UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

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

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

Commission File Number 1-32961

CBIZ, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

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

Class of Common Stock		Outstanding at October 31, 2010
Common Stock, par value $0.01 per share		49,459,753

 

 

CBIZ, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets — September 30, 2010 and December 31, 2009			3
Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2010 and 2009			4
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2010 and 2009			5
Notes to the Consolidated Financial Statements			6-26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27-48
Item 3. Quantitative and Qualitative Disclosures about Market Risk			48
Item 4.Controls and Procedures			49
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 6. Exhibits			52
Signature			53
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CBIZ, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands)

		SEPTEMBER 30,				DECEMBER 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	719			$	9,257
Restricted cash			12,350				15,432
Accounts receivable, net			155,781				128,766
Notes receivable — current, net			1,067				1,766
Income taxes refundable			—				3,391
Deferred income taxes — current			4,591				7,579
Other current assets			8,469				10,701
Assets of discontinued operations			348				4,109
Current assets before funds held for clients			183,325				181,001
Funds held for clients — current			77,613				87,925
Total current assets			260,938				268,926
Property and equipment, net			24,781				26,833
Notes receivable — non-current, net			798				1,041
Deferred income taxes — non-current, net			—				237
Goodwill and other intangible assets, net			397,898				375,211
Assets of deferred compensation plan			30,392				27,457
Funds held for clients — non-current			10,102				10,545
Other assets			7,763				2,847
Total assets		$	732,672			$	713,097
LIABILITIES
Current liabilities:
Accounts payable		$	26,310			$	25,707
Income taxes payable — current			1,984				—
Accrued personnel costs			36,844				34,249
Notes payable — current			307				13,410
Convertible notes, net			38,811				—
Other current liabilities			19,887				13,883
Liabilities of discontinued operations			375				2,281
Current liabilities before client fund obligations			124,518				89,530
Client fund obligations			90,822				101,279
Total current liabilities			215,340				190,809
Convertible notes, net			115,987				93,848
Bank debt			119,000				110,000
Income taxes payable — non-current			5,156				6,686
Deferred income taxes — non-current, net			633				—
Deferred compensation plan obligations			30,392				27,457
Other non-current liabilities			19,973				13,679
Total liabilities			506,481				442,479
STOCKHOLDERS’ EQUITY
Common stock			1,090				1,081
Additional paid-in capital			534,064				518,637
Retained earnings			47,702				21,464
Treasury stock			(355,735	)			(269,642	)
Accumulated other comprehensive loss			(930	)			(922	)
Total stockholders’ equity			226,191				270,618
Total liabilities and stockholders’ equity		$	732,672			$	713,097

See the accompanying notes to the consolidated financial statements.

CBIZ, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share data)

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2010				2009				2010				2009
Revenue		$	176,486			$	175,775			$	567,561			$	577,423
Operating expenses			158,156				160,017				489,624				499,432
Gross margin			18,330				15,758				77,937				77,991
Corporate general and administrative expenses			6,907				8,491				22,529				23,874
Operating income			11,423				7,267				55,408				54,117
Other income (expense):
Interest expense			(3,735	)			(3,181	)			(10,314	)			(10,206	)
Gain on sale of operations, net			89				910				465				1,004
Other income, net			1,015				3,144				1,141				5,449
Total other (expense) income, net			(2,631	)			873				(8,708	)			(3,753	)
Income from continuing operations before income tax expense			8,792				8,140				46,700				50,364
Income tax expense			3,464				2,749				17,594				19,711
Income from continuing operations after income tax expense			5,328				5,391				29,106				30,653
Loss from discontinued operations, net of tax			(533	)			(315	)			(1,873	)			(751	)
Gain (loss) on disposal of discontinued operations, net of tax			37				27				(995	)			178
Net income		$	4,832			$	5,103			$	26,238			$	30,080
Earnings (loss) per share:
Basic:
Continuing operations		$	0.09			$	0.09			$	0.48			$	0.50
Discontinued operations			(0.01	)			(0.01	)			(0.05	)			(0.01	)
Net income		$	0.08			$	0.08			$	0.43			$	0.49
Diluted:
Continuing operations		$	0.09			$	0.09			$	0.48			$	0.50
Discontinued operations			(0.01	)			(0.01	)			(0.05	)			(0.01	)
Net income		$	0.08			$	0.08			$	0.43			$	0.49
Basic weighted average shares outstanding			59,108				61,176				60,680				61,302
Diluted weighted average shares outstanding			59,579				61,712				61,212				61,897

See the accompanying notes to the consolidated financial statements.

CBIZ, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

		NINE MONTHS ENDED
		SEPTEMBER 30,
		2010				2009
Cash flows from operating activities:
Net income		$	26,238			$	30,080
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations, net of tax			1,873				751
Loss (gain) on disposal of discontinued operations, net of tax			995				(178	)
Gain on sale of operations, net			(465	)			(1,004	)
Loss on redemption of 2006 convertible notes			1,996				—
Impairment on auction rate security			263				—
Amortization of discount on convertible notes			3,181				2,946
Amortization of deferred financing costs			804				661
Bad debt expense, net of recoveries			3,462				6,182
Depreciation and amortization expense			15,257				15,129
Adjustment to contingent earnout liability			(1,449	)			—
Deferred income taxes			(1,226	)			(138	)
Employee stock awards			3,943				3,465
Excess tax benefits from share based payment arrangements			(77	)			(397	)
Changes in assets and liabilities, net of acquisitions and divestitures:
Restricted cash			3,082				1,803
Accounts receivable, net			(30,824	)			(27,940	)
Other assets			3,619				430
Accounts payable			244				(1,656	)
Income taxes payable			4,371				6,362
Accrued personnel costs			2,481				(3,837	)
Other liabilities and other			3,896				716
Net cash provided by continuing operations			41,664				33,375
Operating cash flows (used in) provided by discontinued operations			(2,033	)			727
Net cash provided by operating activities			39,631				34,102
Cash flows from investing activities:
Business acquisitions and contingent consideration, net of cash acquired			(35,358	)			(17,073	)
Acquisition of other intangible assets			(10	)			(11	)
Proceeds from sales of divested and discontinued operations			1,265				788
Additions to property and equipment, net			(2,055	)			(3,442	)
Additions to notes receivable			(129	)			—
Payments received on notes receivable			147				729
Investing cash flows used in discontinued operations			—				(43	)
Net cash used in investing activities			(36,140	)			(19,052	)
Cash flows from financing activities:
Proceeds from bank debt			425,125				334,795
Payments of bank debt			(416,125	)			(344,095	)
Proceeds from issuance of 2010 convertible notes			130,000				—
Redemption of 2006 convertible notes			(60,000	)			—
Payments of notes payable and capitalized leases			(126	)			(220	)
Payments for acquisition of treasury stock			(86,094	)			(13,101	)
Proceeds from exercise of stock options			1,182				1,127
Excess tax benefit from exercise of stock awards			77				397
Debt issuance costs			(6,068	)			(36	)
Net cash used in financing activities			(12,029	)			(21,133	)
Net decrease in cash and cash equivalents			(8,538	)			(6,083	)
Cash and cash equivalents at beginning of year			9,257				9,672
Cash and cash equivalents at end of period		$	719			$	3,589

See the accompanying notes to the consolidated financial statements.

CBIZ, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.

Summary of Significant Accounting Policies

		The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements.
		In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) considered necessary to present fairly the financial position of CBIZ, Inc. and its consolidated subsidiaries (“CBIZ” or the “Company”) as of September 30, 2010 and December 31, 2009, the consolidated results of operations for the three and nine months ended September 30, 2010 and 2009, and the cash flows for the nine months ended September 30, 2010 and 2009. Due to seasonality, potential changes in economic conditions, interest rate fluctuations and other factors, the results of operations for such interim periods are not necessarily indicative of the results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2009.
		Principles of Consolidation
		The accompanying consolidated financial statements reflect the operations of CBIZ, Inc. and all of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated financial statements do not reflect the operations or accounts of variable interest entities as the impact is not material to the financial condition, results of operations or cash flows of CBIZ. See CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2009 for further discussion.
		Use of Estimates
		The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Management’s estimates and assumptions include, but are not limited to: estimates of collectability of accounts receivable and unbilled revenue, the realizability of goodwill and other intangible assets, the fair value of certain assets, the valuation of stock options in determining compensation expense, the estimate of accrued liabilities (such as incentive compensation, self-funded health insurance accruals, legal reserves, future contingent purchase price obligations, and consolidation and integration reserves), the provision for income taxes, the realizability of deferred tax assets, and other factors. Management’s estimates and assumptions are derived from and are continually evaluated based upon available information, judgment and experience. Actual results could differ from those estimates.
		Reclassifications
		Certain amounts in the 2009 consolidated financial statements and disclosures have been reclassified to conform to the current year presentation.
		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, the fee to the client is fixed or determinable, and collectability is reasonably assured.
		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 related to those groups, is included in the Annual Report on Form 10-K for the year ended December 31, 2009.

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

		New Accounting Pronouncements
		In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20 (“ASU 2010-20”), which amends Accounting Standards Codification (“ASC”) 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve financial statement users’ evaluation of (1) the nature of credit risk associated with an entity’s financing receivables, (2) how an entity analyzes and assesses risks in estimating its allowance for credit losses, and (3) the changes in the allowances for credit losses and the reasons for those changes. ASU 2010-20 is effective for the first reporting period beginning after December 15, 2010. The Company is currently evaluating the impact of this update, but does not expect the adoption will have a material impact on its consolidated financial statements.
		In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which adds disclosure requirements about transfers in and out of Levels 1 and 2, for activity relating to Level 3 measurements, and clarifies input and valuation techniques. ASU 2010-06 is effective for the first reporting period beginning after December 15, 2009, except as it pertains to the requirement to provide the Level 3 activity for purchases, sales, issuances and settlements on a gross basis. This Level 3 requirement will be effective for fiscal years beginning after December 15, 2010, and is not expected to have a material impact on CBIZ’s consolidated financial statements. CBIZ adopted the applicable provisions of the accounting guidance for the three and nine month interim reporting periods ended September 30, 2010. The adoption did not have a material impact on CBIZ’s consolidated financial statements.
		In December 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 clarifies and improves financial reporting by entities involved with variable interest entities. ASU 2009-17 is effective as of the beginning of the annual period beginning after November 15, 2009. CBIZ adopted the provisions of this accounting guidance for the three and nine month interim periods ended September 30, 2010. The adoption did not have a material impact on CBIZ’s consolidated financial statements.

2.

Accounts Receivable, Net

Accounts receivable balances at September 30, 2010 and December 31, 2009 were as follows (in thousands):

		2010				2009
Trade accounts receivable		$	120,240			$	109,665
Unbilled revenue			45,549				27,611
Total accounts receivable			165,789				137,276
Allowance for doubtful accounts			(10,008	)			(8,510	)
Accounts receivable, net		$	155,781			$	128,766

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

3.

Goodwill and Other Intangible Assets, Net

The components of goodwill and other intangible assets, net at September 30, 2010 and December 31, 2009 were as follows (in thousands):

		2010				2009
Goodwill		$	317,066			$	291,120
Intangible assets:
Client lists			112,523				108,615
Other intangible assets			9,262				9,394
Total intangible assets			121,785				118,009
Total goodwill and intangibles assets			438,851				409,129
Accumulated amortization:
Client lists			(36,335	)			(29,918	)
Other intangible assets			(4,618	)			(4,000	)
Total accumulated amortization			(40,953	)			(33,918	)
Goodwill and other intangible assets, net		$	397,898			$	375,211

4.

Depreciation and Amortization

Depreciation and amortization expense for property and equipment and intangible assets was as follows (in thousands):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2010				2009				2010				2009
Operating expenses		$	4,959			$	4,894			$	14,956			$	14,595
Corporate general and administrative expenses			85				168				301				534
Total depreciation and amortization expense		$	5,044			$	5,062			$	15,257			$	15,129

5.

Borrowing Arrangements

CBIZ has three primary debt arrangements that provide the Company with the capital to meet its working capital needs as well as the flexibility to continue with its strategic initiatives, including business acquisitions and share repurchases: the 2010 Convertible Senior Subordinated Notes (“2010 Notes”) totaling $130 million, the 2006 Convertible Senior Subordinated Notes (“2006 Notes”) totaling $100 million, and a $275 million unsecured credit facility. In connection with CBIZ’s 2010 Notes offering, the Company used proceeds to repurchase $60 million of the 2006 Notes.

		2010 Convertible Senior Subordinated Notes
		On September 27, 2010, CBIZ sold and issued $130.0 million of 2010 Notes to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended. The 2010 Notes are direct, unsecured, senior subordinated obligations of CBIZ and rank (i) junior in right of payment to all of CBIZ’s existing and future senior indebtedness, (ii) equal in right of payment with any other future senior subordinated indebtedness, and (iii) senior in right of payment to all existing and future obligations, if any, that are designated as subordinated to the 2010 Notes. In connection with the issuance and sale of the 2010 Notes, CBIZ entered into an indenture (the “Indenture”) dated as of September 27, 2010, with U.S. Bank National Association as trustee.

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

		CBIZ received net proceeds from the sale of the 2010 Notes of approximately $126.4 million, after deducting offering expenses of approximately $3.6 million. Net proceeds from the sale were used to repurchase $60.0 million of the 2006 Notes through privately negotiated transactions, repurchase 4.6 million shares of CBIZ common stock at a cost of approximately $25.1 million, and pay down outstanding borrowings under the $275.0 million senior unsecured credit facility. Approximately $3.5 million in debt issuance costs related to the 2010 Notes have been recorded as other assets in the accompanying consolidated balance sheets. Debt issuance costs are being amortized over a period of five years.
		The terms of the 2010 Notes are governed by the Indenture. The 2010 Notes bear interest at a rate of 4.875% per annum, payable in cash semi-annually in arrears on April 1 and October 1 beginning April 1, 2011. The 2010 Notes mature on October 1, 2015 unless earlier redeemed, repurchased or converted. The 2010 Notes are convertible into CBIZ common stock at a rate equal to 134.9255 shares per $1,000 principal amount of the 2010 Notes (equal to an initial conversion price of approximately $7.41 per share), subject to adjustment as described in the Indenture. Upon conversion, CBIZ will deliver for each $1,000 principal amount of 2010 Notes, an amount consisting of cash equal to the lesser of $1,000 or the conversion value (as defined in the Indenture) and, to the extent that the conversion value exceeds $1,000, at CBIZ’s election or as required by the rules of the New York Stock Exchange, cash or shares of CBIZ common stock in respect to the remainder.
		If CBIZ undergoes a “fundamental change” (as defined in the Indenture), holders of the 2010 Notes will have the right, subject to certain conditions, to require CBIZ to repurchase for cash all or a portion of their 2010 Notes at a repurchase price equal to 100% of the principal amount of the 2010 Notes to be repurchased plus accrued and unpaid interest, including additional amounts, if any.
		CBIZ separately accounts for the debt and equity components of the 2010 Notes. The carrying amount of the debt and equity components at September 30, 2010 was as follow (in thousands):

Principal amount of 2010 Notes		$	130,000
Unamortized discount			(14,013	)
Net carrying amount		$	115,987
Additional paid-in-capital, net of tax		$	8,153

The discount on the liability component of the 2010 Notes is being amortized using the effective interest method based upon an annual effective rate of 7.5%, which represents the market rate for similar debt without a conversion option at the issuance date. The discount is being amortized over the term of the 2010 Notes which is five years from the date of issuance. At September 30, 2010, the unamortized discount had a remaining amortization period of approximately 60 months.

		2006 Convertible Senior Subordinated Notes
		On May 30, 2006, CBIZ sold and issued $100.0 million of Convertible Senior Subordinated Notes. The 2006 Notes are direct, unsecured, senior subordinated obligations of CBIZ and rank (i) junior in right of payment to all of CBIZ’s existing and future senior indebtedness, (ii) equal in right of payment with any other future senior subordinated indebtedness, and (iii) senior in right of payment to all subordinated indebtedness. The terms of the 2006 Notes are governed by the Indenture dated as of May 30, 2006, with U.S. Bank National Association as trustee. The 2006 Notes and Indenture are further described in CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2009.
		The 2006 Notes bear interest at a rate of 3.125% per annum, payable in cash semi-annually in arrears on each June 1 and December 1. The 2006 Notes mature on June 1, 2026 and may be redeemed by CBIZ in whole or in part anytime after June 6, 2011. In addition, holders of the 2006 Notes will have the right to require CBIZ to repurchase for cash all or a portion of their 2006 Notes on June 1, 2011. The 2006 Notes are convertible into CBIZ common stock at a rate equal to 94.1035 shares per $1,000

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

		principal amount of the 2006 Notes (equal to an initial conversion price of approximately $10.63 per share), subject to adjustment as described in the Indenture. Upon conversion, CBIZ will deliver for each $1,000 principal amount of 2006 Notes, an amount consisting of cash equal to the lesser of $1,000 or the conversion value (as defined in the Indenture) and, to the extent that the conversion value exceeds $1,000, at CBIZ’s election, cash or shares of CBIZ common stock in respect to the remainder. At September 30, 2010, the 2006 Notes have been classified as a current liability based on the provision in the Indenture that gives the holders of the Notes the right to require CBIZ to repurchase the 2006 Notes on June 1, 2011.
		On September 27, 2010, concurrent with the closing of the 2010 Notes, CBIZ repurchased $60.0 million of the 2006 Notes. The 2006 Notes were purchased at par through privately negotiated transactions and resulted in a non-cash pre-tax loss of approximately $2.0 million, primarily as a result of the write-off of the unamortized discount and the unamortized deferred debt costs related to the $60.0 million of 2006 Notes. The $2.0 million pre-tax loss was recorded in other income, net in the consolidated statements of operations for the three and nine months ended September 30, 2010.
		CBIZ separately accounts for the debt and equity components of the 2006 Notes. The carrying amount of the debt and equity components were as follows (in thousands):

		SEPTEMBER 30,				DECEMBER 31,
		2010				2009
Principal amount of 2006 Notes		$	40,000			$	100,000
Unamortized discount			(1,189	)			(6,152	)
Net carrying amount		$	38,811			$	93,848
Additional paid-in-capital		$	11,425			$	11,425

		The discount on the liability component of the 2006 Notes is being amortized using the effective interest method based upon an annual effective rate of 7.8%, which represents the market rate at initial measurement for similar debt without a conversion option at the issuance date. The discount is being amortized over five years from the date of issuance, which coincides with the first date that holders can require CBIZ to repurchase the 2006 Notes. At September 30, 2010, the unamortized discount had a remaining amortization period of approximately 8 months.
		During the three and nine months ended September 30, 2010 and 2009, CBIZ recognized interest expense on the 2006 Notes and 2010 Notes as follows (in thousands):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2010				2009				2010				2009
Contractual coupon interest		$	831			$	782			$	2,393			$	2,344
Amortization of discount			1,083				1,003				3,181				2,946
Total interest expense		$	1,914			$	1,785			$	5,574			$	5,290

		Bank Debt
		Effective June 4, 2010, CBIZ entered into a new credit agreement with Bank of America as agent for a group of seven participating banks. Under this agreement, CBIZ maintains a $275 million unsecured credit facility (“credit facility”), which replaced the prior $214 million credit agreement. The credit facility has a letter of credit sub-facility and matures in June 2014. On September 14, 2010, CBIZ amended its $275 million unsecured credit facility. The amendment allowed CBIZ to consummate the buy back and option transactions with CBIZ’s largest shareholder (see Note 11), to issue new senior subordinated convertible notes, and use up to $30 million of the proceeds from the new convertible notes to repurchase shares of common stock concurrent with the new convertible note transaction. In addition, the amendment increased the total and senior leverage ratios to accommodate these transactions and

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

also allows CBIZ to continue its strategic growth strategy which includes future acquisitions. CBIZ had $119.0 million and $110.0 million of outstanding borrowings under its credit facility at September 30, 2010 and December 31, 2009, respectively.

Interest rates for the nine months ended September 30, 2010 and 2009 were as follows:

		2010				2009
Weighted average interest rates			3.49%				3.84%
Range of effective interest rates			2.71% - 6.40	%			2.74% - 6.40	%

CBIZ had approximately $103.6 million of available funds under the credit facility at September 30, 2010. Available funds under the credit facility are based on a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the credit facility, and are reduced by letters of credit and outstanding borrowings on the credit facility. Under the credit facility, loans are charged an interest rate consisting of a base rate or Eurodollar rate plus an applicable margin, letters of credit are charged based on the same applicable margin, and a commitment fee is charged on the unused portion of the credit facility.

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

There are no limitations on CBIZ’s ability to acquire businesses provided that the total and senior leverage ratios are less than 4.0 and 2.75, respectively. The total and senior leverage ratios are calculated in accordance with the credit agreement and as of September 30, 2010, were 3.57 and 1.53, respectively.

6.		Commitments and Contingencies
		Acquisitions

		The purchase price that CBIZ pays for businesses and client lists has historically consisted of two components: an up-front, non-contingent portion, and a portion which is contingent upon the acquired businesses or client lists’ actual future performance. For acquisitions completed January 1, 2009 and after, the fair value of the contingent purchase price is recorded at the date of acquisition and remeasured each reporting period until the liability is settled. Shares of CBIZ common stock that are issued in connection with acquisitions may be contractually restricted from sale for periods up to two years. Acquisitions are further discussed in Note 12.
		Indemnifications

CBIZ has various agreements in which it 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 the Company customarily agrees 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

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

		typically subject to challenge by CBIZ and to dispute resolution procedures specified in the particular contract. Further, CBIZ’s obligations under these agreements may be limited in terms of time and/or amount and, in some instances, CBIZ may have recourse against third parties for certain payments made by CBIZ. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of CBIZ’s obligations and the unique facts of each particular agreement. Historically, CBIZ has not made any payments under these agreements that have been material individually or in the aggregate. As of September 30, 2010, CBIZ was not aware of any material obligations arising under indemnification agreements that would require payment.
		Employment Agreements

		CBIZ maintains severance and employment agreements with certain of its executive officers, whereby such officers may be entitled to payment in the event of termination of their employment. CBIZ also has arrangements with certain non-executive employees which may include severance and other employment provisions. CBIZ accrues for amounts payable under these contracts and arrangements as triggering events occur and obligations become known. During the three and nine months ended September 30, 2010 and 2009, payments regarding such contracts and arrangements were not material.
		Letters of Credit and Guarantees

CBIZ provides letters of credit to lessors (landlords) of certain leased premises in lieu of cash security deposits which totaled $3.0 million and $3.5 million as of September 30, 2010 and December 31, 2009, respectively. In addition, CBIZ provides license bonds to various state agencies to meet certain licensing requirements. The amount of license bonds outstanding at September 30, 2010 and December 31, 2009 was $1.5 million.

		CBIZ acted as guarantor on various letters of credit for a CPA firm with which it has an affiliation, which totaled $3.4 million and $2.6 million as of September 30, 2010 and December 31, 2009, respectively. CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these guarantees, which is recorded in other current liabilities in the accompanying consolidated balance sheets. Management does not expect any material changes to result from these instruments as performance under the guarantees is not expected to be required.
		Self-Funded Health Insurance

CBIZ maintains a self-funded health benefit plan. Total expenses under this program are limited by stop-loss coverages on individually large claims. A third party administrator processes claims and payments, but does not assume liability for benefits payable under this plan. CBIZ assumes responsibility for funding the plan benefits out of general assets, however, employees contribute to the costs of covered benefits through premium charges, deductibles and co-pays.

The third party administrator provides the Company with reports and other information which provides a basis for the estimate of the liability at the end of each reporting period. Although management believes that it uses the best available information to determine the amount of the liability, unforeseen health claims could result in adjustments and higher costs incurred if circumstances differ from the assumptions used in estimating the liability. The liability for the self-funded health insurance plan is included in other current liabilities in the consolidated balance sheets and was $4.6 million and $3.5 million at September 30, 2010 and December 31, 2009, respectively. CBIZ’s net healthcare costs include health claims, administration fees to third-party administrators and premiums for stop-loss coverages.

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

Legal Proceedings

In May, June, July, August and September of 2010, the Company and its subsidiary, CBIZ MHM, LLC (fka CBIZ Accounting, Tax & Advisory Services, LLC) (“the CBIZ Parties”), were named as defendants in lawsuits filed in the United States District Court for the District of Arizona (Robert Facciola, et al v. Greenberg Traurig LLP, et al.) and in the Superior Court for Maricopa County Arizona (Victims Recovery, LLC v. Greenberg Traurig LLP, et al.; Roger Ashkenazi, et al v. Greenberg Traurig LLP, et al.; Mary Marsh, et al v. Greenberg Traurig LLP, et al.; and ML Liquidating Trust v. Mayer Hoffman McCann, PC, et al.), respectively. The Maricopa County cases have been removed to the United States District Court or Bankruptcy Court. The Facciola plaintiffs seek to proceed as a class action. Additionally, in November 2009, CBIZ MHM, LLC was named as a defendant in the United States District Court for the District of Arizona (Jeffery C. Stone v. Greenberg Traurig LLP, et al.). These matters arise out of the bankruptcy proceedings related to Mortgages Ltd., a mortgage lender to developers in the Phoenix, Arizona area. Various other professional firms not related to the Company are also defendants in these lawsuits. The motion phase of these proceedings has commenced.

The plaintiffs, except for those in the Stone and ML Liquidating Trust cases, are all alleged to have directly or indirectly invested in real estate mortgages through Mortgages Ltd. The Facciola, Victims Recovery, Ashkenazi and Marsh plaintiffs seek monetary damages equivalent to the amounts of their investments. The plaintiff in Stone sought monies it allegedly lost based on the claim that Mortgages Ltd. did not fund development projects in which it was a contractor. The Stone case has been voluntarily dismissed by the plaintiff in that matter. The plaintiff in the ML Liquidating Trust matter asserts errors and omissions and breach of contract claims, and is seeking monetary damages. The plaintiffs in these suits also seek pre- and post-judgment interest, punitive damages and attorneys’ fees.

Mortgages Ltd. had been audited by Mayer Hoffman McCann PC, a CPA firm which has an administrative services agreement with CBIZ. The claims against the CBIZ Parties seek to impose auditor-type liabilities upon the Company for audits it did not conduct. Specific claims include securities fraud, common law fraud, negligent misrepresentation, Arizona Investment Management Act violations, control-person liability, aiding and abetting and conspiracy. CBIZ is not a CPA firm, does not provide audits, and did not audit any of the entities at issue in these lawsuits.

The CBIZ Parties deny all allegations of wrongdoing made against them in these actions and are vigorously defending the proceedings. The Company has been advised by Mayer Hoffman McCann PC that it denies all allegations of wrongdoing made against it and that it intends to continue vigorously defending the matters. Although the proceedings are subject to uncertainties inherent in the litigation process and the ultimate disposition of these proceedings is not presently determinable, management believes that the allegations are without merit and that the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition, results of operations or cash flows of CBIZ.

In addition to those items disclosed above, 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 consolidated financial condition, results of operations or cash flows of CBIZ.

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

7.		Financial Instruments
		Concentrations of Credit Risk

		Financial instruments that may subject CBIZ to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. CBIZ places its cash and cash equivalents with highly-rated financial institutions, limiting the amount of credit exposure with any one financial institution. CBIZ’s client base consists of large numbers of geographically diverse customers dispersed throughout the United States; thus, concentration of credit risk with respect to accounts receivable is not considered significant.
		Corporate Bonds

CBIZ invests and holds corporate bonds with par values totaling $14.1 million and $9.5 million at September 30, 2010 and December 31, 2009, respectively. All bonds are investment grade and are classified as available-for-sale. Corporate bonds have maturity dates ranging from October 2010 through November 2036, and are included in “Funds held for clients — current” on the consolidated balance sheets as these investments are highly liquid and are expected to be held for less than one year. During the three and nine months ended September 30, 2010, CBIZ purchased bonds with a par value totaling $3.0 million and $12.7 million, respectively. During the nine months ended September 30, 2010, CBIZ sold bonds with a par value totaling $5.0 million and recorded a realized gain of $0.1 million resulting from the sale. In addition, CBIZ recorded an unrealized gain on these bonds of $185,000 and $35,000 during the three months ended September 30, 2010 and 2009, respectively, and an unrealized gain of $142,000 and $22,000 for the nine months ended September 30, 2010 and 2009, respectively. These unrealized gains were recorded as a component of other comprehensive loss.

Auction Rate Securities (“ARS”)

At September 30, 2010, CBIZ held three investments in ARS with par values totaling $13.4 million and fair values totaling $10.1 million. During the three and nine months ended September 30, 2010, CBIZ recorded unrealized losses of $0.9 million and $0.2 million, respectively, as a result of changes to the fair values of the securities. These unrealized losses were recorded in other comprehensive loss, net of tax, in the consolidated balance sheets as they were concluded to be temporary. In addition, CBIZ recorded an other-than-temporary impairment (“OTTI”) charge of $0.3 million during the three and nine months ended September 30, 2010 related to one ARS that the Company has determined to have suffered additional impairment related to the credit of the security issuer. This impairment related to credit loss was recorded in other income, net in the consolidated statements of operations. See Note 8 for further discussion regarding the ARS and related fair values.

		Due to the failed auctions and the uncertainty regarding the liquidity of these securities, CBIZ classifies its investments in auction rate securities as funds held for clients — non-current in the consolidated balance sheets. The maturity dates for these ARS investments range from October 2037 through February 2042.
		Interest Rate Swaps

CBIZ uses interest rate swaps to manage interest rate risk exposure. CBIZ’s interest rate swaps effectively mitigate the Company’s exposure to interest rate risk, primarily through converting portions of floating rate debt under the credit facility, to a fixed rate basis. These agreements involve the receipt or payment of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amounts. CBIZ does not enter into derivative instruments for trading or speculative purposes.

Each of CBIZ’s interest rate swaps has been designated as a cash flow hedge. Accordingly, the interest rate swaps are recorded as either assets or liabilities in the consolidated balance sheets at fair value. Changes in fair value are recorded as a component of other comprehensive loss, net of tax, to the

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

extent the swaps are effective. Amounts recorded to other comprehensive loss are reclassified to interest expense as interest on the underlying debt is recognized. Net amounts due related to the swaps are recorded as adjustments to interest expense when incurred or payable. All swaps were deemed to be effective for the three and nine months ended September 30, 2010 and 2009.

At inception, the critical terms of the interest rate swaps matched the underlying risks being hedged, and as such the interest rate swaps are expected to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. The interest rate swaps are assessed for effectiveness and continued qualification for hedge accounting on a quarterly basis. If an interest rate swap were to be de-designated as a hedge it would be accounted for as a financial instrument used for trading and any changes in fair value would be recorded in the consolidated statements of operations.

As a result of the use of derivative instruments, CBIZ is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, CBIZ only enters into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assesses the creditworthiness of counterparties. At September 30, 2010, all of the counterparties to CBIZ’s interest rate swaps had investment grade ratings. To date, all counterparties have performed in accordance with their contractual obligations. There are no credit risk-related contingent features in CBIZ’s interest rate swaps nor do the swaps contain provisions under which the Company has, or would be required, to post collateral.

At September 30, 2010 and December 31, 2009, each of the interest rate swaps was classified as a liability derivative. The following table summarizes CBIZ’s outstanding interest rate swaps and their effects on the consolidated balance sheets at September 30, 2010 and December 31, 2009 (in thousands).

		September 30, 2010
		Notional				Fair				Balance Sheet
		Amount				Value (3)				Location
Interest rate swaps (1)		$	20,000			$	(78	)		Other current liabilities
Total interest rate swaps		$	20,000			$	(78	)

		December 31, 2009
		Notional				Fair				Balance Sheet
		Amount				Value (3)				Location
Interest rate swap (1)		$	20,000			$	(186	)		Other non-current liabilities
Interest rate swap (2)		$	10,000			$	(4	)		Other current liabilities
Total interest rate swaps		$	30,000			$	(190	)

(1)		Represents two interest rate swaps, each with a notional amount of $10.0 million and terms of two years expiring in January, 2011. Under the terms of the interest rate swaps, CBIZ pays interest at a fixed rate of 1.55% and 1.59%, respectively, plus applicable margin under the credit agreement, and receives or pays interest that varies with three-month LIBOR. Interest is calculated by reference to the respective $10.0 million notional amount of the interest rate swap and payments are exchanged every three months.
(2)		Represents one interest rate swap with an initial term of two years that expired in January, 2010. Under the terms of the interest rate swap, CBIZ paid interest at a fixed rate of 3.9% plus applicable margin under the credit agreement, and received or paid interest that varied with one-month LIBOR. Interest was calculated by reference to the $10.0 million notional amount of the interest rate swap and payments were exchanged each month.
(3)		See additional disclosures regarding fair value measurements in Note 8.

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

8.		Fair Value Measurements
		Valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:

•

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 — inputs to the valuation methodology are unobservable and are significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following table summarizes CBIZ’s assets and liabilities at September 30, 2010 that are measured at fair value on a recurring basis subsequent to initial recognition, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

						September 30,				December 31,
		Level				2010				2009
Deferred compensation plan assets			1			$	30,392			$	27,457
Corporate bonds			1			$	14,840			$	9,764
Interest rate swaps			2			$	(78	)		$	(190	)
Contingent purchase price liabilities			3			$	(15,737	)		$	(5,575	)
Auction rate securities			3			$	10,102			$	10,545

For the nine months ended September 30, 2010 and 2009, there were no transfers between the valuation hierarchy Levels 1, 2 and 3. The following table summarizes the change in fair values of the Company’s assets and liabilities identified as Level 3 for the nine months ended September 30, 2010 (pre-tax basis) (in thousands):

		Contingent
		Purchase Price				Auction Rate
		Liabilities				Securities
Balance — December 31, 2009		$	(5,575	)		$	10,545
Transfers into Level 3			—				—
Additions from business acquisitions			(11,477	)			—
Unrealized gain (loss) included in accumulated other comprehensive loss			—				(186	)
Other-than-temporary impairment recognized in earnings			—				(263	)
Change in fair value of contingency			1,449				—
Change in net present value of contingency			(134	)			—
Increase in expected cash flows of OTTI investment			—				6
Ending balance — September 30, 2010		$	(15,737	)		$	10,102

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

Contingent Purchase Price Liabilities - Contingent purchase price liabilities result from business acquisitions made after January 1, 2009, and are classified as Level 3 due to the utilization of a probability weighted discounted cash flow approach to determine the fair value of the contingency. The contingent purchase price liabilities are included in “Other current liabilities” and “Accrued expenses — non-current”, depending on the expected settlement date. During the three and nine months ended September 30, 2010, the addition of $1.5 million and $11.5 million, respectively, to the liability resulted from CBIZ’s acquisition of three businesses, one during the three months ended September 30, 2010 and two during the three months ended March 31, 2010, all of which contained contingent earnout provisions. Offsetting the increases to the contingent liability was a reduction of $0.7 million and $1.4 million which was recorded during the three and nine months ended September 30, 2010, respectively, as a result of a change in the estimate of future contingent liabilities related to prior year acquisitions. See Note 12 for further discussion of contingent purchase price liabilities.

Auction Rate Securities - CBIZ’s investments in ARS were classified as Level 3 as a result of liquidity issues in the ARS market, an inactive trading market of the securities, and the lack of quoted prices from broker-dealers. Accordingly, a fair value assessment was performed on two securities based on a discounted cash flow model utilizing various assumptions that included maximum interest rates for each issue, probabilities of successful auctions, failed auctions or default, the timing of cash flows, the quality and level of collateral of the securities, and the rate of recovery from bond insurers in the event of default. The fair value assessment of one ARS was determined using a combination of quoted prices for similar securities and the Level 3 methodology described above.

At September 30, 2010, CBIZ held three investments in ARS with par values totaling $13.4 million. Changes to the fair values of these ARS resulted in an unrealized loss of $0.9 million and $0.2 million for the three and nine months ended September 30, 2010, respectively, which were recorded in other comprehensive loss, net of tax. CBIZ has determined that these impairments were temporary due to dislocation in the credit markets, the quality of the investments and their underlying collateral, and the probability of a passed auction or redemption in the future, considering the issuers’ ability to refinance if necessary. These ARS are classified as “Funds held for clients — non-current”, as CBIZ does not intend to sell these investments until an anticipated recovery of par value occurs. During the three and nine months ended September 30, 2010, CBIZ recorded an OTTI charge of $0.3 million related to one ARS as a result of a degradation in the credit worthiness of the underlying issuer. This OTTI related to credit was recorded in other income, net in the consolidated statements of operations.

The following table provides additional information with regards to the ARS with temporary impairments, aggregated by the length of time that the securities have been in a continuous unrealized loss position (in thousands):

		September 30, 2010
		Less Than 12 Months								12 Months or Greater								Total
Description of Security		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Auction rate securities		$	—			$	—			$	7,602			$	778			$	7,602			$	778

		December 31, 2009
		Less Than 12 Months								12 Months or Greater								Total
Description of Security		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Auction rate securities		$	—			$	—			$	7,784			$	596			$	7,784			$	596

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

The following table presents financial instruments that are not carried at fair value but which require fair value disclosure as of September 30, 2010 and December 31, 2009 (in thousands):

		September 30, 2010								December 31, 2009
		Carrying Value				Fair Value				Carrying Value				Fair Value
2010 Convertible notes		$	115,987			$	136,384			$	—			$	—
2006 Convertible notes		$	38,811			$	39,800			$	93,848			$	94,800

Although the trading of CBIZ’s convertible notes is limited, the fair value was determined based upon their most recent quoted market price. The convertible notes are carried at face value less any unamortized debt discount. On September 27, 2010, CBIZ repurchased $60.0 million of the 2006 Notes through a privately negotiated transaction. See Note 5 in these consolidated financial statements for further information.

The carrying value of CBIZ’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. The carrying value of bank debt approximates fair value, as the interest rate on the bank debt is variable and approximates current market rates.

9.

Other Comprehensive Income

Other comprehensive income is reflected as an increase to stockholders’ equity and is not reflected in CBIZ’s results of operations. Other comprehensive income and total comprehensive income for the three and nine months ended September 30, 2010 and 2009, net of tax, was as follows (in thousands):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2010				2009				2010				2009
Net income		$	4,832			$	5,103			$	26,238			$	30,080
Other comprehensive income (loss):
Net unrealized (loss) gain on available- for-sale securities, net of tax (1)			(445	)			24				(24	)			244
Interest rate swap loss reclassified into interest expense, net of tax (2)			36				89				119				223
Unrealized gain on interest rate swap arrangements, net of tax (3)			(16	)			(97	)			(48	)			(203	)
Foreign currency translation			(19	)			(15	)			(54	)			(56	)
Total other comprehensive (loss) income			(444	)			1				(7	)			208
Comprehensive income		$	4,388			$	5,104			$	26,231			$	30,288

(1)		Net of income tax benefit of $297 and expense of $16 for the three months ended September 30, 2010 and 2009, respectively, and net of income tax benefit of $16 and expense of $164 for the nine months ended September 30, 2010 and 2009, respectively.
(2)		Net of income tax benefit of $21 and $52 for the three months ended September 30, 2010 and 2009, respectively, and net of income tax benefit of $70 and $131 for the nine months ended September 30, 2010 and 2009, respectively.
(3)		Net of income tax expense of $9 and $57 for the three months ended September 30, 2010 and 2009, respectively, and net of income tax expense of $29 and $119 for the nine months ended September 30, 2010 and 2009, respectively.

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

Accumulated other comprehensive loss, net of tax, as reflected on the consolidated balance sheets, was approximately $0.9 million at September 30, 2010 and December 31, 2009. Accumulated other comprehensive loss consisted of adjustments, net of tax, to unrealized gains and losses on available-for-sale securities and interest rate swaps, and adjustments for foreign currency translation.

10.

Employer Share Plans

CBIZ has granted various stock-based awards under its 2002 Stock Incentive Plan, which is described in further detail in CBIZ’s Annual Report on Form 10-K for the year ended December 31, 2009. The terms and vesting schedules for stock-based awards vary by type and date of grant. Compensation expense for stock-based awards recognized during the three and nine months ended September 30, 2010 and 2009 was as follows (in thousands):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2010				2009				2010				2009
Stock options		$	758			$	749			$	2,250			$	1,996
Restricted stock awards			615				536				1,693				1,469
Total stock-based compensation expense		$	1,373			$	1,285			$	3,943			$	3,465

Stock award activity during the nine months ended September 30, 2010 was as follows (in thousands, except per share data):

		Stock
		Options								Restricted Stock Awards
						Weighted Average								Weighted Average
						Exercise Price Per								Grant-Date Fair
		Number of Options				Share				Number of Shares				Value (1)
Outstanding at beginning of year			4,636			$	7.41				753			$	7.65
Granted			1,420			$	6.75				387			$	6.78
Exercised or released			(286	)		$	4.13				(302	)		$	7.43
Expired or canceled			(31	)		$	7.80				(6	)		$	7.31
Outstanding at September 30, 2010			5,739			$	7.41				832			$	7.33
Exercisable at September 30, 2010			2,504			$	7.46

(1)		Represents weighted average market value of the shares; awards are granted at no cost to the recipients.

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

11.		Earnings Per Share
		The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009 (in thousands, except per share data).

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2010				2009				2010				2009
Numerator:
Income from continuing operations		$	5,328			$	5,391			$	29,106			$	30,653
Denominator:
Basic
Weighted average common shares outstanding			59,108				61,176				60,680				61,302
Diluted
Stock options (1)			86				206				114				245
Restricted stock awards			88				102				121				124
Contingent shares (2)			297				228				297				226
Diluted weighted average common shares outstanding			59,579				61,712				61,212				61,897
Basic earnings per share from continuing operations		$	0.09			$	0.09			$	0.48			$	0.50
Diluted earnings per share from continuing operations		$	0.09			$	0.09			$	0.48			$	0.50

(1)		A total of 6.0 million and 5.2 million options were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2010, respectively, and a total of 4.5 million and 3.8 million options were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2009, respectively, as their exercise prices would render them anti-dilutive.
(2)		Contingent shares represent additional shares to be issued for purchase price earned by former owners of businesses acquired by CBIZ once future conditions have been met.

12.

Acquisitions

During the nine months ended September 30, 2010, CBIZ acquired substantially all of the assets of three companies, Goldstein Lewin & Company, National Benefit Alliance and South Winds, Inc. (dba “Benexx”). Goldstein Lewin & Company, an accounting and financial services company located in Boca Raton, Florida, purchased on January 1, 2010, provides accounting services and financial advisory services, tax planning and compliance, wealth preservation and estate planning, business valuation and litigation support. The operating results of Goldstein Lewin & Company are reported in the Financial Services practice group. National Benefit Alliance, an employee benefits company located in Midvale, Utah, purchased on January 1, 2010, designs, implements and administers employee benefit plans for

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

		government contractors as well as commercial clients. Benexx, a retirement plan consulting firm located in Baltimore, Maryland, purchased on August 1, 2010, provides 401K and other qualified retirement plan services for small and mid-sized companies. The operating results of National Benefit Alliance and Benexx are reported in the Employee Services practice group.
		Aggregate consideration for these acquisitions is expected to be approximately $29.2 million, which consists of $15.3 million in cash and $2.0 million in CBIZ common stock that was paid at closing, $0.4 million in guaranteed future consideration, and $11.5 million in contingent consideration to be settled primarily in cash and a portion in common stock, subject to the acquired operations achieving certain performance targets.
		The preliminary aggregate purchase price for these acquisitions was allocated as follows (in thousands):

Recognized amounts of identifiable assets acquired and liabilities assumed:
Accounts Receivable, net			33
Work in process, net		$	538
Prepaid expenses and other current assets			1,230
Fixed assets			1,440
Identifiable intangible assets			6,735
Accrued liabilities			(123	)
Total identifiable net assets		$	9,853
Goodwill			19,316
Aggregate purchase price		$	29,169

		Under the terms of the acquisition agreements, a portion of the purchase price is contingent on future performance of the businesses acquired. The potential undiscounted amount of all future payments that CBIZ could be required to make under the contingent arrangements is between $0 and $12.1 million. CBIZ is required to record the fair value of these obligations at the acquisition date. CBIZ determined, utilizing a probability weighted income approach, that the fair value of the contingent consideration arrangements was $11.5 million, of which $4.3 million was recorded in “Other current liabilities” and $7.2 million was recorded in “Other non-current liabilities” in the consolidated balance sheets at September 30, 2010.
		The goodwill of $19.3 million arising from the acquisitions in the current year consists largely of expected future earnings and cash flows from the existing management team, as well as the synergies created by the integration of the new businesses within the CBIZ organization, including cross-selling opportunities expected with the Company’s Financial Services group and the Employee Services group, to help strengthen the Company’s existing service offerings and expand the Company’s market position. The goodwill recognized is deductible for income tax purposes.
		During 2010, CBIZ adjusted the fair value of the contingent consideration arrangements related to CBIZ’s prior acquisitions from $5.6 million to $4.2 million due to lower than originally projected future results of the acquired businesses.
		In addition, CBIZ paid $20.0 million in cash and approximately 13,100 shares of common stock were issued during the nine months ended September 30, 2010 as contingent proceeds for previous acquisitions.
		During the nine months ended September 30, 2009, CBIZ acquired substantially all of the assets of two businesses. EAO Consultants, LLC, a New Jersey based employee benefits firm, was acquired on July 1, 2009, and MeyersDining, LLC, a Boulder, Colorado based insurance agency, was acquired on September 30, 2009 in order to broaden the range of services it offers in the New York and New Jersey markets and in the Boulder and Denver, Colorado markets. Aggregate consideration for these

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

		acquisitions consisted of $7.8 million in cash, $0.9 in CBIZ common stock and $5.6 million in contingent consideration, subject to the acquired operations achieving certain performance targets.
		In addition, during the first nine months ended September 30, 2009, CBIZ purchased two client lists, one of which is reported in the Financial Services practice group and the other is reported in the Employee Services practice group. Aggregate consideration for these acquisitions consisted of $0.1 million cash paid at closing and up to an additional $0.4 million in cash which is contingent upon future financial performance of the client lists. In addition, CBIZ paid $12.7 million in cash and issued approximately 131,600 shares of common stock during the nine months ended September 30, 2009 as contingent proceeds and payments against notes payable for previous acquisitions.
		The operating results of these businesses are included in the accompanying consolidated financial statements since the dates of acquisition. Client lists and non-compete agreements are recorded at fair value at the time of acquisition. The excess of purchase price over the fair value of net assets acquired, (including client lists and non-compete agreements) is allocated to goodwill.
		Additions to goodwill, client lists and other intangible assets resulting from acquisitions and contingent consideration earned during the nine months ended September 30, 2010 and 2009 were as follows (in thousands):

		2010				2009
Goodwill		$	25,946			$	17,139
Client lists		$	6,390			$	7,114
Other intangible assets		$	345			$	420

13.

Discontinued Operations and Divestitures

		CBIZ will divest (through sale or closure) business operations that do not contribute to the Company’s long-term objectives for growth, or that are not complementary to its target service offerings and markets. Divestitures are classified as discontinued operations provided they meet the criteria as provided in FASB ASC 205 “Presentation of Financial Statements — Discontinued Operations — Other Presentation Matters”.
		Discontinued Operations
		Gains or losses from the sale of discontinued operations are recorded as “Gain (loss) on disposal of discontinued operations, net of tax”, in the accompanying consolidated statements of operations. Additionally, proceeds that are contingent upon a divested operation’s actual future performance are recorded as gain on sale of discontinued operations in the period they are earned. During the nine months ended September 30, 2010, CBIZ sold two businesses and closed one business from the National Practices group. Proceeds from the sales consisted of $0.2 million in cash and resulted in a pre-tax loss of approximately $0.7 million, and the office closure resulted in a pre-tax loss of approximately $1.1 million. During the nine months ended September 30, 2009, CBIZ did not sell any operations. Gains recorded for the nine months ended September 30, 2009 related to contingent proceeds for a Financial Services operation that was sold during 2007 and an adjustment to reserves established for an operation that was closed in 2008.

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

Revenue and results from operations of discontinued operations for the three and nine months ended September 30, 2010 and 2009 are separately reported as “Loss from discontinued operations, net of tax” in the consolidated statements of operations and were as follows (in thousands):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2010				2009				2010				2009
Revenue		$	—			$	3,110			$	2,723			$	10,422
Loss from discontinued operations, before income tax		$	(872	)		$	(525	)		$	(3,086	)		$	(1,262	)
Income tax benefit			339				210				1,213				511
Loss from discontinued operations, net of tax		$	(533	)		$	(315	)		$	(1,873	)		$	(751	)

Gain (loss) on the disposal of discontinued operations for the three and nine months ended September 30, 2010 and 2009 were as follows (in thousands):

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2010				2009				2010				2009
Gain (loss) on disposal of discontinued operations, before income tax		$	62			$	42			$	(1,821	)		$	282
Income tax (expense) benefit			(25	)			(15	)			826				(104	)
Gain (loss) on disposal of discontinued operations, net of tax		$	37			$	27			$	(995	)		$	178

At September 30, 2010 and December 31, 2009, the assets and liabilities of businesses classified as discontinued operations are reported separately in the accompanying consolidated financial statements and consisted of the following (in thousands):

		September 30,				December 31,
		2010				2009
Assets:
Accounts receivable, net		$	183			$	1,945
Goodwill and other intangible assets, net			—				1,436
Property and equipment, net			—				131
Other current assets			165				597
Assets of discontinued operations		$	348			$	4,109
Liabilities:
Accounts payable		$	18			$	892
Accrued personnel costs			8				191
Other current liabilities			349				1,198
Liabilities of discontinued operations		$	375			$	2,281

		Divestitures
		Gains and losses from divested operations and assets that do not qualify for treatment as discontinued operations are recorded as “Gain on sale of operations, net” in the consolidated statements of operations. During the nine months ended September 30, 2010, CBIZ received cash proceeds of $0.4 million and recognized a gain of $0.4 million from the sale of a client list. During the nine months ended September 30, 2009, CBIZ received cash of $0.2 million and recognized a gain of $0.9 million from the sale of two client lists.

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

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

14.

Segment Disclosures

CBIZ’s business units have been aggregated into four practice groups: Financial Services, Employee Services, Medical Management Professionals (“MMP”), and National Practices. The business units have been aggregated based on the following factors: similarity of the products and services provided to clients; similarity of the regulatory environment in which they operate; and similarity of economic conditions affecting long-term performance. The business units are managed along these segment lines. A general description of services provided by practice group, is provided in the following table.

Financial Services			Employee Services			MMP			National Practices
•	Accounting		•	Group Health		•	Coding and Billing		•	Managed Networking
•	Tax		•	Property & Casualty		•	Accounts Receivable			and Hardware Services
•	Financial Advisory		•	COBRA / Flex			Management		•	Health Care Consulting
•	Litigation Support		•	Retirement Planning		•	Full Practice		•	Mergers & Acquisitions
•	Valuation		•	Wealth Management			Management
•	Internal Audit		•	Life Insurance			Services
•	Fraud Detection		•	Human Capital
•	Real Estate			Management
	Advisory		•	Payroll Services
			•	Actuarial Services
			•	Recruiting

		Corporate and Other. Included in Corporate and Other are operating expenses that are not directly allocated to the individual business units. These expenses are primarily comprised of gains or losses attributable to assets held in the Company’s deferred compensation plan, stock-based compensation, certain health care costs, consolidation and integration charges, and certain advertising costs.
		Accounting policies of the practice groups are the same as those described in Note 1 to the Annual Report on Form 10-K for the year ended December 31, 2009. Upon consolidation, all intercompany accounts and transactions are eliminated; thus inter-segment revenue is not included in the measure of profit or loss for the practice groups. Performance of the practice groups is evaluated on operating income excluding the costs of certain infrastructure functions (such as information systems, finance and accounting, human resources, legal and marketing), which are reported in the “Corporate and Other” segment.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

Segment information for the three and nine months ended September 30, 2010 and 2009 was as follows (in thousands):

		THREE MONTHS ENDED SEPTEMBER 30, 2010
																		Corporate
		Financial				Employee								National				and
		Services				Services				MMP				Practices				Other				Total
Revenue		$	89,612			$	42,417			$	37,423			$	7,034			$	—			$	176,486
Operating expenses			78,919				35,905				32,148				6,343				4,841				158,156
Gross margin			10,693				6,512				5,275				691				(4,841	)			18,330
Corporate general & admin			—				—				—				—				6,907				6,907
Operating income (loss)			10,693				6,512				5,275				691				(11,748	)			11,423
Other income (expense):
Interest expense			(1	)			(6	)			—				—				(3,728	)			(3,735	)
Gain on sale of operations, net			—				—				—				—				89				89
Other income (expense), net			7				101				86				(2	)			823				1,015
Total other income (expense)			6				95				86				(2	)			(2,816	)			(2,631	)
Income (loss) from continuing operations before income tax expense		$	10,699			$	6,607			$	5,361			$	689			$	(14,564	)		$	8,792