Paychex 2011 Annual Report Download - page 61

Note C — Business Combinations
During fiscal 2011, the Company acquired two software-as-a-service companies, opening up additional areas
of the markets the Company serves. Effective February 8, 2011, the Company acquired SurePayroll, Inc.
(“SurePayroll”), a payroll processing provider for small businesses, for $114.9 million, net of cash acquired.
The acquisition of SurePayroll allows the Company entry into a new area of the online market for small businesses,
and resulted in approximately $84.6 million of goodwill, which is not tax-deductible.
Effective May 3, 2011, the Company acquired ePlan Services, Inc. (“ePlan”), a provider of recordkeeping and
administrative solutions to the defined contribution marketplace, for $15.2 million, net of cash acquired. The ePlan
acquisition resulted in $7.5 million of goodwill, which is not tax-deductible.
Upon their respective closing dates, both entities acquired became wholly owned subsidiaries of the Company.
The financial results of SurePayroll and ePlan are included in the Company’s consolidated financial statements
from their respective dates of acquisition. These acquisitions are not material to the Company’s results of
operations, financial position, or cash flows.
Note D — Stock-Based Compensation Plans
The Paychex, Inc. 2002 Stock Incentive Plan, as amended and restated (the “2002 Plan”), effective on
October 13, 2010 upon its approval by the Company’s stockholders, authorizes grants of up to 39.1 million shares of
the Company’s common stock. As of May 31, 2011, there were 24.8 million shares available for future grants under
the 2002 Plan. No future grants will be made pursuant to the Paychex, Inc. 1998 Stock Incentive Plan, which expired
in August 2002; however, options to purchase an aggregate of 1.0 million shares under the plan remain outstanding
as of May 31, 2011.
All stock-based awards to employees are recognized as compensation costs in the consolidated financial
statements based on their fair values measured as of the date of grant. These costs are recognized as an expense in
the Consolidated Statements of Income on a straight-line basis over the requisite service period and increase
additional paid-in capital. Grants prior to June 1, 2006 were expensed on an accelerated basis.
Stock-based compensation expense was $24.8 million, $25.6 million, and $25.7 million for fiscal years 2011,
2010, and 2009, respectively. Related income tax benefits recognized were $8.4 million, $7.9 million, and
$8.0 million for the respective fiscal years. Capitalized stock-based compensation costs related to the development
of internal use software for these same fiscal years were not significant.
As of May 31, 2011, the total unrecognized compensation cost related to all unvested stock-based awards was
$36.9 million and is expected to be recognized over a weighted-average period of 2.7 years.
Stock option grants: Stock option grants entitle the holder to purchase, at the end of the vesting term, a
specified number of shares of Paychex common stock at an exercise price per share set equal to the closing market
price of the common stock on the date of grant. All stock option grants have a contractual life of ten years from the
date of the grant and a vesting schedule as established by the Board of Directors (the “Board”). The Company issues
new shares of common stock to satisfy stock option exercises. Non-qualified stock option grants to officers and
outside directors are typically approved by the Board in July. Non-qualified stock option grants to officers and
employees granted prior to July 2010 vest 20% per annum, while grants to the Board prior to October 2010 vest one-
third per annum. Grants on non-qualified stock options to officers beginning in July 2010 vest 25% per annum.
Grants to members of the Board beginning in October 2010 vest after one year.
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PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)