UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the calendar year ended December 31, 1996 A. Full title of the Plan Paychex, Inc. 401(k) Incentive Retirement Plan. B. Name and address of issuer of the securities held pursuant to the Plan and the address of its principal executive office: Paychex, Inc. 911 Panorama Trail South Rochester, NY 14625 Financial Statements and Exhibits Financial Statements Page No. Report of Independent Auditors 4 Statement of Changes in Net Assets 5 Available for Benefits, with Fund Information for the Year Ended December 31, 1996 Statement of Changes in Net Assets 6 Available for Benefits, with Fund Information for the Year Ended December 31, 1995 Statement of Net Assets Available for 7 Benefits, with Fund Information - December 31, 1996 Statement of Net Assets Available for 8 Benefits, with Fund Information - December 31, 1995 Notes to Financial Statements 9-14 Schedule of Assets Held for Investment Purposes - December 31, 1996 15 Schedule of Reportable Transactions - For the year 16 ended December 31, 1996 Exhibits 23. Consent of Ernst & Young LLP 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Committee has caused this Annual Report to be signed by the undersigned thereunto duly authorized. Dated: June 26, 1997 PAYCHEX 401(k) INCENTIVE RETIREMENT PLAN By: /s/ Francis G. Provino ___________________________________ Francis G. Provino 401(k) COMMITTEE MEMBER ERNST & YOUNG LLP Report of Independent Auditors The Plan Committee Paychex, Inc. 401(k) Incentive Retirement Plan Rochester, New York We have audited the accompanying statements of net assets available for benefits of Paychex, Inc. 401(k) Incentive Retirement Plan as of December 31, 1996 and 1995, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan'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 financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan at December 31, 1996 and 1995, and the changes in its net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the financial statements taken as a whole. The accompanying supplemental schedules of assets held for investment purposes as of December 31, 1996 and reportable transactions for the year then ended are presented for purposes of complying with the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974, and are not a required part of the financial statements. The Fund Information in the statement of net assets available for benefits and the statment of changes in net assets available for benefits is presented for purposes of additional analyses rather than to present the net assets available for benefits and changes in net assets available for benefits of each fund. The supplemental schedules have been subjected to the auditing procedures applied in our audit of the 1996 financial statements and, in our opinion, are fairly stated in all material respects in relation to the 1996 financial statements taken as a whole. April 16, 1997 /s/ Ernst & Young LLP PAYCHEX, INC. 401(K) INCENTIVE RETIREMENT PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
Paychex, Inc. Growth Inter- Common and Stable national Combined Stock Income Equity Value Equity Loan Funds Fund Fund Fund Fund Fund Fund ____________ ____________ ____________ ____________ ____________ ____________ ____________ Interest and dividend income $ 2,213,420 $ 436,130 $ 252,674 $ 997,995 $ 272,664 $ 4,726 $ 249,231 Net appreciation in fair market value of investments - 26,552,916 25,548,295 549,162 332,578 - 122,881 - Notes A & D Contributions: Participants 6,992,391 4,800,726 734,859 951,367 418,861 86,578 - Paychex, Inc. 2,393,697 1,626,893 247,861 319,456 174,691 24,796 - ____________ ____________ ____________ ____________ ____________ ____________ ____________ 38,152,424 32,412,044 1,784,556 2,601,396 866,216 238,981 249,231 Withdrawals by terminated (4,105,947) (2,703,140) (425,286) (522,217) (446,936) (8,368) - participants Transfers between funds - 203,740 (931,193) (1,230,822) 414,503 788,324 755,448 ____________ ____________ ____________ ____________ ____________ ____________ ____________ NET INCREASE 34,046,477 29,912,644 428,077 848,357 833,783 1,018,937 1,004,679 Net assets available for benefits at beginning of year 66,464,090 46,378,918 6,303,545 6,905,781 3,936,638 - 2,939,208 ____________ ____________ ____________ ____________ ____________ ____________ ____________ NET ASSETS AVAILABLE FOR BENEFITS $100,510,567 $ 76,291,562 $ 6,731,622 $ 7,754,138 $ 4,770,421 $ 1,018,937 $ 3,943,887 ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________
See notes to financial statements. PAYCHEX, INC. 401(K) INCENTIVE RETIREMENT PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1995
Paychex, Inc. Growth Common and Stable Combined Stock Income Equity Value Loan Funds Fund Fund Fund Fund Fund ___________ ___________ ___________ ___________ ___________ ___________ Interest and dividend income $ 1,923,627 $ 261,406 $ 219,821 $ 1,047,881 $ 227,454 $ 167,065 Net appreciation in fair market value of investments - 21,952,709 20,518,948 1,060,025 373,736 - - Notes A & D Contributions: Participants 5,451,478 3,345,691 786,486 833,760 485,541 - Paychex, Inc. 1,972,363 1,220,851 256,866 313,537 181,109 - ___________ ___________ ___________ ___________ ___________ ___________ 31,300,177 25,346,896 2,323,198 2,568,914 894,104 167,065 Withdrawals by terminated participants (2,842,603) (1,340,576) (381,429) (395,840) (724,758) - Transfers between funds - (716,628) 57,833 (113,640) 215,300 557,135 ___________ ___________ ___________ ___________ ___________ ___________ NET INCREASE 28,457,574 23,289,692 1,999,602 2,059,434 384,646 724,200 Net assets available for benefits at beginning of year 38,006,516 23,089,226 4,303,943 4,846,347 3,551,992 2,215,008 ___________ ___________ ___________ ___________ ___________ ___________ NET ASSETS AVAILABLE FOR BENEFITS $66,464,090 $46,378,918 $ 6,303,545 $ 6,905,781 $ 3,936,638 $ 2,939,208 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
See notes to financial statements. PAYCHEX, INC. 401(K) INCENTIVE RETIREMENT PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION DECEMBER 31, 1996
Paychex, Inc. Growth Inter- Common and Stable national Combined Stock Income Equity Value Equity Loan Funds Fund Fund Fund Fund Fund Fund ____________ ____________ ____________ ____________ ____________ ____________ ____________ ASSETS Investments at market value: Common Stock of Paychex, Inc. - 1,441,371 Shares (Cost $15,780,069) $ 74,140,260 $ 74,140,260 IVT Total Return Fund - 277,021 Shares (Cost $5,576,820) 6,731,622 $ 6,731,622 Invesco Growth Fund - 1,494,054 Shares (Cost $7,753,188) 7,754,138 $ 7,754,138 Invesco Stable Value Fund - 4,770,421 Shares (Cost $4,770,421) 4,770,421 $ 4,770,421 Global Asset Management Fund - 44,015 Shares (Cost $906,659) 1,018,937 $ 1,018,937 Invesco Funds Group - IMF - Cash Reserves (Cost $2,151,302) 2,151,302 $ 2,151,302 Participant Loans Receivable 3,943,887 $ 3,943,887 ____________ ____________ ____________ ____________ ____________ ____________ ____________ TOTAL ASSETS $100,510,567 $ 76,291,562 $ 6,731,622 $ 7,754,138 $ 4,770,421 $ 1,018,937 $ 3,943,887 LIABILITIES Withdrawals payable to terminated participants - Note E - - - - - - - ____________ ____________ ____________ ____________ ____________ ____________ ____________ NET ASSETS AVAILABLE FOR BENEFITS $100,510,567 $ 76,291,562 $ 6,731,622 $ 7,754,138 $ 4,770,421 $ 1,018,937 $ 3,943,887 ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________
See notes to financial statements. PAYCHEX, INC. 401(K) INCENTIVE RETIREMENT PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION DECEMBER 31, 1995
Paychex, Inc. Growth Common and Stable Combined Stock Income Equity Value Loan Funds Fund Fund Fund Fund Fund ___________ ___________ ___________ ___________ ___________ ___________ ASSETS Investments at market value: Common Stock of Paychex, Inc. - 916,255 Shares (Cost $11,999,017) $45,709,807 $45,709,807 IVT total Return Fund - 282,164 Shares (Cost $5,314,024) 6,303,545 $ 6,303,545 Invesco Growth Fund - 1,395,107 Shares (Cost $7,103,841) 6,905,781 $ 6,905,781 Invesco Stable Value Fund - 3,936,638 Shares (Cost $3,936,638) 3,936,638 $ 3,936,638 Invesco Funds Group - IMF - Cash Reserves (Cost $669,111) 669,111 $ 669,111 Participant Loans Receivable 2,939,208 $ 2,939,208 ___________ ___________ ___________ ___________ ___________ ___________ TOTAL ASSETS 66,464,090 46,378,918 6,303,545 6,905,781 3,936,638 2,939,208 LIABILITIES Withdrawals payable to terminated participants - Note E - - - - - - ___________ ___________ ___________ ___________ ___________ ___________ NET ASSETS AVAILABLE FOR BENEFITS $66,464,090 $46,378,918 $ 6,303,545 $ 6,905,781 $ 3,936,638 $ 2,939,208 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
See notes to financial statements. PAYCHEX, INC. 401(k) INCENTIVE RETIREMENT PLAN NOTES TO FINANCIAL STATEMENTS NOTE A. SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Paychex 401(k) Incentive Retirement Plan (the Plan) are prepared on the accrual basis in accordance with generally accepted accounting principles. Administrative expenses of the Plan are paid by Paychex, Inc. (the "Company"). Investments in Paychex, Inc. Common Stock are carried at market value determined on the basis of quoted market (bid) price. The underlying investments of the mutual funds (excluding the Stable Value Fund) are valued at market, as reported by Invesco, based on the last reported sales price or bid price in the market where the investments are primarily traded or by a pricing service. The value of the Stable Value Fund is determined in the manner set forth above except that guaranteed income contracts, annuities, and other assets that provide for benefit payments or withdrawals on a contractual basis and with respect to which there is no active trading market are valued at their fair value as determined by Invesco, which in the case of such investments, is generally deemed to be at book value (cost plus accrued income). Short-term investments are valued at cost which approximates market value. Securities transactions are accounted for on the trade dates. Realized gains and losses from securities transactions are computed on the average cost basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. NOTE B. PLAN DESCRIPTION AND BENEFITS The Plan is a defined contribution plan established July 1, 1984. Company employees must be employed one year in which a minimum of 1,000 hours has been worked to be eligible for participation in the Plan. At the employee's option, contributions are invested in one or more of the following funds:
Number of Participants ______________________ December 31, December 31, 1996 1995 ____ ____ Paychex, Inc. Common Stock Fund 2,797 2,196 Growth & Income Fund 1,235 1,106 Equity Fund 1,571 1,329 Stable Value Fund 1,006 983 International Equity Fund 277 -
NOTES TO FINANCIAL STATEMENTS (CONTINUED) Employees may contribute up to 10% of their compensation to the Plan through payroll deductions, subject to the limit established by the Internal Revenue Code, which was $9,500 for 1996 and $9,240 for 1995. Discretionary employer contributions are equal to 50% of the participants elective contribution, but not to exceed 3% of the participant's compensation. The Company may elect to make an additional discretionary contribution to the Plan. Each participant is fully vested as to their elective contributions and rollover contributions as well as earnings on them. Employees are fully vested with respect to Company matching contributions upon completion of three years of service. Any nonvested Company matching contributions existing at the time a participant withdraws from the Plan are forfeited and available to Paychex, Inc. to reduce future contributions. Upon termination of the Plan, all participant's rights to accrued benefits are 100% nonforfeitable. The Plan allows participants to borrow up to 50% of the vested balance from their account. Bi-weekly payroll deductions are required to repay the loan within five years. Loans used for the purchase of a principal residence are required to be repaid within ten years. The rate of interest is Prime plus 1%. The Plan is subject to the requirements of the Employee Retirement Income Security Act of 1974. A complete description of the Plan, including eligibility, contribution, investment, vesting and withdrawal provisions, is contained in the official plan document which governs the operation of the Plan. The Plan Adoption Agreement was restated in 1996 to incorporate an amendment on eligibility. An employee will become a participant in the Plan on the first day of the month immediately following the completion of the service requirement. NOTE C. TAX STATUS The restated Plan is designed as a qualified plan under Section 401(a) and 401(k) of the Internal Revenue Code. Accordingly, no provision for Federal income taxes has been made. The Company has received a favorable determination letter from the Internal Revenue Service regarding the qualification of the plan. Employer contributions and investment income of the Plan are not taxable to the participants until withdrawn or distributed. In addition, net unrealized appreciation on any shares of Paychex, Inc. Common Stock distributed to a participant upon termination of employment is not taxed until the time of disposition of such shares, unless the participant elects to be taxed at the time of distribution. The Paychex, Inc. 401(k) Plan Committee is not aware of any course of action or series of events that have occurred that might adversely affect the Plan's qualified status. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE D. INVESTMENTS The net realized gain on disposition of investments was computed as follows:
Paychex, Inc. Growth Inter- Common and national Combined Stock Income Equity Equity Funds Fund Fund Fund Fund ___________ ___________ ___________ ___________ ___________ Year Ended December 31, 1995: Amount realized $11,901,167 $ 9,004,503 $ 1,311,886 $ 1,584,778 $ - Average cost 11,242,845 8,495,844 1,172,172 1,574,829 - ___________ ___________ ___________ ___________ ___________ Net realized gain $ 658,322 $ 508,659 $ 139,714 $ 9,949 $ - ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Year Ended December 31, 1996: Amount realized $20,959,915 $15,144,002 $ 2,390,860 $ 3,244,305 $ 180,748 Average cost 19,532,969 14,245,108 2,006,979 3,110,737 170,145 ___________ ___________ ___________ ___________ ___________ Net realized gain $ 1,426,946 $ 898,894 $ 383,881 $ 133,568 $ 10,603 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
NOTES TO FINANCIAL STATEMENTS (CONTINUED) The unrealized appreciation (depreciation) in fair value of investments included in net assets available for plan benefits is as follows:
Paychex, Inc. Growth Inter- Common and national Combined Stock Income Equity Equity Funds Fund Fund Fund Fund ___________ ___________ ___________ ___________ ___________ Year Ended December 31, 1995: Balance at beginning of year $13,207,864 $13,700,501 $ 69,210 $ (561,847) $ - Change for the year 21,294,387 20,010,289 920,311 363,787 - ___________ ___________ ___________ ___________ ___________ Balance at end of year $34,502,251 $33,710,790 $ 989,521 $ (198,060) $ - ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Year Ended December 31, 1996: Balance at beginning of year $34,502,251 $33,710,790 $ 989,521 $ (198,060) $ - Change for the year 25,125,970 24,649,401 165,281 199,010 112,278 ___________ ___________ ___________ ___________ ___________ Balance at end of year $59,628,221 $58,360,191 $ 1,154,802 $ 950 $ 112,278 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________
NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE E. BENEFIT PAYMENTS The AICPA Audit and Accounting Guide "Audit of Employee Benefit Plans" requires the Plan to disclose, in the footnotes to the financial statements, the amount of assets that have been allocated but not yet paid to participants who have withdrawn from the Plan as of year end; the amount should not be classified as a liability in the statement of net assets available for benefits. As such, the financial statements do not contain an accrual for benefit payments liability as of December 31, 1996. Amounts allocated to withdrawn participants are required to be recorded on Form 5500. The following is a reconciliation of net assets available for benefits at December 31, 1996 per the financial statement to the 1996 Form 5500:
December 31, 1996 Net assets available for benefits per Statement of Net Assets Available for Benefits by Funds and Combined- December 31, 1996 $ 100,510,567 Amounts allocated to withdrawn participants (385,764) _________________ Net assets available for benefits per the Form 5500 $ 100,124,803 _________________ _________________
The following is a reconciliation of benefits paid to participants per the 1996 financial statements to the 1996 Form 5500:
Year ended December 31, 1996 Withdrawals by Terminated Participants per Statement of Changes In Net Assets Available for Benefits by Funds and Combined - December 31, 1996 $ 4,105,947 Add: Amounts allocated to withdrawn participants at December 31, 1996 385,764 Deduct: Amounts allocated to withdrawn participants at December 31, 1995 (608,351) _________________ Benefits paid to participants per the Form 5500 $ 3,883,360 _________________ _________________
NOTE F. ADDITION OF NEW FUND Effective April 1, 1996 the Company began offering an International Equity Fund as an additional investment option for the 401K participants. The fund is managed by Global Asset Management Funds, Inc. and seeks capital appreciation through investing in equity markets worldwide, excluding those in the USA. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE G. SUBSEQUENT EVENT Effective January 1, 1997 the Plan was amended to allow employees to contribute 15% of their compensation through payroll deductions, subject to the limit established by the Internal Revenue Code. The market value of Paychex, Inc. Common Stock was $51.44 on 12/31/96 and $44.00 on 4/16/97. On April 10, 1997, the Company declared a 3 for 2 stock split payable May 29, 1997 to shareholders of record as of May 8, 1997. All Paychex per share amounts included in these Financial Statements have not been restated to reflect this stock split. SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES PAYCHEX, INC. 401 (K) INCENTIVE RETIREMENT PLAN DECEMBER 31, 1996
Description of Investment Identity of Issue, including Maturity Date, Borrower, Lessor Rate of Interest, Collateral, Current or Similar Party Par or Maturity Value Cost Value __________________ _____________________________ ___________ ___________ Paychex, Inc. Common Paychex, Inc. 1,441,371 shares of common Stock $15,780,069 $74,140,260 Stock Fund Invesco Funds Group 2,151,302 shares of the IMF- Cash Reserves Fund 2,151,302 2,151,302 ___________ ___________ $17,931,371 $76,291,562 Growth and Income Fund Invesco Funds Group 277,021 shares of the IVT Total Return Fund 5,576,820 6,731,622 Equity Fund Invesco Funds Group 1,494,054 shares of the Invesco Growth Fund 7,753,188 7,754,138 Stable Value Fund Invesco Funds Group 4,770,421 shares of the Invesco Stable Value Fund 4,770,421 4,770,421 International Equity Fund Global Asset Management 44,015 shares of the Global Funds, Inc. Asset Management Fund 906,659 1,018,937 Participant Loans * 3,943,887 3,943,887 ___________ ___________ $40,882,346 $100,510,567 ___________ ____________ ___________ ____________
There were no investment assets acquired and disposed of during the year which are reportable under the requirements of Section 2520.103-11 of the Department of Labor's rules and regulations. * Loans to participants have various maturity dates and bear interest at rates ranging from 7% to 11 1/2%. SCHEDULE OF REPORTABLE TRANSACTIONS PAYCHEX, INC. 401 (K) INCENTIVE RETIREMENT PLAN YEAR ENDED DECEMBER 31, 1996
Identity of Issue, Borrower, Lessor, or Description Current Value Similar of Purchase Sales Cost of As of Trans- Gain Party Investment Price Price Asset action Date (Loss) ____________ ___________ __________ __________ __________ _____________ ______ Category (iii) - A series of securities transactions in excess of 5% of plan assets: Paychex, Inc. Common Invesco IMF-Cash 15,448,539 15,448,539 15,448,539 Stock Fund Funds Reserves 13,966,348 13,966,348 13,966,348 Group Invesco Paychex, Inc. 4,027,465 4,027,465 4,027,465 Funds Common Stock Group Equity Fund Invesco Invesco 3,760,084 3,760,084 3,760,084 Funds Growth Fund Group Stable Value Fund Invesco IRT Stable 4,946,499 4,946,499 4,946,499 Funds Value Fund 4,112,716 4,112,716 4,112,716 Group
There were no reportable transactions under categories (i), (ii) or (iv).