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Supporting Information about Paychex

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  • 1. Major Market Services Supporting Information about Paychex
  • 2. To Our ShareholdersF iscal 2010 was a challenging year for Paychex as we experienced the most turbulent economictimes most of us can remember. It was also a year of Our conservative investment strategy continues to be the right approach given the uncertainty in the financial markets. Our first priorities are optimizing liquidity andaccomplishment as we met or exceeded most of the safeguarding principal. Investment yield comes second.financial goals we established at the beginning of the On average, we invested approximately $4 billion of ouryear, converted nearly 500,000 of our clients to a new clients’ money as well as our own, with daily balancepayroll platform, invested billions of dollars of our client changes often in the $1 to $2 billion range. Again lastfunds with no principal losses, continued to generate year, we managed those investments with no lossesstrong growth in our health care offerings, and returned in principal.94% of our net income to shareholders in the formof dividends. OUR BUSINESSWhile the economic recovery is slower than we wouldlike and the challenges of a weak economy are not over, Payrollmany of the key economic indicators that we watch Payroll is the bedrock of our business today – and willclosely are beginning to stabilize and, in some cases, continue to be in the future. That’s why one of our mostturn favorable. Our most important key indicator is checks important accomplishments this year was the completionper client, and this metric ended the year slightly higher of a new platform that enhances our core payrollthan a year ago; in addition, it was up 1.1% in the fourth processing capabilities. We invested more than $60quarter of fiscal 2010 compared to the fourth quarter million in modern technology, which allows us to leverageof fiscal 2009. Looking ahead, we are encouraged yet efficiencies in our processes and offer our clients an evencautious about the economy, but confident that when greater experience. Nearly 500,000 of our clients are onit improves Paychex is poised to take advantage of the new platform, and this is just the beginning. Over thethe recovery. next few years, we anticipate adding more functionality, offerings, and further integration of our products.FISCAL 2010 RESULTS Paychex Major Market Services (MMS), which provides payroll and human resource solutions to our larger clientsOur team rose to the challenges we faced this year, with more complex needs, has delivered strong resultsproviding excellent customer service, maximizing for the company throughout the recession – somethingshareholder value, and demonstrating outstanding we expect will continue as we grow our software-as-expense management in delivering our fiscal a-service solution. In 2010, we launched an enriched,2010 results. seamless integration of MMS services through a single,Total revenue for the year ended May 31, 2010, was $2.0 Web-based client portal. Using this portal, MMS clientsbillion, down 4% from the previous year. Service revenue can process payroll for employees, administer time anddeclined 3% to $1.9 billion. Our commitment to controlling attendance, and manage employee benefits at the samecosts helped us meet our expectations for operating time. The integration of our Preview payroll, Time andincome, net of certain items, which was $688.5 million for Labor Online (TLO), and HR Online (HRO) applicationsfiscal 2010. As a percentage of total service revenue, it under the name Paychex One-Source Solutions meanswas 35.4%, off just 1% compared to fiscal 2009. we offer a single-vendor, easy-to-use solution at a timeNet income was $477.0 million, a decrease of 11%. when business owners – our clients – are facing some ofDiluted earnings per share were $1.32. We returned 94% the same challenges we are.of our net income, or $448.6 million, to shareholders incash dividends. Cash flow from operations was $610.9million, down 11% due primarily to lower net income.Our company has no debt and our liquidity positionremains strong, with $657 million in cash and totalcorporate investments.
  • 3. HUMAN RESOURCE SERVICES the complexities of insurance, as well as educational materials to help them understand the impact ofPaychex HR Solutions regulatory changes on their businesses.An important contributor to growing Human Resource Two regulatory changes in the last year that offered anServices revenue in fiscal 2010 was the launch of opportunity to strengthen our position as an industryPaychex HR Solutions, an offering that combines expert were the HIRE Act, a law offering tax breaks forPaychex Premier HR, our full payroll and HR outsourcing businesses hiring the unemployed; and health caresolution, with Paychex Business Solutions, our reform legislation. Paychex demonstrated that it canprofessional employer organization. We expanded our be a reliable and trusted partner to business owners,professional employer organization footprint and are now deciphering the complexities of health care reformin 21 states, compared to 10 a year ago. Paychex HR and developing solutions to help businesses stay inSolutions now serves 502,000 client employees, more compliance with thethan our next three competitors combined. That’s up 11% new legislation.over fiscal 2009. We did that in several ways, including creating dedicated401(k) Web pages to deliver constantly updated informationRecovery in the financial markets and an increase about regulatory changes. Paychex also developedin larger 401(k) plans converting to Paychex for and conducted dozens of free, online seminars forrecordkeeping services provided a 33% jump last year in businesses – not just clients – that helped bring peacethe asset value of our clients’ 401(k) plans. With over $11 of mind to more than 10,000 participants. Another waybillion in assets and 51,000 clients, Paychex continues to we extended our reputation as a trusted authority wasbe a leader in 401(k) recordkeeping. We service about with the creation and distribution of white papers, viaone in every ten 401(k) plans in the country. A recent www.paychex.com, covering topics ranging from how toindustry survey shows that, once again, Paychex sold build a small-business HR program to what criteria to usemore 401(k) plans last year than any other provider. when considering group health insurance.During the last year, we opened a new channel forour 401(k) services, offering independent, fee-basedretirement advisors the opportunity to work with their PARTNERSclients through Paychex. We also provided detailed information about health carePaychex Insurance Agency reform, the HIRE Act, and changes in COBRA to our partners in the accounting profession – an importantThe number of businesses choosing Paychex Insurance referral channel for Paychex since the company beganAgency for their insurance services approached 100,000 nearly 40 years ago.at the end of fiscal 2010. We continue to expand ourinsurance offerings – including workers’ compensation In addition, we conducted our most in-depth researchand health and benefits – nationwide. With access to effort to date involving members of the professionalmore than 150 top national and regional carriers, our accounting community, an initiative aimed at enhancinglicensed insurance agents have a broad portfolio of plans their role as trusted advisor to their clients. And, wetheir clients can choose from. expanded our commitments to two leading channel organizations: the American Institute of Certified PublicHealth and benefits service revenue last year rose 49% to Accountants (AICPA), and the National Association of$31 million. We believe insurance services will continue Enrolled Agents (NAEA), the professional society ofto be a growth opportunity for Paychex, and we are licensed tax agents. We continue to value the preferredinvesting in sales and systems to support that growth. provider relationships we have with both groups.We strengthened our position as an industry expertfor clients and other businesses in fiscal 2010 with thelaunch of a new Paychex Insurance Agency Web site,www.paychexinsurance.com. The site provides a rangeof resources to help small-business owners navigate
  • 4. ACCOMPLISHMENTS AND WHAT’S AHEADACCOLADES Our decades of demonstrated expertise and innovationAt Paychex, we value our employees and the in providing payroll and human resource services,contributions they make every day. Whether it’s one delivered with the highest levels of customer service, willsales representative signing a new client, our entire continue to drive our growth. Change is part of business,operations group producing nearly 10 million W-2s for and Paychex is ready to respond because with changeall of our clients, or the team responsible for moving comes opportunity. Whether it’s developing products thatover half a trillion dollars in client funds last year, each best meet our clients’ needs or interpreting regulatorycontribution counts. changes that affect the way our customers do business,Our employees know this, and through some tough times Paychex has been an essential partner – and we willagain last year, they came to work and delivered. There continue to be an essential partner in the years to come.is a sense of responsibility that comes with caring about Together we will plan for a future that capitalizes on theour clients, our shareholders, and our colleagues. We foundation for growth that we have built.salute that quality inside our company, and we appreciate We thank our shareholders, Board of Directors, clients,the recognition when it comes from outside. and employees for your support.One of the accolades we are most proud of recognized Sincerely,Paychex as one of the world’s most ethical companies.We earned this prestigious honor from Ethispheremagazine for a third time in 2010. We were again namedto Fortune’s list of “100 Best Companies to Work For” inAmerica, as well as Training magazine’s list of top 125training organizations in the world. Fortune also ranked B. Thomas Golisanous among the most admired companies and forbes.com Chairman of the Boardrated us among the most trustworthy companies.These honors speak to the character of our employeesand the standards of our company.LEADERSHIP CHANGE John M. MorphyOn July 12, 2010, Paychex announced that Jonathan Senior Vice President, Chief Financial Officer,J. Judge submitted his resignation as president and and Secretarychief executive officer, effective July 31, 2010. We thankJon for his contributions in growing service revenues,strengthening our management practices, overseeing keytechnology advances, and leading our successful entryinto the health and benefits business. Moving forward, weformed a strong and experienced executive committeeto lead the company in the interim, with oversight fromPaychex Chairman B. Thomas Golisano and the Boardof Directors. The executive committee is comprised ofJohn Morphy, senior vice president, chief financial officer,and secretary; Martin Mucci, senior vice president ofoperations; and Delbert Humenik, senior vice president ofsales and marketing. The company will be well managedduring the period of time we search for a new presidentand chief executive officer.
  • 5. Financial HighlightsIn millions, except per share amounts Year ended May 31,Results of Operations 2010 (1) 2009 Change Service revenue $ 1,945.8 $ 2,007.3 (3%) Interest on funds held for clients 55.0 75.5 (27%) Total revenue $ 2,000.8 $ 2,082.8 (4%) Operating income $ 724.8 $ 805.2 (10%) As a percent of total revenue 36% 39% Net income $ 477.0 $ 533.5 (11%) As a percent of total revenue 24% 26% Diluted earnings per share $ 1.32 $ 1.48 (11%) Cash dividends per common share $ 1.24 $ 1.24 Year ended May 31,Selected Financial Data 2010 2009 Operating income, net of certain items(2) $ 688.5 $ 729.7 Purchases of property and equipment $ 61.3 $ 64.7 Cash flows from operations $ 610.9 $ 688.8 Cash and total corporate investments $ 656.9 $ 574.7 Total assets $ 5,226.3 $ 5,127.4 Total debt $ - $ - Stockholders’ equity $ 1,402.0 $ 1,341.5 Dividends paid as a percentage of net income 94% 84% Return on stockholders’ equity 34% 41%(1) Includes an expense charge of $18.7 million to increase the litigation reserve, which reduced diluted earnings per share by $0.03.(2) Refer to the Overview section of Item 7 of our Annual Report on Form 10-K for the year ended May 31, 2010, for further information. 2,082.8 2,066.3 2,000.8 1,886.9 1,674.6 576.1 515.4 533.5 464.9 477.0 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 TOTA L RE V EN U E NET INCOME (millions $) (millions $)
  • 6. SAS 70 Report on Controls PricewaterhouseCoopers LLP 1100 Bausch & Lomb Place Rochester NY 14604-2705 Telephone (585) 232 4000 Facsimile (585) 454 6594 pwc.com Report of Independent AuditorsTo the Board of Directors of Paychex, Inc.:We have examined the accompanying description of the controls related to the payroll processingsystems of Paychex, Inc. (“Paychex” or “the Company”). Our examination included proceduresto obtain reasonable assurance about whether (1) the accompanying description presents fairly,in all material respects, the aspects of the Company’s controls that may be relevant to a userorganization’s internal control as it relates to an audit of financial statements; (2) the controlsincluded in the description were suitably designed to achieve the control objectives specified inthe description, if those controls were complied with satisfactorily and user organizations appliedthe controls contemplated in the design of the Company’s controls; and (3) such controls hadbeen placed in operation as of September 30, 2010. The control objectives were specified bythe management of Paychex. Our examination was performed in accordance with standardsestablished by the American Institute of Certified Public Accountants and included those procedureswe considered necessary in the circumstances to obtain a reasonable basis for rendering ouropinion.In our opinion, the accompanying description of the aforementioned controls presents fairly, in allmaterial respects, the relevant aspects of the Company’s controls that had been placed in operationas of September 30, 2010. Also, in our opinion, the controls, as described, are suitably designedto provide reasonable assurance that the specified control objectives would be achieved if thedescribed controls were complied with satisfactorily, and user organizations applied the controlscontemplated in the design of the Company’s controls.In addition to the procedures we considered necessary to render our opinion as expressed in theprevious paragraph, we applied tests to specific controls to obtain evidence about their effectivenessin meeting the control objectives, during the period from October 1, 2009 to September 30, 2010.The specific control objectives and controls, and the nature, timing, extent, and results of the testsare listed in Section III. This information has been provided to user organizations of Paychex andto their auditors to be taken into consideration, along with information about the internal control ofuser organizations, when making assessments of control risk for user organizations. In our opinion,the controls that were tested were operating with sufficient effectiveness to provide reasonable, butnot absolute, assurance that the specified control objectives were achieved during the period fromOctober 1, 2009, to September 30, 2010.
  • 7. PricewaterhouseCoopers LLP 1100 Bausch & Lomb Place Rochester NY 14604-2705 Telephone (585) 232 4000 Facsimile (585) 454 6594 pwc.comThe relative effectiveness and significance of specific controls at Paychex and their effect onassessments of control risk at user organizations are dependent on their interaction with thecontrols, and other factors present at individual user organizations. We have performed noprocedures to evaluate the effectiveness of controls at individual user organizations.The description of controls at Paychex is as of September 30, 2010, and the information abouttests of the operating effectiveness of specific controls covers the period from October 1, 2009to September 30, 2010. Any projection of such information to the future is subject to the risk that,because of change, the description may no longer portray the controls in existence. The potentialeffectiveness of specific controls at Paychex is subject to inherent limitations and accordingly, errorsor fraud may occur and not be detected. Furthermore, the projection of any conclusions, based onour findings, to future periods is subject to the risk that changes made to the system or controlsor the failure to make needed changes to the system or controls, may alter the validity of suchconclusions.The information included in Section V describing the Company’s other functions and servicesis presented by Paychex to provide additional information and is not part of the Company’sdescription of controls that may be relevant to user organizations’ internal control as it relates to anaudit of financial statements. Such information has not been subjected to the procedures appliedin the examination of the description of Paychex, related to the payroll processing systems, andaccordingly, we express no opinion on it.This report is intended solely for use by the management of Paychex, its users and the independentauditors of its users.December 7, 2010
  • 8. Description Of ControlsOverview of Payroll Product OfferingsPaychex, Inc. (Paychex or the Company) is a leading national provider of comprehensive payroll,human resource, and benefits outsourcing solutions for small- to medium- sized businesses.Paychex has more than 100 offices and serves over 554,000 payroll clients nationwide as of May31, 2009. In fiscal 2009, the Company reported over $2 billion in revenues. The Company’s payrollservices include production of employee payroll checks and earnings statements, accountingrecords, management reports, and tax payment notices, as well as payroll tax returns for federal,state, and local jurisdictions.The scope of this report includes payroll processing for the Core Payroll and PREVIEW® systems ofPaychex. Also included in the scope of this report are several Paychex products that support payrollinput to the Core Payroll system, including Paychex Online Payroll® and Internet Time Sheet and thecalculation of payroll taxes. This report has been prepared to provide information on the Company’scontrols that may be relevant to the internal controls of Core Payroll and PREVIEW® clients. For thepurposes of this report, payroll services include calculation and delivery of employee pay, includingthe calculation of federal, state and local payroll taxes and the production of management reports.In 2009, the Core Payroll platform was upgraded to provide a more user-friendly interface andadvanced reporting capabilities. The development of this platform, as well as the conversion andtesting, followed the system development and maintenance process described in this report. Thisreport includes the controls over the development, testing, implementation, and conversion of theplatform. The additional products and services offered by Paychex as listed in Section IV are notwithin the scope of this report.The corporate office is located in Rochester, New York and provides administrative and operationalsupport to the Paychex facilities. Staffing at most locations consists of Managers, who managethe operations; Supervisors, who oversee and supervise daily Core Payroll system input andprocessing; Specialists, who manage the initial client relationship for the first few payrolls andfacilitate the ongoing processing of client payroll information; Computer Operators, who processand print payrolls; Distribution Specialists, who pack and prepare payroll for delivery; and SalesRepresentatives who sell the Company’s products and services. All significant computer operationand data processing activities occur at the Corporate Data processing centers located nearRochester, New York.Paychex offers two payroll services to comprehensively address the different needs and levelsof complexity of clients. The Core Payroll product is generally designed for clients with one to 49employees. Core clients communicate their payroll information for processing via phone, fax, orelectronically via Paychex Online Payroll® or Internet Time Sheet. The Paychex Online Payroll® serviceis an Internet-based service allowing clients to send payroll information to Paychex for processingthrough a secure internet site. Internet Time Sheet allows clients to enter and transmit basic payrollinformation to the branches. Paychex then updates the client records and processes the payroll.Paychex Business Solutions (PBS) is a Professional Employer Organization (PEO) that provides anintegrated suite of services critical to managing a user organization’s business, including payrollpreparation. PBS clients utilize the Core Payroll system, which is covered by this SAS 70, forpayroll processing.
  • 9. PREVIEW® is the second service and specializes in meeting the needs of current clients who haveoutgrown the Core Payroll service or new clients with more complex payroll and human resourceneeds. For businesses with over 50 employees, this comprehensive service addresses their specificpayroll and human resource needs. The focal point is the PREVIEW® payroll software, which canbe used as a traditional on-site, PC-based system or via a secure web-hosted environment. UsingPREVIEW®’s extensive features, the client has total control over the payroll process and directaccess to their payroll data. Paychex, however, still handles software maintenance and compliance,payroll tax preparation, and payroll packaging.Paychex provides a consistently high level of service to our clients by standardizing manycomponents of the payroll process. Payroll software applications, computer equipment, andoperating procedures are standardized, allowing Paychex to implement enhancements to itspayroll products and respond to federal, state, and local statutory changes in an efficient,consistent manner.
  • 10. Sarbanes Oxley ComplianceReport On Management’s Assessment OfInternal Control Over Financial Reporting Management of Paychex, Inc. (the “Company”) is responsible for establishing and maintainingan adequate system of internal control over financial reporting as such term is defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’sinternal control over financial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of the Consolidated Financial Statements. Ourinternal control over financial reporting is supported by a program of internal audits and appropriatereviews by management, written policies and guidelines, and careful selection and training ofqualified personnel. Because of its inherent limitations, internal control over financial reporting may not preventor detect misstatements and even when determined to be effective, can only provide reasonableassurance with respect to financial statement preparation and presentation. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate. The Audit Committee of our Company’s Board of Directors meets with the independentregistered public accounting firm (the “independent accountants”), management, and internalauditors periodically to discuss internal control over financial reporting and auditing and financialreporting matters. The Audit Committee reviews with the independent accountants the scopeand results of the audit effort. The Audit Committee also meets periodically with the independentaccountants and the chief internal auditor without management present to ensure that theindependent accountants and the chief internal auditor have free access to the Audit Committee.The Audit Committee’s Report can be found in the Definitive Proxy Statement to be issued inconnection with the Company’s 2010 Annual Meeting of Stockholders. Management assessed the effectiveness of the Company’s internal control over financialreporting as of May 31, 2010. In making this assessment, management used the criteria set forthby the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control— Integrated Framework.” Based on our assessment, management believes that the Companymaintained effective internal control over financial reporting as of May 31, 2010. The Company’s independent accountants, Ernst & Young LLP, an independent registeredpublic accounting firm, are appointed by its Audit Committee. Ernst & Young LLP has audited andreported on the Consolidated Financial Statements of Paychex, Inc. and the effectiveness of theCompany’s internal control over financial reporting. The reports of the independent accountants arecontained in this Annual Report on Form 10-K. /s/ Jonathan J. Judge /s/ John M. Morphy Jonathan J. Judge John M. Morphy President and Chief Executive Officer Senior Vice President, Chief Financial Officer, and SecretarySource: PAYCHEX, INC., 10-K, July 20, 2010
  • 11. Report of Independent Registered Public Accounting FirmThe Audit Committee of the Board of Directorsand the Stockholders of Paychex, Inc. We have audited the accompanying consolidated balance sheets of Paychex, Inc. as of May31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, andcash flows for each of the three years in the period ended May 31, 2010. Our audits also includedthe financial statement schedule listed in the Index at Item 15(1). These financial statements andschedule are the responsibility of Paychex, Inc.’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating the overall financialstatement 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 consolidated financial position of Paychex, Inc. at May 31, 2010 and 2009, and the consolidatedresults of its operations and its cash flows for each of the three years in the period ended May 31,2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, therelated financial statement schedule, when considered in relation to the basic financial statementstaken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Paychex, Inc.’s internal control over financial reporting as of May31, 2010, based on criteria established in “Internal Control — Integrated Framework” issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our report dated July 16,2010 expressed an unqualified opinion thereon./s/ Ernst & Young LLPCleveland, OhioJuly 16, 2010Source: PAYCHEX, INC., 10-K, July 20, 2010
  • 12. Report of Independent Registered Public Accounting FirmThe Audit Committee of the Board of Directorsand the Stockholders of Paychex, Inc. We have audited Paychex Inc.’s internal control over financial reporting as of May 31, 2010, based oncriteria established in “Internal Control — Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Paychex Inc.’s management is responsiblefor maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Report on Management’s Assessmentof Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’sinternal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financial reporting was maintainedin all material respects. Our audit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion. A company’s internal control over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate. In our opinion, Paychex, Inc. maintained, in all material respects, effective internal control over financialreporting as of May 31, 2010, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting OversightBoard (United States), the consolidated balance sheets as of May 31, 2010 and 2009, and the relatedconsolidated statements of income, stockholders’ equity, and cash flows for each of the three years in theperiod ended May 31, 2010 of Paychex, Inc., and our report dated July 16, 2010, expressed an unqualifiedopinion thereon./s/ Ernst & Young LLPCleveland, OhioJuly 16, 2010Source: PAYCHEX, INC., 10-K, July 20, 2010
  • 13. Code of Business Ethics & ConductFull text available online at: www.paychex.com/investor/governance/ethics.aspxCode of Business Ethics and ConductThe Paychex Code of Business Ethics and Conduct organizes a set of company standards forproper business conduct so our employees can gain a better understanding of the way Paychexwishes to conduct business. Paychex maintains a strong belief in the value of ethical behavior. Thetrust and confidence of the public, our stockholders, our clients, and our own employees is a criticalasset that benefits all.All members of the Paychex Board of Directors, all Officers, and all Paychex employees (collectivelyreferred to as “employees” throughout this Code), are expected to read and understand this Codeof Business Ethics and Conduct. Each of us is personally responsible for making sure that ourbusiness decisions and actions comply at all times with the letter and spirit of this Code.In addition, each of us has a duty to report behavior on the part of others that appears to violatethis Code or any other compliance policy or procedure of Paychex. Ethical concerns, questions, orcomplaints may be raised with your immediate supervisor, Human Resources, or submitted directlyto the Audit Committee as outlined within this Code. All concerns, questions, and complaints will betaken seriously and handled promptly and confidentially. No retaliation will be taken for raising anyconcern, question, or complaint in good faith.
  • 14. Privacy StatementPaychex, Inc. is committed to providing payroll processing, payroll tax preparation, and humanresource solutions for your small- to medium-sized business. In an effort to meet that commitment,you will have to provide to Paychex business, financial, and/or personal information about yourselfand your employees. Your privacy and the privacy of the information provided are important to us.Paychex protects the security of your business, financial, and personal information and honorsyour choices for its intended use. Paychex uses reasonable care and maintains appropriate policiesand procedures to protect your data from loss, misuse, unauthorized access, disclosure, alteration,or destruction.Paychex does not sell or disseminate customer information to any third parties under anycircumstances, except to fulfill legal and regulatory requirements, and to facilitate customerrequested transactions. Third party service providers with access to client information are requiredto keep that information confidential and use it only to provide services for Paychex or the client.
  • 15. Business Continuity PlanPaychex, Inc is dedicated to providing seamless business operations in spite of unexpected events.These sudden, uncontrollable scenarios can vary from inclement weather to intentionally damagingacts. The impact of each scenario, depending on its severity, can range from minimal to critical. TheCompany is committed to identifying potential risks and evaluating their potential impacts - beforethe situation occurs to determine what appropriate measures should be taken.To ensure a rapid response to potential harmful situations, the Company has developed acombination of technological solutions and comprehensive recovery planning strategies.•   Duplicate copies of data (backups) of employer and employee master files and tax files are  performed daily at the Corporate Data Centers and each processing location.•   Payroll transaction files are backed up throughout each processing day. •   Weekly backups are performed for payroll history.•   Business critical application transaction files are electronically transmitted throughout each  processing day.•   Backup tapes and other critical supplies needed to process payrolls, such as client contact lists  and payroll forms, are stored off-site.The Corporate Data Centers have appropriate geographic separation for incidents of local andregional disaster, and are equipped with heat, smoke detection, fire suppression systems, redundantuninterruptible power systems (UPS) and redundant generator power. In addition, the branch officesare equipped with heat, smoke, and fire detection systems. Certain branches have a UPS andgenerator that protect computers, phones, and alarm systems from power surges or failures. Powerfailure tests are performed in each corporate processing data center and at each branch annually.Each Data Center operates independently, and is designed to handle the full load of all centers.Comprehensive plans are in place for each critical business unit and each Paychex location toensure the timely relocation of critical personnel to alternate work spaces. These plans are testedmultiple times each year.A dedicated team of business continuity professionals are involved with creating and maintainingbusiness continuity strategies.
  • 16. Security StatementA Commitment to SecurityPaychex, Inc. is committed to protecting the security and integrity of our customer informationthrough procedures and technologies designed for this purpose. Here are some of the thingswe do with our technology and our internal training to ensure that your information in our systemsis protected:•    e maintain polices and procedures covering the physical security of our workplaces,  W systems, and records.•    ur physical, electronic, and procedural safeguards are built on industry recognized  O best practices.•    e use technological means such as backup files, virus detection and prevention, firewalls,  W and other computer hardware and software to protect against unauthorized access or alteration to customer data.•    e encrypt sensitive information that is transmitted over the Internet. W•    e limit employee access to customer information, to those who have a business reason to  W know, through formal approval processes, access controls, and internal auditing.•    e require our employees to take information security awareness training and to apply this  W training to their job every day.•    e use advanced technologies for the backup and recovery of customer information. W
  • 17. Fidelity Bond CoverageNovember 1, 2010To Whom It May Concern:Brown & Brown, Inc. is the insurance broker for Paychex, Inc. This letter is in response to your recent inquiryas to Paychex’ fidelity bond coverage.Paychex has fidelity coverage through St. Paul Fire and Marine Insurance Company (primary) and FederalInsurance Company (excess). The fidelity bond coverage provided by these policies includes AdvantagePayroll Services, Inc., a subsidiary of Paychex, Inc. The current policy period is 11/01/10-11.The coverage provided to Paychex and its subsidiaries is as follows: Primary ExcessEmployee Dishonesty $25,000,000 $25,000,000Forgery & Alteration $10,000,000Theft Inside/Outside $10,000,000Computer Fraud $25,000,000 $25,000,000As one of Paychex’ clients, covered property under the policies includes Client Property which is in thecare, custody and control of Paychex. No Paychex client has ever suffered a loss as a result of employeedishonesty, forgery or alteration, or computer fraud arising from their use of Paychex’ services.Although the above coverages are subject to deductibles, Paychex maintains (as per their 5-31-10 AnnualReport) an extremely strong balance sheet. With over $5.2 billion in assets and $1.4 billion in shareholders’equity, should a loss occur under these coverages, Paychex’ financial condition would not be materiallyimpacted through absorbing the deductible under a loss.This letter is issued as a matter of information only and confers no rights upon you. This letter does notamend, extend or alter the coverages provided by the policies.We hope this helps explain the fidelity coverage Paychex maintains. Brown & Brown of NY, Inc. Steven E. Davis Account ExecutiveBrown & Brown of NY, Inc.45 East AvenueRochester, New York 14604-2286Phone (585) 232-4424Fax (585) 232-5813