As filed with the Securities and Exchange Commission on May 12, 1995
Registration No. 33-58619
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Amendment No. 1 to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PAYCHEX, INC.
(Exact name of registrant as specified in its charter)
Delaware 8721 16-1124166
(State or other (Primary Standard Industrial) (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
911 Panorama Trail South
Rochester, New York 14625
(716) 385-6666
(Address, including zip code and telephone number, including area code,
of registrant's principal executive offices)
G. Thomas Clark
Vice President of Finance
911 Panorama Trail South
Rochester, New York 14625
(716) 385-6666
(Name, address, including zip code and telephone number, including area
code, of agent for service)
Copies To:
Harry P. Messina, Jr., Esq. Alan D. Jacobson, Esq.
Woods, Oviatt, Gilman, Sturman 2029 Century Park East
& Clarke LLP Suite 2600
44 Exchange Street Los Angeles, California
Rochester, New York 14614 90067
(716) 987-2821 (310) 277-5974
Approximate date of commencement of proposed sale of the securities
to the public: As soon as practicable after the effective date of
this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box.
CALCULATION OF REGISTRATION FEE
Title of each class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be registered Registered (1) Offering price per share(2) Aggregate offering price(2) Registration fee
Common Stock, $.01 par value 462,134 $20.87 $9,646,665 $3,326.43
(1) Represents the maximum number of shares of Common Stock, $.01 par
value, of the Registrant ("Paychex Common Stock") issuable to
stockholders of Pay-Fone Systems, Inc. ("Pay-Fone") upon
consummation of the merger of Registrant's subsidiary with and into
Pay-Fone after giving effect to a 3-for-2 split of shares of
Paychex Common Stock in the form of a stock dividend payable on May
25, 1995 to holders of record on May 2, 1995.
(2) Determined in accordance with Rule 457(f)(1) and based on the average
of the high and low sales prices of Pay-Fone Shares on the American
Stock Exchange on April 10, 1995.
PAYCHEX, INC.
CROSS-REFERENCE SHEET TO FORM S-4 REGISTRATION STATEMENT
(Pursuant to Item 501(b) of Regulation S-K)
Part I - INFORMATION REQUIRED IN THE PROSPECTUS
Forms S-4 Item Numbers Location in Proxy Statement/
and Captions Prospectus
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page Prospectus... Facing Page of Registration
Statement; Cross-Reference
Sheet; Outside Front Cover
Page of Proxy Statement/
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front Cover Page of
Proxy Statement/Prospectus;
Available Information; In-
corporation by Reference;
Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other Information.. Summary
4. Terms of the Transaction............. Summary; The Merger; Certain
Provisions of the Merger
Agreement and Other Agree-
ments; Comparison of Rights
of Holders of Pay-Fone Shares
and Paychex Common Stock;
Description of Paychex Common
Stock
5. Pro Forma Financial Information...... Not Applicable
6. Material Contacts with the Company
Being Acquired....................... The Merger - Background of
the Merger
7. Additional Information Required for
Reoffering By Persons and Parties
Deemed to be Underwriters............ Not Applicable
8. Interests of Named Experts and
Counsel.............................. Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants.......................... Not Applicable
11. Incorporation of Certain Information
by Reference......................... Not Applicable
12. Information with Respect to S-2 or S-3
Registrants.......................... Available Information; In-
corporation by Reference;
Summary; The Companies -
Paychex
13. Incorporation of Certain Information
by Reference......................... Incorporation by Reference
14. Information with Respect to Registrants
Other than S-3 or S-2 Companies...... Not Applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies............................ Not Applicable
16. Information with Respect to S-2 or
S-3 Companies........................ Not Applicable
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies...... Available Information;
Summary; The Companies-Pay-
Fone; Management's Discussion
and Analysis of Financial
Condition and Results of
Operations of Pay-Fone;
Ownership of Pay-Fone Shares;
Pay-Fone Consolidated
Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited... Outside Front Cover Page of
Proxy Statement/Prospectus;
Incorporation by Reference;
Summary; The Special Meeting;
The Merger
19. Information if Proxies, Consents
or Authorizations are not to be
Solicited or in an Exchange Offer.... Not Applicable
PAY-FONE SYSTEMS, INC.
8100 Balboa Boulevard
Van Nuys, California 91406
CHAIRMAN'S LETTER TO SHAREHOLDERS
May 24, 1995
To Our Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders
of Pay-Fone Systems, Inc. ("Pay-Fone") at Pay-Fone's executive offices
located at 8100 Balboa Boulevard, Van Nuys, California, on June 15, 1995,
at 10:00 a.m. local time.
At the Special Meeting, shareholders will be asked to approve and
adopt a Restated Agreement and Plan of Merger (the "Merger Agreement")
pursuant to which a newly-formed, wholly owned subsidiary of Paychex, Inc.
("Paychex") will merge into Pay-Fone and Pay-Fone will become a wholly
owned subsidiary of Paychex (the "Merger").
Pursuant to the Merger Agreement, upon consummation of the Merger
outstanding shares of Pay-Fone Common Stock will be converted into shares
of Paychex Common Stock based on an Exchange Ratio specified in a formula
set forth in the Merger Agreement which will be calculated prior to the
Special Meeting. The Exchange Ratio will be calculated primarily on the
basis of a total value for Pay-Fone of $10,475,000 (subject to reduction
for certain events) and the market price of Paychex Common Stock during a
period prior to the Special Meeting. The formula by which the Exchange
Ratio will be determined and other terms of the proposed Merger are
described in the accompanying Proxy Statement/Prospectus, which you are
urged to read carefully.
The Board of Directors believes that the Merger is fair to, and in
the best interests of, Pay-Fone and its shareholders. The Board has
unanimously approved the terms of the Merger and recommends that you vote
in favor of the Merger.
Whether or not you plan to attend the Special Meeting, please be sure
to date, sign and return the proxy card in the enclosed envelope as
promptly as possible so that your shares may be represented at the Meeting
and voted in accordance with your wishes. This will not prevent you from
voting your shares in person if you subsequently choose to attend the
Special Meeting.
Pay-Fone has established two special extensions on its toll-free
number, 800-472-9765, for use by shareholders in connection with the
Merger. Extension 160, the exchange ratio information extension, will
provide current information regarding the provisional Exchange Ratio and
after June 7th, the definitive Exchange Ratio. Extension 180, the proxy
service extension, will enable shareholders to deliver proxies
telephonically. More detailed information regarding these special
telephone services is contained in the accompanying Proxy
Statement/Prospectus.
Sincerely,
Richard Kelton
Chairman of the Board
Pay-Fone Systems, Inc.
8100 Balboa Boulevard
Van Nuys, CA 91406
Notice of Special Meeting of Shareholders
to be Held June 15, 1995
To The Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of
Pay-Fone Systems, Inc. ("Pay-Fone") will be held at 8100 Balboa Boulevard,
Van Nuys, California, on June 15, 1995, at 10:00 a.m. local time, to vote
with respect to the approval and adoption of the Restated Agreement and
Plan of Merger (the "Merger Agreement") described in the attached Proxy
Statement/Prospectus pursuant to which Pay-Fone would become a wholly
owned subsidiary of Paychex, Inc. ("Paychex").
Pursuant to the Merger Agreement, outstanding shares of Pay- Fone
Common Stock will be converted into shares of Paychex Common Stock based
on an Exchange Ratio specified in a formula set forth in the Merger
Agreement which will be calculated prior to the Special Meeting. The
Exchange Ratio will be calculated primarily on the basis of a total value
for Pay-Fone of $10,475,000 (subject to possible reduction) and the market
price of Paychex Common Stock during a period prior to the Special
Meeting. The formula by which the Exchange Ratio will be determined and
other terms of the proposed Merger are described in the accompanying Proxy
Statement/Prospectus, which you are urged to read carefully.
Only shareholders of record at the close of business on May 8, 1995,
are entitled to notice of and to vote at the Special Meeting. Dissenters'
rights may be available to Pay-Fone shareholders if certain conditions are
satisfied. All actions to perfect dissenters' rights must be taken only
by the record holder of the shares. See "The Merger - Rights of
Dissenting Shareholders"
We hope you will be represented at the meeting by signing and
returning the enclosed proxy card in the accompanying envelope as promptly
as possible, whether or not you expect to be present in person. Your
proxy may be revoked at any time by following the procedures set forth in
the accompanying Proxy Statement/Prospectus.
By Order of the Board of Directors
David Kelton
Secretary
May 24, 1995
PROXY STATEMENT
OF
PAY-FONE SYSTEMS, INC.
For Special Meeting of Shareholders to be held on June 15, 1995
PROSPECTUS OF
PAYCHEX, INC.
462,134 Shares of
Common Stock, $.01 Par Value
This Proxy Statement/Prospectus is being furnished by Pay- Fone
Systems, Inc., a California corporation ("Pay-Fone"), and Paychex, Inc., a
Delaware corporation ("Paychex"), to holders of shares of Pay-Fone's
Common Stock $.10 par value ("Pay-Fone Shares"), in connection with the
solicitation of proxies by the Board of Directors of Pay-Fone (the
"Pay-Fone Board") for use at a Special Meeting of shareholders to be held
at the time and place and for the purposes set forth in the accompanying
Notice of Special Meeting of Shareholders, and any adjournment or
postponement thereof (the "Special Meeting"). This Proxy
Statement/Prospectus and the accompanying proxy card are first being
mailed to shareholders of Pay-Fone on or about May 24, 1995.
At the Special Meeting, the shareholders of Pay-Fone will consider
and vote upon a proposal to approve and adopt the Restated Agreement and
Plan of Merger which amends and restates as of May 8, 1995 the Agreement
and Plan of Merger, dated as of March 17, 1995 (as so amended and restated,
the "Merger Agreement") by and among Paychex, Paychex Merger Corp., a
wholly-owned subsidiary of Paychex ("Merger Sub") and Pay-Fone. A copy of
the Merger Agreement is attached to this Proxy Statement/Prospectus as
Annex I and is incorporated herein by reference.
Under the terms of the Merger Agreement, upon completion of
the merger of Merger Sub with and into Pay-Fone (the "Merger"),
all outstanding Pay-Fone Shares, other than shares owned by
Paychex and shares owned by Pay-Fone shareholders who perfect
dissenters' rights as hereinafter described, will be converted
into the right to receive and become exchangeable for shares of
$.01 par value Paychex Common Stock ("Paychex Common Stock").
The number of shares or fraction of a share of Paychex Common Stock, as
constituted on and after May 25, 1995, into which a Pay-Fone Share will be
converted (the "Exchange Ratio") will be determined by dividing
$10,475,000, subject to certain possible adjustments, by the product of
(i) the seventeen trading day average of the last reported sale prices for
a share of Paychex Common Stock on the NASDAQ National Market during the
eight trading days commencing with May 26, 1995 and terminating on June 7,
1995 and two-thirds (2/3) of the last reported sale prices of a share of
Paychex Common Stock (as then constituted) on the NASDAQ National Market
for the nine trading days commencing on May 15, 1995 and terminating on
May 25, 1995, which average may be adjusted by up to $2.00 as specified in
the Merger Agreement, and (ii) the sum of the number of Pay- Fone Shares
outstanding and the number of Pay-Fone Shares issuable pursuant to options
exercisable on June 6, 1995. See "THE MERGER - Merger Consideration."
The Merger Agreement, as originally entered into, provided that the
Exchange Ratio would be appropriately adjusted to reflect a stock split or
similar transaction affecting Paychex Common Stock prior to the date on
which the Merger becomes effective. The Board of Directors of Paychex
(the "Paychex Board") has declared a 3-for-2 stock split of Paychex Common
Stock (the "Paychex 1995 Stock Split") in the form of a stock dividend
payable on May 25, 1995 to shareholders of record on May 2, 1995. The
date of the Special Meeting and the date on which the Merger would become
effective will both be subsequent to May 25, 1995, the effective date of
the Paychex 1995 Stock Split. Accordingly, the parties to the Merger
Agreement amended and restated the Merger Agreement in order, among other
things, to take the Paychex 1995 Stock Split into account and, except as
specifically noted in this Proxy Statement/Prospectus, all references to
Paychex Common Stock and shares thereof will refer to Paychex Common Stock
as it will be constituted after the Paychex 1995 Stock Split is
effective.
This Proxy Statement/Prospectus also constitutes the prospectus of
Paychex with respect to a maximum of 462,134 shares of Paychex Common
Stock to be issued in connection with the Merger in exchange for the
outstanding Pay-Fone Shares. On May 19, 1995, the last reported sale
price on NASDAQ National Market of a share of Paychex Common Stock, as
constituted before the effectiveness of the Paychex 1995 Stock Split was
$__________. The equivalent price for a share of Paychex Common
Stock as it will be constituted after the effective date of the Paychex
1995 Stock Split would be $__________.
All information concerning Paychex contained in this Proxy
Statement/Prospectus has been furnished by Paychex; and all information
concerning Pay-Fone prior to the Merger contained in this Proxy
Statement/Prospectus has been furnished by Pay-Fone. This Proxy
Statement/Prospectus does not cover any resales of shares of Paychex
Common Stock that will be received by Pay-Fone shareholders in connection
with the Merger, and no person is authorized to make any use of this Proxy
Statement/Prospectus in connection with any such resale.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is May 24, 1995.
AVAILABLE INFORMATION
Paychex and Pay-Fone are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith file reports,
proxy statements and other information with the Securities and
Exchange Commission ("SEC"). Copies of such reports, proxy
statements and other information can be inspected and copied at
the public reference facilities maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the following regional offices of the SEC: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549.
Paychex has filed with the SEC a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act") with respect to the
shares of Paychex Common Stock to be issued pursuant to the
Merger Agreement. This Proxy Statement/Prospectus does not
contain all the information set forth in the Registration
Statement, certain portions of which have been omitted pursuant
to the rules and regulations of the SEC. Such additional
information may be obtained from the SEC's principal office in
Washington, D.C.
Reports, proxy statements and other information concerning
Paychex can be inspected at the NASDAQ Stock Market, 1735 K
Street, N.W., Washington, D.C. 20006 on which the Paychex Common
Stock is listed. Reports, proxy statements and other information
concerning Pay-Fone can be inspected at the American Stock
Exchange, 86 Trinity Place, New York, New York 10006, on which
exchange the Pay-Fone Shares are listed.
No person is authorized to give any information or to make
any representations other than those contained or incorporated by
reference in this Proxy Statement/Prospectus, and if given or
made, such information or representations should not be relied
upon as having been authorized. This Proxy Statement/Prospectus
does not constitute an offer to sell, or a solicitation of an
offer to purchase, the securities offered by this Proxy
Statement/Prospectus, or the solicitation of a proxy, in any
jurisdiction to or from any person to whom or from whom it is
unlawful to make such offer, solicitation of an offer or proxy
solicitation in such jurisdiction. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of securities
pursuant to this Proxy Statement/Prospectus shall, under any
circumstances, create any implication that there has been no
change in the information set forth or incorporated herein by
reference or in the affairs of Paychex or Pay-Fone since the date
of this Proxy Statement/Prospectus. However, if any material
change occurs during the period that this Proxy
Statement/Prospectus is required to be delivered, this Proxy
Statement/Prospectus will be amended and supplemented
accordingly.
INCORPORATION BY REFERENCE
The following documents are delivered herewith: the Paychex
1994 Annual Report to Stockholders ("Annual Report"), the
Paychex Proxy Statement for the 1994 Annual Meeting of
Stockholders ("Paychex 1994 Proxy Statement") and the Paychex
Form 10-Q for the quarterly period ended February 28, 1995.
The following documents, which have been filed by Paychex
with the SEC pursuant to the Exchange Act, are incorporated
herein by reference:
(a) Paychex Annual Report on Form 10-K for the year ended
May 31, 1994 which includes:
(i) Market for Registrant's Common Equity and
Related Security Holder Matters (Exhibit 13
and Part II, Item 5);
(ii) Selected Financial Data (Exhibit 13 and Part
II, Item 6);
(iii) Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Exhibit 13 and Part II, Item 7); and
(iv) Supplementary financial data (Exhibit 13 and
Part II, Item 8);
Information on a per share basis presented in the foregoing documents
has not been restated to give effect to the Paychex 1995 Stock Split.
(b) The Paychex 1994 Proxy Statement;
(c) Paychex Quarterly Reports on Form 10-Q for the quarters
ended August 31, 1994, November 30, 1994, February 28, 1995; and
(d) Paychex Current Report on Form 8-K dated March 17,
1995.
All documents subsequently filed by Paychex pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement/Prospectus and prior to the date of
the Special Meeting shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such
documents. All information appearing in this Proxy
Statement/Prospectus or in any document incorporated herein by
reference is not necessarily complete and is qualified in its
entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by
reference and should be read together with such information and
documents.
Any statement contained in a document incorporated or deemed
to be incorporated herein by reference shall be deemed to be
modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document that is deemed
to be incorporated herein by reference modifies or supersedes
such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates documents by reference
which are not presented herein or delivered herewith. Copies of any such
documents, other than exhibits to such documents which are not
specifically incorporated by reference therein, are available without
charge to any person, including any beneficial owner of Pay-Fone Shares,
to whom this Proxy Statement/Prospectus is delivered upon written or oral
request to Paychex, 911 Panorama Trail South, Rochester, New York 14625,
Attention Secretary's Department, telephone (716) 385-3406); to ensure
timely delivery of the documents, any request should be made before June
7, 1995.
TABLE OF CONTENTS
PAGE
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Companies. . . . . . . . . . . . . . . . . . . . . . . . 9
The Special Meeting. . . . . . . . . . . . . . . . . . . . . 9
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . 10
Selected Financial and Per Share Data. . . . . . . . . . . . 18
Comparative Market Prices and Dividend Data. . . . . . . . . 20
THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . 21
Purpose of the Meeting . . . . . . . . . . . . . . . . . . . 21
Voting Rights; Record Date . . . . . . . . . . . . . . . . . 21
Solicitation of Proxies. . . . . . . . . . . . . . . . . . . 23
THE COMPANIES. . . . . . . . . . . . . . . . . . . . . . . . . 24
Paychex. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Merger Sub . . . . . . . . . . . . . . . . . . . . . . . . . 25
Pay-Fone . . . . . . . . . . . . . . . . . . . . . . . . . . 26
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . 30
General. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Background of the Merger . . . . . . . . . . . . . . . . . . 30
Pay-Fone's Reasons for the Merger. . . . . . . . . . . . . . 32
Paychex' Reasons for the Merger. . . . . . . . . . . . . . . 33
Merger Consideration . . . . . . . . . . . . . . . . . . . . 33
Fractional Shares. . . . . . . . . . . . . . . . . . . . . . 36
Procedures for Exchange of Certificates. . . . . . . . . . . 36
Certain Federal Income Tax Consequences. . . . . . . . . . . 37
Accounting Treatment . . . . . . . . . . . . . . . . . . . . 40
Rights of Dissenting Shareholders. . . . . . . . . . . . . . 41
Effect on Pay-Fone Stock Options . . . . . . . . . . . . . . 43
Interests of Certain Persons in the Merger . . . . . . . . . 44
Resale of Paychex Common Stock . . . . . . . . . . . . . . . 46
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
AND OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . 47
Representations and Warranties . . . . . . . . . . . . . . . 47
Business of Pay-Fone Pending the Merger. . . . . . . . . . . 47
Certain Covenants of Paychex . . . . . . . . . . . . . . . . 48
No Solicitation. . . . . . . . . . . . . . . . . . . . . . . 48
Conditions/Waivers . . . . . . . . . . . . . . . . . . . . . 49
Amendment/Termination. . . . . . . . . . . . . . . . . . . . 51
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . 52
Expenses and Fees. . . . . . . . . . . . . . . . . . . . . . 52
Affiliates Agreement . . . . . . . . . . . . . . . . . . . . 52
Escrow and Indemnity Agreement . . . . . . . . . . . . . . . 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PAY-FONE. . . . . . . . . . . . . . . . . . . . 55
Results of Operations. . . . . . . . . . . . . . . . . . . . 55
Liquidity and Capital Resources. . . . . . . . . . . . . . . 58
OWNERSHIP OF PAY-FONE SHARES . . . . . . . . . . . . . . . . . 59
DESCRIPTION OF PAYCHEX COMMON STOCK. . . . . . . . . . . . . . 61
COMPARISON OF RIGHTS OF HOLDERS OF PAY-FONE SHARES
AND PAYCHEX COMMON STOCK . . . . . . . . . . . . . . . . . . . 62
Indemnification. . . . . . . . . . . . . . . . . . . . . . . 62
Limitation of Director Liability . . . . . . . . . . . . . . 63
Cumulative Voting. . . . . . . . . . . . . . . . . . . . . . 63
Super-Majority Voting. . . . . . . . . . . . . . . . . . . . 64
Size of Board of Directors . . . . . . . . . . . . . . . . . 64
Special Meetings of Shareholders . . . . . . . . . . . . . . 64
Vote Required for Certain Mergers or Reorganizations . . . . 65
Class Vote for Certain Reorganizations . . . . . . . . . . . 66
Fairness Opinion for Certain Reorganizations . . . . . . . . 66
Delaware Anti-Takeover Law . . . . . . . . . . . . . . . . . 66
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . 67
Inspection of Shareholder List . . . . . . . . . . . . . . . 67
Loans to Directors, Officers and Employees . . . . . . . . . 68
Interested Director Transactions . . . . . . . . . . . . . . 68
Voting by Ballot . . . . . . . . . . . . . . . . . . . . . . 68
Payment of Dividends and Repurchase of Shares of Common Stock69
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . 70
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
PAY-FONE CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . 70
ANNEXES
I. Restated Agreement and Plan of Merger
Exhibit A. Affiliates Agreement
Exhibit B. Escrow and Indemnity Agreement
II. California General Corporation Law, Sections 1300 et
seq.
DOCUMENTS DELIVERED HEREWITH
A. Paychex 1994 Annual Report to Stockholders
B. Paychex Proxy Statement for 1994 Annual Meeting of
Stockholders
C. Paychex Form 10-Q Quarterly Report for Quarterly
Period Ended February 28, 1995
SUMMARY
The following is a summary of certain information contained
elsewhere in this Proxy Statement/Prospectus. Reference is made
to, and this summary is qualified in its entirety by, the more
detailed information contained, or incorporated by reference, in
this Proxy Statement/Prospectus and the Annexes hereto. Unless
otherwise defined herein, capitalized terms used in this summary
have the respective meanings ascribed to them elsewhere in this
Proxy Statement/Prospectus. Shareholders are urged to read this
Proxy Statement/Prospectus and the Annexes hereto in their
entirety.
THE COMPANIES
Paychex, Inc . . . . Paychex provides automated payroll and tax
reporting and payment services and human resource
services nationwide to over 200,000 businesses with
one to 200 employees. Its principal executive
offices are at 911 Panorama Trail South, Rochester,
New York 14625; its telephone number is (716)
385-6666
Pay-Fone Systems,
Inc. . . . . . . . . Pay-Fone provides automated payroll and tax
reporting and payment services to over 3,500
small-to-medium sized businesses through five
offices in California. Its principal executive
offices are at 8100 Balboa Boulevard, Van Nuys,
California 92406; its telephone number is (818)
997- 0808.
Paychex Merger
Corp. . . . . . . . Merger Sub is a wholly owned subsidiary of Paychex
formed solely for the purpose of the Merger. Its
principal executive offices and telephone number
are the same as Paychex'.
THE SPECIAL MEETING
Time, Date, Place. . The Special Meeting will be held at 10:00 a.m.,
local time, on June 15, 1995, at the executive
offices of Pay-Fone, 8100 Balboa Boulevard, Van
Nuys, California 92406.
Record Date, Shares
Entitled to Vote . . Holders of record of Pay-Fone Shares at the
close of business on May 8, 1995 are entitled to
notice of, and to vote at, the Special Meeting. At
such date there were outstanding 1,495,023 Pay-Fone
Shares, each of which will be entitled to one vote
on each matter to be acted upon or which may
properly come before the Special Meeting.
Purpose of Special
Meeting. . . . . . . The purpose of the Special Meeting is to consider
and vote upon a proposal to approve and adopt the
Merger Agreement pursuant to which Pay-Fone will
become a wholly owned subsidiary of Paychex and
Pay-Fone shareholders will become stockholders of
Paychex.
Vote Required. . . . . Approval and adoption of the Merger Agreement
will require the affirmative vote of the holders
of a majority of the outstanding Pay-Fone Shares.
On the record date, Pay-Fone directors, executive
officers and their affiliates as a group had the
power to vote approximately 76% of the Pay-Fone
Shares entitled to vote at the Special Meeting and
such persons have agreed to vote such Pay-Fone
Shares in favor of the approval and adoption of
the Merger Agreement. See "OWNERSHIP OF PAY-FONE
SHARES."
THE MERGER
Terms of the Merger. . At the Effective Time (as defined below), pursuant
to the Merger Agreement (i) Merger Sub will be
merged with and into Pay-Fone, which will continue
as the surviving corporation and become a wholly
owned subsidiary of Paychex, and (ii) the issued
and outstanding Pay-Fone Shares will be converted
into the right to receive shares of Paychex Common
Stock at the Exchange Ratio.
Pursuant to the Merger Agreement, each Pay-Fone
Share outstanding at the Effective Time will be
converted into the right to receive that number of
shares of Paychex Common Stock calculated by
dividing (a) $10,475,000, subject to certain
adjustments, by (b) the product of (i) a
price (the "Formula Price") based on the
seventeen trading day average of the last reported
sale prices of Paychex Common Stock on the NASDAQ
National Market during the eight trading days
commencing with May 26, 1995 and terminating on
June 7, 1995 and two-thirds (2/3) of the last
reported sale prices of a share of Paychex Common
Stock (as then constituted) on the NASDAQ National
Market for the nine trading days commencing
on May 15, 1995 and terminating on May 25,
1995, (the "Actual Price"), which average may be
adjusted by up to $2.00 as specified in the Merger
Agreement and (ii) the sum of the number of
Pay-Fone Shares outstanding at the close of
business on June 6, 1995 and the number of
Pay-Fone Shares issuable upon exercise of then
exercisable stock options granted by Pay-Fone.
The Merger Agreement, as originally entered
into, provided that the Exchange Ratio would be
appropriately adjusted to reflect a stock split or
similar transaction affecting Paychex Common Stock
prior to the date on which the Merger becomes
effective. The Paychex Board has declared a
3-for-2 stock split of Paychex Common Stock (the
Paychex 1995 Stock Split) in the form of a stock
dividend payable on May 25, 1995 to shareholders
of record on May 2, 1995. The date of the Special
Meeting and the date on which the Merger would
become effective will both be subsequent to May
25, 1995, the effective date of the Paychex 1995
Stock Split. When amended and restating the
Merger Agreement, the parties thereto explicitly
took the Paychex 1995 Stock Split into account
and, except as specifically noted in this Proxy
Statement/Prospectus, all references to Paychex
Common Stock and shares thereof will refer to
Paychex Common Stock as it be constituted
after the Paychex 1995 Stock Split is
effective.
The $10,475,000 will be reduced by (a) the sum
of all amounts expended by Pay-Fone between March
17, 1995 and June 7, 1995 in contesting and resolving
claims asserted by the Internal Revenue Service
against Pay-Fone for the fiscal years 1987 through
1991 and California state tax claims based on the
same facts and for the same periods (the "Tax
Claim Adjustment") and (b) the sum of all losses
(other than those taken into account in (a)
above), each of which exceeds $25,000 and is
calculable without regard to materiality standards
in the Merger Agreement, which would be suffered
by Paychex upon consummation of the Merger as a
result of a breach of a representation, warranty
or covenant made by Pay-Fone in the Merger
Agreement and which were specified in a notice
from Paychex to Pay-Fone given prior to June 8,
1995 in the aggregate exceed $175,000 (the
"General Adjustment"), which reductions may be
offset by (c) the sum of all benefits that would
be enjoyed by Paychex upon consummation of the
Merger as a result of conditions more favorable or
performance more beneficial than represented or
promised by Pay-Fone under the Merger Agreement
and were specified in a notice from Pay-Fone to
Paychex given prior to June 8, 1995 (the "Positive
Adjustment"). Through May 19, 1995, no notice had
been given relating to losses or benefits that
would be taken into account in calculating the
General Adjustment or the Positive Adjustment, and
the Tax Claim Adjustment through that date
amounted to approximately $__________. Pay-Fone
has the right to terminate the Merger Agreement in
the event the net negative adjustment as a result
of the General Adjustment and the Positive
Adjustment exceeds $360,000, upon payment to
Paychex of $70,000.
The Formula Price and the Actual Price will be
the same so long as the Actual Price is no less
than $24.67 and no more than $28.67. In the event
the Actual Price is (a) greater than $28.67 but no
more than $30.67 or (b) less than $24.67 but no
less than $22.67, the Formula Price shall be
$28.67 and $24.67, respectively. In the event the
Actual Price is (a) greater than $30.67 or (b)
less than $22.67, the Formula Price shall be the
Actual Price less $2 or plus $2, respectively. In
the event the Actual Price is (a) more than $32.67
or (b) less than $20.67, Pay-Fone and Paychex,
respectively, shall have the right to terminate
the Agreement unless (a) Paychex agrees to a
Formula Price of $30.67 or (b) Pay-Fone agrees to
a Formula Price of $22.67, respectively.
Fractional shares of Paychex Common Stock will not
be issued. Pay-Fone shareholders otherwise
entitled to fractional shares will be paid cash in
lieu of such fraction.
See "THE MERGER - Merger Consideration."
Background of the
Merger . . . . . . . . See "THE MERGER - Background of the Merger."
Reasons for the
Merger . . . . . . . . See "THE MERGER - Pay-Fone's Reasons for the
Merger" and "THE MERGER - Paychex' Reasons for the
Merger."
Recommendation of the
Pay-Fone Board . . . . The Pay-Fone Board of Directors believes the
Merger is fair and in the best interests of
Pay-Fone and its shareholders. The Board
unanimously approved the Merger Agreement and
recommends a vote in favor of the approval and
adoption of the Merger Agreement by the
shareholders of Pay- Fone.
Effective Time of the
Merger . . . . . . . . It is anticipated that the Merger will become
effective as promptly as practicable after
Pay-Fone shareholder approval has been obtained,
assuming all other conditions to the consummation
of the Merger have been satisfied or waived. The
Merger will become effective when appropriate
certificates have been filed by the Secretaries of
State of California and Delaware (the "Effective
Time").
Conditions to the Merger;
Termination of the
Merger Agreement . . . The obligations of Paychex and Pay-Fone to
consummate the Merger are subject to the
satisfaction of certain conditions, including (in
addition to approval by Pay-Fone shareholders)
approval for listing the shares of Paychex Common
Stock to be issued in the Merger on the NASDAQ
National Market, the absence of any injunction
prohibiting the Merger, the receipt of an
accountant's letter with respect to qualification
of the Merger as a pooling of interests and the
receipt of certain legal opinions from respective
counsel. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT AND OTHER AGREEMENTS -
Conditions/Waiver."
The Merger Agreement may be terminated (i) by
mutual written consent of the parties or (ii) by
either party if (a) the Merger is not consummated
by August 31, 1995 (unless caused by the action or
inaction of the party seeking termination) (b) any
permanent injunction or other order preventing
consummation of the Merger has become final and
nonappealable, or (c) a party acquires verified
information regarding the other party not known
when the Merger Agreement was signed which has or
would reasonably be expected to have a material
adverse effect on the other party, or (iii) by
Paychex if the Board Pay-Fone shall have withdrawn
or amended its recommendation of the Merger and 5%
or more of the Pay-Fone shareholders shall have
elected to exercise dissenters' rights, or (iv) by
Pay-Fone if the net reduction of the $10,475,000
numerator in the Exchange Ratio formula by reason
of the General Adjustment and the Positive
Adjustment exceeds $360,000. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT AND OTHER
AGREEMENTS - Amendment/Termination."
Dissenters' Rights . . Under California law, record holders of
Pay-Fone Shares who comply with certain procedures
are entitled to receive payment in cash for the
fair market value of their Pay-Fone Shares,
provided, however, that such dissenters' rights
will be available only with respect to Pay-Fone
Shares which are subject to a restriction on
transfer imposed by Pay-Fone or by any law or
regulation or if holders of 5% or more of the
outstanding Pay-Fone Shares demand such payment in
accordance with California law. See "THE MERGER -
Rights of Dissenting Shareholders."
Certain Federal Income
Tax Consequences . . . The federal income tax consequences of the Merger
will depend on whether, among other things, the
Merger qualifies as a "tax-free" reorganization
under the Internal Revenue Code of 1986, as
amended. If the Merger so qualifies, tax counsel
has advised that no gain or loss generally would
be recognized by Pay-Fone shareholders upon the
exchange of their Pay-Fone Shares for Paychex
Common Stock (except for cash received in lieu of
a fractional share). If the Merger does not so
qualify, tax counsel has advised that the exchange
would be a taxable transaction. Because certain
actions by Pay-Fone or its historic shareholders
occurring after the Merger could violate the
continuity of business enterprise or continuity of
interest requirements for a "tax-free"
reorganization, tax counsel has expressed no
opinion as to whether the Merger will so qualify.
No ruling from the Internal Revenue Service has
been requested or obtained regarding any of the
federal income tax consequences of the Merger.
Accordingly, Pay-Fone shareholders should consult
their own tax advisors as to the tax consequences
of the Merger. See "THE MERGER - Certain Federal
Income Tax Consequences."
Accounting Treatment . The Merger is intended to qualify as a pooling
of interests for accounting and financial
reporting purposes. Consummation of the Merger is
conditional upon Paychex' receipt of an opinion to
that effect from Ernst & Young LLP, its
independent auditors. See "THE MERGER -
Accounting Treatment."
Affiliates Agreement . Paychex and Pay-Fone have entered into an
agreement with certain affiliates of Pay-Fone,
including its directors, officers and a principal
shareholder (the "Affiliates Agreement") whereby
each such affiliate agreed to vote Pay- Fone
Shares owned by him (an aggregate of approximately
76% of the Pay-Fone Shares outstanding on the
record date for the Special Meeting) in favor of
the approval and adoption of the Merger Agreement.
The Affiliates Agreement also contains certain
provisions relating to the treatment of the Merger
as a pooling of interests which limit transfer of
Pay-Fone Shares and Paychex Common Stock by such
affiliates. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT AND OTHER AGREEMENTS - Affiliates
Agreement."
Escrow and Indemnity
Agreement. . . . . . . In order to satisfy a Paychex requirement that
Paychex not bear any substantial economic risk
with respect to certain claims asserted against
Pay- Fone by the Internal Revenue Service and
related claims as a result of the Merger, the
directors of Pay-Fone and Allied Contractors,
Inc., a shareholder of Pay-Fone (collectively, the
"EIA Share-holders"), have executed an Escrow and
Indemnity Agreement pursuant to which the EIA
Shareholders have agreed under certain conditions
to indemnify Paychex and Pay-Fone against certain
specifically identified losses suffered after the
Merger resulting from pending and possible tax
claims that have been or may be asserted by the
Internal Revenue Service and by the California
Franchise Tax Board for income or franchise taxes
due from Pay-Fone for fiscal years 1987 through
1995. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT AND OTHER AGREEMENTS - Escrow and
Indemnity Agreement."
Interests of Certain
Persons In the Merger. .In considering the recommendation of the Pay-Fone
Board with respect to the Merger Agreement and the
transactions contemplated thereby, shareholders
should be aware that the Pay-Fone Board and
management have certain interests in the Merger
which arise from, among other things, certain
compensation and employment arrangements. In
addition, in the event certain tax claims against
Pay-Fone are not resolved prior to the Merger, on
approved terms, certain affiliates and directors
of Pay-Fone would provide indemnification with
respect thereto. See "THE MERGER - Interests of
Certain Persons in the Merger."
Comparison of
Shareholder Rights . . .If the Merger is consummated, shareholders of
Pay-Fone, a California corporation, will become
stockholders of Paychex, a Delaware corporation.
The rights of Paychex stockholders differ in
certain respects from the rights of Pay-Fone
shareholders, with respect to, among other things,
limitations on director liability, cumulative
voting, super-majority voting, the right of
shareholders to call meetings of shareholders, and
votes required for certain mergers and
reorganizations. The state laws also differ with
respect to their affect on parties who may seek to
take control of corporations. See "COMPARISON OF
RIGHTS OF HOLDERS OF PAY-FONE SHARES AND PAYCHEX
COMMON STOCK."
SELECTED FINANCIAL AND PER SHARE DATA
(In thousands, except percentages and per share data)
The following tables set forth certain historical consolidated financial information and per share data of Paychex and
Pay-Fone, respectively, for the periods indicated. The financial data for the interim 1995 and 1994 periods are derived from
unaudited financial statements. This information should be read in conjunction with the consolidated financial statements and
related notes of Paychex and Pay-Fone appearing elsewhere in this Proxy Statement/Prospectus or incorporated herein by reference.
Paychex and Pay-Fone proforma combined financial data giving effect to the Merger under the pooling of interests accounting
method are not considered to be significant to the consolidated financial statements of Paychex. Accordingly, such pro forma
combined financial data are not presented.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND PER SHARE DATA OF PAYCHEX
Nine Months Ended
February 28, Year Ended May 31,
----------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(Unaudited)
Consolidated Summary
of Operations
Revenue $195,327 $165,212 $224,052 $190,032 $161,272 $137,081 $120,200
Operating costs 57,358 50,633 68,082 60,715 53,243 49,982 45,031
Selling, general and
administrative expenses 100,164 87,248 119,187 102,660 89,301 73,816 63,042
Operating income 37,805 27,331 36,783 26,657 18,728 13,283 12,127
Percent of revenue 19.4 16.5 16.4 14.0 11.6 9.7 10.1
Net income 28,537 20,671 28,070 19,955 13,702 9,623 8,566
Percent of revenue 14.6 12.5 12.5 10.5 8.5 7.0 7.1
------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet
Data - End of Period
Working capital $ 89,036 $ 62,124 $ 68,031 $ 46,389 $ 27,884 $ 19,221 $ 21,257
Total assets 158,765 127,996 129,789 106,920 86,242 70,413 62,109
Long term debt (including
current portion) 948 1,260 948 1,634 2,024 2,408 2,137
Stockholders' equity 131,066 102,816 108,508 85,189 67,405 54,491 47,160
------------------------------------------------------------------------------------------------------------------------------
Common Stock Data (1)
Net income per share $ .63 $ .46 $ .63 $ .45 $ .31 $ .22 $ .19
Cash dividends per share .16 .11 .15 .10 .07 .06 .05
Net book value per share(2) 2.91 2.29 2.42 1.91 1.51 1.23 1.07
Weighted average number of
shares outstanding 44,900 44,769 44,790 44,595 44,279 44,064 44,009
- -------------------------------------------------------------------------------------------------------------------------------
(1) Per share amounts and average shares outstanding have been adjusted for three-for-two stock splits in May 1992 and August
1993 and for the Paychex 1995 Stock Split. Paychex 1994 Annual Report, Proxy Statement and February 28,
1995 Form 10-Q delivered herewith have not been restated to reflect the May 1995 stock split.
(2) Based on shares outstanding at period-end.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND PER SHARE DATA OF PAY-FONE
Nine Months Ended
March 31, Year Ended June 30,
----------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(Unaudited)
Consolidated Summary
of Operations
Revenue $ 3,612 $ 3,371 $ 4,460 $ 4,505 $ 5,186 $ 5,248 $ 5,504
Operating costs 1,653 1,248 1,696 1,637 2,021 2,146 2,267
Selling, general and
administrative expenses 2,278 1,890 2,542 2,680 3,110 3,410 3,587
Operating income (loss) (436) 233 222 188 55 (308) (350)
Percent of revenue - 6.9 5.0 4.2 1.1 - -
Net income(loss) (287) 167 189 151 111 (195) (202)
Percent of revenue - 5.0 4.2 3.4 2.1 - -
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet
Data - End of Period
Working capital $ 2,357 $ 2,734 $ 2,739 $ 2,667 $ 2,257 $ 2,078 $ 1,993
Total assets 5,395 5,697 5,600 5,374 5,324 5,442 5,785
Long term debt (including
current portion) - - - - - - -
Shareholders' equity 4,931 5,186 5,208 5,019 4,868 4,882 5,076
------------------------------------------------------------------------------------------------------------------------------
Common Share Data
Net income (loss) per share $ (.19) $ .11 $ .13 $ .10 $ .07 $ (.13) $ (.13)
Cash dividends per share - - - - - - -
Net book value per share(1) 3.32 3.53 3.55 3.42 3.32 3.24 3.37
Weighted average number of
shares outstanding 1,475 1,468 1,469 1,488 1,484 1,506 1,506
------------------------------------------------------------------------------------------------------------------------------
(1)Based on stockholder's equity and shares outstanding at period-end.
COMPARATIVE MARKET PRICES AND DIVIDEND DATA
Paychex Common Stock is listed and principally traded in the over-the-counter market and quoted on NASDAQ National Market
under the symbol "PAYX". The Pay-Fone Shares are traded on the American Stock Exchange and are reported under the symbol "PYF".
The following table sets forth, for the periods indicated, the range of high and low closing sale prices per share of Paychex
Common Stock as reported on the NASDAQ National Market, and per Pay-Fone Share as reported on the American Stock Exchange. The
Paychex fiscal year ends on May 31, and the Pay-Fone fiscal year ends on June 30. The high and low sales prices of Paychex
Common Stock have been adjusted to give effect to the Paychex 1995 Stock Split and a three-for-two stock split in August 1993.
The following table also shows the cash dividends declared by Paychex. Pay-Fone has not paid any cash dividends. Pursuant to
the Merger Agreement, Pay-Fone is prohibited from declaring, setting aside or paying dividends on Pay-Fone Shares, except with
the consent of Paychex.
Paychex Pay-Fone
Common Stock Common Shares
------------------------------ ------------------------------
Cash Cash
High Low Dividend High Low Dividend
Fiscal Year 1993
First Quarter $12 7/8 $ 9 5/8 .018 $3 5/8 $2 3/4 -
Second Quarter 17 3/4 11 7/8 .027 3 3/8 2 7/8 -
Third Quarter 17 1/8 14 3/8 .027 3 3/8 2 7/8 -
Fourth Quarter 19 1/8 15 7/8 .027 3 3/8 2 7/8 -
Fiscal Year 1994
First Quarter 22 17 1/8 .027 3 1/4 2 5/8 -
Second Quarter 25 1/8 20 1/2 .04 3 2 3/8 -
Third Quarter 27 21 3/8 .04 2 7/8 2 3/8 -
Fourth Quarter 26 1/8 21 1/8 .04 2 7/8 2 1/4 -
Fiscal Year 1995
First Quarter 23 19 .04 5 2 3/8 -
Second Quarter 26 1/8 21 5/8 .06 4 1/2 3 3/4 -
Third Quarter 28 23 1/8 .06 6 1/8 3 7/8 -
Fourth Quarter
through May 16, 1995 32 3/8 26 3/8 - 6 1/8 4 1/4 -
On March 17, 1995, the last full trading day prior to the public announcement of the proposed Merger, the closing price for
a share of Paychex Common Stock (after giving effect to the Paychex 1995 Stock Split) was $30.00 and the closing price of a
Pay-Fone Share was $4.50.
On May 19, 1995, the last full trading day prior to the printing of this Proxy Statement/Prospectus, the closing sales
prices for a share of Paychex Common Stock (after giving effect to the Paychex 1995 Stock Split) and a Pay-Fone Share were
$ and $ , respectively. Shareholders are urged to obtain current market quotations for the Paychex Common Stock and
Pay-Fone Shares. See "THE MERGER-Merger Consideration".
THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the
shareholders of Pay-Fone in connection with solicitation of proxies by the
Board of Directors of Pay-Fone for use at a Special Meeting of
Shareholders to be held at 8100 Balboa Boulevard, Van Nuys, California, on
June 15, 1995, at 10:00 a.m. local time, and at any adjournment or
postponement thereof.
Purpose of the Meeting
At the Special Meeting, the shareholders of Pay-Fone will be asked to
consider and vote upon a proposal to approve and adopt the Merger
Agreement pursuant to which Pay-Fone would become a wholly-owned
subsidiary of Paychex and the shareholders of Pay- Fone would become
stockholders of Paychex. See "THE MERGER."
The Pay-Fone Board has unanimously approved the Merger Agreement and
recommends a vote FOR approval and adoption of the Merger Agreement. See
"THE MERGER - Pay-Fone's Reasons for the Merger." The members of the
Pay-Fone Board, together with Pay- Fone's executive officers and Allied
Contractors, Inc., a principal shareholder of Pay-Fone and an affiliate of
three Pay- Fone directors (collectively, the "Affiliates"), have agreed to
vote their Pay-Fone Shares in favor of the approval and adoption of the
Merger Agreement. See "THE MERGER - Interests of Certain Persons in the
Merger."
Voting Rights; Record Date
The Pay-Fone Board has established May 1, 1995 as the date to
determine those record holders of Pay-Fone Shares entitled to notice of
and to vote at the Special Meeting. On that date, there were 1,495,023
Pay-Fone Shares outstanding, with each Share entitled to one vote.
The presence, in person or by proxy, of the holders of a majority of
the outstanding Pay-Fone Shares at the Special Meeting is necessary to
constitute a quorum. Shares represented in person or by proxy at the Special
Meeting but abstaining with respect to the approval and adoption of the
Merger Agreement will be treated as present with respect to the
determination of the presence of a quorum.
The affirmative vote of the holders of a majority of the outstanding
Pay-Fone Shares is required to approve and adopt the Merger Agreement.
The Affiliates hold approximately 76% of the Pay-Fone Shares entitled to
vote at the Special Meeting, and they have agreed with Paychex to vote for
approval and adoption of the Merger Agreement. Accordingly, approval of
the Merger Agreement is assured. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT AND OTHER AGREEMENTS - Affiliates Agreement" and "OWNERSHIP OF
PAY- FONE SHARES." Abstentions have the effect of a vote against the
Merger Agreement for purposes of the required vote, but not for the
purpose of perfecting dissenters' rights. See "THE MERGER -- Rights of
Dissenting Shareholders."
Shares represented by all properly executed or transmitted proxies
received in time for the Special Meeting will be voted in the manner
specified by the holders thereof. Proxies that do not contain voting
instructions will be voted FOR approval of the Merger Agreement. It is
not expected that any other matter will be brought before the Special
Meeting. If, however, other matters are properly presented, the persons
named as proxies will vote in accordance with their judgment with respect
to such matters.
Any shareholder has the right to revoke his or her proxy at any time
prior to the voting thereof at the Special Meeting by (i) filing a written
revocation with the Secretary of Pay-Fone prior to the voting of such
proxy, (ii) giving a duly executed or transmitted proxy bearing a later
date, or (iii) attending the Special Meeting and voting in person.
Attendance by a shareholder at the Special Meeting will not itself revoke
his or her proxy.
In addition to signing, dating and returning the enclosed proxy card
or another appropriate form of proxy, a shareholder may telephonically
deliver a proxy, including a proxy given for the purpose of revoking or
changing the voting instructions provided in an earlier dated proxy, by
telephoning (800) 472-9765 and asking for the special "proxy service"
extension, which is extension 180. In order to deliver a proxy in this
manner, a shareholder or the shareholders' attorney-in-fact will
need to submit information that will enable Pay-Fone to determine that the
proxy is authorized. For this prupose, Pay-Fone will utilize certain
information that appears on the proxy card that accompanies his Proxy
Statement/Prospectus. To the right of the shareholders' name and address
on the proxy card are three short series of numbers or numbers and
letters, and a shareholder will be required to provide to the official
answering the "proxy service" extension those three series of numbers and
letters as well as the complete name in which the shareholder's Pay-Fone
shares are registered, which also appears on the proxy card. Please
record and retain this information so that you will be able to avail
yourself of this shareholder service should you desire to deliver a proxy
telephonically.
Solicitation of Proxies
Pay-Fone will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by mail, the directors,
officers and employees of Pay-Fone, without additional compensation, may
solicit proxies by telephone, telecopy or telegram or in person. Pay-Fone
has requested banking institutions, brokerage firms, custodians, trustees,
nominees and fiduciaries to forward solicitation materials to the
beneficial owners of Common Stock held of record by such entities, and
Pay- Fone will, upon the request of such record holders, reimburse
reasonable forwarding expenses.
THE COMPANIES
Paychex
Paychex is a national payroll processing and payroll tax preparation
company which provides its services to over 200,000 small-to-medium size
businesses. Paychex believes that in number of clients it is the second
largest payroll accounting service company in the country. Paychex
prepares and furnishes paychecks, earnings statements and internal
accounting records such as journals, summaries and earnings histories.
Paychex also prepares for its clients all required monthly, quarterly and
annual payroll tax returns for federal, state and local governments. Over
48% of its clients nationwide utilize TAXPAY, a service which provides
automatic payment of payroll taxes and filing of quarterly and annual tax
returns. Paychex also provides enhanced payroll services, including an
automatic salary deposit service (Direct Deposit) which electronically
transmits the net payroll for a client's employees to banks throughout the
Federal Reserve System and a digital check signing and inserting
service.
Paychex markets its services principally to small and medium sized
businesses through its 70 branch operating centers and 25 sales offices
located in major metropolitan areas. Its market share in branch
processing center territories ranges from 1% to approximately 20%. No
client accounts for as much as 1% of its revenue.
Clients may discontinue Paychex service at will. Approximately 80%
of the businesses which were clients in fiscal year 1993 or 1994 continued
to be clients in the succeeding fiscal year. Ownership changes or
business failures common to small businesses are the primary causes of
client loss.
Paychex warrants its services, agreeing to reimburse any client for
penalties and interest incurred as a result of a Paychex error. Warranty
expense in fiscal years 1993 and 1994 was approximately $130,000 and
$400,000 respectively and warranty expense for fiscal year 1995 to date is
not materially different.
Paychex employs payroll specialists who communicate primarily by
telephone with their assigned clients each payroll period to record the
hours worked by each employee and any personnel or compensation changes.
These specialists are trained by Paychex in all facets of payroll
preparation and applicable tax regulations. All information furnished by
a client is handled by someone who is "payroll intelligent" and familiar
with that client's payroll.
The Paychex payroll system is an on-line, direct entry computer
system which enables the payroll specialist, upon receiving the
information from the client over the telephone to enter it simultaneously.
Payroll processing is decentralized in each Paychex branch operating
center while Taxpay and Direct Deposit processing are centralized at its
headquarters. Sales offices utilize a nearby branch operating center for
processing.
During 1993, Paychex introduced Paylink, a proprietary software
package which enables clients to use their personal computers and modems
to transmit their payroll data to the local Paychex processing center at
any time, without assistance of a payroll specialist. Currently over
9,000 clients use this feature.
While payroll is its core business, Paychex also provides human
resource products and services through its HRS division. HRS markets
Cafeteria Plan products approved under Section 125 of the Internal Revenue
Code. The Premium Only Plan allows employees to pay for certain fringe
benefits with pre-tax dollars, with a resultant reduction of payroll taxes
to employers and employees. The Flexible Spending Account Plan allows a
client's employees to pay for health and dependent care expenses with
pre-tax dollars. All administration, compliance and coverage tests are
provided with these services.
The HRS Division's employee management services and products include
customized employee handbooks, management manuals, job descriptions and
personnel forms. These have been designed to simplify clients' office
processes and enhance their employee benefits programs. Also available is
a measurement and evaluation tool to assist clients in the process of
hiring, training and developing employees. Group insurance products are
offered in selected geographical areas.
Products and services of the HRS Division are sold through a separate
sales organization located in 44 branch offices. Some of the products and
services are available on a nationwide basis through a central
telemarketing group. Paychex employs over 3,400 persons. The mailing
address of Paychex' principal executive offices is 911 Panorama Trail
South, Rochester, New York 14625, and its telephone number is (716)
385-6666.
Merger Sub
Merger Sub, a wholly owned subsidiary of Paychex, was formed by
Paychex solely for the purpose of effecting the Merger. The mailing
address of Merger Sub's principal executive offices is c/o Paychex, 911
Panorama Trail South, Rochester, New York 14625 and its telephone number
is (716) 385-6666.
Pay-Fone
Pay-Fone, originally founded in 1955, provides automated payroll
services to businesses located primarily in California. Since 1988,
Pay-Fone has operated under the name "Precision Payroll." Pay-Fone
operates from three offices in Southern California and two offices in
Northern California.
In fiscal year 1993 Pay-Fone sold its New York payroll business. On
April 30, 1992, Pay-Fone and the Greenville, South Carolina franchise
terminated their relationship. Pay-Fone and its Mobile, Alabama franchise
terminated their relationship in September of 1992.
On February 1, 1994, Pay-Fone acquired Concentric Computer
Corporation of Aptos, California. This acquisition added 270 new clients
to Pay-Fone's customer base and positively impacted revenues in the fourth
quarter of fiscal year 1994. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PAY-FONE."
Pay-Fone was incorporated in the state of California on July 2, 1970.
Its principal executive offices are located at 8100 Balboa Boulevard, Van
Nuys, California 91406, telephone (818) 997-0808.
Payroll Services
Pay-Fone offers a range of payroll services to meet the needs of its
more than 3,500 clients. From 1987 until 1994, Pay-Fone had offered a
payroll tax filing and payment service in conjunction with independent
contractors. In 1994, Pay-Fone introduced its Precision Tax Service, a
payroll tax filing offering which enables Pay-Fone to perform these
services in-house. As part of the Precision Tax Service, Pay-Fone
collects funds for federal, state and local employment taxes from clients,
files applicable monthly, quarterly and annual tax returns, handles all
regulatory correspondence and amendments, and remits payment to the
appropriate tax agencies. The service also includes year-end
reconciliation and filing of W-2 and 1099 forms.
Pay-Fone's Premium Only Plan is a benefit plan which enables clients
and their employees to obtain tax benefits with respect to certain payroll
deductions. Pay-Fone's services include plan documentation,
administration and preparation of compliance reports.
Clients provide their payroll data to Pay-Fone by one of four means:
Call-A-Check - The customer's data is communicated to Pay-
Fone by telephone each pay period. The client speaks with a
trained specialist who enters the appropriate information
for each of the client's employees, including salary, number
of hours worked and changes in employee status.
Fax-A-Check - The client's data is transmitted by facsimile
machine using worksheets prepared from the prior pay period.
This method is popular with small to medium size businesses.
PayMate - The client enters its payroll data on an IBM
compatible computer using Pay-Fone's proprietary software
program. At the end of the pay period the information is
transmitted via modem to Pay-Fone's computer center. Pay-
Mate also allows the client to prepare personnel statistic
reports and is popular with Pay-Fone's larger clients.
Rapid-PC - This software, designed for large employers and
those with more specialized payroll requirements, allows the
client to calculate and post manual checks from the client's
personal computer. Rapid-PC also provides import/export
capabilities, general ledger reporting, 401(k) next day
transmission, workers' compensation premium calculations,
accruals based on hire dates, print back capability, and a
user friendly report writer. It allows the client to view
its payroll by individual, department and/or grand totals
before transmitting the data to Pay-Fone.
Pay-Fone typically provides clients with processed payroll documents,
including payroll checks, management reports and tax information, within
24 hours after receipt of the client data. Pay-Fone also offers direct
deposit services by which a client's employees can have their net payroll
electronically deposited to their bank accounts.
Data is received at each of Pay-Fone's offices. The information is
then processed at the Van Nuys location and printed at either the Van Nuys
or Burlingame location. Pay-Fone stores client records on magnetic media
and maintains duplicate records in off-site storage to protect against
loss due to computer or power failure.
Pay-Fone enters into a standard service agreement with each client
which describes the services to be performed. This agreement limits
Pay-Fone's liability to the client to the replacement of a defective check
in the event of any errors or omissions by Pay-Fone in the documentation
provided to the client. To date, Pay-Fone's liability with respect to
errors and omissions has not been significant. With respect to tax filing
services, Pay-Fone agrees to be responsible for certain penalties and
interest which may be imposed by the regulatory agencies.
Either Pay-Fone or the client may terminate the standard service agreement
on reasonably short notice. Pay-Fone provides payroll services on a
weekly, bi-weekly, semi-monthly or monthly basis, and bills the customer
on a monthly basis.
Personal service is an important aspect of Pay-Fone's business.
Pay-Fone places a strong emphasis on a commitment to customer service.
Software and Equipment
Pay-Fone develops and owns computer software and related equipment,
in addition to software and hardware Pay-Fone leases from third parties.
Pay-Fone continually updates its proprietary software to reflect changes
in Federal, state and local laws and regulations. Pay-Fone also designs
system enhancements and equipment devices which are intended to enlarge
and improve the capabilities of its payroll services. In fiscal years
1994, 1993 and 1992, Pay-Fone spent $148,528, $182,255 and $172,784,
respectively, on research and development which related to such software
and equipment modifications and enhancements.
Pay-Fone owns the terminals and computer equipment required to
perform its payroll services. The majority of equipment is purchased from
equipment manufacturers such as IBM and is serviced under maintenance
contracts. Other equipment is maintained by Company personnel.
The materials, supplies, equipment and computer hardware used by
Pay-Fone, or substantially equivalent alternatives, are available from
several commercial sources, and Pay-Fone is not dependent on any single
source.
Sales and Marketing
Pay-Fone markets is services through its own sales force from its
headquarters and branch offices. Pay-Fone has historically targeted small
to medium size businesses (up to 200 employees) as those which would have
the most use for Pay-Fone's services. With the introduction of Rapid-PC,
in February 1994, Pay-Fone has expanded its marketing to the large
employer market, generally businesses with more than 200 employees.
Proprietary Rights
Pay-Fone uses the service marks MICRO/HOST, CALL-A-CHECK,
FAX-A-CHECK, Precision Payroll, Precision Package, and PayMate in its
business. Pay-Fone believes it has protectable rights to such marks under
common law principles.
Pay-Fone considers its software, customer lists and trade practices
to be proprietary trade secrets, which it intends to protect to the full
extent permitted by law, and material to its business. Primary to this
protection is Pay-Fone's standard employment agreement which each employee
signs at the inception of his or her employment and in which, in addition
to other restrictions, the employee agrees that he or she will not
directly or indirectly divulge such proprietary trade secrets to any firm,
person or corporation either during his employ or for a period of two
years after the termination of employment.
In February, 1994, Pay-Fone licensed the Rapid PC software, which
allows Pay-Fone to provide full service to the large employer market, from
a third party.
Competition
The business in which Pay-Fone is engaged is highly competitive, and
Pay-Fone competes with numerous entities which provide similar services,
including national data processing companies, local businesses and banks.
Pay-Fone believes that important competitive factors are price, speed and
quality of service. Pay-Fone believes that it competes effectively in
each of these areas. Many of Pay-Fone's competitors have greater
financial and personnel resources than does Pay-Fone. Since the majority
of businesses prepare their own payroll in-house, the major source of
competition is manual payroll systems sold by numerous vendors and the
availability of low-priced computers and software programs which enable
businesses to perform computerized payroll in-house.
Employees
As of May 8, 1995, Pay-Fone had 81 full-time employees and 1
part-time employee.
Properties
Pay-Fone's principal executive offices, which include local customer
service and sales activities and house the central computer processing
facility, are located in Van Nuys, California. The 39,663 square foot
building is owned by Pay-Fone and the ground is leased under a lease
expiring June 2025. Approximately 13,000 square feet of this building are
subleased, most for a term which expires in February 1996. Pay-Fone also
leases offices in four locations in California which house local customer
service and sales operations. Pay-Fone believes that its facilities are
adequate for its needs.
THE MERGER
This section of the Proxy Statement/Prospectus and the next section
entitled "CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND OTHER AGREEMENTS"
describe certain aspects of the proposed Merger. The following
descriptions do not purport to be complete and are qualified in their
entirety by reference to the Merger Agreement and the Exhibits thereto
which are attached as Annex I to this Proxy Statement/Prospectus and
incorporated herein by reference. All shareholders are urged to read the
Merger Agreement and the Exhibits thereto in their entirety.
General
Pursuant to the Merger Agreement, Merger Sub will merge into Pay-Fone
with Pay-Fone surviving the merger, and Pay-Fone will become a wholly
owned subsidiary of Paychex. The Merger Agreement provides that the
Merger will be consummated if the approval of the shareholders of Pay-Fone
is obtained and all other conditions to the Merger are satisfied or
waived.
The Effective Time of the Merger will occur upon the filing of the
appropriate documents with the Secretaries of State of the States of
Delaware and California. These filings will occur as soon as practicable
after the completion of the transactions contemplated by the Merger
Agreement following the Special Meeting of Pay-Fone shareholders. The
Merger Agreement generally may be terminated by either Pay-Fone or Paychex
if the Merger is not consummated on or before August 31, 1995 and under
certain other conditions. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT
AND OTHER AGREEMENTS -- Conditions/Waivers; Amendment/Termination; and
Expenses and Fees."
Background of the Merger
Paychex and Pay-Fone have been familiar to each other for a period of
years as competitors in a number of markets, principally southern
California. Both companies express a commitment to providing superior
customer services, and they have a number of other similar characteristics
which suggested a high potential for compatibility.
Acting at the request of the Pay-Fone Board, David Malcolm, who
became a director of Pay-Fone on July 12, 1994, contacted Paychex in early
July 1994. This initial contact was made to determine whether Paychex had
an interest in pursuing a business combination with Pay-Fone. The
Pay-Fone Board believed that Pay- Fone lacked the critical mass necessary
in its industry to maximize shareholder values in the near term and that
its various constituencies would be better served if Pay-Fone were able to
effect a business combination. Paychex expressed a serious interest in
entering into acquisition discussions. To facilitate these discussions
Paychex entered into a Confidentiality and Non- Disclosure Agreement with
Pay-Fone on July 13, 1994.
During the next two and one-half months, selected confidential
information regarding Pay-Fone was provided to Paychex, and a series of
discussions were held, primarily between G. Thomas Clark, Vice President
of Finance of Paychex, and Mark Kelton, a Pay-Fone director. These
preliminary conversations explored the feasibility of a merger and
included issues such as valuation and possible deal structures.
Mr. Kelton reviewed these discussions in depth with the Pay- Fone
Board during a meeting held on September 30, 1994 and the Board authorized
the continuation of discussions. Mr. Kelton also from time to time had
meetings with, and made calls to, the other Pay-Fone directors to keep
them appraised of the discussions and to solicit their advice.
In early October 1994, Paychex retained its attorneys and accountants
to advise it in the evaluation and possible structuring of a transaction
with Pay-Fone since it appeared that a transaction favorable to the
shareholders of Paychex could possibly be arranged. An initial visit was
made to Pay-Fone by Mr. Clark, Francis Provino, Paychex' Controller, and
Donald Mersh, a Regional Manager of Paychex, on October 11 and 12 to meet
with Mr. Kelton and Pay-Fone President Mark Leekley, visit Pay-Fone's
corporate headquarters and main processing facility, review confidential
information, and discuss issues regarding deal structure and
consideration. During October 1994, Paychex had the opportunity to review
a meaningful amount of confidential information concerning Pay-Fone. Both
parties desired to continue discussions with a view towards reaching an
agreement of merger.
Throughout this period, Pay-Fone reviewed and evaluated the public
information available regarding Paychex, and Messrs. Kelton and Leekley
discussed the business of Paychex with senior Paychex officials,
principally Mr. Clark.
In early November it was decided to defer further discussions and
negotiations to permit Pay-Fone and Paychex to attend to the increased
level of business activity associated with the end of the calendar year.
At a December 16, 1994 meeting of the Pay-Fone Board, Mr. Kelton briefed
the directors on the status of the negotiations, and the matter was
considered at length by the Pay-Fone Board.
Discussions between Paychex and Pay-Fone resumed in mid- January,
1995, and Messrs. Clark and Provino made a second trip to meet with
Messrs. Kelton and Leekley on January 28, 29 and 30, 1995. Subsequent
thereto, drafting of agreements commenced while further negotiations and
due diligence examinations continued. At various times between late
January and mid-March, 1995, Mr. Kelton sent drafts of the agreements to
each of Pay-Fone's directors and solicited their questions and comments in
telephone conversations and personal meetings.
The Paychex Board was advised of the negotiations and proposed terms
of agreement at regular meetings on October 5, 1994 and January 12, 1995.
At the earlier meeting, the Board authorized the Paychex Executive
Committee to pursue, approve and conclude the transaction within specified
price limits. The Executive Committee conferred on February 8, 1995 to
consider various developments and issues in the negotiations and the
results of management's due diligence investigations to date. Minutes of
their deliberations were provided to the full Board. On March 5, 1995,
each of the members of the Executive Committee reviewed in detail the
agreements prepared by counsel and, after conferring, approved said
agreements and authorized Paychex officers to sign and deliver them with
such changes as the officers shall have approved. The full Board then
ratified all agreements as signed at its meeting on April 13, 1995.
On March 17, 1995, the Pay-Fone Board of Directors held a meeting at
which it considered the final negotiated terms of the proposed transaction
with Paychex and reviewed and unanimously approved the draft agreements.
The Agreement and Plan of Merger and related agreements were
originally signed on March 17, 1995. The Agreement and Plan of Merger was
amended and restated as of May 8, 1995 primarily to set prior to the date
of the Special Meeting the time at which the Exchange Ratio would be
determined and to reflect explicitly the effect of the Paychex 1995 Stock
Split on various matters considered in the Agreement and Plan of Merger.
The Restated Agreement and Plan of Merger is attached hereto as Annex
I.
Pay-Fone's Reasons for the Merger
The Pay-Fone Board has believed that it would be beneficial for
Pay-Fone to increase the scope of its operations and revenue substantially
in order to obtain economies of scale which would be likely to enhance
shareholder values. With that objective, various Pay-Fone officers and
directors have held discussions with the managements of a number of other
payroll processing companies with a view towards increasing the scope of
Pay-Fone's operations. Pay-Fone has been unable to arrange transactions
that would have enabled Pay-Fone to achieve the desired scale. However,
the Pay-Fone Board and management believe they have kept themselves well
informed regarding prices, terms and other aspects of merger and
acquisition activities in the payroll processing industry.
The principal reason for the approval of the terms of the Merger
Agreement by the Pay-Fone Board is that, in the opinion of the Pay-Fone
Board, the consummation of the Merger will result in greater value to the
Pay-Fone shareholders than would likely have been achieved in the
foreseeable future through continued independent operations. In addition,
the Pay-Fone Board believes that the relative compatibility of the two
companies including such important areas as their corporate culture and
their commitment to customer service is likely to have beneficial effects
for Pay-Fone's current clients and employees. In comparing the economic
effect of the Merger to the stock market performance it believed could be
achieved by Pay-Fone independently and taking into account among other
things Pay- Fone's expected financial performance, the possibility of
effecting acquisitions in which Pay-Fone would be the surviving company,
and the risks associated therewith, the Pay-Fone Board determined that the
Merger would be the superior alternative for the Pay-Fone shareholders
from a financial point of view.
Paychex' Reasons for the Merger
Paychex believes that the Merger is the best interests of Paychex and
its stockholders because it enables Paychex to expand at a more rapid rate
than possible through the normal acquisition of clients. The cost to
Paychex and its stockholders in terms of shares of Paychex Common Stock
issued in connection with the Merger is deemed reasonable by the Paychex
Board in light of the net assets acquired and the expenses normally
incurred by Paychex in connection with obtaining new clients and selling
additional services. In addition, Pay-Fone provides Paychex the
opportunity to increase its California payroll client base by
approximately 3,500 or 10%. The Pay-Fone client base is very compatible
to the Paychex client base in terms of size and payroll features
delivered. Moreover, Paychex would have significant opportunities to sell
the Pay-Fone client base additional add-on products such as TaxPay, Direct
Deposit and Human Resource products and services. Pay-Fone has a very
limited number of clients utilizing services comparable to TaxPay and
Direct Deposit. Finally, Pay-Fone has an experienced group of customer
service managers and employees that can provide additional quality
personnel to Paychex' southern California business.
Merger Consideration
Pursuant to the Merger Agreement, at the Effective Time each Pay-Fone
Share will be converted into the right to receive that number of shares of
Paychex Common Stock calculated by dividing (a) $10,475,000, subject to
certain adjustments, by (b) the product of (i) a price (the Formula Price)
based on the seventeen trading day average of the last reported sales
price of Paychex Common Stock on the NASDAQ National Market during the
eight trading days commencing with May 26, 1995 and terminating on June 7,
1995 and two-thirds (2/3) of the last reported sales prices of Paychex
Common Stock (as then constituted) on the NASDAQ National Market for the
nine trading days commencing on May 15, 1994 and terminating on May 25,
1995 (the Actual Price), which average may be adjusted by up to $2.00 as
specified in the Merger Agreement and (ii) the sum of the number of
Pay-Fone Shares then outstanding and the number of Pay- Fone Shares
issuable upon exercise of then exercisable stock options granted by
Pay-Fone (the Exchange Ratio).
The $10,475,000 will be reduced by (a) the Tax Claim Adjustment, which
is the sum of all amounts expended by Pay-Fone between March 17, 1995 and
June 7, 1995 in contesting and resolving claims asserted by the Internal
Revenue Service against Pay-Fone for the fiscal years 1987 through 1991
and California state tax claims based on the same facts and for the same
periods (the "Tax Claims") and (b) the General Adjustment, which is the
sum of all losses (other than those taken into account in the Tax Claim
Adjustments), each of which exceeds $25,000 and is calculable without
regard to materiality standards in the Merger Agreement, which would be
suffered by Paychex upon consummation of the Merger as a result of a
breach of a representation, warranty or covenant made by Pay-Fone in the
Merger Agreement and are identified in notices given by Paychex to
Pay-Fone prior to June 8, 1995 and which in the aggregate exceed $175,000,
which reductions may be offset by (c) the Positive Adjustment, which is
the sum of all benefits that would be enjoyed by Paychex upon consummation
of the Merger as a result of conditions more favorable or performance more
beneficial than represented or promised by Pay-Fone under the Merger
Agreement and which are identified in notices given by Pay-Fone to Paychex
prior to June 8, 1995.(/R)
As of May 19, 1995, no notices regarding losses or benefits which
would enter into the calculation of the General Adjustment and the
Positive Adjustment had been given by Paychex or Pay-Fone, respectively.
As of that date, $__________, which would enter into calculation of the
Tax Claim Adjustment, had been expended by Pay-Fone. Pay-Fone has the
right to terminate the Merger Agreement in the event the aggregate
negative adjustment arising from the General Adjustment and the Positive
Adjustment exceeds $360,000, upon payment to Paychex of $70,000.
The Formula Price and the Actual Price will be the same so long as
the Actual Price is no less than $24.67 and no more than $28.67. In the
event the Actual Price is greater than $28.67 but no more than $30.67, the
Formula Price shall be $28.67, and if the Actual Price is greater than
$30.67, the Formula Price shall be an amount equal to the Actual Price
less $2. In the event the Actual Price is greater than $32.67, Pay-Fone
shall have the right to terminate the Merger Agreement unless Paychex
agrees to a Formula Price of $30.67. In the event the Actual Price is
less than $24.67 but no less than $22.67, the Formula Price shall be
$24.67, and if the Actual Price is less than $22.67, the Formula Price
shall be an amount equal to the Actual Price plus $2. In the event the
Actual Price is less than $20.67, Paychex shall have the right to
terminate the Merger Agreement unless Pay-Fone agrees to a Formula Price
of $22.67.
For purposes of illustration only, the following chart sets forth
various calculations of the Exchange Ratio based on a total of 1,607,943
Pay-Fone Shares outstanding and issuable upon exercise of exercisable
options, and certain assumptions as to the Actual Price and adjustments to
$10,475,000.
Value of
Exchange Ratio
Adjustment to Actual Formula Exchange based on
$10,475,000 Price Price Ratio Actual Price
$ 0 $31.00 $29.00 .2246 $6.96
100,000 31.00 29.00 .2225 6.90
360,000 31.00 29.00 .2169 6.72
0 22.33 24.33 .2677 5.97
100,000 22.33 24.33 .2652 5.92
360,000 22.33 24.33 .2585 5.77
On May 19, 1995, the latest trading date before the printing of this
Proxy Statement/Prospectus, the closing price of a share of Paychex Common
Stock (as then constituted) on the NASDAQ National Market was
$____________, and the closing price of a Pay-Fone Share on the American
Stock Exchange was $_____________. On that date, the equivalent price
for a share of Paychex Common Stock as it will be constituted after the
effective date of the Paychex 1995 Stock Split would be $__________, and
the average closing price of a share of Paychex Common
Stock, as it would be constituted after the Paychex 1995 Stock Split,
during the five trading days ending May 19, 1995 was $__________.
The Exchange Ratio will be adjusted to give effect to any stock split
or other similar change in Paychex Common Stock in addition to the Paychex
1995 Stock Split which occurs prior to the Effective Time.
The Exchange Ratio will be calculated pursuant to a formula in which
all of the variables will be finally determined prior to June 8, 1996.
Pay-Fone has a toll-free number which Pay-Fone shareholders may call
between the date of this Proxy Statement/Prospectus and the date of the
Special Meeting to ascertain what the provisional Exchange Ratio and
provisional market value in Paychex Common Stock deliverable in exchange
for a Paychex Share would be based on information available through the
close of business on the prior day. Commencing on June 8, 1995,
shareholders calling this number will be provided with the definitive
Exchange Ratio and the market value in Paychex Common Stock represented
thereby based on the last reported sale of the Paychex Common Stock on the
NASDAQ National Market on the prior trading day. The telephone number to
call for this information regarding the Exchange Ratio and the market
value in Paychex Common Stock represented thereby is (800) 472-9765,
extension 160, the "exchange ratio information" extension.
Fractional Shares
No fractional shares of Paychex Common Stock will be issued in the
Merger. In lieu of any fractional share, each holder of Pay-Fone Shares
who would otherwise be entitled to a fraction of a share of Paychex Common
Stock will be paid an amount in cash equivalent to the same fraction of
the Formula Price.
Procedures for Exchange of Certificates
At the Effective Time, the outstanding Pay-Fone Shares (other than
dissenting shares, if any) will be automatically converted at the Exchange
Ratio into the right to receive full shares of Paychex Common Stock, plus
cash in lieu of any fractional share. It is a condition to the Merger
that all shares of Paychex Common Stock to be issued in the Merger are
registered under the Securities Act and listed on the NASDAQ National
Market.
As soon as practicable after the Effective Time, a transmittal letter
will be mailed by an exchange agent appointed by Paychex to facilitate the
exchange of Pay-Fone Shares for shares of Paychex Common Stock in the
Merger (the "Exchange Agent") to each record shareholder of Pay-Fone
informing such shareholder of the procedures to follow in forwarding his
or her Pay-Fone stock certificates to the Exchange Agent. Upon receipt of
such stock certificates, the Exchange Agent will deliver full shares of
Paychex Common Stock to such shareholder in accordance with the Exchange
Ratio and cash in lieu of fractional shares pursuant to the terms of the
Merger Agreement and in accordance with the transmittal letter, together
with any dividends or other distributions to which such shareholder is
entitled.
There will be no further transfers of Common Stock on Pay- Fone's
stock transfer books after the Effective Time. If a certificate
representing Pay-Fone Shares is presented for transfer, it will be
canceled and a certificate representing the appropriate number of full
shares of Paychex Common Stock and cash in lieu of fractional shares and
any dividends and distributions will be issued in exchange therefor.
After the Effective Time and until surrendered, Pay-Fone Shares will
be deemed for all corporate purposes, other than the payment of dividends
and distributions, to evidence ownership of the number of full shares of
Paychex Common Stock into which such Pay-Fone Shares were converted in the
Merger. No dividends or other distributions, if any, payable to holders
of Paychex Common Stock will be paid to the holders of any certificates
for Pay- Fone Shares until such certificates are surrendered. Upon
surrender of such certificates, all such declared dividends and
distributions which shall have become payable with respect to such Paychex
Common Stock in respect of a record date after the Effective Time will be
paid to the holder of record of the full shares of Paychex Common Stock
represented by the certificate issued in exchange therefor, without
interest.
SHAREHOLDERS OF PAY-FONE SHOULD NOT FORWARD STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. SHAREHOLDERS
OF PAY-FONE SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Certain Federal Income Tax Consequences
The following is a summary of certain federal income tax consequences
of the Merger that are generally applicable to Paychex, Pay-Fone and the
Pay-Fone shareholders. This summary is based on the Internal Revenue Code
of 1986, as amended (the "Code"), regulations promulgated thereunder, and
applicable rulings and decisions, as currently in effect, all of which are
subject to change. This summary does not discuss any aspect of state,
local or foreign taxation and does not discuss all of the tax consequences
that may be relevant to particular Pay-Fone shareholders in light of their
personal investment circumstances, or to certain types of shareholders
that may be subject to special tax rules, such as financial institutions,
tax-exempt organizations, insurance companies, dealers in securities,
foreign corporations, individuals who are not citizens or residents of the
United States and individuals who acquired their Pay-Fone Shares in
connection with stock option plans or in other compensatory transactions.
In addition, the discussion does not address the effects of the Merger on
holders of Pay-Fone Options. The discussion with respect to Pay-Fone
shareholders is limited to those shareholders who have held the Pay-Fone
Shares and who will hold the Paychex Common Stock received in the Merger
as "capital assets" within the meaning of Section 1221 of the Code.
This summary is based upon an opinion of Hughes Hubbard & Reed, tax
counsel for Pay-Fone. It should be noted that tax counsel's opinion does
not address all of the federal income tax consequences of the Merger, and
neither this summary nor tax counsel's opinion is binding on the Internal
Revenue Service ("IRS"). Pay-Fone has not requested and will not request
a ruling from the IRS with regard to any of the federal income tax
consequences of the Merger.
Accordingly, Pay-Fone shareholders and others affected by the Merger
should consult their own tax advisors as to the consequences of the
Merger, including the application to their particular situation of the tax
consequences discussed below, as well as the application of state, local,
foreign or other tax laws.
The federal income tax consequences of the Merger will depend on
whether, among other things, the Merger satisfies the requirements for a
"tax-free" reorganization ("Reorganization") under Code Sections
368(a)(1)(A) and 368(a)(2)(E). Among the requirements for a
Reorganization are that: (1) Pay-Fone after the Merger will have continued
its historic business or will have used a significant portion of its
historic business assets in a business; and (ii) the significant historic
shareholders of Pay- Fone will not have had a plan or intention, existing
at or prior to the Effective Time of the Merger, to dispose of the Paychex
Common Stock to be received in the Merger such that they would not have
retained a significant continuing interest in Pay-Fone after the Merger
through their continued ownership of Paychex Common Stock. Pay-Fone will
not be obligated after the Merger to continue its historic business or to
use a significant portion of its historic assets in a business. Moreover,
while the Affiliates of Pay-Fone have represented that they do not
currently have and at the Closing Date will not have a present plan or
intention to dispose of more than 50 percent of the Paychex Common Stock
to be received in the Merger, they will not be obligated to continue to
hold any Paychex Common Stock, apart from: (i) a contractual commitment
with Paychex to hold all of the Paychex Common Stock received by them
until results covering at least 30 days of combined operations of Pay-Fone
and Paychex have been publicly disseminated by Paychex; and (ii)
restrictions on resale, if any, imposed by the federal securities laws.
Each of the Affiliates has expressly reserved the right at any time after
the Closing Date to evaluate his or her investment portfolio, including
Paychex Common Stock, and to make such investment decision with respect to
such securities as such Affiliate shall deem to be in his or her interest.
Because certain actions by Pay-Fone or its historic shareholders
occurring after the Merger could violate the continuity of business
enterprise or continuity of interest requirements for a Reorganization,
tax counsel has expressed no opinion as to whether the Merger will satisfy
the requirements for a Reorganization. Accordingly, there can be no
assurance that the Merger will satisfy the requirements for a
Reorganization or that the IRS would not challenge the status of the
Merger as a Reorganization based on events which take place after the
Merger.
If the Merger qualifies as a Reorganization, tax counsel has advised
that the following federal income tax consequences will result from the
Merger.
(a) No gain or loss would be recognized by a holder of
Pay-Fone Shares upon the receipt of the Paychex Common
Stock in exchange for his Pay-Fone Shares (except for
cash received in lieu of a fractional share).
(b) The aggregate tax basis of the Paychex Common Stock
received by a Pay-Fone shareholder in the Merger
(including a fractional share interest, if any) would
be the same as the aggregate tax basis of the Pay-Fone
Shares surrendered in exchange therefor.
(c) The holding period of the Paychex Common Stock
(including a fractional share interest, if any)
received by a Pay-Fone shareholder in the Merger would
include the holding period of the Pay-Fone Shares
surrendered in exchange therefor, provided that the
Pay-Fone Shares so surrendered are held as a capital
asset at the Effective Time of the Merger.
(d) A Pay-Fone shareholder who receives cash in lieu of a
fractional share of Paychex Common Stock in connection
with the Merger would recognize gain or loss equal to
the difference between the cash received and the basis
of such fractional share. Such gain or loss would be
capital gain or loss, provided that the Pay-Fone
Shares are held as a capital asset at the Effective
Time of the Merger, and would be long-term capital
gain or loss if the Pay-Fone Shares had been held for
more than one year.
(e) No gain or loss would be recognized by Paychex, Merger
Sub or Pay-Fone in connection with the Merger.
If the Merger does not satisfy the requirements for a Reorganization,
tax counsel has advised that a Pay-Fone shareholder would be treated as if
he sold his Pay-Fone Shares in a taxable transaction. In such event, a
Pay-Fone shareholder would recognize capital gain or loss in an amount
equal to the difference between the fair market value, as of the Effective
Time of the Merger, of the Paychex Common Stock (and the amount of cash
received in lieu of a fractional share) and the tax basis of the Pay-Fone
Shares surrendered in exchange therefor, provided that the Pay-Fone Shares
so surrendered are held as a capital asset at the Effective Time of the
Merger. Such capital gain or loss would be long-term capital gain or loss
if the Pay-Fone Shares have been held for more than one year. A Pay-Fone
shareholder's aggregate basis in the Paychex Common Stock received in the
Merger would equal its fair market value as of the Effective Time of the
Merger, and the Pay-Fone shareholder's holding period of such Paychex
Common Stock would begin the day after the Merger.
Whether or not the Merger qualifies as a Reorganization, tax counsel
has advised that a Pay-Fone shareholder who exercises dissenters' rights
and receives cash in the Merger in lieu of Paychex Common Stock will be
treated as having received the cash as a distribution in redemption of his
Pay-Fone Shares as provided in Code Section 302. Such shareholder
generally will recognize capital gain or loss measured by the difference
between the amount of cash received and his aggregate adjusted tax basis
in the Pay-Fone Shares, provided the Pay-Fone Shares were held as a
capital asset at the Effective Time of the Merger. Such capital gain or
loss will be long-term capital gain or loss if the Pay-Fone Shares have
been held for more than one year. A shareholder exercising dissenters'
rights who also owns Paychex Common Stock, or who is deemed for federal
income tax purposes to own constructively Paychex Common Stock actually
owned by other persons or entities, may recognize dividend income, taxable
as ordinary income, equal to the amount of the cash received.
The discussion set forth above is included for general information
only. It does not address the state, local or foreign tax aspects of the
Merger. The discussion is based on currently existing provisions of the
Code, existing and proposed treasury regulations thereunder and current
administrative rulings and court decisions. All of the foregoing are
subject to change and any such change could affect the continuing validity
of this discussion. Each shareholder should consult his or her own tax
advisor with respect to the specific tax consequences of the Merger to him
or her, including the application and effect of state, local and foreign
tax laws.
Accounting Treatment
The Merger is intended to be treated as a pooling of interests
transaction for accounting and financial reporting purposes. Under the
pooling of interests method of accounting, the recorded assets and
liabilities of Paychex and Pay-Fone will be carried forward to Paychex'
consolidated financial statements at their recorded amounts, the
consolidated earnings of Paychex will include earnings of Paychex and
Pay-Fone for the entire fiscal year in which the Merger occurs and the
reported retained earnings of Paychex and Pay-Fone for prior periods will
be combined and restated as consolidated retained earnings of Paychex.
See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND OTHER AGREEMENTS --
Conditions/Waiver."
Paychex and Pay-Fone have agreed that during the period from the date
of the Merger Agreement through the Effective Time, unless the parties
shall have otherwise agreed in writing, neither of them will take any
action that such party knows or has been advised would prevent Paychex
from accounting for the Merger as a pooling of interests. Paychex and
Pay-Fone have also agreed to use all reasonable efforts to cause their
respective affiliates, and each of Pay-Fone's Affiliates (its officers and
directors and Allied Contractors, Inc.) has agreed, not to take certain
actions, including transfers of Pay-Fone Shares, that would impair
Paychex' ability to account for the Merger as a pooling of interests.
The Merger Agreement provides that a condition to the consummation of the
Merger is the receipt by Paychex of an opinion of its independent auditors
that the Merger will qualify for pooling of interests accounting
treatment.
Rights of Dissenting Shareholders
Sections 1300-1312 of the California General Corporation Law (the
"CGCL"), contain provisions which permit the shareholders of Pay-Fone who
comply with the procedures specified therein to receive payment in cash
for the fair market value of their shares instead of shares of Paychex
Common Stock in the Merger. Sections 1300-1312 are set forth in full in
Annex II to this Proxy Statement/Prospectus. The following is a brief
summary of the provisions of those sections.
The Pay-Fone Shares are listed on the American Stock Exchange. Under
the CGCL, dissenters' rights are not available with respect to shares
listed on the American Stock Exchange unless (i) the shares are subject to
a restriction on transfer imposed by Pay-Fone or by any law or regulation
("Restricted Shares"), or (ii) 5% or more of the outstanding shares demand
payment in accordance with the procedures described below. A condition to
Paychex' obligation to consummate the Merger is that Demands (as defined
below) shall not have been filed with respect to 5% or more of outstanding
Pay-Fone Shares.
Only record holders of Pay-Fone Shares may exercise dissenters'
rights. Accordingly, in any case in which Pay-Fone Shares are held in the
name of a nominee or agent, such as Shares held in "street name" by a
broker, the beneficial owner of such Shares must make arrangements for the
record holder of the Pay- Fone Shares to take all actions and to deliver
all documents required to perfect the beneficial owner's dissenters'
rights.
To exercise dissenters' rights, a record shareholder (the "dissenting
shareholder") must vote against the Merger, Pay-Fone or its transfer agent
must timely receive a written statement from such dissenting shareholder
demanding that Pay-Fone pay in cash the fair market value of the
dissenting shareholder's Pay- Fone Shares (the "dissenting shares") and
there must be a timely and proper submission to Pay-Fone or its transfer
agent of the certificates representing the dissenting shares. A vote
against the Merger will not satisfy the requirements with respect to the
demand for payment in cash or other actions required to perfect
dissenters' rights. Shareholders who vote in favor of the Merger, abstain
from voting or provide no direction on their proxy cards to vote against
the Merger will lose their dissenters' rights. Except as expressly
limited in Sections 1300-1312 of the CGCL, dissenting shareholders have
all the rights otherwise incident to Pay-Fone Shares until the dissenting
shares' fair market value is agreed upon or determined.
For purposes of determining Pay-Fone's purchase price for dissenting
shares, fair market value shall be determined as of the day before the
first announcement of the terms of the proposed Merger, excluding any
appreciation or depreciation in consequence of the proposed Merger, but
adjusted for any stock split or stock dividend which later becomes
effective. On March 17, 1995, the day before the issuance of Pay-Fone's
press release announcing the proposed Merger, the closing sale price for
Pay- Fone Common Stock on American Stock Exchange was $4.50. See "SUMMARY
- - Comparative Market Prices and Dividend Data."
By June 15, 1995, the date of the Special Meeting, a dissenting
shareholder must make, and Pay-Fone or its transfer agent must receive, a
written demand (the "Demand") for Pay-Fone to purchase the dissenting
shares in cash at their fair market value. The Demand must state the
number and class of the shares held of record which the dissenting
shareholder demands that Pay-Fone purchase and must contain a statement of
what such shareholder claims to be the fair market value of the dissenting
shares as of the day before the announcement of the proposed Merger. Once
made, dissenting shareholder may not withdraw a Demand without the consent
of Pay- Fone.
Within ten days after the approval of the Merger by the shareholders,
Pay-Fone will give written notice (the "Notice") by mail of such approval
to those shareholders who voted against the Merger and who timely
delivered a Demand; provided, however, that the Notice shall be mailed to
dissenting shareholders other than holders of Restricted Shares only if
Demands were timely delivered with respect to 5% or more of the
outstanding Pay-Fone Shares. The Notice shall be accompanied by a copy of
Sections 1300-1304 of the CGCL relating to dissenters' rights, a statement
of the price Pay-Fone considers to represent the fair market value of the
dissenting shares and a brief description of the procedure to be followed
to exercise dissenters' rights. Within 30 days of the mailing of the
Notice, a dissenting shareholder must submit to Pay-Fone at its principal
office or at the office of its transfer agent the certificates
representing the dissenting shares for endorsement thereon of a statement
that the shares are dissenting shares or for an exchange for certificates
so endorsed.
Within 30 days after Pay-Fone and the dissenting shareholder agree
that the shares are dissenting shares and agree as to the price of the
shares, Pay-Fone must pay the agreed price plus interest thereon from the
date of agreement. If, however, there is disagreement as to the status of
the shares as dissenting shares or as to the fair market value of the
shares or both, the shareholder may, within six months of the mailing of
the Notice, seek a judicial determination of the status of the shares as
dissenting shares or of the dissenting shares' fair market value.
A dissenting shareholder loses dissenters' rights if (i) Pay-Fone
abandons the Merger (upon such abandonment Pay-Fone shall pay on demand to
any dissenting shareholder who has initiated proceedings in good faith all
necessary expenses incurred in such proceeding and reasonable attorneys'
fees), (ii) the shares are transferred prior to their submission for
endorsement as dissenting shares or are surrendered for conversion into
shares of another class, (iii) there is disagreement as to the status of
the shares as dissenting shares or as to the purchase price thereof and
such shareholder fails to seek a judicial determination thereof within six
months of the date on which the Notice was mailed, or (iv) such
shareholder's Demand is withdrawn with the consent of Pay-Fone. No
shareholder who has a right to demand payment of cash for his Pay-Fone
Shares shall have any right at law or in equity to attack the validity of
the Merger or have it set aside or rescinded except in an action to test
whether a sufficient number of Pay-Fone Shares were legally voted in favor
of the Merger.
All written communications from shareholders with respect to the
exercise of dissenters' rights should be delivered to Mark Leekley,
President of Pay-Fone Systems, Inc., 8100 Balboa Avenue, Van Nuys,
California 91406. For purposes of the foregoing discussion regarding
dissenters' rights, the terms "written" and "in writing" include facsimile
or telegraphic communications.
The foregoing summary does not purport to be a complete statement of
the provisions of the CGCL relating to the rights of dissenting
shareholders and is qualified in its entirety by reference to Annex II
hereto.
Effect on Pay-Fone Stock Options
At the Effective Time each outstanding option to purchase Pay-Fone
Shares ("Pay-Fone Option") shall be deemed to constitute an option to
acquire, on the same terms and conditions as were applicable under such
Pay-Fone Option, a number of shares of Paychex Common Stock equal to the
product of the Exchange Ratio and the number of Pay-Fone Shares subject to
the Pay-Fone Option at a price per share equal to the aggregate exercise
price for the Pay-Fone Shares subject to such option divided by the number
of full shares of Paychex Common Stock deemed purchasable pursuant to such
option; the terms of the conversion of any incentive stock option shall be
determined in a manner that complies with applicable provisions of the
Internal Revenue Code; and the number of shares of Paychex Common Stock
that may be purchased upon exercise of any Pay-Fone Option shall not
include any fractional share and, upon exercise of such option as to all
remaining shares of Paychex Common Stock, a cash payment shall be made for
any fractional share based upon the closing price of a share of Paychex
Common Stock on the trading day next preceding the date of exercise and
the exercise price.
Paychex has agreed to take all corporate action necessary to reserve
a sufficient number of shares of Paychex Common Stock for issuance and
delivery upon exercise of the Pay-Fone Options and to register such shares
under the Securities Act.
Interests of Certain Persons in the Merger
The obligation of Paychex to consummate the Merger is subject to the
condition that the employment agreement between Paychex and Mark Leekley,
President and Chief Executive Officer of Pay-Fone, executed on March 17,
1995, shall have become effective. Pursuant to such employment agreement,
Mr. Leekley will be employed commencing at the Effective Time for a term
of one year for an annual salary of $93,000, plus a bonus of up to $21,000
and certain other benefits. Mr. Leekley will also be awarded stock
options to purchase 1,500 shares of Paychex Common Stock at the closing
price thereof at the Effective Time.
As an incentive for remaining with Pay-Fone from the date of the
Merger Agreement until the end of a period not to exceed eight months
after the Effective Time, Pay-Fone will pay bonuses to its executive
officers and other key employees in amounts ranging from $15,000 to
$25,000 with respect to executive officers. A total of 17 employees
(including five executive officers) are eligible for the bonuses, and the
total bonus pool equals $175,500. Such employees will also be paid
additional severance compensation (up to $10,263 with respect to executive
officers) if they are terminated by Paychex for any reason other than for
cause in the first 12 months after the Effective Time. In consideration
for such payments, each employee must agree to release Pay-Fone from any
claims relating to his or her employment and must execute Paychex'
standard employee confidentiality agreement.
In recognition of extraordinary services rendered in negotiating the
Merger, the Board of Directors of Pay-Fone (with Mark Kelton and David
Malcolm abstaining) has approved and Pay- Fone has paid bonuses to Mark
Kelton, Mark Leekley and David Malcolm of $50,000, $25,000 and $25,000,
respectively.
Pursuant to an Affiliates Agreement dated as of March 17, 1995 with
Paychex, Pay-Fone's directors and executive officers and Allied
Contractors, Inc. (the Affiliates) have agreed to vote their Pay-Fone
Shares in favor of the Merger. The Affiliates collectively own
approximately 76% of the Pay-Fone Shares outstanding and entitled to vote
as of the record date for the Special Meeting and, accordingly, will be
able to approve the Merger without the vote of any other shareholder. See
"CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND OTHER AGREEMENTS -
Affiliates Agreement" and "OWNERSHIP OF PAY-FONE SHARES."
The Merger Agreement prohibits Pay-Fone from, directly or indirectly,
soliciting or engaging in any discussions or negotiations with any third
party, other than Paychex, concerning a transfer of control of Pay-Fone.
Consistent with their fiduciary duties, Affiliates who are also directors
of Pay-Fone are required to act in good faith and in the best interests of
Pay-Fone and its shareholders. Accordingly, notwithstanding the terms of
the Affiliates Agreement or the Merger Agreement, Pay- Fone's directors,
in the exercise of their fiduciary duties, may withdraw their approval and
recommendation of, or abandon, the Merger if, for example, a third party
were to propose a transaction which the directors determined to be more
favorable to Pay-Fone and its shareholders. The Merger Agreement provides
that if the Pay-Fone Board takes a position contrary to the Merger, the
holders of 5% or more of Pay-Fone Shares exercise dissenters' rights and
Paychex elects to terminate the Merger Agreement, or if Pay-Fone fails to
cooperate as required by the Merger Agreement in presenting the Merger to
the Pay-Fone shareholders for their vote, then Pay-Fone will be required
to pay $300,000 to Paychex as liquidated damages within ten days after
written demand.
In order to satisfy a Paychex requirement that Paychex not bear any
substantial economic risk with respect to the Tax Claims and certain
related claims as a result of the Merger, the six individuals serving as
directors of Pay-Fone and Allied Contractors, Inc., a shareholder of
Pay-Fone (collectively, the "EIA Shareholders"), have executed an Escrow
and Indemnity Agreement with Paychex, Pay-Fone and an escrow agent which
under certain circumstances will become effective at the Effective Time.
Pursuant to the Escrow and Indemnity Agreement, the EIA Shareholders will
indemnify Paychex and Pay-Fone against expenses and deficiencies paid
after the Effective Time with respect to the Tax Claims and certain
related claims. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND OTHER
AGREEMENTS - Escrow and Indemnity Agreement." The formula for the
Exchange Ratio in the Merger Agreement provides for an adjustment which
would reduce the Exchange Ratio based on amounts expended by Pay-Fone
between the date of the Merger Agreement and the Effective Time in
contesting and resolving the Tax Claims. As a result of this provision in
the Merger Agreement, expenses and deficiencies paid with respect to the
Tax Claims prior to the Merger will negatively affect the Exchange Ratio
and thereby all shareholders of Pay-Fone, while such expenses and
deficiencies paid after the Merger may instead be borne by the EIA
Shareholders.
Resale of Paychex Common Stock
The shares of Paychex Common Stock to be issued to the shareholders
of Pay-Fone pursuant to the Merger Agreement are being registered under
the Securities Act pursuant to the Registration Statement of which this
Proxy Statement/Prospectus is a part. However, persons who are affiliates
of Pay-Fone will not be able to resell the Paychex Common Stock received
by them in the Merger unless the Paychex Common Stock is registered for
resale under the Securities Act, is sold in compliance with an exemption
from the registration requirements of the Securities Act or is sold in
compliance with Rule 145 under the Securities Act.
Pursuant to Rule 145 under the Securities Act, the sale of Paychex
Common Stock acquired by former affiliates of Pay-Fone pursuant to the
Merger will be subject to certain restrictions. For two years after the
Effective Date such persons may sell Paychex Common Stock under Rule 145
only if (i) Paychex has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding twelve months, (ii)
the Paychex Common Stock is sold in a "broker's transaction," which is
defined in Rule 144 under the Securities Act as a sale in which (a) the
seller does not solicit or arrange for orders to buy the securities, (b)
the seller does not make any payment other than to the broker, (c) the
broker does no more than execute the order and receive a nominal
commission and (d) the broker does not solicit customer orders to buy the
securities, and (iii) such sale and all other sales made by such person
within the preceding three months do not collectively exceed the greater
(x) 1% of the outstanding shares of Paychex Common Stock and (y) the
average weekly trading volume of Paychex Common Stock on all national
securities exchanges during the four-week period preceding the
sale.
The Affiliates have agreed to certain other restrictions with respect
to the transferability of their Paychex Common Stock as described in
"CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND OTHER AGREEMENTS -
Affiliates Agreement."
CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND OTHER AGREEMENTS
The following description does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, including
exhibits thereto, a copy of which is attached as Annex I to the Proxy
Statement/Prospectus and is incorporated herein by reference.
Representations and Warranties
The Merger Agreement contains various representations and warranties
of the parties thereto. The Merger Agreement includes representations and
warranties by Pay-Fone and Paychex as to (i) the corporate organization,
standing and power of Pay-Fone and Paychex and their subsidiaries, (ii)
approvals by their respective Boards of Directors or Committees thereof,
(iii) their capitalization, (iv) the authorization of the Merger
Agreement, (v) pending or threatened litigation, (vi) the Merger
Agreement's non-contravention of any agreement, law, charter or by-law
provision and the absence of the need (except as specified) for
governmental or third-party consents to the Merger, (vii) the terms,
existence, operations, liabilities and compliance with applicable laws of
Pay-Fone employee plans, and certain other matters relating to the
Employment Retirement Income Security Act of 1974, as amended, (viii)
certain tax matters, (ix) ownership of and rights to use certain
intellectual property, (x) the accuracy of financial statements and
filings with the SEC, (xi) the conduct of business in the ordinary and
usual course and the absence of any material adverse change in financial
condition, business, results of operations, properties, assets,
liabilities or prospects, (xii) certain contracts and leases, (xiii)
certain transactions with affiliates, (xiv) brokers and finders, and (xv)
the accuracy of information supplied for inclusion in this Proxy
Statement/Prospectus and in the Registration Statement.
Business of Pay-Fone Pending the Merger
Pay-Fone has agreed that, among other things, prior to the Effective
Time or earlier termination of the Merger Agreement, it will conduct its
operations according to its ordinary course of business consistent with
its past practice and that it will seek to preserve its current business
organizations, keep available the service of its current officers and
employees and preserve its relationships with customers, suppliers and
others having business dealings with it. Pay-Fone further agrees that,
except with the consent of Paychex or as otherwise permitted pursuant to
the Merger Agreement, prior to the Effective Time it will refrain
from taking certain actions with respect to, among other things, its
securities, employee benefits, corporate existence, or form thereof,
assets, indebtedness, and major transactions.
Certain Covenants of Paychex
Paychex has agreed that, prior to the Effective Time or earlier
termination of the Merger Agreement, except as permitted in the Merger
Agreement or with Pay-Fone's prior written consent, Paychex will not (i)
adopt a plan of complete or partial liquidation, dissolution, merger or
consolidation (other than a merger or consolidation in which Paychex would
not become a subsidiary of any other person); (ii) adopt any amendments to
the Certificate of Incorporation of Paychex or take any other action
requiring a vote of the other holders of Paychex Common Stock, which would
adversely effect the terms and provisions of the Paychex Common Stock or
the rights of the holders thereof, (iii) authorize, recommend, propose or
announce an intention, or enter into any contract, agreement, commitment
or arrangement to do any of the foregoing, or (iv) during the 60 days
prior to the Closing purchase shares of Paychex Common Stock or take other
actions a principal purpose of which is to affect the Actual Price of
Paychex Common Stock or the Exchange Ratio.
No Solicitation
Under the Merger Agreement, Pay-Fone has agreed that, prior to the
consummation of the Merger, Pay-Fone will not, and it will not authorize
any of its officers, employees, representatives, agents or affiliates to,
directly or indirectly, encourage, solicit or engage in discussions or
negotiations with any third party (other than Paychex) concerning any
merger, consolidation, share exchange or similar transaction involving
Pay-Fone or any purchase of all or a significant portion of the assets of
or equity interest in Pay- Fone, or any other transaction that would
involve a transfer or potential transfer of control of Pay-Fone, other
than the transactions contemplated by the Merger Agreement, provided,
however, that the Pay-Fone Board may take and disclose to Pay- Fone
shareholders a position under applicable Exchange Act rules with respect
to a tender offer for Pay-Fone Shares commenced by a third party and
otherwise act in a manner consistent with its fiduciary duties. Pay-Fone
has agreed to notify Paychex immediately of any inquiries or proposals
with respect to any such transactions that are received by, or any such
negotiations or discussions that are sought to be initiated with,
Pay-Fone.
Pay-Fone has agreed that, in the event that its Board takes a
position contrary to the proposed Merger and the holders of 5% or more of
the Pay-Fone Shares elect dissenters' rights and Paychex elects to
terminate the Merger Agreement in accordance
with the provisions thereof, then Pay-Fone will pay Paychex the sum of
$300,000. Similarly, Paychex has agreed that, in the event it fails to
cooperate as required by the Merger Agreement or unreasonably fails to
provide its consent or unreasonably employs an immaterial breach or
failure to terminate the Merger Agreement, it will pay Pay-Fone the sum of
$300,000. In both instances the payment represents liquidated damages
which shall extinguish all other claims.
Conditions/Waivers
Conditions to Each Party's Obligations to Effect the Merger.
It is a condition of each party's obligations under the Merger
Agreement that the following conditions be satisfied or waived: (i) the
Merger shall have been approved by the holders of a majority of the
outstanding Pay-Fone Shares, (ii) all governmental authorizations required
for performance of the obligations under the Merger Agreement have been
obtained, (iii) there shall be no judgment, writ, order, injunction or
decree of any court or governmental body enjoining or otherwise preventing
consummation of the transactions contemplated by the Merger Agreement,
(iv) there shall be no stop order suspending the effectiveness of, or any
action by the SEC to suspend the effectiveness of the Registration
Statement, (v) the Paychex Common Stock to be issued in the Merger shall
have been approved for listing on the NASDAQ National Market, (vi) Paychex
shall have received all state securities or blue sky authorizations for
issuance of Paychex Common Stock pursuant to the Merger and (vii) all
required authorizations, consents or approvals (other than those described
in clause (ii) of this sentence) for the performance of the obligations
under the Merger Agreement, the failure of which would have a material
adverse affect on Paychex and its subsidiaries taken as a whole, shall
have been obtained.
Conditions to Paychex' and Merger Sub's Obligations.
The obligations of Paychex and Merger Sub under the Merger Agreement
are subject to the fulfillment or waiver of the following additional
conditions: (i) each of the representations and warranties of Pay-Fone
contained in the Merger Agreement or otherwise expressly required by the
Merger Agreement to be made after the execution thereof (A) shall have
been true in all material respects when made and (B) in some cases shall
be true in all material respects at the time of the Closing with the same
effect as though such representations and warranties had been made at such
time, (ii) at or prior to the Closing, Pay-Fone shall have performed or
complied in all material respects with all agreements and conditions
required of it pursuant to the Merger Agreement, (iii) Pay-Fone shall have
delivered to Paychex
a certificate, dated the date of the Closing and signed by the President
or any Vice President of Pay-Fone, certifying as to the fulfillment of the
conditions specified in clauses (i) and (ii) of this sentence, (iv)
Paychex shall have received a legal opinion from counsel for Pay-Fone
satisfactory to Paychex, (v) all corporate proceedings taken by Pay-Fone
in connection with the transactions contemplated by the Merger Agreement
shall be reasonably satisfactory to Paychex and Paychex' counsel, (vi)
Paychex shall have received a tax opinion of Woods, Oviatt, Gilman,
Sturman & Clarke LLP, counsel for Paychex, as contemplated by the Merger
Agreement, (vii) Paychex shall have received an opinion from Ernst & Young
LLP that the Merger will qualify for pooling-of-interests accounting
treatment, (viii) no suit, action, investigation, inquiry or other
proceeding by any United States governmental body or other material
governmental body shall have been instituted and be pending which imposes
or which would be reasonably expected to impose any condition or
restriction unacceptable to Paychex in its reasonable judgment, (ix) the
Registration Statement shall disclose no information in existence on the
date of the execution of the Merger Agreement which is materially adverse
to Pay-Fone's business, properties, operations, condition or prospects not
previously disclosed in reports of Pay-Fone filed with the SEC or in the
Merger Agreement, (x) the Employment Agreement between Paychex and Mark
Leekley, Pay-Fone's President, shall have become effective, (xi) Pay-Fone
shareholders holding 5% or more of the outstanding Pay- Fone Shares shall
not have exercised appraisal rights, (xii) all persons required so to
sign shall have signed the Affiliates Agreement, (xiii) the Escrow
Agreement shall have become effective, if required, and (xiv) the Actual
Price shall not be less than $20.67, unless Pay-Fone agrees that the
Formula Price will be $22.67.
Conditions to Pay-Fone's Obligations.
Pay-Fone's obligations under the Merger Agreement are subject to the
fulfillment or waiver of the following additional conditions: (i) each of
the representations and warranties of Paychex and Merger Sub contained in
the Merger Agreement or otherwise expressly required by the Merger
Agreement to be made after the execution thereof (A) shall have been true
in all material respects when made and (B) in some cases shall be true in
all material respects at the time of the Closing with the same effect as
though such representations and warranties had been made at such time,
(ii) at or prior to the Closing, Paychex shall have performed or complied
in all material respects with all agreements and conditions required of it
pursuant to the Merger Agreement, (iii) Paychex shall have delivered to
Pay-Fone a certificate, dated the date of the Closing and signed by the
President or any Vice President of Paychex certifying as to the
fulfillment of the conditions specified in clauses (i) and (ii)
of this sentence, (iv) Pay-Fone shall have received a legal opinion from
Woods, Oviatt, Gilman, Sturman & Clarke LLP counsel for Paychex
satisfactory to Pay-Fone, (v) all corporate proceedings taken by Paychex
in connection with the transactions contemplated by the Merger Agreement
shall be reasonably satisfactory to Pay-Fone and Pay-Fone's counsel, (vi)
the Registration Statement shall disclose no information in existence on
the date of the execution of the Merger Agreement which is materially
adverse to Paychex' business, properties, operations, condition or
prospects not previously disclosed in reports of Paychex filed with the
SEC or in the Merger Agreement, (vii) the Actual Price shall not
be more than $32.67 (unless Paychex agrees that the Formula Price will be
$30.67), and (viii) the aggregate amount subtracted from $10,475,000 in
the Exchange Ratio calculation by reason of the provisions relating to
the General Adjustment and Positive Adjustment do not exceed $360,000. If
Pay-Fone elects to terminate the Merger Agreement because condition (viii)
is not satisfied, Pay-Fone has agreed to pay Paychex $70,000.
Amendment/Termination
The parties to the Merger Agreement may amend it by a writing signed
by both parties.
The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, before or after the
approval of Pay-Fone shareholders, either by the mutual written consent of
Paychex and Pay-Fone or by the mutual action of their respective Boards of
Directors.
The Merger Agreement may also be terminated by action of either the
Paychex Board or the Pay-Fone Board if (i) the Merger has not been
consummated by August 31, 1995 (provided that the right to terminate under
this clause (i) will not be available to any party whose failure to
fulfill any obligation under the Merger Agreement or whose action or
inaction, even though not prohibited by the Merger Agreement, has been the
cause of or resulted in the failure of the Merger to occur on or before
such date), (ii) any court or governmental body in the United States has
issued a final and nonappealable order, decree or ruling or taken any
other final and nonappealable action permanently restraining, enjoining or
otherwise prohibiting the Merger, or (iii) a party acquires verified
information regarding the other party not known to the first party when
the Merger Agreement was signed which has or would reasonably be expected
(so far as can be foreseen at the time) to have a material adverse effect
on the business, properties, operations, condition (financial and other)
or prospects of the other party.
In the event of termination of the Merger Agreement and abandonment
of the Merger, neither Paychex nor Pay-Fone (or any of their directors or
officers) will have any liability or further obligation to any party to
the Merger Agreement, except with respect to certain confidentiality
requirements as provided for in the Merger Agreement. Nevertheless, each
party to the Merger Agreement will remain liable for any breach thereof.
Regulatory Approvals
There are no federal or state regulatory requirements which
must be complied with or approvals which must be obtained in connection
with the Merger.
Expenses and Fees
Paychex and Pay-Fone will each pay their own expenses in connection
with the Merger, whether or not consummated. However, in the event that
the aggregate adjustments to the $10,475,000 numerator in the Exchange
Ratio formula exceeds $360,000 and Pay- Fone terminates the Merger
Agreement, Pay-Fone must pay Paychex $70,000. See "THE MERGER - Merger
Consideration."
In the event that the Pay-Fone Board takes a position
contrary to the proposed Merger, the holders of 5% or more of Pay-Fone
Shares elect dissenters' rights and Paychex elects to terminate the Merger
Agreement, then Pay-Fone must pay Paychex $300,000. Similarly, if Paychex
fails to cooperate as required by the Merger Agreement or unreasonably
fails to provide its consent or unreasonably employs an immaterial breach
or failure to terminate the Merger Agreement, it must pay Pay-Fone
$300,000. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT AND OTHER
AGREEMENTS."
Affiliates Agreement
Concurrently with the original execution of the Agreement and Plan
of Merger, Paychex, Merger Sub, Pay-Fone and the Affiliates entered into
the Affiliates Agreement, pursuant to which each Affiliate agreed to
attend the Special Meeting in person or by proxy and to vote all Pay-Fone
Shares owned by such Affiliate for approval and adoption of the Merger
Agreement.
The Affiliates Agreement also contains certain provisions relating to
the treatment of the Merger as a pooling of interests for accounting
purposes. Certain of the Affiliates (the "Members"), who own more than
70% of the outstanding Pay-Fone Shares, have agreed to continue to own
their Pay-Fone Shares at
all times prior to the Effective Time; while the remaining Affiliates have
agreed not to sell, transfer or otherwise dispose of Pay-Fone securities
only from and after the date which is 30 days prior to the Special
Meeting. All Affiliates have agreed to hold their Pay-Fone Shares or the
shares of Paychex Common Stock received in exchange therefor from the
applicable date until after such time as results covering at least 30 days
of combined operations of Pay-Fone and Paychex have been published by
Paychex (the "Publication Date").
Each Member has represented that such Member does not have, and as of
the Closing Date such Member will not have, any present plan to sell more
than 50% of the shares of Paychex Common Stock issued to such Member in
connection with the Merger, but no Member has undertaken any obligation to
hold any amount of such shares of Paychex Common Stock beyond the
Publication Date.
Escrow and Indemnity Agreement
Concurrently with the original execution of the Agreement of
and Plan of Merger and the Affiliates Agreement, Paychex and certain
owners of more than 70% of the outstanding Pay-Fone Shares (the "EIA
Shareholders") executed an Escrow and Indemnity Agreement with Mara Escrow
Company ("Escrow Agent"). The EIA Shareholders are the six Pay-Fone
directors and a shareholder, Allied Contractors, Inc. The EIA
Shareholders agreed under certain circumstances to deposit with the Escrow
Agent at Closing that number of shares of Paychex Common Stock (the
"Escrow Shares") as shall be equal to the quotient (rounded to the nearest
whole number) derived by dividing $400,000 by the Formula Price. The
Escrow Shares are to secure Pay-Fone and Paychex against loss resulting
from Internal Revenue Service ("IRS") claims against Pay-Fone for the
fiscal years ended June 30, 1987 through 1991 (the "Federal Tax Claims"),
which currently aggregate $471,000, to the extent they are unresolved at
the Closing Date. The EIA Shareholders (along with qualified
professionals designated by them and approved by Paychex) would be
authorized to negotiate and litigate to a final resolution the Federal Tax
Claims and under certain circumstances claims asserted by the California
Franchise Tax Board ("CFTB") for state income or franchise taxes with
respect to the same periods and based on the same facts in the event the
EIA Shareholders are responsible therefor. The authorization may also
extend to similar IRS and CFTB claims relating to subsequent periods
through June 30, 1995 for which the EIA Shareholders may also be
responsible.
Upon a final resolution of the Federal Tax Claims, Paychex will cause
Pay-Fone to pay to the IRS the amounts still due with respect to the
Federal Tax Claims and to pay to the EIA Shareholders the amount of the
expenses incurred by them for which they seek reimbursement. The EIA
Shareholders and Paychex will then agree upon (or accountants will
determine) the net economic cost to Paychex and Pay-Fone ("Federal Tax
Claim Cost") after reasonably anticipated tax benefits (taking deferred
benefits into account by discounting them at the prime rate then
in effect) of such resolution including reimbursement of EIA
Shareholders' expenses.
The Escrow Agent will release to Paychex that number of Escrow Shares
as results from dividing the Federal Tax Claim Cost by the Formula Price
and release to the EIA Shareholders the remaining Escrow Shares. If the
quotient of such division is greater than the number of Escrow Shares,
then the EIA Shareholders (in proportion) shall deliver to Paychex shares
of Paychex Common Stock equal to the amount by which such quotient exceeds
the number of Escrow Shares. If an EIA Shareholder no longer holds shares
of Paychex Common Stock, he shall deliver in lieu of any such share cash
in an amount equal to the Formula Price. The liability of the EIA
Shareholders is several and not joint and is proportional.
Upon delivery of all Escrow Shares, the escrow shall terminate.
However, if the amount paid the IRS with respect to the Federal Tax Claims
is more than $25,000, the EIA Shareholders agree to indemnify Paychex and
Pay-Fone against the net economic cost of any claim, loss, liability or
expense arising out of any IRS claim for fiscal years 1992 through 1995,
and for CFTB claims for fiscal years 1987 through 1995 which claims are
based on the same issues or facts as the Federal Tax Claims. If the
amount paid the IRS with respect to the Federal Tax Claims is $25,000 or
less, but includes some liability with respect to accumulated earnings
claims, the EIA Shareholders agree to indemnify Paychex and Pay-Fone from
the net economic cost of any claim, loss, liability or expense arising out
of any IRS claim for fiscal years 1992 through 1995 and CFTB claims for
fiscal years 1987 through 1995 which claims are based on the same issues
and facts that result in liability in connection with the accumulated
earnings claim.
The EIA Shareholders agree to pay the Escrow Agent's fees for
standard services; and Paychex and Pay-Fone on the one hand, and EIA
Shareholders on the other, agree to share equally the fees of the Escrow
Agent for extraordinary services required.
The EIA Shareholders agreed to enter into the Escrow and Indemnity
Agreement in order to satisfy a requirement of Paychex that Paychex not
bear any substantial economic risk with respect to the Federal Tax Claims
and related claims as a result of the Merger. Amounts paid by Pay-Fone
with respect to the Federal Tax Claims and certain CFTB claims prior to
the Effective Time could have the effect of reducing the Exchange Ratio.
See "THE MERGER -Merger Consideration."
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATION OF PAY-FONE
The following discussion should be read in conjunction with the
consolidated financial statements of Pay-Fone contained elsewhere in this
Proxy Statement/Prospectus.
Results of Operations
Nine Months ended March 31, 1995 and 1994 (Unaudited):
Pay-Fone experienced a net loss of $287,425 for the nine months
ended March 31, 1995 compared to net income of $167,440, for the nine
months ended March 31, 1994. The 1995 loss was primarily due to
expenditures associated with Pay-Fone's introduction of in-house tax
filing services and entrance into the large-employer market as well
as approximately $117,500, of expenses incurred in the third quarter of
fiscal 1995 attributed to the proposed Paychex Merger. Management
anticipated that the increased expenditures related to the in-house tax
filing services and entry into the large employer market and increased
marketing expenses would have a negative impact on earnings in the
first half of fiscal year 1995, but that the expenditures would
position Pay-Fone for continued revenue growth in fiscal 1995 and
beyond.
Revenues for the nine months ended March 31, 1995 increased
$240,655 (7.1%) over the nine months ended March 31, 1994. This increase
in revenues is attributable primarily to Pay-Fone's acquisition of
Concentric Computer Corporation in February 1994 and additional revenues
generated by Pay-Fone's introduction of in-house tax filing services and
entrance into the large-employer market.
Direct operating costs as a percentage of revenues increased to 46%
in the nine months ended March 31, 1995 as compared to 37% in the same
nine months in the prior year due to the costs associated with the
establishment of Pay-Fone's second branch location in Northern California
and Pay-Fone's introduction of in-house tax filing services and entrance
into the large-employer market.
Selling, general and administrative expenses as a percentage of
revenues increased to 63% in the nine month period ended March 31, 1995,
as compared to 56% in the same period of the prior year. Again, this
increase is due to the expenditures related to the introduction of
in-house tax filing services and entrance into the large-employer market,
including increased staffing and marketing expenses.
Pay-Fone incurred approximately $117,500 of Merger related costs in
the third quarter of fiscal 1995. The Company expects to incur additional
legal and other costs associated with the Merger during the balance of the
fiscal year.
Fiscal Years ended June 30, 1994, 1993 and 1992.
Net income for the fiscal year ended June 30, 1994 was $188,966 as
compared to net income of $151,015 for the fiscal year ended June 30, 1993
and net income of $110,596 for the fiscal year ended June 30, 1992. The
25% improvement in net income in fiscal 1994 compared to fiscal 1993 was
primarily due to Pay-Fone's ongoing program of cost controls, a $38,000
increase in rent earned in fiscal 1994 by leasing excess space in its
corporate headquarters building, a $20,976 credit to earnings arising from
the change in the method of accounting for income taxes, and a reduction
in legal expenses. This improvement occurred despite a slight reduction
in revenues and additional expenses incurred with the establishment of a
second branch office in Northern California.
Pay-Fone's gross revenues declined 1% in fiscal 1994 after declining
13.1% in fiscal 1993 and 1.2% in fiscal 1992. Despite the slight decline
in revenues in fiscal 1994, in the fourth quarter revenues increased 7.6%
as compared to the same quarter in the prior fiscal year. In fiscal 1994,
it was management's objective to improve Pay-Fone's sales and marketing
results and to continue to actively pursue acquisition opportunities so as
to increase Pay-Fone's gross revenues, net income and shareholder value.
Pay-Fone's acquisition of Concentric Computer Corporation on February 1,
1994 contributed significantly to the increase in fourth quarter revenues
above 1993 levels. Additionally, Pay- Fone continued to add new services
and enhancements to its operating segments, including the introduction of
in-house tax filing services and entrance into the large-employer market
in the third quarter of fiscal 1994. While management expects that the
increased expenditures in these areas and in marketing expenses will have
a negative impact on earnings in the first half of the fiscal year, it
believes that these expenditures will position Pay-Fone for continued
revenue growth in fiscal 1995.
The decline in Pay-Fone's revenues over the past several years was
due to several factors, including the sale or discontinuation of portions
of Pay-Fone's business outside California which were not profitable. In
fiscal 1993, Pay-Fone sold its New York payroll business and terminated
its Mobile, Alabama franchise, and in fiscal 1992 Pay-Fone terminated its
franchise in Greenville, South Carolina, which in the aggregate
contributed .5% and 5.5% of Pay-Fone's revenues in fiscal 1993 and 1992,
respectively.
Also, although the number of clients in fiscal 1993 and 1992 remained
approximately the same, the average revenue per client declined because
of a decrease in the number of employees which resulted in reduced payroll
services. Management believes this was due, at least in part, to
prevailing economic and employment conditions in California, Pay-Fone's
main market. With the acquisition of Concentric Computer Corporation and
Pay-Fone's increased sales efforts, the number of clients at June 30, 1994
increased approximately 9% over the number at June 30, 1993.
Direct operating costs as a percentage of revenues increased from 36%
in fiscal 1993 to 38% in fiscal 1994 due to the decrease in revenues and
the expenses incurred with the establishment of Pay-Fone's second branch
location in Northern California. Direct operating costs as a percentage
of revenues decreased to 36% in fiscal 1993 as compared to 39% in fiscal
1992 due to the Company's cost controls.
Selling, general and administrative costs as a percentage of revenues
decreased to 57% in fiscal 1994 compared to 59% in fiscal 1993 and 60% in
fiscal 1992 due to Pay-Fone's program of cost controls and a reduction in
legal expenses in fiscal 1994. Combined marketing and advertising
expenditures for fiscal 1994 increased approximately $62,000 to $1,032,571
as compared to $970,304 in fiscal 1993 and $1,088,090 in fiscal 1992.
Research and development expenses in fiscal 1994 totaled $148,527 as
compared to $182,255 in fiscal 1993 and $172,784 in fiscal 1992. Research
and development expenditures are for payroll system enhancements and
improvements to service and output to clients.
Income from operations for fiscal 1994 increased $34,124 over fiscal
1993 after increasing $133,277 over fiscal 1992 due primarily to the
reduction in selling, general and administrative costs.
Pay-Fone adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (Statement 109) in fiscal year 1994 and
applied the provisions of Statement 109 retroactively to July 1, 1993.
The cumulative effect of the change in the method of accounting for income
taxes as of July 1, 1993 was reported separately in fiscal 1994 as a
$20,976 credit to earnings.
Liquidity and Capital Resources
Pay-Fone relies on cash flow from operations and working capital to
finance its business and operations. Pay-Fone's overall financial
position continues to be strong with a current ratio of 8.3 at March 31,
1995. This compares to a current ratio of 12.0 at June 30, 1994. At March
31, 1995, Pay-Fone had $2.4 million in working capital. Pay-Fone has no
legal obligation for material capital commitments. In management's
opinion, current working capital together with cash flow from operations
are sufficient to meet its normal operating requirements. Pay-Fone does
not have any long-term debt, lines of credit or other material financing
arrangements.
OWNERSHIP OF PAY-FONE SHARES
The following table sets forth information as of May 1,
1995, as to Pay-Fone Shares owned by (a) persons known to Pay-
Fone to be the beneficial holders of more than 5% of the
outstanding Pay-Fone Shares, (b) each director and the chief
executive officer of Pay-Fone, and (c) all executive officers and
directors of Pay-Fone as a group.
Beneficial Owner* Number of Shares Percent
Beneficially Owned of Class
Allied Contractors, Inc.
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207 386,669 (1) 25.86%
Richard Kelton
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207 629,436 (2) 41.76%
David Kelton
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207 229,688 (3) 15.31%
Allen Kahn, M.D.
55 East Washington Street
Chicago, IL 60602-2174 253,400 (4) 16.79%
Mark Kelton 114,596 (5) 7.64%
2716 Ocean Park Boulevard
Suite 3006
Santa Monica, CA 90405-5207
Edwin Johnson 43,700 (6) 2.90%
David L. Malcolm 23,100 (7) 1.55%
Mark Leekley 17,100 (8) 1.13%
All Executive Officers and
Directors as a Group
(11 persons) 1,228,920 (9) 77.39%
* Includes the address of more than 5% shareholders.
(1) Allied Contractors, Inc. ("Allied") is a California
corporation owned by members of the Kelton family. Richard
Kelton, David Kelton and Mark Kelton each serve as officers and
directors of Allied. As President of Allied, Richard Kelton has
the sole power to vote and dispose of all Pay-Fone Shares owned
by Allied. Allied has granted each of Richard, David and Mark
Kelton an option to purchase 54,000 Pay-Fone Shares owned by
Allied.
(2) Includes 386,669 shares owned by Allied (see Note 1)
and exercisable options to purchase 12,200 shares from the
Company.
(3) Includes exercisable options to purchase 5,000 shares
from the Company and exercisable options to purchase 54,000
shares from Allied.
(4) Includes exercisable options to purchase 14,000 shares
from the Company.
(5) Includes exercisable options to purchase 5,000 shares
from the Company and exercisable options to purchase 54,000
shares from Allied.
(6) Includes 1,000 shares owned by Mr. Johnson's wife,
10,000 shares owned by Economy Service Station, Inc., a
corporation of which Mr. Johnson is the sole stockholder, and
exercisable options to purchase 14,000 shares from the Company.
(7) Includes 5,500 shares owned by Suncoast Financial
Corporation, a corporation wholly-owned by Mr. Malcolm and his
wife.
(8) Includes exercisable options to purchase 16,800 shares
from the Company.
(9) Includes exercisable options to purchase 25,900 shares
held by executive officers not named in the foregoing table.
Also includes the shares identified in Notes (2) through (8)
except that all of the shares owned by Allied, all of which have
been attributed to Richard Kelton and some of which have also
been attributed to David and Mark Kelton by reason of options
granted by Allied, have been counted only once.
Allied Contractors, Inc. and each of Pay-Fone's executive
officers and directors have agreed to vote all voting securities
of Pay-Fone owned by them, representing 76.47% of the Pay-Fone
Shares outstanding and entitled to vote at the Special Meeting,
for approval and adoption of the Merger Agreement.
DESCRIPTION OF PAYCHEX COMMON STOCK
The holders of Paychex Common Stock are entitled to one vote per
share on all matters voted on by stockholders, including elections of
directors, and, except as otherwise required by law, the holders of such
shares exclusively possess all voting power. The Paychex Certificate of
Incorporation does not provide for cumulative voting in the election of
directors. The holders of Paychex Common Stock are entitled to such
dividends as may be declared from time to time by the Paychex Board from
funds available therefore, and upon liquidation, are entitled to receive
pro rata all assets of Paychex available for distribution to such holders.
All shares of Paychex Common Stock, when issued, are fully paid and
non-assessable and the holders thereof do not have preemptive rights. As
of May 2, 1995, there were ___________ shares of Paychex Common Stock (as
then constituted) issued and outstanding. The Paychex Board has declared
the Paychex 1995 Stock Split, a 3-for-2 stock split of Paychex Common
Stock in the form of a stock dividend payable on May 25, 1995 to
stockholders of record on May 2, 1995.
COMPARISON OF RIGHTS OF
HOLDERS OF PAY-FONE SHARES AND
PAYCHEX COMMON STOCK
Pay-Fone is a California corporation and, accordingly, the rights of
its shareholders are governed by California law. If the Merger is
consummated, Pay-Fone shareholders will become shareholders of Paychex and
their rights as such will be governed by the Delaware General Corporation
Law ("Delaware Law"), the Certificate of Incorporation, as amended, of
Paychex (the "Paychex Certificate") and the Bylaws of Paychex, (the
"Paychex Bylaws"). The following is a summary of certain material
differences between the Delaware Law, Paychex Certificate and Paychex
Bylaws, on the one hand, and the California Corporations Code ("California
Law"), Pay-Fone's Articles of Incorporation, as amended (the "Pay-Fone
Articles"), and Pay-Fone's Bylaws, as amended (the "Pay-Fone Bylaws"), on
the other.
Indemnification
Although generally similar, Delaware Law permits a corporation to
indemnify its directors, officers, employees and agents (collectively
"agents") against liabilities and expenses arising out of legal
proceedings brought against them by reason of their service as agents
under a broader range of circumstances than does California Law. For
example, under Delaware Law a corporation has the power to indemnify its
directors and officers for expenses incurred or amounts paid in connection
with a proceeding that is settled. California Law does not permit
indemnification for expenses incurred or amounts paid in connection with a
proceeding that is settled without court approval. Delaware Law allows a
corporation to include in its bylaws, and in agreements between the
corporation and its agents, provisions which expand the scope of
indemnification beyond that otherwise provided by law. Under California
Law, on the other hand, expanded indemnification is permitted only to the
extent the additional rights to indemnification are authorized in the
articles of incorporation. Pay-Fone has no such authorization in its
Articles.
The Pay-Fone Bylaws require Pay-Fone to indemnify its directors and
officers to the extent permitted by law. The Paychex Bylaws require
Paychex to indemnify its agents to the full extent permitted by law. In
addition, Paychex has entered into separate indemnification agreements
with its directors which may afford greater indemnification rights than
Delaware Law. Paychex also maintains directors' and officers' liability
insurance.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted pursuant to the foregoing
provisions, the SEC has taken the position that such indemnification is
against public policy as expressed in the Securities Act and is therefor
unenforceable.
Limitation of Director Liability
As permitted by Delaware Law, the Paychex Certificate includes a
provision which eliminates the personal liability of directors for
monetary damages for breach of fiduciary duty as a director. Thus, no
director of Paychex may be personally liable for monetary damages for
negligence or gross negligence, including grossly negligent business
decisions in the case of a takeover attempt under Delaware Law; however,
each director remains personally liable for failure to act in good faith,
for breach of his duty of loyalty, for engaging in a transaction from
which the director derives an improper personal benefit, for engaging in
intentional misconduct or a knowing violation of law, or for the improper
payment of a dividend or repurchase of shares. Paychex or any stockholder
may seek an injunction or any other non-monetary relief in the event of a
breach of a director's fiduciary duty. The limitation of liability
applies only to claims against a director arising out of his role as a
director and does not extend to the liability of a person who is a
director for acts or omissions in his capacity as an officer.
Furthermore, a director's liability under, and duty to comply with, the
federal securities laws or other obligations unrelated to his fiduciary
duty remain unaffected.
California Law authorizes a corporation to adopt a provision in its
articles of incorporation which similarly limits a director's personal
liability for breach of his duties to the corporation (although Delaware
Law limits director liability in a broader range of circumstances), but
the Pay-Fone Articles do not contain such a provision.
Cumulative Voting
Under California Law, cumulative voting in the election of directors
is available to shareholders unless specifically eliminated in the
articles of incorporation of a listed corporation (a corporation whose
shares are listed on the New York Stock Exchange or American Stock
Exchange, or whose shares are listed on the NASDAQ National Market and
which has 800 or more shareholders). The Pay-Fone Articles do not
eliminate cumulative voting. Under Delaware Law, cumulative voting in the
election of directors is not available unless the corporation's
certificate of incorporation so provides. The Paychex Certificate does
not provide for cumulative voting.
Super-Majority Voting
Delaware Law permits a corporation to include in its certificate of
incorporation a provision requiring for any corporate action the vote of a
larger proportion of the outstanding shares, or any class or series
thereof, than required by Delaware Law ("super-majority vote"). Under
California Law, a corporation may provide for a super-majority vote in its
articles of incorporation for any corporate action except with respect to
the election of directors, the removal of directors without cause, and the
approval of the voluntary dissolution of a corporation. In the case of a
corporation which has more than 100 shareholders of record (with certain
exceptions not applicable to Pay-Fone), such corporation may not provide
for a super-majority vote which exceeds 66-2/3% of the outstanding shares
or any class or series thereof. Such super-majority vote provision must be
approved by the same proportion of the outstanding shares as is required
in the super-majority vote provision and such provision is effective only
for a period of two years, subject to readoption by the shareholders for
additional two-year periods. Neither the Pay-Fone Articles nor the Paychex
Certificate contains a super-majority vote provision.
Size of Board of Directors
Under California Law, although changes in the number of directors
must in general be approved by the shareholders, the board of directors
may fix the exact number of directors within a stated range set forth in
the articles of incorporation or bylaws, provided that such provision has
been approved by the shareholders. The Pay-Fone Articles provide that the
Board of Directors shall consist of not less than four nor more than seven
members and that the exact number shall be fixed by the Board of Directors
or the shareholders. The current number of directors of Pay-Fone is six.
Delaware Law permits the Board of Directors to change the authorized
number of directors by amendment of the bylaws or in the manner provided
in the bylaws, unless the number of directors is fixed in the certificate
of incorporation, in which case the number of directors may be changed
only by an amendment to the certificate of incorporation. The Paychex
Certificate does not fix the number of directors, nor do the Paychex
By-Laws which provide that the Paychex Board may fix the number by
resolution adopted prior to the annual meeting of stockholders. The
Paychex Board has currently fixed the number of directors at seven.
Special Meetings of Shareholders
Under California Law, a special meeting of shareholders may be called
by the board of directors, the chairman of the board, the president, the
holders of shares entitled to cast not less
than 10% of the votes at a meeting or such other persons as may be
provided in the articles of incorporation or bylaws. The Pay- Fone
Articles and Bylaws do not provide for any additional persons who may call
a special meeting of shareholders. Under Delaware Law, a special meeting
of stockholders may be called by the board of directors or such other
persons as may be provided in the certificate of incorporation or bylaws.
The Paychex Bylaws provide that the President, the Board of Directors or
stockholders owning a majority of the outstanding shares may call a
special meeting of stockholders.
Vote Required for Certain Mergers and Reorganizations
Delaware Law relating to mergers and other corporate reorganizations
differs from California Law in a number of respects. Generally, California
Law requires a shareholder vote in more situations than does Delaware Law.
Both California and Delaware Law generally provide for a shareholder
vote of both the acquiring and acquired corporation in a merger and of the
selling corporation for the sale of all or substantially all of its
assets. In addition, with certain exceptions, California Law requires the
affirmative vote of a majority of the outstanding shares of each class of
(i) the acquiring corporation in a share-for-share exchange; (ii) the
acquiring corporation (if it issues its securities) and acquired
corporation in a sale-of-assets reorganization; and (iii) any parent
corporation whose equity securities are issued or transferred in
connection with a corporate reorganization.
Delaware Law generally does not require a shareholder vote of the
surviving corporation in a merger if the number of shares to be issued by
the surviving corporation in the merger does not exceed 20 percent of the
shares outstanding immediately prior to such issuance. California law
contains a similar exception to its voting requirements for
reorganizations where any corporation or its shareholders or both
immediately before the reorganization own (immediately after the
reorganization) more than five-sixths of the voting power of the surviving
or acquiring corporation (or its parent).
Under California Law, a sale of all or substantially all of a
corporation's assets to a buyer in control of, or under common control
with, the selling corporation requires the approval of at least 90 percent
of the voting power of the selling corporation, unless the sale is in
consideration of the nonredeemable common shares of the buying corporation
or its parent, or the selling corporation obtains the approval of the
Commissioner of Corporations, in either of which cases the sale must
instead be approved by a majority of the outstanding shares. Under
Delaware Law, a corporation may sell all or substantially all of its
assets with the approval of a majority of the outstanding stock
entitled to vote thereon, and there is no required super-majority
stockholder approval for such a sale to a buyer that controls the selling
corporation.
Class Vote for Certain Reorganizations
With certain exceptions, California Law requires that
reorganizations (mergers, certain sales and purchases of assets and
similar transactions) be approved by a majority vote of each class of
shares outstanding, and provides for separate series votes in certain
circumstances. In contrast, the Delaware Law generally does not require
such class voting, except in certain circumstances if the transaction
involves an amendment to the certificate of incorporation which affects a
class of shares adversely.
Fairness Opinion for Certain Reorganizations
California Law provides that if a proposal for a tender offer, merger
or other reorganization (including a share-exchange tender offer) or for
certain sales of assets (a "Proposal") is made by a party who (i) directly
or indirectly controls the target corporation, (ii) is, or is directly or
indirectly controlled by, an officer or director of the target, or (iii)
is an entity in which a material financial interest is held by any
director or executive officer of the target, then an independent
affirmative opinion as to fairness of the consideration to the
shareholders of the target corporation must be delivered to the
shareholders. The fairness opinion requirement does not apply if the
target does not have shares held of record by 100 or more persons or if
the transaction has been qualified under the California securities laws.
If any other proposal for a reorganization (the "Later Offer") is received
at least ten days prior to the date for acceptance of the tender offer or
vote on the reorganization, the directors must inform the shareholders of
the Later Offer, and must forward any Later Offer written material to the
shareholders. In such event, the shareholders must be given a reasonable
opportunity to withdraw any shares tendered or any vote, consent, or proxy
given in connection with the Proposal. Delaware Law does not contain a
similar provision.
Delaware Anti-Takeover Law
Delaware Law prevents an "Interested Stockholder" (defined as any
person that owns 15 percent or more of the outstanding voting securities
of a corporation), from engaging in certain business combinations with a
Delaware corporation for three years following the date such person became
an Interested Stockholder unless certain conditions (such as approval by
the board of directors or shareholders) are met. California Law has no
comparable provision, although California Law regulates certain
tender offers or proposals for reorganization by persons who directly or
indirectly control the corporation. See "Fairness Opinion for Certain
Reorganizations" above.
This Delaware Law may have the effect of deterring an attempt to take
control of Paychex or significantly delaying a purchaser's ability to
acquire the entire interest in Paychex if such acquisition is not approved
by Paychex' Board of Directors. The Paychex Certificate and Bylaws do not
contain any additional anti-takeover provisions.
Appraisal Rights
Delaware Law provides dissenters' rights of appraisal (statutory
rights of dissenting shareholders to demand that, upon consummation of
certain reorganizations, the corporation purchase their shares at an
appraised fair market value) generally in connection with mergers and
consolidations, but not with respect to (a) a sale-of-assets
reorganization, (b) a merger by a corporation, the shares of which are
either listed on a national securities exchange or the NASDAQ National
Market System, or widely held (by more than 2,000 record shareholders) if
such shareholders receive shares of the surviving corporation or of a
listed or widely held corporation, and (c) shares of a corporation which
survives the merger if no vote of such corporation's shareholders is
required to approve the merger. California Law affords dissenters' rights
in a reorganization which requires shareholder approval, including in a
sale-of- assets reorganization, but excluding a share-exchange tender
offer. California Law does not afford dissenters' rights in the case of
shares that are listed on a national securities exchange or are on the
list of OTC margin stocks, unless such shares are subject to restrictions
on transfer or at least five percent (5%) of the outstanding shares claim
dissenters' rights. See "THE MERGER - Rights of Dissenting Shareholders."
Inspection of Shareholder List
California Law provides for an absolute right of inspection of the
shareholder list for persons holding 5% or more of a corporation's voting
shares or persons holding 1% or more of such shares who have filed a
Schedule 14B with the SEC relating to the election of directors. Both
California Law and Delaware Law allow any shareholder to inspect the
shareholder list and certain corporate books and records for a purpose
reasonably related to such person's interest as a shareholder. Delaware
Law contains no provisions comparable to the absolute right to inspect the
shareholder list provided by California Law to certain shareholders.
California Law, however, purports to apply such provision to any foreign
corporation if its principal executive office is in California or if it
customarily holds meetings of its board of directors in California.
Paychex may be considered to be within the penumbra of this provision of
California law since currently one of the four quarterly meetings of its
board of directors is annually held in California.
Loans to Directors, Officers and Employees
Under Delaware Law, a corporation may make loans to or guarantee the
obligations of its officers or other employees, including officers or
employees who are also directors, when such action, in the judgment the
directors, may reasonably be expected to benefit the corporation. Under
California Law, a corporation may not make any loan to, or guarantee the
obligation of, a director or officer without shareholder approval.
Although California Law would permit Pay-Fone's shareholders to adopt a
bylaw permitting a disinterested majority of the directors to approve such
loans or guarantees without shareholder approval, the Pay-Fone Bylaws do
not contain such a provision.
Interested Director Transactions
Under both California Law and Delaware Law certain contracts or
transactions in which one or more of a corporation's directors has an
interest are not void or voidable because of such interest or because such
director was present at the meeting where such contract or transaction was
authorized, approved or ratified by the shareholders or the board of
directors if certain conditions are met, such as obtaining the required
approval and fulfilling the requirement of good faith and full disclosure.
Generally, with certain exceptions, the conditions are similar under
California Law and Delaware. Generally, under both Laws shareholder or
board approval of such contracts or transactions is required, except that
pursuant to California Law, if shareholder approval is sought, the
interested director is not entitled to vote his shares at a shareholder
meeting with respect to any action regarding such contract or transaction.
Under California Law, the contract or transaction must be approved by a
majority vote of a quorum of the directors without counting the vote of
the interested director (except for purposes of establishing a quorum)
while under Delaware Law, the contract or transaction must be approved by
a majority of the disinterested directors (even though less than a
quorum).
Voting by Ballot
California Law grants to each shareholder the right to require a vote
by written ballot for the election of directors. Delaware Law provides
that all actions of stockholders must be by written ballot unless
otherwise provided in the certificate of incorporation. The Paychex
Certificate does not require ballot voting, nor do the Paychex By-Laws.
Payment of Dividends and Repurchase of Shares of Common Stock
Under Delaware Law, a corporation may pay dividends only out of
surplus (generally the shareholders' equity of the corporation less the
par value of the capital stock outstanding) or, if there exists no
surplus, out of the net profits of the corporation for the fiscal year in
which the dividend is declared and/or the preceding fiscal year (provided
that provision must be made for outstanding stock having a liquidation
preference). In general, shares of a corporation's capital stock may only
be repurchased or redeemed by the corporation out of surplus.
Under California Law, a corporation may pay dividends and may
purchase or redeem outstanding shares of its capital stock only if the
retained earnings of the corporation immediately prior thereto equal or
exceed the amount of the proposed distribution or, in general, if
immediately after giving effect to such distribution the assets of the
corporation (excluding certain intangible assets) equal at least 125% of
the liabilities of the corporation and the current assets of the
corporation equal at least 100% or 125% (depending on whether certain
financial tests are met) of the current liabilities.
LEGAL OPINIONS
The legality of the Paychex Common Stock to be issued in connection
with the Merger is being passed upon for Paychex by Woods, Oviatt, Gilman,
Sturman & Clarke LLP. As of May 2, 1995, the attorneys in that
firm owned 49,444 shares of Paychex Common Stock and held options to
purchase an additional 10,500 shares. A member of the firm also
serves as a director of Paychex.
Certain of the tax consequences of the Merger to Pay-Fone
shareholders at the Effective Time will be passed upon by Hughes Hubbard &
Reed, Los Angeles, California, on behalf of Pay-Fone. See "THE MERGER -
Certain Federal Income Tax Consequences." As of May 2, 1995,
attorneys in that firm did not beneficially own any shares of Paychex
Common Stock or Pay-Fone Shares.
EXPERTS
The consolidated financial statements of Paychex, Inc. incorporated
by reference in Paychex' Annual Report (Form 10-K) for the year ended May
31, 1994, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon included therein and incorporated herein
by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Pay-Fone Systems, Inc. as of
June 30, 1994 and 1993, and for each of the years then ended, have been
included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts
in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the June 30, 1994
consolidated financial statements refers to a change in the method of
accounting for income taxes.
The financial statements of Pay-Fone for the fiscal year ended June
30, 1992, included in this Proxy Statement/Prospectus have been audited by
Clumeck, Stern, Phillips and Schwartz, independent public accountants,
whose report given on the authority of that firm as experts in accounting
and auditing, is included herein.
CLUMECK, STERN, PHILLIPS & SCHWARTZ
Certified Public Accounts
15910 Ventura Blvd. Suite 1633
Encino, CA 91436
August 21, 1992
INDEPENDENT AUDITORS' REPORT
To the Shareholders and The Board of Directors
of Pay-Fone Systems, Inc.
We have audited the accompanying statements of operations,
shareholders' investment and cash flows of Pay-Fone Systems, Inc. for the
year ended June 30, 1992. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of its operations and
cash flows for the year ended June 30, 1992, in conformity with generally
accepted accounting principles.
/s/CLUMECK, STERN, PHILLIPS & SCHWARTZ
Certified Public Accountants
KPMG Peat Marwick LLP
Independent Auditors' Report
The Board of Directors and Shareholders
of Pay-Fone Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Pay-Fone
Systems, Inc. and subsidiary as of June 30, 1994 and 1993, and the related
consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These consolidated 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 generally accepted auditing
standards. 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 financial position of
Pay-Fone Systems, Inc. and subsidiary as of June 30, 1994 and 1993 and the
results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
As discussed in notes 1 and 3 to the consolidated financial statements,
effective July 1, 1993, the company changed its method of accounting for
income taxes.
/s/KPMG Peat Marwick LLP
Los Angeles, California
September 1, 1994
PAY-FONE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1994 1993 1995
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 740,734 $ 1,116,949 $ 399,182
Short term investments 1,382,203 1,100,714 1,256,941
Accounts receivable, less $8,000 allowance
for doubtful accounts 516,704 476,285 567,429
Prepaid supplies and other 347,824 266,792 454,392
TOTAL CURRENT ASSETS 2,987,465 2,960,740 2,677,944
PROPERTY AND EQUIPMENT, at Cost:
Building 3,001,540 3,001,540 3,001,540
Terminals and computer equipment 2,020,258 2,580,377 2,024,671
Other 1,231,633 999,851 1,484,724
6,253,431 6,581,768 6,510,935
Less: Accumulated depreciation
and amortization (3,753,268) (4,168,114) (3,925,789)
2,500,163 2,413,654 2,585,146
Intangible assets, net of amortization 111,920 -- 131,920
$ 5,599,548 $ 5,374,394 $ 5,395,010
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 76,892 $ 41,341 $ 40,560
Accrued wages and other related costs 111,152 105,965 138,474
Other accrued liabilities 25,118 70,782 141,977
Customer security deposits 35,785 65,577 400
Income taxes payable -- 9,653 --
TOTAL CURRENT LIABILITIES 248,947 293,318 321,411
Deferred Income Taxes 143,047 62,488 143,047
SHAREHOLDERS' EQUITY:
Common stock $.10 par value
Authorized - 10,000,000 shares
Issued and Outstanding - 1,467,813
at June 30, 1994 and 1993; and
1,484,233 (unaudited) at March 31, 1995 90,781 90,781 92,423
Additional paid-in capital 2,755,826 2,755,826 2,804,607
Retained earnings 2,360,947 2,171,981 2,073,522
Unrealized Loss on Debt
and Equity Marketable Securities -- -- (40,000)
TOTAL SHAREHOLDERS' EQUITY 5,207,554 5,018,588 4,930,552
Commitments, Contingencies and
Subsequent Event
$ 5,599,548 $ 5,374,394 $ 5,395,010
=========== =========== ===========
See accompanying notes to consolidated financial statements.
PAY-FONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months
June 30, Ended March 31,
1994 1993 1992 1995 1994
(Unaudited) (Unaudited)
Revenues $4,459,935 $4,505,111 $5,185,819 $3,612,130 $3,371,475
Direct costs 1,695,727 1,636,677 2,021,492 1,652,861 1,248,252
Gross profit 2,764,208 2,868,434 3,164,327 1,959,269 2,123,223
Selling, general and administrative expenses 2,541,995 2,680,345 3,109,515 2,277,914 1,890,318
Miscellaneous merger costs -- -- -- 117,500 --
Income (loss) from operations 222,213 188,089 54,812 (436,145) 232,905
Interest income 61,369 58,108 67,584 53,220 39,535
Income (loss) before income taxes, extraordinary
item and cumulative effect of change in method
of accounting for income taxes 283,582 246,197 122,396 (382,925) 272,440
Income tax expense (benefit) 115,592 95,182 40,000 (95,500) 105,000
Income (loss) before extraordinary item
and cumulative effect of change in method of
accounting for income taxes 167,990 151,015 82,396 (287,425) 167,440
Extraordinary item --
income tax benefit resulting from utilization
of net operating loss carryforward -- -- 28,200 -- --
Cumulative effect of change in method
of accounting for income taxes 20,976 -- -- -- --
Net income (loss) $ 188,966 $ 151,015 $ 110,596 $ (287,425) $ 167,440
========== ========== ========== =========== ==========
Per share amounts:
Income (loss) before extraordinary item
and cumulative effect of change in method of
accounting for income taxes $ 0.12 $ 0.10 $ 0.05 $ (0.19) $ 0.11
Extraordinary item --
income tax benefit resulting from utilization
of net operating loss carryforward -- -- 0.02 -- --
Cumulative effect of change in method
of accounting for income taxes 0.01 -- -- -- --
Net income (loss) per common share $ 0.13 $ 0.10 $ 0.07 $ (0.19) $ 0.11
========== ========== ========== =========== ==========
Weighted average shares
and common stock equivalents 1,468,813 1,488,416 1,483,780 1,475,054 1,467,813
========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
PAY-FONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
June 30, Ended March 31,
1994 1993 1992 1995 1994
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income (loss) $ 188,966 $ 151,015 $ 110,596 $ (287,425) $ 167,440
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 278,852 290,170 376,815 182,522 219,021
Deferred income taxes 80,559 18,736 (65,200) -- --
Change in assets and liabilities, net
of effects from acquisition:
Accounts receivables (18,892) 37,345 29,067 (50,725) (72,218)
Prepaid supplies and other (77,162) 23,028 (47,337) (106,568) (146,853)
Accounts payable 35,274 (10,458) (6,014) (36,332) 12,357
Accrued wages and other related costs 5,187 (16,992) (44,860) 27,322 15,706
Other accrued liabilities (94,883) (16,446) (18,658) 116,859 (11,518)
Customer security deposits (29,792) (8,448) (45,275) (35,385) (20,076)
Income taxes payable (9,653) (66,547) 76,200 -- 192,401
Total adjustments 169,490 250,388 254,288 97,693 188,820
Net cash provided by (used in)
operating activities 358,456 401,403 364,884 (189,732) 356,260
Cash flows from investing activities:
Short term investments (281,489) (626,463) 405,869 85,262 649,934
Capital expenditures (309,297) (49,698) (95,518) (257,505) (256,375)
Payments for acquired company
(net of cash acquired) (143,885) -- -- (30,000) --
Net cash provided by (used in)
investing activities (734,671) (676,161) 310,351 (202,243) 393,559
Cash flows from financing activities --
Repurchase of common stock -- -- (124,540) -- --
Options exercised -- -- -- 50,423 --
Net cash used in financing activities -- -- (124,540) 50,423 --
Net increase (decrease)
in cash and cash equivalents (376,215) (274,758) 550,695 (341,552) 749,819
Cash and cash equivalents at beginning of period 1,116,949 1,391,707 841,012 740,734 1,116,949
Cash and cash equivalents at end of period $ 740,734 $1,116,949 $1,391,707 $ 399,182 $1,866,768
========== ========== ========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 69,600 $ 146,800 $ 1,681 $ -- $ 33,980
========== ========== ========== ========== ==========
Interest $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
NONCASH TRANSACTION (Unaudited) - During the nine months ended March 31, 1995 the Company wrote down its short term investments
and recorded an unrealized loss of $40,000.
See accompanying notes to consolidated financial statements.
PAY-FONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized
Loss on Debt
Additional and Equity Total
Common Stock Paid-In Retained Marketable Shareholders'
Shares Amount Capital Earnings Securities Equity
Balance, June 30, 1991 1,506,133 $ 94,613 $2,876,535 $1,910,370 $ -- $4,881,518
Net Income -- -- -- 110,596 -- 110,596
Common Stock Redeemed (38,320) (3,832) (120,709) -- -- (124,541)
--------------------------------------------------------------------------
Balance, June 30, 1992 1,467,813 90,781 2,755,826 2,020,966 -- 4,867,573
Net Income -- -- -- 151,015 -- 151,015
--------------------------------------------------------------------------
Balance, June 30, 1993 1,467,813 90,781 2,755,826 2,171,981 -- 5,018,588
Net Income -- -- -- 188,966 -- 188,966
--------------------------------------------------------------------------
Balance, June 30, 1994 1,467,813 90,781 2,755,826 2,360,947 -- 5,207,554
Net Loss (Unaudited) -- -- -- (287,425) -- (287,425)
Options Exercised
(Unaudited) 16,420 1,642 48,781 -- -- 50,423
Unrealized Loss on
Debt and Equity
Marketable Securities
(Unaudited) -- -- -- -- (40,000) (40,000)
--------------------------------------------------------------------------
Balance, March 31, 1995
(Unaudited) 1,484,233 $ 92,423 $2,804,607 $2,073,522 $(40,000) $4,930,552
==========================================================================
See accompanying notes to consolidated financial statements.
PAY-FONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the nine month periods ended March 31, 1995 and 1994
is unaudited.)
Note 1 - Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the financial statements
of Pay-Fone Systems, Inc. and its wholly-owned subsidiary (collectively
the "Company"). All significant inter-Company balances and
transactions have been eliminated in consolidation.
Business
The Company operates in the data processing service industry. It
provides automated payroll services for businesses located primarily in
California.
Revenue Recognition
Revenues are recognized as the services are performed.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
Short-Term Investments
Short-term investments at June 30, 1994 consist primarily of
certificates of deposit with original maturities between three and six
months, adjustable-rate preferred stock and treasury instruments and
are carried at cost which approximates market.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which adopts
changes that apply to all companies holding short- or long-term
investments. Adoption of Standard No. 115 is required for the
Company's 1995 fiscal year. The Company plans to adopt Statement No.
115 in the first quarter of fiscal 1995 and believes the application of
Statement No. 115 will have no material effect on the Company's
consolidated financial statements.
Property and Equipment
The Company follows the policy of capitalizing expenditures that
materially increase the life or serviceability of equipment and
charging ordinary maintenance and repairs to operations as incurred.
When property is sold or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts
and any gain or loss resulting from sales or abandonments is recorded
on the consolidated statements of operations.
The depreciation and amortization of property is provided over the
estimated useful life of the asset using straight-line and accelerated
methods as follows:
Building 38 Years
Terminals and Computer Equipment 5 - 12 Years
Other 5 - 10 Years
Intangible Assets
Intangible assets consist of a covenant not to compete and goodwill
arising from an acquisition in fiscal 1994 (see Note 2). The values
assigned to intangible assets are being amortized on a straight-line
basis. The covenant is being amortized over its contractual life, five
years. Goodwill, representing the excess of the purchase price over
the estimated fair value of the net assets of the acquired business, is
being amortized over the period of expected benefit, ten years.
Amortization expense for the year ended June 30, 1994 and accumulated
amortization at June 30, 1994 aggregated $5,000.
Note 1 - Summary of Significant Accounting Policies (con't.):
Research and Development Costs:
For financial reporting purposes, research and development costs
related to the designing, developing and testing of new and existing
software products are charged to expense as incurred. Accordingly,
for the years ended June 30, 1994, 1993 and 1992 the Company expensed
$148,527, $182,255, and $172,784, respectively.
Net Income Per Common Share
Net income per common share has been computed based on the weighted
average number of outstanding shares and common stock equivalents, if
dilutive.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (Statement 109). Statement 109 requires a change from
the deferred method of accounting for income taxes under APB Opinion 11
to the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Further, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
The Company adopted Statement 109 in fiscal year 1994 and has applied
the provisions of Statement 109 retroactively to July 1, 1993. The
cumulative effect of the change in the method of accounting for income
taxes as of July 1, 1993 has been reported separately in the fiscal
year 1994 consolidated statement of operations.
Interim Financial Statements
The accompanying consolidated balance sheet as of March 31, 1995 and
the consolidated statements of operations and cash flows for the nine
month periods ended March 31, 1995 and 1994 are unaudited. In the
opinion of management, all adjustments, consisting only of normal
recurring accruals necessary for a fair presentation of the results for
the periods presented were made. The operating results for the nine
month period ended March 31, 1995 are not necessarily indicative of
the results that may be expected for the year ending June 30, 1995.
In fiscal 1995, the Company adopted SFAS No. 115. Such adoption had
no cumulative effect on retained earnings at July 1, 1994 and reduced
the net loss for the nine months ended March 31, 1995 by $40,000.
The fair market value and gross unrealized holding losses for
available-for-sale debt and marketable equity securities aggregated
approximately $760,000 and $40,000, respectively, at March 31, 1995.
Note 2 - Acquisition:
On February 1, 1994, the Company acquired Concentric Computer
Corporation of Aptos, California ("Concentric"), a provider of
automated payroll services, for cash plus a percentage of future net
revenues, as defined. The acquisition was accounted for as a purchase
with the results of Concentric included from the acquisition date. The
excess of the payments made in fiscal 1994 over the fair value of the
net assets acquired has been allocated to goodwill. Additional
payments made in subsequent fiscal years, if any, will be allocated to
goodwill. Proforma financial information is not presented as the
acquisition, for accounting purposes, is not deemed significant.
Note 3 - Income Taxes:
As discussed in Note 1, the Company adopted Statement 109 in fiscal
year 1994 and has applied the provisions of the Statement retroactively
to July 1, 1993. The cumulative effect of this change in accounting
for income taxes as of July 1, 1993 is reported separately in the
accompanying consolidated statement of operations as a $20,976 credit
to earnings.
The provision for income taxes, which excludes the Statement 109
cumulative effect adjustment, consists of the following:
1994 1993 1992
Current:
Federal $ 23,089 $ 47,351 $ 54,500
State 3,775 28,931 22,500
26,864 75,282 77,000
Deferred:
Federal 68,029 24,529 (26,300)
State 20,699 (5,629) (10,000)
88,728 18,900 (37,000)
115,592 95,182 40,000
Extraordinary item - tax benefit resulting from
utilization of net operating loss carryforwards -- -- (28,200)
$ 115,592 $ 95,182 $ 11,800
========= ========= =========
Actual income tax expense differs from the expected income tax expense
determined by applying the Federal tax rate of 34% to income before
income taxes and cumulative effect of a change in the method of
accounting for income taxes as follows:
1994 1993 1992
Expected income tax expense $ 96,418 $ 83,700 $ 31,000
State income taxes, net of Federal benefit 16,153 15,380 7,000
Other 3,021 (3,898) 2,000
$ 115,592 $ 95,182 $ 40,000
========= ========= =========
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities is as
follows:
1994 1993
Deferred tax assets:
Tax credits $ 28,700 $ 40,200
State loss carryforwards -- 14,600
Amortization of intangible assets 10,400 --
Other 4,500 12,400
Total gross deferred tax assets 43,600 67,200
Deferred tax liabilities:
Depreciation 105,000 104,000
Capitalized software development costs 71,500 --
Other 10,147 25,688
Total gross deferred tax liability 186,647 129,688
Net deferred tax liability $ 143,047 $ 62,488
========= =========
At June 30, 1994, the Company had a general business credit
carryforward totaling $ 5,500, which is available to reduce federal
taxes otherwise payable in future years. This carryforward expires in
the year 2001.
The Company is currently undergoing an examination by the Internal
Revenue Service of its June 30, 1989, 1990 and 1991 income tax returns.
The audit is not yet complete. It is the opinion of management that no
assessments are proper and the audit will not have a material impact on
the consolidated financial statements.
Note 4 - Stock Options:
At June 30, 1994, 51,650 shares of common stock were reserved for
issuance under the Company's Incentive and Executive Stock Option
Plans. Options to purchase common stock may be granted at exercise
prices not less than fair market value and in no event less than $1 per
share at the grant date, and are subject to certain conditions with
respect to continuous employment, and are exercisable within a one to
ten-year period from the date of grant in such manner as set forth in
the option agreements. The following is a summary of stock option
activity for the years ended June 30, 1994, 1993 and 1992:
Option Price
1981 1983 1987 1990 1993 Per Share
Incentive Incentive Incentive Incentive Incentive (Range)
Options outstanding at June 30, 1991 88,000 69,950 45,600 -- -- $2.13-$5.25
Options terminated (40,000) (20,100) (19,400) -- -- $2.50-$4.75
Options granted 40,000 26,750 2,250 -- -- $2.13-$2.75
Options outstanding at June 30, 1992 88,000 76,600 28,450 -- -- $2.13-$5.25
Options terminated (45,000) (8,650) (4,900) (2,000) -- $2.13-$5.25
Options granted -- 15,900 26,850 45,800 -- $3.13-$3.44
Options outstanding at June 30, 1993 43,000 83,850 50,400 43,800 -- $2.13-$4.75
Options terminated -- (4,750) (9,850) (1,000) (500) $2.50-$4.50
Options granted -- 3,150 -- 1,850 63,650 $2.88-$3.30
Options outstanding at June 30, 1994 43,000 82,250 40,550 44,650 63,150 $2.13-$4.75
====== ====== ====== ====== ======
Options exercisable at June 30, 1994 28,400 44,290 16,770 8,560 --
====== ====== ====== ====== ======
Note 5 - Related Party Transactions:
Richard Kelton, who is shareholder, officer and member of the Board of
Directors, also acts in the capacity of Company attorney from time to
time. Fees for legal and executive services paid to Richard Kelton for
the years ended June 30, 1994, 1993 and 1992 amounted to $10,990,
$18,562, and $24,077, respectively.
Note 6 - Payroll and Payroll Tax Filing Services:
During fiscal 1994, the Company developed the ability to perform tax
filing in-house. As part of its integrated payroll and payroll tax
filing services, the Company collects funds for Federal, state and
local employment taxes from clients, files applicable tax returns,
handles all regulatory correspondence and amendments, absorbs
regulatory charges for certain penalties and interest, and remits the
funds to the appropriate tax agencies. In addition to fees paid by
clients for these services, the Company receives interest during the
interval between the receipt and disbursement of funds by investing the
funds in savings accounts. The amount of collected but unremitted
funds varies significantly during the year. At June 30, 1994, the
amount of such funds was $194,662. Such funds and the related tax
obligations are neither assets nor liabilities of the Company and,
therefore, are not included in the accompanying consolidated financial
statements. Related income earned from these investments is included
in revenue.
Note 7 - Commitments and Contingencies:
The Company occupies certain of its facilities under non-cancellable
operating leases expiring at various dates through fiscal year ended
June 30, 2025.
The non-cancellable ground lease for the corporate offices, expiring in
2025, calls for a rent readjustment every five years with the midpoint
of each five year period subject to Producer Price Index changes. The
current ground lease payments amount to $2,948 per month.
Minimum annual commitments under all non-cancellable leases are as
follows:
Fiscal Year Ended June 30:
1995 $ 151,473
1996 151,473
1997 143,770
1998 38,382
1999 36,504
2000 - 2025 912,600
$ 1,434,202
===========
For the years ended June 30, 1994, 1993, and 1992, the total rental
expense charged to operations under these leases totaled $170,049,
$199,478, and $298,712, respectively.
The Company also subleases a portion of its corporate offices and
records rental income based on square footage leased. Sublease income
recognized by the Company in fiscal 1994, 1993 and 1992 totaled
$126,930, $88,992, and $63,306, respectively.
Note 8 - Subsequent Event:
On March 17, 1995, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Paychex, Inc., a Delaware
corporation ("Paychex"), and Paychex Merger Corp., a wholly owned
subsidiary of Paychex ("Merger Sub"), pursuant to which, subject to
approval by the Company's shareholders and the satisfaction of certain
other conditions, Merger Sub will merge into the Company and the
Company will become a wholly owned subsidiary of Paychex (the
"Merger"). Pursuant to the Merger Agreement, outstanding shares of the
Company's Common Stock will be converted into shares of Paychex Common
Stock in accordance with a formula set forth in the Merger Agreement
based on a total value of $10,475,000 (subject to certain reductions)
and the market price of Paychex Common Stock during a period prior to
the Merger. The Merger will be accounted for as a pooling of
interests.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
has duly caused this Amendment No. 1 Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City
of Rochester, State of New York, on May ____, 1995.
PAYCHEX, INC.
By: /s/ G. Thomas Clark
-------------------------------
G. Thomas Clark, Vice President
of Finance
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Name Title Date
/s/B. Thomas Golisano Chairman of the Board, May 18, 1995
B. Thomas Golisano Chief Executive Officer,
President and Director
/s/ G. Thomas Clark Vice President May 18, 1995
G. Thomas Clark of Finance and
Director (principal
financial and
accounting officer)
*Donald W. Brinckman Director May 18, 1995
Donald W. Brinckman
*Phillip Horsley Director May 18, 1995
Phillip Horsley
*Grant M. Inman Director May 18, 1995
Grant M. Inman
*Harry P. Messina, Jr. Director May 18, 1995
Harry P. Messina, Jr.
*J. Robert Sebo Director May 18, 1995
J. Robert Sebo
*By: /s/ G. Thomas Clark
G. Thomas Clark, as Attorney-in-Fact
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 21. Exhibits and Financial Statement Schedules
Exhibit No. Description
2 Restated Agreement and Plan of Merger, dated as of May 8,
1995, by and among Paychex, Inc., Paychex Merger Corp. and
Pay-Fone Systems, Inc.(attached as Annex 1 to the Proxy
Statement/Prospectus included in this Registration
Statement)
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Peat Marwick LLP
23.4 Consent of Clumeck, Stern, Phillips
& Schwartz
ANNEX II
CALIFORNIA GENERAL CORPORATION LAW
Chapter 13
DISSENTERS' RIGHTS
1300. Right to Require Purchase - "Dissenting Shares" and
"Dissenting Shareholder" Defined
(a) If the approval of the outstanding shares (Section 152)
of a corporation is required for a reorganization under
subdivisions (a) and (b) or subdivision (e) or (f) of Section
1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase
for cash at their fair market value the shares owned by the
shareholder which are dissenting shares as defined in subdivision
(b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation
or depreciation in consequence of the proposed action, but
adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means
shares which come within all of the following descriptions:
(1) Which were not immediately prior to the
reorganization or short-form merger either (A) listed on any
national securities exchange certified by the Commissioner of
Corporations under subdivision (o) of Section 25100 or (B) listed
on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided,
however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed
by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of
shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the
determination of shareholders entitled to vote on the
reorganization and (A) were not voted in favor of the
reorganization, or (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of
record on the effective date of a short-form merger; provided,
however, that subparagraph (A) rather than subparagraph (B) of
this paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a
meeting.
(3) Which the dissenting shareholder has demanded that
the corporation purchase at their fair market value, in
accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means
the recordholder of dissenting shares and includes a transferee
of record.
1301 Demand for Purchase
(a) If, in the case of a reorganization, any shareholders
of a corporation have a right under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b)
thereof, to require the corporation to purchase their shares for
cash, such corporation shall mail to each such shareholder a
notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such
approval, accompanied by a copy of Sections 1300, 1302, 1303,
1304 and this section, a statement of the price determined by the
corporation to represent the fair market value of the dissenting
shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer
by the corporation to purchase at the price stated any dissenting
shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the
corporation to purchase the shareholder's shares for cash under
Section 1300, subject to compliance with paragraphs (3) and (4)
of subdivision (b) thereof, and who desires the corporation to
purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the
shareholder in cash of their fair market value. The demand is
not effective for any purpose unless it is received by the
corporation or any transfer agent thereof (1) in the case of
shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos
in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case
within 30 days after the date on which the notice of the approval
by the outstanding shares pursuant to subdivision (a) or the
notice pursuant to subdivision (i) of Section 1110 was mailed to
the shareholder.
(c) The demand shall state the number and class of the
shares held of record by the shareholder which the shareholder
demands that the corporation purchase and shall contain a
statement of what such shareholder claims to be the fair market
value of those shares as of the day before the announcement of
the proposed reorganization or short-form merger. The statement
of fair market value constitutes an offer by the shareholder to
sell the shares at such price.
1302. Endorsement of Shares
Within 30 days after the date on which notice of the
approval by the outstanding shares or the notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder,
the shareholder shall submit to the corporation at its principal
office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder
demands the corporation purchase, to be stamped or endorsed with
a statement that the shares are dissenting shares or to be
exchanged for certificates of appropriate denomination so stamped
or endorsed or (b) if the shares are uncertificated securities,
written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers
of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together
with the name of the original dissenting holder of the shares.
1303 Agreed Price - Time For Payment
(a) If the corporation and the shareholder agree that the
shares are dissenting shares and agree upon the price of the
shares, the dissenting shareholder is entitled to the agreed
price with interest thereon at the legal rate on judgments from
the date of the agreement. Any agreements fixing the fair market
value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the
corporation.
(b) Subject to the provisions of Section 1306, payment of
the fair market value of dissenting shares shall be made within
30 days after the amount thereof has been agreed or within 30
days after any statutory or contractual conditions to the
reorganization are satisfied, whichever is later, and in the case
of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
1304 Dissenter's Action to Enforce Payment.
(a) If the corporation denies that the shares are
dissenting shares, or the corporation and the shareholder fail to
agree upon the fair market value of the shares, then the
shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section
1110 was mailed to the shareholder, but not thereafter, may file
a complaint in the superior court of the proper county praying
the court to determine whether the shares are dissenting shares
or the fair market value of the dissenting shares or both or may
intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as
plaintiffs or be joined as defendants in any such action and two
or more such actions may be consolidated.
(c) On the trial of the action, the court shall determine
the issues. If the status of the shares as dissenting shares is
in issue, the court shall first determine that issue. If the
fair market value of the dissenting shares is in issue, the court
shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. Appraisers' Report - Payment - Costs
(a) If the court appoints an appraiser or appraisers, they
shall proceed forthwith to determine the fair market value per
share. Within the time fixed by the court, the appraisers, or a
majority of them, shall make and file a report in the office of
the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the
report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make
and file a report within 10 days from the date of their
appointment or within such further time as may be allowed by the
court or the report is not confirmed by the court, the court
shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment
shall be rendered against the corporation for payment of an
amount equal to the fair market value of each dissenting share
multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest
thereon at the legal rate from the date on which judgment was
entered.
(d) Any such judgement shall be payable forthwith with
respect to uncertificated securities and, with respect to
certificated securities, only upon the endorsement and delivery
to the corporation of the certificates for the shares described
in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable
compensation to the appraisers to be fixed by the court, shall be
assessed or apportioned as the court considers equitable, but, if
the appraisal exceeds the price offered by the corporation, the
corporation shall pay the costs (including in the discretion of
the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with
Sections 1300, 1301 and 1302 if the value awarded by the court
for the shares is more than 125% of the price offered by the
corporation under subdivision (a) of Section 1301).
1306. Dissenting Shareholder's Status as Creditor
To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market
value, they shall become creditors of the corporation for the
amount thereof together with interest at the legal rate on
judgments until the date of payment, but subordinate to all other
creditors in any liquidation proceeding, such debt to be payable
when permissible under the provisions of Chapter 5.
1307. Dividends Paid as Credit Against Payment
Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the
reorganization by the outstanding shares (Section 152) and prior
to payment for the shares by the corporation shall be credited
against the total amount to be paid by the corporation therefor.
1308. Continuing Rights and Privileges of Dissenting
Shareholders
Except as expressly limited in this chapter, holders of
dissenting shares continue to have all the rights and privileges
incident to their shares, until the fair market of their shares
is agreed upon or determined. A dissenting shareholder may not
withdraw a demand for payment unless the corporation consents
thereto.
1309. Termination of Dissenting Shareholder Status
Dissenting shares lose their status as dissenting shares and
the holders thereof cease to be dissenting shareholders and cease
to be entitled to require the corporation to purchase their
shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon
abandonment of the reorganization, the corporation shall pay on
demand to any dissenting shareholder who has initiated
proceedings in good faith under this chapter all necessary
expenses incurred in such proceedings and reasonable attorneys'
fees.
(b) The shares are transferred prior to their submission
for endorsement in accordance with Section 1302 or are
surrendered for conversion into shares of another class in
accordance with the articles.
(c) The dissenting shareholder and the corporation do not
agree upon the status of the shares as dissenting shares or upon
the purchase price of the shares, and neither files a complaint
or intervenes in a pending action as provided in Section 1304,
within six months after the date on which notice of the approval
by the outstanding shares or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the
corporation, withdraws the shareholder's demand for purchase of
the dissenting shares.
1310. Suspension of Proceedings For Payment Pending
Litigation
If litigation is instituted to test the sufficiency or
regularity of the votes of the shareholders in authorizing a
reorganization, any proceedings under Sections 1304 and 1305
shall be suspended until final determination of such litigation.
1311. Exempt Shares
This chapter, except Section 1312, does not apply to classes
of shares whose terms and provisions specifically set forth the
amount to be paid in respect to such shares in the event of a
reorganization or merger.
1312. Attacking Validity of Reorganization or Merger.
(a) No shareholder of a corporation who has a right under
this chapter to demand payment of cash for the shares held by the
shareholder shall have any right at law or in equity to attack
the validity of the reorganization or short-form merger, or to
have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of
shares required to authorize or approve the reorganization have
been legally voted in favor thereof; but any holder of shares of
a class whose terms and provisions specifically set forth the
amount to be paid in respect to them in the event of a
reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal
terms of the reorganization are approved pursuant to subdivision
(b) of Section 1202, is entitled to payment in accordance with
the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form
merger is directly or indirectly controlled by, or under common
control with, another party to the reorganization or short-form
merger, subdivision (a) shall not apply to any shareholder of
such party who has not demanded payment of cash for such
shareholder's shares pursuant to this chapter; but if the
shareholder institutes an action to attack the validity of the
reorganization or short-form merger or to have the reorganization
or short-form merger set aside or rescinded, the shareholder
shall not thereafter have any right to demand payment of cash for
the shareholder's shares pursuant to this chapter. The court in
any action attacking the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger
set aside or rescinded shall not restrain or enjoin the
consummation of the transaction except upon 10 days' prior notice
to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining
shareholder or the class of shareholders of which such
shareholder is a member.
(c) If one of the parties to a reorganization or short-form
merger is directly or indirectly controlled by, or under common
control with, another party to the reorganization or short-form
merger, in any action to attack the validity of the
reorganization or short-form merger or to have the reorganization
or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party
to the reorganization or short-form merger shall have the burden
of proving that the transaction is just and reasonable as to the
shareholders of the controlled party, and (2) a person who
controls two or more parties to a reorganization shall have the
burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.