UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

For the fiscal year ended December 31, 2006 or

 

 

For the transition period from           to          

 

Commission file number 0-25890

 

CBIZ, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No x

 

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, and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  Large accelerated filer o  Accelerated filer x  Non-accelerated filer o

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $513.9 million as of June 30, 2006.

 

The number of outstanding shares of the registrant’s common stock is 66,669,709 as of February 28, 2007.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

CBIZ, INC.

 

ANNUAL REPORT ON FORM 10-K

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

 

Table of Contents

 

The following text is qualified in its entirety by reference to the more detailed information and consolidated financial statements (including the notes thereto) appearing elsewhere in this Annual Report on Form 10-K. Unless the context otherwise requires, references in this Annual Report to “we”, “our”, “us”, “CBIZ”, or the “Company” shall mean CBIZ, Inc., a Delaware corporation, and its wholly-owned subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year which ends on December 31.

 

Available Information

 

CBIZ’s principal executive office is located at 6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio 44131, and our telephone number is (216) 447-9000. Our website is located at http://www.cbiz.com. CBIZ makes available, free of charge on its website, through the investor information page, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after CBIZ files (or furnishes) such reports with the U.S. Securities and Exchange Commission (SEC). The public may read and copy materials we file (or furnish) with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, and may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-732-0330. In addition, the SEC maintains an internet site that contains reports, proxy and information statements and other information about us at http://www.sec.gov. Our corporate code of conduct and ethics and the charters of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee of the Board of Directors are available on the investor information page of CBIZ’s website, referenced above, and in print to any shareholder who requests them.

 

Overview and History

 

CBIZ provides professional business services that help clients manage their finances, employees and technology. These services are provided to businesses of various sizes, as well as individuals, governmental entities and not-for-profit enterprises throughout the United States and Toronto, Canada. CBIZ delivers its integrated services through the following four practice groups:

 

 

CBIZ believes that our diverse and integrated services offerings results in advantages for both the client and for CBIZ. By providing custom solutions that help our clients manage their finances, employees and technology, CBIZ enables our clients to focus their resources on their own core business and operational competencies. Additionally, working with one provider for several solutions enables our clients to utilize their resources more efficiently by eliminating the need to coordinate with multiple service providers. For example, the employee data used to process payroll can also be used by a CBIZ health and welfare insurance agent and benefits consultant to provide an appropriate benefits package to a client’s employee base. In addition, the relationship our accounting and tax advisors have with their clients allows us to identify financial planning, wealth management, and other business opportunities. The ability to combine several services and offer them through one trusted provider distinguishes CBIZ from other service providers.

 

Effective August 1, 2005, after approval by our Board of Directors and shareholders, CBIZ changed its corporate name from “Century Business Services, Inc.” to “CBIZ, Inc.”, and effective August 4, 2006, CBIZ transferred the listing of its common stock to the New York Stock Exchanges (NYSE) under the new symbol “CBZ”. Prior to August 4, 2006, CBIZ’s common stock was traded on the NASDAQ National Market under the symbol “CBIZ”. CBIZ has been operating as a professional services business since 1997, and built its professional services business through acquiring accounting, benefits, technology, valuation and other service firms throughout the United States.

 

Business Strategy

 

CBIZ’s business strategy is to grow in the business services industry through: internal organic growth, cross-serving our existing clients, and targeted acquisitions. Each of these components are critical to our long-term growth strategy, and we expect each component to contribute equally to our long-term revenue growth.

 

CBIZ has capitalized on organic growth opportunities, and believes it can continue to capitalize on opportunities, including:

 

 

Cross-serving provides CBIZ with the opportunity to deliver multiple services to existing clients, and thus contributes to revenue growth through the expansion of business to such clients. Cross-serving opportunities are identified by our employees as they provide services to their existing clients. Being a trusted advisor to our clients provides CBIZ with the opportunity to identify our clients’ needs, while the diverse and integrated services offered by CBIZ allows us to provide solutions to satisfy our clients’ needs.

 

Our acquisition strategy is to selectively acquire businesses that expand our market position and strengthen our existing service offerings. Strategic businesses that CBIZ seeks to acquire generally have a strong potential for cross-serving to CBIZ’s clients, can integrate quickly with existing CBIZ operations, have strong and energetic leadership, and are accretive to earnings.

 

CBIZ continually strives to create value for our shareholders, and believes that repurchasing shares of its common stock is a use of cash that provides such value. Accordingly, CBIZ continually evaluates share repurchase opportunities, and may repurchase shares of its common stock when capital resources are available, and such repurchases are accretive to shareholders.

 

Business Services

 

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:

 

 

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.

 

Services

 

CBIZ delivers its integrated services through four operating practice groups. A general description of services provided by practice group, is provided in the table below.

•	Accounting
•	Tax
•	Financial Advisory
•	Litigation Support
•	Valuation
•	Sarbanes-Oxley 404 Consulting
•	Internal Audit
•	Fraud Detection
•	Real Estate Advisory

•	Group Health
•	Property & Casualty
•	COBRA / Flex
•	Retirement Planning
•	Wealth Management
•	Life Insurance
•	Human Capital Management
•	Payroll Services
•	Specialty Life Insurance
•	Actuarial Services

 

•	Managed Networking and Hardware Services
•	IT Consulting
•	Project Management
•	Software Solutions
•	Mergers & Acquisitions
•	Health Care Consulting
•	Government Relations

•	Coding and Billing
•	Accounts Receivable Management
•	Full Practice Management Services

 

Practice Groups

 

During the year ended December 31, 2006, CBIZ’s operating practice groups contributed to consolidated revenue as follows: Financial Services, 46.2%; Employee Services, 25.9%; CBIZ MMP, 19.5%; and National Practices, 8.4%. Revenue by practice group for the years ended December 31, 2006, 2005 and 2004, is provided in the table below (in millions):

 

 

Certain external relationships and regulatory factors currently impacting CBIZ’s practice groups are provided in the paragraphs below. See Note 20 of the accompanying consolidated financial statements for further discussion of CBIZ’s practice groups.

 

Financial Services

 

The Financial Services practice is divided into three geographic regions, representing the East, Midwest, and West regions of the United States, and a national service division consisting of those units that provide their services nationwide. The East, Midwest and West regions are each headed by a designated regional director, each of whom report to the Senior Vice President, Financial Services. Those units within the national service division report either directly to the Senior Vice President, Financial Services, or to a designated regional director.

 

Restrictions imposed by independence requirements and state accountancy laws and regulations preclude CBIZ from rendering audit and attest services (other than internal audit services). As such, CBIZ and its subsidiaries maintain joint-referral relationships and administrative service agreements (ASAs) with independent licensed Certified Public Accounting (CPA) firms under which audit and attest services may be provided to CBIZ’s clients

by such CPA firms. These firms are owned by licensed CPAs, a vast majority of whom are also employed by CBIZ subsidiaries.

 

Under these ASAs, CBIZ provides a range of services to the CPA firms, including (but not limited to): administrative functions such as office management, bookkeeping, and accounting; preparing marketing and promotion materials; providing office space, computer equipment, and systems support; and leasing administrative and professional staff. Services are performed in exchange for a fee. Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated statements of operations and amounted to approximately $71.4 million, $69.0 million, and $46.3 million for the years ended December 31, 2006, 2005 and 2004, respectively, a majority of which is related to services rendered to privately-held clients. 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. The ASAs typically have terms ranging up to ten years, and are renewable upon agreement by both parties. In January 2006, the ASA between CBIZ and Mayer Hoffman McCann P.C., the largest firm associated with CBIZ, was extended for an additional eighteen years, with certain rights of extension and termination.

 

With respect to CPA firm clients that are required to file audited financial statements with the SEC, the SEC staff views CBIZ and the CPA firms with which we have contractual relationships as a single entity in applying independence rules established by the accountancy regulators and the SEC. Accordingly, we do not hold any financial interest in an SEC-reporting attest client of an associated CPA firm, enter into any business relationship with an SEC-reporting attest client that the CPA firm performing an audit could not maintain, or sell any non-audit services to an SEC-reporting attest client that the CPA firm performing an audit could not maintain, under the auditor independence limitations set out in the Sarbanes-Oxley Act of 2002 and other professional accountancy independence standards. Applicable professional standards generally permit the Financial Services practice group to provide additional services to privately-held companies, in addition to those services which may be provided to SEC-reporting attest clients of an associated CPA firm. CBIZ and the CPA firms with which we are associated have implemented policies and procedures designed to enable us to maintain independence and freedom from conflicts of interest in accordance with applicable standards. Given the pre-existing limits set by CBIZ on its relationships with SEC-reporting attest clients of associated CPA firms, and the limited number and size of such clients, the imposition of Sarbanes-Oxley Act independence limitations did not and is not expected to materially affect CBIZ revenues.

 

The CPA firms with which CBIZ maintains ASAs may operate as limited liability companies, limited liability partnerships or professional corporations. The firms are separate legal entities with separate governing bodies and officers. 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 their respective services. Attest services can not be performed by any individual or entity which is not licensed to do so. CBIZ can not perform audits, reviews, compilations, or other attest services, does not contract to perform them and does not provide audit, review, compilation, or other attest reports. Given this legal prohibition and course of conduct, CBIZ does not believe it is likely that we would bear the risk of litigation losses related to attest services provided by the CPA firms.

 

At December 31, 2006, CBIZ maintained administrative service agreements with four CPA firms. Most of the members and/or shareholders of the CPA firms are also CBIZ employees, and CBIZ renders services to the CPA firms as an independent contractor. The number of firms with which CBIZ maintains administrative service agreements decreased when a majority of the partners of the CPA firms with whom we previously maintained ASAs joined Mayer Hoffman McCann, P.C. (MHM P.C.), an independent national CPA firm headquartered in Kansas City, Kansas. MHM P.C. has 209 shareholders, a vast majority of whom are also employees of CBIZ. MHM maintains a seven member Board of Directors. There are no board members of MHM P.C. who hold senior officer positions at CBIZ. CBIZ’s association with MHM P.C. offers clients access to the multi-state resources and expertise of a national CPA firm. The advantage to CBIZ of these consolidations is a reduction in the number of different firms with which we maintain ASAs.

 

Although the ASAs do not constitute control, CBIZ is one of the beneficiaries of the agreements and may bear certain economic risks. As such, the CPA firms with which CBIZ maintains administrative service agreements

qualify as variable interest entities under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), as amended. See further discussion in Note 1 of the consolidated financial statements included herewith.

 

Employee Services

 

CBIZ’s Employee Services group operates under one Senior Vice President who oversees the practice group, along with a senior management team which supports the practice group leader along: functional; product; and unit management lines. The business units that comprise CBIZ’s Employee Services group are organized between Retail and National Services. The Retail offices generally provide services locally, within their geographic area. The National group is comprised of several specialty operations that provide unique services on a national scale.

 

CBIZ’s Employee Services group maintains relationships with many different insurance carriers. Some of these carriers have compensation arrangements with CBIZ whereby some portion of payments due may be contingent upon meeting certain performance goals, or upon CBIZ providing client services that would otherwise be provided by the carriers. These compensation arrangements are provided to CBIZ as a result of our performance and expertise, and may result in enhancing CBIZ’s ability to access certain insurance markets and services on behalf of CBIZ clients. The aggregate of these payments received during the years ended December 31, 2006, 2005 and 2004 were less than 2% of consolidated CBIZ revenue for the respective periods.

 

State insurance regulators have conducted inquiries to clarify the nature of compensation arrangements within the insurance brokerage industry. To date, CBIZ, along with other major insurance brokerage companies, has received requests for information regarding our compensation arrangements related to these practices from such authorities. In addition to inquiries from various states’ insurance departments, CBIZ has received subpoenas from the New York Attorney General, the Connecticut Attorney General, and the Ohio Department of Insurance regarding its insurance brokerage compensation arrangements. CBIZ is cooperating fully in each inquiry. CBIZ has discussed the nature of these inquires and compensation arrangements with each of the major insurance carriers with whom we have established these arrangements. We believe that our arrangements are lawful and consistent with industry practice, and we expect that any changes to compensation arrangements in the future will have a minimal impact on CBIZ, barring future regulatory action. Future regulatory action may limit or eliminate our ability to enhance revenue through all current compensation arrangements, and may result in a diminution of future revenue from these sources.

 

Medical Management Professionals

 

CBIZ Medical Management Professionals (CBIZ MMP) provides billing and collection as well as full-practice management services for hospital-based physicians practicing anesthesiology, pathology, radiology and emergency medicine. CBIZ MMP operates under one Senior Vice President who reports to CBIZ’s Chief Executive Officer. The Senior Vice President is supported by an executive management team which oversees CBIZ MMP’s operating units along functional and product lines. CBIZ MMP’s operating units are organized into three geographic regions representing the East, Central and West regions of the United States. Each region is managed by a two person management team, focused on finance and operations.

 

Changes in some managed care plans and federal Medicare and Medicaid physician and practice expense reimbursement rules and rates are expected to adversely affect revenue in our existing physician and medical billing and collections business. The Deficit Reduction Act of 2005 also provides for a reduction and cap beginning in 2007 of reimbursement for certain fees and charges related to imaging services and facilities of offices, imaging centers and independent diagnostic testing facilities. In addition, certain managed care payors may impose precertification and other management programs which could limit or control the use of, and reimbursement for, imaging and diagnostic services. Certain managed care payors may institute “Pay for Performance” and “quality initiative” programs that could limit or control physician, office and facility, and practice services and procedures, as well as reimbursement costs, and replace volume-based payment methods. Since our physician and medical billing and collections business is typically paid a portion of the revenue collected on behalf of our clients, any reduction in the volume of services or reimbursement rates for such services or expenses for which our clients are eligible to be paid may adversely affect our ability to generate revenue and maintain margins. CBIZ will make its best efforts to take appropriate actions to maintain margins in this business, however there is no assurance that we

will be able to maintain margins at historic levels. These changes in reimbursement rates may provide CBIZ with the opportunity to increase the number of clients to which medical coding and billing services are provided, as they may cause physicians who do not currently utilize third party providers to consider the use of CBIZ’s medical coding and billing services.

 

National Practices

 

The National Practices group offers technology and other services, including health care consulting, mergers and acquisitions, and government relations services. The majority of the units within the National Practices group report to CBIZ’s President and Chief Operating Officer, with one unit reporting to CBIZ’s Chief Executive Officer.

 

Sales and Marketing

 

CBIZ’s branding strategy has historically focused on providing CBIZ with a consistent image and value proposition within each of its primary geographic and industry markets. Beginning in 2005, CBIZ capitalized on those successful efforts by refining its message to reinforce the CBIZ “Client Centric” model — a more intuitive way of taking the wide array of CBIZ service offerings to market, based on the fundamental needs of businesses to manage their financial, employee and technology challenges. These efforts included an evolution of the CBIZ advertising strategy, focusing on our three primary service offerings: employee management; financial management; and technology, as well as the development of a revised web presence, new collateral materials, and the introduction of several new direct marketing and e-marketing vehicles. The Client Centric model was also used as a basis to begin to better understand and define each client’s unique areas of need, through the use of our proprietary database, CNECT. CBIZ believes that this level of client information is strategically important for revenue generation as it enhances CBIZ’s ability to identify the most appropriate cross-serving opportunities.

 

For 2006, CBIZ has focused on three key strategies: thought leadership; market segmentation; and sales/marketing integration.

 

 

Beyond branding, a major marketing initiative was undertaken to enhance CBIZ’s targeted marketing capabilities. While it is CBIZ’s intent to continue to foster the entrepreneurial spirit of our offices by allowing individual business units to execute their local marketing plans, CBIZ has significantly increased our ability to provide offices with a host of highly targeted marketing tools, support, and strategies to better capitalize on market opportunities in selected industries and practice areas. These tools include print and radio advertisements, printed material such as brochures and stationery, and CBIZ-branded merchandise for trade shows and other client-oriented events. CBIZ continues to be focused on creating business development tools and programs on a national level that can be easily customized for use at the local level.

 

Customers

 

CBIZ provides professional business services to approximately 90,000 clients. By providing various administrative functions, CBIZ enables its clients to focus their resources on their own operational competencies. Reducing administrative functions allows clients to enhance productivity, reduce costs and improve service, quality and efficiency by focusing on their core business. Depending on a client’s size and capabilities, it may choose to utilize some or many of the diverse and integrated services offered by CBIZ.

 

CBIZ’s clients come from a large variety of industries and markets. No single client individually comprises more than 10.0% of CBIZ’s consolidated revenue and our largest client, Edward Jones, contributed approximately 2.6% of our consolidated revenue in 2006. Management believes that such diversity helps insulate CBIZ from a downturn in a particular industry. Nevertheless, economic conditions among selected clients and groups of clients may have an impact on the demand for such services.

 

Competition

 

The professional business services industry is highly fragmented and competitive, with a majority of industry participants, such as accounting, employee benefits, payroll providers or professional service organizations, offering only a limited number of services. Competition is based primarily on customer relationships, range and quality of services or product offerings, customer service, timeliness, geographic proximity, and competitive rates. CBIZ competes with a number of multi-location regional or national professional services firms and a large number of relatively small independent firms in local markets. CBIZ’s competitors in the professional business services industry include, but are not limited to, independent consulting services companies, independent accounting and tax firms, payroll service providers, independent insurance brokers and divisions of diversified services companies.

 

Acquisitions and Divestitures

 

CBIZ seeks to strengthen its operations and customer service capabilities by selectively acquiring businesses that expand our market position and strengthen our existing service offerings. During 2006, CBIZ acquired three businesses. The TriMed Group, which is reported with our Medical Management Professionals group, is based in Flint, Michigan and provides medical billing services and in-house computer systems primarily to hospital-based physician practices in Michigan, Ohio and Indiana. Valley Global Insurance Brokers, and Burnham Colman Kaelin and Walker Insurance Agency (BCKW) are reported with our Employee Services practice group. Valley Global Insurance Brokers is a property and casualty insurance broker located in San Jose, California and BCKW is an insurance agency offering property and casualty, commercial bonds and employee benefits with offices in St. Joseph and Kansas City, Missouri.

 

In an on-going effort to rationalize our business, CBIZ has divested (and may continue to divest), business units that do not contribute to our long-term objectives for growth, or that are not complementary to our target service offerings and markets. In 2006, CBIZ sold two business operations which were classified as discontinued operations. These sales consisted of an accounting and tax practice that was previously reported as part of the Financial Services practice group, and an operation offering property tax services that was previously reported as part of the National Practices group. Additionally, during the fourth quarter of 2006, CBIZ committed to the divestitures of an operation from the Employee Services group and an operation from the Financial Services group. CBIZ plans to divest of the operations through sales transactions which are expected to be completed during 2007.

 

Regulation

 

CBIZ’s operations are subject to regulations by federal, state, and local governing bodies. Accordingly, our business services may be impacted by legislative changes by these bodies, particularly with respect to provisions relating to payroll, benefits administration and insurance services, pension plan administration, medical management billing and collections, and tax and accounting. CBIZ remains abreast of regulatory changes affecting our business, as these changes often affect clients’ activities with respect to employment, taxation, benefits, and accounting. For instance, changes in income, estate, or property tax laws may require additional consultation with clients subject to these changes to ensure their activities comply with revised regulations.

 

CBIZ itself is subject to industry regulation and changes, including changes in laws, regulations, and codes of ethics governing its accounting, insurance, valuation, medical management, registered investment advisory and broker-dealer operations, as well as in other industries, the interpretation of which may restrict CBIZ’s operations.

 

CBIZ is subject to certain privacy and information security laws and regulations, including, but not limited to those under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), The Financial Modernization Act of 1999 (the Gramm-Leach-Bliley Act), and other provisions of federal and state law which may restrict CBIZ’s operations and give rise to expenses related to compliance.

 

As a public company, CBIZ is subject to the provisions of the Sarbanes-Oxley Act of 2002 to reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors.

 

Liability Insurance

 

CBIZ carries policies including those for commercial general liability, automobile liability, property, crime, professional liability, directors and officers liability, fiduciary liability, employment practices liability and workers’ compensation subject to prescribed state mandates. Excess liability coverage is carried over the underlying limits provided by the commercial general liability, directors and officers liability, professional liability and automobile liability policies.

 

Employees

 

At December 31, 2006, CBIZ employed approximately 5,200 employees, and CBIZ believes that it has a good relationship with its employees. A large number of our employees hold professional licenses or degrees. As a professional services company that differentiates itself from competitors through the quality and diversity of our service offerings, CBIZ believes that our employees are our most important asset. Accordingly, CBIZ strives to remain competitive as an employer while increasing the capabilities and performance of our employees.

 

Seasonality

 

A disproportionately large amount of CBIZ’s revenue occurs in the first half of the year. This is due primarily to accounting and tax services provided by our Financial Services practice group, which is subject to seasonality related to heavy volume in the first four months of the year. CBIZ’s Financial Services group generated approximately 42% of its revenue in the first four months of 2006. Like most professional service companies, most of CBIZ’s operating costs are relatively fixed in the short term, resulting in higher operating margins in the first half of the year.

 

Uncertainty of Forward-Looking Statements

 

This Annual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Annual Report, including without limitation, “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding CBIZ’s financial position, business strategy and plans and objectives for future performance are forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are commonly identified by the use of such terms and phrases as “intends,” “believes,” “estimates,” “expects,” “projects,” “anticipates,” “foreseeable future,” “seeks,” and words or phrases of similar import in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated services, sales efforts, expenses, and financial results. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this 10-K, in the 2006 Annual Report and in any other public statements that we make, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Such forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in “Item 1A. Risk Factors” will be important in determining future results. Consequently, no forward-looking statement can be

guaranteed. Our actual future results may vary materially. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in the quarterly, periodic and annual reports we file with the SEC. Also note that we provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those described here could also adversely affect operating or financial performance. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

 

The following factors may affect our actual operating and financial results and could cause results to differ materially from those in any forward-looking statements. There may be other factors, and new risk factors may emerge in the future. You should carefully consider the following information.

 

A reversal of or decline in the current trend of outsourcing business services may have a material adverse effect on our business, financial condition and results of operations.

 

Our business and growth depend in large part on the trend toward outsourcing business services. We can give you no assurance that this trend in outsourcing will continue. Current and potential customers may elect to perform such services with their own employees. A significant reversal of, or a decline in, this trend would have a material adverse effect on our business, financial condition and results of operations.

 

We may be more sensitive to revenue fluctuations than other companies, which could result in fluctuations in the market price of our common stock.

 

A substantial majority of our operating expenses such as personnel and related costs, depreciation and rent, are relatively fixed in the short term. As a result, we may not be able to quickly reduce costs in response to any decrease in revenue. For example, any decision by a significant client to delay or cancel our services may cause significant variations in operating results and could result in losses for the applicable quarters. Additionally, the general condition of the United States economy has and will continue to affect our business. Potential new clients may defer from switching service providers when they believe economic conditions are unfavorable. Any of these factors could cause our quarterly results to be lower than expectations of securities analysts and shareholders, which could result in a decline in the price of our common stock.

 

We have a risk that payments on accounts receivable or notes receivable may be slower than expected, or that amounts due on receivables or notes may not be fully collectible.

 

Professional services firms often experience higher average accounts receivable days outstanding compared to many other industries. If collections become slower, our liquidity may be adversely impacted. We monitor the aging of receivables regularly and make assessments of the ability of customers to pay amounts due. We provide for potential bad debts each month and recognize additional reserves against bad debts as we deem it appropriate. Notwithstanding these measures, our customers may face unexpected circumstances that adversely impact their ability to pay their trade receivables or note obligations to us and we may face unexpected losses as a result.

 

We are dependent on the services of our executive officers and other key employees, the loss of any of whom may have a material adverse effect on our business, financial condition and results of operations.

 

Our success depends in large part upon the abilities and continued services of our executive officers and other key employees, such as our business unit presidents. In the course of business operations, employees may resign and seek employment elsewhere. Certain principal employees, however, are bound in writing to non-compete agreements barring competitive employment, client solicitation, and solicitation of employees for a period of between two and ten years following his or her resignation. We cannot assure you that we will be able to retain the services of our key personnel. If we cannot retain the services of key personnel, there could be a material adverse effect on our business, financial condition and results of operations. While we generally have employment agreements and non-

competition agreements with key personnel, courts are at times reluctant to enforce such non-competition agreements. In addition, many of our executive officers and other key personnel are either participants in our stock option plan or holders of a significant amount of our common stock. We believe that these interests provide additional incentives for these key employees to remain with us. In order to support our growth, we intend to continue to effectively recruit, hire, train and retain additional qualified management personnel. Our inability to attract and retain necessary personnel could have a material adverse effect on our business, financial condition and results of operations.

 

Restrictions imposed by independence requirements and conflict of interest rules may limit our ability to provide services to clients of the attest firms with which we have contractual relationships and the ability of such attest firms to provide attestation services to clients of ours.

 

Restrictions imposed by independence requirements and state accountancy laws and regulations preclude CBIZ from rendering audit and attest services (other than internal audit services). As such, CBIZ and its subsidiaries maintain joint-referral relationships and administrative service agreements (ASAs) with independent licensed Certified Public Accounting (CPA) firms under which audit and attest services may be provided to CBIZ’s clients by such CPA firms. These firms are owned by licensed CPAs, a vast majority of whom are employed by CBIZ subsidiaries.

 

Under these ASAs, CBIZ provides a range of services to the CPA firms, including (but not limited to): administrative functions such as office management, bookkeeping, and accounting; preparing marketing and promotion materials; providing office space, computer equipment, and systems support; and leasing administrative and professional staff. Services are performed in exchange for a fee. Fees earned by CBIZ under the ASAs are recorded as revenue in the accompanying 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.

 

With respect to CPA firm clients that are required to file audited financial statements with the SEC, the SEC staff views CBIZ and the CPA firms with which we have contractual relationships as a single entity in applying independence rules established by the accountancy regulators and the SEC. Accordingly, we do not hold any financial interest in, nor do we enter into any business relationship with, an SEC-reporting attest client that the CPA firm performing an audit could not maintain; further, we do not sell any non-audit services to an SEC-reporting attest client that the CPA firm performing an audit could not maintain, under the auditor independence limitations set out in the Sarbanes-Oxley Act of 2002 and other professional accountancy independence standards. Applicable professional standards generally permit the Financial Services practice group to provide additional services to privately-held companies, in addition to those services which may be provided to SEC-reporting attest clients of an associated CPA firm. CBIZ and the CPA firms with which we are associated have implemented policies and procedures designed to enable us to maintain independence and freedom from conflicts of interest in accordance with applicable standards. Given the pre-existing limits set by CBIZ on its relationships with SEC-reporting attest clients of associated CPA firms, and the limited number and size of such clients, the imposition of Sarbanes-Oxley Act independence limitations did not and is not expected to materially affect CBIZ revenues.

 

There can be no assurance that following the policies and procedures implemented by us and the attest firms will enable us and the attest firms to avoid circumstances that would cause us and them to lack independence from an SEC-reporting attest client; nor can there be any assurance that state accountancy authorities will not extend current restrictions on the profession to include private companies. To the extent that licensed CPA firms for whom we provide administrative and other services are affected, we may experience a decline in fee revenue from these businesses as well. To date, revenues derived from providing services in connection with attestation engagements of the attest firms performed for SEC-reporting clients have not been material.

 

Governmental regulations and interpretations are subject to changes.

 

Laws and regulations often result in changes in the amount or the type of business services required by businesses and individuals. We cannot be sure that future laws and regulations will provide the same or similar opportunities for us to provide business consulting and management services to businesses and individuals. State insurance

regulators have conducted inquiries to clarify the nature of compensation arrangements within the insurance brokerage industry. Future regulatory action may limit or eliminate our ability to enhance revenue through all current compensation arrangements, and may result in a diminution of future insurance brokerage revenue from these sources. Accordingly, CBIZ’s ability to continue to operate in some states may depend on our flexibility to modify our operational structure in response to these changes in regulations.

 

Changes in government and managed care reimbursement rules and rates, as well as other practices, may adversely affect the revenue of our current medical management business.

 

Changes in some managed care plans and federal Medicare and Medicaid physician and practice expense reimbursement rules and rates are expected to adversely affect revenue in our existing physician and medical billing and collections business. The Deficit Reduction Act of 2005 also provides for a reduction and cap beginning in 2007 of reimbursement for certain fees and charges related to imaging services and facilities of offices, imaging centers and independent diagnostic testing facilities. In addition, certain managed care payors may impose precertification and other management programs which could limit or control the use of, and reimbursement for, imaging and diagnostic services. Certain managed care payors may institute “Pay for Performance” and “quality initiative” programs that could limit or control physician, office and facility, and practice services and procedures, as well as reimbursement costs, and replace volume-based payment methods. Since our physician and medical billing and collections business is typically paid a portion of the revenue collected on behalf of our clients, any reduction in the volume of services or reimbursement rates for such services or expenses for which our clients are eligible to be paid may adversely affect our ability to generate revenue and maintain margins.

 

We are subject to risks relating to processing customer transactions for our payroll, medical practice management, property tax management, and other transaction processing businesses.

 

The high volume of client funds and data processed by us in our transaction related businesses entails risks for which we may be held liable if the accuracy or timeliness of the transactions processed is not correct. We could incur significant legal expense to defend any claims against us, even those claims without merit. While we carry insurance against these potential liabilities, we cannot be certain that circumstances surrounding such an error would be entirely reimbursed through insurance coverage. We believe we have controls and procedures in place to address our fiduciary responsibility and mitigate these risks. However, if we are not successful in managing these risks, our business, financial condition and results of operations may be harmed.

 

We are subject to risk as it relates to software that we license from third parties.

 

We license software from third parties, much of which is integral to our systems and our business. The licenses are terminable if we breach our obligations under the license agreements. If any of these relationships were terminated or if any of these parties were to cease doing business or cease to support the applications we currently utilize, we may be forced to spend significant time and money to replace the licensed software. However, we cannot assure you that the necessary replacements will be available on reasonable terms, if at all.

 

We could be held liable for errors and omissions.

 

All of our business services entail an inherent risk of malpractice and other similar claims. Therefore, we maintain errors and omissions insurance coverage. Although we believe that our insurance coverage is adequate, we cannot be certain that actual future claims or related legal expenses would not exceed the coverage amounts. In addition, we cannot be certain that the different insurance carriers which provide errors and omissions coverage for different lines of our business will not dispute their obligation to cover a particular claim. If we have a large claim, or a large number of claims, on our insurance, the rates for such insurance may increase, and amounts expended in defense or settlement of these claims prior to exhaustion of deductible or self-retention levels may become significant, but contractual arrangements with clients may constrain our ability to incorporate such increases into service fees. Insurance rate increases, disputes by carriers over coverage questions, payments by us within deductible or self-retention limits, as well as any underlying claims or settlement of such claims, could have a material adverse effect on our business, financial condition and results of operations.

 

Our principal stockholders may have substantial control over our operations.

 

As of December 31, 2006, the stockholders identified below owned the following aggregate amounts and percentages of our common stock, including shares that may be acquired by exercising options:

 

 

Because of their stock ownership, these stockholders may exert substantial influence or actions that require the consent of a majority of our outstanding shares, including the election of directors. CBIZ’s share repurchase activities may serve to increase the ownership percentage of these individuals and therefore increase the influence they may exert, if they do not participate in these share repurchase transactions.

 

We have shares eligible for future sale that could adversely affect the price of our common stock.

 

Future sales or issuances of common stock, or the perception that sales could occur, could adversely affect the market price of our common stock and dilute the percentage ownership held by our stockholders. We have authorized 250 million shares, and have issued and outstanding approximately 67 million shares at January 31, 2007. A substantial number of these shares have been issued in connection with acquisitions. As part of many acquisition transactions, shares are contractually restricted from sale for periods up to two years, and as of January 31, 2007, approximately 600,000 shares of common stock were under lock-up contractual restrictions. We cannot be sure when sales by holders of our stock will occur, how many shares will be sold or the effect that sales may have on the market price of our common stock. As of January 31, 2007, we also have registered under the Securities Act of 1933, 15 million shares of our common stock, most of which remain available to be offered from time to time by us in connection with acquisitions under our acquisition shelf registration statement.

 

In 2006, CBIZ filed a registration statement with the SEC to register an undeterminable number of shares of Common Stock issuable by the Company upon conversion (the “Conversion Shares”) of the Company’s issued and outstanding 3.125% Convertible Senior Subordinated Notes due 2026 (the “Notes”). The registration statement has been declared effective. Although the Company cannot at this time determine the number of Conversion Shares it will issue upon conversion of the Notes, if any, the number of Conversion Shares will be calculated as set out in the S-3 Registration Statement filed by the Company with the SEC on July 21, 2006.

 

We are reliant on information processing systems.

 

Our ability to provide business services depends on our capacity to store, retrieve, process and manage significant databases, and expand and upgrade periodically our information processing capabilities. Interruption or loss of our information processing capabilities through loss of stored data, breakdown or malfunctioning of computer equipment and software systems, telecommunications failure, or damage caused by fire, tornadoes, lightning, electrical power outage, or other disruption could have a material adverse effect on our business, financial condition and results of operations. Although we have disaster recovery procedures in place and insurance to protect against such contingencies, we cannot be sure that insurance or these services will continue to be available at reasonable prices, cover all our losses or compensate us for the possible loss of clients occurring during any period that we are unable to provide business services.

 

We may not be able to acquire and finance additional businesses which may limit our ability to pursue our business strategy.

 

CBIZ acquired three businesses during 2006. It is our intention to selectively acquire businesses that are complementary in building out our service offerings in our target markets. However, we cannot be certain that we will be able to continue identifying appropriate acquisition candidates and acquire them on satisfactory terms. We cannot assure you that such acquisitions, even if completed, will perform as expected or will contribute significant synergies, revenues or profits. In addition, we may also face increased competition for acquisition opportunities, which may inhibit our ability to complete transactions on terms that are favorable to us. There are certain provisions under our credit facility that may limit our ability to acquire additional businesses. In the event that we are not in compliance with certain covenants as specified in our credit facility, we could be restricted from making acquisitions, restricted from borrowing funds from our credit facility for other uses, or required to pay down the outstanding balance on the line of credit. However, management believes that funds available under the credit facility, along with cash generated from operations, will be sufficient to meet our liquidity needs, including planned acquisition activity in the foreseeable future. To the extent we are unable to find suitable acquisition candidates, an important component of our growth strategy may not be realized.

 

The business services industry is competitive and fragmented. If we are unable to compete effectively, our business, financial condition and results of operations may be harmed.

 

We face competition from a number of sources in both the business services industry and from specialty insurance agencies. Competition in both industries has led to consolidation. Many of our competitors are large companies that may have greater financial, technical, marketing and other resources than us. In addition to these large companies and specialty insurance agencies, we face competition in the business services industry from in-house employee services departments, local business services companies and independent consultants, as well as from new entrants into our markets. We cannot assure you that, as our industry continues to evolve, additional competitors will not enter the industry or that our clients will not choose to conduct more of their business services internally or through alternative business services providers. Although we intend to monitor industry trends and respond accordingly, we cannot assure you that we will be able to anticipate and successfully respond to such trends in a timely manner. We cannot be certain that we will be able to compete successfully against current and future competitors, or that competitive pressure will not have a material adverse effect on our business, financial condition and results of operations.

 

None.

 

CBIZ’s corporate headquarters is located at 6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio 44131, in leased premises. CBIZ and its subsidiaries lease more than 140 offices (including CBIZ MMP which has 71 offices) in 35 states, the District of Columbia and one in Toronto, Canada. CBIZ and its subsidiaries also lease office equipment and company vehicles. Some of CBIZ’s property and equipment are subject to liens securing payment of indebtedness of CBIZ and its subsidiaries. CBIZ believes that its current facilities are sufficient for its current needs.

 

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.

 

No matters were submitted to a vote of CBIZ’s stockholders during the fourth quarter of the fiscal year covered by this Annual Report.

 

Price Range of Common Stock

 

Effective August 4, 2006, CBIZ’s common stock began trading on the New York Stock Exchange under the trading symbol “CBZ”. Prior to August 4, 2006, CBIZ’s common stock was traded on the Nasdaq National Market under the trading symbol “CBIZ”. The table below sets forth the range of high and low sales prices for CBIZ’s common stock as reported on the New York Stock Exchange and Nasdaq National Market for the periods indicated.

 

 

On December 29, 2006, the last reported sale price of CBIZ’s Common Stock as reported on the New York Stock Exchange was $6.97 per share. As of February 28, 2007, CBIZ had approximately 7,500 holders of record of its common stock, and the last sale of CBIZ’s common stock as of that date was $6.82.

 

Dividend Policy

 

CBIZ’s credit facility does not permit CBIZ to declare or make any dividend payments, other than dividend payments made by one of CBIZ’s wholly owned subsidiaries to the parent company. Historically, CBIZ has not paid cash dividends on its common stock, and does not anticipate paying cash dividends in the foreseeable future. CBIZ’s Board of Directors has discretion over the payment and level of dividends on common stock. The Board of Directors’ decision is based among other things, on the Company’s results of operations and financial condition. CBIZ currently intends to retain future earnings to finance the ongoing operations and growth of the business. Any future determination as to dividend policy will be made at the discretion of the Board of Directors.

 

Issuer Purchases of Equity Securities

 

 

On December 31, 2006, approximately 215,100 shares of CBIZ common stock became issuable as contingent consideration owed to former owners of businesses that were acquired by CBIZ.

 

The above referenced shares were issued in transactions not involving a public offering in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933. The persons to whom the shares were issued had access to full information about CBIZ and represented that they acquired the shares for their own account and not for the purpose of distribution. The certificates for the shares contain a restrictive legend advising that the shares may not be offered for sale, sold, or otherwise transferred without having first been registered under the Securities Act or pursuant to an exemption from the Securities Act.

 

 

On February 9, 2006, CBIZ’s Board of Directors authorized a share repurchase program allowing for share repurchases of up to 5.0 million shares of CBIZ common stock. On May 18, 2006, CBIZ’s Board of Directors authorized a supplemental share repurchase program allowing for share repurchases of up to 10.0 million shares of CBIZ common stock, in addition to the 5.0 million shares previously authorized. Under these programs, shares may be repurchased in the open market or in privately negotiated transactions according to SEC rules. The programs expire March 31, 2007.

 

On February 8, 2007, CBIZ’s Board of Directors authorized the purchase of up to 5.0 million shares of CBIZ common stock through March 31, 2008. The shares may be repurchased in the open market or in privately negotiated transactions according to SEC rules.

 

The repurchase plans to not obligate CBIZ to acquire any specific number of shares and may be suspended at any time. Stock repurchase activity during the year ended December 31, 2006 (reported on a trade-date basis) is summarized in the table below (in thousands, except per share data).

 

Issuer Purchases of Equity Securities

 

 

 

Performance Graph

 

Set forth below is a performance graph comparing the cumulative total stockholder return on CBIZ’s common stock, based on its market price, with the cumulative total return of companies in the S&P 500 Index and a Peer Group consisting of American Express Company, Paychex, Inc., Brown & Brown, Inc., H&R Block, Inc., Arthur J. Gallagher & Company, Ceridian Corporation, and Answerthink, Inc. The graph assumes the reinvestment of dividends for the period beginning December 31, 2001 through the year ended December 31, 2006.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among CBIZ, Inc., The S&P 500 Index

And A Peer Group

 

 

* $100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.

 

Copyright ^© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.

 

www.researchdatagroup.com/S&P.htm

 

The following table presents selected historical financial data for CBIZ and is derived from the historical consolidated financial statements and notes thereto. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and the notes thereto, which are included elsewhere in this Annual Report.

 

 

 

 

The following discussion is intended to assist in the understanding of CBIZ’s financial position at December 31, 2006 and 2005, and results of operations and cash flows for each of the years ended December 31, 2006, 2005 and 2004. This discussion should be read in conjunction with CBIZ’s consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Uncertainty of Forward-Looking Statements” and “Item 1A. Risk Factors” in this Annual Report on Form 10-K.

 

Overview

 

During the year ended December 31, 2006 CBIZ acquired three businesses. The TriMed Group, which is reported with our Medical Management Professionals group, is based in Flint, Michigan and provides medical billing services and in-house computer systems primarily to hospital-based physician practices in Michigan, Ohio and Indiana. Valley Global Insurance Brokers, and Burnham Colman Kaelin and Walker Insurance Agency (BCKW) are reported with our Employee Services practice group. Valley Global Insurance Brokers is a property and casualty insurance broker located in San Jose, California and BCKW is an insurance agency offering property and casualty, commercial bonds and employee benefits with offices in St. Joseph and Kansas City, Missouri.

 

In January 2006, CBIZ and Mayer Hoffman McCann P.C. extended the term of their administrative service agreement through 2019. The expiration date is subject to further extension upon agreement by both parties. Administrative service agreements are described in further detail under “Business Services — Financial Services”.

 

In January 2006, CBIZ acquired the trade-name of a nationally recognized practice which complements our Financial Services practice group. The use of the trade-name is currently licensed to Mayer Hoffman McCann P.C. through January 1, 2016.

 

During the year ended December 31, 2006, CBIZ sold two business operations which were classified as discontinued operations. These sales consisted of an accounting and tax practice that was previously reported as part of the Financial Services practice group, and an operation offering property tax services that was previously reported as part of the National Practices group. Additionally, during the fourth quarter of 2006, CBIZ committed to the divestiture of two operations, one each from the Employee Services and Financial Services practice groups. CBIZ plans to divest of the operations through sales transactions which are expected to be completed during 2007.

 

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. During 2006, CBIZ recognized approximately $1.6 million of compensation expense for stock options as required by SFAS 123(R). CBIZ adopted SFAS 123R using the modified prospective transition method, and accordingly our consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. SFAS 123R is discussed in further detail in Note 1 of the accompanying consolidated financial statements.

 

In 2006, CBIZ adopted Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108), and in accordance with such, recorded a $2.6 million adjustment to January 1, 2006 retained earnings. The impact of SAB 108 is further discussed in Note 1 of the accompanying consolidated financial statements.

 

CBIZ purchased 9.7 million shares of its common stock at a total cost of $74.5 million during the year ended December 31, 2006. Of these repurchases, approximately 6.6 million shares were repurchased at a cost of $52.5 million, concurrent with closing the $100.0 million convertible senior subordinated notes (described below). On February 8, 2007, CBIZ’s Board of Directors authorized the purchase of up to 5.0 million shares of CBIZ common stock through March 31, 2008. The shares may be repurchased in the open market or through privately negotiated purchases according to SEC rules. During the period January 1 through February 28, 2007, CBIZ repurchased approximately 1.5 million shares of its common stock at a total cost of approximately $10.1 million.

 

Effective February 13, 2006, CBIZ entered into a $100.0 million unsecured credit facility, with an option to increase the commitment to $150.0 million. The credit facility is maintained by Bank of America, N.A. as agent bank for a group of five participating banks and has a five year term expiring February 2011. The credit facility was amended in May 2006, principally to permit CBIZ to issue the $100.0 million convertible senior subordinated notes (discussed below). The amendment did not materially change any of the other terms or conditions of the credit facility.

 

On May 30, 2006, CBIZ completed a $100.0 million offering of convertible senior subordinated notes (“Notes”) due in 2026. Net proceeds from the sale of the Notes 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.

 

Effective August 4, 2006, CBIZ transferred the listing of its common stock to the New York Stock Exchange (NYSE) under the new symbol “CBZ.” CBIZ believes that being traded on the NYSE provides recognition of our growth, stability, market position and business conduct. CBIZ also expects that being traded on the NYSE will broaden our name recognition, improve our market liquidity, and assist in recruiting and acquisitions.

 

Results of Operations — Continuing Operations

 

CBIZ provides professional business services that help clients manage their finances, employees and technology. CBIZ delivers its integrated services through the following four practice groups: Financial Services, Employee Services, Medical Management Professionals (CBIZ MMP), and National Practices. A brief description of these groups’ operating results and factors affecting their businesses is provided below.

 

Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures. For example, for a business acquired on July 1, 2005, revenue for the period January 1, 2006 through June 30, 2006 would be reported as revenue from acquired businesses; same-unit revenue would include revenue for the periods July 1 through December 31 of both years.

 

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

 

Revenue

 

The following table summarizes total revenue for the twelve months ended December 31, 2006 and 2005 (in thousands, except percentages):

 

 

A detailed discussion of revenue by practice group is included under “Operating Practice Groups”.

 

Expenses

 

Operating expenses increased to $519.2 million for the twelve months ended December 31, 2006, from $476.0 million for the comparable period in 2005, an increase of $43.2 million or 9.1%. As a percent of revenue, operating expenses (excluding consolidation and integration charges) were 86.1% and 85.8% for the twelve months ended

December 31, 2006 and 2005, respectively. The primary components of operating expenses are personnel costs and occupancy expense, representing 81.3% and 80.2% of total operating expenses and 70.2% and 69.3% of revenue for the twelve months ended December 31, 2006 and 2005, respectively.

 

The majority of CBIZ’s operating costs are relatively fixed in the short term, thus gross margin as a percentage of revenue generally improves with revenue growth. However, for the twelve months ended December 31, 2006 versus the comparable period in 2005, gross margin as a percentage of revenue did not change. Gross margin remained unchanged despite the growth in revenue primarily as the result of an increase in compensation expense. The increase in compensation expense was primarily the result of: an increase in the number of personnel in our Financial Services practice group (including many senior positions); an increase in expenses related to CBIZ’s employee benefit programs; and $1.1 million related to the expensing of employee stock options as required by SFAS 123(R), “Share-Based Payment”. These increases were partially offset by a decrease in compensation expense related to our incentive compensation plan. A more comprehensive analysis of operating expenses and their impact on gross margin is discussed under “Operating Practice Groups” below.

 

In addition to the sources cited above, compensation expense increased by approximately $0.9 million as the result of appreciation in the fair value of investments held in relation to our deferred compensation plan. This increase in compensation expense did not impact CBIZ’s net income, as adjustments to the fair value of investments are offset by the same adjustments to other income (expense).

 

Consolidation and integration charges are reported as operating expenses in the accompanying consolidated statements of operations, and were 0.2% and 0.7% of revenue for the twelve months ended December 31, 2006 and 2005, respectively. Consolidation and integration charges incurred during 2005 primarily related to co-location activities in the Denver and Chicago markets. There were no significant charges incurred or programs implemented during the year ended December 31, 2006. Consolidation and integration charges are further discussed in Note 10 of the accompanying consolidated financial statements.

 

Corporate general and administrative expenses decreased to $24.7 million and 4.1% of revenue during the year ended December 31, 2006, from $24.9 million and 4.5% of revenue during the comparable period of 2005. The decrease in corporate general and administrative expenses was primarily attributable to a decrease in professional fees paid to third party professionals for consulting projects, and was partially offset by $0.5 million in compensation costs related to the expensing of employee stock options as required by SFAS 123(R), “Share-Based Payment”.

 

Depreciation and amortization expense was $16.4 million for the twelve months ended December 31, 2006, compared to $14.6 million for the comparable period in 2005. As a percent of revenue, depreciation and amortization expense was 2.7% for both years. The increase in depreciation and amortization expense was primarily due to an increase in the amortization of intangible assets as the result of businesses, client lists, and a trade-name that were acquired after December 31, 2005.

 

Other Income and Expense

 

Interest expense increased by $0.3 million to $3.4 million for the twelve months ended December 31, 2006, from $3.1 million for the comparable period in 2005. Average debt was $80.4 million for the twelve months ended December 31, 2006, compared to $51.6 million for the comparable period in 2005, and average interest rates were 4.0% and 5.4% during the twelve months ended December 31, 2006 and 2005, respectively. The increase in average debt was primarily the result of CBIZ repurchasing 9.7 million shares if its common stock at a cost of approximately $74.5 million during 2006. The share repurchases were primarily funded by proceeds received by CBIZ’s $100.0 convertible senior subordinated notes which were completed on May 30, 2006 and carry a fixed interest rate of 3.125%. Proceeds from the offering were also used to pay-off the debt balance under the $100.0 million credit facility. Debt is further discussed under “Liquidity and Capital Resources”.

 

Gain on sale of operations, net was $21,000 for the twelve months ended December 31, 2006, and related to the sale of two client lists from the Employee Services practice group; the gain on sale related to these client lists has been deferred and is being recognized as payments are received. Gain on sale of operations, net for the twelve months

ended December 31, 2005 was $0.3 million, and related to the sale of client lists from the Financial Services and Employee Services practice groups.

 

Other income, net was $5.0 million for the twelve months ended December 31, 2006, and $4.0 million for the comparable period in 2005. Other income (expense), net is comprised primarily of interest income, adjustments to the fair value of investments held in a rabbi trust related to the deferred compensation plan, gains and losses on sales of assets, and miscellaneous income such as contingent royalties from previous divestitures. Adjustments to the fair value of investments related to the deferred compensation plan do not impact CBIZ’s net income, as they are offset by the same adjustments to compensation expense (recorded as operating or corporate general and administrative expenses in the consolidated statements of operations). The increase in other income for the twelve months ended December 31, 2006 from the comparable period in 2005 was primarily the result of an increase in interest income earned on short-term investments, an increase in the fair value of investments related to the deferred compensation plan, and proceeds received on a life insurance policy. The increase in other income was partially offset by lower contingent royalties received from previous divestitures due to the expiration of some royalty arrangements.

 

Income Taxes

 

CBIZ recorded income tax expense from continuing operations of $16.8 million and $14.7 million for the years ended December 31, 2006 and 2005, respectively. The effective tax rate for the twelve months ended December 31, 2006 was 39.6%, compared to an effective rate of 40.3% for the comparable period in 2005. The effective tax rate for the twelve months ended December 31, 2006 decreased from the comparable period in 2005, primarily due to the 2006 reduction of a valuation allowance for state tax credit carryforwards based upon an improved ability to utilize such carryforwards. The impact of this reduction was partially offset by an increase in state income tax expense due to state tax law changes that became effective during 2006.

 

Operating Practice Groups

 

Financial Services

 

 

The growth in same-unit revenue was primarily due to an increase in the aggregate number of hours charged and rates realized for traditional accounting and tax services provided to clients. The increase in same-unit revenue was partially offset by a decline in revenue from Sarbanes-Oxley consulting services. The growth in revenue from acquired businesses was provided by a valuation business in Milwaukee, Wisconsin which was acquired during the first quarter of 2005.

 

The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs and travel and meals expenses, representing 89.7% and 88.9% of total operating expenses for the twelve months ended December 31, 2006 and 2005, respectively. Personnel costs increased $14.4 million to 66.8% of revenue for the twelve months ended December 31, 2006 from 65.3% of revenue for the comparable period in 2005. The increase in personnel costs was primarily related to annual merit increases to existing employees, as well as an increase in salaries and benefits for new employees as CBIZ continues to expand its professional workforce to

accommodate revenue growth. Occupancy costs are relatively fixed in nature but increased $0.7 million for the twelve months ended December 31, 2006 from the comparable period in 2005, primarily due to additional space required in certain facilities to accommodate the additional work force. Travel and meals expenses decreased to 3.2% of revenue for the twelve months ended December 31, 2006, from 3.4% for the comparable period in 2005. The decrease in travel and meals expense as a percentage of revenue was primarily the result of the decrease in revenue generated from Sarbane-Oxley consulting services (described above), which typically involves a higher level of travel.

 

Gross margin as a percent of revenue decreased for the twelve months ended December 31, 2006 from the comparable period in 2005. The decrease in gross margin was primarily the result of a decline in revenue from Sarbanes-Oxley consulting services and an increase in personnel costs as described above.

 

Employee Services

 

 

The growth in same-unit revenue was primarily attributable to growth in our group health, payroll and human capital advisory businesses. These increases were partially offset by a decline in revenue from our specialty life insurance business. The growth in revenue from acquired businesses was provided by a property and casualty business in San Jose, California which was acquired during the first quarter of 2006, and a property and casualty business with offices in St. Joseph and Kansas City, Missouri, which was acquired during the second quarter of 2006.

 

The largest components of operating expenses for the Employee Services practice group are personnel costs, commissions paid to third party brokers, and occupancy costs, representing 86.9% and 86.6% of total operating expenses for the twelve months ended December 31, 2006 and 2005, respectively. Personnel costs increased $10.5 million to 58.5% of revenue for the year ended December 31, 2006 from 56.8% of revenue for the comparable period in 2005. Approximately $3.3 million of the increase in personnel costs was attributable to acquired businesses; the remainder of the increase was primarily the result of an increase in commissions paid to the sales force as a result of increased revenue. Commissions paid to third party brokers decreased as a percentage of revenue to 3.9% for the twelve months ended December 31, 2006, from 5.1% for the comparable period of 2005, primarily due to the termination of relationships with certain brokers and a decline in revenue at a specialty life insurance business. Occupancy costs increased $0.9 million for the twelve months ended December 31, 2006 from the comparable period of 2005, and were 7.3 % of revenue for both years. The increase in occupancy costs was primarily due to new facilities and the acquired businesses described above.

 

Gross margin as a percent of revenue decreased for the year ended December 31, 2006 from the comparable period in 2005. The decrease in gross margin was primarily a result of the decline in higher margin revenue at our specialty life insurance business.

 

CBIZ Medical Management Professionals (CBIZ MMP)

 

 

Growth in same-unit revenue was attributable to new clients obtained in 2006, the maturation of clients obtained in 2005, and growth in revenue from existing clients. The growth in revenue from acquired businesses was provided by a medical billing business based in Flint, Michigan which was acquired during the first quarter of 2006.

 

The largest components of operating expenses for CBIZ MMP are personnel costs, occupancy costs and office expenses (primarily postage), representing 88.9% and 88.2% of total operating expenses for the year ended December 31, 2006 and 2005, respectively. Personnel costs increased by $10.8 million but decreased as a percentage of revenue to 57.4% for the years ended December 31, 2006, from 57.6% for the year ended December 31, 2005. Acquired businesses contributed $6.8 million of the increase in personnel costs; the remainder of the increase was due to an increase in the number of client service staff employed by CBIZ MMP during 2006 compared to 2005, as required to support the growth in revenue. The decrease in personnel costs as a percent of revenue was the result of the acquired business’s operating expense structure. Occupancy costs increased $1.1 million, but decreased as a percentage of revenue to 6.8% from 7.0% for the years ended December 31, 2006 and 2005, respectively. The increase in occupancy costs was primarily due to the medical billing business that was acquired during the first quarter of 2006, and additional space required and expenses incurred to accommodate overall growth of the unit. Office expenses for the year ended December 31, 2006 increased $3.6 million to 9.6% of revenue from 7.8% of revenue for the year ended December 31, 2005, primarily due to the impact of an increase in postage rates, and the medical billing business that was acquired during the first quarter of 2006. In addition to medical billing services, the acquired business provides statement printing and mailing services to their clients, and thus incurs higher postage costs as a percentage of revenue than the typical CBIZ MMP billing office.

 

Gross margin as a percentage of revenue decreased for the year ended December 31, 2006 from the year ended December 31, 2005. The decrease in gross margin was primarily the result of a decrease in revenue in certain market places and the impact of the postage rate increase described above.

 

National Practice Services

 

 

The increase in same-unit revenue was primarily due to growth in our technology businesses and in our mergers and acquisitions unit. Revenue at our technology businesses increased by approximately $1.7 million for the twelve months ended December 31, 2006 over the comparable period in 2005 and was largely the result of service revenue to new clients.

 

The largest components of operating expenses for the National Practices group are personnel costs, direct costs and occupancy costs, representing 91.3% and 89.7% of total operating expenses for the twelve months ended December 31, 2006 and 2005, respectively. Personnel costs increased $1.2 million to 58.3% of revenue for the twelve months ended December 31, 2006 from 58.0% of revenue for the comparable period in 2005. The increase in personnel costs was primarily due to additional personnel in our technology business and commissions related to the mergers and acquisition transactions that closed during the twelve months ended December 31, 2006. Direct costs (which consist primarily of product costs associated with hardware sales in the technology businesses) increased $0.2 million, but decreased as a percentage of revenue to 18.9% for the twelve months ended December 31, 2006 from 19.3% for the comparable period in 2005. The increase in direct costs occurred as a result of higher product sales during 2006 versus 2005; the decrease in direct costs as a percentage of revenue occurred as a result of the mix of products that were sold. Occupancy costs are relatively fixed in nature and were $1.6 million for the years ended December 31, 2006 and 2005.

 

Gross margin as a percent of revenue increased for the twelve months ended December 31, 2006 from the twelve months ended December 31, 2005. The improvement in gross margin was primarily the result of growth in service-related revenue combined with expense management efforts.

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Revenue

 

The following table summarizes total revenue for the twelve months ended December 31, 2005 and 2004 (in thousands, except percentages):

 

 

A detailed discussion of revenue by practice group is included under “Operating Practice Groups” below.

 

Expenses

 

Operating expenses increased to $476.0 million for the twelve months ended December 31, 2005, from $427.0 million for the comparable period in 2004, an increase of $49.0 million or 11.5%. As a percent of revenue, operating expenses (excluding consolidation and integration charges) were 85.8% and 86.2% for the twelve months ended December 31, 2005 and 2004, respectively. The primary components of operating expenses are personnel costs and occupancy expense, representing 80.2% and 80.3% of total operating expenses and 69.3% and 69.7% of revenue for the twelve months ended December 31, 2005 and 2004, respectively. As the majority of CBIZ’s operating costs are relatively fixed in the short term, gross margin as a percentage of revenue generally improves with revenue growth. A more comprehensive analysis of operating expenses and their impact on gross margin is discussed by operating practice group below.

 

Consolidation and integration charges are reported as operating expenses in the accompanying consolidated statements of operations, and were 0.7% and 0.6% of revenue for the twelve months ended December 31, 2005 and 2004, respectively. The increase in consolidation and integration charges in 2005 versus 2004 was primarily due to co-location activities in the Denver and Chicago markets during 2005.

 

Corporate general and administrative expenses increased to $24.9 million from $24.1 million, but decreased as a percentage of revenue to 4.5% from 4.9% for the twelve months ended December 31, 2005 and 2004, respectively. The increase in corporate general and administrative expenses was primarily attributable to compensation and benefits, including expenses related to our incentive compensation plan.

 

Depreciation and amortization expense was $14.6 million or 2.7% of revenue for the twelve months ended December 31, 2005, compared to $15.5 million or 3.1% of revenue for the comparable period in 2004. The decrease in depreciation and amortization expense was primarily attributable to the shift from purchasing computer-related equipment and furniture to leasing such items. Operating lease costs are recorded as operating expenses rather than capitalized and recorded as depreciation expense. Lease expenses related to these items totaled $3.4 million and $2.5 million for the twelve months ended December 31, 2005 and 2004, respectively.

 

Other Income and Expense

 

Interest expense increased by $1.6 million to $3.1 million for the twelve months ended December 31, 2005, from $1.5 million for the comparable period in 2004. The increase in interest expense was the result of higher average debt and higher interest rates during the twelve months ended December 31, 2005 versus the comparable period in

2004. Average debt was $51.6 million for the twelve months ended December 31, 2005 compared to $40.9 million for the comparable period in 2004, and average interest rates were 5.4% and 3.5% for the twelve months ended December 31, 2005 and 2004, respectively. Higher debt during 2005 compared to 2004 was primarily due to $29.3 million in spending during 2005 for share repurchases and acquisitions. Debt is further discussed under “Liquidity and Capital Resources”.

 

Gain on sale of operations, net was $0.3 million for the twelve months ended December 31, 2005, and was related to the sale of client lists from the Financial Services and Employee Services practice groups. For the twelve months ended December 31, 2004, gain on sale of operations, net was $1.0 million and was related to the sale of two operations and three client lists in the Financial Services practice group, and a client list from the Employee Services practice group.

 

Other income, net was $4.0 million for the twelve months ended December 31, 2005, and $3.1 million for the comparable period in 2004. Other income (expense), net is comprised primarily of interest income, adjustments to the fair value of investments held in a rabbi trust related to the deferred compensation plan, gains and losses on sales of assets, and miscellaneous income such as contingent royalties from previous divestitures. Adjustments to the fair value of investments related to the deferred compensation plan do not impact CBIZ’s net income, as they are offset by the same adjustments to compensation expense (recorded as operating or corporate general and administrative expenses in the consolidated statements of operations). The increase in other income for the twelve months ended December 31, 2005 from the comparable period in 2004, was primarily the result of higher contingent royalties earned from previous divestitures, and an increase in the fair value of investments related to the deferred compensation plan. The increase in other income was partially offset by $0.4 million in interest income in 2004 related to a tax refund, that did not recur in 2005.

 

Income Taxes

 

CBIZ recorded income tax expense from continuing operations of $14.7 million and $7.6 million for the years ended December 31, 2005 and 2004, respectively. The effective tax rate for the twelve months ended December 31, 2005 was 40.3%, which is generally in line with statutory federal and state tax rates of approximately 40.0%. The effective tax rate for the twelve months ended December 31, 2004 was 26.9%, primarily due to a $3.5 million net tax benefit related to a favorable tax position which was successfully resolved upon completion of an examination by the Internal Revenue Service for the years ended December 31, 1998, 1999 and 2000.

 

Operating Practice Groups

 

Financial Services

 

 

The growth in same-unit revenue was primarily due to an increase in fees earned pursuant to administrative service agreements (further described under “Business Services” of Item 1), an increase in the aggregate number of hours charged to clients for consulting, litigation support, valuation services and Sarbanes-Oxley consulting and compliance services, net price increases for traditional accounting and tax services and litigation support, and

a higher number of transactions closed by our real estate brokerage firm during 2005 versus 2004. The growth in revenue from acquired businesses was provided by accounting and consulting firms in San Diego, California and Denver, Colorado as well as a valuation business in Milwaukee, Wisconsin. Divested operations represent one small unit that did not provide opportunity for growth or cross-serving.

 

The largest components of operating expenses for the Financial Services practice group are personnel costs, occupancy costs and travel and meals expense, representing 88.9% and 89.0% of total operating expenses for the twelve months ended December 31, 2005 and 2004, respectively. Personnel costs increased $21.3 million in 2005 from 2004, primarily due to additional professionals employed by CBIZ, both from acquired businesses and to accommodate growth in revenue. As a percentage of revenue, personnel costs decreased to 65.3% for the twelve months ended December 31, 2005, from 66.2% for the comparable period in 2004, primarily as the result of improved utilization of personnel. Occupancy costs are relatively fixed in nature but increased $0.4 million for the twelve months ended December 31, 2005 from the comparable period in 2004, primarily due to the business acquired in San Diego, California. As a percentage of revenue, occupancy costs decreased to 6.4% for the twelve months ended December 31, 2005 from 7.2% for the comparable period in 2004, primarily due to the increase in revenue previously discussed. Travel and meals expenses primarily relate to client reimbursable expenses, travel related to business development, client service and professional development. These expenses increased $1.5 million for the twelve months ended December 31, 2005 from the comparable period in 2004, primarily due to additional travel required to support Sarbanes-Oxley consulting as well as an increase related to the business acquired in San Diego, California.

 

Gross margin as a percent of revenue increased for the twelve months ended December 31, 2005 from the comparable period in 2004, primarily due to the improved utilization of personnel combined with an increase in net rates charged to clients for accounting and tax services and an increase in the number of hours charged to clients for consulting, litigation support, valuation services and Sarbanes-Oxley consulting and compliance services.

 

Employee Services

 

 

The growth in same-unit revenue was primarily attributable to growth in our group health, payroll, group retirement plan consulting and human capital advisory businesses. These increases were partially offset by the loss of a large client from our retail business and the pricing of property and casualty policies sold during 2005 versus 2004. The growth in revenue from acquired businesses was provided by a group benefits business in Owings Mills, Maryland and a registered investment advisory firm in Cleveland, Ohio.

 

The largest components of operating expenses for the Benefits and Insurance practice group are personnel costs, commissions paid to third party brokers, and occupancy costs, representing 86.6% and 85.8% of total operating expenses for the twelve months ended December 31, 2005 and 2004, respectively. Personnel costs increased $5.8 million to 56.8% of revenue for the year ended December 31, 2005 from 56.0% of revenue for the comparable period in 2004. Acquired businesses contributed $2.0 million of the increase in personnel costs; the remainder of the increase was primarily the result of an increase in commissions paid to the sales force as a result of increased revenue and investments in sales and support personnel intended to promote organic growth. Commissions paid to

third party brokers decreased as a percentage of revenue to 5.1% for the twelve months ended December 31, 2005 from 6.1% for the twelve months ended December 31, 2004, primarily due to a decline in commissionable revenues at a national business. Occupancy costs are relatively fixed in nature and were approximately $8.1 million for the years ended December 31, 2005 and 2004.

 

Gross margin as a percent of revenue increased for the year ended December 31, 2005 from the comparable period in 2004, primarily due to the growth in revenue, including revenue from the acquired retail businesses, and expense management efforts.

 

CBIZ Medical Management Professionals (CBIZ MMP)

 

 

Growth in revenue was attributable to new clients obtained in 2005, the maturation of clients obtained in 2004, and growth in revenue from existing clients.

 

The largest components of operating expenses for CBIZ MMP are personnel costs, occupancy costs and office expenses (primarily postage), representing 88.2% and 89.0% of total operating expenses for the twelve months ended December 31, 2005 and 2004, respectively. Personnel costs increased by $5.1 million, but decreased as a percent of revenue to 57.6% from 58.7% for the twelve months ended December 31, 2005 and 2004, respectively. The increase in personnel costs was directly related to an increase in the number of client service staff employed by CBIZ MMP during 2005 compared to 2004, as required to support the growth in revenue. Additionally, CBIZ MMP added personnel in the compliance and technology disciplines to support the infrastructure and to position the unit for continued growth in the future. Occupancy costs increased $1.0 million to 7.0% of revenue for the twelve months ended December 31, 2005 from 6.7% of revenue for the comparable period in 2004. The increase in occupancy costs was primarily due to additional space required and expenses incurred to accommodate overall growth of the unit. Office expenses for the twelve months ended December 31, 2005 increased 8.4% from the comparable period in 2004 in response to overall growth of the unit.

 

Gross margin as a percentage of revenue increased for the twelve months ended December 31, 2005 from the comparable period in 2004 as a result of the growth in revenue.

 

National Practice Services

 

 

The increase in same-unit revenue was primarily due to growth in our technology businesses of $3.5 million, offset by a decline in revenue generated by the mergers and acquisition business of $0.5 million. Growth in revenue experienced by our technology businesses was largely the result of sales to new clients, as well as higher product sales at one unit. The decline in revenue experienced by the mergers and acquisition business was attributable to the number and size of transactions that closed during 2005 versus 2004. The mergers and acquisition business closed two transactions in 2005 as compared to three transactions that closed during 2004. The growth in revenue from acquired businesses was provided by a technology firm in Cleveland, Ohio.

 

The largest components of operating expenses for the National Practices group are personnel costs, direct costs and occupancy costs, representing 89.7% and 91.2% of total operating expenses for the twelve months ended December 31, 2005 and 2004, respectively. Personnel costs increased $1.1 million for the twelve months ended December 31, 2005 from the comparable period in 2004, of which $0.4 million was attributable to the acquired business. As a percentage of revenue, personnel costs decreased to 58.0% for the twelve months ended December 31, 2005 from 60.6% for the comparable period in 2004. Direct costs (which consist primarily of product costs associated with hardware sales in the technology businesses) increased $2.1 million to 19.3% of revenue for the twelve months ended December 31, 2005 from 16.3% of revenue for the comparable period in 2004. Direct costs increased as a percentage of revenue, and personnel costs decreased as a percentage of revenue, as a larger portion of revenue was derived from product sales during the twelve months ended December 31, 2005 than in the comparable period of 2004. Occupancy costs are relatively fixed in nature and decreased as a percentage of revenue to 3.4% for the twelve months ended December 31, 2005, from 4.3% for the comparable period in 2004. The decrease in occupancy costs as a percentage of revenue resulted from a combination of revenue growth and the shutdown of unprofitable facilities.

 

Gross margin as a percent of revenue decreased for the twelve months ended December 31, 2005 from the comparable period in 2004. The decrease in gross margin was primarily the result of a change in revenue mix; revenue in the higher margin mergers and acquisitions business declined, while revenue in the lower margin technology businesses increased.

 

Financial Condition

 

Total assets were $518.3 million, total liabilities were $301.7 million and shareholders’ equity was $216.6 million as of December 31, 2006. Current assets of $245.1 million exceeded current liabilities of $175.8 million by $69.3 million.

 

Cash and cash equivalents increased by $4.1 million to $13.0 million at December 31, 2006 from December 31, 2005. Restricted cash was $17.5 million at December 31, 2006, an increase of $7.6 million from December 31, 2005. Restricted cash represents those funds held in connection with CBIZ’s NASD regulated operations and funds held in connection with the pass through of insurance premiums to various carriers. Cash and restricted cash fluctuate during the year based on the timing of cash receipts and related payments.

 

Accounts receivable, net were $106.3 million at December 31, 2006, an increase of $9.8 million from December 31, 2005. Days sales outstanding (DSO) from continuing operations was 67 days and 66 days at December 31, 2006 and December 31, 2005, respectively. DSO represents accounts receivable (before the allowance for doubtful accounts) and unbilled revenue (net of realization adjustments) at the end of the period, divided by trailing twelve month daily revenue. CBIZ provides DSO data because such data is commonly used as a performance measure by analysts and investors and as a measure of the Company’s ability to collect on receivables in a timely manner.

 

Other current assets were $9.7 million and $9.0 million at December 31, 2006 and December 31, 2005, respectively. Other current assets are primarily comprised of prepaid assets. Balances may fluctuate during the year based upon the timing of cash payments and amortization of prepaid expenses.

 

Funds held for clients are directly offset by client fund obligations. Funds held for clients fluctuate during the year based on the timing of cash receipts and related payments, and are further described in Note 1 to the accompanying consolidated financial statements.

 

Notes receivable (current and non-current) decreased by $5.0 million at December 31, 2006 from December 31, 2005. The decrease in notes receivable relates primarily to a payment received in the second quarter of 2006 for contingent proceeds earned on the Employee Services business that was sold in the third quarter of 2005.

 

Goodwill and other intangible assets, net of accumulated amortization, increased by $30.6 million at December 31, 2006 from December 31, 2005. Acquisitions, including contingent consideration earned, resulted in a $29.5 million increase in goodwill and other intangible assets during the twelve months ended December 31, 2006. Additionally, CBIZ acquired the trade-name of a nationally recognized practice which is recorded as an other intangible asset. Intangible assets decreased by $4.5 million as a result of amortization expense.

 

Assets of the deferred compensation plan represent participant deferral accounts. The assets are held in a rabbi trust and are directly offset by obligations of the plan, representing obligations due to the participants. Although the assets of the plan are specifically designated as available to CBIZ solely for the purpose of paying benefits under the deferred compensation plan, in the event that CBIZ became insolvent, the assets would be available to all unsecured general creditors. The plan is described in further detail in Note 11 to the accompanying consolidated financial statements.

 

Other assets increased by $1.7 million, to $5.4 million at December 31, 2006, from $3.6 million at December 31, 2005. The increase in other assets was primarily the result of deferred debt costs related to the convertible senior subordinated notes (described in further detail below), and was partially offset by a decrease in the carrying value of a life insurance policy, recorded as a result of CBIZ’s adoption of SAB 108. See further discussion of SAB 108 in Note 1 to the accompanying consolidated financial statements.

 

The accounts payable balance of $28.0 million at December 31, 2006 reflects amounts due to suppliers and vendors; balances fluctuate during the year based on the timing of cash payments. Accrued personnel costs were $36.4 million at December 31, 2006 and represent amounts due for payroll, payroll taxes, employee benefits and incentive compensation; balances fluctuate during the year based on the timing of payments and our estimate of incentive compensation costs.

 

Other liabilities (current and non-current) increased by $5.4 million at December 31, 2006 from December 31, 2005, primarily as a result of acquisitions, differences between cash payments required under various operating leases versus rent expense which is recognized on a straight-line basis (“deferred rent”), and a net increase in notes payable as the result of payments owed by CBIZ as contingent proceeds earned by acquired businesses. The increase in deferred rent was primarily the result of CBIZ’s adoption of SAB 108. See further discussion of SAB 108 in Note 1 to the accompanying consolidated financial statements.

 

Income taxes payable of $3.7 million at December 31, 2006 and $1.1 million at December 31, 2005 represents our estimate of taxes due on current year income. The increase in income taxes payable at December 31, 2006 from December 31, 2005 was primarily due to the provision for income taxes for the twelve months ended December 31, 2006, offset by estimated tax payments and tax benefits related to the exercise of stock options.

 

On May 30, 2006, CBIZ completed a $100.0 million offering of convertible senior subordinated notes (“Notes”) due in 2026. Net proceeds from the sale of the Notes were used to repurchase approximately 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 our $100.0 million unsecured credit facility. See further discussion under “Liquidity and Capital Resources”.

 

Stockholders’ equity decreased $38.1 million to $216.6 million at December 31, 2006 from $254.7 million at December 31, 2005. During 2006, CBIZ recorded a $2.6 million adjustment to stockholders’ equity in accordance with the adoption of SAB 108. This adjustment resulted in a decrease to stockholders’ equity and is further described in Note 1 to the accompanying consolidated financial statements. Stockholders’ equity also decreased as a result of CBIZ repurchasing 9.7 million shares of common stock during 2006, for a total cost of approximately $74.5 million. These decreases were partially offset by net income of $24.4 million, the exercise of stock options and related tax benefits which contributed $8.7 million, the issuance of $4.0 million in common shares related to business acquisitions, and $1.9 million related to the recognition of stock compensation expense.

 

Liquidity and Capital Resources

 

CBIZ’s principal source of net operating cash is derived from the collection of fees and commissions for professional services and products rendered to its clients. CBIZ supplements net operating cash with an unsecured credit facility and with $100.0 million in convertible senior subordinated notes (“Notes”). The Notes, were sold to qualified institutional buyers on May 30, 2006, mature on June 1, 2026, and may be redeemed by CBIZ in whole or in part anytime after June 6, 2011. CBIZ received approximately $97.0 million in net proceeds from the sale of the Notes, after deducting expenses of approximately $3.0 million. CBIZ used approximately $52.5 million of the net proceeds to repurchase 6.6 million shares of CBIZ common stock (concurrent with closing the Notes). The remaining proceeds were used to repay the outstanding balance under CBIZ’s credit facility, which bears interest at a higher rate than the 3.125% interest rate on the Notes.

 

CBIZ’s $100.0 million unsecured credit facility was amended during the second quarter of 2006 to permit issuance of the Notes. The facility has a five year term expiring in February 2011, and carries an option to increase the commitment to $150.0 million. At December 31, 2006, CBIZ did not have outstanding borrowings under its credit facility, but did have letters of credit and performance guarantees totaling $3.7 million. Available funds under the facility based on the terms of the commitment were approximately $83.7 million at December 31, 2006. Management believes that cash generated from operations, combined with the available funds from the credit facility, provides CBIZ the financial resources needed to meet business requirements for the foreseeable future, including capital expenditures, working capital requirements, and strategic investments.

 

The facility allows for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock. Under the credit facility, CBIZ is required to meet certain financial covenants with respect to (i) minimum net worth; (ii) maximum leverage ratio; and (iii) a minimum fixed charge coverage ratio. CBIZ believes it is in compliance with its covenants, as amended effective March 12, 2007. The amendment to the credit facility is filed as exhibit 10.9 to this Annual Report on Form 10-K.

 

CBIZ may also obtain funding by offering securities or debt, through public or private markets. CBIZ currently has a shelf registration under which it can offer such securities. See Note 12 to the consolidated financial statements included herewith for a description of the shelf registration statement.

 

Sources and Uses of Cash

 

The following table summarizes our cash flows from operating, investing and financing activities for the years ended December 31, 2006, 2005 and 2004 (in thousands):

 

Operating Activities

 

Cash flows from operating activities represent net income adjusted for certain non-cash items and changes in assets and liabilities. CBIZ typically experiences a net use of cash from operations during the first quarter of its fiscal year, as accounts receivable balances grow in response to the seasonal increase in first quarter revenue generated by the Financial Services practice group (primarily for accounting and tax services). This net use of cash is followed by strong operating cash flow during the second and third quarters, as a significant amount of revenue generated by the Financial Services practice group during the first four months of the year are billed and collected in subsequent quarters.

 

During the year ended December 31, 2006, net cash provided by operating activities was $28.2 million, compared to $54.3 million for the comparable period in 2005. The decrease in net cash provided by operating activities is 2006 was primarily the result of a $4.0 million income tax refund received during 2005 that did not recur in 2006, a decrease in the change in accrued personnel costs of $11.2 million, and an increase in the change in accounts receivable, net of $5.9 million. The change in accrued personnel costs was primarily related to CBIZ’s incentive compensation program, as amounts earned by employees under the program did not vary significantly from 2005 to 2006. The increase in accounts receivable was primarily the result of businesses acquired during 2006, and overall growth in the business.

 

During 2005, cash provided by operating activities was $54.3 million compared to $20.9 million in 2004. The increase in net cash provided by operating activities in 2005 was primarily due to a decrease in the change in income taxes of $13.2 million, a decrease in the change in accounts receivable, net, of $8.3 million, and an increase in the change in accrued personnel costs of $7.2 million. The change in income taxes was related to a $4.0 million refund received during 2005, combined with the overpayment of taxes during 2004 which were used to reduce 2005 tax payments. The change in accrued personnel costs was primarily related to an increase in the amount of compensation earned by employees under CBIZ’s incentive compensation program in 2005 versus 2004.

 

Investing Activities

 

CBIZ’s investing activities typically result in a net use of cash, and generally consist of payments toward business acquisitions, other intangible assets and capital expenditures, proceeds received from divestitures and discontinued operations, and activity related to notes receivable. CBIZ used $21.9 million, $15.7 million and $9.1 million in net cash for investing activities during the years ended December 31, 2006, 2005 and 2004, respectively.

 

Investing uses of cash during the year ended December 31, 2006 primarily consisted of $22.1 million of net cash used towards business acquisitions, $2.4 million for the acquisition of other intangible assets and $6.5 million for capital expenditures (net), and were partially offset by $7.3 million in proceeds received from the sale of discontinued operations, and $1.9 million in net collections on notes receivable.

 

Investing uses of cash during the year ended December 31, 2005 primarily consisted of $12.6 million of net cash used toward business acquisitions and $6.8 million for capital expenditures (net), and were partially offset by $2.0 million in proceeds received from the sale of discontinued operations and $1.7 million in net collections on notes receivable.

 

Investing uses of cash during the year ended December 31, 2004 primarily consisted of $5.7 million of net cash used toward business acquisitions and $6.6 million for capital expenditures (net), and were partially offset by $4.6 million in proceeds from the sale of various operations, and $0.2 million in net collections on notes receivable. Additionally, investing uses of cash during 2004 consisted of $1.6 million for investing activities of discontinued operations, which related to capital expenditures.

 

Capital expenditures during the years ended December 31, 2006, 2005 and 2004 primarily consisted of investments in technology, leasehold improvements, and purchases of furniture and equipment.

 

Financing Activities

 

CBIZ’s financing cash flows typically consist of activity related to our convertible notes, net borrowing and payment activity from the credit facility, repurchases of CBIZ common stock, and proceeds from the exercise of

stock options. Net cash used in financing activities during the years ended December 31, 2006, 2005 and 2004 was $2.3 million, $35.0 million, and $10.3 million, respectively.

 

Financing uses of cash during the year ended December 31, 2006 included $32.2 million in net payments toward the credit facility, $74.5 million in cash used to repurchase 9.7 million shares of CBIZ common stock, $3.6 million in cash paid for debt issuance costs (primarily related to the convertible senior subordinated notes), and $0.7 million in net payments towards notes payable and capitalized leases. These uses of cash were substantially offset by sources of cash which included $100.0 million in proceeds from the issuance of convertible senior subordinated notes, and $8.7 million in proceeds from the exercise of stock options (including tax benefits).

 

Financing uses of cash during the year ended December 31, 2005 included $21.7 million in net payments toward the credit facility, $16.7 million in cash used to repurchase approximately 3.8 million shares of CBIZ common stock, and $0.8 million in net payments towards notes payable and capitalized leases. These uses of cash were partially offset by $4.2 million in proceeds from the exercise of stock options.

 

Financing uses of cash during the year ended December 31, 2004 included $50.4 million in cash used to repurchase approximately 10.4 million shares of CBIZ common stock, $0.7 million in cash paid for fees to modify the credit facility, and $0.4 million in net payments towards notes payable and capitalized leases. These uses of cash were partially offset by sources of cash which included $39.9 million in net proceeds from the credit facility and $1.4 million in proceeds from the exercise of stock options.

 

Obligations and Commitments

 

CBIZ’s aggregate amount of future obligations for the next five years and thereafter is set forth below (in thousands):

 

 

 

(1) Excludes cash expected to be received under subleases.

 

Off-Balance Sheet Arrangements

 

CBIZ maintains administrative service agreements with independent CPA firms (as described more fully under “Business Services — Financial Services”), which qualify as variable interest entities under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended. The impact to CBIZ of this accounting pronouncement is not material to the financial condition, results of operations, or cash flows of CBIZ, and is further discussed in Note 1 to the consolidated financial statements included herewith.

 

CBIZ provides guarantees of performance obligations for a CPA firm with which CBIZ maintains an administrative service agreement. Potential obligations under the guarantees totaled $1.7 million and $2.4 million at December 31, 2006 and 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. The liability is recorded as other current liabilities in the accompanying consolidated balance sheets. CBIZ does not expect it will be required to make payments under these guarantees.

 

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

 

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 December 31, 2006, CBIZ was not aware of any obligations arising under indemnification agreements that would require material payments.

 

Interest Rate Risk Management

 

CBIZ has used interest rate swaps to manage the interest rate mix of its credit facility and related overall cost of borrowing. Interest rate swaps involve the exchange of floating for fixed rate interest payments to effectively convert floating rate debt into fixed rate debt based on a one, three, or nine-month U.S. dollar LIBOR. Interest rate swaps allow CBIZ to maintain a target range of fixed to floating rate debt. During the years ended December 31, 2006 and 2005, management did not utilize interest rate swaps. During 2006, CBIZ sold $100.0 million in convertible senior subordinated notes (“Notes”) bearing a fixed interest rate of 3.125% to qualified institutional buyers. As the Notes mature on June 1, 2026 and have call protection until June 6, 2011, we believe this low cost of borrowing mitigates our interest rate risk. Management will continue to evaluate the potential use of interest rate swaps as it deems appropriate under certain operating and market conditions.

 

In connection with payroll services provided to clients, CBIZ collects funds from its clients’ accounts in advance of paying these client obligations. These funds held for clients are segregated and invested in short-term investments and Auction Rate Securities (“ARS”), which are classified as marketable securities. ARS generally have a high credit quality, are highly liquid, and generate higher rates of return than typical money market investments. During 2006, the average balance of funds held for clients related to payroll services was approximately $45.8 million, and the average interest yield was approximately 5.0% (on an after-tax basis). The interest income on these short-term investments mitigates the interest rate risk for the borrowing costs of CBIZ’s credit facility, as the rates on both the investments and the outstanding borrowings against the credit facility float based on market conditions.

 

Critical Accounting Policies

 

The policies discussed below are considered by management to be critical to the understanding of CBIZ’s consolidated financial statements because their application places significant demand on management’s judgment, with financial reporting results relying on estimation about the effects of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that estimates may require adjustment if future events develop differently than expected.

 

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 Generally Accepted Accounting Principles (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 data necessary from the carriers to properly record revenue becomes available; 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.

 

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. Revenue earned on statement mailing services is recognized when statements are processed and mailed. Revenue from the sale of billing systems is recognized upon installation of the system, while the related system maintenance revenue is recognized over the period covered by the maintenance agreement.

 

National Practices Services — 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.

 

Valuation of Accounts Receivable and Notes Receivable

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Specifically, management must make estimates of the collectibility of accounts receivable, including unbilled accounts receivable, related to current period service revenue. Management analyzes historical bad debts, client credit-worthiness, the age of accounts receivable and current economic trends and conditions when evaluating the adequacy of the allowance for doubtful accounts and the collectibility of notes receivable. Significant management judgments and estimates must be made and used in connection with establishing the allowance for doubtful accounts in any accounting period. Material differences may result if management made different judgments or utilized different estimates.

 

Valuation of Goodwill

 

CBIZ utilizes the purchase method of accounting for all business combinations in accordance with Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations.” Intangible assets, which include client lists and non-compete agreements, are amortized principally by the straight-line method over their expected period of benefit, not to exceed ten years.

 

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is not amortized. Goodwill is tested for impairment annually during the fourth quarter of each year, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. There was no goodwill impairment during the years ended December 31, 2006, 2005, or 2004.

 

Loss Contingencies

 

Loss contingencies, including litigation claims, are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis that often depends on judgment about potential actions by third parties.

 

Incentive Compensation

 

Determining the amount of expense to recognize for incentive compensation at interim and annual reporting dates involves management judgment. Expenses accrued for incentive compensation are based upon expected financial results for the year, and the ultimate determination of incentive compensation can not be made until after year-end results are finalized. Thus, amounts accrued are subject to change in future interim periods if actual future financial results are higher or lower than expected. In arriving at the amount of expense to recognize, management believes it makes reasonable judgments using all significant information available.

 

Income Taxes

 

Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves management judgment. Management estimates an annual effective tax rate (which takes into consideration expected full-year results), which is applied to our quarterly operating results to determine the provision for income tax expense. In the event there is a significant, unusual or infrequent item recognized in our quarterly operating results, the tax attributable to that item is recorded in the interim period in which it occurs. Circumstances that could cause our estimates of effective income tax rates to change include the impact of information that subsequently becomes available as we prepare our corporate income tax returns; the level of actual pre-tax income; revisions to tax positions taken as a result of further analysis and consultation; the receipt and expected utilization of federal and state income tax credits; and changes mandated as a result of audits by taxing authorities. Management believes it makes reasonable judgments using all significant information available when estimating income taxes.

 

Other Significant Policies

 

Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above are nevertheless important to understanding the consolidated financial statements. Those policies are described in Note 1 to the consolidated financial statements contained herein.

 

New Accounting Pronouncements

 

In July 2006, the Financial Accounting Standards Board (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. The estimated cumulative effect of adopting FIN 48 is expected to be an increase in the opening balance of retained earnings on January 1, 2007 of between $0.4 million and $0.6 million.

 

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 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 December 2006, the FASB issued Staff Position (FSP) EITF 00-19-2, “Accounting for Registration Payment Arrangements.” This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, “Accounting for Contingencies.” The guidance is effective for fiscal years beginning after December 15, 2006. The adoption of EITF 00-19-2 is not expected to have a material impact on CBIZ’s consolidated financial statements.

 

CBIZ’s floating rate debt under its credit facility exposes the Company to interest rate risk. Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. A

change in the Federal Funds Rate, or the reference rate set by the Bank of America, would affect the rate at which CBIZ could borrow funds under its credit facility. Although CBIZ did not have a balance outstanding under its credit facility at December 31, 2006, CBIZ may borrow funds under its credit facility in future periods which could expose the Company to interest rate risk.

 

CBIZ does not engage in trading market risk sensitive instruments. CBIZ has used interest rate swaps to manage the interest rate mix of its credit facility and related overall cost of borrowing. Interest rate swaps involve the exchange of floating for fixed rate interest payments to effectively convert floating rate debt into fixed rate debt based on a one, three, or six-month U.S. dollar LIBOR. Interest rate swaps allow CBIZ to maintain a target range of fixed to floating rate debt. Management will continue to evaluate the potential use of interest rate swaps as it deems appropriate under certain operating and market conditions.