Financial Highlights
In millions, except per share amounts
Year ended May 31, ..................... 2001 2000 Increase
- -----------------------------------------------------------------------------
Total revenues ......................... $869.9 $728.1 19%
Operating income ....................... $336.7 $258.9 30%
As a percent of total revenues ....... 39% 36%
Net income ............................. $254.9 $190.0 34%
As a percent of total revenues ....... 29% 26%
Diluted earnings per share ............. $ .68 $ .51 33%
Cash dividends per common share ........ $ .33 $ .22 50%
Return on stockholders' equity ......... 38% 38%
- -----------------------------------------------------------------------------
[graphics omitted]
The data in the following table was depicted in bar graphs in the 2001 Annual
Report to Shareholders:
(millions $) 1997 1998 1999 2000 2001
Total Revenues $399.7 $493.7 $597.3 $728.1 $869.9
Operating Income $ 96.6 $134.7 $187.6 $258.9 $336.7
Net Income $ 75.2 $102.2 $139.1 $190.0 $254.9
[pictures omitted]
To Our Shareholders
In 2001, Paychex completed thirty years serving American businesses. In
that time we have built a comprehensive employer and employee administrative
services company. 2001 also represents the eleventh straight year that our
company has achieved record levels of service revenues and net income.
For the year ended May 31, 2001, total revenues increased by 19% to $869.9
million. Operating income grew 30% to $336.7 million, with an operating margin
of 39% compared with 36% in the prior year. This was the tenth consecutive year
of net income growth exceeding 30%, as net income for 2001 increased 34% to
$254.9 million. Our earnings per share rose 33% from $.51 to $.68.
Paychex has a strong balance sheet and solid liquidity position. Our
corporate cash and investments position has grown to $614.0 million and we have
no outstanding notes or mortgages. Our cash flow from operations was $304.9
million for fiscal 2001, an increase of 22% over the prior year. Return on
equity was 38%. In October 2000, in recognition of the company's strong
financial position, our Board of Directors increased the quarterly dividend to
shareholders for the ninth consecutive year, and dividend payments equaled 48%
of this year's net income.
Strong financial results were achieved while making investments in future
growth. Paychex Administrative Services (PAS) provides a great example of
Paychex building on well-established foundations. PAS brings businesses a
full-service approach to the outsourcing of employer and employee administrative
needs. It is payroll, benefits and retirement plan administration, human
resource and risk management - a wide spectrum of services rolled into one. In
its first full year of nationwide availability, PAS has grown significantly and
has already surpassed our professional employer organization in the number of
client employees served.
As we continue to grow our core client base, we develop new services that
our clients seek as they expand and mature. For example, our investment in
Internet initiatives continues, as does client acceptance and usage. Our online
payroll sales presentation has proven to be a cost-efficient tool, providing a
new source of leads and sales while complementing the efforts of our field sales
force. The Paychex Internet Report Service, Internet Time Sheets, General Ledger
Reporting Service, and other Internet product features provide an additional way
that our clients, their employees, and their accountants can exchange payroll
information with Paychex in a fast, convenient, and cost-effective manner. The
Internet also extends our reach, making it increasingly practical to service
remote markets, opening a previously untapped pool of potential clients.
In 2001, we continued expansion of our Major Market Services (MMS) payroll
product offering. The MMS product is now available in almost half of the markets
where our core payroll service is offered. Businesses served by MMS are larger
and have more complex payroll needs than our core clients, and as a result are
more likely to need additional services. As such, MMS clients generally deliver
substantially higher per-client revenues.
Our retirement plan recordkeeping services now offer a full spectrum of
options, including 401(k) and 401(k) SIMPLE, IRA SIMPLE, as well as profit
sharing and money purchase plans. Retirement plan recordkeeping revenues
increased 36% in fiscal 2001 and the client base soared by 33%, making us one of
the largest 401(k) recordkeepers for small business in the United States. Given
the strong growth in workers' compensation sales, we also continued expansion of
our sales force for this product, which provides insurance for qualified clients
through several leading insurance providers. Sales of workers' compensation
insurance are through Paychex Agency, Inc., our licensed insurance agency.
An extensive consolidation of our electronic network and human resource
operations infrastructure was completed this year. This improved client response
times and streamlined support for clients, with the added benefit of increased
billing and accounts receivable efficiencies. We will realize further
productivity and customer service benefits as the results of this reorganization
take effect.
The past decade has been a very exciting time for Paychex. Our total
revenues are fast approaching the one billion dollar mark. We have significantly
expanded our product portfolio to include a variety of ancillary services that
help small- to medium-sized employers comply with governmental regulations and
offer valuable benefits to their employees. Our organization has grown to over
7,300 employees nationwide. We have a consistent record of strong financial
performance for our shareholders. In 1991 we were a company with revenues of
$137 million and net income of $10 million. Over the past ten years we have
experienced an average annual compounded growth rate of 20% for revenues and 39%
for net income to arrive at the results we have today. We have achieved this
level of success by consistently applying our growth strategy - increasing our
client base, obtaining higher utilization of ancillary services, developing new
services, and leveraging our infrastructure.
As mentioned earlier, we successfully completed our tenth consecutive year
of better than 30% year-over-year net income growth. Few companies in the world
have experienced a decade similar to what Paychex has achieved. Looking ahead to
fiscal 2002, we recognize interest rate reductions will impact our
year-over-year net income growth. However, we expect to continue to generate
record revenues and net income with total revenue growth in the range of 16% to
18%.
In closing, with sadness I mention the loss of Gene Polisseni, our Senior
Vice President of Marketing, who passed away after a lengthy battle with cancer.
He provided Paychex with decades of exceptional service, and most recently was
instrumental in the building of our human resource and benefits product line.
Both Paychex and I will sorely miss his contributions, friendship, and sound
advice.
/s/ B. Thomas Golisano
B. Thomas Golisano
Chairman, President, and Chief Executive Officer
CLIENTS, EMPLOYEES, SHAREHOLDERS
Paychex was founded in 1971 with an objective of providing timely,
accurate, and affordable payroll-related services to American business. Focused
on that goal, the company and its employees have been successfully serving
clients and their employees while achieving consistent growth and strong
financial performance for shareholders.
Business Process Outsourcing
The outsourcing of business processes has become an increasingly important
management practice, with over $340 billion spent in the U.S. on such services
each year. Outsourcing of employer and employee services - of which payroll, tax
compliance, transaction processing, cash flow management, and benefits
administration are some of the most relied upon segments - is the capability
Paychex provides to the business community.
The complexity of employer and employee administrative tasks and
ever-changing regulations (not to mention penalties for non-compliance) make
outsourcing an increasingly attractive alternative. Outsourcing also helps
companies reduce and control operating costs, gain access to world-class
capabilities, improve the speed and accuracy of these complex functions, and
free resources. In short, companies no longer have room for in-house "cost
centers" or processes that detract from primary objectives and competencies.
Instead, they turn to experts like Paychex, who free client manpower to
concentrate on the goals of the business.
Our Clients and Markets
There are approximately six million businesses in the markets we serve and
98% of them have fewer than 100 employees. Market penetration remains relatively
small, with all payroll processors combined serving only about 15% of the
potential businesses. Therefore, there is still tremendous opportunity for
growth in our business.
Paychex provides payroll and employee benefit outsourcing to over 375,000
small- to medium-sized businesses located throughout the United States. The
primary human resource needs of the businesses we serve include staffing,
managing, paying, and retaining employees. The technical capabilities,
knowledge, and operational expertise that Paychex has built - as well as the
wide portfolio of products we offer - allow us to partner with our clients to
effectively meet their diverse needs.
Paychex began by specializing in payroll processing for smaller businesses,
and these companies remain our focus. As the small business market has become
better informed about the benefits of outsourcing, and as the needs of such
businesses have become more complex and more sophisticated, we have added
products to meet these needs. The demand for "more than just payroll" has been
evidenced in the success of newer Paychex products such as retirement plan
recordkeeping, new employee pay options, and our workers' compensation service.
Paychex has also built capabilities tailored to meet the diverse and
complex requirements of both midsize and small businesses. Today, we have
clients with thousands of employees, and thousands of clients that have but one
employee. Each of these businesses receives quality sales, processing service,
and support from one of the more than 100 Paychex offices across the United
States and the employees in our corporate headquarters in Rochester, New York.
Our highly trained, experienced, and motivated employees have translated into a
service culture that results in about two-thirds of our new business coming from
current client and accountant referrals.
Partnership for Success
The days of the stereotypical accountant with an eye shade and ledgers,
working in a windowless room under a harsh light, are long gone. Today's
accounting professionals are more often business consultants who provide a wide
spectrum of support and guidance to businesses, while outsourcing much of their
labor-intensive, low-margin compliance work such as payroll. As a result, many
accountants turn to Paychex and we continually seek new ways to bring value to
this relationship. For example, our Internet Report Service and General Ledger
Reporting Service have provided accountants with convenient new ways to access
current and historical client payroll data.
After-the-Fact Payroll, introduced this year, was designed specifically for
accountants. The term "after-the-fact" refers to situations outside of the
normal payroll process. For example, an employer may pay its employees a net
dollar amount without considering the tax withholding implications. The tax
impact, including tax calculations and regulatory reporting, is left for the
accounting professional to perform "after-the-fact." This triggers
time-consuming accounting and compliance tasks. Paychex now offers a way to
accomplish the required work while the accountant need only let us know the
"who, when, and how much" of the after-the-fact payments.
===============================================================================
[SIDEBAR]
Recognition for Paychex: Paychex achievements are often
recognized by the press. Here are some of the honors received this year.
Forbes 500s. This measures the top companies in the United States. In the
list of 500 companies ranked by market value, Paychex moved from last year's
position of #212 to #169. In the profits category, the company went from #458 to
#372. In the 817-company "super rank" that combines sales, profits, assets, and
value, Paychex advanced ninety-seven positions to #373.
The Wall Street Journal's "Shareholders' Scoreboard." This annual
evaluation ranks the total return to investors of 1,000 companies. Paychex
joined the exclusive list of only fourteen comprising "The Honor Roll." These
are companies that earned straight-A ratings on five-year average compound
annual total returns, and were in the top 20% of companies evaluated for the
past one, three, five, and ten years. Paychex also topped the "Industrial
Services" sector listing that compared forty-four businesses.
Forbes Global A-List. In this listing of the 400 best companies in the
world, Forbes Global magazine divided the group into twenty-eight sectors
composed of "companies that are leaders in their fields." For the second year in
a row, Paychex was the featured company in the sixteen-firm business services
category.
The Business Week 50. Paychex became a BW 50 "top corporate performer" in
this ranking of the S&P 500, moving up to #47, from #68 last year. In making
selections, Business Week weighs eight criteria, including sales, profits, and
return to shareholders.
IBD Corporate Leaders, Long-Term Performers. Paychex placed #3 in the
Investor's Business Daily's annual list of the "decade's best long-term
outperformers." This list was limited to ten companies. With an increase of
4,388%, Paychex was #5 on an accompanying list that ranked companies by the
amount that their stock price changed between December 29, 1989 and April
12,2001.
The Business Week Global 1000. This list ranks companies, worldwide, by
market value. The Paychex position in the U.S. was #172, and internationally
#330.
[end of sidebar]
===============================================================================
Products like our Internet services and After-the-Fact Payroll, CPE seminar
programs, and informational publiscations expand on a well-established
partnership for success that mutually benefits the accounting community and
Paychex.
Paychex Employees
One of our greatest assets is the dedication and skill of our 7,300
employees nationwide. Paychex realizes the value of its human resources and
emphasizes personal development through employee recognition, internal
promotion, and an emphasis on training and development programs. Paychex has a
corporate training and development center that delivers comprehensive
professional programs, many of which are certified for college credit. This
year, there were over one million employee hours dedicated to field training,
formal classroom instruction, and testing. These programs keep everyone from
payroll specialists and sales representatives to computer operators up to date
on products, payroll and tax regulations, management skills, and other topics
that are important to delivering quality customer service.
IT ALL BEGINS WITH PAYROLL
Calculating a payroll, remitting the appropriate taxes, and getting pay to
employees requires that Paychex handle the funds as well as extensive employer
and employee information. These data and funds, combined with the sophisticated
capabilities and knowledge used to handle them, form a foundation upon which
Paychex builds new products to meet the needs of its clients.
Payroll Processing
Any business owner with employees knows the headaches that come from
calculating payrolls, determining and filing tax payments, keeping records, and
providing employee benefits. They are never-ending tasks that are filled with
the risk of legal penalties, take away from the business of doing business, and
can become overwhelming. To ease this burden, many businesses turn to Paychex.
Calculation and delivery of employee pay, production of management reports,
and preparation of payroll tax returns form the basis of the Paychex payroll
service. Core payroll clients have an average of fourteen employees and
thirty-one payrolls processed each year.
Clients send their employee hour and wage information to Paychex in a
variety of ways. For personalized service, our Payroll Specialists telephone
businesses on a scheduled basis to obtain payroll data. Other clients prefer to
fax us their information, send it from a personal computer via our
Paylink(Registered Trademark) or Preview(Service Mark) software, or use our
Internet Time Sheet. We also offer the ability to accept payroll input from time
and attendance systems of our clients.
Paychex Major Market Services (MMS) specializes in the needs of current
clients who have outgrown our core service or new clients with more complex
payroll and human resource needs. Larger companies often prefer to retain
process control with an in-house payroll system, and this is provided by Paychex
Preview software. Paychex handles the software maintenance and compliance,
payroll taxes, direct deposit, payroll packaging, and related issues of business
continuity. This is a mutually beneficial division of labor for businesses and
Paychex, and this year MMS revenue increased 58%.
Internet Utilization
Paychex continues to expand its Internet capabilities and clients have
embraced the efficiencies these services offer. While our Internet Time Sheet
facilitates the flow of payroll information from businesses to our processing
centers, two other Internet products expand the ways that information can travel
back to clients. The Paychex Internet Report Service lets companies access their
current and historical payroll information, and reduces the cost and delivery
time of their reports. Our General Ledger Reporting Service transfers calculated
payroll information to a client's accounting software, eliminating
time-consuming manual entries and improving the accuracy of bookkeeping.
The view from the Paychex end of this electronic pipeline is one of broader
communication with prospects and clients, expanded avenues for customer service,
improved productivity, and new opportunities for delivering products and
services. We plan continued expansion of Internet capabilities where they
promise benefits to those on both ends of the connection. For example, in fiscal
2002, we will be implementing enhancements to our retirement plan programs that
will provide 401(k) participants online access to their personal information.
They will be able to review the status of their account, calculate contribution
scenarios, and make changes to the way funds are invested, as allowed by their
plan. This Internet capability will benefit employers, employees, and Paychex by
streamlining access for participants while reducing the time and expense spent
on support by company managers and Paychex personnel.
We also plan on introducing a real-time, online payroll service that will
complement our current set of Internet payroll products. With this new
capability, clients will be able to enter their payroll data and receive full
payroll processing, including all reports, within hours.
BEYOND A STRONG FOUNDATION
Payroll doesn't end with the gathering of the hours an employee has worked
and the calculation of their net pay. Complying with tax and other laws,
transferring funds, and accomplishing other necessary tasks provide the demand
for products that Paychex continues to build on the foundation of basic payroll
processing.
Taxpay(Registered Trademark)
An employer typically files and makes payments for over forty payroll tax
returns a year. Penalties can result if they do not deposit payroll taxes and
file returns in a timely fashion. The Paychex Taxpay service provides peace of
mind to clients by assuming the responsibility for the accurate preparation and
punctual filing of quarterly and year-end returns, as well as the electronic
transfer of funds to the appropriate agencies. This very successful ancillary
service has reached 83% client utilization, with Paychex making available
federal, state, and local payroll and business tax services. During fiscal 2001,
Paychex made $54.0 billion in payroll tax payments on behalf of clients.
Employee Pay Services
Conventional payroll checks, direct bank deposit, a debit and purchase card
option called the Paychex Access Card (in association with MasterCard(Registered
Trademark)), and a special check called Readychex(Service Mark) are all payment
selections offered by Paychex. These allow payroll disbursements that fit the
variable needs of both employees and employers. Additionally, the Paychex
Flexible Pay Package provides a cost-effective, bundled approach that can have
the extended benefit of very convenient, one-step payroll account reconciliation
for employers. From the Paychex perspective, direct deposit, Access Card,
Readychex, and the Flexible Pay Package encourage purely electronic money
transfers that cut costs, increase productivity, extend the use of ancillary
products, and maximize investment periods on related float monies.
This year, Paychex transferred $67.1 billion in direct deposit funds to
employee accounts. Client utilization of our employee pay services has grown to
53%, from 47% in 2000.
New-Hire Reporting
New-hire reporting helps employers meet federal and state requirements
that aid enforcement of child support orders, and help reduce fraudulent
workers' compensation and unemployment claims. This service removes a compliance
concern from the schedule of employers and eliminates the risk of penalties.
Niche services like new-hire reporting contribute to our full-service goals and,
in combination with other products, encourage businesses to maintain a long-term
relationship with Paychex.
Garnishment Processing
When legal action causes a worker's wages to be garnished, the task of
compliance falls on the shoulders of the person's employer. This involves
deduction of the appropriate amount each pay period, forwarding of the payment
to the proper agency, and accurate tracking so that the garnishment ceases when
the obligation has been fulfilled. To help simplify this process, Paychex has
introduced a payroll garnishment service that will be available nationwide by
the end of calendar 2001.
Research indicates that as many as one in ten American workers has a wage
garnishment, suggesting widespread need for this product. In addition to
extending revenue per client, this garnishment service is another offering that
helps solidify the Paychex partnership with clients and encourages retention.
COMPREHENSIVE SERVICES FOR EMPLOYERS AND EMPLOYEES
Payroll provides the fulcrum on which Paychex leverages many other
value-added products. This has made Paychex a full-service company, capable of
delivering complete employer and employee administrative services. With this
"critical mass" of infrastructure, knowledge, and experience, Paychex is well
positioned to both create and exploit new windows of opportunity.
Comprehensive Administrative Services
Paychex has introduced Paychex Administrative Services (PAS) nationwide,
and we are very excited about the potential for this inclusive format of bundled
services. In its first full year of nationwide availability, PAS already serves
more client employees than our professional employer organization (PEO). PAS
provides the most beneficial and acceptable approach for employers because it
brings businesses a total package that includes payroll, employer compliance,
employee benefits administration, and risk management. Smaller companies find
this approach attractive because it brings them comprehensive, big-company human
resource services and expertise that were previously out of reach. Larger firms
favor PAS because they seek a turnkey approach with related administrative
functions sourced from a single vendor. PAS does not engage in co-employment of
workers, removing objections that many employers have with some employee leasing
programs. It also eliminates substantial areas of co-employer risk and other
factors that tend to dilute margins.
A professional employer organization takes a somewhat different approach to
total services by becoming co-employer of a client company's employees. In
Florida and Georgia, states that offer an attractive regulatory environment that
reduces risks related to co-employer status and where PEOs are popular, we offer
this service through our PEO, Paychex Business Solutions.
Retirement Services
The 401(k) retirement plan has become a prevalent part of employee benefit
packages, and because of its unique position as a payroll processor, Paychex has
been able to make these plans economical for almost any employer. The number of
companies that depend on Paychex for their funds transfer and 401(k) plan
recordkeeping increased 33% over last year. This represented $1.8 billion in
plans for which we do the recordkeeping. Paychex has been very successful in
educating the marketplace about retirement plan options, particularly for
smaller companies that previously thought that such programs were out of reach.
Measured by the number of plans administered, Paychex has become one of the
country's fastest-growing and largest recordkeepers. Even with this growth,
this service offers considerable room for continued expansion.
In addition to conventional 401(k) administration, Paychex also partners
with leading fund managers to offer SIMPLE Individual Retirement Account plans.
SIMPLE IRAs are particularly well suited for the self-employed, business owners
seeking a successor to a SAR/SEP plan, or those for whom employee compensation
does not coincide with the compliance requirements of a traditional 401(k) plan.
Recognizing the value of our 401(k) recordkeeping capabilities, Paychex has
extended the product to companies that are not using our payroll service. Their
payroll information is transferred electronically to Paychex directly from the
company or its payroll provider. Only recently introduced, this service provides
an example of how our company can extend capabilities without requiring
recordkeeping clients to become Paychex payroll clients. However, pricing has
been structured to make the conversion to the Paychex payroll service attractive
if so desired by the recordkeeping client. This product promises broad potential
because it allows Paychex to market 401(k) recordkeeping, regardless of whether
we initially obtain the client's payroll business.
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. Usually, companies pay estimated premiums at the start of the coverage
period and then an audit examines claims, wage rates, and job classifications
for an adjustment at the end of the period. Smaller companies in particular find
the ups and downs of these payments a difficult cash management problem. The
Paychex Pay-As-You-Go(Service Mark) plan stabilizes cash flow and minimizes
period-end adjustments by monitoring claims, rates, and classifications on a
continuing basis and assesses costs more evenly throughout the term of the
policy.
This product has significant growth potential because of the near universal
need for workers' compensation insurance. Paychex acts, through its licensed
agency, as a general agent providing insurance through a variety of insurance
carriers who are the underwriters, and receives revenue from fees and float
income from the collection and subsequent distribution of premiums to carriers.
Section 125 Plans
Section 125 of the U.S. Internal Revenue Code was established to encourage
individual health care planning, and it provides favorable tax considerations
for persons who contribute to premium-only plans and flexible spending accounts
(FSAs). Section 125 provisions are typically implemented via payroll deductions,
and handling these plans can be time consuming for employers because of
government reporting and compliance requirements, and recordkeeping needed for
the deductions and disbursements on FSA plans. Paychex provides cost-efficient
outsourcing of section 125 plan administration, which allows the addition of a
section 125 plan to a client's benefits package at low cost.
Other Human Resource Products
From employee handbooks to workplace compliance packages, Paychex provides
a range of products that helps employers and employees communicate and stay
informed. With these services, Paychex seeks to round out an offering that
provides comprehensive business process outsourcing to employers.
Strategies for Success
Outsourcing the administration of important, and often confidential
business functions requires confidence and trust. As we continue to expand our
client base, we will focus on improving client services, growing revenue per
client through increased utilization of ancillary services, and on continued
leveraging of our infrastructure. We have built a full-service company capable
of delivering comprehensive employer and employee administrative services, and
are well prepared to capitalize on these strategies for future success.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews the Company's operating results for each of the three fiscal
years in the period ended May 31, 2001 (fiscal 2001, 2000, and 1999), and its
financial condition at May 31, 2001. This review should be read in conjunction
with the accompanying Consolidated Financial Statements, the related Notes to
Consolidated Financial Statements, and the Eleven-Year Summary of Selected
Financial Data. Forward-looking statements in this review are qualified by the
cautionary statement contained in Exhibit 99: "Safe Harbor" Statement Under the
Private Securities Litigation Reform Act of 1995.
Results of Operations
In thousands, except
per share amounts
2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Total revenues $869,857 19.5% $728,119 21.9% $597,296
Combined operating and
SG&A expenses $533,155 13.6% $469,226 14.5% $409,734
Operating income $336,702 30.1% $258,893 38.0% $187,562
Operating margin 38.7% 35.6% 31.4%
Income before income taxes $363,981 32.2% $275,372 37.6% $200,143
Net income $254,869 34.1% $190,007 36.6% $139,099
% of total revenues 29.3% 26.1% 23.3%
Basic earnings per share $ .68 33.3% $ .51 34.2% $ .38
Diluted earnings per share $ .68 33.3% $ .51 37.8% $ .37
- --------------------------------------------------------------------------------
The financial results for Paychex, Inc. in fiscal 2001 reflect the eleventh
consecutive year of record service revenues and net income, and the tenth
consecutive year of net income growth of 30% or more. The Company's ability to
grow its client base, increase client utilization of ancillary services, develop
new services, implement price increases, and decrease operating expenses as a
percent of total revenues has driven the increases in total revenues and net
income in fiscal 2001 and fiscal 2000.
The increases in combined operating and selling, general, and administrative
(SG&A) expenses reflect increases in personnel, information technology, and
facility costs necessary to support the growth of the Company. At the end of
fiscal 2001, the Company had 7,300 employees compared with 6,200 at the end of
fiscal 2000. In fiscal 2002, combined operating and SG&A costs are expected to
grow at a rate slightly below the growth rate experienced in fiscal 2001.
The increase in operating income and the improvement in operating margins
reflect the Company's ability to add profitable ancillary services and leverage
its infrastructure to grow profits faster than revenue growth.
In fiscal 2001, total revenues and net income benefited from higher comparable
average rates of interest earned and net realized gains on available-for-sale
securities related to the funds held for clients and corporate investment
portfolios. The recent trend of interest rate reductions is evidenced by the
Federal Funds rate moving from 6.50% at the beginning of January 2001 to 4.00%
at the end of May 2001. Looking ahead to fiscal 2002, the interest rate
reductions will impact year-over-year net income growth. The Company expects to
continue to generate record revenues and net income with total revenue growth in
the range of 16% to 18%.
In fiscal 2001, 2000, and 1999, the Company had two reportable business
segments: Payroll and Human Resource and Benefits. See Note A of the Notes to
Consolidated Financial Statements for a detailed description of these reportable
segments and related business activities.
Payroll segment
In thousands
2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Service revenue $688,650 15.8% $594,445 20.6% $492,914
Interest on funds held
for clients $ 83,336 41.7% $ 58,800 12.4% $ 52,335
-------- ---- -------- ---- --------
Total Payroll segment revenues $771,986 18.2% $653,245 19.8% $545,249
Operating income $366,498 20.8% $303,360 27.9% $237,236
Operating margin 47.5% 46.4% 43.5%
- --------------------------------------------------------------------------------
Revenues: Total Payroll segment revenues include service fees and interest on
funds held for clients. Service fee revenue is earned primarily from Payroll,
Taxpay, Employee Pay Services, and other ancillary services. Employee Pay
Services includes the Direct Deposit, Readychex, and Access Card products. In
addition to service fees paid by clients, the Company earns interest on Taxpay
and Employee Pay Services funds that are collected before due dates and invested
(funds held for clients) until remittance to the applicable tax authorities for
Taxpay clients and employees of Employee Pay Services clients. Interest on funds
held for clients is included in total revenues on the Consolidated Statements of
Income as the collection, holding, and remittance of these funds is a critical
component of providing these particular product services. Interest on funds held
for clients also includes net realized gains and losses from the sale of
available-for-sale securities.
The increases in Payroll service revenue are primarily related to the addition
of new clients, new services, price increases, and increased utilization of
ancillary services, by both new and existing clients. At May 31, 2001, 83% of
Paychex clients utilized Taxpay, the Company's tax filing and payment feature,
compared with 81% at the end of 2000 and 79% at the end of 1999. Client
utilization of the Taxpay product is expected to mature within a range of 83% to
87%. The Company's Employee Pay Services were utilized by 53% of clients at May
31, 2001, versus 47% and 42% at May 31, 2000 and 1999, respectively. During
fiscal 2001 and 2000, the Company continued expansion of its Major Market
Services (MMS) payroll product offering. MMS is now available in approximately
half of the markets served by the Company. MMS revenues totaled $47.4 million,
$30.0 million, and $19.3 million in fiscal 2001, 2000, and 1999, respectively.
This represents year-over-year revenue growth of 58% for fiscal 2001 and 55% for
fiscal 2000. Employee Pay Services and MMS are expected to provide continuing
revenue growth opportunities for fiscal 2002 and beyond. In fiscal 2001, the
Company introduced new payroll product enhancements including Employee
Garnishments and After-the-Fact payroll. Fiscal 2002's percentage growth in
Payroll service revenue is expected to be in the range of 16% to 18%.
In fiscal 2001 and 2000, interest on funds held for clients increased due to
growth in the utilization of Taxpay and Employee Pay Services by new and
existing clients and higher average daily balances. Average daily portfolio
balances for funds held for clients were approximately $1.7 billion, $1.4
billion, and $1.1 billion in fiscal 2001, 2000, and 1999, respectively. The
significantly higher percentage growth in interest on funds held for clients in
fiscal 2001 reflects the benefit of higher comparable average rates of return
and net realized gains on the sale of available-for-sale securities. In fiscal
2001, interest on funds held for clients included net realized gains of $5.7
million compared with net realized losses of $2.9 million and net realized gains
of $2.4 million in fiscal 2000 and 1999, respectively. During the third and
fourth quarters of fiscal 2001, market rates of interest declined significantly
with the Federal Funds rate decreasing 2.50 percentage points during the period.
Due to the decrease in interest rates, the Company expects that interest on
funds held for clients in fiscal 2002 will be lower than in fiscal 2001. For
further discussion of interest rates and related risks, refer to the "Market
Risk Factors" section of this review.
Operating income: Operating income for 2001 and 2000 increased as a result of
the increases in Payroll service revenue and interest on funds held for clients
and continued leveraging of the segment's operating expense base as evidenced by
the improvement in operating margins year-over-year.
Effective September 1, 1999, the Company increased its sales force compensation
package by approximately $6.0 million on an annualized basis to increase the
retention and quality of its payroll sales representatives. This compensation
increase resulted in additional expense of approximately $4.5 million in fiscal
2000 and $1.5 million in the first quarter of fiscal 2001 when compared to the
prior years.
Human Resource and Benefits segment
In thousands
2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Service revenue $97,871 30.7% $74,874 43.9% $52,047
Operating income $37,890 62.0% $23,395 111.3% $11,072
Operating margin 38.7% 31.2% 21.3%
- --------------------------------------------------------------------------------
Revenues: The significant increases in service revenue for 2001 and 2000 are
primarily related to increasing 401(k) Recordkeeping, Workers' Compensation
Insurance Administration, and Section 125 clients, and PAS and PEO client
employees serviced. At May 31, 2001, over 19,000 clients utilized the Company's
401(k) Recordkeeping service, and over $1.7 billion of client employee funds
were managed externally. The growth in 401(k) clients reflects the continuing
interest of small- to medium-sized businesses in offerering retirement savings
benefits to their employees. 401(k) Recordkeeping revenues were $43.0 million,
$31.5 million, and $19.7 million in fiscal 2001, 2000, and 1999, respectively.
This represents year-over-year growth of 36% in fiscal 2001 and 60% in fiscal
2000. The Company continued to expand its Workers' Compensation Insurance
Administration product, which provides insurance for qualified clients through
leading insurance providers and a reporting method to stabilize their cash flows
throughout the year.
In fiscal 2000, the Company began a nationwide expansion of its Paychex
Administrative Services (PAS) product, a combined package of payroll, employer
compliance, employee benefit administration, and risk management outsourcing
services designed to make it easier for small businesses to manage their payroll
and related benefit costs. Expansion efforts continued throughout fiscal 2001,
and the PAS product is now available nationwide. The Company operates a
Professional Employer Organization (PEO) which provides the same combined
package of services as the PAS product, but as a co-employer of the client's
employees. The Company's PEO service is primarily focused in the states of
Florida and Georgia where PEOs are popular and operate under an attractive
regulatory environment. At the end of fiscal 2001, the PAS and PEO products
serviced over 60,000 client employees.
Operating income: For 2001 and 2000, the increases in operating income are
primarily related to the service revenue gains and the leveraging of operating
expenses.
Full-year fiscal 2002's Human Resource and Benefits service revenue is expected
to grow at a rate slightly higher than in fiscal 2001. Fiscal 2002's
quarter-over-quarter percentage comparisons in Human Resource and Benefits
revenue and operating income may vary significantly throughout the year, and any
one particular quarter's results may not be indicative of expected full-year
results.
Corporate expenses
In thousands
2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Corporate expenses $67,686 -.3% $67,862 11.7% $60,746
- --------------------------------------------------------------------------------
Corporate expenses are primarily related to the Information Technology,
Organizational Development, Finance, Marketing, and Senior Management functions
of the Company. Corporate expenses have increased primarily due to additional
employees and other expenditures required to support the continued growth of the
Company's service operations and sales force. In fiscal 2001, these increases
were offset by lower spending on national marketing efforts and other areas,
resulting in a relatively flat growth year-over-year. Looking forward, the
Company expects the growth in corporate expenses to be in the range of 10% to
13% in fiscal 2002.
Investment income
In thousands
2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Investment income $27,279 65.5% $16,479 31.0% $12,581
- --------------------------------------------------------------------------------
Investment income primarily represents earnings from the Company's cash and cash
equivalents and investments in available-for-sale securities. Investment income
does not include interest on funds held for clients, which are recorded within
the Payroll segment and total revenue. The increases in investment income in
fiscal 2001 and 2000 are primarily due to the increase in average daily invested
balances generated from increases in overall cash flows. Average daily balances
invested were $.6 billion, $.4 billion, and $.3 billion for fiscal 2001, 2000,
and 1999, respectively. Fiscal 2001 also benefited from higher comparable
average rates of return and net realized gains on available-for-sale securities.
In fiscal 2001, investment income included net realized gains on
available-for-sale securities of $1.7 million compared to net realized losses of
$0.8 million in fiscal 2000 and net realized gains of $0.5 million in fiscal
1999. During the third and fourth quarters of fiscal 2001, market rates of
interest declined significantly with the Federal Funds rate decreasing 2.50
percentage points during the period. As a result of the decrease in interest
rates, investment income for fiscal 2002 is expected to grow at a rate
significantly lower than in fiscal 2001. Refer to the "Market Risk Factors"
section of this review for further discussion of interest rates and the related
risks.
Income taxes
In thousands
2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Income taxes $109,112 27.8% $85,365 39.8% $61,044
Effective income tax rate 30.0% 31.0% 30.5%
- --------------------------------------------------------------------------------
The change in the effective income tax rate in 2001 is due to the growth in
tax-exempt income exceeding the growth in taxable income and other tax reduction
opportunities. Tax-exempt income is derived primarily from income earned on
municipal debt securities. Fiscal 2002's effective income tax rate is expected
to approximate 31.0%.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
In thousands
2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Operating cash flows $304,938 22.5% $249,028 43.0% $174,120
- --------------------------------------------------------------------------------
The increases in operating cash flows resulted primarily from the achievement of
higher net income. Projected operating cash flows are expected to adequately
support normal business operations, forecasted growth, purchases of property and
equipment, and dividend payments. At May 31, 2001, the Company had $614 million
in available cash and corporate investments. The Company also had $140 million
of available, uncommitted, unsecured lines of credit and $350 million available
under an uncommitted, secured line of credit.
Investing activities
In thousands
2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Net funds held for clients
and corporate investment
activities $(144,270) -- $(144,322) 74.5% $(82,724)
Purchases of property
and equipment (45,250) 32.5% (34,154) 54.4% (22,116)
Proceeds from the sale of
property and equipment 32 -- 1,266 -- 12
Purchases of other assets (8,290) 19.0% (6,964) 94.0% (3,590)
--------- ----- --------- ----- ---------
Net cash used in investing
activities $(197,778) 7.4% $(184,174) 69.9% $(108,418)
- --------------------------------------------------------------------------------
Funds held for clients and corporate investments: 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. The portfolio of funds held for clients and corporate investments is
detailed in Note D of the Notes to Consolidated Financial Statements.
The reported amount of funds held for clients will vary significantly based upon
the timing of collecting client funds, and the related remittance of funds to
the applicable tax authorities for Taxpay clients and employees of clients
utilizing Employee Pay Services. Corporate investments have increased due to the
investment of growing cash balances provided by operating activities offset by
purchases of property and equipment and dividend payments. At May 31, 2001, the
total available-for-sale portfolio included unrealized gains of $20.5 million,
compared to a portfolio at May 31, 2000 that included unrealized losses of $13.4
million. Additional discussion of interest rates and related risks is included
in the "Market Risk Factors" section of this review.
Purchases of property and equipment: To support the Company's client and
ancillary product growth, investments are regularly made in data processing
equipment and software, and for the expansion and upgrade of various branch
facilities. In fiscal 2001, the Company made purchases of property and equipment
of $45.3 million compared with $34.2 million of purchases in fiscal 2000. In May
2001, the Company purchased a 135,000-square-foot office facility in Rochester
for approximately $5.0 million. This facility will house a centralized
information technology data center and various other support functions. As a
result of this purchase, the Company has delayed previously announced plans to
construct a new 300,000-square-foot building at an estimated cost of $40
million. During fiscal 2000, the Company sold an office facility in California
for $1.2 million and purchased a branch office facility in Pennsylvania for $6.1
million. Purchases of property and equipment in fiscal 2002 are expected to be
in the range of $35 million to $40 million. Fiscal 2002 depreciation expense is
projected to be approximately $28 million.
Effective June 1, 1999, the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires the capitalization of internal use computer
software costs if certain criteria are met, including all external direct costs
for materials and services and certain payroll and related fringe benefit costs.
Prior to fiscal 2000, the Company expensed as incurred certain payroll and
related fringe benefit costs to develop and enhance its internal computer
programs and software. The effect of adopting the SOP increased net income by
approximately $3.2 million and $2.4 million for the years ended May 31, 2001 and
May 31, 2000, respectively.
Financing activities
In thousands, except
per share amounts
2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Dividends paid $(123,112) 50.9% $(81,583) 50.9% $(54,055)
Proceeds from exercise
of stock options 14,600 29.9% 11,242 103.1% 5,535
Other -- -- (69) 13.1% (61)
--------- ----- -------- ----- --------
Net cash used in financing
activities $(108,512) 54.1% $(70,410) 44.9% $(48,581)
- --------------------------------------------------------------------------------
Cash dividends per common
share $ .33 50.0% $ .22 46.7% $ .15
- --------------------------------------------------------------------------------
Dividends paid: On October 10, 2000 and October 7, 1999, the Company increased
its quarterly cash dividend rate per share by 50%. Future dividends are
dependent on the Company's future earnings and cash flow. The Company has
declared three-for-two stock splits effected in the form of 50% stock dividends
on outstanding shares in May of 2000 and 1999.
Proceeds from exercise of stock options: The increase in proceeds from the
exercise of stock options is primarily due to an increase in the number of
shares exercised and higher comparable exercise prices per share. The Company
has recognized a tax benefit from the exercise of stock options of $26.4
million, $19.4 million, and $16.3 million for fiscal 2001, fiscal 2000, and
fiscal 1999, 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 of the Notes to the Consolidated
Financial Statements for additional disclosure on the Company's stock option
plans.
MARKET RISK FACTORS
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. The Company's
available-for-sale debt securities are exposed to interest rate risk as
interest rate volatility will cause fluctuations in the market value of held
investments and the earnings potential of future investments. Decreases in
interest rates normally increase the market value of the available-for-sale
securities, while increases in interest rates decrease the market value of the
available-for-sale securities. The Company's available-for-sale securities and
short-term funds are exposed to earnings risk from changes in interest rates, as
rate volatility will cause fluctuations in the earnings potential of future
investments. Decreases in interest rates quickly decrease earnings from short-
term funds, and over time decrease earnings from the available-for-sale
securities portfolio. Increases in interest rates have the opposite earnings
effect on the available-for-sale securities and short-term funds. Earnings from
the available-for-sale securities do not reflect changes in rates until the
investments are sold or mature, and the proceeds are reinvested at current
rates. The immediate impact of changing interest rates on earnings from
short-term funds may be temporarily offset by realized gains or losses from
transactions in the Company's available-for-sale portfolio. The Company
estimates that the earnings effect of a 25-basis-point change in interest rates
(17 basis points for tax-exempt investments) at this point in time would equate
to approximately $3.0 million for fiscal 2002.
The Company directs investments towards high-credit-quality, tax-exempt
securities to mitigate the risk that earnings from the portfolio could be
adversely impacted by changes in interest rates in the near term. The Company
invests in short- to intermediate-term, fixed-rate municipal and government
securities, which typically have lower interest rate volatility, and manages the
securities portfolio to a benchmark duration of 2.5 to 3.0 years. The Company
does not utilize derivative financial instruments to manage interest rate risk.
The recent trend in interest rates has been toward interest rate reductions
versus interest rate increases during fiscal 2000. The following table
summarizes the changes in the Federal Funds rate over the last three years:
2001 2000 1999
- --------------------------------------------------------------------------------
Federal Funds rate - beginning
of fiscal year 6.50% 4.75% 5.50%
Rate increase/(decrease):
First quarter - .50 -
Second quarter - .25 (.75)
Third quarter (1.00) .25 -
Fourth quarter (1.50) .75 -
----- ----- -----
Federal Funds rate - end of 4.00% 6.50% 4.75%
fiscal year
- --------------------------------------------------------------------------------
Three-Year "AAA" Municipal Securities
Yield at May 31: 3.44% 4.96% 3.85%
- --------------------------------------------------------------------------------
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- and
intermediate-term investments, the proportionate 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 Company's tax-exempt interest rates
by approximately 17 basis points. Realized gains are more prevalent in a
decreasing rate environment and realized losses are more prevalent in an
increasing rate environment. During fiscal 2001, the Company's total investment
portfolio averaged approximately $2.3 billion compared with an average of $1.8
billion for fiscal 2000. The total investment portfolio is expected to average
$2.6 billion in fiscal 2002. The Company's normal and anticipated allocation is
approximately 50% invested in short-term securities with a duration of less than
30 days and 50% invested in intermediate-term municipal securities with an
average duration of three years.
As of May 31, 2001, the available-for-sale securities included unrealized gains
of $20.5 million, compared with a portfolio at May 31, 2000 that included
unrealized losses of $13.4 million. In fiscal 2000, the available-for-sale
portfolio had a market value less than its cost basis as a result of the upward
trend in interest rates throughout the year. The decreasing interest rate
environment in fiscal 2001 resulted in the improvement in the market value of
the available-for-sale portfolio. As of May 31, 2001 and May 31, 2000, the
Company had $1.3 billion and $1.0 billion invested in available-for-sale
securities at fair value, with weighted average yields to maturity of 4.3% and
4.5%, respectively. Assuming a hypothetical decrease in interest rates of 25
basis points given the May 31, 2001 securities portfolios, the resulting
potential increases in fair value would be in the range of $7.5 million to $8.5
million. Conversely, a corresponding increase in interest rates would result in
a comparable decrease in fair value. This hypothetical decrease or increase in
the fair value of the portfolio would be recorded as an adjustment to the
portfolio's recorded value, with an offsetting amount recorded in stockholders'
equity, with no related or immediate impact to 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, 2001,
approximately 98% of the available-for-sale securities held an AA rating or
better, and all short-term securities classified as cash equivalents held an A-1
or equivalent rating.
OTHER
Recently issued accounting standards: In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements." This SAB formalizes the SEC's position on
application of revenue recognition rules. The Company adopted SAB No. 101 in the
fourth quarter of fiscal 2001 with no material impact on the Company's results
of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement was most recently amended in
June 2000 by Statement of Financial Accounting Standards No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - An Amendment
of FASB Statement No. 133." These statements are collectively referred to as
SFAS 133. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities and is effective for fiscal
years beginning after June 15, 2000. The Company will adopt the provisions of
SFAS No. 133 in the first quarter of fiscal 2002. The Company currently does not
utilize derivative instruments and does not expect that adoption of SFAS No. 133
will have a significant effect on its consolidated results of operations or
financial position.
Report of Ernst & Young LLP Independent Auditors
Board of Directors
Paychex, Inc.
We have audited the accompanying consolidated balance sheets of Paychex, Inc. as
of May 31, 2001 and 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended May 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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, 2001 and 2000, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
May 31, 2001, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Buffalo, New York
June 21, 2001
Consolidated Statements of Income
- ------------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts
Year ended May 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Revenues:
Payroll $688,650 $594,445 $492,914
Human Resource and Benefits 97,871 74,874 52,047
-----------------------------------------------------
Total service revenues 786,521 669,319 544,961
Interest on funds held for clients 83,336 58,800 52,335
-----------------------------------------------------
Total revenues 869,857 728,119 597,296
Operating costs 200,352 173,481 151,956
Selling, general, and administrative expenses 332,803 295,745 257,778
-----------------------------------------------------
Operating income 336,702 258,893 187,562
Investment income 27,279 16,479 12,581
-----------------------------------------------------
Income before income taxes 363,981 275,372 200,143
Income taxes 109,112 85,365 61,044
-----------------------------------------------------
Net income $254,869 $190,007 $139,099
-----------------------------------------------------
Basic earnings per share $ .68 $ .51 $ .38
-----------------------------------------------------
Diluted earnings per share $ .68 $ .51 $ .37
-----------------------------------------------------
Weighted-average common shares outstanding 372,777 370,603 368,282
-----------------------------------------------------
Weighted-average shares assuming dilution 377,510 375,081 373,182
-----------------------------------------------------
Cash dividends per common share $ .33 $ .22 $ .15
- ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------
In thousands
May 31, 2001 2000
- --------------------------------------------------------------------------------------------------
Assets
- ------
Cash and cash equivalents $ 45,784 $ 47,136
Corporate investments 568,217 412,357
Interest receivable 28,281 22,436
Accounts receivable 100,640 87,608
Deferred income taxes -- 9,539
Prepaid expenses and other current assets 7,306 6,531
-----------------------------------
Current assets before funds held for clients 750,228 585,607
Funds held for clients 2,041,045 1,776,968
-----------------------------------
Total current assets 2,791,273 2,362,575
Property and equipment - net 96,078 75,375
Goodwill and intangible assets - net 9,612 5,584
Deferred income taxes 1,361 2,494
Other assets 8,872 9,549
-----------------------------------
Total assets $2,907,196 $2,455,577
-----------------------------------
Liabilities
- -----------
Accounts payable $ 16,377 $ 17,086
Accrued compensation and related items 57,418 52,631
Deferred revenue 4,421 4,719
Accrued income taxes 9,783 2,969
Deferred income taxes 4,996 --
Other current liabilities 19,282 24,400
-----------------------------------
Current liabilities before client fund deposits 112,277 101,805
Client fund deposits 2,031,565 1,785,140
-----------------------------------
Total current liabilities 2,143,842 1,886,945
Long-term liabilities 5,512 5,200
-----------------------------------
Total liabilities 2,149,354 1,892,145
Stockholders' equity
- --------------------
Common stock, $.01 par value, 600,000 authorized shares
Issued: 373,647/2001 and 371,769/2000 3,736 3,718
Additional paid-in capital 139,897 98,904
Retained earnings 601,142 469,385
Accumulated other comprehensive income/(loss) 13,067 (8,575)
-----------------------------------
Total stockholders' equity 757,842 563,432
-----------------------------------
Total liabilities and stockholders' equity $2,907,196 $2,455,577
- --------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Statements of Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------
In thousands Accumulated
Common stock Additional other
------------------ paid-in Retained comprehensive
Shares Amount capital earnings income/(loss) Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1998 163,188 $1,632 $ 46,463 $ 278,107 $ 3,405 $ 329,607
- ---------------------------------------------------------------------------------------------------------------------------
Net income 139,099 139,099
Unrealized losses on securities,
net of tax (575) (575)
--------------
Total comprehensive income 138,524
Cash dividends declared (54,055) (54,055)
Exercise of stock options 1,032 10 5,525 5,535
Tax benefit from exercise of
stock options 16,250 16,250
Shares issued in connection
with three-for-two stock split 82,106 821 (882) (61)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1999 246,326 2,463 68,238 362,269 2,830 435,800
- ---------------------------------------------------------------------------------------------------------------------------
Net income 190,007 190,007
Unrealized losses on securities,
net of tax (11,405) (11,405)
--------------
Total comprehensive income 178,602
Cash dividends declared (81,583) (81,583)
Exercise of stock options 1,532 16 11,226 11,242
Tax benefit from exercise of
stock options 19,440 19,440
Shares issued in connection
with three-for-two stock split 123,911 1,239 (1,308) (69)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2000 371,769 3,718 98,904 469,385 (8,575) 563,432
- ---------------------------------------------------------------------------------------------------------------------------
Net income 254,869 254,869
Unrealized gains on securities,
net of tax 21,642 21,642
--------------
Total comprehensive income 276,511
Cash dividends declared (123,112) (123,112)
Exercise of stock options 1,878 18 14,582 14,600
Tax benefit from exercise of
stock options 26,411 26,411
- ---------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2001 373,647 $3,736 $139,897 $ 601,142 $ 13,067 $ 757,842
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------
In thousands
Year ended May 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Operating activities
- --------------------
Net income $ 254,869 $ 190,007 $ 139,099
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization on depreciable and
intangible assets 26,439 23,903 22,097
Amortization of premiums and discounts on
available-for-sale securities 12,700 12,581 10,814
Provision (benefit) for deferred income taxes 3,411 (2,786) (427)
Provision for bad debts 1,413 1,871 1,886
Net realized (gains)/losses on sales of
available-for-sale securities (7,423) 3,728 (2,866)
Changes in operating assets and liabilities:
Interest receivable (5,845) (4,391) (4,818)
Accounts receivable (14,445) (26,538) (10,231)
Prepaid expenses and other current assets (775) (531) (1,609)
Accounts payable and other current liabilities 34,116 48,276 21,847
Net change in other assets and liabilities 478 2,908 (1,672)
-----------------------------------------------------
Net cash provided by operating activities 304,938 249,028 174,120
-----------------------------------------------------
Investing activities
- --------------------
Purchases of available-for-sale securities (921,138) (869,795) (755,335)
Proceeds from sales of available-for-sale securities 575,247 711,184 488,662
Proceeds from maturities of available-for-sale securities 19,230 19,770 31,535
Net change in funds held for clients money market
securities and other cash equivalents (64,034) (432,016) (55,707)
Net change in client fund deposits 246,425 426,535 208,121
Purchases of property and equipment (45,250) (34,154) (22,116)
Proceeds on the disposal of property and equipment 32 1,266 12
Purchases of other assets (8,290) (6,964) (3,590)
-----------------------------------------------------
Net cash used in investing activities (197,778) (184,174) (108,418)
-----------------------------------------------------
Financing activities
- --------------------
Dividends paid (123,112) (81,583) (54,055)
Proceeds from exercise of stock options 14,600 11,242 5,535
Other -- (69) (61)
-----------------------------------------------------
Net cash used in financing activities (108,512) (70,410) (48,581)
-----------------------------------------------------
Increase/(decrease) in cash and cash equivalents (1,352) (5,556) 17,121
Cash and cash equivalents, beginning of fiscal year 47,136 52,692 35,571
-----------------------------------------------------
Cash and cash equivalents, end of fiscal year $ 45,784 $ 47,136 $ 52,692
- ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Note A - Significant Accounting Policies
Business activities and reportable segments: Paychex, Inc. and its wholly owned
subsidiaries (the "Company") is a national provider of payroll, human resource,
and employee benefits outsourcing solutions for small- to medium-sized
businesses.
Paychex, Inc. operates within the continental United States of America and
has two reportable segments: Payroll and Human Resource and Benefits.
Payroll segment: The Payroll segment is engaged in 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 Taxpay, an automated tax payment and
filing service, the Company collects payroll taxes from clients on payday, files
the applicable tax returns, and pays taxes to the appropriate taxing authorities
on the due dates. 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 or underpayments of taxes.
In connection with Employee Pay Services, employers are offered the option of
paying their employees by Direct Deposit, Access Card, a check drawn on a
Paychex account, or a check drawn on the employer's account. For the first three
methods, net payroll is collected from the client's account one day before
payroll and provides payment to the employee on payday.
In addition to service fees paid by clients, the Company earns interest on
Taxpay and Employee Pay Services funds that are collected before due dates and
invested (funds held for clients) until remittance to the applicable tax
authorities for Taxpay clients and employees of Employee Pay Services clients.
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.
Human Resource and Benefits segment: The Human Resource and Benefits segment
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 Company's Paychex Administrative Services (PAS) product provides a combined
package of payroll, employer compliance, employee benefit administration, and
risk management outsourcing services designed to make it easier for small
businesses to manage their payroll and related benefit costs. The Company also
operates a Professional Employer Organization (PEO), which provides the same
combined package of services as the PAS product, but as a co-employer of the
client's 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.
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 each security's cost basis. 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 on the Consolidated Statements of Income.
Concentrations: Substantially all of the Company's deposited cash is maintained
at two, large, creditworthy financial institutions. These deposits may exceed
the amount of any insurance provided. All of the Company's 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 creditworthy 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 typical estimated useful lives of depreciable assets are 35 years for
buildings and 2 to 15 years for all others.
Goodwill and intangible assets - net: Goodwill and intangible assets result from
business acquisitions and client acquisitions and are reported net of
accumulated amortization in the Consolidated Balance Sheets. Goodwill and
intangible assets are amortized over periods ranging from 5 to 10 years using
either straight-line or accelerated methods. The Company regularly reviews and
assesses the recoverability of such assets.
Revenue recognition: Service revenues are recognized in the period services are
rendered and earned. PEO revenues are included in Human Resource and Benefits
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 were $865,716,000, $731,266,000, and
$578,132,000 for fiscal 2001, 2000, and 1999, respectively.
Interest on funds held for clients is earned on Taxpay and Employee Pay Services
funds that are collected by the Company before due dates and invested (funds
held for clients) until remittance to the applicable tax authorities for Taxpay
clients and employees of Employee Pay Services clients. The interest earned on
these funds is included in total revenues on the Consolidated Statements of
Income as the collection, holding, and remittance of these funds is a critical
component of providing these particular product services. Interest on funds held
for clients also includes net realized gains and losses from the sale of
available-for-sale securities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." This SAB formalizes the SEC's position on application of revenue
recognition rules. The Company adopted SAB No. 101 in the fourth quarter of
fiscal 2001 and there was no significant impact to the consolidated results of
operations or financial position.
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 bases 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
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: Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," establishes
accounting and reporting standards for stock-based employee compensation plans.
As permitted by the SFAS, 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 grant.
Stock splits effected in the form of stock dividends: The Company declared
three-for-two stock splits in the form of 50% stock dividends on outstanding
shares payable to shareholders of record as of May 12, 2000 and May 13, 1999,
with respective distribution dates of May 22, 2000 and May 21, 1999. Basic and
diluted earnings per share, cash dividends per common share, weighted-average
shares outstanding, weighted-average shares assuming dilution, and all
applicable footnotes have been adjusted to reflect the aforementioned stock
splits.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues,
and expenses during the reporting period. Actual amounts and results could
differ from those estimated.
New accounting standard: In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The statement was most
recently amended in June 2000 by Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133." The statements are
collectively referred to as SFAS 133. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities and is
effective for fiscal years beginning after June 15, 2000. The Company will adopt
the provisions of SFAS No. 133 in the first quarter of fiscal 2002. The Company
currently does not utilize derivative financial instruments and does not expect
that adoption of SFAS No. 133 will have any significant effect on its
consolidated 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.
Note B - Segment Financial Information
The Company operates in two reportable business segments - Payroll and Human
Resource and Benefits. Refer to Note A for a description of these segments. The
Company reports segment financial information consistent with the presentation
made to the Company's management for decision-making purposes and resource
allocation. The Company evaluates segment performance based on operating income,
utilizing the Company's accounting policies described in the summary of
significant accounting policies. There are no intersegment sales. The Company's
Corporate function and expenses are comprised of the Information Technology,
Organizational Development, Finance, Marketing, and Senior Management
organizations. Financial information for each segment is as follows:
- -----------------------------------------------------------------------------------------------------------------------
In thousands
Year ended May 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
Payroll service revenue $ 688,650 $ 594,445 $ 492,914
Interest on funds held for clients 83,336 58,800 52,335
------------------------------------------------------
Total Payroll segment revenues 771,986 653,245 545,249
Human Resource and Benefits service revenue 97,871 74,874 52,047
------------------------------------------------------
Total revenues $ 869,857 $ 728,119 $ 597,296
- -----------------------------------------------------------------------------------------------------------------------
Operating income:
Payroll $ 366,498 $ 303,360 $ 237,236
Human Resource and Benefits 37,890 23,395 11,072
------------------------------------------------------
Segment operating income 404,388 326,755 248,308
Corporate expenses 67,686 67,862 60,746
------------------------------------------------------
Total operating income 336,702 258,893 187,562
Investment income 27,279 16,479 12,581
------------------------------------------------------
Income before income taxes $ 363,981 $ 275,372 $ 200,143
- -----------------------------------------------------------------------------------------------------------------------
Purchases of long-lived assets:
Payroll $ 26,513 $ 18,367 $ 13,597
Human Resource and Benefits 3,650 1,184 539
Corporate 23,377 21,567 11,570
------------------------------------------------------
Total purchases of long-lived assets $ 53,540 $ 41,118 $ 25,706
- -----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense:
Payroll $ 23,123 $ 22,177 $ 20,050
Human Resource and Benefits 1,405 1,115 1,070
Corporate 14,611 13,192 11,791
------------------------------------------------------
Total depreciation and amortization expense $ 39,139 $ 36,484 $ 32,911
- -----------------------------------------------------------------------------------------------------------------------
Identifiable assets: May 31,
------------------------------------------------------
Payroll $2,166,836 $1,889,554 $1,463,606
Human Resource and Benefits 65,987 57,822 32,144
Corporate 674,373 508,201 377,351
------------------------------------------------------
Total identifiable assets $2,907,196 $2,455,577 $1,873,101
- -----------------------------------------------------------------------------------------------------------------------
Note C - Basic and Diluted Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
- --------------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts
Year ended May 31, 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net income $ 254,869 $ 190,007 $ 139,099
-----------------------------------------------------
Weighted-average common shares outstanding 372,777 370,603 368,282
-----------------------------------------------------
Basic earnings per share $ .68 $ .51 $ .38
-----------------------------------------------------
Diluted earnings per share:
Net income $ 254,869 $ 190,007 $ 139,099
-----------------------------------------------------
Weighted-average common shares outstanding 372,777 370,603 368,282
Effect of dilutive stock options at average market price 4,733 4,478 4,900
-----------------------------------------------------
Weighted-average shares assuming dilution 377,510 375,081 373,182
-----------------------------------------------------
Diluted earnings per share $ .68 $ .51 $ .37
- --------------------------------------------------------------------------------------------------------------------
For the years ended May 31, 2001, 2000, and 1999, weighted-average options to
purchase shares of common stock in the amount of 328,000, 495,000, and 149,000,
respectively, were not included in 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, and, therefore, the effect
would have been anti-dilutive.
Note D - Corporate Investments and Funds Held For Clients
Corporate investments and funds held for clients at May 31, 2001 and 2000 are as
follows:
- -------------------------------------------------------------------------------------------------------------------
In thousands
2001 2000
-----------------------------------------------------------------------
Type of issue: Cost Fair value Cost Fair value
-----------------------------------------------------------------------
Money market securities and other
cash equivalents $1,266,698 $1,266,698 $1,202,664 $1,202,664
Available-for-sale securities:
General obligation municipal bonds 582,249 590,806 405,214 399,190
Pre-refunded municipal bonds 293,109 298,058 301,271 298,706
Revenue municipal bonds 443,667 450,635 291,157 286,294
Other securities 20 64 20 92
-----------------------------------------------------------------------
Total available-for-sale securities 1,319,045 1,339,563 997,662 984,282
Other 3,099 3,001 1,802 2,379
-----------------------------------------------------------------------
Total corporate investments
and funds held for clients $2,588,842 $2,609,262 $2,202,128 $2,189,325
- -------------------------------------------------------------------------------------------------------------------
Classification of investments on
Consolidated Balance Sheets:
Corporate investments $ 557,277 $ 568,217 $ 416,988 $ 412,357
Funds held for clients 2,031,565 2,041,045 1,785,140 1,776,968
-----------------------------------------------------------------------
Total corporate investments and
funds held for clients $2,588,842 $2,609,262 $2,202,128 $2,189,325
- -------------------------------------------------------------------------------------------------------------------
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, 2001, approximately 98% of the available-for-sale bond
securities held an AA rating or better, and all short-term securities classified
as cash equivalents held an A-1 or equivalent rating. The Company does not
utilize derivative financial instruments to manage interest rate risk.
Cost, gross unrealized gains and losses, and the fair value of the
available-for-sale securities are as follows:
- -------------------------------------------------------------------------------------------------------------------
In thousands Gross Gross
unrealized unrealized
May 31, Cost gains losses Fair value
- -------------------------------------------------------------------------------------------------------------------
2001 $1,319,045 $ 20,771 $ 253 $1,339,563
-----------------------------------------------------------------------
2000 $ 997,662 $ 401 $ 13,781 $ 984,282
- -------------------------------------------------------------------------------------------------------------------
Gross realized gains and losses are as follows:
- -------------------------------------------------------------------------------------------------------------------
In thousands
Year ended May 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Gross realized gains $ 8,157 $ 590 $ 3,129
Gross realized losses $ 734 $ 4,318 $ 263
- -------------------------------------------------------------------------------------------------------------------
The cost and fair value of available-for-sale securities at May 31, 2001, 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.
- -------------------------------------------------------------------------------------------------------------------
In thousands
May 31, 2001 Cost Fair value
- -------------------------------------------------------------------------------------------------------------------
Maturity date:
Due in one year or less $ 165,753 $ 166,797
Due after one year through three years 528,282 536,873
Due after three years through five years 410,691 418,461
Due after five years 214,319 217,432
------------------------------------
Total available-for-sale securities $1,319,045 $1,339,563
- -------------------------------------------------------------------------------------------------------------------
Note E - Property and Equipment - Net
The components of property and equipment - net are as follows:
- ------------------------------------------------------------------------------------------------------------------
In thousands
May 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Land and improvements $ 2,919 $ 2,919
Buildings and improvements 36,923 30,195
Data processing equipment and software 106,359 84,490
Furniture, fixtures, and equipment 75,243 64,729
Leasehold improvements 12,545 10,536
-----------------------------------
233,989 192,869
Less: accumulated depreciation and amortization 137,911 117,494
-----------------------------------
Property and equipment - net $ 96,078 $ 75,375
- ------------------------------------------------------------------------------------------------------------------
Depreciation expense was $24,406,000, $22,442,000, and $20,853,000 for fiscal
years 2001, 2000, and 1999, respectively.
Note F - Goodwill and Intangible Assets - Net
The components of goodwill and intangible assets - net are as follows:
- ------------------------------------------------------------------------------------------------------------------
In thousands
May 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Goodwill $ 3,955 $ 3,955
Less: accumulated amortization 2,300 1,918
-----------------------------------
Goodwill - net $ 1,655 $ 2,037
-----------------------------------
Intangible assets:
Client acquisitions $ 12,809 $ 6,748
Less: accumulated amortization 4,852 3,201
-----------------------------------
Client acquisitions - net $ 7,957 $ 3,547
-----------------------------------
Goodwill and intangible assets - net $ 9,612 $ 5,584
- ------------------------------------------------------------------------------------------------------------------
Goodwill amortization expense was $382,000, $382,000, and $402,000 for fiscal
years 2001, 2000, and 1999, respectively. Amortization expense for client
acquisitions was $1,651,000, $1,079,000, and $842,000 for fiscal years 2001,
2000, and 1999, respectively.
Note G - Stock Option Plans
The Company reserved 7,814,250 shares to be granted to employees in the form of
non-qualified and incentive stock options under the 1998 Stock Incentive Plan,
with 4,386,000 shares available for future grants at May 31, 2001. The 1995,
1992, and 1987 Stock Incentive Plans expired in August 1998, 1995, and 1992,
respectively; however, options to purchase 5,850,000 shares under these plans
remained outstanding at May 31, 2001.
The exercise price for the shares subject to options of the Company's 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.
In November 1996, the Company granted options to purchase 3,157,000 shares in a
broad-based incentive stock option grant, for which 50% vested on May 3, 1999,
and 50% vested on May 1, 2001. At May 31, 2001, options to purchase 1,160,000
shares remained outstanding and exercisable at an exercise price of $11.53 per
share. In July 1999, the Company granted options to purchase 1,381,000 shares in
a second broad-based incentive stock option grant, for which 25% vested in July
2000 and an additional 25% will vest in each of the following three years. At
May 31, 2001, options to purchase 943,000 shares remained outstanding at an
exercise price of $21.46 per share. Subsequent to each of the broad-based
grants, each April and October the Company granted options to newly hired
employees that met certain criteria.
The following table summarizes stock option activity for the three years ended
May 31, 2001:
- ------------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts Shares subject Weighted-average
to options exercise price
-----------------------------------------------------
Outstanding at May 31, 1998 12,942 $ 7.08
Granted 1,130 $ 19.59
Exercised (2,318) $ 2.59
Forfeited (882) $ 12.37
-----------------------------------------------------
Outstanding at May 31, 1999 10,872 $ 8.91
Granted 2,991 $ 22.82
Exercised (2,281) $ 5.16
Forfeited (875) $ 17.62
-----------------------------------------------------
Outstanding at May 31, 2000 10,707 $ 12.88
Granted 881 $ 43.35
Exercised (1,878) $ 8.10
Forfeited (547) $ 22.73
-----------------------------------------------------
Outstanding at May 31, 2001 9,163 $ 16.21
-----------------------------------------------------
Exercisable at May 31, 1999 5,429 $ 4.99
-----------------------------------------------------
Exercisable at May 31, 2000 4,708 $ 6.59
-----------------------------------------------------
Exercisable at May 31, 2001 5,202 $ 9.63
- ------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding and
exercisable at May 31, 2001:
- ------------------------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
- ------------------------------------------------------------------------------------------------------------------
Weighted-
Weighted- average Weighted-
Range of exercise Shares subject average remaining Shares subject average
prices per share to options exercise price contractual to options exercise price
(in thousands) per share life in years (in thousands) per share
- ------------------------------------------------------------------------------------------------------------------
$ 1.08 - $10.28 2,177 $ 4.26 3.2 2,177 $ 4.26
$10.29 - $20.55 3,780 $13.08 5.9 2,708 $12.31
$20.56 - $30.83 2,178 $21.57 8.0 273 $21.67
$30.84 - $41.10 382 $34.84 9.2 44 $35.58
$41.11 - $51.38 646 $45.74 9.2 -- $ --
-------------- --------------
9,163 $16.21 6.1 5,202 $ 9.63
- ------------------------------------------------------------------------------------------------------------------
In applying APB Opinion No. 25, no expense was recognized for stock options
granted. SFAS No. 123 requires that a fair market value of all awards of
stock-based compensation be determined using standard techniques and that pro
forma net income and earnings per share be disclosed as if the resulting
stock-based compensation amounts were recorded in the Consolidated Statements of
Income. The table below depicts the effects of SFAS No. 123:
- ------------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts
Year ended May 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Pro forma net income $244,481 $180,849 $134,642
Pro forma basic earnings per share $ .66 $ .49 $ .37
Pro forma diluted earnings per share $ .65 $ .48 $ .36
- ------------------------------------------------------------------------------------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the stock
option is amortized to expense over the option's vesting period. The fair value
of these stock options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
-----------------------------------------------------
Year ended May 31, 2001 2000 1999
-----------------------------------------------------
Risk-free interest rate 5.7% 5.7% 5.0%
Dividend yield .8% 1.1% .8%
Volatility factor .33 .30 .40
Expected option term life in years 5.0 5.0 4.5
- ------------------------------------------------------------------------------------------------------------------
The weighted-average fair value of stock options granted for the years ended May
31, 2001, 2000, and 1999 were $15.55, $7.62, and $7.45 per share, respectively.
Note H - Income Taxes
The components of net deferred tax assets are as follows:
- ----------------------------------------------------------------------------------------------------------------
In thousands
May 31, 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Compensation and employee benefit liabilities $ 3,717 $ 3,500
Allowance for bad debts 1,307 1,250
Other current liabilities 4,247 5,227
Unrealized losses on available-for-sale securities -- 4,805
Other 2,879 2,851
-----------------------------------
Gross deferred tax assets 12,150 17,633
-----------------------------------
Deferred tax liabilities:
Revenue not subject to current taxes 5,782 4,440
Unrealized gains on available-for-sale securities 7,451 --
Other 2,552 1,160
-----------------------------------
Gross deferred tax liabilities 15,785 5,600
-----------------------------------
Net deferred tax asset/(liability) $(3,635) $12,033
- ----------------------------------------------------------------------------------------------------------------
The components of the provision for income taxes are as follows:
- ----------------------------------------------------------------------------------------------------------------
In thousands
Year ended May 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Current:
Federal $ 91,297 $76,327 $51,224
State 14,404 11,824 10,247
---------------------------------------------------
Total current 105,701 88,151 61,471
---------------------------------------------------
Deferred:
Federal 2,934 (2,398) (131)
State 477 (388) (296)
---------------------------------------------------
Total deferred 3,411 (2,786) (427)
---------------------------------------------------
Provision for income taxes $109,112 $85,365 $61,044
- ----------------------------------------------------------------------------------------------------------------
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, 2001 is as
follows:
- ------------------------------------------------------------------------------------------------------------------
Year ended May 31, 2001 2000 1999
-----------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
Increase/(decrease) resulting from:
State income taxes, net of federal benefit 2.7 2.7 3.2
Tax-exempt municipal bond interest (7.8) (7.8) (7.7)
Other items .1 1.1 -
-----------------------------------------------------
Effective income tax rate 30.0% 31.0% 30.5%
- ------------------------------------------------------------------------------------------------------------------
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, the only component of other
comprehensive income:
- ------------------------------------------------------------------------------------------------------------------
In thousands
Year ended May 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Unrealized holding gains/(losses) $ 41,321 $(21,599) $ 1,979
Income tax (expense)/benefit related to unrealized
holding (gains)/losses (14,923) 7,806 (716)
Reclassification adjustment for the (gain)/loss
on sale of securities realized in net income (7,423) 3,728 (2,866)
Income tax expense/(benefit) on reclassification
adjustment for gain/(loss) on sale of securities 2,667 (1,340) 1,028
---------------------------------------------
Other comprehensive income/(loss) $ 21,642 $(11,405) $ (575)
- ------------------------------------------------------------------------------------------------------------------
Note J - Supplemental Cash Flow Information
Income taxes paid: The Company paid state and federal income taxes of
$71,734,000, $68,194,000, and $43,251,000 for the years ended May 31, 2001,
2000, and 1999, 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 $26,411,000, $19,440,000, and $16,250,000 for the
years ended May 31, 2001, 2000, and 1999, respectively.
Note K - Commitments and Contingencies
Employee benefits: The Company's 401(k) Incentive Retirement Plan allows all
employees to immediately participate in the salary deferral portion of the plan.
Employees who have completed one year of service are eligible to receive a
company matching contribution. The Company currently matches 50% of an
employee's voluntary contribution, with a maximum of 3% of eligible
compensation. Company contributions for the years ended May 31, 2001, 2000, and
1999 were $4,981,000, $4,235,000, and $3,525,000, respectively.
Lines of credit: The Company has two available, uncommitted, unsecured lines of
credit from various banks totaling $140 million at market rates of interest. The
Company also has an available, uncommitted, secured line of credit totaling $350
million at market rates of interest. No amounts were outstanding against these
lines of credit at May 31, 2001 and 2000.
Contingencies: In the normal course of business and operations, the Company is
subject to various claims and litigation. Management believes the resolution of
these matters will not have a material effect on the financial position or
results of operations of the Company.
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, 2001, 2000, and 1999 was $29,054,000, $25,400,000, and $23,038,000,
respectively. At May 31, 2001, future minimum lease payments under various
noncancelable operating leases with terms of more than one year are $23,284,000
in fiscal 2002, $21,379,000 in fiscal 2003, $17,975,000 in fiscal 2004,
$13,251,000 in fiscal 2005, $10,580,000 in fiscal 2006, and $17,502,000
thereafter.
QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands, except per share amounts
- -----------------------------------------------------------------------------------------------------------------
Fiscal 2001 August 31, November 30, February 28, May 31, Year
----------------------------------------------------------------------------
Revenues:
Payroll $164,521 $167,133 $177,842 $179,154 $688,650
Human Resource and Benefits 21,949 23,612 25,509 26,801 97,871
----------------------------------------------------------------------------
Total service revenues 186,470 190,745 203,351 205,955 786,521
Interest on funds held for clients 17,413 17,353 25,905 22,665 83,336
----------------------------------------------------------------------------
Total revenues $203,883 $208,098 $229,256 $228,620 $869,857
----------------------------------------------------------------------------
Operating income $ 78,826 $ 83,425 $ 86,882 $ 87,569 $336,702
Investment income 5,534 5,965 7,234 8,546 27,279
----------------------------------------------------------------------------
Income before income taxes 84,360 89,390 94,116 96,115 363,981
Income taxes 25,730 27,264 27,764 28,354 109,112
----------------------------------------------------------------------------
Net income $ 58,630 $ 62,126 $ 66,352 $ 67,761 $254,869
----------------------------------------------------------------------------
Basic earnings per share $ .16 $ .17 $ .18 $ .18 $ .68
Diluted earnings per share $ .16 $ .16 $ .18 $ .18 $ .68
Weighted-average common
shares outstanding 372,015 372,618 373,057 373,455 372,777
Weighted-average shares
assuming dilution 377,165 377,839 377,681 377,397 377,510
Cash dividends per common share $ .06 $ .09 $ .09 $ .09 $ .33
Market value per share:
High $ 46.88 $ 61.25 $ 58.63 $ 42.85 $ 61.25
Low $ 35.00 $ 40.50 $ 36.75 $ 30.61 $ 30.61
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Fiscal 2000 August 31, November 30, February 29, May 31, Year
----------------------------------------------------------------------------
Revenues:
Payroll $138,712 $142,866 $155,466 $157,401 $594,445
Human Resource and Benefits 15,473 17,459 20,362 21,580 74,874
----------------------------------------------------------------------------
Total service revenues 154,185 160,325 175,828 178,981 669,319
Interest on funds held for clients 12,207 12,033 16,355 18,205 58,800
----------------------------------------------------------------------------
Total revenues $166,392 $172,358 $192,183 $197,186 $728,119
----------------------------------------------------------------------------
Operating income $ 58,684 $ 62,508 $ 67,903 $ 69,798 $258,893
Investment income 3,688 3,854 4,012 4,925 16,479
----------------------------------------------------------------------------
Income before income taxes 62,372 66,362 71,915 74,723 275,372
Income taxes 19,335 20,572 22,294 23,164 85,365
----------------------------------------------------------------------------
Net income $ 43,037 $ 45,790 $ 49,621 $ 51,559 $190,007
----------------------------------------------------------------------------
Basic earnings per share $ .12 $ .12 $ .13 $ .14 $ .51
Diluted earnings per share $ .12 $ .12 $ .13 $ .14 $ .51
Weighted-average common
shares outstanding 369,627 370,258 370,972 371,576 370,603
Weighted-average shares
assuming dilution 373,493 374,717 377,723 376,407 375,081
Cash dividends per common share $ .04 $ .06 $ .06 $ .06 $ .22
Market value per share:
High $ 22.13 $ 28.42 $ 34.13 $ 36.88 $ 36.88
Low $ 16.58 $ 19.17 $ 24.67 $ 29.54 $ 16.58
- ---------------------------------------------------------------------------------------------------------------
Note: 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. Per
share amounts have been adjusted for three-for-two stock splits in May 2000 and
May 1999.
QUARTERLY SEGMENT FINANCIAL DATA (UNAUDITED)
In thousands
- -----------------------------------------------------------------------------------------------------------------
Fiscal 2001 August 31, November 30, February 28, May 31, Year
-----------------------------------------------------------------------------
Revenues:
Payroll service revenue $164,521 $167,133 $177,842 $179,154 $688,650
Interest on funds held for clients 17,413 17,353 25,905 22,665 83,336
-----------------------------------------------------------------------------
Total Payroll segment revenues 181,934 184,486 203,747 201,819 771,986
Human Resource and Benefits
service revenue 21,949 23,612 25,509 26,801 97,871
-----------------------------------------------------------------------------
Total revenues $203,883 $208,098 $229,256 $228,620 $869,857
- -----------------------------------------------------------------------------------------------------------------
Operating income:
Payroll $ 87,534 $ 90,328 $ 94,259 $ 94,377 $366,498
Human Resource and Benefits 8,394 9,199 9,349 10,948 37,890
-----------------------------------------------------------------------------
Segment operating income 95,928 99,527 103,608 105,325 404,388
Corporate expenses 17,102 16,102 16,726 17,756 67,686
-----------------------------------------------------------------------------
Total operating income 78,826 83,425 86,882 87,569 336,702
Investment income 5,534 5,965 7,234 8,546 27,279
-----------------------------------------------------------------------------
Income before income taxes $ 84,360 $ 89,390 $ 94,116 $ 96,115 $363,981
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Fiscal 2000 August 31, November 30, February 29, May 31, Year
-----------------------------------------------------------------------------
Revenues:
Payroll service revenue $138,712 $142,866 $155,466 $157,401 $594,445
Interest on funds held for clients 12,207 12,033 16,355 18,205 58,800
-----------------------------------------------------------------------------
Total Payroll segment revenues 150,919 154,899 171,821 175,606 653,245
Human Resource and Benefits
service revenue 15,473 17,459 20,362 21,580 74,874
-----------------------------------------------------------------------------
Total revenues $166,392 $172,358 $192,183 $197,186 $728,119
- -----------------------------------------------------------------------------------------------------------------
Operating income:
Payroll $ 72,184 $ 72,567 $ 77,683 $ 80,926 $303,360
Human Resource and Benefits 4,504 5,729 6,831 6,331 23,395
-----------------------------------------------------------------------------
Segment operating income 76,688 78,296 84,514 87,257 326,755
Corporate expenses 18,004 15,788 16,611 17,459 67,862
-----------------------------------------------------------------------------
Total operating income 58,684 62,508 67,903 69,798 258,893
Investment income 3,688 3,854 4,012 4,925 16,479
-----------------------------------------------------------------------------
Income before income taxes $ 62,372 $ 66,362 $ 71,915 $ 74,723 $275,372
- -----------------------------------------------------------------------------------------------------------------
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
In thousands, except per share amounts
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended May 31, 2001 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Results of operations
- ---------------------
Revenues:
Payroll $ 688,650 $ 594,445 $ 492,914 $ 411,798 $ 334,750 $282,452
Human Resource and Benefits 97,871 74,874 52,047 38,477 30,878 23,791
----------------------------------------------------------------------------------------
Total service revenues 786,521 669,319 544,961 450,275 365,628 306,243
Interest on funds held for clients 83,336 58,800 52,335 43,429 34,105 27,065
----------------------------------------------------------------------------------------
Total revenues $ 869,857 $ 728,119 $ 597,296 $ 493,704 $ 399,733 $333,308
----------------------------------------------------------------------------------------
Operating income $ 336,702 $ 258,893 $ 187,562 $ 134,700 $ 96,625 $ 69,922
% of total revenues 38.7% 35.6% 31.4% 27.3% 24.2% 21.0%
Investment income $ 27,279 $ 16,479 $ 12,581 $ 9,473 $ 7,031 $ 5,467
Income before income taxes $ 363,981 $ 275,372 $ 200,143 $ 144,173 $ 103,656 $ 75,389
% of total revenues 41.8% 37.8% 33.5% 29.2% 25.9% 22.6%
Net income $ 254,869 $ 190,007 $ 139,099 $ 102,219 $ 75,150 $ 55,035
% of total revenues 29.3% 26.1% 23.3% 20.7% 18.8% 16.5%
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .68 $ .51 $ .38 $ .28 $ .21 $ .15
Diluted earnings per share $ .68 $ .51 $ .37 $ .28 $ .20 $ .15
Weighted-average common shares outstanding 372,777 370,603 368,282 366,771 364,503 360,885
Weighted-average shares assuming dilution 377,510 375,081 373,182 370,829 368,454 364,926
Cash dividends per common share $ .33 $ .22 $ .15 $ .10 $ .07 $ .05
- -----------------------------------------------------------------------------------------------------------------------------------
Financial position
- ------------------
Working capital $ 647,431 $ 475,630 $ 360,784 $ 263,118 $ 194,614 $138,639
Purchases of property and equipment $ 45,250 $ 34,154 $ 22,116 $ 28,386 $ 18,536 $ 17,806
Total assets $2,907,196 $2,455,577 $1,873,101 $1,549,787 $1,201,323 $831,585
Total debt $ -- $ -- $ -- $ -- $ -- $ --
Stockholders' equity $ 757,842 $ 563,432 $ 435,800 $ 329,607 $ 251,542 $191,072
Return on stockholders' equity 37.9% 37.8% 35.9% 36.0% 33.9% 32.3%
- -----------------------------------------------------------------------------------------------------------------------------------
Note: Per share and weighted-average share amounts have been adjusted for
three-for-two stock splits in May 2000, May 1999, May 1998, May 1997, May 1996,
May 1995, August 1993, and May 1992.
- -----------------------------------------------------------------------------------------------------------
Year ended May 31, 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
Results of operations
- ---------------------
Revenues:
Payroll $235,427 $203,612 $175,071 $151,138 $131,711
Human Resource and Benefits 18,020 11,290 7,700 5,253 3,289
----------------------------------------------------------------
Total service revenues 253,447 214,902 182,771 156,391 135,000
Interest on funds held for clients 18,666 12,051 8,933 5,514 2,175
----------------------------------------------------------------
Total revenues $272,113 $226,953 $191,704 $161,905 $137,175
----------------------------------------------------------------
Operating income $ 52,264 $ 37,442 $ 26,934 $ 18,812 $ 13,267
% of total revenues 19.2% 16.5% 14.0% 11.6% 9.7%
Investment income $ 3,458 $ 2,220 $ 1,379 $ 821 $ 764
Income before income taxes $ 55,722 $ 39,662 $ 28,313 $ 19,633 $ 14,031
% of total revenues 20.5% 17.5% 14.8% 12.1% 10.2%
Net income $ 40,389 $ 28,746 $ 20,241 $ 13,788 $ 9,606
% of total revenues 14.8% 12.7% 10.6% 8.5% 7.0%
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share $ .11 $ .08 $ .06 $ .04 $ .03
Diluted earnings per share $ .11 $ .08 $ .06 $ .04 $ .03
Weighted-average common shares outstanding 356,016 354,972 353,505 351,057 349,464
Weighted-average shares assuming dilution 359,066 358,085 356,298 353,063 349,988
Cash dividends per common share $ .03 $ .02 $ .01 $ .01 $ .01
- -----------------------------------------------------------------------------------------------------------
Financial position
- ------------------
Working capital $100,009 $ 68,888 $ 46,776 $ 28,245 $ 19,230
Purchases of property and equipment $ 12,535 $ 11,667 $ 8,822 $ 13,580 $ 18,420
Total assets $647,366 $474,786 $322,214 $221,771 $133,342
Total debt $ 728 $ 948 $ 1,634 $ 2,024 $ 2,431
Stockholders' equity $141,976 $109,124 $ 85,365 $ 67,623 $ 54,512
Return on stockholders' equity 32.2% 29.6% 26.5% 22.6% 18.9%
- -----------------------------------------------------------------------------------------------------------
Board of Directors
B. Thomas Golisano, 59, a director since 1979, founded Paychex, Inc., in 1971
and is Chairman, President, and Chief Executive Officer of the Company. He
serves on the Board of Trustees of the Rochester Institute of Technology and is
a member of the Board of Directors of Iron Mountain Corporation and several
privately held companies. He is former chairman of Greater Rochester Fights Back
(a coalition to combat illegal drugs and alcohol abuse), has served as a member
of the Board of Directors of numerous non-profit organizations, and is founder
of the B. Thomas Golisano Foundation.
Steven D. Brooks, 50, a director since 1995, is a founding Managing Director of
Broadview Capital Partners, a private equity firm focused on investments in the
technology sector. From 1997 to 1999, he served as a Managing Director and head
of technology mergers and acquisitions at Donaldson, Lufkin & Jenrette
Securities Corporation. From 1996 to August 1997, he was a private investor and
a consultant to technology companies. From 1994 to 1996, he served as Managing
Director and head of Global Technology Investment Banking at Union Bank of
Switzerland Securities LLC. He is a member of the Board of Directors of
Pharsight Corporation, an enterprise software company serving the pharmaceutical
industry, and VERITAS Software Corporation, a storage management software
company, as well as several privately held companies.
G. Thomas Clark, 63, a director since 1980, retired as Senior Vice President of
Finance, Secretary, and Treasurer of Paychex, Inc., in October 1996. He joined
Paychex in 1979 after spending eighteen years in the commercial banking
business. He is a member of the Board of Directors of Unity Health Systems, the
Rochester School of the Holy Childhood, the Heritage Christian Home Foundation,
and Harris Interactive, Inc. as well as several privately held companies. Mr.
Clark is a Trustee of the B. Thomas Golisano Foundation.
David J. S. Flaschen, 45, a director since 1999, is currently a General Partner
with OneLiberty Ventures. From 1997 to 1999, he was the President and Chief
Executive Officer of Thomson Financial, an information services company focused
on the financial industry. Previously, he served as Chairman and Chief Executive
Officer of Donnelley Marketing, Inc., a consumer information services company.
Prior to 1995, he was with Dun & Bradstreet for ten years as the President and
Chief Operating Officer of A.C. Nielsen, North America, and held senior
management positions at IMS and DataQuest. Mr. Flaschen is a member of the Board
of Directors of Buyerzone.com and a member of the Board of Advisors of SI
Ventures.
Phillip Horsley, 62, a director since 1982, is the founder and Managing Director
of Horsley Bridge Partners, formed in 1983. Horsley Bridge manages private
equity investments for institutional investors.
Grant M. Inman, 59, a director since 1983, is the founder and President of
Inman Investment Management, a private venture capital investment company formed
in 1998. Prior to 1998, he co-founded and was general partner of Inman & Bowman,
a private venture capital partnership formed in 1985. He is a member of the
Board of Directors of Lam Research Corporation, Wind River Systems, Inc., and
several privately held companies. Mr. Inman is a trustee of the University of
California, Berkeley Foundation and the University of Oregon Foundation.
Harry P. Messina, Jr., 69, a director since 1985, has been a partner for more
than thirty-five years in the law firm of Woods Oviatt Gilman LLP. He serves on
the Advisory Board of M & T Bank, the Board of Trustees of St. Joseph's Villa,
and is a member of the Board of Directors of Rochester Management, Inc., as well
as several privately held companies.
J. Robert Sebo, 65, a director since 1979, retired as Senior Vice
President/Director of Eastern Operations of Paychex, Inc., in December 1994,
where he also had many sales and operations positions within the Company. In
1974, he started his own Paychex franchise operation in Cleveland, Ohio. For
fourteen years prior to that he held sales, marketing, and business management
positions in the Cadillac Motor Car Division of General Motors Corporation.
Joseph M. Tucci, 53, a director since January 2000, is the President and Chief
Executive Officer of EMC Corporation, a leading provider of intelligent
enterprise information storage systems, software, networks, and services. From
January 2000 to January 2001, he was President and Chief Operating Officer of
EMC Corporation. Prior to joining EMC, Mr. Tucci served as Deputy Chief
Executive Officer of Getronics NV, an information technology services company,
from June 1999 through December 1999. From 1993 to June 1999, he served as
Chairman and Chief Executive Officer of Wang Global, a leader in networked
technology services and solutions, which was acquired by Getronics NV in June
1999. Mr. Tucci is a member of the Board of Directors of Telecom Italia S.p.A.
Officers
B. Thomas Golisano
Chairman, President, and Chief Executive Officer
Daniel Canzano
Vice President, Information Technology
William Kuchta
Vice President, Organizational Development
John Morphy
Vice President, Chief Financial Officer, and Secretary
Diane Rambo
Vice President, Human Resource Services
Walter Turek
Vice President, Sales
In Memoriam
EUGENE POLISSENI
[picture omitted]
At Paychex, we have visionaries. We have financial professionals. We have
technicians. We have salespeople. In Gene Polisseni, we had something special.
Gene represented the heart and soul of Paychex. You could approach him about
anything - and when you did, you would always find him smiling.
Gene deserves credit for designing our management structure of separate
sales and operations divisions. He became our first vice president of sales,
creating many of the sales and management techniques we still use today. Gene
formed our first centralized training schools for salespeople, and was our first
director of human resources. He became director of marketing, and started our
first telemarketing organization. Most recently, Gene oversaw the creation of
our Human Resource Services division, and initiated many new products, including
401(k) recordkeeping, employee handbooks, cafeteria plans, workers' compensation
insurance, our PEO, and Paychex Administrative Services. But with all of that
said, Gene's most notable accomplishment was the many, many employees he
recruited and brought into this organization - and then was instrumental in
their development.
We will remember Gene for his friendship and for his advice and counsel.
His contributions to our company and, in particular, to the officer group were
invaluable.
SHAREHOLDER INFORMATION
Annual Meeting
The annual meeting of stockholders will be held Thursday, October 11, 2001, at
10:00 a.m. at the Rochester Riverside Convention Center, 123 East Main Street,
Rochester, NY 14604.
Common Stock
The Company's common stock trades on The NASDAQ Stock Market(Service Mark) under
the symbol PAYX.
Dividends
The Company has paid a cash dividend each quarter since 1988. Dividends are
normally paid in February, May, August, and November. The level and continuation
of future dividends is dependent on the Company's future earnings and cash flow.
Transfer Agent and Registrar
Please send inquiries, certificates for transfer, address changes, and dividend
reinvestment and stock purchase requests to:
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10038
1-800-937-5449
Direct Reinvestment and Stock Purchase Plan
Stockholders can elect to have some or all of their dividends reinvested,
and can make additional investments in common stock through American Stock
Transfer & Trust Co.
Independent Auditors
Ernst & Young LLP
1400 Key Tower
50 Fountain Plaza
Buffalo, NY 14202
Financial Information
The Company's 2001 annual report on Form 10-K is filed with the Securities and
Exchange Commission and is available without charge upon written request
submitted to:
Paychex, Inc., c/o Secretary
911 Panorama Trail South
Rochester, NY 14625-0397
Investor Relations
Members of the financial community and the media should direct inquiries to John
Morphy, Vice President, Chief Financial Officer, and Secretary.