UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

CBIZ, INC.

(Exact name of registrant as specified in its charter)

Delaware		22-2769024
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)

6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio		44131
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code) 216-447-9000

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

				Outstanding at
		Class of Common Stock		October 31, 2006
		Common Stock, par value $0.01 per share			68,648,784

 

 

CBIZ, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets – September 30, 2006 and December 31, 2005			3
Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2006 and 2005			4
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2006 and 2005			5
Notes to the Consolidated Financial Statements			6-23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24-44
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			45
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 6. Exhibits			47
Signature			47
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CBIZ, INC. AND SUBSIDIARIES

		SEPTEMBER 30,				DECEMBER 31,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	15,477			$	8,909
Restricted cash			14,517				9,873
Accounts receivable, net			113,987				98,390
Notes receivable — current			2,084				6,042
Deferred income taxes — current			3,381				3,241
Other current assets			8,503				9,490
Assets of discontinued operations			205				8,696
Current assets before funds held for clients			158,154				144,641
Funds held for clients			62,270				65,669
Total current assets			220,424				210,310
Property and equipment, net			30,649				33,403
Notes receivable — non-current			2,599				3,575
Deferred income taxes — non-current			11,310				9,199
Goodwill and other intangible assets, net			206,729				184,462
Assets of deferred compensation plan			15,482				9,803
Other assets			6,707				3,832
Total assets		$	493,900			$	454,584
LIABILITIES
Current liabilities:
Accounts payable		$	24,513			$	26,427
Income taxes payable			7,475				1,115
Accrued personnel costs			30,469				35,920
Other current liabilities			18,124				18,332
Liabilities of discontinued operations			2,991				5,991
Current liabilities before client fund obligations			83,572				87,785
Client fund obligations			62,270				65,669
Total current liabilities			145,842				153,454
Convertible notes			100,000				—
Bank debt			—				32,200
Deferred compensation plan obligations			15,482				9,803
Other non-current liabilities			6,353				4,466
Total liabilities			267,677				199,923
STOCKHOLDERS’ EQUITY
Common stock			1,013				984
Additional paid-in capital			463,848				450,734
Accumulated deficit			(73,347	)			(94,714	)
Treasury stock			(165,237	)			(102,317	)
Accumulated other comprehensive loss			(54	)			(26	)
Total stockholders’ equity			226,223				254,661
Total liabilities and stockholders’ equity		$	493,900			$	454,584

See the accompanying notes to the consolidated financial statements.

CBIZ, INC. AND SUBSIDIARIES

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2006				2005				2006				2005
Revenue		$	143,382			$	135,345			$	467,201			$	430,189
Operating expenses			128,235				120,533				397,741				368,554
Gross margin			15,147				14,812				69,460				61,635
Corporate general and administrative expense			5,568				6,364				19,633				20,234
Depreciation and amortization expense			4,300				3,759				12,540				11,436
Operating income			5,279				4,689				37,287				29,965
Other income (expense):
Interest expense			(844	)			(787	)			(2,503	)			(2,413	)
Gain on sale of operations, net			7				29				14				29
Other income, net			995				1,069				2,806				2,214
Total other income (expense), net			158				311				317				(170	)
Income from continuing operations before income tax expense			5,437				5,000				37,604				29,795
Income tax expense			2,117				2,142				15,079				12,061
Income from continuing operations			3,320				2,858				22,525				17,734
Gain (loss) from operations of discontinued operations, net of tax			250				(1,625	)			(1,664	)			(4,929	)
Gain on disposal of discontinued operations, net of tax			553				802				506				693
Net income		$	4,123			$	2,035			$	21,367			$	13,498
Earnings per share:
Basic:
Continuing operations		$	0.05			$	0.04			$	0.31			$	0.24
Discontinued operations			0.01				(0.01	)			(0.01	)			(0.06	)
Net income		$	0.06			$	0.03			$	0.30			$	0.18
Diluted:
Continuing operations		$	0.05			$	0.04			$	0.30			$	0.23
Discontinued operations			0.01				(0.01	)			(0.01	)			(0.05	)
Net income		$	0.06			$	0.03			$	0.29			$	0.18
Basic weighted average shares outstanding			68,314				73,793				72,092				74,895
Diluted weighted average shares outstanding			70,421				75,988				74,406				76,886

See the accompanying notes to the consolidated financial statements.

CBIZ, INC. AND SUBSIDIARIES

		NINE MONTHS ENDED
		SEPTEMBER 30,
		2006				2005
Cash flows from operating activities:
Net income		$	21,367			$	13,498
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from operations of discontinued operations, net of tax			1,664				4,929
Gain on disposal of discontinued operations, net of tax			(506	)			(693	)
Gain on sale of operations, net			(14	)			(29	)
Life insurance benefit in excess of cash surrender value			(383	)			—
Bad debt expense, net of recoveries			2,504				3,831
Depreciation and amortization expense			12,540				11,436
Deferred income taxes			(3,093	)			(4,358	)
Stock-based compensation expense			2,777				160
Changes in assets and liabilities, net of acquisitions and dispositions:
Restricted cash			(4,526	)			987
Accounts receivable, net			(15,454	)			(11,043	)
Other assets			165				456
Accounts payable			(3,078	)			(3,939	)
Income taxes			5,556				8,649
Accrued personnel costs			(5,624	)			7,370
Other liabilities			894				1,764
Net cash provided by continuing operations			14,789				33,018
Operating cash flows provided by discontinued operations			1,397				1,795
Net cash provided by operating activities			16,186				34,813
Cash flows from investing activities:
Business acquisitions, net of cash acquired and contingent consideration earned			(20,578	)			(11,014	)
Acquisition of other intangible assets			(2,416	)			—
Proceeds from sales of divested operations and client lists			19				29
Proceeds from sales of discontinued operations			7,303				2,000
Proceeds from life insurance benefit			560				—
Additions to property and equipment, net			(4,824	)			(4,739	)
Payments received on notes receivable			1,528				1,320
Net cash used in investing activities			(18,408	)			(12,404	)
Cash flows from financing activities:
Proceeds from convertible notes			100,000				—
Proceeds from bank debt			142,900				203,100
Proceeds from notes payable			—				196
Payment of bank debt			(175,100	)			(213,250	)
Payment of notes payable and capitalized leases			(503	)			(624	)
Debt issuance costs			(3,561	)			(40	)
Payment for acquisition of treasury stock			(62,920	)			(13,736	)
Proceeds from exercise of stock options			5,265				2,169
Excess tax benefit from exercise of stock options			2,709				—
Net cash provided by (used in) financing activities			8,790				(22,185	)
Net increase in cash and cash equivalents			6,568				224
Cash and cash equivalents at beginning of year			8,909				5,291
Cash and cash equivalents at end of period		$	15,477			$	5,515

See the accompanying notes to the consolidated financial statements.

CBIZ, INC. AND SUBSIDIARIES

1.		Summary of Significant Accounting Policies
		The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements.
		In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) considered necessary to present fairly the financial position of CBIZ, Inc. and its consolidated subsidiaries (CBIZ) as of September 30, 2006, and December 31, 2005, the results of their operations for the three and nine months ended September 30, 2006 and 2005, and cash flows for the nine months ended September 30, 2006 and 2005. Due to seasonality, potential changes in economic conditions, interest rate fluctuations and other factors, the results of operations for such interim periods are not necessarily indicative of the results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2005, with subsequent reclassifications made thereto as filed on our Current Report on Form 8-K dated May 22, 2006 (collectively referred to as “Annual Report”).
		Organization
		CBIZ is a diversified services company which, acting through its subsidiaries, provides professional business services primarily to small and medium-sized businesses, as well as individuals, governmental entities, and not-for-profit enterprises throughout the United States and Toronto, Canada. During the first quarter of 2006, CBIZ realigned its operations into four client-centric practice groups: Financial Services, Employee Service, Medical Management Professionals, and National Practices. A further description of changes made during the first quarter of 2006, as well as products and services offered by each of the practice groups, is provided in Note 9.
		Principles of Consolidation
		The accompanying consolidated financial statements reflect the operations of CBIZ and all of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated financial statements do not reflect the operations or accounts of variable interest entities as the impact is not material to the financial condition, results of operations or cash flows of CBIZ. See further discussion under “Variable Interest Entities” below.
		Use of Estimates
		The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Management’s estimates and assumptions include, but are not limited to, estimates of collectibility of accounts receivable and unbilled revenue, the realizability of goodwill and other intangible assets, accrued liabilities (such as incentive compensation), income taxes and other factors. Management’s estimates and assumptions are derived from and are continually evaluated based upon available information, judgment and experience. Actual results could differ from those estimates.
		Reclassifications
		Certain amounts in the 2005 consolidated financial statements have been reclassified to conform to the current year presentation. Reclassifications include: interest income earned by our payroll unit previously reported as “other income” which is now reported as revenue; and certain expenses reimbursable to CBIZ by its clients previously netted against revenue which are now reported as operating expenses. These reclassifications did not impact CBIZ’s reported income from continuing operations.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

		Prior period financial statements and disclosures have been reclassified to reflect discontinued operations. In addition, for the nine-month period ended September 30, 2006 CBIZ has separately disclosed the operating and investing portions of the cash flows attributable to its discontinued operations, which were combined and reported as a single amount in the comparable period of 2005. Prior periods have been revised to conform to the current year presentation. There were no financing activities attributable to the operations of discontinued operations during the nine months ended September 30, 2006 or 2005.
		Revenue Recognition and Valuation of Unbilled Revenues
		Revenue is recognized only when all of the following are present: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our fee to the client is fixed or determinable, and collectibility is reasonably assured. These criteria are in accordance with GAAP and SEC Staff Accounting Bulletin No. 104 (SAB 104). CBIZ offers a vast array of products and business services to its clients. Those services are delivered through four practice groups. A description of revenue recognition, as it relates to those groups, is provided below.
		Financial Services — Revenue consists primarily of fees for accounting services, preparation of tax returns, consulting services including Sarbanes-Oxley consulting and compliance projects, and valuation services including fairness opinions, business plans, litigation support, purchase price allocations and derivative valuations. Revenues are recorded in the period in which services are provided and meet revenue recognition criteria in accordance with SAB 104. CBIZ bills clients based upon a predetermined agreed-upon fixed fee or based on actual hours incurred on client projects at expected net realizable rates per hour, plus agreed-upon out-of-pocket expenses. The cumulative impact on any subsequent revision in the estimated realizable value of unbilled fees for a particular client project is reflected in the period in which the change becomes known.
		Through one of its Financial Services units, CBIZ provides flexible benefits administration services to clients, grants access of its proprietary software to third parties, and provides hosting services to these parties. Revenue associated with set up and license fees related to our flexible benefits services are deferred and recognized pro rata over the life of the contract.
		Employee Services — Revenue consists primarily of brokerage and agency commissions, payroll service fees, interest on client funds, and fee income for administering health and retirement plans. A description of the revenue recognition, based on the service provided, insurance product sold, and billing arrangement, is described below.

	•		Commissions relating to brokerage and agency activities whereby CBIZ has primary responsibility for the collection of premiums from insured’s (agency or indirect billing) are recognized as of the latter of the effective date of the insurance policy or the date billed to the customer; commissions to be received directly from insurance companies (direct billing) are recognized when the policy becomes effective; and life insurance commissions are recognized when the policy becomes effective. Commission revenue is reported net of sub-broker commissions, and reserves for estimated policy cancellations and terminations. The cancellation and termination reserve is based upon estimates and assumptions using historical cancellation and termination experience and other current factors to project future experience. CBIZ periodically reviews the adequacy of the reserve and makes adjustments as necessary. The use of different estimates or assumptions could produce different results.
	•		Commissions which are based upon certain performance targets are recognized at the earlier of written notification that the target has been achieved, or cash collection.
	•		Fee income is recognized in the period in which services are provided, and may be based on actual hours incurred on an hourly fee basis, fixed fee arrangements, or asset-based fees.
	•		Payroll— Revenue is recognized when the actual payroll processing occurs.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

		Medical Management Professionals— Fees for services are primarily based on a percentage of net collections on our clients’ patient accounts receivable. As such, revenue is determinable, earned, and recognized, when payments are received by our clients on their patient accounts.
		National Practices— The business units that comprise this practice group offer a variety of services. A description of revenue recognition associated with the primary services is provided below.

	•		Technology Consulting — Revenue associated with hardware and software sales is recognized upon delivery and acceptance of the product. Revenue associated with installation is recognized as services are performed, and revenue associated with service agreements is recognized on a straight-line basis over the period of the agreement. Consulting revenue is recognized on an hourly or per diem fee basis as services are performed.
	•		Health Care Consulting— CBIZ bills clients based upon a predetermined agreed-upon fixed fee or based on actual hours incurred on client projects at expected net realizable rates per hour, plus agreed-upon out-of-pocket expenses, or as a percentage of savings after contingencies have been resolved and verified by a third party.
	•		Mergers & Acquisitions and Capital Advisory — Revenue associated with non-refundable retainers is recognized on a pro rata basis over the life of the engagement. Revenue associated with success fee transactions is recognized when the transaction is completed.

		Certain of our client arrangements encompass multiple deliverables. CBIZ accounts for these arrangements in accordance with Emerging Issues Task Force No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (EITF 00-21). If the deliverables meet the criteria in EITF 00-21, the deliverables are divided into separate units of accounting and revenue is allocated to the deliverables based on their relative fair values. Revenue for each unit is recognized separately in accordance with CBIZ’s revenue recognition policy for each unit. For those arrangements where the deliverables do not qualify as a separate unit of accounting, revenue from all deliverables are treated as one accounting unit and evaluated for appropriate accounting treatment based upon the underlying facts and circumstances.
		Operating Expenses
		Operating expenses represent costs of service and other costs incurred to operate our business units, and are primarily comprised of personnel and occupancy related expenses. Personnel costs include base compensation, commissions, payroll taxes, income or losses earned on assets of the deferred compensation plan, and benefits, which are recognized as expense as they are incurred. Personnel costs also include stock-based and incentive compensation costs, which are estimated and accrued on a monthly basis. The ultimate determination of incentive compensation is made after year-end results are finalized, and therefore estimates are subject to change. Total personnel costs were $94.7 million and $88.2 million for the three months ended and $296.2 million and $269.6 million for the nine months ended September 30, 2006 and 2005, respectively.
		The largest components of occupancy costs are rent expense and utilities. Base rent expense is recognized over respective lease terms, while utilities and common area maintenance charges are recognized as incurred. Total occupancy costs were $9.5 million and $8.9 million for the three months ended and $28.4 million and $26.4 million for the nine months ended September 30, 2006 and 2005, respectively.
		Accounts Receivable and Allowance for Doubtful Accounts
		CBIZ carries accounts receivable at their face amount less allowances for doubtful accounts, and carries unbilled revenues at estimated net realizable value. Assessing the collectibility of receivables (billed and unbilled) requires management judgment. When evaluating the adequacy of the allowance for doubtful accounts and the overall collectibility of receivables, CBIZ analyzes historical bad debts, client credit-worthiness, the age of accounts receivable and current economic trends and conditions.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

		Funds Held for Clients and Client Fund Obligations
		Payroll services provided by CBIZ include the preparation of payroll checks, federal, state, and local payroll tax returns, and flexible spending account administration. In relation to these services, CBIZ collects funds from its clients’ accounts in advance of paying these client obligations. Funds that are collected before they are due are segregated and reported separately as “funds held for clients” in the consolidated balance sheets, and may include cash, cash equivalents and short-term investments. Other than certain federal and state regulations pertaining to flexible spending account administration, there are no regulatory or other contractual restrictions placed on these funds. Funds held for clients and the related client fund obligations are included in the consolidated balance sheets as current assets and current liabilities, respectively. The amount of collected but not yet remitted funds may vary significantly during the year.
		One of the business units classified as a discontinued operation collects funds from clients’ accounts in advance of paying the related client obligations. These funds and related liabilities are reported as “assets of discontinued operations” and “liabilities of discontinued operations,” respectively, in the accompanying consolidated balance sheets.
		Stock-Based Awards
		On January 1, 2006, CBIZ adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which requires the measurement and recognition of compensation cost for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123R also amends FASB Statement No. 95, “Statement of Cash Flows,” to require that excess tax benefits, as defined, realized from the exercise of stock options be reported as a financing cash inflow rather than as a reduction of taxes paid in cash flows from operations. In March 2005, the Securities and Exchanges Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107, which summarizes the SEC’s views regarding the interaction between SFAS 123R and certain SEC rules and regulations, as well as the SEC’s views regarding the valuation of share-based payment arrangements. CBIZ applied the provisions of SAB 107 in its adoption of SFAS 123R.
		Prior to the adoption of SFAS 123R, CBIZ accounted for its stock-based compensation related to stock options under the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and the disclosure alternative prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Accordingly, CBIZ presented pro forma information for the periods prior to the adoption of SFAS No. 123R and no compensation cost was recognized for stock options granted prior to January 1, 2006.
		CBIZ adopted SFAS 123R using the modified prospective transition method. Accordingly, CBIZ has recorded stock compensation expense for all awards granted after the adoption date (January 1, 2006) and for the unvested portion of previously granted awards outstanding with unrecognized expense as of the adoption date. Expense recognized for the unvested portion of awards granted prior to January 1, 2006, are based on the estimated grant date fair value as determined under the original provisions of SFAS No. 123. CBIZ’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.
		CBIZ recognizes stock-based compensation costs for only those shares expected to vest, on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of up to five years. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount of expense recognized. Forfeiture estimates will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In CBIZ’s pro forma information required under SFAS 123 for periods prior to adoption of SFAS 123R, CBIZ accounted for forfeitures as they occurred. Stock-based compensation expense is recorded in operating expenses or corporate general and administrative expenses depending on where the respective individual’s compensation is recorded.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

CBIZ utilizes the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. The fair value of stock options granted during 2006 and 2005 were determined using the following weighted average assumptions:

		2006				2005
Weighted average grant-date fair value of options granted		$	3.59			$	1.65
Expected volatility (1)			48.23	%			49.71	%
Expected option life (years) (2)			4.25				5.00
Risk-free interest rate (3)			4.85	%			3.90	%
Expected dividend yield (4)			0.00	%			0.00	%

(1)		The expected volatility assumption was determined based upon the historical volatility of CBIZ’s stock price, using daily price intervals. CBIZ believes that the future volatility of its stock price will not differ significantly from its history.
(2)		The expected option life assumption was determined by considering the vesting and contractual terms of the respective options.
(3)		The risk-free interest rate assumption was based upon zero-coupon U.S. Treasury bonds with a term approximating the expected life of the respective options.
(4)		The expected dividend yield assumption was determined in view of CBIZ’s historical and estimated dividend payouts. CBIZ does not expect to change its dividend payout policy in the foreseeable future.

CBIZ has granted various stock-based awards under its 1996 Employee Stock Option Plan and 2002 Stock Incentive Plan, which are described in further detail in our 2005 Annual Report. The terms and vesting schedules for stock-based awards vary by type and date of grant. Compensation cost recognized in the consolidated statements of operations for these awards during the three and nine months ended September 30, 2006 and 2005 was as follows (in thousands):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2006				2005				2006				2005
Stock options		$	421			$	—			$	1,113			$	—
Restricted stock awards			143				62				359				160
Restricted performance awards			559				—				1,305				—
Total stock-based compensation expense		$	1,123			$	62			$	2,777			$	160

		At September 30, 2006, CBIZ had unrecognized compensation costs for non-vested stock awards as follows: $3.4 million for stock options; $1.5 million for restricted stock awards; and $2.8 million for restricted performance awards, to be recognized over weighted average periods of approximately 3.0 years, 3.1 years and 1.3 years, respectively.
		Stock options granted prior to 2006 were generally subject to a 20% incremental vesting schedule over a five-year period commencing from the date of grant. Stock options granted in 2006 are subject to a 25% incremental vesting schedule over a four-year period commencing from the date of grant. Stock options expire six years from the date of grant, and are awarded with an exercise price equal to the market value of CBIZ’s common stock on the date of grant.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

		Restricted stock awards are independent of option grants, and are granted at no cost to the recipients. Recipients of restricted stock awards are entitled to the same dividend and voting rights as holders of other CBIZ common stock. Shares granted under the plan cannot be sold, pledged, transferred or assigned during the vesting period (generally two to five years from the grant date), and awards are subject to forfeiture if employment terminates prior to the release of restrictions. Restricted stock awards are considered to be issued and outstanding shares of common stock from the date of grant. The market value of shares awarded is recorded against additional paid-in capital, and is expensed ratably over the period which the restrictions lapse.
		Restricted performance awards were granted in the first quarter of 2006, and will only vest and become exercisable provided that CBIZ meets a pre-determined earnings per share target for the year ending December 31, 2007. The market value of shares awarded is being expensed ratably over the performance period. If it becomes improbable that the earnings per share target will be achieved, previously recognized expense will be reversed.
		Stock award activity during the nine months ended September 30, 2006 was as follows (in thousands, except per share data):

		Stock								Restricted Stock								Restricted
		Options								Awards								Performance Awards
						Weighted								Weighted								Weighted
						Average								Average								Average
		Number				Exercise				Number				Exercise				Number				Exercise
		of				Price Per				of				Price Per				of				Price Per
		Options				Share				Shares				Share				Shares				Share
Outstanding at beginning of year			6,803			$	2.72				236			$	3.91				—			$	—
Granted			661			$	8.07				160			$	7.40				627			$	6.54
Exercised			(2,348	)		$	2.24				—			$	—				—			$	—
Vested and released from restriction			—				—				(21	)		$	4.35				—			$	—
Expired or canceled			(148	)		$	4.72				—			$	—				—			$	—
Outstanding at September 30, 2006			4,968			$	3.60				375			$	5.37				627			$	6.54
Exercisable at September 30, 2006			3,143			$	2.66

The table below provides information about stock options outstanding and exercisable at September 30, 2006 (in thousands, except per share data):

		Options Outstanding																Options Exercisable
						Weighted				Weighted												Weighted
						Average				Average												Average
Range of		Number				Remaining				Exercise				Aggregate				Number				Exercise				Aggregate
Exercise		of				Contractual				Price Per				Intrinsic				of				Price Per				Intrinsic
Price		Options				Life (Years)				Share				Value				Options				Share				Value
$5.00 - $8.08			661				5.5			$	8.07								—			$	—
$3.00 - $4.99			2,590				2.3			$	3.62								1,544			$	3.58
$1.52 - $2.99			1,717				1.0			$	1.85								1,599			$	1.77
Total			4,968				2.3			$	3.60			$	18,900				3,143			$	2.66			$	14,587

The aggregate intrinsic value in the preceding table represents the difference between CBIZ’s closing stock price and the exercise price of each in-the-money option on the last trading day (September 29, 2006) of the period presented. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2006 was $10,870, calculated as the difference between CBIZ’s stock price on the exercise date and the exercise price of each option exercised.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

CBIZ had approximately 4.0 million shares available for future grant under the stock option plans at September 30, 2006.

The following table illustrates the effect on net income and earnings per share if CBIZ had applied the fair value recognition provisions of SFAS 123 during the three and nine months ended September 30, 2005 (in thousands, except per share data):

		THREE MONTHS ENDED				NINE MONTHS ENDED
		SEPTEMBER 30, 2005				SEPTEMBER 30, 2005
Net income as reported		$	2,035			$	13,498
Add: Stock-based employee compensation expense included in net income			62				160
Fair value of stock-based compensation, net of tax (1)			(289	)			(959	)
Pro forma net income		$	1,808			$	12,699
Earnings per share:
Basic – as reported		$	0.03			$	0.18
Basic – pro forma			0.02			$	0.17
Diluted – as reported		$	0.03			$	0.18
Diluted – pro forma		$	0.02			$	0.16

Variable Interest Entities

In accordance with the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46), as amended, CBIZ has determined that its relationship with certain Certified Public Accounting (CPA) firms with whom we maintain administrative service agreements (ASAs) qualify as variable interest entities. The accompanying financial statements do not reflect the consolidation of the variable interest entities, as the impact is not material to the financial condition, results of operations or cash flows of CBIZ.

The CPA firms with which CBIZ maintains administrative service agreements operate as limited liability companies, limited liability partnerships or professional corporations. The firms are separate legal entities with separate governing bodies and officers. CBIZ has no ownership interest in any of these CPA firms, and neither the existence of the ASAs nor the providing of services thereunder is intended to constitute control of the CPA firms by CBIZ. CBIZ and the CPA firms maintain their own respective liability and risk of loss in connection with performance of each of its respective services, and CBIZ does not believe that its arrangements with these CPA firms result in additional risk of loss.

Fees earned by CBIZ under the ASAs are recorded as revenue (at net realizable value) in the consolidated statements of operations. In the event that accounts receivable and unbilled work in process become uncollectible by the CPA firms, the service fee due to CBIZ is reduced on a pro-rata basis. Although the administrative service agreements do not constitute control, CBIZ is one of the beneficiaries of the agreements and may bear certain economic risks.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

New Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting for Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 requires that retrospective application of a change in accounting principle be limited to the direct effects of the change; indirect effects of a change in accounting principle should be recognized in the
period of the accounting change. CBIZ adopted the provisions of SFAS No. 154 on January 1, 2006; adoption did not have an impact on the financial position, results of operations or cash flows of CBIZ.

In October 2005, the FASB issued FSP No. FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period”. FSP No. FAS 13-1 clarifies that there is no distinction between the right to use a leased asset during the construction period and after the construction period, and therefore rental costs associated with ground or building operating leases that are incurred during a construction period shall be recognized as rental expense. CBIZ adopted the provisions of FSP No. FAS 13-1 on January 1, 2006 . Adoption did not have a material impact on the financial position, results of operations or cash flows of CBIZ.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income tax positions and requires applying a “more likely than not” threshold to the recognition and derecognition of tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. CBIZ is currently evaluating the impact of adoption of FIN 48 on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, rather it applies under existing accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. CBIZ is currently evaluating the impact of adoption of SFAS No. 157 on the consolidated financial statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary “correcting” adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108 is effective for fiscal years ending on or after November 15, 2006. CBIZ is currently evaluating the impact of adoption of SAB 108 on the consolidated financial statements.

2.

Accounts Receivable, Net

Accounts receivable balances at September 30, 2006 and December 31, 2005 were as follows (in thousands):

		2006				2005
Trade accounts receivable		$	88,793			$	83,122
Unbilled revenue			30,031				19,264
Other accounts receivable			974				1,717
Total accounts receivable			119,798				104,103
Allowance for doubtful accounts			(5,811	)			(5,713	)
Accounts receivable, net		$	113,987			$	98,390

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

3.

Goodwill and Other Intangible Assets, Net

The components of goodwill and other intangible assets, net at September 30, 2006 and December 31, 2005 were as follows (in thousands):

		2006				2005
Goodwill		$	172,324			$	167,829
Intangibles:
Client lists			36,816				23,498
Intangible assets — other			7,541				1,493
Total intangibles			44,357				24,991
Total goodwill and other intangibles assets			216,681				192,820
Accumulated amortization			(9,952	)			(8,358	)
Goodwill and other intangible assets, net		$	206,729			$	184,462

Client lists are amortized over periods not exceeding ten years. Other intangibles, which consist primarily of non-compete agreements and trade-names, are amortized over periods ranging from two to ten years. Amortization expense for client lists and other intangible assets was approximately $1.2 million and $0.7 million for the three months ended and $3.4 million and $2.0 million for the nine months ended September 30, 2006 and 2005, respectively.

During the first quarter of 2006, CBIZ acquired the trade name of a nationally recognized practice which complements our Financial Services practice group. The trade name is recorded as “intangible assets — other” and is being amortized over ten years. The use of the trade name is currently licensed to Mayer Hoffman McCann P.C. through January 1, 2016.

4.

Borrowing Arrangements

Convertible Senior Subordinated Notes

On May 30, 2006, CBIZ sold and issued $100.0 million in convertible senior subordinated notes to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the “Notes”). The Notes are direct, unsecured, senior subordinated obligations of CBIZ and rank (i) junior in right of payment to all of CBIZ’s existing and future senior indebtedness, (ii) equal in right of payment with any other future senior subordinated indebtedness, and (iii) senior in right of payment to all subordinated indebtedness. In connection with the issuance and sale of the Notes, CBIZ entered into an indenture (the “Indenture”) dated as of May 30, 2006, with U.S. Bank National Association as trustee.

The Notes bear interest at a rate of 3.125% per annum, payable in cash semi-annually in arrears on each June 1 and December 1 beginning December 1, 2006. During the period commencing on June 6, 2011, and each six-month period from June 1 to November 30 or from December 1 to May 31 thereafter, CBIZ will pay contingent interest during the applicable interest period if the average “trading price” (as defined in the Indenture ) of a Note for the five consecutive trading days ending on the third trading day immediately preceding the first day of the relevant six-month period equals or exceeds 120% of the principal amount of the Notes. The contingent interest will equal 0.25% per annum calculated on the average trading price of a Note for the relevant five trading day period.

CBIZ received net proceeds from the sale of the Notes of approximately $97.0 million, after deducting discounts and estimated offering expenses of approximately $3.0 million. Net proceeds from the sale were used to repurchase 6.6 million shares of CBIZ common stock at a cost of approximately $52.5 million (concurrent with closing the Notes), and to repay the outstanding balance under the $100.0 million unsecured credit facility (described in further detail below). Approximately $3.2 million in debt issuance costs related to the Notes, have been recorded as other assets in the accompanying consolidated balance sheets. Debt issuance costs are being amortized over a period of five years.

The terms of the Notes are governed by the Indenture. The Notes mature on June 1, 2026 unless earlier redeemed, repurchased or converted. CBIZ may redeem the Notes for cash, either in whole or in part, anytime after June 6, 2011 at a redemption price equal to 100% of the principal amount of the Notes to be

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

redeemed plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to but not including the date of redemption. In addition, holders of the Notes will have the right to require CBIZ to repurchase for cash all or a portion of their Notes on June 1, 2011, June 1, 2016 and June 1, 2021, at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to but not including, the date of repurchase. The Notes are convertible into CBIZ common stock at a rate equal to 94.1035 shares per $1,000 principal amount of the Notes (equal to an initial conversion price of approximately $10.63 per share), subject to adjustment as described in the Indenture. Upon conversion, CBIZ will deliver for each $1,000 principal amount of Notes, an amount consisting of cash equal to the lesser of $1,000 and the conversion value (as defined in the Indenture) and, to the extent that the conversion value exceeds $1,000, at CBIZ’s election, cash or shares of CBIZ common stock in respect of the remainder.

If CBIZ undergoes a “fundamental change” (as defined in the Indenture), holders of the Notes will have the right, subject to certain conditions, to require CBIZ to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any.

The carrying amount of convertible senior subordinated notes approximates fair value.

Bank Debt

Bank debt balances at September 30, 2006 and December 31, 2005 were as follows (in thousands, except percentages):

		2006				2005
Revolving credit facility		$	—			$	32,200
Weighted average rates (1)			6.26	%			5.39	%
Range of effective rates (1)			5.41% - 8.25	%			3.94% -7.25	%

CBIZ maintains a $100.0 million unsecured credit facility (facility) with Bank of America as agent bank for a group of five participating banks. The facility has a five year term expiring February 2011, and an option to increase the commitment to $150.0 million. The facility was amended in May 2006, principally to permit CBIZ to issue up to $100.0 million of convertible senior subordinated notes as described above. The amendment did not materially impact any other terms or conditions of the credit facility. Management believes that the carrying amount of bank debt approximates its fair value, and CBIZ had approximately $88.7 million of available funds under the facility at September 30, 2006.

The credit facility provides CBIZ operating flexibility and funding to support seasonal working capital needs and other strategic initiatives such as acquisitions and share repurchases. Under the facility, loans are charged an interest rate consisting of a base rate or Eurodollar rate plus an applicable margin. Additionally, a commitment fee of 22.5 to 47.5 basis points is charged on the unused portion of the facility.

The facility is subject to certain financial covenants that may limit CBIZ’s ability to borrow up to the total commitment amount. Covenants require CBIZ to meet certain requirements with respect to (i) minimum net worth; (ii) maximum leverage ratio; and (iii) a minimum fixed charge coverage ratio. The facility also places restrictions on CBIZ’s ability to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets, or to merge or consolidate with an unaffiliated entity. According to the terms of the facility, CBIZ is not permitted to declare or make any dividend payments, other than dividend payments made by one of its wholly owned subsidiaries to the parent company. The facility contains a provision that, in the event of a defined change in control, the facility may be terminated.

There are no limitations on CBIZ’s ability to acquire businesses or repurchase CBIZ common stock provided that the leverage ratio (total debt compared to EBITDA as defined by the facility) is less than 2.0.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

5.

Commitments and Contingencies

Acquisitions

The purchase price that CBIZ pays for businesses and client lists generally consist of two components: an up-front non-contingent portion, and a portion which is contingent upon the acquired businesses or client lists actual future performance. Non-contingent purchase price is recorded at the date of acquisition and contingent purchase price is recorded as it is earned. Acquisitions are further discussed in Note 7.

Letters of Credit and Guarantees

CBIZ provides letters of credit to landlords (lessors) of its leased premises in lieu of cash security deposits, which totaled $2.0 million as of September 30, 2006 and December 31, 2005. In addition, CBIZ provides bonds to various state agencies to meet certain licensing requirements. The amount of bonds outstanding at September 30, 2006 and December 31, 2005 was $1.6 million and $1.2 million, respectively.

CBIZ acted as guarantor on various letters of credit for a CPA firm with which it has an affiliation, which totaled $1.7 million and $2.4 million as of September 30, 2006 and December 31, 2005, respectively. In accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, as amended, CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these guarantees, which is recorded as other current liabilities in the accompanying consolidated balance sheets. Management does not expect any material changes to result from these instruments as performance under the guarantees is not expected to be required.

Indemnifications

CBIZ has various agreements under which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations, warranties, covenants or agreements, related to matters such as title to assets sold and certain tax matters. Payment by CBIZ under such indemnification clauses are generally conditioned upon the other party making a claim. Such claims are typically subject to challenge by CBIZ and to dispute resolution procedures specified in the particular contract. Further, CBIZ’s obligations under these agreements may be limited in terms of time and/or amount and, in some instances, CBIZ may have recourse against third parties for certain payments made by CBIZ. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of CBIZ’s obligations and the unique facts of each particular agreement. Historically, CBIZ has not made any payments under these agreements that have been material individually or in the aggregate. As of September 30, 2006, CBIZ was not aware of any obligations arising under indemnification agreements that would require material payments.

Employment Agreements

CBIZ maintains severance and employment agreements with certain of its executive officers, whereby such officers may be entitled to payment in the event of termination of their employment. CBIZ also has arrangements with certain non-executive employees which may include severance and other employment provisions. CBIZ accrues for amounts payable under these contracts and arrangements as triggering events occur and obligations become known. During the three and nine months ended September 30, 2006 and 2005, payments regarding such contracts and arrangements were not material.

Legal Proceedings

CBIZ is from time to time subject to claims and suits arising in the ordinary course of business. Although the ultimate disposition of such proceedings is not presently determinable, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the financial condition, results of operations or cash flows of CBIZ.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

6.

Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2006 and 2005 (in thousands, except per share data).

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2006				2005				2006				2005
Numerator:
Net income		$	4,123			$	2,035			$	21,367			$	13,498
Denominator:
Basic
Weighted average common shares			68,314				73,793				72,092				74,895
Diluted
Options (1)			1,792				2,132				2,016				1,948
Restricted stock awards			122				60				105				40
Contingent shares (2)			193				3				193				3
Total diluted weighted average common shares (3)			70,421				75,988				74,406				76,886
Basic net income per share		$	0.06			$	0.03			$	0.30			$	0.18
Diluted net income per share		$	0.06			$	0.03			$	0.29			$	0.18

7.

Acquisitions

During the nine months ended September 30, 2006, CBIZ acquired a medical billing services company based in Flint, Michigan which was merged into the Medical Management Professionals practice group. Additionally, CBIZ acquired a property and casualty insurance broker located in San Jose, California, an insurance business offering property and casualty, commercial bonds and employee benefits with offices in St. Joseph and Kansas City, Missouri, and two client lists which complement the Employee Services practice group. Aggregate consideration for these acquisitions consisted of approximately $13.5 million in cash (net of cash acquired) and 232,400 shares of restricted common stock (valued at approximately $1.5 million) paid at closing, and up to an additional $9.6 million (payable in cash and stock) which is contingent upon the future financial performance of the acquired businesses and client lists. In addition, CBIZ paid approximately $7.1 million in cash and issued approximately 159,000 shares of common stock during the nine months ended September 30, 2006, as contingent proceeds and towards notes payable for previous acquisitions.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

During the nine months ended September 30, 2005, CBIZ acquired three business operations consisting of: a registered investment firm in Cleveland, Ohio which complements the Employee Services practice; and an accounting and consulting practice in San Diego, California and a valuation business in Milwaukee, Wisconsin which are reported as part of the Financial Services practice group. In addition, CBIZ acquired the client lists of an accounting and consulting practice in Philadelphia, Pennsylvania and of a benefits and insurance practice in Charlotte, North Carolina, which are reported as part of the Financial Services and Employee Services practice groups, respectively. Aggregate consideration for the acquisitions consisted of approximately $6.6 million cash, $0.4 million in notes and approximately 45,000 shares of restricted common stock (estimated stock value of $0.2 million at acquisition) paid at closing, and up to an additional $13.2 million (payable in cash and stock) which is contingent on the future financial performance of the acquired businesses and client lists. In addition, CBIZ paid approximately $4.4 million in cash and issued approximately 23,900 shares of common stock during the nine months ended September 30, 2005, as contingent proceeds and towards notes payable for previous acquisitions.

The operating results of these businesses have been included in the accompanying consolidated financial statements since the dates of acquisition. Client lists and non-compete agreements were recorded at fair value at the time of acquisition. The excess of purchase price over the fair value of net assets acquired, (including client lists and non-compete agreements) was allocated to goodwill. Additions to goodwill, client lists and other intangible assets resulting from acquisitions and contingent consideration earned during the nine months ended September 30, 2006 and 2005 were as follows (in thousands):

		2006				2005
Goodwill		$	4,495			$	3,198
Client lists		$	15,084			$	5,605
Other intangible assets		$	412			$	597

8. Discontinued Operations and Divestitures

From time to time, CBIZ will divest (through sale or closure) business operations that are underperforming, located in secondary markets, or do not provide the level of synergistic cross-serving opportunities with other CBIZ businesses that is desired. Divestitures are classified as discontinued operations provided they meet the criteria as provided in SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and EITF No. 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets in Determining Whether to Report Discontinued Operations”.

During the second quarter of 2006, CBIZ sold an operation from the Financial Services practice group which was classified as available for sale at March 31, 2006. During the first quarter of 2006, the unit was written down to its fair value, resulting in a pre-tax loss of approximately $0.2 million. CBIZ also sold certain property tax operations from a business unit in the National Practices group during the second quarter of 2006. The business was classified as a discontinued operation in 2005, and the sale resulted in a pre-tax loss of approximately $0.5 million. These losses are included in “gain on disposal of discontinued operations, net of tax”, in the accompanying consolidated statements of operations. Aggregate proceeds from these sales consisted of approximately $1.7 million cash and $0.2 million in notes.

During 2005, CBIZ closed an operation from the Financial Services practice group, sold an operation from the Employee Services practice group, and committed to the divestiture of a business unit in the National Practices group. These operations qualified for treatment as discontinued operations and are classified as such in the accompanying consolidated financial statements. The Employee Services operation was sold during the third quarter of 2005, for proceeds that consisted of: $2.0 million cash received at closing; $4.1 million due from others which is subject to adjustment based upon actual cash collected on accounts receivable that were sold; and contingent proceeds which are determined based upon the divested

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

operation’s actual future performance. Contingent proceeds are recorded as they are earned, and are included in “gain on disposal of discontinued operations, net of tax” in the accompanying consolidated statements of operations. The sale of the Employee Services operation resulted in a pre-tax gain of $1.2 million at closing, and contingent proceeds earned by CBIZ during the three and nine months ended September 30, 2006 totaled approximately $0.9 million and $2.0 million, respectively. During the second quarter of 2006 CBIZ received a payment of $5.6 million for contingent proceeds earned through March 31, 2006.

In addition to the businesses previously discussed, CBIZ sold two client lists from the Employee Services practice group during the second quarter of 2006. The client lists were sold for notes totaling approximately $0.1 million. Gain on the sale of the client lists was deferred, and the deferred gain is recorded as “other non-current liabilities” in the accompanying consolidated balance sheets. Sale of the client lists did not qualify for treatment as discontinued operations, and as such the gain will be recorded in continuing operations as “gain on sale of operations, net” as cash payments are received. For the three and nine months ended September 30, 2006, gain on sale of operations related to these client lists totaled $7,000 and $14,000, respectively.

CBIZ also sold a client list from the Benefits and Insurance practice group during the third quarter of 2005, which did not qualify for treatment as a discontinued business. The client list was sold for proceeds of approximately $29,000 cash, and resulted in a pretax gain of $29,000 which is reported as “gain on sale of operations, net” from continuing operations.

CBIZ may earn additional proceeds on the sale of certain client lists (sold in previous years), which are contingent upon future revenue generated by the client lists. CBIZ records these proceeds as other income when they are earned.

For those businesses that qualified for treatment as discontinued operations, the assets, liabilities and results of operations are reported separately in the accompanying consolidated financial statements. Revenue and results from operations of discontinued operations for the three and nine months ended September 30, 2006 and 2005, were as follows (in thousands):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2006				2005				2006				2005
Revenue		$	973			$	2,119			$	1,822			$	7,414
Gain (loss) from operations of discontinued operations, before income tax expense (benefit)		$	397			$	(2,498	)		$	(2,641	)		$	(7,579	)
Income tax expense (benefit)			147				(873	)			(977	)			(2,650	)
Income (loss) from operations of discontinued operations, net of tax		$	250			$	(1,625	)		$	(1,664	)		$	(4,929	)

Gain on the disposal of discontinued operations for the three and nine months ended September 30, 2006 and 2005 were as follows (in thousands):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2006(1)				2005				2006(1)				2005
Gain on disposal of discontinued operations, before income tax expense		$	877			$	1,233			$	1,309			$	1,066
Income tax expense			324				431				803				373
Gain on disposal of discontinued operations, net of tax		$	553			$	802			$	506			$	693

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

At September 30, 2006 and December 31, 2005, the assets and liabilities of businesses classified as discontinued operations consisted of the following (in thousands):

		SEPTEMBER 30,				DECEMBER 31,
		2006				2005
Assets:
Accounts receivable, net		$	80			$	2,113
Due from others			—				1,513
Funds held for clients			102				3,392
Property and equipment, net			—				498
Goodwill and other intangible assets, net			—				1,073
Other assets			23				107
Assets of discontinued operations		$	205			$	8,696
Liabilities:
Accounts payable		$	73			$	326
Accrued personnel costs			12				86
Client fund obligations			102				3,392
Other liabilities			2,699				2,117
Deferred income taxes			105				70
Liabilities of discontinued operations		$	2,991			$	5,991

9. Segment Disclosures

CBIZ’s business units have been aggregated into four practice groups: Financial Services; Employee Services; Medical Management Professionals; and National Practices. The business units have been aggregated based on the following factors: similarity of the products and services provided to clients; similarity of the regulatory environment; and similarity of economic conditions affecting long-term performance. The business units are managed along these segment lines.

During the first quarter of 2006, CBIZ realigned its operations into four client-centric practice groups, and changed the names of those practice groups to encompass the comprehensive range of services offered by each of the respective groups. Changes made to CBIZ’s practice groups during the first quarter of 2006 were as follows:

	•		Financial Services: The Financial Services practice group was formerly referred to as “Accounting, Tax and Advisory Services”. In addition, CBIZ Valuation Group was transferred from National Practices into Financial Services during the first quarter of 2006.
	•		Employee Services: The Employee Services practice group was formerly referred to as “Benefits and Insurance Services”. In addition, CBIZ Payroll Services was transferred from National Practices into Employee Services during the first quarter of 2006.
	•		Medical Management Professionals: Medical Management Professionals (CBIZ MMP) is an individual practice group. Historically, CBIZ MMP was reported and managed within National Practices.
	•		National Practices: The National Practices group is primarily comprised of business units offering technology services to clients, as well as other units whose individual size do not meet quantitative thresholds as provided by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. During the first quarter of 2006, CBIZ Valuation Group and CBIZ Payroll Services were transferred out of National Practices into Financial Services and Employee Services, respectively.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

Prior period financial statements have been reclassified to reflect these changes in segment reporting. Although financial results for the individual practice groups have changed, there was no impact to CBIZ’s consolidated financial statements as a result of these reclassifications. A detailed description of services offered by each of the practice groups are provided in the paragraphs below.

Financial Services. The Financial Services practice group offers services in the following areas: general accounting services, cash flow management; strategic planning; consulting; record-keeping; federal, state and local tax return preparation; tax planning based on financial and investment alternatives; tax structuring of business transactions such as mergers and acquisitions; quarterly and year-end payroll tax reporting; corporate, partnership and fiduciary tax planning and return preparation; financial staffing services including chief financial officer services; financial investment analysis; succession, retirement, and estate planning; profitability, operational and efficiency enhancement consulting to a number of specialized industries; litigation support services; internal audit services; Sarbanes-Oxley consulting and compliance services; and valuations of commercial, tangible, and intangible assets and financial securities.

Employee Services. The Employee Services practice group offers services in the following areas: employee benefits, brokerage, consulting, and administration, including the design, implementation and administration of qualified plans, such as 401(k) plans, profit-sharing plans, defined benefit plans, and money purchase plans; actuarial services; health and welfare benefits consulting, including group health insurance plans; dental and vision care programs; group life insurance programs; accidental death and dismemberment and disability programs; COBRA administration and voluntary insurance programs; health care and dependent care spending accounts; premium reimbursement plans; communications services to inform and educate employees about their benefit programs; executive benefits consulting on non-qualified retirement plans and business continuation plans; human capital advisory services; specialty high-risk life insurance; and wealth management services, including Registered Investment Advisory Services, Investment Policy Statements, also known as IPS, mutual fund selection based on IPS; ongoing mutual fund monitoring; and payroll processing and administration.

Medical Management Professionals. CBIZ MMP offers services to hospital-based physicians in the following areas: billing and accounts receivable management; coding and claims filing; comprehensive delinquent claims follow up and collections; compliance plans to meet government and other third party regulations; local office management; and comprehensive statistical and operational reporting; financial reporting, accounts payable, payroll, general ledger processing; design and implementation of managed care contracts with focus on negotiation strategies, pricing, cost containment and utilization tracking; review and negotiation of hospital contracts; evaluation of other strategic business partners; identification and coordination of practice manager and integration opportunities; coordination of practice expansion efforts; statement mailing operation; and turn-key billing system sales and support.

National Practices. The National Practices group offers services in the following areas: mergers and acquisitions; capital advisory services; health care consulting; government relations; and technology consulting, including strategic technology planning, project management, development, network design and implementation and software selection and implementation.

Corporate and Other. Included in Corporate and Other are operating expenses that are not directly allocated to the individual business units. These expenses are primarily comprised of stock-based and incentive compensation, and infrastructure costs (as described below).

Accounting policies of the practice groups are the same as those described in Note 1, “Summary of Significant Accounting Policies.” Upon consolidation, all intercompany accounts and transactions are eliminated; thus inter-segment revenue is not included in the measure of profit or loss for the practice groups. Performance of the practice groups is evaluated on operating income excluding the costs of infrastructure functions (such as information systems, finance and accounting, human resources, legal and marketing), which are reported as operating expenses in the “Corporate and Other” segment.

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

Segment information for the three and nine-month periods ended September 30, 2006 and 2005 was as follows (in thousands):

		THREE MONTHS ENDED SEPTEMBER 30, 2006
		Financial				Employee								National				Corporate
		Services				Services				CBIZ MMP				Practices				and Other				Total
Revenue		$	60,964			$	40,101			$	29,746			$	12,571			$	—			$	143,382
Operating expenses			55,801				33,176				24,255				11,219				3,784				128,235
Gross margin			5,163				6,925				5,491				1,352				(3,784	)			15,147
Corporate general & admin			—				—				—				—				5,568				5,568
Depreciation & amortization			1,023				927				776				64				1,510				4,300
Operating income (loss)			4,140				5,998				4,715				1,288				(10,862	)			5,279
Other income (expense):
Interest expense			(21	)			(1	)			—				—				(822	)			(844	)
Gain on sale of ops, net			—				—				—				—				7				7
Other income, net			52				486				32				4				421				995
Total other income (expense)			31				485				32				4				(394	)			158
Income (loss) from continuing operations before income tax expense		$	4,171			$	6,483			$	4,747			$	1,292			$	(11,256	)		$	5,437

		THREE MONTHS ENDED SEPTEMBER 30, 2005
		Financial				Employee								National				Corporate
		Services				Services				CBIZ MMP				Practices				and Other				Total
Revenue		$	59,778			$	38,516			$	25,189			$	11,862			$	—			$	135,345
Operating expenses			53,755				30,450				20,051				11,205				5,072				120,533
Gross margin			6,023				8,066				5,138				657				(5,072	)			14,812
Corporate general & admin			—				—				—				—				6,364				6,364
Depreciation & amortization			895				797				699				60				1,308				3,759
Operating income (loss)			5,128				7,269				4,439				597				(12,744	)			4,689
Other income (expense):
Interest expense			(25	)			(1	)			—				—				(761	)			(787	)
Gain on sale of ops, net			—				—				—				—				29				29
Other income, net			119				229				14				20				687				1,069
Total other income (expense)			94				228				14				20				(45	)			311
Income (loss) from continuing operations before income tax expense		$	5,222			$	7,497			$	4,453			$	617			$	(12,789	)		$	5,000

CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

		NINE MONTHS ENDED SEPTEMBER 30, 2006
		Financial				Employee								National				Corporate
		Services				Services				CBIZ MMP				Practices				and Other				Total
Revenue		$	217,510			$	123,669			$	88,014			$	38,008			$	—			$	467,201
Operating expenses			178,062				99,552				73,076				33,194				13,857				397,741
Gross margin			39,448				24,117				14,938				4,814				(13,857	)			69,460
Corporate general & admin			—				—				—				—				19,633				19,633
Depreciation & amortization			3,082				2,630				2,421				190				4,217				12,540
Operating income (loss)			36,366				21,487				12,517				4,624				(37,707	)			37,287
Other income (expense):
Interest expense			(71	)			(3	)			—				—				(2,429	)			(2,503	)
Gain on sale of ops, net			—				—				—				—				14				14
Other income, net			194				1,434				44				21				1,113				2,806
Total other income (expense)			123				1,431				44				21				(1,302	)			317
Income (loss) from continuing operations before income tax expense		$	36,489			$	22,918			$	12,561			$	4,645			$	(39,009	)		$	37,604