liabilities on
the Consolidated Balance Sheets at May 31, 2004:
21
Paychex, through its acquisition of Advantage,
has license agreements with fifteen independently owned
associate offices, which are responsible for selling and
marketing the Companys payroll services and performing
certain operational functions, while Paychex provides all
centralized back-office payroll processing and tax filing
services. In addition, the Company has a relationship with NEBS
(New England Business Service, Inc.) whereby Paychex
performs all client functions other than sales and marketing.
Under these arrangements, Paychex pays the Associates and NEBS
commissions based on processing activity for the related
clients. Since the actual amounts of future payments is
uncertain, obligations under these arrangements are not included
in the table above. Commission expense for the Associates and
NEBS in fiscal 2004 was $14.4 million.
In the normal course of business, the Company
makes representations and warranties that guarantee the
performance of the Companys services under service
arrangements with clients. The Company has entered into
indemnification agreements with its Officers and Directors,
which require the Company to defend and, if necessary, indemnify
these individuals for certain pending or future legal claims as
they relate to their services to Paychex and its subsidiaries.
Historically, there have been no material losses related to such
guarantees and indemnifications.
Paychex currently self-insures the deductible
portion of various insured exposures under certain employee
benefit plans. The Companys estimated loss exposure under
these insurance arrangements is recorded in other current
liabilities. Historically, the amounts accrued have not been
material.
Off-Balance Sheet Arrangements
As part of its ongoing business, Paychex does not
participate in transactions with unconsolidated entities such as
special purpose entities or structured finance entities, which
would have been established for the purpose of facilitating
off-balance sheet arrangements or other limited purposes.
Operating Cash Flow Activities
The increase in operating cash flows in fiscal
2004 reflects higher net income adjusted for non-cash items,
offset by cash used by working capital. The increase in
operating cash flows in fiscal 2003 is due to higher net income
adjusted for non-cash items and cash provided by working
capital. The increases in non-cash adjustments to net income are
primarily related to higher depreciation and amortization on
fixed and intangible assets. In fiscal 2004, non-cash
adjustments to net income were also impacted by
$35.8 million in expense charges to increase the reserve
for pending legal matters. The fluctuations in working capital
between
22
Investing Cash Flow Activities
Funds held for clients and corporate
investments:
Funds held for
clients are primarily comprised of short-term funds and
available-for-sale debt securities. Corporate investments are
primarily comprised of available-for-sale debt securities. The
portfolio of funds held for clients and corporate investments is
detailed in Note D of the Notes to Consolidated Financial
Statements, included in Item 8 of this Form 10-K.
The amount of funds held for clients will vary
based upon the timing of collecting client funds, and the
related remittance of funds to tax authorities for tax filing
and payment services and employees of clients utilizing employee
payment services. Fluctuations in net funds held for clients and
corporate investment activities primarily relate to timing of
purchases, sales, or maturities of corporate investments. During
fiscal 2003, corporate investments were sold to fund the
acquisitions of Advantage and InterPay. Additional discussion of
interest rates and related risks is included in Item 7A of
this Form 10-K.
Acquisitions of businesses, net of cash
acquired:
In fiscal 2004, the
Company paid approximately $12.6 million in cash for the
acquisition of Stromberg and $.6 million of additional
purchase price related to the InterPay acquisition. In fiscal
2003, the company paid $314.4 million in cash for the
acquisition of Advantage and $181.7 million in cash for the
acquisition of InterPay.
Purchases of property and
equipment:
To support the
Companys continued client and ancillary product growth,
purchases of property and equipment were made for data
processing equipment and software, and for the expansion and
upgrade of various operating facilities. In fiscal 2004, the
Company made purchases of property and equipment of
$50.6 million, compared with $60.2 million of
purchases in fiscal 2003, and $54.4 million in fiscal 2002.
The capital expenditures in fiscal 2003 include the purchase of
a 220,000-square-foot facility in Rochester, New York. In the
second quarter of fiscal 2003, the Company placed into service a
consolidated data center to enhance data processing and disaster
recovery capabilities. Purchases of data processing equipment,
software, and building improvements in fiscal 2003 and 2002 for
the data center were approximately $12.2 million and
$18.3 million, respectively. Construction in progress
totaled $10.9 million and $5.0 million at May 31,
2004 and 2003, respectively. These amounts primarily represent
costs for software being developed for internal use.
During fiscal 2004, fiscal 2003, and fiscal 2002,
the Company purchased approximately $1.2 million,
$2.6 million, and $11.2 million, respectively, of data
processing equipment and software from EMC Corporation, whose
President and Chief Executive Officer is a member of the Board
of Directors of Paychex.
Purchases of property and equipment in fiscal
2005 are expected to be in the range of $65 million to
$70 million. The expected increase in fiscal 2005 capital
expenditures reflects higher anticipated purchases for printing
equipment, communication system upgrades, and branch expansions.
Fiscal 2005 depreciation expense is projected to be in the range
of $40 million to $45 million. In addition, the
Company projects amortization of intangible assets for fiscal
2005 to be in the range of $15 million to $16 million.
23
Financing Cash Flow Activities
Dividends
paid:
In October 2003, the Board
of Directors approved a 9.1% increase in the quarterly dividend
payment to $.12 per share from $.11 per share. In
October 2001, the Board of Directors approved a 22.2% increase
in the quarterly dividend payment to $.11 per share from
$.09 per share. The dividends paid as a percentage of net
income totaled 59%, 56%, and 57% in fiscal 2004, fiscal 2003,
and fiscal 2002, respectively. Future dividends are dependent on
the Companys future earnings and cash flow and are subject
to the discretion of the Board of Directors.
Proceeds from exercise of stock
options:
The increase in proceeds
from the exercise of stock options in fiscal 2004 compared with
fiscal 2003 is primarily due to an increase in both the average
exercise price per share and the number of shares exercised. The
decrease in proceeds from the exercise of stock options in
fiscal 2003 compared with fiscal 2002 is due to a decrease in
the number of shares exercised. Shares exercised in fiscal 2004
were 1.3 million compared with .8 million shares in
fiscal 2003, and 2.2 million shares in fiscal 2002. The
Company has recognized a tax benefit from the exercise of stock
options of $10.2 million, $5.5 million, and
$24.1 million for fiscal 2004, fiscal 2003, and fiscal
2002, respectively. This tax benefit reduces the accrued income
tax liability and increases additional paid-in capital, with no
impact on the expense amount for income taxes. See Note G
to the Notes to Consolidated Financial Statements, contained in
Item 8 of this Form 10-K, for additional disclosures
on the Companys stock option plans.
Other
New accounting
pronouncements:
In August 2001,
the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement
Obligations, which requires companies to record a
liability at fair value for asset retirement obligations in the
period in which they are incurred. The associated asset
retirement costs are capitalized as part of the carrying amount
of the long-lived asset. This Statement was effective for the
Company for the fiscal year beginning June 1, 2003. The
Company adopted this Statement in the first quarter of fiscal
2004, with no material impact on its results of operations or
financial position.
In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities. A variable interest entity is
an entity that has: (1) an insufficient amount of equity to
absorb the entitys losses; (2) equity owners that do
not have voting rights; or (3) equity that does not absorb
the entitys losses or residual returns. FIN 46
requires a variable interest entity to be consolidated by its
primary beneficiary, which is the company that is subject to a
majority of the risk of loss from the entitys activities,
or is entitled to receive a majority of the entitys
residual returns, or both. For Paychex, the effective date for
application of FIN 46 to variable interest entities created
before February 1, 2003, was the fourth quarter of fiscal
2004. The Company has investments in various U.S. real
estate partnership arrangements, which provide income tax
credits for the Company. These partnerships have been determined
to be variable interest entities as defined by FIN 46. At
May 31, 2004, the Companys net invested equity in
these partnerships was approximately $6.1 million. The
Company has determined that it is not the primary beneficiary of
these partnerships and, therefore, the Companys adoption
of FIN 46 in the fourth quarter of fiscal 2004 did not have
a material impact on its results of operations or financial
position.
In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which
amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities under
SFAS No. 133. This Statement clarifies under what
circumstances a contract with an initial net investment
24
In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, which establishes standards for classifying and
measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of
both liabilities and equity. SFAS No. 150 was
effective for all financial instruments entered into or modified
after May 31, 2003. The Company currently does not issue
financial instruments covered within the scope of
SFAS No. 150 and, therefore, the adoption of this
standard did not have an impact on its results of operations or
financial position.
Market Risk Factors
Changes in interest rates and interest rate
risk:
Funds held for clients are
primarily comprised of short-term funds and available-for-sale
debt securities, and corporate investments are primarily
comprised of available-for-sale debt securities. Changes in
interest rates will impact the earnings potential of future
investments and will cause fluctuations in the market value of
the Companys longer-term available-for-sale investments.
The Company generally directs investments towards
high-credit-quality, fixed-rate municipal and government
securities and manages the available-for-sale portfolio to a
benchmark duration of two and one-half to three years. The
Company does not utilize derivative financial instruments to
manage interest rate risk.
The Companys investment portfolios and the
earnings from these portfolios have been impacted by the
decreasing interest rate environment, as the federal funds rate
decreased from 6.50% at the end of fiscal 2000 to 1.00% at May
31, 2004. The decreasing interest rate environment has
negatively affected net income growth in fiscal years 2004,
2003, and 2002, and generated significant unrealized gains for
the Companys longer-term available-for-sale portfolio
during most of the same periods. The Company has mitigated some
of the impact of lower interest rates on earnings by realizing
gains from the sale of investments. When interest rates begin to
rise, the full benefit of higher interest rates will not
immediately be reflected in net income due to the interaction of
long- and short-term interest rate changes, as discussed below.
Increases in interest rates increase earnings
from the Companys short-term investments, which totaled
approximately $1.5 billion at May 31, 2004, and over
time will increase earnings from the Companys longer-term
available-for-sale investments, which totaled approximately
$1.4 billion at May 31, 2004. Earnings from the
available-for-sale investments, which currently have an average
duration of 2.1 years, will not reflect increases in
interest rates until the investments are sold or mature and the
proceeds are reinvested at higher rates. An increasing rate
environment will generally result in a decrease in the fair
value of the Companys investment portfolio.
25
The following table summarizes the changes in the
Federal Funds rate over the past three fiscal years:
On June 29, 2004, the Federal Funds rate was
increased to 1.25%.
Calculating the future effects of changing
interest rates involves many factors. These factors include, but
are not limited to, daily interest rate changes, seasonal
variations in investment balances, actual duration of short-term
and available-for-sale investments, the proportional mix of
taxable and tax-exempt investments, and changes in tax-exempt
municipal rates versus taxable investment rates, which are not
synchronized or simultaneous. Subject to these factors, a
25-basis-point change generally affects the Companys
tax-exempt interest rates by approximately 17 basis points.
The total investment portfolio is expected to
average approximately $3.3 billion in fiscal 2005. The
Companys normal and anticipated allocation is
approximately 60% invested in short-term securities with an
average duration of thirty days and 40% invested in
available-for-sale municipal securities with an average duration
of two and one-half to three years. The Company estimates that
the earnings effect of a 25-basis-point change in interest rates
(17 basis points for tax-exempt investments) at the
beginning of fiscal 2005 would be in the range of
$3.5 million to $4.0 million for fiscal 2005.
The combined funds held for clients and corporate
available-for-sale investment portfolios reflected a net
unrealized loss of $4.2 million at May 31, 2004,
compared with net unrealized gains of $45.0 million at
May 31, 2003, and $26.7 million at May 31, 2002.
During the fourth quarter of fiscal 2004, interest rates on
longer-term securities began to increase while short-term rates
remained fairly consistent. The three-year AAA
municipal securities yield increased to 2.50% at May 31,
2004, from 1.58% at February 29, 2004. This trend in
longer-term interest rates resulted in a decrease in the fair
value of the Companys investment portfolios, as the
Companys $25.0 million net unrealized gain position
at February 29, 2004, changed to a $4.2 million net
unrealized loss position at May 31, 2004. During fiscal
2004, the net unrealized gain or loss position ranged from
approximately $7.6 million net unrealized loss to
$49.6 million net unrealized gain. The range of unrealized
gains in fiscal 2003 was $22.3 million to
$49.7 million. The net unrealized loss position of the
Companys investment portfolios was approximately
$.3 million at July 14, 2004. See Note D of the
Notes to Consolidated Financial Statements, included in
Item 8 of this Form 10-K, for additional disclosures
about the Companys investment portfolios.
As of May 31, 2004, and May 31, 2003,
the Company had $1.4 billion invested in available-for-sale
securities at fair value, with weighted average yields to
maturity of 2.3% and 3.1%, respectively. Assuming a hypothetical
increase in both short-term and longer-term interest rates of
25 basis points, the resulting potential decrease in fair
value for the portfolio of securities at May 31, 2004,
would be in the range of $7.0 million to $7.5 million.
Conversely, a corresponding decrease in interest rates would
result in a comparable increase in fair value. This hypothetical
decrease or increase in the fair value of the portfolio would be
recorded as an adjustment to the portfolios recorded
value, with an offsetting amount recorded in stockholders
equity and with no related or immediate impact on the results of
operations.
Credit risk:
The Company is exposed to credit risk in connection with these
investments through the possible inability of the borrowers to
meet the terms of the bonds. The Company attempts to limit
credit risk by investing primarily in AAA- and AA-rated
securities and A-1-rated short-term securities, and by limiting
amounts that can be invested in any single instrument. At
May 31, 2004, all available-for-sale and short-term
securities classified as cash equivalents held an A-1 or
equivalent rating, with over 99% of available-for-sale
securities holding an AA rating or better.
26
Report of Ernst & Young LLP
Independent Registered Public Accounting Firm
Board of Directors
We have audited the accompanying consolidated
balance sheets of Paychex, Inc. as of May 31, 2004 and
2003, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended May 31, 2004. Our audits also
included the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). 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.
at May 31, 2004 and 2003, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended May 31, 2004, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
Buffalo, New York
27
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements.
28
PAYCHEX, INC.
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
29
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
See Notes to Consolidated Financial Statements.
30
PAYCHEX, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
See Notes to Consolidated Financial Statements.
31
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note A Significant Accounting
Policies
Business
activities:
Paychex, Inc. and its
wholly owned subsidiaries (the Company) are a
national provider of payroll, human resource, and employee
benefits outsourcing solutions for small- to medium-sized
businesses in the United States. The Company reports one segment
based upon the provision of Statement of Financial Accounting
Standard (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information.
Total revenues are comprised of service revenues
and interest on funds held for clients. Service revenues are
comprised of the Payroll and Human Resource and Benefits product
lines. Payroll service revenues are earned primarily from
payroll processing, tax filing and payment services, employee
payment services, and other ancillary services. Employee payment
services include the Direct Deposit, Readychex, and Access Card
product lines.
Payroll processing services include the
preparation of payroll checks; internal accounting records;
federal, state, and local payroll tax returns; and collection
and remittance of payroll obligations for small- to medium-sized
businesses.
In connection with the automated tax filing and
payment services, the Company collects payroll taxes
electronically from clients bank accounts typically on
payday, prepares and files the applicable tax returns, and
remits taxes to the appropriate taxing authorities on the due
date. These collections from clients are typically paid between
one and thirty days after receipt, with some items extending to
ninety days. The Company handles all regulatory correspondence,
amendments, and penalty and interest disputes, and is subject to
cash penalties imposed by tax authorities for late filings and
late or underpayment of taxes. With employee payment services,
employers are offered the option of paying their employees by
Direct Deposit, Access Card, a check drawn on a Paychex account
(Readychex), or a check drawn on the employers account.
For the first three methods, net payroll is collected
electronically from the clients bank account typically one
day before the payroll date and provides payment to the employee
on payday. In connection with both the tax filing and payment
and employee payment services, authorized electronic money
transfers from client bank accounts are subject to potential
risk of loss resulting from insufficient funds to cover such
transfers.
In addition to service fees paid by clients, the
Company earns interest on funds that are collected before due
dates and invested (funds held for clients) until remittance to
the applicable tax authorities or client employees. The funds
held for clients and related client deposit liability are
included in the Consolidated Balance Sheets as current assets
and current liabilities. The amount of funds held for clients
and related client deposit liability varies significantly during
the year.
The Human Resource and Benefits product line
provides small- to medium-sized businesses with 401(k) Plan
Recordkeeping, Workers Compensation Insurance
Administration, Section 125 Plan Administration, Group
Benefits, State Unemployment Insurance, and Employee Management
Services. The Companys Paychex Administrative Services
(PAS) product provides a combined package of payroll,
employer compliance, employee benefits administration, and risk
management outsourcing services designed to make it easier for
businesses to manage their payroll and related benefits costs.
The Company also operates a Professional Employer Organization
(PEO), which provides primarily the same combined package of
services as the PAS product, but with Paychex acting as a
co-employer of the clients employees.
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 and cash
equivalents:
Cash and cash
equivalents consist of available cash, money market securities,
and other investments with a maturity of three months or less
when purchased. Amounts reported in the Consolidated Balance
Sheets approximate fair values.
32
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts receivable,
net:
Accounts receivable balances
are shown on the Consolidated Balance Sheets net of the
allowance for doubtful accounts of $3.3 million and
$2.2 million at May 31, 2004 and 2003, respectively.
Amounts reported in the Consolidated Balance Sheets approximate
fair values.
Funds held for clients and corporate
investments:
Marketable securities
included in funds held for clients and corporate investments
consist primarily of debt securities classified as available for
sale and are recorded at fair value obtained from an independent
pricing service. Funds held for clients also include cash, money
market securities, and short-term investments. Unrealized gains
and losses, net of applicable income taxes, are reported as
accumulated other comprehensive income in the Consolidated
Statements of Stockholders Equity. Realized gains and
losses on the sale of securities are determined by specific
identification of the securitys cost basis. On the
Consolidated Statements of Income, realized gains and losses
from funds held for clients are included in interest on funds
held for clients and realized gains and losses from corporate
investments are included in investment income, net.
Concentrations:
Substantially all of the Companys deposited cash is
maintained at two large credit-worthy financial institutions.
These deposits may exceed the amount of any insurance provided.
All of the Companys deliverable securities are held in
custody with one of the two aforementioned financial
institutions, for which that institution bears the risk of
custodial loss. Non-deliverable securities, primarily time
deposits and money market securities, are restricted to
credit-worthy broker-dealers and financial institutions.
Property and equipment,
net:
Property and equipment is
stated at cost, less accumulated depreciation and amortization.
Depreciation is based on the estimated useful lives of property
and equipment using the straight-line method. The estimated
useful lives of depreciable assets are generally ten to
thirty-five years for buildings and improvements, two to seven
years for data processing equipment, three to five years for
software, seven years for furniture and fixtures, and two to ten
years for leasehold improvements. The Company reviews the
carrying value of property and equipment, including capitalized
software, for impairment when events or changes in circumstances
indicate that the carrying value of such assets may not be
recoverable.
Software development and
enhancements:
Expenditures for
major software purchases and software developed for internal use
are capitalized and depreciated using the straight-line method
over the estimated useful lives of the related assets, which are
generally three to five years. For software developed for
internal use, all external direct costs for materials and
services and certain payroll and related fringe benefit costs
are capitalized in accordance with Statement of Position
(SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.
Goodwill and other intangible assets,
net:
The Company has recorded
goodwill in connection with the acquisitions of businesses
during fiscal 2003 and fiscal 2004, which are discussed in
Note B of the Notes to Consolidated Financial Statements.
Under the provisions of SFAS No. 142, goodwill is
tested for impairment on an annual basis and between annual
tests if an event occurs or circumstances change in a way to
indicate that there has been a potential decline in the fair
value of the reporting unit. Impairment is determined by
comparing the fair value of the reporting unit to its carrying
amount, including goodwill. The Companys business is
largely homogeneous and, as a result, substantially all the
goodwill is associated with one reporting unit. The Company
performs its annual impairment testing at the beginning of the
fourth fiscal quarter. Based on the Companys review, no
impairment loss was recognized in the results of operations for
fiscal 2004.
Intangible assets are primarily comprised of
client list acquisitions and license agreements with
independently owned associate offices and are reported net of
accumulated amortization on the Consolidated Balance Sheets.
Intangible assets are amortized over periods generally ranging
from five to twelve years using either straight-line or
accelerated methods. The Company tests intangible assets for
impairment when events or changes in circumstances indicate that
the carrying value may not be recoverable.
Other long-term
assets:
Other long-term assets are
primarily related to the Companys investment as a limited
partner in various low-income housing partnerships. These
partnerships were determined to be
33
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
variable-interest entities as defined by FASB
Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities. The Company is not the primary
beneficiary of these variable interest entities and, therefore,
does not consolidate them in the Companys results of
operations and financial position. The investments in these
partnerships are accounted for under the equity method, with the
Companys share of partnership losses recorded in
investment income, net on the Consolidated Statements of Income.
The net investment in these entities recorded on the
Consolidated Balance Sheets was $6.1 million at
May 31, 2004, and $6.5 million at May 31, 2003.
Revenue
recognition:
Service revenues are
recognized in the period services are rendered and earned under
service arrangements with clients where service fees are fixed
or determinable and collectibility is reasonably assured.
Certain processing services are provided under annual service
arrangements with revenue recognized ratably over the annual
service period. The Companys service revenues are largely
attributable to payroll-related processing services where the
fee is based on a fixed amount per processing period or a fixed
amount per processing period plus a fee per employee or
transaction processed. Paychex provides delivery service for
many of its clients payroll checks and reports. The
revenue earned from delivery service is included in service
revenues, and the costs for the delivery are included in
operating costs on the Consolidated Statements of Income.
Professional Employer Organization
(PEO) revenues are included in service revenues and are
reported net of direct costs billed and incurred for PEO
worksite employees, which include wages, taxes, benefit
premiums, and claims of PEO worksite employees. Direct costs
billed and incurred were $1,846.1 million,
$1,460.7 million, and $1,056.9 million for fiscal
2004, 2003, and 2002, respectively.
Interest on funds held for clients is earned
primarily on tax filing and payment and employee payment
services funds that are collected before due dates and invested
(funds held for clients) until remittance to the applicable tax
authorities or client employees. These collections from clients
are typically remitted between one and thirty days after
receipt, with some items extending to ninety days. The interest
earned on these funds is included in total revenues on the
Consolidated Statements of Income because the collection,
holding, and remittance of these funds are critical components
of providing these services. Interest on funds held for clients
also includes net realized gains and losses from the sale of
available-for-sale securities.
PEO workers compensation
insurance:
For fiscal 2003,
workers compensation insurance for PEO worksite employees
was provided under a pre-funded deductible workers
compensation policy with a national insurance company. Under
this policy, the Companys maximum individual claims
expense was $250,000 and the aggregate claims exposure was based
on a percentage of premium rates as applied to workers
compensation payroll.
Based on claims experience, during the third
quarter of fiscal 2004, the Company recorded approximately
$6.4 million of net incremental PEO revenue resulting from
a refund of insurance premiums and a reduction in estimated
claims loss exposure under the fiscal 2003 policy. The fiscal
2004 policy is similar to the fiscal 2003 policy, except that
the Companys maximum individual claims liability is
$500,000. At May 31, 2004, the Company has recorded
$1.8 million in other current liabilities for workers
compensation claims cost based on the estimated loss exposure
under the fiscal 2003 policy, and an estimated prepayment of
$5.0 million under the fiscal 2004 policy in prepaid
expenses and other current assets. These estimates may change in
the future based on claims experience trends.
Income taxes:
The Company accounts for deferred taxes by recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The Company
accounts for the tax benefit
34
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from the exercise of non-qualified stock options
by reducing its accrued income tax liability and increasing
additional paid-in capital.
Stock-based compensation
costs:
SFAS No. 123,
Accounting for Stock-Based Compensation, establishes
accounting and reporting standards for stock-based employee
compensation plans. As permitted by SFAS No. 123, the
Company accounts for such arrangements under Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, no compensation expense is
recognized for stock option grants because the exercise price of
the stock options equals the market price of the underlying
stock on the date of the grant.
In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure. SFAS No. 148 provides
alternate methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the previous
disclosure requirements of SFAS No. 123 to require
prominent disclosures about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported financial results and requires these
disclosures in interim financial information. The Company
continues to account for stock-based employee compensation under
APB Opinion 25, but adopted the new disclosure requirements
of SFAS No. 148 beginning in the third quarter of
fiscal 2003.
The following table illustrates the pro forma
effect on net income and earnings per share as if the Company
had applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation.
For purposes of pro forma disclosures, the
estimated fair value of the stock option is amortized to expense
over the options vesting period. The weighted-average fair
value of stock options granted for the years ended May 31,
2004, 2003, and 2002 was $9.61, $8.66, and $11.78 per
share, respectively. The fair value of these stock options was
estimated at the date of the grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
35
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additional information related to the
Companys stock option plans is detailed in Note G of
the Notes to Consolidated Financial Statements.
Use of
estimates:
The preparation of
financial statements in conformity with U.S. generally
accepted accounting principles requires management to make
estimates, judgments, and assumptions that affect reported
amounts of assets, liabilities, revenues, and expenses during
the reporting period. Actual amounts and results could differ
from these estimates.
Newly issued accounting
standards:
In August 2001, the
FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which requires companies to record
a liability at fair value for asset retirement obligations in
the period in which they are incurred. The associated asset
retirement costs are capitalized as part of the carrying amount
of the long-lived asset. This Statement was effective for the
Company for the fiscal year beginning June 1, 2003. The
Company adopted this Statement in the first quarter of fiscal
2004, with no material impact on its results of operations or
financial position.
In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities. A variable interest entity is
an entity that has: (1) an insufficient amount of equity to
absorb the entitys losses; (2) equity owners that do
not have voting rights; or (3) equity that does not absorb
the entitys losses or residual returns. FIN 46
requires a variable interest entity to be consolidated by its
primary beneficiary, which is the company that is subject to a
majority of the risk of loss from the entitys activities,
or is entitled to receive a majority of the entitys
residual returns, or both. For Paychex, the effective date for
application of FIN 46 to variable interest entities created
before February 1, 2003, was the fourth quarter of fiscal
2004. The Company has investments in various U.S. real
estate partnership arrangements, which provide income tax
credits for the Company. These partnerships have been determined
to be variable interest entities as defined by FIN 46. At
May 31, 2004, the Companys net invested equity in
these partnerships was approximately $6.1 million. The
Company has determined that it is not the primary beneficiary of
these partnerships and, therefore, the Companys adoption
of FIN 46 in the fourth quarter of fiscal 2004 had no
material impact on its results of operations or financial
position.
In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which
amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities under
SFAS No. 133. This Statement clarifies under what
circumstances a contract with an initial net investment meets
the characteristic of a derivative under SFAS No. 133,
and clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows.
SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The
Company currently does not utilize derivative instruments and,
therefore, the adoption of this standard did not have an impact
on its results of operations or financial position.
In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, which establishes standards for classifying and
measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of
both liabilities and equity. SFAS No. 150 was
effective for all financial instruments entered into or modified
after May 31, 2003. The Company currently does not issue
financial instruments covered within the scope of
SFAS No. 150 and, therefore, the adoption of this
standard did not have an impact on its results of operations or
financial position.
Reclassifications:
Certain prior year amounts have been reclassified to conform to
current year presentation. These reclassifications had no effect
on reported consolidated earnings.
36
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note B Business
Combinations
Fiscal 2003 acquisitions:
In fiscal 2003, Paychex acquired
two comprehensive payroll processors that serviced small- to
medium-sized businesses throughout the United States. On
September 20, 2002, the Company acquired Advantage Payroll
Services, Inc. (Advantage) for $314.4 million
in cash including the redemption of preferred stock and the
repayment of outstanding debt of Advantage. On April 1,
2003, Paychex acquired InterPay, Inc. (InterPay), a
wholly owned subsidiary of FleetBoston Financial Corporation
(Fleet®), for $182.3 million in cash.
These acquisitions provided Paychex with over
80,000 new clients and geographic coverage into some areas that
were previously not served by the Company. In addition, the
integration of these companies provides Paychex the opportunity
to achieve economies of scale in providing services to its
clients. Results of operations for Advantage and InterPay are
included in the Consolidated Statements of Income from their
respective acquisition dates.
Advantage has license agreements with fifteen
independently owned associate offices. The associate offices are
responsible for selling and marketing Advantage services and
performing certain operational functions. Advantage provides all
centralized back-office payroll processing and tax filing
services for the associate offices, including the billing and
collection of processing fees and the collection and remittance
of payroll and payroll tax funds pursuant to Advantages
service arrangement with associate customers. Commissions earned
by the associate offices are based on the processing activity
for the related clients. Revenue generated from customers as a
result of these relationships and commissions paid to associates
are included in the Consolidated Statements of Income as service
revenues and selling, general, and administrative expense,
respectively.
Purchase price allocations:
The cost to acquire Advantage and
InterPay has been allocated to the assets acquired and
liabilities assumed according to estimated fair values at the
respective dates of acquisition. During fiscal year 2004, the
Company recorded adjustments to the estimated fair values and
for additional purchase price required, which increased goodwill
by $.4 million. The following table summarizes the
estimated fair values of the assets acquired and liabilities
assumed for each of the acquired entities.
The amounts assigned to funds held for clients
represent investments in marketable securities, primarily money
markets and other cash equivalents as well as mutual funds and
debt securities, which are classified as available-for-sale
securities. These investments were recorded at fair value
obtained from an independent pricing service as of the
acquisition date. The amounts assigned to client fund deposits
liability represent the cash collected from clients for payroll
and tax payment obligations, which had not yet been remitted to
the related client employees or tax agencies.
37
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amounts assigned to intangible assets
primarily represent client lists and license agreements with
associate offices and were based on independent appraisals. The
intangible assets will be amortized over periods generally
ranging from five to twelve years using either accelerated or
straight-line methods, based on the provisions of
SFAS No. 142, Goodwill and Other Intangible
Assets.
In connection with the acquisitions of Advantage
and InterPay, the Company recorded $10.0 million of
severance and $5.9 million of redundant lease liabilities
in the allocation of the purchase price under Emerging Issues
Task Force (EITF) 95-3, Recognition of Liabilities in
Connection with a Purchase Combination.
The Advantage purchase price allocation included
$1.8 million of severance and $3.3 million of
redundant lease liabilities. Approximately $1.4 million was
paid in fiscal 2003, and $1.4 million was paid in fiscal
2004, for Advantage severance and redundant lease costs. The
purchase price allocation for InterPay included
$8.2 million of severance and $2.6 million of
redundant lease liabilities. Approximately $3.3 million was
paid in fiscal 2003, and $2.8 million was paid in fiscal
2004, for InterPay severance and redundant lease costs. The
severance payments for both acquisitions are expected to be
substantially complete by the end of fiscal 2005. The majority
of the redundant lease payments are expected to be complete in
fiscal 2007, with the remaining payments extending until 2015.
The amount of goodwill allocated to the Advantage
purchase price was $241.8 million, which is not deductible
for tax purposes. The amount of goodwill allocated to the
InterPay purchase price was $152.2 million, nearly all of
which is expected to be deductible for tax purposes as the
acquisition includes a section 338(h)(10) tax election.
Pro forma financial information:
The following table sets forth the
unaudited pro forma results of operations of the Company for the
years ended May 31, 2003 and May 31, 2002,
respectively. The unaudited pro forma financial information
summarizes the results of operations for the periods indicated
as if the Advantage and InterPay acquisitions had occurred at
the beginning of each of the annual periods presented. The pro
forma information contains the actual combined operating results
of Paychex, Advantage, and InterPay, with the results prior to
the acquisition date adjusted to include the pro forma impact
of: the amortization of acquired intangible assets, the
elimination of Advantages interest expense and preferred
stock dividends, and lower interest income as a result of the
sale of available-for-sale securities to fund the two
acquisitions. The Company realized a total of $10.5 million
of gains related to the sale of corporate investments to fund
the acquisitions. These gains are included in each pro forma
period presented as if they occurred at the beginning of that
period. These pro forma amounts do not purport to be indicative
of the results that would have actually been obtained if the
acquisitions occurred as of the beginning of each of the periods
presented or that may be obtained in the future.
Fiscal 2004 acquisition:
During fiscal 2004, the Company
expanded its product offerings to include time and attendance
products. Effective April 12, 2004, Paychex acquired
substantially all the assets and certain liabilities of
Stromberg LLC (Stromberg), a provider of time and
attendance software solutions for mid- to large-sized
businesses, for approximately $13.6 million. The Company
paid $12.6 million at the date of acquisition and an
additional $1.0 million is expected to be paid in the
fourth quarter of fiscal 2005. Paychex had purchased
Strombergs Time In A Box product, a time and
attendance solution for small- to medium-
38
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sized businesses, in October 2003. The purchase
price was allocated to the assets and liabilities of Stromberg
based on their fair values as follows:
The amount assigned to property and equipment
primarily represents the fair value of software and is based
upon an independent appraisal. The goodwill balance is
deductible for tax purposes.
Note C Basic and Diluted
Earnings Per Share
Basic and diluted earnings per share were
calculated as follows:
Weighted-average anti-dilutive stock options to
purchase shares of common stock were excluded from the
computation of diluted earnings per share. These options had an
exercise price that was greater than the average market price of
the common shares for the period; therefore, the effect would
have been anti-dilutive.
39
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note D Funds Held for Clients
and Corporate Investments
Funds held for clients and corporate investments
at May 31, 2004 and 2003, are as follows:
The Company is exposed to credit risk from the
possible inability of the borrowers to meet the terms of their
bonds. In addition, the Company is exposed to interest rate
risk, as rate volatility will cause fluctuations in the market
value of held investments and the earnings potential of future
investments. The Company attempts to limit these risks by
investing primarily in AAA- and AA-rated securities and
A-1-rated short-term securities, limiting amounts that can be
invested in any single instrument, and by investing in short- to
intermediate-term instruments whose market value is less
sensitive to interest rate changes. At May 31, 2004, all
short-term securities classified as cash equivalents and all
available-for-sale securities held at least an A-1 or equivalent
rating, with over 99% of the available-for-sale bond securities
holding an AA rating or better. The Company does not utilize
derivative financial instruments to manage interest rate risk.
Unrealized gains and losses of the
available-for-sale securities, are as follows:
The $11.1 million in gross unrealized losses
are related to 257 available-for-sale debt securities, which had
a fair value of $876.0 million at May 31, 2004. These
securities have been in an unrealized loss position for less
than twelve months. The Company periodically reviews its
investment portfolios to determine if any investment is
other-than-temporarily impaired due to changes in credit risk or
other potential valuation
40
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
concerns. At May 31, 2004, Paychex believes
that the investments that it holds are not
other-than-temporarily impaired. While certain
available-for-sale debt securities have fair values that are
below cost, the Company believes that it is probable that
principal and interest will be collected in accordance with
contractual terms, and that the decline in market value is due
to changes in interest rates and not due to increased credit
risk. At May 31, 2004, all bond securities in an unrealized
loss position held and AA rating or better. The Company
currently believes that it has the ability and intent to hold
these investments until the earlier of market price recovery or
maturity. The Companys assessment that an investment is
not other-than-temporarily impaired could change in the future
due to new developments or changes in the Companys
strategies or assumptions related to any particular investment.
Realized gains and losses are as follows:
The cost and fair value of available-for-sale
securities at May 31, 2004, 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.
41
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note E Property and
Equipment, Net
The components of property and equipment, net are
as follows:
Depreciation expense was $39.2 million,
$33.9 million, and $27.0 million, for fiscal years
2004, 2003, and 2002, respectively.
Construction in progress at May 31, 2004,
and May 31, 2003, primarily represents costs for software
being developed for internal use.
Note F Intangible Assets,
Net
The components of intangible assets, net are as
follows:
Amortization expense on intangible assets was
$16.6 million, $9.5 million, and $2.5 million for
fiscal years 2004, 2003, and 2002, respectively.
42
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated amortization expense for the next
five fiscal years relating to intangible asset balances as of
May 31, 2004, is as follows:
Note G Stock Option
Plans
On July 11, 2002, the Board of Directors of
the Company adopted the Paychex, Inc. 2002 Stock Incentive Plan
(2002 Plan), which became effective upon stockholder
approval at the Companys Annual Meeting of Stockholders on
October 17, 2002. The 2002 Plan authorizes the granting of
options to purchase up to 9.1 million shares of the
Companys common stock, of which 1.6 million shares
were authorized by the stockholders for the Paychex, Inc. 1998
Stock Incentive Plan (1998 Plan), but were not
optioned under the 1998 Plan, and 7.5 million shares were
newly authorized for options. At May 31, 2004, there were
5.5 million shares available for future grants under this
Plan.
No future grants will be made from the 1998 Plan,
or the 1995 and 1992 Stock Incentive Plans, which expired in
August 1998 and 1995, respectively. However, options to
purchase 7.0 million shares under these three plans
remain outstanding at May 31, 2004.
The exercise price for the shares subject to
options of the Companys common stock is equal to the fair
market value on the date of the grant. All stock option grants
have a contractual life of ten years from the date of the grant.
Non-qualified stock option grants vest at 33.3% after two years
of service from the date of the grant, with annual vesting at
33.3% thereafter.
The Company has granted stock options to
employees in the following broad-based incentive stock option
grants:
Subsequent to each of the broad-based grants,
each April and October, the Company granted options to newly
hired employees who met certain criteria.
43
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock option
activity for the three years ended May 31, 2004:
The following table summarizes information about
stock options outstanding and exercisable at May 31, 2004:
44
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note H Income Taxes
The components of deferred tax assets and
liabilities are as follows:
The components of the provision for income taxes
are as follows:
45
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the U.S. federal
statutory tax rate to the effective rates reported for income
before taxes for the three years ending May 31, 2004, is as
follows:
As of May 31, 2004, the Company had
approximately $1.4 million in acquired operating loss
carryforwards available to offset future taxable income. The
acquired operating loss carryforwards expire through the year
2022. The Company believes that future taxable income will be
sufficient to fully utilize these operating loss carryforwards.
Note I Other Comprehensive
Income
The following table sets forth the related tax
effects allocated to unrealized gains and losses on
available-for-sale securities, which is the only component of
other comprehensive income:
At May 31, 2004, accumulated other
comprehensive loss was $2.7 million, net of tax of
$1.5 million. At May 31, 2003, accumulated other
comprehensive income was $28.7 million, net of tax of
$16.3 million.
Note J Supplemental Cash Flow
Information
Income taxes
paid:
The Company paid state and
federal income taxes of $145.7 million,
$126.3 million, and $98.7 million for the years ended
May 31, 2004, 2003, and 2002, respectively.
Non-cash financing
transactions:
The Company recorded
the tax benefit from the exercise of non-qualified stock options
as a reduction of its income tax liability in the amount of
$10.2 million, $5.5 million, and $24.1 million
for the years ended May 31, 2004, 2003, and 2002,
respectively.
Note K Employee Benefit
Plans
401(k) Plans:
The Company maintains contributory savings plans that qualify
under Section 401(k) of the Internal Revenue Code. The
Paychex, Inc. 401(k) Incentive Retirement Plan allows all
employees to immediately participate in the salary deferral
portion of the Plan, contributing up to a maximum of 50% of
46
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
their salary. Employees who have completed one
year of service are eligible to receive a company matching
contribution. The Company currently matches 50% of an
employees voluntary contribution up to 6% of a
participants gross wages.
This Plan is 100% participant-directed. Plan
participants can fully diversify their portfolios by choosing
from any or all investment fund choices in the Plan. Transfers
in and out of investment funds, including the Paychex, Inc. ESOP
Stock Fund (Stock Fund), are not restricted in any
manner. The Company match contribution follows the same fund
elections as the employee compensation deferrals.
Effective April 15, 2002, the Plan was
amended to add an Employee Stock Ownership Plan
(ESOP) feature to the Stock Fund under section 404(k)
of the Internal Revenue Code. Under this ESOP feature,
participants have voting rights for their ownership of Paychex
stock within the Plan. Participants are able to elect to receive
dividends on their shares of Paychex stock in the form of cash
or have them reinvested into the Stock Fund.
On February 28, 2003, the Advantage Business
Services Holdings, Inc. 401(k) Incentive Plan was merged into
the Paychex, Inc. 401(k) Incentive Retirement Plan. On
January 2, 2004, the InterPay, Inc. 401(k) Retirement Plan
was merged into the Paychex, Inc. 401(k) Incentive Retirement
Plan.
Company contributions to the 401(k) plans for the
years ended May 31, 2004, 2003, and 2002 were
$7.1 million, $6.3 million, and $5.7 million,
respectively.
Deferred Compensation
Plans:
The Company offers a
non-qualified Deferred Compensation Plan to a select group of
key employees that provides these employees with the opportunity
to defer up to 100% of their annual base salary and bonus. This
Plan also allows non-employee Directors to defer 100% of their
Board compensation. The amounts accrued under this Plan were
$4.5 million and $3.4 million at May 31, 2004 and
2003, respectively, and are reflected in other long-term
liabilities in the accompanying Consolidated Balance Sheets.
Prior to the April 1, 2003 acquisition,
InterPay entered into various salary continuation agreements
with certain former employees. These agreements provide for
benefits to these retired employees, and in certain cases to
their beneficiaries, for life or other designated periods
through 2015. The amounts accrued under these agreements were
$1.9 million and $2.1 million at May 31, 2004 and
2003, respectively, and represent the estimated present value of
the benefits earned under these agreements.
Employee Stock Purchase
Plan:
The Company offers an
Employee Stock Purchase Plan under which eligible employees may
purchase common stock of the Company at current market prices.
All transactions occur directly through the Companys
Transfer Agent and no brokerage fees are charged to employees,
except for when stock is sold.
Note L Commitments and
Contingencies
Lines of
credit:
The Company has borrowing
capacity available under three uncommitted, short-term lines of
credit with financial institutions at market rates of interest
as follows:
The primary uses of the lines of credit would be
to meet short-term funding requirements related to client fund
deposit obligations or to fund normal business operations, if
necessary. The secured line of credit is collateralized
primarily by securities in the Companys investment
portfolios. No amounts were outstanding
47
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
against these lines of credit during fiscal 2004
or at May 31, 2004 and 2003. The Company expects to renew
the short-term line of credit which expires at the end of July
2004.
Letters of
credit:
The Company had standby
letters of credit outstanding totaling $8.4 million and
$7.1 million at May 31, 2004 and 2003, respectively,
which are required for certain insurance policies. The letters
of credit outstanding at May 31, 2004, expire at various
dates between December 2004 and December 2005. In June 2004, the
Company entered into a $24.5 million letter of credit
arrangement to secure a commitment for an insurance policy. The
letters of credit are secured by securities in the
Companys investment portfolios.
Contingencies:
The Company is subject to various claims and legal matters that
arise in the normal course of business. These include disputes
related to breach of contract, employment-related claims,
intellectual property infringement, and other matters.
The Company and its wholly owned subsidiary,
Rapid Payroll, Inc., are defendants in twenty-two lawsuits
pending in Los Angeles Superior Court and the United States
District Court for the Central District of California brought by
licensees of payroll processing software owned by Rapid Payroll.
In August of 2001, Rapid Payroll informed seventy-six licensees
that it intended to stop supporting the software in August of
2002. Thereafter, thirty lawsuits were commenced by licensees
asserting various claims, including breach of contract and
related tort and fraud causes of action. These lawsuits seek
compensatory damages, punitive damages, and injunctive relief
against Rapid Payroll, the Company, its Chief Executive Officer,
and its Senior Vice President of Sales and Marketing. In
accordance with the Companys indemnification agreements
with its senior executives, the Company will defend and, if
necessary, indemnify the individual defendants as it relates to
these pending matters. On July 5, 2002, the federal court
entered a preliminary injunction requiring that Rapid Payroll
and the Company continue to support and maintain the subject
software pursuant to the license agreements. The Company has
reached resolutions with certain licensees, resulting in the
dismissal of eight lawsuits, which included payments totaling
approximately $1.6 million. The Company, Rapid Payroll, and
the individual defendants are vigorously defending the remaining
twenty-two actions, which are in various stages. Among other
defenses, Rapid Payroll asserts that its liability is limited,
by express contractual provisions, to the amount of fees paid
under the license agreements. The Company and other defendants
have been granted several motions for summary judgment
dismissing various claims, and other such motions are pending or
anticipated upon completion of discovery.
On June 18, 2004, a Superior Court jury
found that Rapid Payroll had breached its license agreement with
Payroll Partnership, L.P. and two related entities. The jury
awarded approximately $6.4 million in compensatory damages
against Rapid Payroll, which plans to file post-trial motions
and, if necessary, to appeal. The Superior Court dismissed other
claims against Rapid Payroll, the Company, and the individual
defendants, including fraud and tort causes of action. The six
remaining state court cases are to be tried one after the other
in Superior Court, beginning with a jury trial currently
scheduled to begin on August 23, 2004. Discovery and
motions are continuing in the federal court cases, with the
first trial currently scheduled to start in January 2005.
Based on the application of SFAS No. 5,
Accounting for Contingencies, the Company is
required to record a reserve if it believes an unfavorable
outcome is probable and the amount of the probable loss can be
reasonably estimated. During the third and fourth quarters of
fiscal 2004, the Company recorded $9.2 million and
$26.6 million, respectively, in expense to increase the
reserve for the estimated costs associated with the resolution
of pending legal matters. The legal reserve totaled
$35.0 million and $1.1 million at May 31, 2004,
and May 31, 2003, respectively, and is included in other
current liabilities on the Consolidated Balance Sheets. This
reserve may change in the future due to new developments or
changes in the Companys strategies.
In light of the legal reserve recorded, the
Companys management currently believes that resolution of
these matters will not have a material adverse effect on the
Companys financial position or results of
48
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operations. However, these matters are subject to
inherent uncertainties and there exists the possibility that the
ultimate resolution of these matters could have a material
adverse impact on the Companys financial position and the
results of operations in the period in which any such effect is
recorded.
Lease
commitments:
The Company leases
office space and data processing equipment under terms of
various operating leases, with most data processing equipment
leases containing a purchase option at prices representing the
fair value of the equipment at expiration of the lease term.
Rent expense for the years ended May 31, 2004, 2003, and
2002 was $37.7 million, $36.6 million, and
$33.9 million, respectively. At May 31, 2004, future
minimum lease payments under various non-cancelable operating
leases with terms of more than one year are as follows:
The amounts shown above for operating leases
include obligations under redundant leases related to Advantage
and InterPay.
Other
commitments:
At May 31, 2004,
the Company had outstanding commitments under purchase orders
and legally binding contractual arrangements with minimum future
payment obligations of approximately $32.8 million,
including $5.4 million of commitments to purchase capital
assets.
In the normal course of business, the Company
makes representations and warranties that guarantee the
performance of the Companys services under service
arrangements with clients. The Company has entered into
indemnification agreements with its Officers and Directors,
which require the Company to defend and, if necessary, indemnify
these individuals for certain pending or future legal claims as
they relate to their services to Paychex and its subsidiaries.
Historically, there have been no material losses related to such
guarantees and indemnifications.
Paychex currently self-insures the deductible
portion of various insured exposures under certain employee
benefit plans. The Companys estimated loss exposure under
these insurance arrangements is recorded in other current
liabilities. Historically, the amounts accrued have not been
material.
Note M Related
Parties
During the fiscal years 2004, 2003, and 2002, the
Company purchased approximately $1.2 million,
$2.6 million, and $11.2 million, respectively, of data
processing equipment and software from EMC Corporation, whose
President and Chief Executive Officer is a member of the Board
of Directors of Paychex.
49
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Quarterly Financial Data (Unaudited)
50
None.
Evaluation of Disclosure Controls and
Procedures:
As of the end of the
period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of
the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934, as amended (the
Exchange Act). Based on such evaluation, the
Companys Chief Executive Officer and Chief Financial
Officer have concluded that as of the end of the period covered
by this report, the Companys disclosure controls and
procedures were effective at meeting their objectives.
Changes in Internal
Controls:
There were no changes in
the Companys internal controls over financial reporting
that occurred during the Companys most recently completed
fiscal quarter that materially affected, or are reasonably
likely to materially affect, the Companys internal control
over financial reporting.
PART III
The following table shows the executive officers
of the Company as of May 31, 2004, and information
regarding their positions and business experience.
51
The additional information required is set forth
in the Companys definitive Proxy Statement for its 2004
Annual Meeting of Stockholders in the sections titled
PROPOSAL 1 ELECTION OF DIRECTORS FOR A
ONE-YEAR TERM, CORPORATE GOVERNANCE,
CODE OF ETHICS, and SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE, and is
incorporated herein by reference thereto.
The information required is set forth in the
Companys definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders in the section titled EXECUTIVE
OFFICER COMPENSATION, and is incorporated herein by
reference thereto.
The Company maintains equity compensation plans
in the form of stock option incentive plans, all of which have
been approved by the shareholders of the corporation. Currently,
stock options are granted to employees in the form of
non-qualified or incentive stock options (broad-based grants
only) from the Paychex, Inc. 2002 Stock Incentive Plan (the
2002 Plan). The 2002 Plan was adopted on
July 11, 2002, by the Board of Directors of the Company and
became effective upon stockholder approval at the Companys
Annual Meeting of Stockholders held on October 17, 2002.
There are previously granted options to purchase shares under
the 1998, 1995, and 1992 Stock Incentive Plans that remain
outstanding at May 31, 2004. There will not be any new
grants under these expired plans. Refer to
Note G Stock Option Plans in the Notes to
Consolidated Financial Statements, contained in Item 8 of
this Form 10-K, for more information on the Companys
stock option plans.
52
The following table details information on
securities authorized for issuance under the Companys
Stock Incentive Plans:
The additional information required is set forth
in the Companys definitive Proxy Statement for its 2004
Annual Meeting of Stockholders under the heading
BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS, DIRECTORS,
AND MANAGEMENT, and is incorporated herein by reference
thereto.
The information required is set forth in the
Companys definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders under the heading OTHER MATTERS
AND INFORMATION, under the sub-heading Certain
Related Transactions, and is incorporated herein by
reference thereto.
The information required is set forth in the
Companys definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders under the heading INDEPENDENT
PUBLIC ACCOUNTANTS, and is incorporated herein by
reference thereto.
PART IV
53
Paychex, Inc.
Item 1.
Business
Achieving strong financial performance while
providing high-quality, timely, accurate, and affordable payroll
processing services and value-added, comprehensive ancillary
services to meet the human resource and employee benefits needs
of the Companys client base.
Delivering these services utilizing a
well-trained and responsive work force through a network of
local and corporate offices servicing over 100 of the largest
markets in the United States.
Growing the client base, primarily through the
Companys direct sales force, while minimizing client
losses.
Capitalizing on the growth opportunities, from
within the current client base and from new clients, by
increasing utilization of the Companys payroll-related and
human resource ancillary products.
Capitalizing on and leveraging the Companys
highly developed technological and operating infrastructure.
Supplementing the Companys growth through
strategic acquisition or expansion of product offerings when
opportunities arise.
Business size
Estimated market distribution
(Number of employees)
(7.5 million businesses in areas served)
Paychex client base
74
%
37
%
20
%
44
%
4
%
13
%
1
%
4
%
1
%
2
%
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security
Holders
Item 5.
Market for Registrants Common Equity,
Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Fiscal 2004
Fiscal 2003
Sales prices
Sales prices
Cash dividends
Cash dividends
High
Low
declared per share
High
Low
declared per share
$
37.07
$
28.43
$
.11
$
34.68
$
20.15
$
.11
$
40.54
$
33.35
$
.12
$
29.93
$
21.56
$
.11
$
40.00
$
31.74
$
.12
$
29.85
$
23.74
$
.11
$
39.12
$
31.88
$
.12
$
32.19
$
23.68
$
.11
Item 6.
Selected Financial Data
In thousands, except per share amounts
Year ended May 31,
2004
2003
2002
2001
2000
$
1,240,093
$
1,046,029
$
892,189
$
786,521
$
669,319
54,254
53,050
62,721
83,336
58,800
$
1,294,347
$
1,099,079
$
954,910
$
869,857
$
728,119
$
433,315
$
401,041
$
363,694
$
336,702
$
258,893
$
302,950
$
293,452
$
274,531
$
254,869
$
190,007
$
.80
$
.78
$
.73
$
.68
$
.51
$
.47
$
.44
$
.42
$
.33
$
.22
$
3,950,203
$
3,690,783
$
2,953,075
$
2,907,196
$
2,455,577
$
$
$
$
$
$
1,199,973
$
1,077,371
$
923,981
$
757,842
$
563,432
Item 7.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
For fiscal year
2004
2003
2002
985
900
880
150
125
100
200
180
165
105
80
65
40
40
40
1,480
1,325
1,250
As of May 31,
2004
2003
2002
29,000
26,000
23,000
37,000
32,000
26,000
157,000
103,000
80,000
Paychex expanded its product line to include time
and attendance solutions products.
In the fourth quarter of fiscal 2004, Paychex
began operating a start-up payroll sales and operations facility
in Germany. This represents the first expansion of Paychex
outside of the United States.
Paychex expanded its network of offices within
the United States by opening four new offices in mid-tier
markets. The Company anticipates opening additional offices in
similar-sized markets in fiscal 2005.
In millions, except per share amounts
2004
Change
2003
Change
2002
Change
$
1,042.4
16
%
$
897.5
17
%
$
770.3
12
%
197.7
33
%
148.5
22
%
121.9
25
%
1,240.1
19
%
1,046.0
17
%
892.2
13
%
54.2
2
%
53.1
-15
%
62.7
-25
%
1,294.3
18
%
1,099.1
15
%
954.9
10
%
861.0
23
%
698.1
18
%
591.2
11
%
433.3
8
%
401.0
10
%
363.7
8
%
33
%
36
%
38
%
16.5
-46
%
30.5
-3
%
31.3
15
%
449.8
4
%
431.5
9
%
395.0
9
%
35
%
39
%
41
%
146.8
6
%
138.0
15
%
120.5
10
%
$
303.0
3
%
$
293.5
7
%
$
274.5
8
%
23
%
27
%
29
%
$
.80
3
%
$
.78
7
%
$
.73
7
%
$
433.3
8
%
$
401.0
10
%
$
363.7
8
%
54.2
2
%
53.1
-15
%
62.7
-25
%
$
379.1
9
%
$
347.9
16
%
$
301.0
19
%
31
%
33
%
34
%
35.8
6.4
29.4
$
408.5
17
%
$
347.9
16
%
$
301.0
19
%
33
%
33
%
34
%
($ in millions)
For the fiscal year ended May 31,
2004
2003
2002
$
2,515.3
$
2,176.4
$
1,852.4
446.9
547.6
686.5
$
2,962.2
$
2,724.0
$
2,538.9
1.7
%
2.3
%
2.9
%
2.3
%
3.3
%
3.7
%
1.8
%
2.5
%
3.1
%
$
11.5
$
4.0
$
9.2
7.4
13.7
6.7
$
18.9
$
17.7
$
15.9
As of May 31,
2004
2003
2002
(in millions)
$
(4.2
)
$
45.0
$
26.7
1.00
%
1.25
%
1.75
%
2.50
%
1.40
%
2.75
%
$
1,358.7
$
1,388.7
$
1,502.7
2.1
2.3
2.3
2.3
%
3.1
%
3.6
%
In millions
2004
Change
2003
Change
2002
Change
$
510.2
17
%
$
435.7
16
%
$
375.7
12
%
45.3
7
%
42.4
16
%
36.7
21
%
39.2
16
%
33.9
26
%
27.0
11
%
16.6
75
%
9.5
280
%
2.5
25
%
35.8
213.9
21
%
176.6
18
%
149.3
7
%
$
861.0
23
%
$
698.1
18
%
$
591.2
11
%
Payroll service revenue growth is projected to be
in the range of 9% to 11%.
Human Resource and Benefits service revenue
growth is expected to be in the range of 12% to 14%, reflecting
the impact of the net incremental PEO revenue benefit recorded
in fiscal 2004. Human Resource and Benefits service revenue
growth excluding total PEO revenue is expected to be in the
range of 21% to 23%.
Total service revenue growth is projected to be
in the range of 10% to 12%.
Interest on funds held for clients is expected to
decrease approximately 10% to 15%.
Total revenue growth is estimated to be in the
range of 9% to 11%.
Corporate investment income is anticipated to
decrease approximately 25% to 30%.
Net income growth is expected to be in the range
of 16% to 18%.
Growth in operating income excluding interest on
funds held for clients, the expense charges for pending legal
matters, and the net incremental PEO revenue, is expected to be
in excess of 15%.
Expiration Date
Amount Available
Secured/Unsecured
July 2004
$
150 million
Unsecured
January 2005
$
350 million
Secured
June 2005
$
100 million
Unsecured
Payments due by period
Less than
More than
In millions
Total
1 year
1-3 years
4-5 years
5 years
$
130.8
$
32.4
$
51.8
$
32.7
$
13.9
32.8
23.0
9.8
4.6
1.4
1.6
.5
1.1
$
168.2
$
56.8
$
63.2
$
33.2
$
15.0
(1)
The Companys operating leases are primarily
for office space and equipment used by its operations throughout
the United States. These amounts do not include future payments
under redundant leases related to the acquisitions of Advantage
and InterPay, which are included in the table above with other
long-term liabilities.
(2)
Purchase obligations include the Companys
estimate of the minimum outstanding commitments under purchase
orders to buy goods and services and legally binding contractual
arrangements with future payment obligations. Included in the
total purchase obligations is $5.4 million of commitments
to purchase capital assets. Amounts actually paid under some of
these arrangements may be higher due to variable components of
these agreements.
(3)
The obligations shown as other long-term
liabilities are reflected in the Consolidated Balance Sheets at
May 31, 2004, with $1.4 million in other current
liabilities and $3.2 million in other long-term
liabilities. Certain deferred compensation plan obligations and
other long-term liabilities amounting to $10.7 million are
excluded because the timing of actual payments cannot be
specifically or reasonably determined due to the variability in
assumptions required to project the timing of future payments.
In millions
2004
2003
2002
$
303.0
$
293.5
$
274.5
106.7
64.6
60.8
(19.6
)
15.6
(31.5
)
$
390.1
$
373.7
$
303.8
In millions
2004
2003
2002
$
(25.1
)
$
358.2
$
(94.7
)
(50.6
)
(60.2
)
(54.4
)
(13.2
)
(492.6
)
(2.4
)
(3.9
)
(2.2
)
$
(91.3
)
$
(198.5
)
$
(151.3
)
In millions, except per share amounts
2004
2003
2002
$
(177.4
)
$
(165.5
)
$
(157.5
)
18.3
8.2
21.0
$
(159.1
)
$
(157.3
)
$
(136.5
)
$
.47
$
.44
$
.42
Item 7A.
Quantitative and Qualitative Disclosures
About Market Risk
2004
2003
2002
1.25
%
1.75
%
4.00
%
(.25
)
(.50
)
(.50
)
(1.50
)
(.25
)
1.00
%
1.25
%
1.75
%
2.50
%
1.40
%
2.75
%
Item 8.
Financial Statements and Supplementary
Data
/s/ ERNST & YOUNG LLP
Year ended May 31,
2004
2003
2002
$
1,240,093
$
1,046,029
$
892,189
54,254
53,050
62,721
1,294,347
1,099,079
954,910
303,436
258,862
220,697
557,596
439,176
370,519
433,315
401,041
363,694
16,469
30,503
31,315
449,784
431,544
395,009
146,834
138,092
120,478
$
302,950
$
293,452
$
274,531
$
.80
$
.78
$
.73
$
.80
$
.78
$
.73
377,371
376,263
374,747
379,524
378,083
378,002
$
.47
$
.44
$
.42
May 31,
2004
2003
Assets
$
219,492
$
79,871
304,348
301,328
22,564
22,787
135,764
118,512
25,646
1,962
600
16,938
11,503
726,714
534,601
2,553,733
2,498,041
3,280,447
3,032,642
8,207
7,057
171,346
159,039
84,551
98,342
405,652
393,703
$
3,950,203
$
3,690,783
$
22,589
$
22,213
87,344
70,388
3,650
3,645
7,488
35,047
1,101
18,049
17,068
166,679
121,903
2,555,224
2,465,622
2,721,903
2,587,525
14,396
7,045
13,931
18,842
2,750,230
2,613,412
Issued: 377,968 at May 31, 2004, and 376,698 at
May 31, 2003
3,780
3,767
227,164
198,713
971,738
846,196
(2,709
)
28,695
1,199,973
1,077,371
$
3,950,203
$
3,690,783
Accumulated
Common stock
Additional
other
paid-in
Retained
comprehensive
Shares
Amount
capital
earnings
income/(loss)
Total
373,647
$
3,736
$
139,897
$
601,142
$
13,067
$
757,842
274,531
274,531
3,957
3,957
278,488
(157,481
)
(157,481
)
2,212
23
21,008
21,031
24,101
24,101
375,859
3,759
185,006
718,192
17,024
923,981
293,452
293,452
11,671
11,671
305,123
(165,448
)
(165,448
)
839
8
8,162
8,170
5,545
5,545
376,698
3,767
198,713
846,196
28,695
1,077,371
302,950
302,950
(31,404
)
(31,404
)
271,546
(177,408
)
(177,408
)
1,270
13
18,257
18,270
10,194
10,194
377,968
$
3,780
$
227,164
$
971,738
$
(2,709
)
$
1,199,973
Year ended May 31,
2004
2003
2002
$
302,950
$
293,452
$
274,531
55,837
43,378
29,509
26,954
21,177
17,883
(8,004
)
9,663
3,750
10,194
5,545
24,101
2,941
1,699
1,378
35,800
1,947
810
(18,924
)
(17,685
)
(15,853
)
223
4,457
2,971
(19,622
)
(3,102
)
(10,596
)
(5,288
)
(151
)
(2,800
)
9,798
8,320
(22,179
)
(4,720
)
6,145
1,126
390,086
373,708
303,821
(1,237,008
)
(815,714
)
(1,213,325
)
1,036,237
913,557
969,177
173,650
115,020
85,115
(87,917
)
(53,931
)
164,977
89,874
199,275
(100,672
)
(50,562
)
(60,212
)
(54,378
)
7
17
14
(13,213
)
(492,594
)
(2,395
)
(3,874
)
(2,166
)
(91,327
)
(198,456
)
(151,258
)
(177,408
)
(165,448
)
(157,481
)
18,270
8,170
21,031
(159,138
)
(157,278
)
(
136,450
)
139,621
17,974
16,113
79,871
61,897
45,784
$
219,492
$
79,871
$
61,897
Year ended May 31,
In thousands, except per share amounts
2004
2003
2002
$
302,950
$
293,452
$
274,531
9,051
9,981
12,621
$
293,899
$
283,471
$
261,910
$
.80
$
.78
$
.73
$
.78
$
.75
$
.70
$
.80
$
.78
$
.73
$
.77
$
.75
$
.69
Year ended May 31,
2004
2003
2002
2.8
%
3.6
%
4.2
%
1.4
%
1.6
%
1.2
%
.33
.35
.35
4.7
4.9
4.7
In thousands
Advantage
InterPay
Total
$
7,831
$
6,432
$
14,263
180,905
154,513
335,418
7,826
3,540
11,366
8,086
3,225
11,311
59,450
35,400
94,850
241,836
152,249
394,085
(10,887
)
(18,522
)
(29,409
)
(180,669
)
(154,513
)
(335,182
)
$
314,378
$
182,324
$
496,702
Year ended May 31,
Pro forma, unaudited, in thousands, except per share amounts
2003
2002
$
1,166,065
$
1,073,711
$
284,666
$
265,062
$
.75
$
.70
In thousands
Stromberg
$
694
2,097
950
11,567
(1,684
)
$
13,624
Year ended May 31,
In thousands, except per share amounts
2004
2003
2002
$
302,950
$
293,452
$
274,531
377,371
376,263
374,747
$
.80
$
.78
$
.73
$
302,950
$
293,452
$
274,531
377,371
376,263
374,747
2,153
1,820
3,255
379,524
378,083
378,002
$
.80
$
.78
$
.73
1,907
3,464
1,476
2004
2003
In thousands
Cost
Fair value
Cost
Fair value
$
1,494,925
$
1,494,925
$
1,407,280
$
1,407,280
739,855
736,582
751,435
776,848
162,529
163,111
204,423
211,108
397,448
396,165
387,878
400,702
62,995
62,739
20
63
20
55
1,362,847
1,358,660
1,343,756
1,388,713
4,390
4,496
3,771
3,376
$
2,862,162
$
2,858,081
$
2,754,807
$
2,799,369
$
2,555,224
$
2,553,733
$
2,465,622
$
2,498,041
306,938
304,348
289,185
301,328
$
2,862,162
$
2,858,081
$
2,754,807
$
2,799,369
Unrealized
In thousands
Gross unrealized
Gross unrealized
gains/(losses),
May 31,
gains
losses
net
$
6,928
$
(11,115
)
$
(4,187
)
$
44,985
$
(28
)
$
44,957
Year ended May 31,
In thousands
2004
2003
2002
$
19,599
$
18,165
$
16,064
(675
)
(480
)
(211
)
$
18,924
$
17,685
$
15,853
May 31, 2004
In thousands
Cost
Fair value
$
176,920
$
177,724
705,063
705,414
418,126
413,870
62,738
61,652
$
1,362,847
$
1,358,660
May 31,
In thousands
2004
2003
$
4,250
$
4,205
70,987
65,634
117,419
107,694
57,190
46,901
99,721
90,265
19,816
17,425
10,871
4,978
380,254
337,102
208,908
178,063
$
171,346
$
159,039
May 31,
In thousands
2004
2003
$
103,673
$
101,643
12,250
12,250
4,300
3,550
120,223
117,443
35,672
19,101
$
84,551
$
98,342
In thousands
Fiscal year ended May 31,
Estimated amortization expenses
$
15,792
$
13,721
$
12,003
$
10,472
$
8,993
Shares outstanding
Date of broad-based grant
Shares granted
Exercise price
at May 31, 2004
Vesting schedule
3,157,000
$
11.53
509,000
50% on May 3, 1999, 50% on May 1, 2001
1,381,000
$
21.46
530,000
25% each July in 2000 through 2003
1,295,000
$
33.17
858,000
25% each October in 2002 through 2005
1,655,000
$
37.72
1,624,000
25% each April in 2005 through 2008
Shares subject
Weighted-average
In thousands, except per share amounts
to options
exercise price
9,163
$
16.21
2,224
$
36.30
(2,212
)
$
9.51
(475
)
$
32.41
8,700
$
22.16
1,452
$
28.04
(839
)
$
9.74
(442
)
$
33.00
8,871
$
23.77
3,429
$
34.29
(1,270
)
$
14.38
(424
)
$
32.89
10,606
$
27.93
4,515
$
12.75
5,001
$
17.07
5,000
$
21.31
Options Outstanding
Options Exercisable
Weighted-
Weighted-
average
Weighted-
Shares subject
average
remaining
Shares subject
average
Range of exercise prices
to options
exercise price
contractual
to options
exercise price
per share
(in thousands)
per share
life in years
(in thousands)
per share
416
$
5.61
1.3
416
$
5.61
1,941
$
13.25
3.1
1,941
$
13.25
3,903
$
26.35
7.4
1,401
$
21.83
3,826
$
37.11
8.5
883
$
35.96
520
$
44.98
6.1
359
$
45.09
10,606
$
27.93
6.7
5,000
$
21.31
May 31,
In thousands
2004
2003
$
629
$
6,416
12,848
296
5,909
4,816
1,779
2,489
9,677
1,787
1,477
4,661
6,012
2,684
5,335
39,664
27,151
7,145
5,547
8,929
6,652
7,924
7,113
3,837
5,479
16,263
579
630
28,414
41,684
$
11,250
$
(14,533
)
Year ended May 31,
In thousands
2004
2003
2002
$
140,130
$
114,104
$
101,742
14,708
14,325
14,986
154,838
128,429
116,728
(7,657
)
9,486
3,168
(347
)
177
582
(
8,004
)
9,663
3,750
$
146,834
$
138,092
$
120,478
Year ended May 31,
2004
2003
2002
35.0
%
35.0
%
35.0
%
2.1
2.2
2.6
(3.8
)
(4.7
)
(6.1
)
(0.7
)
(0.5
)
(1.0
)
32.6
%
32.0
%
30.5
%
Year ended May 31,
In thousands
2004
2003
2002
$
(30,220
)
$
35,991
$
21,987
10,845
(13,020
)
(7,874
)
(18,924
)
(17,685
)
(15,853
)
6,895
6,385
5,697
$
(31,404
)
$
11,671
$
3,957
Expiration Date
Amount Available
Secured/Unsecured
July 2004
$
150 million
Unsecured
January 2005
$
350 million
Secured
June 2005
$
100 million
Unsecured
In thousands
Fiscal year ended May 31,
Minimum lease payments
$
34,186
$
29,265
$
24,117
$
19,838
$
13,336
$
14,966
Fiscal 2004
August 31
November 30
February 29
May 31
Year
$
295,918
$
297,559
$
328,088
$
318,528
$
1,240,093
13,335
14,540
14,518
11,861
54,254
$
309,253
$
312,099
$
342,606
$
330,389
$
1,294,347
$
115,078
$
114,815
$
116,473
$
86,949
$
433,315
3,949
5,071
3,166
4,283
16,469
119,027
119,886
119,639
91,232
449,784
38,684
39,202
39,121
29,827
146,834
$
80,343
$
80,684
$
80,518
$
61,405
$
302,950
$
.21
$
.21
$
.21
$
.16
$
.80
$
.21
$
.21
$
.21
$
.16
$
.80
376,836
377,263
377,601
377,813
377,371
378,815
379,649
379,795
379,864
379,524
$
.11
$
.12
$
.12
$
.12
$
.47
$
4,153
$
7,180
$
4,509
$
3,082
$
18,924
Fiscal 2003
August 31
November 30
February 28
May 31
Year
$
239,398
$
255,675
$
274,303
$
276,653
$
1,046,029
13,277
13,132
13,486
13,155
53,050
$
252,675
$
268,807
$
287,789
$
289,808
$
1,099,079
$
102,477
$
99,194
$
101,419
$
97,951
$
401,041
8,385
11,401
3,760
6,957
30,503
110,862
110,595
105,179
104,908
431,544
34,922
35,944
33,658
33,568
138,092
$
75,940
$
74,651
$
71,521
$
71,340
$
293,452
$
.20
$
.20
$
.19
$
.19
$
.78
$
.20
$
.20
$
.19
$
.19
$
.78
375,955
376,191
376,356
376,558
376,263
377,949
377,934
378,081
378,376
378,083
$
.11
$
.11
$
.11
$
.11
$
.44
$
3,991
$
7,860
$
732
$
5,102
$
17,685
(A):
Each quarter is a discrete period and the sum of
the four quarters basic and diluted earnings per share
amounts may not equal the full year amount.
(B):
Total net realized gains on the combined funds
held for clients and corporate investment portfolios.
Item 9.
Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 10.
Directors and Executive Officers of the
Registrant
Name
Age
Position and business experience
62
Mr. Golisano founded Paychex, Inc. in 1971 and is
Chairman, President, and Chief Executive Officer of the Company.
He also has served on the Companys Board of Directors
since 1979.
57
Mr. Morphy joined the Company in October 1995 and
was named Vice President, Director of Finance in July 1996 and
Chief Financial Officer and Secretary in October 1996. In
October 2002, he was promoted to Senior Vice President. Prior to
joining the Company, he served as Chief Financial Officer and in
other senior management capacities for over ten years at Goulds
Pumps, Incorporated.
44
Mr. Mucci joined the Company in March 2002 and
was appointed Senior Vice President, Operations, in October
2002. Prior to joining the Company, he served as President of
Telephone Operations for Frontier Communications and Chief
Executive Officer of Frontier Communications of Rochester, N.Y.
52
Mr. Turek has served as Vice President, Sales,
since April 1989. In October 2002, he was promoted to Senior
Vice President, Sales and Marketing. He has been with the
Company since 1981 and has served in various sales and
management capacities.
50
Mr. Canzano was named Vice President, Information
Technology in April 1993. He has been with the Company since
1989 and has served as Zone Sales Manager and Director of
Information Technology.
57
Mr. Kuchta joined the Company in February 1995
and was named Vice President, Organizational Development in
April 1996. From 1993 to 1995, he was principal of his own
consulting firm, and from 1989 to 1993, he served as Vice
President of Human Resources of Fisons Corporation.
Name
Age
Position and business experience
55
Mr. Miley was named Vice President, Eastern
Operations in May 2004. He joined the Company in April 2002,
serving as Regional Manager for the Southeast United States.
Prior to joining Paychex, Mr. Miley served as General
Manager, Emerging Business Services for the Southeast United
States and in various other management positions for twenty
years at Automatic Data Processing.
53
Ms. Rambo was named Vice President, Human
Resource Services, in fiscal 2001 and prior to that was Vice
President, Electronic Network Services, since October 1994. She
has been with the Company since August 1980 and has served as
Director of Electronic Network Services and as a Branch Manager.
52
Mr. Redon is Vice President, Western Operations.
He joined the Company in October 2001 as Area Vice President,
Western Operations and was promoted to his current position in
October 2002. Prior to joining Paychex, Mr. Redon served as
Vice President, Rochester Area Operations and in various other
management positions for twenty-eight years at Eastman Kodak
Company.
45
Mr. Tortorella was named Vice President, Human
Resource Services, Sales in October 2002. He has been with the
Company since 1987 and has served as Area Vice President and
Director of Human Resource Services, Sales.
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters
Number of
securities
Number of
remaining available
securities to be
for future issuance
issued upon
Weighted-average
under equity
exercise of
exercise price of
compensation
Plan category
outstanding options
outstanding options
plans
10,606,000
$
27.93
5,501,000
10,606,000
$
27.93
5,501,000
Item 13.
Certain Relationships and Related
Transactions
Item 14.
Principal Accountant Fees and
Services
Item 15.
Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
Financial Statements and Supplementary Data
The schedules required for this item are included with this
report in Item 8: Financial Statements and Supplementary
Data.
Financial statement schedules required to be
filed by Item 8 of this Form 10-K include
Schedule II Valuation and Qualifying Accounts,
which is included in Item 15(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.
Exhibits
(3)(a)
Restated Certificate of Incorporation.
(3)(b)
By-laws, as amended, are incorporated herein by
reference to the Companys Form 10-Q filed with the
Commission on March 19, 2002.
(10)(a)
Paychex, Inc. 1992 Stock Incentive Plan,
incorporated herein by reference to the Companys
Registration Statement on Form S-8, No. 33-52772.
(10)(b)
Paychex, Inc. 1995 Stock Incentive Plan,
incorporated herein by reference to the Companys
Registration Statement on Form S-8, No. 33-64389.
(10)(c)
Paychex, Inc. 1998 Stock Incentive Plan,
incorporated herein by reference to the Companys
Registration Statement on Form S-8, No. 333-65191.
(10)(d)
Paychex, Inc. 2002 Stock Incentive Plan,
incorporated herein by reference to the Companys
Registration Statement on Form S-8, No. 333-101074.
Additions/
Balance at
Additions
(deductions)
Balance
beginning
charged to
to other
Costs and
at end of
Description
of year
expenses
accounts (A)
deductions (B)
year
$
2,208
$
2,941
$
702
$
2,589
$
3,262
$
1,944
$
2,726
$
(207
)
$
3,303
$
1,160
$
2,600
$
1,699
$
432
$
2,523
$
2,208
$
1,716
$
3,304
$
593
$
3,669
$
1,944
$
3,365
$
1,378
$
$
2,143
$
2,600
$
2,938
$
9,193
$
$
10,415
$
1,716
(A): | Reflects amounts acquired in purchase transactions or adjustments to purchase price allocations. |
(B): | Uncollectible amounts written off, net of recoveries. |
54
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, on July 19, 2004.
PAYCHEX, INC.
By: /s/ B. THOMAS GOLISANO
By: /s/ JOHN M. MORPHY
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 indicated on July 19, 2004.
By: /s/ B. THOMAS GOLISANO
By: /s/ BETSY S. ATKINS*
By: /s/ G. THOMAS CLARK*
By: /s/ DAVID J. S. FLASCHEN*
By: /s/ PHILLIP HORSLEY*
By: /s/ GRANT M. INMAN*
By: /s/ J. ROBERT SEBO*
By: /s/ JOSEPH M. TUCCI*
*By: /s/ B. THOMAS GOLISANO
55
EXHIBIT 3(a): RESTATED CERTIFICATE OF INCORPORATION
OF
PAYCHEX, INC.
This Restated Certificate of Incorporation of Paychex, Inc. (the "Corporation") restates the provisions of the original Certificate of Incorporation of the Corporation and supersedes the original Certificate of Incorporation as heretofore amended or supplemented.
1. The name of the corporation (hereafter the "Corporation") is Paychex, Inc.
The name under which the Corporation was originally incorporated was BLASE T.
GOLISANO, INC.
2. The date of filing of the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware was April 26, 1979.
3. The Certificate of Incorporation is restated to read as follows:
1. The name of the corporation is Paychex, Inc.
2. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company.
3. The nature of the business or purposes to be conducted or promoted is:
To act as designated agent for persons, partnerships, firms, associations, institutions or corporations employing persons performing services for wages, salaries or other forms of compensation;
To have the control, receipt, custody or disposal of, or pay the periodically due wages, salaries or compensation of an employee or group of employees, employed by one or more of the employers who shall designate the corporation as agent.
To perform such acts as are required of such employer or employers under any federal, state or local statute or ordinance with respect to payment of wages including, without limitation, the payment of statutory withholding taxes, mandatory
insurance premiums, other taxes and the preparation of payroll reports required to be submitted to governmental and other agencies.
To engage in any other commercial, mercantile, industrial, manufacturing, or franchise business permitted by law.
To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.
To manufacture, purchase or otherwise acquire, invest in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of, trade, deal in and deal with goods, wares and merchandise and personal property of every class and description.
To acquire, and pay for in cash, stock or bonds of this corporation or otherwise, the good will, rights, assets and property, and to undertake or assume the whole or any part of the obligations or liabilities of any person, firm, association or corporation.
To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage or otherwise dispose of letters patent of the United States or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trade-marks and trade names, relating to or useful in connection with any business of this corporation.
To acquire by purchase, subscription or otherwise, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any of the shares of the capital stock, or any voting trust certificates in respect of the shares of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and other securities obligations, choses in action and evidences of indebtedness or interest issued or created by any corporations, joint stock companies, or private, or by the government of the United States of America, or by any foreign government, or by any state, territory, province, municipality or other political subdivision or by any governmental agency, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including the right to execute consents
and vote thereon, and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof.
To borrow or raise money for any of the purposes of the corporation and, from time to time without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the corporation, whether at the time owned or thereafter acquired, and to sell, pledge or otherwise dispose of such bonds or other obligations of the corporation for its corporate purposes.
To purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of the corporation's property and assets, or any interest therein, wherever situated.
In general, to possess and exercise all the powers and privileges granted by the General Corporation Law of Delaware or by any other law of Delaware or by this certificate of incorporation together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business or purposes of the corporation.
The business and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in this certificate of incorporation, but the business and purposes specified in each of the foregoing clauses of this article shall be regarded as independent business and purposes.
4. The total number of shares of stock which the Corporation shall have authority to issue is 600,000,000 shares of common stock and the par value of each of such shares is $.01, amounting in the aggregate to $6,000,000.
5. The corporation is to have perpetual existence.
6. The directors shall be elected annually.
No director shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which intentional misconduct or a knowing violation of law, (iii) for paying a dividend or approving a stock repurchase which was illegal under Section 174 (or any successor section) of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. The foregoing provisions shall not eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provisions become effective.
In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the By-Laws of the Corporation.
7. Elections of directors need not be by written ballot unless the by-laws of the corporation shall so provide.
Meetings of stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the corporation.
8. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.
4. This Restated Certificate of Incorporation was duly adopted in accordance with Section 245 of the Delaware General Corporation Law and only restates and integrates and does not further amend the provisions of the Corporation's Certificate of Incorporation as amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation.
IN WITNESS WHEREOF, Paychex, Inc. has caused this Restated Certificate of Incorporation to be signed by its Secretary, John M. Morphy, this 12th day of July, 2004.
Paychex, Inc.
By: /s/ John M. Morphy ------------------------------- John M. Morphy, Secretary |
EXHIBIT 10(f): PAYCHEX, INC. OFFICER PERFORMANCE INCENTIVE PROGRAM FOR THE YEAR ENDED MAY 31, 2005
On July 8, 2004, the Board of Directors (the "Board") approved the Compensation Committee's recommendation to adopt the Paychex, Inc. Officer Performance Incentive Program (the "Program") for the year ended May 31, 2005, as outlined below:
1. Participants: Executive officers of Paychex, Inc.
2. Maximum Incentive: 50% of base salary for fiscal year 2005 as approved by the Board of Directors at the July 2004 Board meeting.
3. Performance Criteria: The payment of cash bonus awards to participants shall be determined by the Board on a discretionary basis based primarily on how year-over-year revenue growth, year-over-year growth in operating income excluding interest on funds held for clients, and improvement in operating income excluding interest on funds held for clients as a percentage of service revenues for the fiscal year compare to the goals that are established annually by the Board of Directors.
4. Payment: Incentive payments to be paid in July 2005, after Board approval. Officer must be employed at the fiscal year end to be eligible for any bonus.
5. Changes and Terminations: Bonus awards, changes to and termination of the Program are at the sole discretion of the Board.
EXHIBIT 10(g): PAYCHEX, INC. INDEMNIFICATION AGREEMENT WITH B.
THOMAS GOLISANO
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made, entered into and effective this 12th day of May, 2003 by and between B. THOMAS GOLISANO ("Golisano") and PAYCHEX, INC. ("Paychex") and RAPID PAYROLL, INC. ("RPI").
RECITALS
WHEREAS, Golisano is the Chairman, President, and Chief Executive Officer of Paychex;
WHEREAS, Paychex and RPI, along with others, have been sued in the following actions brought in the Superior Court of the State of California for the County of Los Angeles, United States District Court for the Central District of California, United States District Court for the Southern District of Texas - Houston Division, and New York Supreme Court for the County of Monroe (the "Lawsuits") for purported breaches of software licensing agreements as well as other claims;
WHEREAS, Paychex has agreed to indemnify Golisano against claims and liability arising from the Lawsuits and Golisano has agreed to be indemnified by Paychex against claims and liability in the Lawsuits; and
WHEREAS, Paychex and Golisano desire to reduce their agreement to writing.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises, the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
1. INCORPORATION OF RECITALS. The Recitals to this Agreement are hereby incorporated into and made a part of this Agreement.
2. INTENT. This Agreement is executed in order to protect Golisano from any claims made against him arising from the transactions or occurrences related to the Lawsuits and relating to Golisano's employment at Paychex.
3. INDEMNIFICATION. Paychex and RPI agree to indemnify, protect, defend, and hold harmless Golisano, his heirs, executors, and administrators from and against any liability, loss, claim, demand, damage, cost or expense (including, without limitation, professional fees for attorneys and other consultants, whether incurred before trial, at trial, on appeal, or in any bankruptcy or post-judgmental proceedings), which arise from the Lawsuits. Notwithstanding anything contained herein to the contrary, Paychex and RPI's agreement to indemnify Golisano hereunder shall not extend to actions arising out of or based upon the gross negligence or willful misconduct of Golisano.
4. GOVERNING LAW, JURISDICTION, AND VENUE. This Agreement shall be construed, in all respects, according to the laws of the State of New York. The parties hereby consent to jurisdiction in the State of New York.
5. MODIFICATION AND ASSIGNMENT. This Agreement shall not be amended or modified, except in writing signed by the parties [nor assigned without the consent of the other party]. Subject to the foregoing, this Agreement shall be binding upon the parties and inure to the benefit of the parties' permitted successors and assigns.
6. COUNTERPART. This Agreement may be executed in counterparts, which may be by facsimile, each of which when executed and delivered, shall be deemed to be an original, and all of which taken together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
WITNESSES:
/s/ Stephanie Schaeffer /s/ B. Thomas Golisano ---------------------------------- ----------------------------------- Name: Stephanie Schaeffer Name: B. Thomas Golisano /s/ Dana L. Bolia ---------------------------------- Name: Dana L. Bolia /s/ Stephanie Schaeffer Paychex, Inc. ---------------------------------- Name: Stephanie Schaeffer /s/ Dana L. Bolia By: /s/ John M. Morphy ---------------------------------- ------------------------------- Name: Dana L. Bolia Name: John M. Morphy Title: Senior Vice President, Chief Financial Officer, and Secretary /s/ Stephanie Schaeffer Rapid Payroll, Inc., ---------------------------------- Name: Stephanie Schaeffer /s/ Dana L. Bolia By: /s/ Walter Turek ---------------------------------- ------------------------------- Name: Dana L. Bolia Name: Walter Turek Title: President |
EXHIBIT 10(h): PAYCHEX, INC. INDEMNIFICATION AGREEMENT WITH
WALTER TUREK
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made, entered into and effective this 12th day of May, 2003 by and between WALTER TUREK ("Turek") and PAYCHEX, INC. ("Paychex") and RAPID PAYROLL, INC. ("RPI").
RECITALS
WHEREAS, Turek is the Senior Vice President of Sales and Marketing of Paychex;
WHEREAS, Paychex and RPI, along with others, have been sued in the following actions brought in the Superior Court of the State of California for the County of Los Angeles, United States District Court for the Central District of California, United States District Court for the Southern District of Texas - Houston Division, and New York Supreme Court for the County of Monroe (the "Lawsuits") for purported breaches of software licensing agreements as well as other claims;
WHEREAS, Paychex has agreed to indemnify Turek against claims and liability arising from the Lawsuits and Turek has agreed to be indemnified by Paychex against claims and liability in the Lawsuits; and
WHEREAS, Paychex and Turek desire to reduce their agreement to writing.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises, the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
1. INCORPORATION OF RECITALS. The Recitals to this Agreement are hereby incorporated into and made a part of this Agreement.
2. INTENT. This Agreement is executed in order to protect Turek from any claims made against him arising from the transactions or occurrences related to the Lawsuits and relating to Turek's employment at Paychex.
3. INDEMNIFICATION. Paychex and RPI agree to indemnify, protect, defend, and hold harmless Turek, his heirs, executors, and administrators from and against any liability, loss, claim, demand, damage, cost or expense (including, without limitation, professional fees for attorneys and other consultants, whether incurred before trial, at trial, on appeal, or in any bankruptcy or post-judgmental proceedings), which arise from the Lawsuits. Notwithstanding anything contained herein to the contrary, Paychex and RPI's agreement to indemnify Turek hereunder shall not extend to actions arising out of or based upon the gross negligence or willful misconduct of Turek.
4. GOVERNING LAW, JURISDICTION, AND VENUE. This Agreement shall be construed, in all respects, according to the laws of the State of New York. The parties hereby consent to jurisdiction in the State of New York.
5. MODIFICATION AND ASSIGNMENT. This Agreement shall not be amended or modified, except in writing signed by the parties [nor assigned without the consent of the other party]. Subject to the foregoing, this Agreement shall be binding upon the parties and inure to the benefit of the parties' permitted successors and assigns.
6. COUNTERPART. This Agreement may be executed in counterparts, which may be by facsimile, each of which when executed and delivered, shall be deemed to be an original, and all of which taken together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
WITNESSES:
/s/ Stephanie Schaeffer /s/ Walter Turek ---------------------------------- ----------------------------------- Name: Stephanie Schaeffer Name: Walter Turek /s/ Dana L. Bolia ---------------------------------- Name: Dana L. Bolia /s/ Stephanie Schaeffer Paychex, Inc. ---------------------------------- Name: Stephanie Schaeffer /s/ Dana L. Bolia By: /s/ B. Thomas Golisano ---------------------------------- ------------------------------- Name: Dana L. Bolia Name: B. Thomas Golisano Title: Chairman, President, and Chief Executive Officer /s/ Stephanie Schaeffer Rapid Payroll, Inc., ---------------------------------- Name: Stephanie Schaeffer /s/ Dana L. Bolia By: /s/ John Morphy ---------------------------------- ------------------------------- Name: Dana L. Bolia Name: John Morphy Title: Secretary, Treasurer, Director |
EXHIBIT 10(i): PAYCHEX, INC. DEFERRED COMPENSATION PLAN
1. PRELIMINARY MATTERS
1.1. Name. The Plan evidenced by this instrument shall be known as the Paychex, Inc. Deferred Compensation Plan.
1.2. Purpose. The sole and exclusive purpose of the Plan is to enable a select group of highly compensated and/or management employees of the Corporation and Directors of the Corporation to defer income tax on a portion of their Compensation.
2. DEFINITIONS
2.1. "Board" means the Board of Directors of the Corporation.
2.2. "Change in Control" means: (i) one or more changes in the ownership of stock of the Corporation if after the change or changes, at least 50 percent of the total combined voting power of all classes of stock of the Corporation is actually or constructively owned by one person, corporate or otherwise; or (ii) the transfer by the Corporation, in one or more transactions, of all or substantially all of its assets to another person, corporate or otherwise, or group of related persons, whether by sale, merger, consolidation, or other arrangement. The Board shall make the final determination of whether a Change in Control has occurred.
2.3. "Compensation" means taxable wages paid by the Corporation for
services rendered by the Participant including contributions
made to the Paychex, Inc. 401(k) Incentive Retirement Plan,
excluding reimbursements of moving expenses, stock option
income, the imputed value of group-term life insurance,
Section 125 contributions, and amounts distributed from the
Paychex, Inc. 401(k) Incentive Retirement Plan. With respect
to a Director of the Corporation, "Compensation" means
Director's fees.
2.4. "Committee" means the Deferred Compensation Plan Committee of the Corporation, as duly appointed from time to time.
2.5. "Corporation" means Paychex, Inc., or any other corporation
that is a member of the same affiliated group (as defined in
Section 1504(a) of the Internal Revenue Code) and adopts the
Plan.
2.6. "Deferred Compensation Account" or "Accounts" means the account established by the Corporation for a Participant pursuant to Section 3.3 of the Plan.
2.7. "Designated Fund" means any mutual fund selected by the Committee to be an investment alternative under the Plan. The Committee has sole authority to determine the funds that may be used as investment alternatives under the Plan and may add, delete or substitute funds from time to time.
2.8. "Participant" means an employee or Director of the Corporation who has been designated by the Committee as eligible to participate in the Plan, and who has signed a written deferral election pursuant to Section 3.2 of the Plan.
2.9. "Plan" means the Paychex, Inc. Deferred Compensation Plan as set forth in this document or as amended from time to time.
2.10. "Termination Date" means, with respect to each Participant, the date on which the Participant terminates active employment with the Corporation. For purposes of this definition, (i) payments for accrued vacation time or sick leave following an employment termination shall not constitute active employment, and (ii) the period of any paid or unpaid leave shall not be treated as a termination of active employment unless and until the Corporation or the Participant gives notice that the Participant will not return to active employment with the Corporation.
2.11. "Valuation Date" means each date set by the Committee, under
Section 3.4 of the Plan, for crediting investment returns to
Accounts.
3. BENEFITS
3.1. Eligibility. The Plan is available to (a) Directors of the Corporation and (b) employees of the Corporation who are designated as eligible by the Committee. The determination as to whether an employee of the Corporation is eligible to participate in the Plan is within the sole and complete discretion of the Committee. Notwithstanding the foregoing, no employee may be designated as eligible unless the employee belongs to "a select group of management or highly compensated employees" as described in Title I of ERISA.
3.2. Deferral Elections. A Participant may elect to defer the receipt of a portion of the Compensation otherwise payable to him by delivering prior written notice to the Committee. Deferral elections and modifications of existing elections, shall take effect on the first day of January and July each year (the normal enrollment periods), and on any additional dates determined by the Committee. Once made, the Participant's election shall be irrevocable and remain in effect until the next enrollment period established by the Committee at which point the election may be modified or superseded in a new written election delivered to the Committee. Notwithstanding the foregoing, the Committee, in its sole discretion, may permit a Participant to change a deferral election outside the normal enrollment periods if the Committee believes such change is appropriate. All elections shall be made in the form and manner prescribed by the Committee in its sole discretion.
3.3. Establishment of Deferred Compensation Accounts. Subject to the provisions of Section 3.7 of the Plan, the Corporation shall establish on its books a Deferred Compensation Account in the name of each Participant who elects to defer the receipt of a portion of Compensation pursuant to Section 3.2 of the Plan. Each deferral of Compensation by a Participant shall, as of a date determined by the Committee on a uniform and consistent basis for all Participants in the Plan, nominally be credited to the Participant's Deferred Compensation Account. The Corporation is under no obligation to segregate or otherwise set aside amounts nominally credited to any Participant's Deferred Compensation Account.
3.4. Deemed Investment Returns. Participants shall elect, as part of the written notice described in Section 3.2 of the Plan, to have all amounts credited to their Deferred Compensation Account deemed to earn income, or suffer loss, at the rate of increase or decrease in the value of one or more Designated Funds. Amounts of income or loss shall be added to, or subtracted from, Participants' Deferred
Compensation Accounts on the Valuation Dates determined by the Committee on a uniform and consistent basis for all Participants in the Plan.
3.5. Reallocation Among Designated Indexes or Funds. Participants may change the allocation of investments of future contributions to or existing balances in their Deferred Compensation Accounts among any of the Designated Funds at such times and in such manner as determined by the Committee.
3.6. Maintenance of Records. The Committee shall maintain records, including records relating to the amount nominally credited to each Participant's Deferred Compensation Account for all Participants who elect to defer the receipt of a portion of their Compensation pursuant to the Plan. These records shall indicate the effective date and amount of each deferral as well as any income or loss credited to, or debited from, a Participant's Deferred Compensation Account. The Committee shall, no less frequently than once a year, deliver to each Participant a statement of all amounts credited to his Deferred Compensation Account.
3.7. No Property Rights or Fiduciary Relationships Created. The right of any Participant to receive future payments under the provisions of the Plan shall be a contractual obligation of the Corporation and is subject to the claims of the creditors of the Corporation in the event of the Corporation's insolvency or bankruptcy. Accordingly, the rights of any Participant to amounts nominally credited to a Participant's Deferred Compensation Account shall be no greater than the right of any unsecured general creditor of the Corporation. Title to and beneficial ownership of all assets the Corporation may identify for the distribution of amounts under the Plan shall remain at all times in the Corporation, and no Participant shall have an interest in specific assets of the Corporation, including amounts nominally credited to a Participant's Deferred Compensation Account, by virtue of the Plan. Neither the existence of the Plan nor the creation of the Deferred Compensation Accounts on behalf of Participants shall create or be construed to create a trust of any kind or any type of fiduciary relationship between the Corporation and any Participant.
4. DISTRIBUTIONS
4.1. Payment of Benefits. In the first deferral election made under
Section 3.2 of the Plan, each Participant shall specify the
date and method of payment for amounts credited to his
Deferred Compensation Account. All elections shall be made in
the form and manner prescribed by the Committee.
4.1.1. Timing. Participants may elect to begin receiving payment of amounts credited to their Deferred Compensation Accounts on any one of the following dates: (i) the Participant's Termination Date; (ii) the date on which the Participant retires from active employment (including self-employment); or (iii) a specific date selected by the Participant. Payments shall begin as soon as administratively practical after the payment date selected by the Participant. If a Participant elects to commence distributions on a specified date and the Participant is an active employee or Director of the Corporation
on such date, the Participant may continue to participate in the Plan by electing during any following open enrollment period to make future deferrals; provided that the following conditions are satisfied:
- the Participant's participation is suspended and future deferrals will not be permitted until the Participant receives all amounts credited to the Participant's Deferred Compensation Account; and
- after such suspension, the Participant re-enrolls in the Plan (at which time the Participant can make a new election as to the commencement date and form of payment that will apply to the new Deferred Compensation Account that the Committee will establish for the Participant to track new deferrals).
4.1.2. Method. Participants may elect to receive payment of their Deferred Compensation Accounts in one lump sum, or in annual installments over a term of years (not to exceed ten) specified by Participants in their initial or subsequent elections. If Participants elect to receive their payment in annual installments, subsequent payments shall continue in January of each succeeding year, and each payment shall equal the amount credited to the Participant's Deferred Compensation Account divided by the remaining number of annual installments selected by the Participant. A Participant's Deferred Compensation Account shall be credited with deemed investment returns pursuant to Section 3.4 of the Plan until all payments have been made to the Participant or his designated beneficiary.
4.1.3. Suspension of Payments. If a Participant who has installment payments from the Plan pursuant to an election made under Section 4.1.1(i) or (ii) above is reemployed by the Corporation and again becomes eligible for participation in the Plan, then all payments shall cease until the Participant again satisfies the conditions of Section 4.1.1(i) or (ii) of the Plan. The payment elections previously made by the Participant under the Plan shall apply to any compensation deferred after re-employment.
4.2. One-Time Modification. A Participant may change the method of payment initially elected by filing a written election with the Committee at any time up to 12 months prior to the date payments would otherwise have commenced under the Plan. Any change of an earlier election that is made within 12 months of the date payments commence under the Plan shall be disregarded by the Committee. A Participant may also defer the date that payments are to commence to a subsequent date by filing a written election with the Committee at any time up to 12 months prior to the date payments would otherwise have commenced under the Plan. Any change of an earlier election that is made within 12 months of the date payments commence under the Plan shall be disregarded by the Committee. A Participant may not elect to defer the commencement date or form of payment the Participant initially elected for receiving benefits more than once.
4.3. Benefits Payable Upon Death. Participants may designate a beneficiary to receive payments of their benefits under this Plan in the event of their death. Beneficiary designations shall be made in a form and manner prescribed by the Committee. Participants may change their designations at any time by making a subsequent designation. In the event that a Participant dies before the payments of all amounts credited to his Deferred Compensation Account, any remaining balance in the Account shall be paid to his designated beneficiary in a single cash sum. If a Participant dies without having designated a beneficiary, or if the designated beneficiary predeceases the Participant, a single cash sum payment of all amounts due to the Participant shall be made to the Participant's estate.
4.4. Benefits Payable Upon Unanticipated Emergency. In the event of an unanticipated emergency that would result in severe financial hardship, a
Participant may request the Committee to make a distribution to him of all or a portion of the amounts deferred under this Plan. The hardship must result from a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, loss of the Participant's property due to casualty, or similar extraordinary and unforeseeable circumstances which are beyond the control of the Participant, and which cannot be relieved by reimbursement through insurance, liquidation of the Participant's assets (to the extent that the liquidation itself would not cause severe financial hardship), or the cessation of deferral contributions under this Plan or any other plan maintained by the Corporation. The amount of the distribution shall be no greater than the amount necessary to meet the emergency and to pay any income tax due on the withdrawal. The decision to make a distribution to the Participant shall be made by the Committee in its sole discretion.
4.5. Tax Consequences of Contributions/Distributions. Amounts deferred into the Plan and distributions from the Plan are subject to all applicable federal, state, and local employment taxes and appropriate withholdings on such amounts will be made to the extent required by applicable law.
5. AMENDMENT AND TERMINATION OF THE PLAN
5.1. Amendment. The Corporation may amend the Plan at any time or from time to time by a written instrument executed by an officer of the Corporation and approved by the Board.
5.2. Termination by the Corporation. The Plan is intended by the Corporation to be a long-term program for the deferral of income by Participants. The Corporation, by action of the Board, nevertheless reserves the right to terminate the Plan at any time and for any reason. Upon termination of the Plan, all amounts held in the Participants' Deferred Compensation Accounts, determined as of the date of termination, shall be distributed to Participants within thirty days.
5.3. Termination Upon Change in Control. In the event of a Change in Control, the Plan shall immediately terminate, and all amounts held in a Participant's Deferred Compensation Account, determined as of the date of termination, shall be distributed to the Participants within thirty days.
6. MISCELLANEOUS
6.1. No Employment Rights Conferred. The adoption and maintenance of the Plan shall not be deemed to constitute an employment contract between the Corporation and any Participant or to be in consideration for, or an inducement to or condition of, the employment of any person. Nothing herein contained shall be deemed to: (i) give to any Participant the right to be retained in the employment of the Corporation; (ii) interfere with the right of the Corporation to discharge any Participant at any time; (iii) give to the Corporation the right to require any Participant to remain in its employment; or (iv) interfere with any Participant's right to terminate his employment with the Corporation at any time.
6.2. No Compensation for Other Purposes. Amounts deferred under the terms of the Plan and distributions paid under the Plan shall not be treated as compensation to the Participant for purposes of any qualified retirement plan maintained by the Corporation or for purposes of any other benefit obligations of the Corporation, unless otherwise provided under the terms of the relevant plan.
6.3. Spendthrift Provision. Except to the extent that this provision may be contrary to law, the rights of Participants under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or the Participant's beneficiary.
6.4. Impossibility of Performance. In the event that it becomes impossible for the Corporation to perform any act under the Plan, that act shall be performed which in the judgment of the Corporation will most nearly carry out the intent and purposes of the Plan.
6.5. Interpretation/Administration. The Committee shall have full discretionary power and authority to interpret this Plan and decide any and all questions arising in the application of its terms. The interpretation and construction of this Plan by the Committee, and any actions taken by the Committee, shall be binding and conclusive upon all parties. The Committee also has full discretionary authority to administer the Plan. The Committee's powers include the power, in its sole discretion and consistent with the terms of the Plan, to determine who is eligible to participate in this Plan, to determine the amount of benefits payable under the Plan, to determine when and how amounts are allocated to a Participant's Deferred Compensation Account, to establish rules for determining when and how elections can be made, to adopt any rules relating to administering the Plan and to take any other action it deems appropriate to administer the Plan.
6.6. Claims Procedures. The Committee shall maintain a procedure under which a Participant or a Participant's beneficiary (hereinafter called "claimant") whose claim for benefits under the Plan has been denied will receive written notice which clearly sets forth the specific reason or reasons for such denial, the specific plan provision or provisions on which the denial is based, any additional information necessary for the claimant to perfect the claim, if possible, (including an explanation of why such additional information is needed), and an explanation of the Plan's claims review procedures. Such procedures shall allow a claimant 60 days after receipt of the written notice of denial to request a review of such denied claim, and the Committee shall make its decision based on such review within 60 days (120 days if special circumstances require more time) of its receipt of the request for review. The decision on review shall be in writing and shall clearly describe the reasons for the Committee's decision. The decisions of the Committee shall be final and binding on the Participant and beneficiary.
6.7. Governing Law. All legal questions pertaining to the Plan shall be determined in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, Paychex, Inc. has caused this instrument to be executed effective as of February 1, 2002.
PAYCHEX, INC.
By: /S/ John M. Morphy ------------------------------- |
.
.
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EXHIBIT 21: SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARIES OF PAYCHEX, INC. AS OF MAY 31, 2004
JURISDICTION OF NAME OF SUBSIDIARIES INCORPORATION -------------------------------------- ---------------- Advantage Payroll Services, Inc. Delaware Business Benefits Administrators, Inc. Massachusetts Paychex Agency, Inc. New York Paychex Business Solutions, Inc. Florida Paychex Deutschland GmbH Germany Paychex Investment Partnership LP (1) Delaware Paychex Management Corp. (2) New York Paychex of New York LLC (2) Delaware Paychex North America Inc. Delaware Paychex Securities Corporation New York Paychex Time & Attendance Inc. Delaware Prime Real Estate LLC Delaware PXC Inc. New York Rapid Payroll, Inc. California |
(1) Paychex Investment Partnership LP is 1% owned by Paychex, Inc. and 99% owned by a subsidiary of PXC Inc.
(2) Paychex of New York LLC and Paychex Management Corp. are 100% owned by Paychex Investment Partnership LP
Certain subsidiaries, which considered in the aggregate as a single subsidiary, that would not constitute a significant subsidiary, per Regulation S-X, Article 1, as of May 31, 2004, have been omitted from this exhibit.
EXHIBIT 23: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of Paychex, Inc., outlined below, of our report dated June 24, 2004 with respect to the consolidated financial statements and schedule of Paychex, Inc. included in the Annual Report on Form 10-K for the year ended May 31, 2004.
a. Form S-8 - Paychex, Inc. 1992 Stock Incentive Plan - as filed with the Securities and Exchange Commission on October 2, 1992 (No. 33-52772).
b. Form S-8 - Paychex, Inc. 1995 Stock Incentive Plan - as filed with the Securities and Exchange Commission on November 17, 1995 (No. 33-64389).
c. Form S-8 - Paychex, Inc. 1998 Stock Incentive Plan - as filed with the Securities and Exchange Commission on October 1, 1998 (No. 333-65191).
d. Form S-8 - Paychex, Inc. 401(k) Incentive Retirement Plan - as filed with the Securities and Exchange Commission on July 30, 1999 (No. 333-84055).
e. Form S-8 - Paychex, Inc. 2002 Stock Incentive Plan - as filed with the Securities and Exchange Commission on November 7, 2002 (No. 333-101074).
/s/ Ernst & Young LLP Buffalo, New York July 15, 2004 |
EXHIBIT 24: POWER OF ATTORNEY
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, 2004, 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: July 9, 2004 /s/ Betsy S. Atkins ----------------------------------- Betsy S. Atkins Dated: July 8, 2004 /s/ G. Thomas Clark ----------------------------------- G. Thomas Clark Dated: July 8, 2004 /s/ David J. S. Flaschen ----------------------------------- David J. S. Flaschen Dated: July 8, 2004 /s/ Phillip Horsley ----------------------------------- Phillip Horsley Dated: July 9, 2004 /s/ Grant M. Inman ----------------------------------- Grant M. Inman Dated: July 8, 2004 /s/ J. Robert Sebo ----------------------------------- J. Robert Sebo Dated: July 8, 2004 /s/ Joseph M. Tucci ----------------------------------- Joseph M. Tucci |
EXHIBIT 31.1: CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, B. THOMAS GOLISANO, certify that:
1. I have reviewed this annual report on Form 10-K of Paychex, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: July 19, 2004 /s/ B. Thomas Golisano ----------------------------------- Chairman, President, and Chief Executive Officer |
EXHIBIT 31.2: CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, JOHN M. MORPHY, certify that:
1. I have reviewed this annual report on Form 10-K of Paychex, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: July 19, 2004 /s/ John M. Morphy ----------------------------------- Senior Vice President, Chief Financial Officer, and Secretary |
EXHIBIT 32.1: CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Paychex, Inc. (the "Company") on Form 10-K for the fiscal year ended May 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, B. THOMAS GOLISANO, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC upon request.
Date: July 19, 2004 /s/ B. Thomas Golisano ---------------------------------- B. Thomas Golisano Chairman, President, and Chief Executive Officer |
EXHIBIT 32.2: CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Paychex, Inc. (the "Company") on Form 10-K for the fiscal year ended May 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, JOHN M. MORPHY, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC upon request.
Date: July 19, 2004 /s/ John M. Morphy ---------------------------------- John M. Morphy Senior Vice President, Chief Financial Officer, and Secretary |