**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

----

**FORM 10-K**

----

**x**               ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the fiscal year ended December 31,2005**

**OR**

**o**                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Transition Period from                     to                     **

**CommissionFile Number 1-15168**

**CERIDIANCORPORATION**

(Exact name of Registrant as specified in its charter)

| **Delaware**                                                    | **41-1981625**                       |
|-----------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | (I.R.S. Employer Identification No.) |

 

**3311 East Old Shakopee RoadMinneapolis, Minnesota 55425**

(Address of principal executive offices)

**Telephone No.: (952) 853-8100**

(Registrant’s telephone number, including area code)

----

Securities Registered Pursuant to Section 12(b) ofthe Act:

|                                                                             | **Title of each class:**     | ** ** | **Name of each exchange on which registered:** |
|-----------------------------------------------------------------------------|------------------------------|------------|------------------------------------------------|
| Common stock, par value $.01 per share                                      | The New York Stock  Exchange |
| Rights to Purchase  Class A Junior Participating  Preferred Stock | The New York Stock  Exchange |

 

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   Yes o No x

Indicate by check mark whether the Registrant (1) hasfiled all reports required by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   x Yes o No

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of the Registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

Large accelerated filer x   Accelerated filer o   Non-accelerated filer o

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

The aggregate market value of the voting stock ofCeridian held by non-affiliates of Ceridian on June 30, 2005 was$2,830,419,338 based on the closing sales price of Ceridian common stock asreported on the New York Stock Exchange on June 30, 2005.

The number of shares of Ceridian common stockoutstanding as of March 1, 2006 was 145,870,088.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portionsof the Proxy Statement for Annual Meeting of Stockholders to be held on May 11,2006:  Part III

 

----

**CERIDIANCORPORATIONAnnual Report on Form 10-KFor the fiscal year ended December 31, 2005Table of Contents**

|               | ** ** | ** **                                                                                                               | ** ** | **Page** | ** ** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       |                                                                                                                     |       |     |       |
| Item  1.      |       | Business                                                                                                                 |       | 1        |       |
| Item  1A.     |       | Risk  Factors                                                                                                            |       | 17       |       |
| Item 1B.      |       | Unresolved Staff Comments                                                                                                |       | 27       |       |
| Item  2.      |       | Properties                                                                                                               |       | 28       |       |
| Item  3.      |       | Legal  Proceedings                                                                                                       |       | 28       |       |
| Item 4.       |       | Submission of  Matters to a Vote of Security Holders                                                                     |       | 29       |       |
| PART II  |       |                                                                                                                     |       |     |       |
| Item 5.       |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 30       |       |
| Item 6.       |       | Selected Financial  Data                                                                                                 |       | 31       |       |
| Item 7.       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |       | 31       |       |
| Item 7A.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                              |       | 52       |       |
| Item 8.       |       | Financial  Statements and Supplementary Data                                                                             |       | 56       |       |
| Item 9.       |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                    |       | 104      |       |
| Item 9A.      |       | Controls and  Procedures                                                                                                 |       | 104      |       |
| Item  9B.     |       | Other  Information                                                                                                       |       | 108      |       |
| PART III |       |                                                                                                                     |       |     |       |
| Item 10.      |       | Directors and  Executive Officers of the Registrant                                                                      |       | 109      |       |
| Item 11.      |       | Executive  Compensation                                                                                                  |       | 109      |       |
| Item 12.      |       | Security  Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters                    |       | 109      |       |
| Item 13.      |       | Certain  Relationships and Related Transactions                                                                          |       | 111      |       |
| Item 14.      |       | Principal  Accounting Fees and Services                                                                                  |       | 111      |       |
| PART IV  |       |                                                                                                                     |       |     |       |
| Item 15.      |       | Exhibits,  Financial Statement Schedules                                                                                 |       | 112      |       |

 

----

**CERIDIAN CORPORATION**

**PART I**

*This Annual Reporton Form 10-K contains forward-looking statements within the meaningof the Private Securities Litigation Reform Act of 1995. The statementsregarding Ceridian Corporation and its subsidiaries contained in this reportthat are not historical in nature, particularly those that utilize terminologysuch as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,”“believes” or “plans,” or comparable terminology, are forward-lookingstatements based on current expectations and assumptions, and entail variousrisks and uncertainties that could cause actual results to differ materiallyfrom those expressed in such forward-looking statements. Importantfactors known to us that could cause material differences are described in thisreport, including in Part I, Item 1A, “Risk Factors” of this report. Youshould carefully consider each cautionary factor and all of the otherinformation in this report. We undertake no obligation to correct or update anyforward-looking statements, whether as a result of new information, futureevents or otherwise. You are advised, however, to consult any futuredisclosures we make on related subjects in future reports to the Securities andExchange Commission.*

We own or have the rightsto various trademarks, trade names or service marks, including the following:BusinessLink®,Ceridian Corporation and logo, Ceridian®, Comchek®,Comchek eCash®, Comdata® and logo, Comdata®, LifeWorks®, Stored Value Systems®, and Stored Value Systems® andlogo. The trademarks American Express®,Discover®, MasterCard®, Visa®, Cirrus® andMaestro® referred to in this report are the registeredtrademarks of others.

**Item 1.**                        Business

**General**

Ceridian Corporation was formed on August 8, 2000and is incorporated in Delaware. Our principal executive office is located at3311 East Old Shakopee Road, Minneapolis, Minnesota 55425, and our telephonenumber is (952) 853-8100.

Ceridian Corporation is an information services companyprincipally in the human resource (“HR”), transportation and retail markets.Our human resource solutions business (which we refer to in this report as“HRS” or “Human Resource Solutions”) enables customers to outsource a broadrange of employment processes, from recruitment and applicant screening, topayroll, tax filing, human resource information systems, employee self-service,time and labor management, benefits administration, employee assistance andwork-life programs, to post-employment health insurance portability compliance,and retirement plan administration. We have HRS operations primarily in theUnited States, Canada and the United Kingdom. Our Comdata subsidiary (which werefer to in this report as “Comdata”) provides transaction processing,financial services and regulatory compliance services primarily to thetransportation and retail industries. Comdata’s products and services includepayment processing and the issuance of credit, debit and stored value cards.

Ceridian Corporation was formed as a result of thespin-off of the human resource solutions division and human resource solutionsand Comdata subsidiaries of Arbitron Inc., formerly known as CeridianCorporation (which entity is referred to in this report as “Ceridian’spredecessor”). On March 30, 2001, we became an independent public companywhen Ceridian’s predecessor distributed all of our outstanding common stock toits stockholders in a tax-free spin-off transaction (which transaction isreferred to in this report as the “spin-off” or the “Arbitron spin-off”).Despite the legal form of the spin-off, because of the relative significance ofour businesses to Ceridian’s predecessor, we are considered the divestingentity and treated as the “accounting successor” to Ceridian’s predecessor forfinancial reporting purposes. As used in this report, references to “Ceridian,”the “Company,” “we,” “our” or “us” mean Ceridian Corporation together with ourconsolidated subsidiaries, and include the historical operating results andactivities of the businesses and operations that constituted Ceridian’spredecessor prior to the spin-off, as well as the 

1

----

continuing operations ofthe operations that were transferred to us by Ceridian’s predecessor in thespin-off, unless the context otherwise indicates.

We refer you to Part II,Item 7 and Item 7A of this report for additional descriptions of our business.

**FinancialInformation About Segments**

Our business has twosegments, Human Resource Solutions and Comdata. We refer you to Note M, *“Segment Data”* to our consolidated financial statements forfinancial information about our business segments and geographic areas. Thisinformation may be found in Part II, Item 8 of this report.

**Human Resource Solutions**

The operating units comprising HRS offer a broad rangeof managed human resource solutions designed to help companies maximize thevalue of their people by more effectively managing their work forces and theinformation that is integral to human resource processes. Our human resourcemanagement products and services are provided principally in the United States,Canada and the United Kingdom.

Late in 2005, we realigned our internal organizationstructure in U.S. HRS into six operating units to eliminate perceivedweaknesses in the organization’s effectiveness and functional operatingenvironment. We believe our new organization structure for U.S. HRS willenhance decision making, accountability and overall performance. The operatingunits relate to certain HRS solution areas (payroll processing, tax filing, andother HR services; benefits administration services, qualified retirement andother plan administration; and work-life and employee assistance programs) orthe nature of customers (government, small business and human resourceoutsourcing). We anticipate that the implementation of this U.S. HRSorganizational structure will continue through 2006.

HRS’srevenue and U.S. HRS’s products and services revenue for the years ended December 31,2005, 2004 and 2003 was as follows:

| ** **                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(dollars in millions)**         | ** ** |
| HRS Revenue                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. HRS                                             |       | $                                           | 799.8      |   | 76.2 | % | $ | 731.5 |   | 75.9 | % | $ | 687.7 |   | 76.9 | % |
| Ceridian Canada                                      |       | 158.1                                       |       | 15.0 | % | 141.1 |   | 14.6 | % | 127.2 |   | 14.2 | % |
| Ceridian Centrefile                                  |       | 92.2                                        |       | 8.8 | % | 91.8 |   | 9.5 | % | 79.3 |   | 8.9 | % |
| Total HRS                                            |       | $                                           | 1,050.1    |   | 100.0 | % | $ | 964.4 |   | 100.0 | % | $ | 894.2 |   | 100.0 | % |
| U.S. HRS Revenue                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Payroll processing, tax filing and other HR services |       | $                                           | 500.9      |   |   |   | $ | 452.0 |   |   |   | $ | 435.9 |   |   |   |
| Benefits administration services                     |       | 151.1                                       |       |   |   | 146.1 |   |   |   | 135.9 |   |   |   |
| Work-life and employee assistance programs           |       | 147.8                                       |       |   |   | 133.4 |   |   |   | 115.9 |   |   |   |
|                                                 |       | $                                           | 799.8      |   |   |   | $ | 731.5 |   |   |   | $ | 687.7 |   |   |   |

 

Our HRS revenue in 2005includes approximately $105.5 million of investment income earned in lieu ofadditional fees from customer funds temporarily held in the United States andCanada pending remittance to taxing authorities, customer employees or otherthird parties. All customer funds temporarily held by us are held either in atrust or in segregated accounts. Funds from U.S. customers are investedprimarily in high quality collateralized short-term investments or money marketmutual funds. We may also invest in U.S. Treasury and Agency securities, AAArated asset-backed securities, and corporate securities rated A3/A- or better.Funds from Canadian customers are invested primarily in securities issued bythe government and provinces of Canada, highly rated Canadian banks andcorporations, asset-backed 

2

----

trustsand mortgages. The maturity of these investments is carefully managed to meetthe related payment obligations. Due to the significance of this investmentincome, our quarterly revenue and profitability fluctuate as a result ofchanges in interest rates and in the amount of customer funds held.

***Market***

The market forhuman resource solutions covers a comprehensive range of informationmanagement, human resource administration and employee assistance services andsoftware. These products and services include:

·                    transaction-orientedadministrative services and software products, primarily in areas such aspayroll processing, tax filing and benefits enrollment and administration; and

·                    managementsupport services and software, primarily in areas such as recruiting and humancapital management, human resource administration, regulatory compliance,work-life and employee assistance programs.

We believe that the market for these solutions willcontinue to grow as organizations seek to reduce costs, improve productivityand add services for employees by outsourcing administrative services andfurther automating internal processes. We also believe the demand for humanresource solutions will increase as organizations seek assistance inmaintaining their compliance with the increasing scope and complexity of lawsand regulations governing businesses and increasingly complicated work-lifeissues faced by employers and employees.

Wegenerally classify customers in the human resource solutions market by employersize into three categories, each of which represents a distinct marketopportunity for us:

| Type of Employer | ** ** | ** **               | ** ** | **Size of Employer***                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **Typical Characteristics** |
|------------------|------------|--------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|
| Small            |       | Fewer than 250 employees |       | Tend to be relatively  more price sensitive, to require less customization or flexibility in product  and service offerings and to switch more readily from one provider to another                                                                                                                                                                                                                                              |
| Corporate        |       | 250 to 5,000  employees  |       | Human resource  management needs tend to be more complex, and therefore often require more  customization and flexibility in products and services, greater integration  among data processing systems and a greater variety of products and services                                                                                                                                                                            |
| Enterprise       |       | Over 5,000 employees     |       | Human resource management needs tend to be the most  complex, and therefore often require the most customization and flexibility  in products and services, the greatest integration among data processing  systems and the greatest variety of products and services; also has the  greatest reliance on their integral legacy systems which increase integration  complexity and challenge outsourcing and migration decisions |

----

*                    This column ofthe table reflects the employer size of U.S. customers in 2005. In Canada andthe United Kingdom, the employer segment sizes are typically smaller, althoughthe characteristics of such segments are similar in nature.

We believe, however, that with regard to any sizeemployer, a provider of a core transaction-based service, such as payrollprocessing or tax filing services, is afforded opportunities to complement thatcore 

3

----

service with additionalproducts and services that are natural adjuncts to that service, such as timeand labor management, health insurance portability compliance administration,flexible spending account administration, employee self-service, benefitseligibility and enrollment, employee assistance and work-life services, andretirement plan administration. Our ability to wrap value-added servicesaround a core service or product in an integrated manner will, we believe, leadto revenue growth and our ability to achieve higher margins.

Further, we believe that customers are increasinglyseeking providers that can take responsibility for entire human resourcemanagement processes. These human resource outsourcing (referred to in thisreport as “HRO”)****relationships transferresponsibility for managing each core process from the employer to theprovider. Through HRO, we are able to provide our customers with acomprehensive suite of modular, fully managed HRS products and servicesdescribed above. By fully managing the products and services that we canotherwise provide on a stand-alone basis and presenting a single face to ourcustomers’ employees, we are able to transfer responsibility for managing eachcore HR process from the employer to the provider. Our HRO customizing to datetypically involves: (1) conversion and implementation consulting services;(2) processing and hosting services related to payroll, tax filingservices and benefits needs; and (3) administration of payroll or benefitsfunctions.

***Products and Services***

Our human resourcemanagement solutions include:

·                    payrollprocessing, tax filing and other HR services;

·                    benefitsadministration services; and

·                    work-life andemployee assistance programs.

***Payroll Processing, Tax Filing and Other HR Services.***

***Payroll Processing.******  ***Ourpayroll processing for customers in the United States consists primarily ofpreparing and furnishing employee payroll checks, direct deposit advices andsupporting journals and summaries. For certain business customers, we mayhandle the transmission of customer payroll funds to the customer’s employees.We also supply quarterly and annual social security, Medicare and federal,state and local income tax withholding reports and forms that are required tobe filed by employers and employees.

We provide human resource information systems(commonly referred to as “HRIS”) solutions that serve as a “front-end” to ourpayroll processing system, allowing our customers to utilize a common databasefor both payroll and other HRIS purposes. This enables the customer to create asingle database of employee information for on-line inquiry, updating andreporting in payroll and other areas important to human resource administrationand management, such as employee data tracking, time and labor management,government compliance, compensation analysis and benefits administration. Wealso provide HRIS solutions that incorporate open, industry standardtechnology, are scalable and can be utilized with an existing interface as afront-end for our payroll processing and tax filing services.

Our HR/payroll product suite provides an integratedHR/payroll and benefits solution with outsourced payroll and tax filingservices to customers primarily in the corporate and enterprise customermarkets. It is primarily available in a hosted “application service provider”environment. On a limited basis within Ceridian Centrefile Limited, it also canbe managed in-house as an installed application. Our hosted solutions providecustomers with secure 24/7 access to our solutions using a standard webbrowser.

Our HR/payroll web product is a web-enabled, fullyhosted integrated payroll and human resource administration solution, designedspecifically for the corporate and enterprise customer 

4

----

markets. Ceridian’sHR/payroll web product also includes integrated time management andself-service features, as well as wage attachments and disbursements, Internetpayroll management, and customization features within the core productoffering.

We also provide Internet and phone-in payroll processing,tax filing, unemployment compensation management and related services for smallemployers located in the United States and Canada. Our Small BusinessHR/payroll web-based solution allows customers to complete payroll transactionsvia the Internet. The Small Business HR/payroll product also provides smallbusinesses with access to services, such as new hire reporting, tax filing,direct deposit, optional benefits programs, unemployment filing and specialreports services that were previously only available to larger companies.

***Tax Filing.******  ***Ourpayroll tax filing services for customers in the United States consistprimarily of collecting funds for federal, state and local employment taxesfrom customers based on payroll information provided by the customers,remitting funds collected to the appropriate taxing authorities, filingapplicable returns and handling related regulatory correspondence andamendments. Our tax filing services are provided not only to employers whoutilize our payroll processing service, but also to local and regional payrollprocessors and directly to employers as stand alone tax services. Payroll-relatedtax filing services are typically priced on a fee-per-item-processed basis.

*Other HR Services****.******  ***Wealso provide customers with a number of other HR solutions. Such servicesinclude time and attendance, administration of payroll and benefit functions,talent acquisition and management, expense management and human capitalmanagement services. These services are generally designed to automate,streamline and integrate certain traditional HR services to provide ourcustomers with the ability to focus less on administration and more on theircore business.

***BenefitsAdministration Services.******  ***Weprovide employee health and welfare benefits administration and qualified planadministration services to our customers. Employee health and welfare benefitsadministration services include health insurance portability (*i.e*., the Consolidated Omnibus Budget Reconciliation Act, or“COBRA,” and the Health Insurance Portability and Accountability Act of 1996,or “HIPAA”) compliance services. Health and welfare benefits administrationservices also encompass benefits provided to active employees, such as annualhealth plan enrollment, ongoing employee enrollment and eligibility services,tuition refund plans, transportation reimbursement under the TransportationEquity Act, and Internal Revenue Code Section 125 plans including fullyadministered and self-administered flexible spending accounts and premium-onlyplans. We also provide administration and benefits billing services forbenefits provided to retired and inactive employees, including retireehealthcare, disability, surviving dependent, family leave and severancebenefits.

Our qualified plan administration services include 401(k) planadministration, profit sharing plan administration, defined benefit planadministration, employee stock ownership plan administration and QualifiedDomestic Relations Order and medical support order administration.

***Work-Life andEmployee Assistance Programs.******  ***Weprovide customers of all sizes and their employees with a single source forfully integrated work-life and employee assistance programs (which we refer toin this report as “LifeWorks”). Our customers include employers in both theprivate and public sectors, including the U.S. Department of Defense. Servicesare delivered through on-line access and telephonically, and throughface-to-face counseling provided by referral resources.

The services and programs we provide may be customizedto meet an individual customer’s particular needs. Our portfolio of productsallows a customer to choose the mix, level and mode of access to services thatbest meet its needs. These products range from “high touch technology”capabilities allowing employees to access specific information on-line tocomprehensive “person-to-person” consultation and referral services. Alsoincluded are specialized service options, such as assistance with collegeselection, 

5

----

elder care assessment andfacility review services, and health and wellness services. These servicesaddress employee effectiveness issues and seek to improve employee retentionand productivity, reduce absenteeism and increase recruitment success.Consultants provide confidential assistance 24 hours a day to customers’employees to help them address issues ranging from everyday matters to crisissituations. Supporting these consultants are research and subject matterexperts who provide specialized expertise or referrals in areas such asparenting/child care, elder care, disabilities, addiction disorders, mentalhealth, health and wellness, financial, legal, managerial/supervisory andeducation/schooling issues. We have also entered into arrangements with someservice and product providers to provide additional leading edge services andexpertise to our customers.

We currently providecustomized work-life and employee assistance services to U.S. Armed Servicespersonnel under a contract with the U.S. Department of Defense. Our contractwith the U.S. Department of Defense will expire on March 31, 2006. We arecurrently negotiating a contract extension with the U.S. Department of Defensethat would extend our relationship with them through approximately September 30,2006. It is our understanding that the U.S. Department of Defense intends toissue a request for proposal to enter into a long-term contract with a providerto begin on or about October 1, 2006. We intend to respond to this requestfor proposal.

***International Operations***

Our international HRS operations are primarilyconducted in Canada, through Ceridian Canada Ltd. (“Ceridian Canada”) and inthe United Kingdom, through Ceridian Centrefile Limited (“Ceridian Centrefile”).Ceridian Canada provides payroll processing services, HRIS solutions, taxfiling services, work-life and employee assistance programs and recruitmentservices to its customers. Ceridian Canada handles payroll as well as taxfiling funds for our Canadian customers. These Canadian operations collectpayroll and payroll tax amounts from customers, remit tax amounts to applicablegovernmental authorities and make direct deposits of payroll amounts toemployees’ bank accounts. As a result, revenue from our payroll processingservices in Canada includes investment income received in lieu of additionalfees from temporarily holding these amounts in trust. We also charge fees forservices to our Canadian customers that are similar in nature to those providedin the United States.

Ceridian Centrefile provides payroll processingservices, HRIS solutions, work-life and employee assistance programs andrecruitment services primarily in the United Kingdom. Ceridian Centrefile’sservices generally do not involve the handling or transmission of customerfunds. In a very few instances, Ceridian Centrefile holds customer funds for ashort period of time in non-interest bearing segregated accounts prior todisbursement pursuant to the customer’s instructions.

We have begun to expand our international payrollservices into other countries, principally in Europe, by engaging partners withina country to provide us with payroll administration and processing services forthat country. We in turn have contracted with multinational customers for theirinternational requirements, and deliver a fully outsourced payroll service tothese customers.

There are risks associatedwith operating internationally. We refer you to Part I, Item 1A, “RiskFactors” of this report.

***Customers***

Our existing customer base covers a wide range ofindustries and markets. Our products and services are generally provided underwritten license or service agreements, with contracts for repetitive servicesgenerally terminable upon relatively short notice.

Customer retention is animportant factor in the amount and predictability of revenue and profits in ourHRS businesses. The length of time it takes for a contract to become profitabledepends on a number of factors such as the pricing of the contract, the numberof employees covered by the contract, the 

6

----

complexityof the services involved, the amount of customization of services required andthe number of locations in which the customer’s employees are located. Thelonger we are able to retain a customer, the more profitable that contract willlikely be.

***Sales and Marketing***

Our HRS services aremarketed in the United States through our direct sales force operatingthroughout the country. We currently utilize, and seek to develop other,cooperative marketing relationships with other companies offering products orservices that complement our businesses as well as informal and formalmarketing alliances with human resource consulting firms, other outsourcingfirms and benefits brokers. The most significant source of customer leads forthese transaction-based products and services are referrals from thesemarketing relationships and existing customers, and other direct marketingefforts such as web marketing, telemarketing, direct mail and trade shows. Ourinternational HRS operations, principally located in Canada and the UnitedKingdom, utilize their own direct sales forces. Customer leads for the productsand services of these businesses are generally obtained through referrals,trade shows, product demonstration seminars, third party resellers and directsales efforts. We are exploring additional cooperative arrangements with otherbenefits brokers and human resource services providers. We are also seeking tofurther integrate and coordinate the sales and marketing efforts of ourbusinesses and to sell a greater variety of our products and services to thecustomers of our various businesses.

***Competition***

The human resourcesolutions industry is highly competitive. Competition comes from national,regional and local third party transaction processors, as well as from softwarecompanies, consulting firms, governments, enterprise wide providers offinancial services, complete enterprise outsourcing providers, includinginformation technology providers, and internally developed and operated systemsand software.

We believe that themajority of all payroll processing and tax filing in the United States, Canadaand the United Kingdom is supported by in-house systems, with the remaindersupported by third party providers. In the United States, Automatic DataProcessing, Inc. (“ADP”) is the largest third party provider of payrollprocessing in terms of revenue, with Paychex, Inc. and Ceridian comprisingthe other two large, national providers in terms of revenue. ADP servesemployers of all sizes, while Paychex generally focuses on small to medium sizeemployers. Other third party payroll and tax filing providers are generallyregional and local competitors, although larger, national providers of benefitsadministration and 401(k) processing services or financial institutionsmay expand further into outsourced payroll processing. In Canada, we believethat our Ceridian Canada subsidiary is the second largest outsourced payrollservices provider in terms of revenue, facing competition from other nationalproviders, including ADP, and local providers. In the United Kingdom, webelieve that our Ceridian Centrefile subsidiary is the second largestoutsourced payroll processing provider in terms of revenue, competing withseveral other national providers, including a subsidiary of ADP and a divisionof Northgate Information Solutions, and local providers. Competition in boththe payroll processing and HRIS areas also comes from a number of large,national software companies that provide both payroll processing software forin-house processing as well as HRIS software, often in conjunction with otherenterprise management software applications.

Apart from payrollprocessing and tax filing, our other human resource solutions generally competewith a variety of national and regional application software companies,consulting firms, financial services companies and human resource servicesproviders. Generally, the market for these products and services is evolvingand is not dominated by a small number of competitors.

Currently,we believe the principal competitive factors in the human resource solutionsindustry are:

·                    customerservice;

·                    leadership intechnology applications;

7

----

·                    choice ofservices;

·                    integratedplatforms;

·                    performance;

·                    price;

·                    functionality;

·                    ease andflexibility of use;

·                    expertise inHR processes;

·                    regulatorycompliance in the delivery of products and services; and

·                    data securityand privacy.

We believe that theability to integrate human resource management solutions with a customer’sother acquired services and in-house applications and the ability to providesolutions delivered through the Internet are increasingly important competitivefactors. While we believe our businesses will be able to compete effectively inthe overall human resource solutions market, our ability to compete effectivelywill depend in large measure on our ability to timely develop and implement theappropriate technology solutions, particularly those which incorporate industrystandard architecture and Internet-based solutions, and provideleading-edge customer service.

***Regulation***

The delivery of servicesby HRS is subject to various local, state, federal and international laws,statutes and regulations. For example, the tax filing services must comply withthe applicable regulatory requirements of the various taxing authorities. Additionally,through contract or directly applicable regulation, various data security andprivacy interests of our customers must be protected.

***Research andDevelopment***

We intend to continue to investresources in our proprietary payroll processing systems and further develop acomprehensive and fully integrated suite of employee administrative services.

Thetable below reflects the amount of research and development expenses for ourHRS businesses for the periods indicated.

| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(dollars in millions)**         | ** ** |
| Research and  development |       | $                                           | 21.5       |   | $ | 21.7 |   | $ | 15.7 |   |
| Percent of revenue        |       | 2.0                                         | %          | 2.3 | % | 1.8 | % |
|                           |            |                                             |            |  |  |  |  |  |  |  |

 

8

----

**Comdata**

Comdataprovides transaction processing, financial services and regulatory complianceservices primarily to the transportation and retail industries. Comdataoperations are located substantially in the United States with some operationsin Canada. Approximately 2% of Comdata’s revenue for each of 2005, 2004 and2003 was derived from customers outside of the United States. Comdata’s revenuefrom products and services for the years ended December 31, 2005, 2004 and2003 was as follows:

| ** **      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------|------------|---------------------------------------------|------------|
| ** **      | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **      | ** ** | **(dollars in millions)**         | ** ** |
| Revenue         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Transportation  |       | $                                           | 284.7      |   | 69.6 | % | $ | 257.1 |   | 72.2 | % | $ | 242.0 |   | 75.7 | % |
| Retail services |       | 124.2                                       |       | 30.4 | % | 98.9 |   | 27.8 | % | 77.7 |   | 24.3 | % |
| Total           |       | $                                           | 408.9      |   | 100.0 | % | $ | 356.0 |   | 100.0 | % | $ | 319.7 |   | 100.0 | % |

 

***Principal Markets***

The trucking segment of the transportation industry iscomprised of both long haul fleets and local fleets. Private fleets predominatein the local fleet segment, but play a lesser role in the long haul fleetsegment. Common carriers, which provide trucking services to companies that donot have fleets of trucks of their own, predominate in the long haul fleetsegment, which is comprised of less-than-truckload and truckload components.The less-than-truckload component, which involves trucks that make multiplestops to load and unload, is characterized by large capital requirements. Thetruckload component involves the transportation of full loads directly fromshipper to final destination without going through any sorting terminals.

The majority of Comdata’s trucking company customersare common carriers serving the truckload component of the long haul segment.Many of these carriers use a combination of company-employed drivers anddrivers contracted with individual owner-operators. These owner-operatorsusually settle their expenses with the common carrier after the completion ofeach trip. Drivers for truckload carriers often spend weeks on the road at atime, creating a number of unique conditions and business opportunities.Truckload carriers are challenged to monitor and control fuel purchases,provide driver services to aid in recruitment and improve retention, obtainnecessary licenses and permits, and effectively manage the routing andlogistics of the long-distance trips.

In addition to providing services to long-distancetrucking companies, Comdata also offers card-based payment and transactionprocessing services to companies and organizations which operate local fleets.Customers in this segment include, by way of example, local delivery companies,home maintenance companies and local and state government agencies.

Stored Value Systems, Inc.,a wholly owned subsidiary of Comdata and a part of Comdata’s retail servicesdivision (referred to in this report as “SVS”), provides electronic privatelabel cards that can be assigned a cash value. The market for these privatelabel cards includes merchants, such as retailers, who use traditional papergift certificates or gift cards, give store credits in connection with thereturn of products, and make monetary or stored-value-based loyalty promotions.SVS markets its private label cash card to these merchants, namely majorretailers, for use with their customers, both as “gift cards” and loyaltybuilding tools. Additionally, SVS markets ancillary support services including cardinventory management and assistance in designing and supervising the productionof plastic cards. Comdata’s retail services division also provides a card-basedfunds distribution service for use by employers and others for, among otherthings, expense reimbursements, payroll delivery and termination pay. Comdatamarkets this card-based funds distribution service to a variety of employers,such as temporary staffing companies, professional employment organizations,custodial companies, the restaurant and hospitality industries, and retailers,including the customers of SVS.

9

----

***Products and Services***

***Transportation.***   Comdataprovides transaction processing, financial services and regulatory complianceservices primarily to the transportation industry. Comdata also providestransaction processing services to other industries, including the retail,temporary staffing, oil company, restaurant and grocery store sectors. Comdataprovides services to trucking companies, truck stops and truck drivers in thelong haul segment of the trucking industry, and to the local fleet segment.These services primarily involve the use of a proprietary card that facilitatestruck driver transactions and provides transaction control and trip informationfor trucking firms. Additionally, Comdata markets “co-branded” cards andtransaction processing in association with MasterCard networks. Comdata alsoprovides assistance in obtaining regulatory permits, pilot car services, andother compliance services, such as fuel tax reporting and driver log auditing,and local fueling services.

***Trucking Company Services.***   Comdata’sfinancial services, most commonly initiated through the use of Comdata’sproprietary Comdata card, are designed to enable truck drivers to obtainfunding for purchases and cash advances at truck stops and other locationsen route to their destination. Drivers may use the Comdata card topurchase fuel, lodging and other approved items, obtain cash advances from ATMmachines or through the use of Comchek drafts, and make direct deposits of pay,settlements (for non-employee owner-operators) or trip advances topersonal bank accounts. In 2005, Comdata processed approximately 91.3 millionfunds transfer transactions involving approximately $20.8 billion for thetransportation industry.

Use of the Comdata card allows the trucking companycustomer greater control over its expenses by allowing it to set limits on theuse of the cards, such as by designating locations where the cards may be used,and the frequency and amount of authorized use. Use of a Comdata card alsoenables Comdata to capture and provide transaction and trip-relatedinformation to trucking company customers. This information greatly enhances acustomer’s ability to track and plan fuel purchases and other trip expenses andto settle with drivers. Comdata also provides information gathering andprocessing services in connection with fueling transactions that Comdata doesnot fund, but that are billed instead directly by the truck stop to thetrucking company. Fees for these “direct bill” transactions are substantiallylower than fees for Comdata funded transactions. Comdata also provides fuelprice tracking reports and fuel management programs within a network of truckstops, including cost/plus fuel purchase programs.

Comdata also provides trucking companies with on-lineaccess to Comdata’s computer system for data on fuel purchases and other tripinformation, facilitating pre- and post-trip planning functions. Comdata’siConnectData web-based application enables customers to go on-line from theircomputer for interactive reporting capabilities, the latest diesel fuel pricesand related information.

In addition to the Comdata card, Comdata providesComchek drafts, which are drawn on Comdata and payable through a bank. When atruck driver makes a request at a truck stop for a Comchek transaction, Comdataverifies that the driver’s company has established sufficient credit. Uponpresentation of valid identification, the truck stop obtains an authorizationnumber from Comdata and prints a Comchek draft. Comdata funds the underlyingtransaction when the truck stop (or other payee) negotiates the draft bydepositing it in its bank account. Comdata bills the trucking company for theamount of the draft plus a portion of the service fee, and collects from thetruck stop the balance of the service fee. The trucking company remits paymentto Comdata by wire transfer, electronic transfer or check, typically withinseven days, although customers that do not meet Comdata’s credit criteria arerequired to prepay their accounts. Risks associated with fraudulent orunauthorized transactions are allocated between Comdata and its customers basedupon which party may be at fault under a specific circumstance and based uponwhich party is in the better position to control or eliminate these types oftransactions. Historically the number of fraudulent or unauthorized 

10

----

transactions attributableto this aspect of Comdata’s business has been minimal compared to the aggregatedollar amount of funds Comdata has transferred annually. Comdata is licensed by41 states as a seller of checks or money transmitter and, pursuant to theselicenses, undergoes annual examinations by several states with respect to theintegrity of its funds transfer methods and procedures.

Comdata’s regulatory compliance division assists indetermining the permits needed for a designated trip, truck and load; purchasesthose permits on behalf of the customer; and delivers them by facsimile machineto the carrier or a truck stop where they can be picked up by the driver.Comdata also provides other regulatory compliance services, such as processingand auditing of driver trip logs, reporting of fuel taxes, annual licensing andmotor vehicle registration verification. Vehicle escort services for oversizedloads are also provided.

*TruckStop Services.***  **Comdata maintains a nationwide electronic datanetwork with 24-hour independent truck stop service centers that utilizepoint-of-sale devices and other computer equipment to facilitate communicationwith Comdata’s database and operations centers. The service centers acceptComdata’s payment instruments as a method of payment pursuant to a servicecenter agreement with Comdata.

Comdata’s merchant services division provides fuelingcenters with PC-based, point of sale systems that automate the various transactionsthat occur at a fuel purchase desk and systems which enable customers totransact card-based fuel purchases at the fuel pump. These systems accept manytypes of fuel purchase cards currently used by drivers. The merchant servicesdivision additionally offers point-of-sale systems for use at attended andunattended fuel sites.

*LocalFueling.***  **Comdata is a provider of fuel management and paymentsystems for local transportation fleets. Comdata provides local fleet operatorswith Comdata MasterCard corporate fleet cards that offer the fleet operatorstransaction control and trip-related information gathering features similar tothose of the Comdata card.

*FinancialServices.****  ***Comdata’s financial services business purchasesaccounts receivable due to trucking companies from manufacturers and shippersat a discount and with recourse back to the trucking company in the event ofnon-payment. This permits trucking companies to receive payment on shippinginvoices sooner than they may otherwise receive payment from shippers. Whilethe majority of Comdata’s financial services portfolio relates to truckingcompany operations as described above, Comdata may, on occasion, enter into afactoring arrangement with a business outside the trucking industry.

*MerchantBank Card Transaction Processing.**  *Following itsacquisition of Tranvia, Inc., a merchant processing company (“Tranvia”), in March2005, Comdata has offered transaction processing services to merchants for avariety of card-based products, such as traditional bank credit and debit cardscarrying the Visa or MasterCard logos. Such transaction processing services includetransaction authorization, settlement and reporting. Tranvia acquires clientsthrough both direct sales and, indirectly, through third parties, such as banksand other financial institutions and independent sales organizations.

***Retail Services.*****  **Comdata’sretail services division, which is comprised of SVS and Comdata’s paymentservices division, provides stored value cards and employer pay cards tocustomers principally in the retail industry. SVS provides, among otherservices, stored value card programs to major retailers that are used as giftcards, gift certificates, credits for returned product, loyalty promotions andretail promotions. SVS believes that its cards, transaction reliability, cardmaintenance/inventory programs and reporting capability provide benefits toretailers and their customers, including ease of use and controls previouslydifficult to realize.

11

----

Comdata’s payment servicesdivision provides pay cards used by its customers to pay their employees.Comchek eCash is a card-based service allowing employers to post or loadpayment of wages and other payments, such as expense reimbursements, to cardsissued to employees and other recipients. Cardholders, in turn, may accessthese funds in a number of ways, including withdrawal of cash from ATMs,point-of-sale purchases at stores or issuance of a Comchek draft.

***BusinessLink.******  ***Comdata’sBusinessLink product is a payment transaction services card with credit anddebit capabilities principally designed to provide businesses with control overpayments to and spending by their employees. The BusinessLink card allowsbusinesses to authenticate and authorize individual employee purchases andprovide payroll to employees. A BusinessLink customer can review reports oftransactions made by its employees over the Internet, as well as request theissuance of new employee cards. The BusinessLink product offers businesses thecapability of performing these services on a single, customizable employeecard. The BusinessLink card may be customized for each individual employeewithin a business. Comdata intends to expand the services currently availableunder the BusinessLink card. The BusinessLink product has been initiallyintroduced to Comdata’s principal markets, transportation and retail. Comdatabelieves that the BusinessLink card has application to businesses in otherindustries. In 2005, more than 2,900 customers used the BusinessLink card.

***Sales and Marketing; Customers***

Comdata markets its card-based financial and datamanagement services, delivered through both proprietary and branded paymentnetworks, to several industries, the largest of which is the transportationindustry. Comdata markets its services to the transportation industry throughoutthe United States and Canada through a direct sales force located at itsheadquarters in Brentwood, Tennessee. Comdata provides services to more than20,000 long haul and local trucking fleets with more than 900,000 active fuelcards. Comdata also provides services to more than 8,500 truck stops, travelcenters and repair facilities nationwide. Contracts generally range from one tothree years in duration.

Through SVS, Comdatamarkets its private label cash cards, electronic payroll cards and ancillaryservices throughout the United States and Canada through a direct sales forcelocated in Louisville, Kentucky. SVS sales efforts are also being conducted inEurope, South Africa and other areas on a modest basis. All SVS transactionprocessing is conducted in Louisville, Kentucky regardless of the location inthe world where the sale occurs or the card is used. In 2005, SVS provided cashcards and/or payroll distribution services to more than 410 customers. Thecontracts with these customers are generally three years in duration.

***Suppliers***

Comdata’s current businessrelies upon relationships with third-party suppliers, such as MasterCard, toeffect and support transactions, including access to the Cirrus ATM network andthe Maestro point-of-sale debit network. The ability of Comdata to continue toprovide some of its services in the manner in which it currently delivers themmay be affected by actions taken by third-party suppliers, including MasterCardor other similar card associations. Comdata has applied to form a Utahindustrial bank that would likely become a direct participant in the MasterCardcredit and debit networks. This application is subject to FDIC approval, whichis currently pending until, among other things, the issues with the Securitiesand Exchange Commission investigation discussed in Part I, Item 3, “LegalProceedings” of this report, are substantively resolved.

***Competition***

The principal competitive factors relevant totransaction processing are marketing efforts, pricing, reliability of computerand communications systems and time required to effect transactions. The major 

12

----

credit and debit cardassociations and companies, such as Visa, MasterCard, American Express andDiscover, are significant competitors of Comdata since they make cash availableto, and facilitate purchases of fuel and other products by, holders of theircards on a nationwide basis. Several other companies also offer similarservices, including First Data Corporation, T-Chek Systems, Inc., FleetOne, L.L.C., FleetCor and Wright Express Corp. In addition, truck stops oftennegotiate directly with trucking companies for a direct billing relationship.Some of Comdata’s competitors, such as Transportation Clearing House, LLC, anaffiliate of Flying J, Inc., are under common ownership with entities thatoperate or franchise nationwide truck stop chains. In addition, Comdatacompetes with truck stops and other service centers that offer similar productsand services.

While the majority of regulatory services continue tobe performed by customers in-house, at least one other nationwide company,Xero-Fax, Inc., and several regional companies, including The PermitCompany, provide permit services similar to those provided by Comdata.Competition in this market is influenced by price, the expertise of personneland the ease with which permits may be ordered and received. In addition,Comdata believes that technological advances, such as the Internet, will impactthe way regulatory services are delivered. These advances may give rise to newcompetitors or change the way this service is offered.

Comdata believes that it is the leading provider oftransaction processing, financial services and regulatory compliance servicesto the long haul fleets and one of the leading providers to local fleets in thetrucking segment of the transportation industry. Comdata believes that itscompetitive strengths include its:

·                    abilityto provide services to trucking companies and drivers at a large number oflocations in the continental United States and Canada;

·                    abilityto offer a variety of services, frequently tailored to an individual customer’sneeds;

·                    proprietarydatabases regarding funds transfers and fuel purchases;

·                    long-termrelationships in the transportation industry;

·                    highquality of customer service; and

·                    long-timereputation in the transportation industry.

Comdata’s retail services division (which principallyincludes SVS) competes with a number of national companies in providing privatelabel cards, including ValueLink, a division of First Data Corporation. Comdatabelieves that it is one of the leading providers of private label cards tolarge retailers in the United States. Comdata’s retail services divisioncompetes on the bases of breadth of services offered, systems, technology andprice. Comdata believes that one of the competitive weaknesses of its retailservices division is that most of its competitors have establishedrelationships with many of the potential customers of Comdata’s retail servicesdivision to provide additional and unrelated products and services to thesecustomers, such as credit card processing and check authorization services. Byproviding these other services which Comdata’s retail services division doesnot provide, these competitors have an advantage of being able to bundle theirproducts and services together and present them to existing customers with whomthey have established relationships. Another competitive weakness of Comdata’sretail services division is that its competitors have greater financial, salesand marketing resources and better brand name recognition than Comdata’s retailservices division.

Comdata believesthe competitive strengths of Comdata’s retail services division are:

·                    leadingedge information and communications systems which provide real-timeconnectivity with retailers’ existing platforms;

·                    breadthof solutions offered; and

13

----

·                    experience intransaction processing and related services providing for high quality controland reduced time of implementation of cash card solutions.

***Network and Data Processing Operations***

Comdata operates twocommunications and data processing facilities, one located in Brentwood,Tennessee and the other in Louisville, Kentucky. All internal data processingfunctions for Comdata’s transportation business, including its paymentprocessing systems, and SVS are conducted in one of these two facilities,depending on the application, process or transaction being performed. Thesedual sites operate in tandem with one another to execute certain functions.Moreover, each facility serves as a back-up facility for the other inconnection with various activities.

***Regulation***

Many states requirepersons engaged in the business of selling or issuing payment instruments, suchas the Comchek draft, or in the business of transmitting funds to obtain alicense from the appropriate state agency. In some states, Comdata is requiredto post bonds or other collateral to secure its obligations. Comdata believesthat it is currently in compliance in all material respects with the regulatoryrequirements applicable to its business. The failure to comply with therequirements of any particular state could significantly adversely affectComdata’s business in that state.

***Research and Development***

Comdata’s research and development activitiesprincipally include applications development for existing products andservices, and the new product development around the BusinessLink product.Comdata anticipates a continuing need to develop applications to enhance itsproducts and services to meet the needs of its customers. Further, Comdataexpects to develop applications to bring additional features to its productsand services, thus enhancing their use in new segments and industries.

Thetable below reflects the amount of research and development expenses forComdata for the periods indicated.

| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(dollars in millions)**         | ** ** |
| Research and  development |       | $                                           | 6.6        |   | $ | 4.4 |   | $ | 3.1 |   |
| Percent of revenue        |       | 1.6                                         | %          | 1.2 | % | 1.0 | % |
|                           |            |                                             |            |  |  |  |  |  |  |  |

 

**Other Investments and Divestitures**

In addition to theArbitron spin-off, we refer you to Note B, *“Investing Activity,”*and Note C, *“Supplementary Data to Statements of Operations,”*to our consolidated financial statements for further information on ourinvesting and divesting activities. This information may be found in Part II,Item 8 of this report.

**Intellectual Property**

We own or license a number of trademarks, tradenames,copyrights, service marks, trade secrets and other intellectual property rightsthat relate to our products and services, including several mentioned in thisreport. Although we believe that these intellectual property rights are, in theaggregate, of material importance to our businesses, we believe that none ofour businesses is materially dependent upon any particular trademark,tradename, copyright, service mark, license or other intellectual propertyright. We believe, however, that the “Ceridian” and “Comdata” names, marks and logosare of material importance 

14

----

to us. U.S. trademark andservice mark registrations are generally for a term of 10 years, renewableevery 10 years as long as the trademark or service mark is used in the regularcourse of trade.

We have entered into confidentialityagreements with most of our key employees and consultants. In addition, we haveentered into license agreements with customers of our businesses, whichagreements impose restrictions on these customers’ use of our proprietarysoftware and other intellectual property rights.

**Seasonality**

Because the volume of payroll items processedincreases in the fourth quarter of each year in connection with employers’year-end reporting requirements, our HRS revenue and profitability tend to begreater in that quarter.

In Comdata’stransportation business, trucking activity has traditionally diminished at theend of December of each year, which has led to declining accountsreceivable balances and increased cash flow from operations.

**Employees**

As of February 1,2006, we employed approximately 9,433 people on a full- or part-time basis,including 7,222 full-time and 478 part-time employees of HRS, 1,493 full-timeand 140 part-time employees of Comdata, and 97 full-time and 3 part-timecorporate employees. None of our employees are covered by a collectivebargaining agreement.

**Backlog**

Although our businesses are typically characterized bylong-term customer relationships that result in a high level of recurringrevenue, a substantial portion of our customer contracts used by our businessesare terminable by our customers upon relatively short notice periods, includingcontracts that have been extended beyond their original terms. In addition,orders for products and services are terminable by our customers, and no orderfor one of our products or services is considered firm until the contract isexecuted. The timing of the delivery of our products and services is largelydependent upon the customer. As such, we do not have backlog information thatcan be provided for our businesses.

In our HRS business, wedo, however, track the estimated dollar value of a year’s worth of product orservice orders from our customers that have not yet been billed or installed.Although not a reported number, this metric is used by management as a planningtool relating to resources needed to install products and services, and a meansof assessing our performance against installation timing expectations of us andour customers.

15

----

**Executive Officers of Registrant**

Ourexecutive officers as of March 1, 2006 are:

| Name (Age)              | ** ** | ** **                                               | ** ** | **Current Position** |
|-------------------------|------------|----------------------------------------------------------|------------|----------------------|
| Ronald L. Turner (59)   |       | Chairman, President and  Chief Executive Officer         |
| Gary A. Krow (51)       |       | Executive Vice  President and President of Comdata       |
| Gary M. Nelson (54)     |       | Executive Vice  President, Chief Administrative Officer, |
|                    |       | General Counsel and  Corporate Secretary                 |
| Douglas C. Neve (50)    |       | Executive Vice  President and Chief Financial Officer    |
| Robert J. Severson (61) |       | Senior Vice  President, Corporate Technology             |
| Randy W. Strobel (39)   |       | Vice President and  Corporate Controller                 |

 

Our executive officers are annually elected by ourBoard of Directors and serve at the pleasure of the Board of Directors and theChief Executive Officer. There are no immediate family relationships between oramong any of our executive officers.

Upon the completion of our spin-off from Ceridian’spredecessor on March 31, 2001, with the exception of Messrs. Neve andStrobel who joined Ceridian in 2005, each of our executive officers resigned asan executive officer from Ceridian’s predecessor and was thereafter reappointedto the equivalent position within Ceridian. In connection with this spin-off, Mr. Turnerresigned as a director of Ceridian’s predecessor and became a director ofCeridian. Except as specifically noted, our executive officers have held thefollowing positions with Ceridian, Ceridian’s predecessor and certain otherentities for the past five years:

Ronald L. Turner has served as a director since July 1998;Chairman since May 2000; Chief Executive Officer since January 2000;and President since April 1998. Mr. Turner was Chief OperatingOfficer from April 1998 to January 2000.

Gary A. Krow has served as Executive Vice Presidentand President of our Comdata subsidiary since November 1999.

Gary M. Nelson has served as Executive Vice Presidentsince October 2001; Chief Administrative Officer since January 2005;General Counsel since July 1997; and Corporate Secretary since October 1998.Mr. Nelson was Vice President from July 1997 until October 2001.

Douglas C. Neve has served as Executive Vice Presidentand Chief Financial Officer since February 2005. Mr. Neve was asenior audit partner with Deloitte & Touche LLP, an internationalpublic accounting firm, from June 2002 until February 2005 and anaudit partner with Arthur Andersen, an international public accounting firm,from September 1989 through May 2002.

Robert J. Severson has served as Senior VicePresident, Corporate Technology since July 2000 and Senior Vice President,U.S. HRS Business Technology since February 2005.

Randy W. Strobel hasserved as Vice President and Controller since June 2005. Mr. Strobelwas Vice President of Finance of Mesaba Aviation, Inc., an aviationcompany, from October 2002 until June 2005, and Controller of MesabaAviation from October 2001 until September 2002. He was anindependent finance consultant from March 2000 until September 2001.

**Available Information**

Our Internet website is *http://www.ceridian.com.*You may access, free of charge, through the “Investor Relations” portion of ourwebsite, our annual reports on Form 10-K, quarterly reports on Form 10-Q,

16

----

current reports on Form 8-K,and amendments to such reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended, as soon asreasonably practicable after we electronically file such material with, orfurnish it to, the SEC.

We also post otherdocuments containing information about our corporate governance on our website,including information relating to our corporate governance policies andpractices, charters of our committees of the Board of Directors, codes ofconduct and other corporate governance matters. These documents are located inthe “Corporate Governance” section of our website. Copies of our corporategovernance policies and guidelines, charters for each of our committees of theBoard of Directors, code of conduct and other corporate governance documentscontained in the Corporate Governance section of our website are available inprint without charge to any stockholder by writing Ceridian Corporation,Attention: Corporate Secretary, 3311 East Old Shakopee Road, Minneapolis,Minnesota 55425-1640. Our Internet website and the information containedon or connected to the website are not intended to be incorporated by referenceinto this report.

**Item 1A.**                RiskFactors

Our business faces manyrisks. Any of the risks and uncertainties discussed below, or elsewhere in thisreport or our other filings with the Securities and Exchange Commission, couldhave a material impact on our business, financial condition or results ofoperations. Additional risks and uncertainties not presently known to us orthat we currently believe to be immaterial may also adversely affect ourbusiness. If any of the risks and uncertainties develops into actual events,our business, financial condition or results of operations could be materiallyaffected. If that happens, the trading price of our common stock could declinesignificantly.

***Our future revenueand revenue growth will depend on our ability to retain our existing customers,sell additional products and services to our existing customers, introduce newor enhanced products and services and attract and retain new customers.***

Customer retentionis an important factor in the amount and predictability of revenue in each ofour businesses. Our ability to retain our customers depends on a number offactors, including:

·       customersatisfaction;

·       newproduct and service offerings;

·       customerservice levels;

·       price;

·       customerviability; and

·       competition.

We expect that aportion of our anticipated future revenue growth in each of our businesssegments will be derived from:

·       thecontinued selling of products and services to our existing customers;

·       theselling of additional products and services to our existing customers;

·       theintroduction of new or enhanced products and services by our businesses; and

·       theselling of products and services to new customers.

17

----

Our ability toretain existing customers, attract new customers and grow revenue will dependon a variety of factors, including:

·       thequality and perceived value of our product and service offerings by existingand new customers;

·       effectivesales and marketing efforts;

·       ourspeed to market and avoidance of difficulties or delays in development of newproducts and services;

·       thelevel of market acceptance of new products and services;

·       ourability to integrate technology into our products and services to avoidobsolescence and provide scalability;

·       thesuccessful implementation of products and services for new and existingcustomers;

·       theregulatory needs and requirements facing our company and our customers; and

·       ourability to meet increased customer regulatory requirements, including ourcustomers that are governmental agencies or entities.

There can be no assurancethat we will achieve our revenue objectives from our cross-selling efforts andselling of new products and services. The inability to cross-sell our productsand services, retain existing customers (such as the U.S. Department ofDefense), attract new customers or successfully develop and implement new andenhanced products and services could adversely affect our businesses.

***Our ability toimprove operating margins in our HRS business will depend on the degree towhich and the speed with which we are able to increase operational efficienciesand reduce operating costs.***

Our ability to improveprofit margins in our HRS business will depend on factors that include thedegree to which and the speed with which we are able to increase operationalefficiencies and reduce operating costs. We may not be able to reduce ouroverall cost structure compared to our revenues, or otherwise improveproductivity. We may face delays or difficulties in implementing product,process and system improvements. We may not be able to quickly and effectivelyinstall new products and services for customers. We may face delays ordifficulties in consolidating various functions, including administrativefunctions, eliminating duplicate operations and consolidating facilities. Wemay not be able to successfully outsource or offshore various operating andadministrative functions, to the extent we deem appropriate. Any of thesefactors could adversely affect the timing or effectiveness of cost reductionand margin improvement efforts in our business and our ability to successfullycompete in the markets we serve.

***The markets weserve are highly competitive and may attract new competitors or cause currentcompetitors to focus more on these markets, which could adversely affect ourbusiness.***

The markets for ourbusinesses are highly competitive. We face a variety of competitors, and someof our competitors have substantially greater financial resources than Ceridian.In addition, new competitors could decide to enter the markets we serve or currentcompetitors could decide to focus greater resources on these markets, whichcould intensify the highly competitive conditions that already exist. These newentrants and existing competitors could offer or introduce new technologies ora different service model, or could treat the services to be provided by one ofour businesses as one component of a larger product or service offering. Thesedevelopments could enable these new and existing competitors to offer similarproducts or services at reduced prices. Any of these or similar developmentscould adversely affect our business and results of operations.

18

----

***The loss of ourcontract with the U.S. Department of Defense would likely have an adverse affecton our HRS business.***

We currently provide customizedwork-life and employee assistance services to U.S. Armed Services personnelunder a contract with the U.S. Department of Defense. Our contract with theU.S. Department of Defense will expire on March 31, 2006. We are currentlynegotiating a contract extension with the U.S. Department of Defense that wouldextend our relationship with them through approximately September 30,2006. It is our understanding that the U.S. Department of Defense intends toissue a request for proposal to enter into a long-term contract with a providerto begin on or about October 1, 2006. We intend to respond to this requestfor proposal. If we are unsuccessful in securing an extension of the existingcontract or securing a new contract with the U.S. Department of Defense, theloss of this customer would likely have an adverse affect on our HRS business.

***Any breach of ourIT security or loss of customer data could adversely affect our businesses.***

Any security breach in ourbusiness processes and/or systems has the potential to impact our customerinformation and our financial reporting capabilities which could result in thepotential loss of business and our ability to accurately report financialresults. In addition, any issues of data privacy as it relates to unauthorizedaccess to or loss of customer and/or employee information could result in the potentialloss of business, damage to our market reputation, litigation and regulatoryinvestigation and penalties. We cannot assure you that our continued investmentin the security of our IT systems and continued efforts to improve the controlswithin the IT and business processes will prevent attempts to breach oursecurity. If our security is breached, our business and operating results couldbe adversely affected.

***Political and economicfactors may adversely affect our business and operating results.***

Trade, monetary and fiscal policies, and political andeconomic conditions may substantially change, with corresponding impacts on theindustries that we serve, particularly those more economically sensitiveindustries such as trucking and retail. Approximately 69.6% of Comdata’srevenue for 2005 was attributable to its transportation business. Comdata’sresults of operations are, therefore, dependent on the level of activity in thetransportation industry, which, in turn, is affected by general economicconditions. Further, a decrease in the number of truck drivers would decreasethe number of Comchek transactions and could adversely affect Comdata’srevenues. 

Also, since significantportions of fueling transactions are priced by reference to the amount spent onthe transaction, Comdata’s revenue can be significantly affected by changes infuel prices. Falling fuel prices directly reduce the amounts of revenue andearnings related to these transactions. Rising fuel prices increases Comdata’srevenue and earnings. However, rising fuel prices also increase working capitalrequirements and subject Comdata to greater credit or bad debt risks withrespect to its customers that purchase fuel using a Comdata payment method. Wehave a fuel price risk management objective to protect Comdata earnings fromthe effects of falling fuel prices. Comdata has entered into derivative instrumentsthat convert the floating price of diesel fuel used to a fixed price. Thesederivative instruments generally expire at the end of the year. As a result,quarterly results for Comdata and Ceridian as a whole could be volatile asthese instruments are “marked to market” at the end of each quarter. For thefull term of the derivative instrument, however, the gain or loss on diesel fuelprice derivatives included in Comdata’s results will be approximately equal tothe cash flows related to these instruments.

19

----

Changes in trade,monetary and fiscal policies, and political and economic conditions could alsoaffect:

·       employment levels, with acorresponding impact on our HRS business; and

·       interestrates, with a corresponding impact on investment income from invested customer fundswhich are held pending remittance to taxing authorities, customer employees andother third parties.

Decreased employmentlevels, as well as slowed economic conditions, could negatively affect wage andbonus payments, orders and the timing of product installations, and negativelyimpact the operating results of our HRS business.

***Government regulation changes on timing or amount ofremittances and changes in interest rates may reduce our investment income fromcustomer deposits.***

Our HRS business in the United States and Canada hashistorically derived significant revenue and earnings from the investment ofcustomer deposits, and this revenue and earnings are an integral part of ourHRS business. Changes in governmental regulations on the timing and amount ofremittances may reduce the period of time we are allowed to hold theseremittances, as well as the amount of such remittances, and may decrease ourrevenue and earnings from this source. If governmental regulations change inthis fashion, we would likely seek to require customers who permit us to retainearnings on their deposits to pay us additional fees in lieu of a portion ofthis lost investment income.

In addition, changes ininterest rates will affect our revenue and earnings from this source. Interestrate changes are difficult to predict and could be significant.

***Changes in or theelimination of governmental regulations may negatively impact our revenue andearnings and the way we conduct our business.***

Changes in or theelimination of governmental regulations may adversely affect our revenue andearnings and the way in which we conduct our business. Changes in governmentalregulations are difficult to predict and could be significant. For example, theextent and type of benefits that employers are required to or may choose toprovide employees and/or the amount and type of federal or state taxesemployers and employees are required to pay will affect the revenue andearnings associated with the products or services that we may sell. As anotherexample, Comdata is currently licensed on the state level by the banking orfinancial institutions departments of numerous states. Continued licensing bythese states is subject to ongoing satisfaction of compliance requirementsregarding safety and soundness, including, for example, posting of surety bondsto guarantee payment of funds in transit. Changes in this regulatoryenvironment, including the implementation of new or varying measures by the government,may significantly affect or change the manner in which we currently conductsome of the aspects of our business. Further, if we are unable to timely andappropriately comply with existing or changed government regulations, we may besubject to sanctions and the payment of fines and penalties. 

***Our investments inour business may not improve our business performance.***

We have ongoing andcontinued initiatives to invest in and improve the performance of ourbusinesses. These initiatives include:

·       improvingour customer service model;

·       improvingcustomer retention;

·       continuingproduct enhancements;

20

----

·       improvingour return on information technology investments;

·       investingin and improving our return on process improvements, including our Six Sigmaprogram (an effort that focuses on helping organizations design, produce,implement and provide services better, faster and cheaper);

·       consolidating and improvingefficiencies at our processing centers; and

·       increasingthe effectiveness of our direct sales efforts and account management programs.

In our HRS business, the profitability of certainportions of the business, including various HRS operating functions and ouroperations in different countries (the United States, Canada and the UnitedKingdom), varies greatly, and in some instances generates losses. Theprofitability of certain elements of our HRS business can also vary from yearto year due to either external or internal factors. We may not be able toimprove the performance of the elements of the HRS business that lose money orare less profitable than others.

Further, each of our U.S. HRS operating functions andour HRS operations in Canada and the United Kingdom require substantial ongoinginvestment in maintaining and improving infrastructure and product solutions. Wemay not have sufficient financial resources to fund all of the desired ornecessary investments.

We cannot assure you thatour efforts and the amount we invest in this process will improve the performanceof our business, and if so, by how much. If these initiatives are lesssuccessful than planned, or the level of investment needs to be increased, ourbusiness could be adversely affected.

***Our investments may not improve the performance of ourtechnology.***

We have ongoing andcontinued initiatives to invest in and improve the performance of informationtechnology (IT) systems and technology based products and services. Theseinitiatives include:

·       standardizingthe IT development process;

·       integratingof new technology into our products and services to avoid obsolescence;

·       providingscalability;

·       upgradingour financial systems; and

·       continuingrationalization of our staff and locations.

We cannot assure you thatour efforts will be successful and that the amount we invest in this processwill improve the performance of our technology or improve our ability tocompete in the markets we serve. If these initiatives are unsuccessful or lesssuccessful than planned, or the level of investment needs to be increased, ourbusiness and operating results could be adversely affected.

***Any problems ordelays we may experience in implementing system upgrades and conversions couldadversely affect our business.***

We expect to continue ourefforts to transition to new or enhanced data processing systems and/orsoftware, including systems that process customer data and internal managementinformation systems. The successful implementation of these new or enhancedsystems will be critical to the effective delivery of products and services andthe efficient operation of our businesses. Problems or delays with theinstallation or initial operation of the new or enhanced systems could disruptor increase costs in connection with our delivery of services and with ouroperations planning, financial reporting and management. From time to time, wehave experienced these types of problems or delays.

21

----

***Our ability toremain competitive depends on our speed to market with new or enhancedtechnology.***

As a provider ofinformation management and data processing services in both of our businesssegments, we need to rapidly adapt and respond to the technological advancesoffered by our competitors and the technological requirements of our customersin order to maintain or improve upon our competitive position. There can be noassurance that we will develop and release new products and services or productand service enhancements within the required time frames and within targetedcosts. Significant delays, difficulties or added costs in introducing newproducts and services or enhancements, either through internal development,acquisitions or cooperative relationships with other companies, could adverselyaffect the market acceptance of our products and services and our operatingresults.

***In the event of acatastrophic occurrence our ability to protect client data and maintainoperations may be impaired.***

In the event of acatastrophic occurrence, either natural or man-made, our ability to protect ourinfrastructure, including client data, and maintain ongoing operations may besignificantly impaired. We cannot assure you that our business continuity and disasterrecovery plans and strategies will be successful in mitigating the effects of acatastrophic occurrence. We could potentially lose control of customer data andmay experience significant interruptions of our operations and service to ourcustomers.

***Our success isdependent on the retention and acquisition of talented people and the skills andabilities of our management team and key personnel.***

We must continue to attract, hire, train, develop andretain talented people to fill the key roles within the organization. We mustprovide challenging roles, with accountability and commensurate rewards, toattract and retain the appropriate individuals to the organization. If we areunable to attract and retain talented employees who work effectively as membersof teams, it could impact our ability to deliver the expected results from ouroperations.

The success andperformance of our business is dependent upon retaining and attractingmanagement and key personnel with the appropriate skills, abilities and marketknowledge for each of our operating functions and geographic areas, as well asfor product development. There is no assurance we can retain our currentmanagement and key personnel or attract additional talent and skills to ourexisting team. We must continue to retain, attract and develop a core group ofmanagement personnel with the appropriate skills, abilities and marketknowledge and continually develop appropriate succession plans to continue togrow our business. The failure to do so could have a material adverse effect onour business, operating results and financial condition.

***We are subject torisks related to our international operations, which may adversely affect ouroperating results.***

Approximately 24%of HRS revenue in 2005 was obtained from our international operations. OurCeridian Canada operations provide certain HRS services for our Canadiancustomers, and our Ceridian Centrefile subsidiary primarily provides certainHRS services in the United Kingdom. We are beginning to expand ourinternational HRS business into other countries by engaging a partner within acountry to provide us with payroll administration and processing services forthat country. Comdata also has small operations in Canada, and is beginning toexpand its business into Europe. Approximately2% of Comdata’s revenue in 2005 was derived from customers outside of theUnited States. In addition to the risks otherwise describedherein, international operations are subject to further additional risks thatcould adversely affect those operations or our business as a whole, including:

·       costsof customizing products and services for foreign customers;

22

----

·       difficultiesin managing and staffing international operations;

·       difficultieswith or inability to engage global partners;

·       reducedprotection for intellectual property and other legal rights in some countries;

·       longersales and payment cycles;

·       theburdens of complying with a wide variety of foreign laws;

·       exposureto legal jurisdictions which may not recognize or interpret customer contractsin predictable ways;

·       exposureto local economic and political conditions; and

·       unfavorablecurrency exchange rates.

In addition, we anticipatethat customers and potential customers may increasingly require and demand thata single vendor provide HRS solutions and services for their employees in anumber of countries. If we are unable to provide the required services on amulti-national basis, there may be a negative impact on our new orders andcustomer retention, which would negatively impact revenue and earnings. Althoughwe have a multi-national strategy, substantial additional investment andefforts may be necessary to ensure success.

***Our business and results of operations are dependenton several vendors and suppliers, the loss of whom could adversely affect ourconsolidated results of operations.***

Our business is dependenton several vendors and suppliers, the loss of whom could adversely affect ourconsolidated results of operations. In particular, Comdata’s current businessrelies upon its relationships with third party suppliers, such as MasterCard,to effect and support transactions, including access to the Cirrus ATM networkand the Maestro point-of-sale debit network. The ability of Comdata to continueto provide some of its services in the manner in which it currently deliversthem may be affected by actions taken by third party suppliers, includingMasterCard or other similar card associations. Comdata’s application to form aUtah industrial bank that would likely become a direct participant in theMasterCard credit and debit networks is subject to FDIC approval, which iscurrently pending and may not be approved until, among other things, the issueswith the Securities and Exchange Commission investigation discussed below aresubstantively resolved. Any adverse change in Comdata’s relationship with thesevendors or Comdata’s inability to timely and effectively establish anindustrial bank or find other timely and effective alternatives to these vendorrelationships could likely adversely affect Comdata’s business and results ofoperations and could adversely affect our consolidated results of operations aswell.

***The failure of ourHRS business to comply with applicable laws could result in substantial taxes,penalties and liabilities that could adversely affect our business.***

Our HRS customers remit employer and employee taxfunds to our HRS division or its subsidiaries. Our HRS division or itssubsidiaries process the data received from its customers and remit the fundsalong with a tax return to the appropriate taxing authorities when due. Undervarious service agreements with its customers, our HRS division or itssubsidiaries assume financial responsibility for the payment of the taxes,penalties and liabilities assessed against its customers arising out of thefailure of our HRS division or its subsidiaries to fulfill its obligationsunder its agreements with these customers, unless these taxes, penalties orliabilities are attributable to the customer’s failure to comply with the termsof the agreement the customer has with our HRS division or its subsidiaries.These taxes, penalties and liabilities could, in some cases, be substantial andcould adversely affect its business and operating results. Additionally, thefailure of our HRS division or its subsidiaries to fulfill its obligationsunder its customer agreements could adversely affect our reputation, itsrelationship with our customers and its ability to gain 

23

----

new customers. Mistakesmay occur in connection with this service. Our HRS division or its subsidiariesand its customers may be subject to penalties imposed by tax authorities forlate filings or underpayment of taxes.

Retirement plan assets are remitted directly by ourcustomers to investment vehicles selected by the plan administrator or plansponsor. Because tracking, processing and administering retirement plans iscomplex, providers of these services on occasion make mistakes in connectionwith this service. Our HRS division or its subsidiaries and its customers aresubject to cash penalties and legal liabilities imposed by regulatoryauthorities for non-compliance with required reporting and processing ofretirement plan contributions.

As a result of the services our benefit servicessubsidiary provides, it may be subject to potential legal liability as aprovider of portability compliance services. As a provider of COBRA complianceservices, our benefit services subsidiary is subject to excise taxes andpenalties for noncompliance with provisions of COBRA. In addition to the excisetax and penalty liabilities that may be imposed on our benefit servicessubsidiary, substantial excise taxes and penalties may be imposed under COBRAon our customers. In addition, as a provider of HIPAA compliance andadministration services, our benefit services subsidiary may be subject toERISA (Employee Retirement Income Security Act of 1974) penalties fornoncompliance with various provisions of HIPAA.

As a result of work-lifeand assistance programs currently provided to the U.S. Department of Defense,we are required to comply with all applicable Federal and U.S. Department ofDefense contracting regulations. Non-compliance with required reporting andperformance activities subjects us to penalties and legal liabilities imposedby regulatory authorities.

***Litigation andgovernmental inquiries, investigations and proceedings may adversely affect ourfinancial results.***

Our future operating results may be adversely affectedby adverse judgments, settlements, unanticipated costs or other effects oflegal and administrative proceedings now pending or that may be instituted inthe future, or from investigations by the Securities and Exchange Commission(SEC) and other administrative agencies.

From time totime, we have had inquiries from regulatory bodies relating to the operation ofour business. It has been our practice to cooperate with such inquiries. Suchinquiries may result in various audits, reviews and investigations. Forexample, on January 22, 2004, we filed a Current Report on Form 8-K,under Item 5, stating that we announced that we are responding to a documentrequest from the SEC, and that we had been advised that the SEC has issued aformal order of investigation. In February 2004, we provided documentsresponsive to the SEC. In July 2004, we advised the SEC of the investigationbeing directed by the Audit Committee of our Board of Directors. We have keptthe SEC advised on a regular basis of the Audit Committee’s investigation. On December 10,2004, we received a further formal confidential document request from the SEC. Thesecond request broadened the areas of inquiry to include, among other things,Ceridian’s restatements, revenue recognition, capitalization, expenserecognition, how we respond to any internal ethics complaints, and Ceridian’saccounting policies and procedures. The formal document requests state that theSEC investigation is a non-public, fact-finding inquiry, and that theinvestigation and document requests do not mean that the SEC has concluded thatwe have violated any securities laws. As is common in SEC investigations, on June 15,2005, we received a subpoena from the SEC seeking certain additional documentsthat relate to some of the areas of inquiry identified above. The subpoena isconsistent with investigations of this type and was anticipated. We continue tofully cooperate with the SEC and are in the process of responding to the SEC’sadditional document request and subpoena and cannot estimate when suchinvestigation will conclude.

24

----

An adverse outcomeof this SEC investigation or other inquiries from regulatory bodies could havea material adverse effect on us and result in:

·       theinstitution of administrative or civil proceedings;

·       sanctionsand the payment of fines and penalties;

·       afurther restatement of our financial results for the years under review;

·       changesin personnel;

·       shareholderlawsuits; and

·       increasedreview and scrutiny of us by our customers, regulatory authorities, the mediaand others.

In addition, the following lawsuits have been filed inrelation to the restatements and SEC investigation. An adverse outcome of theselawsuits could have a material adverse effect on the company.

Since August 6, 2004, six shareholder lawsuitshave been filed against Ceridian Corporation and certain executive officers inUnited States District Court, District of Minnesota. On March 7, 2005,those lawsuits were consolidated into a single case captioned *In re Ceridian Corporation Securities Litigation*, Case No. 04-cv-03704MJD-JGL. This consolidated action purports to be a class action filed on behalfof all persons who purchased or otherwise acquired common stock of the Companybetween April 17, 2003 through and including March 17, 2005, andalleges claims against the Company and certain of its officers under Sections10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffschallenge the accuracy of certain public disclosures made by Ceridian regardingits financial performance, and in particular Ceridian’s accounting for revenueand expenses, accounting for capitalization, accounting for derivatives,accounting for long-term leases, and accounting for trademarks. Plaintiffsallege, in essence, that the Company’s series of restatements constituted aviolation of Section 10(b) and 20(a) of the Securities ExchangeAct of 1934.

Since August 13,2004, two shareholders have filed derivative suits on behalf of Ceridianagainst Ceridian, as nominal defendant, its directors and certain of itsexecutive officers in United States District Court, District of Minnesota: *James Park, Derivatively On Behalf of Ceridian Corporation v. Ronald L.Turner, et al.*, and *Anthony Santiamo,Derivatively On Behalf of Ceridian Corporation v. Ronald L. Turner, et al.*,both served August 19, 2004. These complaints have been consolidated intoa single lawsuit. The consolidated lawsuit alleges that the Ceridian Board ofDirectors and certain executive officers breached fiduciary duties, throughabuse of control, gross mismanagement, waste of corporate assets and unjustenrichment. These complaints rely on the same factual allegations as thepurported class action shareholder lawsuits described above.

***Our ability to implement and execute our strategicplans may not be successful and, accordingly, we may not be successful inachieving our strategic goals.***

We cannot ensure that we will be successful in developingand implementing our strategic plans for our businesses or that the operationalplans that have been or need to bedeveloped to implement the strategic plans will produce therevenue, margins, earnings or synergies that we need to be successful. Inaddition, these strategic plans and operational plans need to continue to beassessed and reassessed to meet the challenges and needs of our businesses inorder for us to remain competitive. Further, the execution of the strategic plans will, to some extent, bedependent on external factors that we cannot control. 

25

----

***Our strategy to make acquisitions of and investmentsin complementary businesses, products and technologies may not be successfuland involves risks that could adversely affect our business and operatingresults.***

One of our growthstrategies for each of our business segments is to make acquisitions of andinvestments in complementary businesses, products and technologies that willenable us to add products and services for our core customer base and foradjacent markets, and to expand each of our businesses geographically. Ourability to make these acquisitions and investments will depend on a number offactors, including:

·       theavailability of suitable acquisition candidates and investments at acceptablecosts;

·       ourability to compete effectively for these acquisition candidates andinvestments; and

·       theavailability of capital to complete these acquisitions and investments.

A number of thesefactors are outside our control. In addition, implementation of this strategyentails a number of other risks, including:

·       inaccurateassessment of undisclosed liabilities;

·       entryinto markets in which we may have limited or no experience;

·       potentialloss of key employees or customers of the acquired businesses;

·       difficultiesin assimilating the operations and products of an acquired business or inrealizing projected efficiencies and cost savings;

·       reallocationof significant amounts of capital from operating initiatives to acquisitions;and

·       increasein our indebtedness and a limitation in our ability to access additionalcapital when needed.

In addition, from an accounting perspective, mostacquisitions and investments involve periodic assessments of the recoverablevalue of goodwill and other intangible assets. Such assessments could result inan impairment of the goodwill or other intangible assets recorded which mayhave an adverse impact on our financial condition or operating results.

These risks could beheightened if we complete several acquisitions or investments within arelatively short period of time. The benefits of an acquisition or investmentmay often take considerable time to be realized, or may never be realized, andwe cannot guarantee that any acquisition or investment will in fact produce therevenue, earnings or business synergies that we anticipated at the time of thetransaction.

***Our $250 millionrevolving credit facility and $150 million Comdata receivables securitizationfacility may restrict our operating flexibility.***

The governingdocuments for our $250 million revolving credit facility and the $150 millionComdata receivables securitization facility contain a number of significantprovisions that, among other things, restrict our ability to:

·       sellassets;

·       incurmore indebtedness;

·       grantor incur liens on our assets;

·       makeinvestments or acquisitions;

·       enterinto leases or assume contingent obligations;

26

----

·       engagein mergers or consolidations; and

·       engagein transactions with our affiliates.

These restrictions couldlimit our ability to finance our future operations or capital needs or makeacquisitions that may be in our best interest. In addition, our creditfacilities require that we satisfy several financial covenants. Our ability tocomply with these financial requirements and other restrictions may be affectedby events beyond our control, and our inability to comply with them couldresult in a default under a credit facility. If a default occurs under one ofthese facilities, the lenders under the other facility could elect to declareall of the outstanding borrowings, as well as accrued interest and fees, to bedue and payable under that other facility and require us to apply all of ouravailable cash to repay those borrowings. In addition, a default may result inhigher rates of interest and the inability to obtain additional capital.

***We are reporting a material weakness in our internalcontrol over financial reporting and as a result, we have concluded, pursuantto the Sarbanes-Oxley Act of 2002, that our internal control over financialreporting at December 31, 2005 was not effective.***

As we disclosed in our“Management’s Report on Internal Control Over Financial Reporting” set forth inPart II, Item 8 “Financial Statements and Supplementary Data”, and as disclosedin Part II, Item 9A “Controls and Procedures” of this report, we haveconcluded that our internal control over financial reporting was not effectivebased on applicable evaluation criteria as of December 31, 2005 as aresult of our identification of a “material weakness” (as defined by the PublicCompany Accounting Oversight Board in its Auditing Standard No. 2, “AnAudit of Internal Control over Financial Reporting Performed in Conjunctionwith an Audit of Financial Statements”) relating to inadequate revenuerecognition procedures and controls with respect to the analysis of certain complexmultiple element revenue arrangements. While we are taking steps to correctthis material weakness, this material weakness will not be consideredremediated until the new and improved internal controls operate for a period oftime, are tested and it is concluded that such new and improved internalcontrols are operating effectively. If we fail to remediate this materialweakness, we could be unable to provide timely and reliable financialinformation, which could have a material adverse effect on our business,results of operations or financial condition. Furthermore, it is uncertain whatimpact an adverse audit opinion on the effectiveness of our internal controlover financial reporting will have upon our stock price or business.

**Item1B.     Unresolved Staff Comments.**

None.

27

----

**Item 2.**                        Properties

Our principal executiveoffices are located at 3311 East Old Shakopee Road, Minneapolis, Minnesota55425. As of February 1, 2006, the principal computer and officefacilities used in our businesses were located in the metropolitan areas ofMinneapolis, Minnesota; Atlanta, Georgia; Los Angeles, California; Chicago,Illinois; St. Louis, Missouri; Louisville, Kentucky; Raleigh, NorthCarolina; Nashville, Tennessee; Dallas, Texas; El Paso, Texas; St. Petersburg,Florida; Philadelphia, Pennsylvania; in London, England; in Winnipeg, Manitobaand Markham, Ontario, Canada; and in Mauritius.

The following tablesummarizes the usage and location of our facilities as of February 1,2006:

**Facilities**

**(inthousands of square feet)**

| ** **                                | ** ** | **U.S.**   | ** ** | **Non-U.S.** | ** ** | **Total**  | ** ** |
|-------------------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| **Type of Property Interest**             | ** ** | ** ** | ** ** |         | ** ** | ** ** |       | ** ** | ** ** |
| Owned                                     |       | 388        |       |         | 0          | ** ** |       | 388 |   |
| Leased                                    |       | 1,715      |       |         | 425        | ** ** |       | 2,140 |   |
| Total                                     |       | 2,103      |       |         | 425        | ** ** |       | 2,528 |   |
| **Property  Interest by Segment**         | ** ** | ** ** | ** ** |         | ** ** | ** ** |       | ** ** | ** ** |
| HRS                                       |       | 1,646      |       |         | 411        | ** ** |       | 2,057 |   |
| Comdata                                   |       | 387        |       |         | 14         | ** ** |       | 401 |   |
| Corporate                                 |       | 70         |       |         | 0          | ** ** |       | 70 |   |
| Total                                     |       | 2,103      |       |         | 425        | ** ** |       | 2,528 |   |
| **Utilization  of Property**              | ** ** | ** ** | ** ** |         | ** ** | ** ** |       | ** ** | ** ** |
| Office, Computer  Center & Other |       | 2,092      |       |         | 425        | ** ** |       | 2,517 |   |
| Leased or  Subleased to Others            |       | 11         |       |         | 0          | ** ** |       | 11 |   |
| Total                                     |       | 2,103      |       |         | 425        | ** ** |       | 2,528 |   |

 

With the exception of ourSt. Petersburg, Florida facility, we conduct all of our operations in leasedfacilities, including our 211,000 square feet Minneapolis headquarters complexin Minneapolis, Minnesota. Most of these leases contain renewal options andrequire payment for taxes, insurance and maintenance.

Our St. Petersburg,Florida facility is not subject to any major encumbrances. We believe that ourfacilities are adequate for their intended purposes, are adequately maintainedand are reasonably necessary for current and anticipated output levels of thosebusinesses.

**Item 3.**                        LegalProceedings

Ceridian and itssubsidiaries are involved in a number of judicial and administrativeproceedings considered normal in the course of our current and past operations,including employment-related disputes, contract disputes, governmentproceedings, customer disputes, and tort claims. In some proceedings, theclaimant seeks damages as well as other relief, which, if granted, wouldrequire substantial expenditures on our part.

Some of these mattersraise difficult and complex factual and legal issues, and are subject to manyuncertainties, including the facts and circumstances of each particular action,and the jurisdiction, forum and law under which each action is proceeding. Becauseof this complexity, final disposition of some of these proceedings may notoccur for several years. As such, we are not always able to estimate the amountof our possible future liabilities. There can be no certainty that we may notultimately incur charges in excess of presently established or future financialaccruals or insurance coverage. Although occasional adverse decisions (orsettlements) may occur, it is management’s opinion that the final dispositionof these proceedings will not, considering the merits of the claims andavailable reserves and insurance and based upon the facts and circumstancescurrently known, have a material adverse effect on our financial position orresults of operations.

28

----

**Securities Class Actions**

Since August 6, 2004,six shareholder lawsuits have been filed against Ceridian Corporation andcertain executive officers in United States District Court, District ofMinnesota. On March 7, 2005, those lawsuits were consolidated into asingle case captioned *In re Ceridian CorporationSecurities Litigation*, Case No. 04-cv-03704 MJD-JGL.This consolidated action purports to be a class action filed on behalf of allpersons who purchased or otherwise acquired common stock of the Company betweenApril 17, 2003 through and including March 17, 2005, and allegesclaims against the Company and certain of its officers under Sections 10(b) and20(a) of the Securities Exchange Act of 1934. Plaintiffs challenge theaccuracy of certain public disclosures made by Ceridian regarding its financialperformance, and in particular Ceridian’s accounting for revenue and expenses,accounting for capitalization, accounting for derivatives, accounting forlong-term leases, and accounting for trademarks. Plaintiffs allege, in essence,that the Company’s series of restatements constituted a violation of Section 10(b) and20(a) of the Securities Exchange Act of 1934.

Ceridian believes theseclaims are without merit and intends to vigorously defend itself in thisaction. We cannot estimate the possible loss or range of loss from thesematters.

**Derivative Actions**

Since August 13,2004, two shareholders have filed derivative suits on behalf of Ceridianagainst Ceridian, as nominal defendant, its directors and certain of itsexecutive officers in United States District Court, District of Minnesota: *James Park, Derivatively On Behalf of Ceridian Corporation v. Ronald L.Turner, et al.*, and *Anthony Santiamo,Derivatively On Behalf of Ceridian Corporation v. Ronald L. Turner, et al.*,both served August 19, 2004. These complaints have been consolidated intoa single lawsuit. The consolidated lawsuit alleges that the Ceridian Board ofDirectors and certain executive officers breached fiduciary duties, throughabuse of control, gross mismanagement, waste of corporate assets and unjustenrichment. These complaints rely on the same factual allegations as thepurported class action shareholder lawsuits described above.

Ceridian willappropriately defend itself in the consolidated action. We cannot estimate thepossible loss or range of loss from these matters.

**SEC Investigation**

On January 22, 2004,we filed a Current Report on Form 8-K, under Item 5, stating that weannounced that we are responding to a document request from the Securities andExchange Commission, and that we have been advised that the SEC has issued aformal order of investigation. In February 2004, we provided documentsresponsive to the SEC. In July 2004, we advised the SEC of theinvestigation being directed by the Audit Committee of our Board of Directors. Wehave kept the SEC advised on a regular basis of the Audit Committee’sinvestigation. On December 10, 2004, we received a further formalconfidential document request from the SEC. The second request broadened theareas of inquiry to include, among other things, Ceridian’s restatements,revenue recognition, capitalization, expense recognition, how we respond to anyinternal ethics complaints, and Ceridian’s accounting policies and procedures. Theformal document requests state that the SEC investigation is a non-public,fact-finding inquiry, and that the investigation and document requests do notmean that the SEC has concluded that we have violated any securities laws. Asis common in SEC investigations, on June 15, 2005, we received a subpoenafrom the SEC seeking certain additional documents that relate to some of theareas of inquiry identified above. The subpoena is consistent withinvestigations of this type and was anticipated. We continue to fully cooperatewith the SEC and are in the process of responding to the SEC’s additionaldocument request and subpoena and cannot estimate when such investigation willconclude.

**Item4.**                        Submissionof Matters to a Vote of Security Holders

No matters were submittedto a vote of our stockholders during the fourth quarter of 2005.

29

----

**PART II**

**Item 5.**                        MarketFor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

Our common stock is listedand trades on The New York Stock Exchange under the symbol “CEN”. The number ofholders of record of our common stock on March 1, 2006 was 10,922. We havenot declared or paid any cash dividends on our common stock since ourinception, and our Board of Directors presently intends to retain all earningsfor use in the business for the foreseeable future. The transfer agent andregistrar for our common stock is the Bank of New York.

The following table setsforth the high and low sale prices of our common stock as reported on the NYSEComposite Tape for each quarterly period during the fiscal years ending December 31,2005 and 2004.

| **2005** | ** ** | ** ** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
|----------|------------|------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| High     |       | $          | 18.55      |   | $          | 20.05  |       | $      | 21.34      |   | $          | 25.16 |   |
| Low      |       | 16.55      |       | 16.22  |       | 19.34  |       | 20.48  |       |
|          |            |            |            |        |            |        |            |        |            |        |            |  |  |  |  |

 

| **2004** | ** ** | ** ** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
|----------|------------|------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| High     |       | $          | 22.56      |   | $          | 23.41  |       | $      | 22.57      |   | $          | 19.42 |   |
| Low      |       | 16.69      |       | 19.70  |       | 17.05  |       | 16.25  |       |
|          |            |            |            |        |            |        |            |        |            |        |            |  |  |  |  |

 

Thetable below sets forth the information with respect to purchases made by or onbehalf of Ceridian of our common stock during the three months ended December 31,2005.

| **Period**                                                | ** ** | ** ** | ** **    | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced  Plans or Programs(1)** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Plans or Programs(1)** | ** ** |
|-----------------------------------------------------------|------------|------------|---------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Month #1  (October 1, 2005- October 31, 2005)   |       |       | 55,000        |                                                 |       |                                             | $          | 21.95                                                                                                                                   |       |                                                                                                                                       |       | 55,000 |   |   |   | 19,057,850 |   |   |
| Month #2  (November 1, 2005- November 30, 2005) |       |       | 2,805,884     | (2)                                                  |       |                                             | $          | 22.59                                                                                                                                   |       |                                                                                                                                       |       | 2,799,300 |   |   |   | 16,258,550 |   |   |
| Month #3  (December 1, 2005- December 31, 2005) |       |       | 668,995  | (3)                                                  |       |                                             | $          | 23.46                                                                                                                                   |       |                                                                                                                                       |       | 644,500 |   |   |   | 15,614,050 |   |   |
| Total:                                                    |       |       | 3,529,879     | (2)(3)                                               |       |                                             | $          | 22.74                                                                                                                                   |       |                                                                                                                                       |       | 3,498,800 |   |   |   | 15,614,050 |   |   |

----

(1)          OnJuly 27, 2005, our Board of Directors authorized the Company to repurchaseup to 20,000,000 additional shares of common stock. We disclosed this increasein the repurchase program in a press release on July 28, 2005. Therepurchase program is being effected from time to time, depending on marketconditions and other factors, through open market purchases and privatelynegotiated transactions. The total remaining authorization under the repurchaseprogram was 15,614,050 shares as of December 31, 2005. The repurchaseprogram has no set expiration or termination date.

(2)          6,584shares were repurchased from an employee in connection with the payment ofwithholding taxes resulting from the exercise of a stock option award.

(3)          24,495 shares wererepurchased from an employee in connection with the payment of withholdingtaxes resulting from the exercise of a stock option award.

30

----

**Item 6.**                        SelectedFinancial Data

The selectedconsolidated historical financial information set forth below should be readalong with Part II, Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our audited consolidatedfinancial statements included in Part II, Item 8, “Financial Statementsand Supplementary Data” of this report.

(Dollars in millions, except per share data)

| ** **                                      | ** ** | **Years Ended December 31,** | ** **  |
|-------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                      | ** ** | **2005**                                    | ** **  | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Revenue**                                     |       | **$**                                       | **1,459.0** |   | $ | 1,320.4 |   | $ | 1,213.9 |   | $ | 1,160.3 |   | $ | 1,167.0 |   |
| Earnings from continuing operations             |       | **127.9**                                   |        | 36.9 |   | 98.8 |   | 111.5 |   | 54.5 |   |
| Discontinued operations of Arbitron             |       | **—**                                  |        | — |   | — |   | — |   | 5.2 |   |
| Net earnings                                    |       | **$**                                       | **127.9**   |   | $ | 36.9 |   | $ | 98.8 |   | $ | 111.5 |   | $ | 59.7 |   |
| **Earnings Per Common Share**                   |       | ** **                                  |        |   |   |   |   |   |   |   |   |
| **Basic**                                       |       | ** **                                  |        |   |   |   |   |   |   |   |   |
| Continuing operations                           |       | **$**                                       | **0.87**    |   | $ | 0.25 |   | $ | 0.66 |   | $ | 0.75 |   | $ | 0.37 |   |
| Net earnings                                    |       | **$**                                       | **0.87**    |   | $ | 0.25 |   | $ | 0.66 |   | $ | 0.75 |   | $ | 0.41 |   |
| **Diluted**                                     |       | ** **                                  |        |   |   |   |   |   |   |   |   |
| Continuing operations                           |       | **$**                                       | **0.86**    |   | $ | 0.24 |   | $ | 0.66 |   | $ | 0.74 |   | $ | 0.37 |   |
| Net earnings                                    |       | **$**                                       | **0.86**    |   | $ | 0.24 |   | $ | 0.66 |   | $ | 0.74 |   | $ | 0.40 |   |
| **Shares  used in calculations (in thousands)** |       | ** **                                  |        |   |   |   |   |   |   |   |   |
| Basic                                           |       | **146,935**                                 |        | 149,074 |   | 148,634 |   | 148,029 |   | 146,069 |   |
| Diluted                                         |       | **148,633**                                 |        | 151,079 |   | 150,197 |   | 149,633 |   | 147,669 |   |
| **Balance Sheet Data at end of year**           |       | ** **                                  |        |   |   |   |   |   |   |   |   |
| Working capital                                 |       | **$**                                       | **401.2**   |   | $ | 345.0 |   | $ | 302.6 |   | $ | 246.6 |   | $ | 189.6 |   |
| Total assets before customer funds              |       | **$**                                       | **2,291.1** |   | $ | 2,116.1 |   | $ | 2,028.1 |   | $ | 2,006.9 |   | $ | 1,858.9 |   |
| Customer funds                                  |       | **$**                                       | **4,341.2** |   | $ | 4,096.0 |   | $ | 3,152.7 |   | $ | 2,446.6 |   | $ | 2,177.6 |   |
| Total assets                                    |       | **$**                                       | **6,632.3** |   | $ | 6,212.1 |   | $ | 5,180.8 |   | $ | 4,453.5 |   | $ | 4,036.5 |   |
| Total debt and capital lease obligations        |       | **$**                                       | **106.5**   |   | $ | 100.7 |   | $ | 163.5 |   | $ | 193.5 |   | $ | 237.9 |   |
| Stockholders’ equity                       |       | **$**                                       | **1,291.8** |   | $ | 1,295.7 |   | $ | 1,245.2 |   | $ | 1,102.3 |   | $ | 1,049.3 |   |
| **Number of Employees at end of year(1)**       | ** ** | **9,633**                                   | ** **  | 9,517 |   | 9,349 |   | 9,412 |   | 9,546 | ** ** |

----

(1)          Continuing operations only.

**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Thefollowing discussion should be read in conjunction with Item 1A. “Risk Factors”and in conjunction with our consolidated financial statements and the notesrelated to those consolidated financial statements contained in Part II,Item 8, “Financial Statements and Supplementary Data” of this report. Anyreference to a “Note” in this discussion relates to the accompanying notes tothe consolidated financial statements unless otherwise indicated.**

**Overview**

**Ceridian Corporation is an informationservices company principally serving the human resource (“HR”), transportationand retail markets. Our human resource solutions (“HRS”) business segmentenables customers to outsource a broad range of human resource processes. Wehave HRS operations primarily in the United States, Canada and the UnitedKingdom. Our Comdata subsidiary (which we refer to in this report as “Comdata”)provides transaction processing, financial services and regulatory complianceservices primarily to the transportation and retail industries. Comdata’sproducts and services**

31

----

**includepayment processing and the issuance of credit, debit and stored value cards. Ourbusinesses are more fully described in Part I, Item 1, “Business” and inNote M, “Segment Data.”**

**Anumber of events or transactions occurred during the period covered by thisdiscussion that had a significant effect on the year-to-year comparisons of ourfinancial condition and performance, including:**

*·**       Phase-outof CobraServ trademark.  *The comparison of selling, general andadministrative (SG&A) expense for 2005 to 2004 and 2004 to 2003 wasaffected by the abandonment of the CobraServ trademark. The CobraServ trademarkwas capitalized as part of our 1999 acquisition of our benefits administration servicesbusiness. In 2004, the CobraServ trademark was phased out of operation. As partof this abandonment, we accelerated the amortization of the remaining net bookvalue of $42.6 million in 2004. This amortization is reported in SG&Aexpense in the HRS operations for the year ended December 31, 2004.

*·**       Saleof our SourceWeb payroll platform and the reorganization within our U.S. HRSpayroll processing and tax filing operations.  *The sale on December31, 2004 of certain customer relationships and other assets associated with ourSourceWeb payroll platform (“SourceWeb Assets”) resulted in a 2004 charge toearnings of $28.5 million. The elimination of the direct costs associated withthis product offering and the benefits of the reorganization within our U.S.HRS payroll processing and tax filing operations significantly improved thecomparison of costs and expenses for 2005 to 2004.

*·**       Incometax matters.  *In 2005, we repatriated $130.3 million of accumulatedearnings from Ceridian Canada under the American Jobs Creation Act of 2004,resulting in an additional tax expense of $5.2 million. During 2005, we reducedour income tax provision by $24.5 million due to favorable settlements ofspecific matters related to U.S. federal income taxes, along with other creditsrelated primarily to state statute expirations. During 2004, we reduced our taxby $16.3 million related to tax settlements and $7.0 million relatedto a valuation allowance realization and we increased tax expense by$12.3 million for a proposed tax adjustment on international earnings. During2003, we reduced our income tax provision by $3.9 million due to favorablesettlements.

*·**       Derivativeinstruments.  *Our diesel fuel and interest rate derivative instrumentscontributed to the variability of costs and expenses during the reportedperiods in this report. For 2005, the loss on derivatives was $11.6 million,mainly due to diesel fuel derivatives, and for 2004, the loss on derivativeswas $0.3 million. For 2003, the gain on derivatives was $14.7 million, mainlydue to interest rate derivatives.  

*·**       Accelerationof W-2 information delivery.  *In 2003, we advanced the delivery andbilling by U.S. HRS of W-2 information for our customers to December from thefollowing January, which affected the comparison of 2004 to 2003 results ofoperations. This resulted in the recognition of $9.2 million of W-2 revenue inDecember 2003 that otherwise would have been recognized inJanuary 2004.

32

----

**Resultsof Operations**2005 Compared to 2004

**Statementsof Operations (Dollars in millions, except per share data)**

| ** **                                  | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **2005**   | ** ** | **2004**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                                     |       | $          | 1,459.0    |                     | $          | 1,320.4                    |       | 138.6 |   | 10.5 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                             |       | 791.7      |       | 745.2                    |       | 46.5                       |       | 6.2 |   | 54.3 |   | 56.4 |   |
| SG&A expense                            |       | 451.6      |       | 479.3                    |       | (27.7                      | )          | (5.8 | ) | 30.9 |   | 36.3 |   |
| Research and  development (R&D) expense |       | 28.1       |       | 26.1                     |       | 2.0                        |       | 7.6 |   | 1.9 |   | 2.0 |   |
| Loss on  derivative instruments             |       | 11.6       |       | 0.3                      |       | 11.3                       |       | NM |   | 0.8 |   | — |   |
| Other expense                               |       | 4.5        |       | 26.5                     |       | (22.0                      | )          | (82.9 | ) | 0.3 |   | 2.0 |   |
| Interest income                             |       | (7.8       | )          | (2.6                     | )          | (5.2                       | )          | NM |   | (0.5 | ) | (0.2 | ) |
| Interest expense                            |       | 5.5        |       | 4.4                      |       | 1.1                        |       | 27.2 |   | 0.4 |   | 0.3 |   |
| Total costs and  expenses                   |       | 1,285.2    |       | 1,279.2                  |       | 6.0                        |       | 0.5 |   | 88.1 |   | 96.9 |   |
| Earnings before  income taxes               |       | 173.8      |       | 41.2                     |       | 132.6                      |       | 321.9 |   | 11.9 |   | 3.1 |   |
| Income tax  provision                       |       | 45.9       |       | 4.3                      |       | 41.6                       |       | NM |   | 3.1 |   | 0.3 |   |
| Net earnings                                |       | $          | 127.9      |                     | $          | 36.9                       |       | 91.0 |   | 246.7 |   | 8.8 |   | 2.8 |   |
| Diluted earnings per  common share          |       | $          | 0.86       |                     | $          | 0.24                       |       | 0.62 |   | 258.3 |   | NM |   | NM |   |

----

*“NM” representscomparisons that are not meaningful to this analysis.

***Consolidated Results—Overview***

Total revenue increased $138.6 million or 10.5% to$1,459.0 million in 2005 compared to $1,320.4 million in 2004. HRS revenueincreased $85.7 million from 2004 to 2005 while Comdata revenue increased $52.9million from 2004 to 2005. HRS revenue benefited $19.3 million from higheryields on invested customer funds, $10.6 million from higher invested balances,$20.2 million from increased sales of work-life services to the U.S.Department of Defense, and $10.1 million from the effect of foreign currencytranslation. Comdata’s revenue benefited $25.3 million from increased revenuefrom retail services and $12.9 million due to increased transaction fees fortransportation services due to higher fuel prices. In addition, both segmentsbenefited from the addition of new customers, selling additional services toexisting customers and price increases.

Total costs and expenses increased $6.0 million due toan increase in cost of revenue offset by decreases in SG&A expense andother expense. Cost of revenue as a percent of revenue improved from 56.4% in2004 to 54.3% in 2005 due primarily to increased sales of higher marginproducts and services and improved efficiencies resulting from reorganizationefforts principally in our payroll processing and tax filing operations. SG&Aexpense decreased $27.7 million due primarily to the $42.6 million charge in2004 for accelerated amortization of the CobraServ trademark. Loss onderivative instruments increased $11.3 million mainly due to our diesel fuel derivatives.During 2005, we made payments of $8.2 million to counterparties for our dieselfuel derivatives and recorded a $1.1 million unrealized loss on diesel fuelderivatives. We sold our interest rate derivatives in February 2005 andrecorded a $2.3 million loss. Other expense decreased $22.0 million in 2005mainly due to the charge to earnings in 2004 as a result of the sale of ourSourceWeb Assets in 2004. Interest income increased $5.2 million in 2005 due toboth a higher average level of cash and equivalents and higher interest rates. Interestexpense increased $1.1 million in 2005 largely due to rising interest rates. Ouraverage outstanding borrowings under our U.S. credit facilities decreased from$125.2 million for 2004 to $61.2 million for 2005. Our average effectiveinterest rate on these facilities increased from 1.97% for 2004 to 4.15% for2005.

33

----

Income taxes increased $41.6million from 2004 to 2005 primarily due to increased earnings and additionaltaxes of $5.2 million related to the repatriation of funds from Ceridian Canada.In 2005, we favorably settled a tax matter that resulted in a $13.0 millionreduction in tax expense. In addition, a former affiliate settled an audit thatresolved our potential obligations which reduced our tax expense by $5.9million. Finally, the expiration of the statute of limitations and otheradjustments to our contingent tax liabilities resulted in a $5.6 millionreduction in our tax expense. The income tax expense for 2004 was lowerprimarily due to lower earnings. We also provided additional tax expense in2004 of $12.3 million for a proposed tax adjustment on international earnings. Wereduced tax expense in 2004 by $16.3 million related to tax settlements and$7.0 million related to a valuation allowance realization. The reported effectivetax rate was 26.4% for 2005 and 10.4% for 2004. 

***Business Segment Results***

We measure businesssegment results by reference to earnings before interest and taxes (“EBIT”)because interest income and interest expense are not allocated to our segments.Revenue between business segments is not material and is eliminated uponconsolidation. Expenses incurred by corporate center operations are directlycharged or otherwise allocated to the business segments. Corporate center costsinclude medical, workers compensation, casualty and property insurance,retirement plan expenses, treasury services, tax services, audit services,accounting services, general management services and other corporate overheadsuch as occupancy and aircraft costs. Certain of these costs are charged to thebusiness segment based on usage and the remainder is allocated on a consistentbasis based on a percentage of revenue.

***HRS***

| ** **                             | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| **(dollars in millions)**    | ** ** | ** ** | ** ** | **2005**                 | ** ** | **2004**                   | ** ** | **$** | ** ** | **%** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                                |       | $          | 1,050.1    |                     | $          | 964.4                      |       | 85.7 |   | 8.9 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                        |       | 601.4      |       | 576.2                    |       | 25.2                       |       | 4.4 |   | 57.3 |   | 59.7 |   |
| SG&A expense                       |       | 375.8      |       | 414.5                    |       | (38.7                      | )          | (9.4 | ) | 35.8 |   | 43.0 |   |
| R&D expense                        |       | 21.5       |       | 21.7                     |       | (0.2                       | )          | (0.9 | ) | 2.0 |   | 2.3 |   |
| (Gain) loss on  derivative instruments |       | 2.3        |       | (1.1                     | )          | 3.4                        |       | NM |   | 0.2 |   | (0.1 | ) |
| Other expense                          |       | 4.5        |       | 25.7                     |       | (21.2                      | )          | (82.4 | ) | 0.4 |   | 2.7 |   |
| EBIT                                   |       | 44.6       |       | (72.6                    | )          | 117.2                      |       | 161.4 |   | 4.3 |   | (7.5 | ) |
|                                        |            |            |            |                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

HRS revenue increased $85.7 million or 8.9% in 2005. Revenuefrom U.S. operations increased $68.3 million with payroll processing, taxfiling and human resource services (“Payroll and Tax Services”) contributing$48.9 million, benefits administration services (“Benefit Services”)contributing $5.0 million, and work-life and employee assistance programs(“LifeWorks”) contributing $14.4 million. The increase in Payroll and Tax Servicesrevenue was mainly driven by a $25.3 million increase in interest income earnedon invested customer funds due to both a higher average invested balance and a higheraverage yield. The remainder of the increase in Payroll and Tax Servicesrevenue was primarily driven by the addition of new customers. The increase in BenefitServices revenue was mainly driven by increased interest income of $2.3 millionand the addition of new customers. LifeWorks revenue increased $20.2 milliondue to increased sales of work-life services to the U.S. Department of Defense,which was partially offset by a reduction in revenue from commercial customers.Ceridian Canada revenue increased $16.9 million with $10.2 million of theincrease due to the strengthening of the Canadian dollar against the U.S.dollar and $2.3 million due to increased interest income. Ceridian Centrefilerevenue increased $0.5 million. Currency rate changes had little effect onCeridian Centrefile revenue.

Cost of revenue as a percent of revenue improved from59.7% in 2004 to 57.3% in 2005. The improvement was mainly driven by a decreaseof 6.9 percentage points in cost of revenue as a percent of 

34

----

revenue in Payroll and TaxServices as a result of reorganization efforts that reduced cost and byincreased interest income on invested customer funds without significant incrementalcosts.  The improvement in the cost ofrevenue as a percent of revenue in Payroll and Tax Services was partiallyoffset by increases in cost of revenue as a percent of revenue in Benefit Services,LifeWorks, Ceridian Canada, and Ceridian Centrefile mainly due to compensationand benefit increases. 

SG&A expense for HRS decreased $38.7 million from2004 to 2005 primarily due to the $42.6 million expense in 2004 foramortization of the CobraServ trademark, a decrease of $20.8 million related toselling expense and an increase of $24.7 million related to other general andadministrative expense. The decrease in selling expense is primarily attributedto cost savings resulting from our Payroll and Tax Services reorganization inconnection with the disposition of the SourceWeb Assets. The increase ingeneral and administrative expense of $24.7 million was primarily due toincreased costs of technology support, compensation, benefits and severancecosts.

We have maintained interest rate derivatives for thepurpose of mitigating interest rate risk on customer funds, although as ofDecember 31, 2005, we held no such instruments. The fair market value of ourinterest rate derivative instruments was $26.8 million at December 31, 2004. 

In the first quarter of 2005, we disposed of ourinterest rate derivative instruments, receiving proceeds of $21.0 million and$3.5 million for settlements. We recorded a loss of $2.3 million on interestrate derivative instruments representing the difference between the carryingvalue of $26.8 million and the $24.5 million of total cash received.

Other expense for HRS decreased $21.2 million in 2005primarily due to a charge to earnings of $28.5 million recorded in 2004 associatedwith the sale of the SourceWeb Assets. In addition, we recognized gains onsales of marketable securities of $4.3 million offset by $9.1 million of assetwrite-downs. In 2004, we recognized gains on sales of marketable securities of$4.5 million offset in part by $3.6 million of asset write-downs.

HRS EBIT increased from aloss of $72.6 million in 2004 to earnings of $44.6 million in 2005. Thisimprovement was mainly driven by an improvement in EBIT from the U.S. HRSbusiness. EBIT from LifeWorks remains one of the key drivers of theprofitability of the HRS segment. However, EBIT for both Payroll and Tax Services,which includes Human Resource Outsourcing (“HRO”) costs for the administrationof payroll and benefit functions, and Benefit Services remained at a loss in2005 despite the improvements that were achieved. Ceridian Canada’s EBITimproved in 2005 and also continues to be one of the key drivers of theprofitability of the HRS segment. Ceridian Centrefile’s EBIT decreased from asmall profit in 2004 to a small loss in 2005.

***Comdata***

| ** **                          | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| **(dollars in millions)** | ** ** | ** ** | ** ** | **2005**                 | ** ** | **2004**                   | ** ** | **$** | ** ** | **%** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                             |       | $          | 408.9      |                     | $          | 356.0                      |       | 52.9 |   | 14.8 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                     |       | 190.3      |       | 169.0                    |       | 21.3                       |       | 12.6 |   | 46.5 |   | 47.5 |   |
| SG&A expense                    |       | 75.8       |       | 64.8                     |       | 11.0                       |       | 17.1 |   | 18.5 |   | 18.2 |   |
| R&D expense                     |       | 6.6        |       | 4.4                      |       | 2.2                        |       | 49.7 |   | 1.6 |   | 1.2 |   |
| Loss on  derivative instruments     |       | 9.3        |       | 1.4                      |       | 7.9                        |       | NM |   | 2.3 |   | 0.4 |   |
| Other expense                       |       | —     |       | 0.8                      |       | (0.8                       | )          | NM |   | — |   | 0.2 |   |
| EBIT                                |       | 126.9      |       | 115.6                    |       | 11.3                       |       | 9.7 |   | 31.0 |   | 32.5 |   |
|                                     |            |            |            |                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

35

----

Comdata revenue increased $52.9 million or 14.8% from2004 to 2005 as revenue from transportation services contributed $27.6 millionand revenue from retail services contributed $25.3 million. The $27.6 millionincrease in transportation services revenue in 2005 over 2004 related primarilyto revenue from the long haul business, which increased $17.4 million includinga $10.4 million increase resulting from higher fuel prices. A 4.4% increase intransaction volume in 2005 over 2004, including the impact of the growingacceptance of the BusinessLink card, provided the remaining $7.0 millionincrease in long haul revenue. Local fleet revenue grew $3.9 million in 2005over 2004, primarily due to $2.5 million from higher fuel prices. Also majorlocal fleet customers increased their utilization of Comdata’s products andservices, including the BusinessLink card. Comdata earns fee revenue for aportion of the card transactions based on a percentage of the total cost ofeach fuel purchase. An increase or decrease in the price of fuel increases ordecreases the total dollar amount of fuel purchases and corresponding Comdatarevenue. The remaining increase in transportation services revenue in 2005compared to 2004 of $6.3 million included increases of $2.4 million from salesof products and services to truck stops, due largely to increased outsourcingof maintenance services, and $3.2 million from regulatory compliance services,due largely to price increases related to improved delivery of services.

***In 2005, revenue from retail services increasedprimarily due to higher levels of retail cards in use, greater transactionvolume and the addition of new customers. As described in the “RevenueRecognition” section of Note A, “Accounting Policies,” revenue from retailservices is generally deferred and recognized largely over a six-month periodfollowing the activation of a card, which typically takes place about sevenmonths after the shipment of the card to the retailer. Cards deliveredincreased by approximately 50% and transactions processed increased approximately22% in 2005.***

***Comdata cost of revenue as a percent ofrevenue improved from 47.5% in 2004 to 46.5% in 2005. The improvement wasprimarily due to higher margins on fuel transactions resulting from higher fuelprices.***

***SG&A expense increased $11.0 millionin 2005 compared to 2004. Selling expense increased $1.3 million as a result ofincreases in staffing, compensation and advertising, largely related to retailservices and regulatory compliance. General and administrative expenseincreased $9.7 million in 2005 over 2004 due primarily to increased costs ofcompensation and benefits, increased costs for contracted services, an increaseof $1.7 million in amortization of identifiable intangible assets from recentacquisitions and a $1.1 million increase in bad debt expense.***

***R&D expense increased $2.2 million in2005 over 2004 due primarily to a higher level of application development forexisting products and services and product development around the BusinessLink card.***

***The loss on derivative instrumentsrelated to the diesel fuel price contracts increased to $9.3 million in 2005from $1.4 million in 2004. Our diesel fuel price risk management objective isto protect Comdata earnings from the effects of falling diesel fuel prices byentering into derivative instruments that convert the floating price of fuelused in revenue calculations to a fixed price. During 2004, we entered into adiesel fuel price derivative instrument covering approximately 66% of our totalrisk for the period July 1, 2004 through December 31, 2004 with a strike priceof $1.51 per gallon. For 2005, we covered approximately 100% of our diesel fuelprice risk for the full year with a combination of diesel fuel price derivativeinstruments with similar terms and an average strike price of $1.92 per gallon.During 2005, there were payments of $8.2 million to counterparties as well asan unrealized loss of $1.1 million, resulting in a $9.3 million net lossreported in (gain) loss on derivative instruments on our consolidated statementof operations. During 2004, there were payments of $2.2 million tocounterparties as well as an unrealized gain of $0.8 million resulting in a$1.4 million net loss reported in (gain) loss on derivative instruments on ourconsolidated statement of operations.***

***We continuously monitor fuel pricevolatility and the cost of derivative instruments. We have entered into dieselfuel price derivative contracts covering 80% of our anticipated 2006 dieselfuel price related earnings exposure with an average strike price of $2.55 pergallon effective until December 31, 2006.***

36

----

***Other expense decreased $0.8 million in2005 as compared with 2004 due primarily to nonrecurring facility shut-downcosts in 2004.***

***Comdata EBIT increased from $115.6 million in 2004 to $126.9million in 2005 primarily due to increased revenues. EBIT as a percent ofrevenue decreased slightly from 32.5% to 31.0% due primarily to the increase of$7.9 million in loss on derivative instruments.***

**2004 Compared to 2003**

**Statements of Operations (Dollars in millions, except per share data)**

| ** **                             | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **2004**   | ** ** | **2003**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                |       | $          | 1,320.4    |                     | $          | 1,213.9                    |       | 106.5 |   | 8.8 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                        |       | 745.2      |       | 689.4                    |       | 55.8                       |       | 8.1 |   | 56.4 |   | 56.8 |   |
| SG&A expense                       |       | 479.3      |       | 370.1                    |       | 109.2                      |       | 29.5 |   | 36.3 |   | 30.5 |   |
| R&D expense                        |       | 26.1       |       | 18.8                     |       | 7.3                        |       | 39.2 |   | 2.0 |   | 1.5 |   |
| (Gain) loss on  derivative instruments |       | 0.3        |       | (14.7                    | )          | 15.0                       |       | NM |   | — |   | (1.2 | ) |
| Other expense  (income)                |       | 26.5       |       | (2.5                     | )          | 29.0                       |       | NM |   | 2.0 |   | (0.2 | ) |
| Interest income                        |       | (2.6       | )          | (2.0                     | )          | (0.6                       | )          | 31.6 |   | (0.2 | ) | (0.2 | ) |
| Interest expense                       |       | 4.4        |       | 4.6                      |       | (0.2                       | )          | (5.7 | ) | 0.3 |   | 0.4 |   |
| Total costs and  expenses              |       | 1,279.2    |       | 1,063.7                  |       | 215.5                      |       | 20.3 |   | 96.9 |   | 87.6 |   |
| Earnings before  income taxes          |       | 41.2       |       | 150.2                    |       | (109.0                     | )          | (72.6 | ) | 3.1 |   | 12.4 |   |
| Income tax  provision                  |       | 4.3        |       | 51.4                     |       | (47.1                      | )          | (91.6 | ) | 0.3 |   | 4.2 |   |
| Net earnings                           |       | $          | 36.9       |                     | $          | 98.8                       |       | (61.9 | ) | (62.7 | ) | 2.8 |   | 8.1 |   |
| Diluted earnings per  common share     |       | $          | 0.24       |                     | $          | 0.66                       |       | (0.42 | ) | (63.6 | ) | NM |   | NM |   |

 

***Consolidated Results—Overview***

Total revenue increased $106.5 million or 8.8% to$1,320.4 million in 2004 compared to $1,213.9 million in 2003. HRS revenueincreased $70.2 million from 2003 to 2004 while Comdata revenue increased $36.3million from 2003 to 2004. HRS revenue benefited $22.6 million from a full yearand a higher level of LifeWorks service deliveries to the U.S. Department ofDefense, $21.6 million from the effect of foreign currency translation, $5.0million from higher yields on invested customer funds and $8.4 million fromhigher invested balances. Comdata’s revenue benefited $21.2 million fromincreased revenue from retail services and $7.8 million due to increasedtransaction fees for transportation services due to higher fuel prices. Inaddition, both segments benefited from the addition of new customers, sellingadditional services to existing customers and price increases. 

Total costs and expenses increased $215.5 million in2004. Cost of revenue increased $55.8 million primarily due to increasedrevenues in 2004. Cost of revenue as a percent of revenue remainedapproximately the same from 2003 to 2004. SG&A expense increased $109.2million primarily due to the $40.9 million increase in 2004 due to acceleratedamortization of the CobraServ trademark. In addition, the 2004 increase inSG&A expenses was in part driven by $9.4 million of increasedaccounting compliance costs in U.S. HRS, $7.1 million of increasedtechnology support costs in U.S. HRS, and $8.5 million of an increaserelated to currency exchange rate changes. The remainder of the increase mainlyrelates to increased compensation expense, contracted services, occupancycosts, and royalties. The change in the (gain) loss on derivative instrumentsof $15.0 million is primarily related to the interest rate derivativeinstruments and rising interest rates. Other expense (income) increased $29.0million in 2004 mainly due to the charge taken as a result of the sale of ourSourceWeb Assets in 2004. Our 2004 interest income increased $0.6 millioncompared to 2003 due to both a higher average level of cash and equivalents and

37

----

higher interest rates. Our2004 total financing cost for debt obligations was basically unchanged comparedto 2003 as a lower level of outstanding debt offset the effect of risinginterest rates. Our average outstanding borrowings under our U.S. creditfacilities decreased from $174.5 million for 2003 to $125.2 million for 2004. Ouraverage effective interest rate on these facilities increased from 1.82% for2003 to 1.97% for 2004. 

Income taxes decreased$47.1 million from 2003 to 2004 primarily due to lower earnings. We alsoprovided additional tax expense of $12.3 million for a proposed tax adjustment oninternational earnings. In 2004, we reduced tax expense by $16.3 millionrelated to tax settlements and $7.0 million related to a valuation allowancerealization. The reported effective tax rate was 10.4% for 2004 and 34.2% for2003. During 2003, we reduced our income tax provision by $3.9 million dueto favorable tax settlements.

***Business Segment Results***

We measure businesssegment results by reference to EBIT because interest income and interestexpense are not allocated to our segments. Revenue between business segments isnot material and is eliminated upon consolidation. Expenses incurred bycorporate center operations are directly charged or otherwise allocated to thebusiness segments. Corporate center costs include medical, workerscompensation, casualty and property insurance, retirement plan expenses,treasury services, tax services, audit services, accounting services, generalmanagement services and other corporate overhead such as occupancy and aircraftcosts. Certain of these costs are charged to the business segment based onusage and the remainder is allocated on a consistent basis based on apercentage of revenue.

***HRS***

| ** **                          | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| **(dollars in millions)** | ** ** | ** ** | ** ** | **2004**                 | ** ** | **2003**                   | ** ** | **$** | ** ** | **%** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                             |       | $          | 964.4      |                     | $          | 894.2                      |       | 70.2 |   | 7.9 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                     |       | 576.2      |       | 537.2                    |       | 39.0                       |       | 7.3 |   | 59.7 |   | 60.1 |   |
| SG&A expense                    |       | 414.5      |       | 312.7                    |       | 101.8                      |       | 32.6 |   | 43.0 |   | 35.0 |   |
| R&D expense                     |       | 21.7       |       | 15.7                     |       | 6.0                        |       | 38.6 |   | 2.3 |   | 1.8 |   |
| Gain on  derivative instruments     |       | (1.1       | )          | (15.5                    | )          | 14.4                       |       | (93.0 | ) | (0.1 | ) | (1.7 | ) |
| Other expense  (income)             |       | 25.7       |       | (4.4                     | )          | 30.1                       |       | NM |   | 2.7 |   | (0.5 | ) |
| EBIT                                |       | (72.6      | )          | 48.5                     |       | (121.1                     | )          | (249.8 | ) | (7.5 | ) | 5.4 |   |
|                                     |            |            |            |                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

HRS revenue increased $70.2 million or 7.9% in 2004. Revenuefrom U.S. operations increased $43.8 million in 2004 with Payroll and Tax Servicescontributing $16.1 million, Benefit Services contributing $10.2 million andLifeWorks contributing $17.5 million. The increase in Payroll and Tax Serviceswas mainly driven by a $10.9 million increase in interest income earned oninvested customer funds due to both higher invested balances and a higheryield. In addition, Payroll and Tax Services benefited by $14.4 million fromnet additions of customers receiving repetitive services and growth in sales ofadd-on services offset in part by lower non-repetitive revenue. The comparisonof Payroll and Tax Services 2004 revenue versus 2003 revenue is negativelyimpacted by $9.2 million due to the acceleration of W-2 delivery in 2003. The$10.2 million increase in Benefit Services revenue in 2004 over 2003 relatedprimarily to the addition of customers and higher levels of individuals beingserved and an increase in interest income earned on invested customer funds. The$17.5 million increase in LifeWorks revenue reflected an additional $22.6million from a full year and a higher level of service deliveries under a U.S.Department of Defense contract that commenced during the last half of 2003,offset in part by a reduction in revenue from commercial customers. CeridianCanada revenue increased $13.9 million primarily due to an increase of $11.9million from changes in currency exchange rates. The remaining $2.0 millionincrease in revenue at Ceridian Canada reflected increases from Payroll and TaxServices. Ceridian Centrefile revenue was up 

38

----

$12.5 million including anincrease of $9.7 million from currency exchange rate changes and $2.8 milliondue primarily to growth in small business services and managed payrollservices.

Cost of revenue as a percent of revenue improved from60.1% in 2003 to 59.7% in 2004. The improvement is mainly due to a decrease of 2.4percentage points in cost of revenue as a percent of revenue in Ceridian Canadawhich was driven by cost reduction efforts and a decrease of 1.6 percentagepoints in cost of revenue as a percent of revenue for Benefit Services. Theimprovements in the cost of revenue as a percent of revenue for Ceridian Canadaand Benefit Services were partially offset by increases in cost of revenue as apercent of revenue in Payroll and Tax Services mainly due to higherimplementation costs and in LifeWorks mainly due to costs associated with theU.S. Department of Defense contract. 

SG&A expense for HRS increased $101.8 million from2003 to 2004 due to an increase of $24.9 million related to selling expense andan increase of $76.9 million related to general and administrative expense. Theincrease in selling expense is primarily attributed to staff additions, higheroccupancy costs, royalties and contracted services. The increase in general andadministrative expense includes the $40.9 million expense for acceleratedamortization of the CobraServ trademark, an increase of $36.0 million primarilydue to increased accounting compliance costs of $9.4 million in U.S. HRS,increased technology support costs of $7.1 million in U.S. HRS and $6.2 millionrelated to currency exchange rate changes, with the remaining increaseprimarily attributed to increased compensation, benefits and severance costs.

R&D expense for HRS in 2004 increased $6.0 millioncompared to 2003 due to a higher level of software development efforts.

The reduction of $14.4 million in gains from interestrate derivative instruments in 2004 compared to 2003 included a decrease inrealized gains of $1.2 million from cash settlements and a decrease inunrealized gains of $13.2 million from revaluation of the future expectedbenefit from these instruments over their remaining terms. These results reflectedthe rise of interest rates during 2004.

Other expense (income) for HRS changed $30.1 millionin 2004 primarily due to the $28.5 million charge taken as result of the saleof the SourceWeb Assets. In addition, we also recognized gains on sales of marketablesecurities of $4.5 million offset in part by asset write-downs of $3.6 million.Other expense (income) for HRS in 2003 reflected income of $4.4 million largelyfrom a net gain from the sale of marketable securities and land.

HRS EBIT decreased from earningsof $48.5 million in 2003 to a loss of $72.6 million in 2004. This decrease inEBIT was mainly driven by losses in Payroll and Tax Services, which includesHRO costs for the administration of payroll and benefit functions, as well as BenefitServices. Contributing to the losses were the $40.9 million of acceleratedamortization of the CobraServ trademark in Benefit Services and the $28.5million charge to earnings taken as a result of the sale of the SourceWebAssets in Payroll and Tax Services. The losses in Payroll and Tax Services aswell as Benefit Services were partially offset by increased EBIT fromLifeWorks, Ceridian Canada and Ceridian Centrefile.

***Comdata***

| ** **                             | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| **(dollars in millions)**    | ** ** | ** ** | ** ** | **2004**                 | ** ** | **2003**                   | ** ** | **$** | ** ** | **%** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                |       | $          | 356.0      |                     | $          | 319.7                      |       | 36.3 |   | 11.4 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                        |       | 169.0      |       | 152.2                    |       | 16.8                       |       | 11.0 |   | 47.5 |   | 47.6 |   |
| SG&A expense                       |       | 64.8       |       | 57.4                     |       | 7.4                        |       | 12.8 |   | 18.2 |   | 18.0 |   |
| R&D expense                        |       | 4.4        |       | 3.1                      |       | 1.3                        |       | 42.3 |   | 1.2 |   | 1.0 |   |
| (Gain) loss on  derivative instruments |       | 1.4        |       | 0.8                      |       | 0.6                        |       | 78.5 |   | 0.4 |   | 0.2 |   |
| Other expense  (income)                |       | 0.8        |       | 1.9                      |       | (1.1                       | )          | (58.1 | ) | 0.2 |   | 0.6 |   |
| EBIT                                   |       | 115.6      |       | 104.3                    |       | 11.3                       |       | 10.9 |   | 32.5 |   | 32.6 |   |
|                                        |            |            |            |                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

39

----

Comdata revenue increased $36.3 million in 2004compared to 2003 as revenue from retail services contributed $21.2 million andrevenue from transportation services contributed $15.1 million. Revenue fromretail services increased in 2004 over 2003 due to higher levels of cards inuse, greater transaction volume and the addition of new customers. As describedin the “Revenue Recognition” section of Note A, “Accounting Policies,” revenuefrom retail services is generally deferred and recognized largely over asix-month period following the activation of a card, which typically takesplace about seven months after the shipment of the card to the retailer. Cardsdelivered increased 18% and transactions processed increased 30% from 2003 to2004. The $15.1 million increase in transportation services revenue in 2004over 2003 related primarily to revenue from the long haul business, whichincreased $12.2 million including $5.5 million resulting from higher fuelprices. A higher level of transactions in 2004 over 2003, including the impactof the growing acceptance of the BusinessLink card, provided the remaining $6.7million increase in long haul revenue. Local fleet revenue grew $3.5 million in2004 over 2003, primarily due to $2.3 million from higher fuel prices. Alsomajor local fueling customers increased their utilization of Comdata productsand services, including the BusinessLink card. The remaining net decrease intransportation services revenue in 2004 compared to 2003 of $0.6 millionreflected lower revenue from phone services and point of sale terminalequipment sales that were offset in part by modest increases in revenue forfinancial services and regulatory compliance services.

Cost of revenue increased $16.8 million in 2004 over2003 including an increase of $17.5 million from retail services due to thehigher revenue levels. The remaining decrease in cost of revenue includedincreases totaling $1.6 million in bank fees and costs related to point of saleterminal equipment sales, which were more than offset by cost savings from reorganizationand other cost reduction actions.

Comdata SG&A expense increased $7.4 million in2004 compared to 2003. Selling expense increased $1.7 million in 2004 as aresult of increases in staffing, compensation and advertising, largely relatedto retail services and regulatory compliance. General and administrativeexpense increased $5.7 million in 2004 over 2003 due primarily to an increase of$4.6 million in compensation, an increase of $3.7 million in contractedservices and a reduction of $2.6 million in the provision for doubtfulaccounts. The reduction in the provision for doubtful accounts reflected improvedcredit checking and collection performance as well as the impact of a $1.2million provision for a particular doubtful account in 2003. The increase of$4.6 million in compensation in 2004 over 2003 included incentives related toimproved operating performance and staff additions. The increase of $3.7million in contracted services included $2.9 million for accounting compliance costsin addition to legal and other professional services. 

R&D expense increased $1.3 million in 2004 over2003 due primarily to a higher level of product maintenance activities. Theloss on diesel fuel price derivative instruments increased to $1.4 million in2004 from $0.8 million in 2003, and partially offset the favorable impact ofhigher fuel prices reported in revenue. Other expense (income) decreased $1.1million in 2004 as compared with 2003 due primarily to a $1.9 million charge in2003 to settle a dispute with a vendor.

Comdata EBIT increasedfrom $104.3 million in 2003 to $115.6 million in 2004 primarily due toincreased revenues. EBIT as a percent of revenue remained approximately thesame from 2003 to 2004.

**BalanceSheets at December 31, 2005 and 2004**

Our consolidated balance sheets reflect operatingassets and liabilities, as well as assets and liabilities related to customerfunds. Customer funds assets arise from amounts that our customers haveadvanced to us to pay their employees, remit to taxing authorities, or pay forbenefits services to other third parties. Customer funds obligations representour liability to pay the amounts due to these third parties on behalf of ourcustomers. Customer funds assets are held substantially in trust accounts and areinvested in high-quality short-term investments or highly-rated fixedincome securities and are not utilized in our operations except for earningsfrom those investments that are included in our revenue.

40

----

Total assets before customer funds increased $175.0million during 2005 as current assets increased $196.5 million and noncurrentassets decreased $21.5 million. Our current assets increase was due primarilyto increases of $114.9 million in cash and equivalents and $79.1 million in tradeand other receivables, net. The increase in cash and equivalents was primarilydue to cash provided by operations. Increased volume in the number oftransactions processed by Comdata and the impact of higher fuel pricescontributed to the $79.1 million increase in trade and other receivables, netwith a corresponding increase in drafts and settlements payable of $79.3million. We discuss changes in cash and equivalents in a following section ofthis discussion entitled “Cash Flows.” Our noncurrent assets decreased $21.5 millionin 2005 due to a net decrease of $19.4 million in property, plant and equipmentand a decrease of $27.6 million in derivative instruments offset by an increaseof $31.3 million in deferred income taxes.

Current liabilities increased $140.3 million during2005 as short-term debt and current portion of long-term obligations increased$10.6 million, Comdata drafts and settlements payable increased $79.3 millionand deferred income increased $26.6 million to $114.0 million. The increasein short-term debt and current portion of long-term obligations represents thecombination of management’s intent to repay certain debt in 2006 as well asstated maturities of other debt offset by the payment of the CeridianCentrefile overdraft facility. As of December 31, 2005, $20.7 million of ourrevolving credit facility was classified as a current liability as it is ourintention to repay this amount in 2006. Noncurrent liabilities increased $8.1 millionprimarily due to an increase of $15.7 million in employee benefit planobligations offset by decreases in long-term obligations and other noncurrentliabilities. 

Stockholders’ equitydecreased $3.9 million primarily due to net earnings of $127.9 million and$105.8 million of stock-based compensation offset by stock repurchases of$222.3 million and changes in realized and unrealized gain (loss) on customerfunds and marketable securities of $19.8 million.

**Cash Flows**

**ConsolidatedStatements of Cash Flows Highlights (Dollars in millions)**

| ** **                                       | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating  activities                            |       | $                                           | 285.6      |   | $ | 252.5 |   | $ | 56.6 |   |
| Investing  activities                            |       | (43.1                                       | )          | (68.0 | ) | (34.4 | ) |
| Financing  activities                            |       | (129.8                                      | )          | (93.5 | ) | (37.5 | ) |
| Effect of  exchange rate on cash and equivalents |       | 2.2                                         |       | 5.5 |   | 5.2 |   |
| Net cash flows  provided (used)                  |       | $                                           | 114.9      |   | $ | 96.5 |   | $ | (10.1 | ) |
| Cash and equivalents at  end of year             |       | $                                           | 335.6      |   | $ | 220.7 |   | $ | 124.2 |   |

 

***Cash Balances and Operating Activities***

During 2005, our cash and equivalents increased $114.9million to $335.6 million as we used operating cash flows and cash balances tofund investing activities and repurchase our stock. During 2004, our cash andequivalents increased $96.5 million to $220.7 million as we used operating cashflows and cash balances to fund investing activities, repay debt and repurchaseour stock. In 2003, our cash and equivalents decreased $10.1 million duelargely to a $105.5 million contribution to our pension plans out of operatingactivities. 

Our operating cash flowswere $285.6 million in 2005, $252.5 million in 2004 and $56.6 million in 2003. In2003, operating cash flows were negatively impacted by the $105.5 millionpension contribution.

41

----

***Investing Activities***

| ** **                                    | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|----------|------------|----------|------------|
| ** **                                    | ** ** | **(dollars in millions)** | ** ** |
| Capital  expenditures                         |       | $                                   | (64.2      | )        | $          | (65.8    | )          | $ | (57.5 | ) |
| Acquisitions of  investments and businesses   |       | (10.4                               | )          | (19.3    | )          | (1.7     | )          |
| Proceeds from  sales of businesses and assets |       | 31.5                                |       | 17.1     |       | 24.8     |       |
| Net cash outflows                             |       | $                                   | (43.1      | )        | $          | (68.0    | )          | $ | (34.4 | ) |

 

During 2005, our capital expenditures included $31.4million for property and equipment and $32.8 million for software anddevelopment costs. Our expenditures for acquisitions of investments andbusinesses (net of cash acquired) included Comdata’s $8.2 million purchaseof Tranvia, Inc., a provider of merchant card processing services, and $1.8million in contingent payments made for previous acquisitions. Cash inflowsfrom sales of businesses and assets amounted to $31.5 million, including $21.0million from the disposition of our HRS interest rate derivative instruments,$7.8 million from the sale of land and $2.7 million from the sale of marketablesecurities. 

During 2004, our capital expenditures included $32.9million for property and equipment and $32.9 million for software anddevelopment costs. Our expenditures for acquisitions of investments andbusinesses (net of cash acquired) amounted to $19.3 million resulting primarilyfrom the HRS acquisition of Recruiting Solutions, Inc., a provider ofweb-based recruiting products, for $11.0 million and Comdata’s acquisition ofDatamark Technologies, Inc., a provider of stored value and customerloyalty programs, for $4.1 million. Our proceeds from sales of businesses andassets amounted to $17.1 million and consisted largely of $11.1 million fromthe sale of marketable securities and $4.0 million from the sale of theSourceWeb Assets.

Our 2003 investingactivities included capital expenditures of $30.5 million for property andequipment and $27.0 million for software and development costs. Ourexpenditures for acquisitions of investments and businesses (net of cashacquired) amounted to $1.7 million. We purchased $3.0 million of marketablesecurities and received $1.4 million from an earn-out escrow related to the 2002acquisition of GLS Benefits Services LLC, a benefits administration outsourcingfirm. Our proceeds from sales of businesses and assets amounted to $24.8million and consisted of $12.1 million for assets sold relative to two sale-leasebacktransactions, $7.7 million from the sale of marketable securities and $4.3million from the sale of land.

***FinancingActivities***

| ** **                                            | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------|------------|----------|------------|----------|------------|
| ** **                                            | ** ** | **(dollars in millions)** | ** ** |
| Revolving credit  facilities and overdrafts, net      |       | $                                   | 11.5       |     | $          | (59.6    | )          | $ | (49.6 | ) |
| Repayment of  other debt                              |       | (5.9                                | )          | (4.1     | )          | (1.4     | )          |
| Repayment of  Ultimate software royalty obligation    |       | (5.3                                | )          | —   |       | —   |       |
| Repurchase of  common stock                           |       | (222.3                              | )          | (80.3    | )          | (28.8    | )          |
| Proceeds from  stock option exercises and stock sales |       | 92.2                                |       | 50.5     |       | 42.3     |       |
| Net cash outflows                                     |       | $                                   | (129.8     | )        | $          | (93.5    | )          | $ | (37.5 | ) |

 

In November 2005, we entered into a new revolvingcredit facility that provides up to $250.0 million for a combination ofadvances and letters of credit until November 18, 2010. The new facilityreplaced our existing $350.0 million revolving credit facility..

In connection with the repatriation of funds fromCeridian Canada to the United States in December 2005, Ceridian Canada borrowed$40.6 million under our revolving credit facility. We reduced the amount 

42

----

outstanding on our Comdatareceivables securitization facility by $20.0 million and the CeridianCentrefile overdraft facility by $9.0 million of which $8.3 million wasattributable to debt reduction and $0.7 million was due to the foreign currencytranslation effect. We made payments of $5.9 million on capital leases. Inconnection with the sale of the SourceWeb Assets in 2004, we accrued aliability of $19.2 million representing the fair value of an associatedguaranteed future minimum royalty obligation to The Ultimate Software Group,Inc. (“Ultimate”). We made principal payments of $5.3 million related to theUltimate royalty obligation during 2005. During 2005, we repurchased 10,736,450shares of our common stock on the open market at an average net price of $20.71per share, resulting in financing cash outflows of $222.3 million for settledtrades. Proceeds from exercises of stock options and employee stock planpurchases amounted to $92.2 million during 2005.

Our financing activities for 2004 resulted in net cashoutflows of $93.5 million. We repaid $65.0 million of our Comdata receivablesecuritization facility. We repurchased 4,012,400 shares of our common stockfor $80.3 million on the open market at an average net price of $20.01 pershare. We also received proceeds of $50.5 million for exercises of stockoptions and employee stock plan purchases. 

During 2003, we reduced our borrowings under our domesticrevolving credit facility by $40.0 million and our Comdata receivablesecuritization facility by $10.0 million. Also during 2003, we entered into twocapital lease arrangements resulting in an obligation of $22.2 million to bepaid over a 60-month period. We repurchased 1,844,100 shares of our commonstock for $28.8 million on the open market at an average net price of $15.60per share. Proceeds from exercises of stock options and employee stock planpurchases amounted to $42.3 million during 2003. 

For further information onfinancing cash flows, see Note F, “Financing” and the following section of thisdiscussion entitled “Liquidity and Capital Resources.”

**Liquidity and Capital Resources**

We expect to meet our liquidity needs from existingcash balances, cash flows from operations and borrowings under our creditfacilities. We expect to use our cash flows for capital expenditures,investments in software and development costs, potential acquisitions,repayment of debt, stock repurchases and potential pension plan contributions. Cashbalances and cash flows are discussed under the section of this discussionentitled “Cash Flows.” Cash flows from operations are primarily influenced bythe same factors that influence revenue as discussed in a preceding section ofthis discussion entitled “Results of Operations” and in several of the risksidentified in Part I, Item 1A, “Risk Factors” of this report.

On November 18, 2005, we entered into a five-year,$250.0 million revolving credit agreement (“2005 Revolving Credit Facility”)and terminated the existing revolving credit agreement dated January 31, 2001.The 2005 Revolving Credit Facility provides for up to $250.0 million (subjectto possible increase, at our request as authorized by our Board of Directors toup to $400.0 million) for a combination of advances and letters of credit untilNovember 18, 2010. The interest rate on this facility is 57.5 basis points overthe Eurocurrency Rate (3.89% at December 31, 2005). This facility includes a$25.0 million sublimit for swingline loans, a $100.0 million U.S. dollarequivalent sublimit for loans made in Canadian dollars to Ceridian Canada (the“Canadian subfacility”) and a $50.0 million U.S. dollar equivalent sublimit formulticurrency borrowings in certain currencies. The Canadian subfacility is tobe used to meet the ongoing working capital, capital expenditures and generalcorporate needs of Ceridian Canada. Advances under the 2005 Revolving CreditFacility are unsecured. The amount outstanding under the 2005 Revolving CreditFacility was $40.6 million along with $2.8 million of letters of credit atDecember 31, 2005. As of December 31, 2005, we had unused borrowingcapacity under the 2005 Revolving Credit Facility amounting to $206.6 millionof which we have designated $55.0 million as backup for the amount outstandingat that date under the Comdata receivables securitization facility. The termsof the 2005 

43

----

Revolving Credit Facility requirethat our consolidated debt must not exceed 50% of our consolidated net worth,as defined in the agreement, as of the end of any fiscal quarter and the ratioof earnings before interest and taxes to interest expense on a rolling fourquarter basis must be at least 2.75 to 1. The 2005 Revolving CreditFacility also contains covenants that, among other things, limit liens,subsidiary debt, contingent obligations, operating leases, minority equityinvestments and divestitures. There is no requirement under the terms of the2005 Revolving Credit Facility agreement to make any principal payments untilthe agreement expires on November 18, 2010.

In addition at December 31, 2005, we had a $150.0million receivables securitization facility with a term ending in June 2008,which uses selected Comdata trade receivables as collateral for borrowings (the“Comdata Credit Facility”). We had unused borrowing capacity under the ComdataCredit Facility amounting to $95.0 million as of December 31, 2005. We mayincrease or decrease our use of the Comdata Credit Facility up to four times amonth provided there are sufficient accounts receivable to use as collateral. Asof December 31, 2005, the aggregate amount of receivables serving as collateralamounted to $230.2 million. The interest rate on the amount outstanding iseither at the third-party multi-seller commercial paper conduit’s pooledA-1/P-1 commercial paper rate or at our choice of either prime or LIBOR plus1.5% (4.26% at December 31, 2005). The Comdata Credit Facility is subject tofinancial covenants similar to those included in the 2005 Revolving CreditFacility. We are in compliance with all covenants related to our creditfacilities. 

In 2005, we recapitalized the Ceridian Centrefileoperations by contributing £5.0 million ($8.7 million). At December31, 2005 and 2004, Ceridian Centrefile maintained two overdraft facilitiestotaling £7.5 million. No amounts were outstanding as of December 31, 2005. Thebalance outstanding as of December 31, 2004 was £4.7 million ($9.0million). The overdraft facility in the amount of £6.5 million is in theprocess of being renewed.

In addition to the Canadian subfacility, CeridianCanada had available at December 31, 2005 and 2004 a committed bank creditfacility that provided up to CDN $5.0 million for issuance of letters of creditand guarantees that is renewed annually by the granting bank. The amounts ofletters of credit outstanding under this facility were CDN $4.1 million ($3.5million) at December 31, 2005 and CDN $1.0 million ($0.7 million) at December31, 2004.

As described in the preceding discussion of financingactivities in the “Cash Flows” section of this discussion, we repurchasedCeridian common stock pursuant to our stock repurchase program. We repurchased 10,736,450 shares in 2005, 4,012,400 sharesin 2004 and 1,844,100 shares in2003. As of December 31, 2005, wewere authorized to purchase up to 15,614,050 additional shares of our commonstock under the authorization from our Board of Directors. We generallyuse our treasury stock to address our obligations under our stock compensationplans. 

44

----

Thetable below describes the future cash payments for which we are obligated underour financing agreements, capital and operating lease agreements and guaranteedpurchase obligations as of December 31, 2005.

**ContractualObligations at December 31, 2005(Dollars in millions)**

| ** **            | ** ** | **Payments due by period** | ** ** | ** **     | ** ** |
|-----------------------|------------|-------------------------------------------|------------|----------------|------------|
| ** **            | ** ** | **Less than  one year**         | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 years** | ** ** | **Total** | ** ** |
| Long-term debt        |       |                                      | $          | 20.7           |       |   | $ | 74.9 |   | $ | — |   |   | $ | — |   |   | $ | 95.6 |   |
| Capital leases        |       |                                      | 5.3        |           |       | 6.3 |   | — |   |   | — |   |   | 11.6 |   |
| Operating leases      |       |                                      | 43.7       |           |       | 76.7 |   | 51.0 |   |   | 75.6 |   |   | 247.0 |   |
| Purchase  obligations |       |                                      | 7.0        |           |       | 8.4 |   | — |   |   | — |   |   | 15.4 |   |
| Total                 |       |                                      | $          | 76.7           |       |   | $ | 166.3 |   | $ | 51.0 |   |   | $ | 75.6 |   |   | $ | 369.6 |   |

 

Our long-term debt and capital lease obligations aredescribed in the “Cash Flows” section of this discussion and in Note F,“Financing.” The long-term debt payments include amounts due under the 2005Revolving Credit Facility and the Comdata Credit Facility. Since we have thecapability under our 2005 Revolving Credit Facility and the intention ofcontinuing our use of short-term borrowings under our Comdata Credit Facility, itsoutstanding balance of $55.0 million is reported in noncurrent liabilities onour consolidated balance sheet. The table above reflects the total amount dueunder the Comdata Credit Facility according to the contractual 2008 maturitydate. Of the $40.6 million outstanding under our 2005 Revolving CreditFacility, $20.7 million is classified as a current liability on ourconsolidated balance sheet as it is our intention to repay this amount in 2006.The remaining outstanding amount is indicated in the table as due in 2007 as itis our intention to repay this amount in 2007. 

The capital lease payments represent scheduledpayments under the terms of the operating lease agreements and include implicitinterest. The operating lease obligations represent our future minimumnoncancelable lease payments. We conduct substantially all of our operations inleased facilities. Most of these operating leases contain renewal options andrequire payments for taxes, insurance and maintenance. We also lease equipmentfor use in our businesses.

Purchase obligations include minimum royalty paymentsto Ultimate and a guaranteed purchase commitment with a vendor.

**Ourplanned expenditures for capital assets in 2006 are expected to be between$65.0 million and $70.0 million with an estimated allocation of 85% to HRS and15% to Comdata. The amount of our obligation to vendors for these expendituresat December 31, 2005 was not material and no such amount is included in thetable above.**

**CriticalAccounting Policies and Estimates**

**Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makejudgments, estimates, and assumptions regarding uncertainties that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of our financial statements and our reportedamounts of revenues and expenses during the reported periods. Additionally,management’s judgment is required in selecting among available alternativeaccounting standards that allow different accounting treatment for similartransactions. Areas that require significant judgments, estimates andassumptions include revenue recognition, the assignment of fair values uponacquisition of goodwill and other intangible assets and testing for impairment;the capitalization, amortization and impairment testing of software anddevelopment costs; the determination**

45

----

**ofour liability for pensions and other postretirement benefits; the determinationof the allowance for doubtful accounts and reserve for sales adjustment; and theresolution of tax matters. We use historical experience, qualified independentconsultants and all available information to make these judgments andestimates, and actual results will inevitably differ from those estimates andassumptions that are used to prepare the Company’s financial statements at anygiven time. Despite these inherent limitations, we believe that ourManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and consolidated financial statements and related notes provide ameaningful and fair perspective of our Company. Further discussion of therisks, judgments and uncertainties associated with our business can be found inPart I, Item 1A, “Risk Factors” and Part II, Item 7A, “Quantitative andQualitative Disclosures About Market Risks” of this report.**

***Revenue Recognition***

**Werecognize revenue from the sale of our products and services when the followingcriteria are met: (1) persuasive evidence of an arrangement exists;(2) delivery has occurred or services have been rendered; (3) theseller’s price to the buyer is fixed or determinable; and(4) collectibility is reasonably assured. Generally, we rely on a signedcontract between us and the customer as the persuasive evidence of a salesarrangement. We address these and the other criteria for revenue recognition inthe following discussion of types of revenue within our business.**

***HRS***

***Repetitive Business***

**Themajority of our HRS revenue is generated by recurring monthly or quarterly feesfrom our payroll processing, tax filing and other HR services, benefitadministration services, work-life and employee assistance services, and humanresource outsourcing. This revenue is generated by service fees, income frominvestment of customer funds in lieu of additional fees, software maintenanceand subscription fees.**

***Payroll and Tax Services.******  ***Generally, servicefees for HRS payroll processing are contracted on a per transaction basis andrecognized as revenue when transaction services are provided and the amount isbillable. We also recognize payroll revenue from customer funds heldtemporarily pending remittance to the customers’ employees. These payrolldeposits are primarily invested through grantor trusts. We derive and recognizeinvestment income in lieu of additional fees as a component of revenue asearned.

**Our taxfiling services consist primarily of: (1) collecting funds for federal,state and local employment taxes from customers based on payroll informationprovided by the customers; (2) remitting funds collected to theappropriate taxing authorities; (3) filing applicable returns; and(4) handling related regulatory correspondence and amendments forcustomers. Revenue from these tax filing services is billed and recognized asthe services are provided, generally on a monthly basis. We hold our customers’tax filing deposits for the period between collection and remittance of thefunds to the applicable taxing authority. These tax filing deposits areinvested through a grantor trust. We derive and recognize this investmentincome in lieu of additional fees as a component of revenue as earned.**

**Payrollprocessing and tax filing services are sold separately; accordingly, we haveobjective evidence of standalone value for most services. Separate sales alsoestablish the fair value of many of the services sold in the event a customercontracts with us for multiple services. Where fair value cannot be establishedon the undelivered element, revenue (and the related direct costs of revenue)for the delivered elements are deferred and recognized ratably over theremaining repetitive processing period commencing upon completion of implementationconsulting services.**

***Benefit Services.******  ***We provide employeehealth and welfare benefits administration and qualified administrationservices to our customers. Employee health and welfare benefits administrationservices include health insurance portability compliance services relatedprimarily to COBRA (Consolidated Omnibus Budget Reconciliation Act). Health andwelfare benefits administration services also encompass 

46

----

benefits providedto active employees, such as (1) annual health plan enrollment,(2) ongoing employee enrollment and eligibility services, (3) tuitionrefund plans, (4) transportation reimbursement under the TransportationEquity Act and (5) Internal Revenue Code Section 125 plans (FlexibleSpending), which include fully administered and self-administered flexiblespending accounts and premium-only plans.

**We alsoprovide retirement planning services that include: (1) administrationservices for benefits provided to retired and inactive employees, which includeretiree healthcare, disability, surviving dependent, family leave and severancebenefits; and (2) qualified plan administration services which include401(k) plan administration, profit sharing administration, defined benefitplan administration, ESOP administration and Qualified Domestic Relations Orderadministration.**

**Revenuefor COBRA services is generally earned and recognized as the services areprovided. Revenue associated with other health and welfare benefitsadministration and retirement planning services is generally recognized monthlybased on the number of employees that receive or participate in the benefit.**

**BenefitServices are sold separately; accordingly, we have objective evidence ofstandalone value for most services. Separate sales also establish the fairvalue of many of the services sold in the event a customer contracts with usfor multiple services. Where fair value cannot be established on theundelivered element, revenue (and the related direct costs of revenue) for thedelivered elements are deferred and recognized ratably over the remainingrepetitive processing period commencing upon completion of implementationconsulting services.**

***LifeWorks.******  ***We provide work-lifeand employee assistance programs to our clients. LifeWorks are deliveredthrough on-line access and telephonically, and through face-to-face counselingprovided by referral resources. Contracted fees for these services aregenerally billed monthly or quarterly. Revenue is generally earned andrecognized over the term of the contract based on the number of customeremployees served and the level of service.

***HRO.******  ***We providecomprehensive HRO solutions to our customers. HRO services can provide anentire suite of any of the HRS services outlined above, but to date typicallyinvolve: (1) conversion and implementation consulting services;(2) processing and hosting services related to payroll, tax filingservices and benefit needs; and (3) administration of payroll or benefitsfunctions.

**HROservices are sold separately by us or by our competitors; accordingly, there isevidence of standalone value for the repetitive deliverables. In certainarrangements, a substantive stated renewal rate in the contract providesevidence of the fair value for the undelivered repetitive processing services. Inthose situations where a substantive stated renewal rate is included in thearrangement, the use of the residual method afforded by Emerging Issues TaskForce (“EITF”) Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables” allows us to recognize revenue on the delivered elements, generallyconsisting of non-repetitive implementation services. Where fair value cannotbe established on the undelivered element, revenue (and the related directcosts of revenue) for the delivered elements are deferred and recognizedratably over the remaining repetitive processing period commencing uponcompletion of implementation consulting services.**

***Non-RepetitiveBusiness***

**Wegenerate revenue from the sale and installation of software and data conversionservices in our HRS businesses (including non-repetitive HRO services discussedabove). These services may also include training and other consulting.**

**For ournon-HRO business, the fees for these non-repetitive services are based uponpublished hourly rates that are considered competitive with other providers andare consistent with hourly rates billed for customization and consultingservices performed by us on a standalone basis. Revenue from consultingservices is non-refundable; is primarily determined on a time and materialsbasis; and is recognized over the installation and conversion period, generallyone to four months.**

47

----

***Comdata***

***Transportation***

**Comdata’sfunds transfer system is designed to enable truck drivers to obtain funding forpurchases and cash advances at truck stops and other locations en route totheir destinations. Drivers may use Comdata’s proprietary Comdata card topurchase fuel, lodging and other approved items, obtain cash advances fromautomated teller machines or through the use of Comchek drafts and make directdeposits of pay, settlements or trip advances to personal bank accounts. Revenuefrom funds transfer transactions is based on a per transaction fee that isbased on either a fixed amount or a percentage of the face value of thetransaction and is recognized when the transaction is processed.**

**Comdatapurchases accounts receivable due to trucking companies from manufacturers andshippers at a discount and with recourse back to the trucking company in theevent of non-payment. This service allows trucking companies to receive paymenton shipping invoices sooner. The non-refundable discount represents adequatecompensation charged for servicing the receivables over a 30-day period.If the collection period extends beyond 30 days, a non-refundable additionalfee is charged for each month of servicing. After 90 days, an uncollectedreceivable can be returned to the seller for its face value. Comdata recognizesrevenue from the discounted fee in the month of the purchase and the additionalfees for servicing as it becomes entitled to collect the fee.**

**Comdataalso provides fueling centers with: (1) PC-based, point of sale systemsthat automate the various transactions that occur at a fuel purchase desk; and(2) “pay at the pump” systems which enable customers to transactcard-based fuel purchases at the pump. Revenue from the sale of PC-based pointof sale equipment and pay at the pump equipment is recognized at the time theequipment is received and accepted by the customer. Recurring service revenuesfor these activities are recognized as earned. Support and maintenancecontracts are generally for 12 month periods and are invoiced annually with therevenues recognized on a straight-line basis over the maintenance period. Theseproducts and services are all sold separately; accordingly, we have standalonevalue for each product and service. Separate sales also establish the fairvalue of each of the products and services sold in the event a customercontracts with us for multiple products and/or services.**

***Retail Services***

**Comdatasells stored value cards and provides subsequent activation, reporting andtransaction processing services (“services”) through its wholly ownedsubsidiary, Stored Value Systems, Inc. (referred to in this report as “SVS”). Customersmay also choose to purchase cards alone, without a continuing obligation forservices from SVS. SVS recognizes revenue for card sales without services uponshipment.**

**Forcard sales with future processing services, revenue on both the card sales andservices are deferred and reported on the consolidated balance sheets asdeferred income. Costs of the cards sold are deferred and reported on theconsolidated balance sheets in other current assets. Costs associated with theservices are recognized as incurred. The deferred income and deferred cost onthe card sale are both recognized in earnings over the estimated life of thecard, which includes the transaction processing period. The recognition periodis 30 months, beginning upon activation of the card. The deferred income on theservices where we charge a fee upon card activation for unlimited transactionsis recognized in earnings over the same 30 month period, beginning when the feeis assessed. The deferred income on the services where we charge a fee eachtime a transaction is processed is recognized in earnings over the same 30month period, beginning when the fee is assessed. Our history of providingservices to our customers indicates that (1) we can expect activation of acard within approximately seven months following card shipment, and(2) during the six months following the activation of a card, approximately90% of the services have been performed.**

**Salesof cards under either arrangement do not include a right of return of the cardsshipped.**

48

----

***Gross Versus NetRevenue***

**Weinclude in revenue amounts that we bill for and remit to third-party vendorsfor associated products and services as required on a gross basis as aprincipal rather than net as an agent when the following conditions are met:(1) we are the primary obligor in the arrangement with the customer;(2) we have credit risk and inventory risk; (3) we have latitude inthe establishment of pricing, subject to general economic restraints; and(4) we have full discretion in vendor selection.**

***Determination of our Allowance for Doubtful Accountsand Reserve for Sales Adjustment***

We assess the collectibility of our accounts receivablebased primarily on the creditworthiness of the customer as determined by creditchecks and analysis, as well as the customer’s payment history. The amountestablished for the allowance for doubtful accounts is dependent on various mattersincluding changes in the customer’s financial condition and general economic factorssuch as the price of diesel fuel.

We assess the reserve for sales adjustment based on ananalysis of historical trends, current dispute levels and the terms ofcontractual obligations. The amount established for the reserve for salesadjustment is dependent on various matters including customer negotiations andthe notification of the dispute by the customer.

***Assignment of Fair Values upon Acquisition of Goodwilland Other Intangible Assets and Testing for Impairment***

**In theevent of a business combination where we are the acquiring party, we arerequired to assign fair values to all identifiable assets and liabilitiesacquired, including intangible assets such as customer lists, trademarks,technology and covenants not to compete. We are also required to determine theuseful life for amortizable assets acquired. These determinations requiresignificant judgments, estimates and assumptions and, when material amounts areinvolved, we generally utilize the assistance of independent valuationconsultants. The remainder of the purchase cost of the acquired business notassigned to identifiable assets or liabilities is then recorded as goodwill. Althoughgoodwill is no longer subject to amortization, we reassess the carrying valueof goodwill annually, or more frequently when certain developments occur,indicating a potential impairment of that value.**

**Anumber of significant assumptions and estimates are involved in determining thecurrent fair value of the reporting unit including operating cash flows,markets and market share, sales volumes and prices and working capital changes.We consider historical experience and all available information at the time thefair values of our reporting units are estimated. However, actual fair valuesthat could be realized in an actual transaction may differ from those used toevaluate the impairment of goodwill. The evaluation of impairment involvescomparing the current fair value of the reporting units to the recorded value(including goodwill).**

**If therecorded value (including goodwill) of a reporting unit exceeds its currentfair value, then to the extent that the recorded value of goodwill of thereporting unit exceeds the implied fair value of the reporting unit’s goodwill,an impairment loss is recognized. The implied fair value of goodwill isdetermined in the same manner as the amount of goodwill recognized in abusiness combination. That is, the fair value of a reporting unit is allocatedto all of the assets and liabilities of that reporting unit including anyunrecognized intangible assets and the excess is the implied fair value ofgoodwill.**

**Wealso test long-lived assets, including other intangible assets, whenever eventsor changes in circumstances indicate that the carrying value of such an assetor group of assets may not be recoverable. Events or circumstances that mightindicate an impairment of carrying value include:**

·       asignificant decrease in the market value of the asset or asset group

·       asignificant adverse change in the extent or manner in which the asset or assetgroup is used or in its physical condition

49

----

·       asignificant adverse change in legal factors or in the business climate that couldaffect the value of the asset or asset group, including an adverse action orassessment by a regulator

·       anaccumulation of costs significantly in excess of the amount originally expectedfor the acquisition or construction of the asset or asset group

·       acurrent-period operating or cash flow loss combined with a history of operatingor cash flow losses or a projection or forecast that demonstrates continuinglosses associated with the use of the asset or asset group.

**Whenthe need for such a test is indicated, we consider such factors as whether theamortization of the carrying values for these assets for each operating unitcan be recovered through forecasted undiscounted cash flows over theirremaining economic life.**

***Capitalization, Amortization and Impairment Testing ofSoftware and Development Costs***

**Oursoftware and development efforts are substantially for internal use and, asindicated in Note A, “Accounting Policies—Software and Development Costs,” werely on AICPA Statement of Position 98-1 (“SOP 98-1”) foraccounting guidance. Therefore, for our modification or development efforts, weneed to identify by nature and by stage of development those costs which are tobe capitalized rather than charged to operations as incurred. We also need to identifythe point at which the modified or developed software is ready for use,capitalization of cost will cease and amortization of that cost will begin. Costsincurred subsequent to the ready for use date will generally be charged tooperations and only capitalized if justified as a material improvement in thefunctionality of the capitalized software product.**

**Withregard to the recoverability of capitalized software and development costs, weregularly perform an assessment of our ability to recover the costs invested inthese assets. The net amount of these costs shown on our consolidated balancesheet at December 31, 2005 was $71.8 million. The elements of software anddevelopment costs were purchased software of $22.1 million and internallydeveloped software of $49*.7* million. Theseamounts represent the costs we have invested in these assets, reduced byamortization expense charged against our earnings as the software was used inour operations and by any write-downs as a result of our recoverability analysis.Our recoverability analysis considers projected future cash flows from theutilization of the underlying software in the respective components of thebusiness. Our projections of future cash flows are affected by such factors astechnological change, competitive offerings, marketplace expectations andproject development. Changes in any of these factors may result in futurewrite-downs of the carrying value of these or other assets. The amount of thewrite-down, if any, is largely dependent on our estimates of future cash flowsand the selection of an appropriate discount rate. As a result of ourassessments during the past three years, we recorded asset write-downs of $7.8million in 2005, $3.2 million in 2004 and none in 2003, for abandoned softwareprojects.**

***Determination of our Liability for Pensions and Other PostretirementBenefits***

We present informationabout our pension and postretirement benefit plans in Note I, “RetirementPlans.” The determination of the liabilities and expenses for pensions andother postretirement benefits are accomplished with the assistance ofindependent actuaries using actuarial methodologies and incorporatingsignificant assumptions, including the rate used to discount the futureestimated liability, the long-term rate of return on plan assets, and severalassumptions relating to the employee workforce (salary increases, medicalcosts, retirement age and mortality). The discount rate assumption used forpension plan accounting is used to determine the benefit obligation and theinterest portion of the net periodic pension cost (credit) for the followingyear. The 2005 discount rate for the U.S. pension plans was selected byreference to the Moody’s Aa Corporate Bond Index, the Citigroup PensionDiscount Curve and the Hewitt Yield Curve. Similar to the Citigroup PensionDiscount Curve, the Hewitt Yield Curve was designed by Hewitt Associates toprovide a means for plan sponsors to value the liabilities of their benefitplans. The Hewitt Yield Curve is a hypothetical Aa yield curve represented by aseries of annualized 

50

----

individualdiscount rates. Each bond issue underlying the Hewitt Yield Curve is requiredto have a rating of Aa or better by Moody’s Investor Service, Inc. or a ratingof AA or better by Standard & Poor’s. The three reference rates werecompared in arriving at the discount rate for 2005. We determine the assumedrate of compensation increase based upon our long-term plans for suchincreases. We will continue to evaluate all of our actuarial assumptions on anannual basis, including the expected long-term rate of return on assets and thediscount rate, and will adjust as necessary. Actual pension expense will dependon future investment performance, changes in future discount rates, the levelof contributions we may make and various other factors.

**Theimpact on the pension plan liabilities of a change in the discount rate of 1⁄4 of1% would be approximately $19.1 million and approximately $0.4* *million to pre-tax earnings in the following year. Thelong-term rate of return is estimated by considering historical returns andexpected returns on current and projected asset allocations and is generallyapplied to a five-year average market value of assets. A change in theassumption for the long-term rate of return on plan assets of 1⁄4 of 1% wouldimpact pre-tax earnings by approximately $1.3**million.A one percent increase in the assumed health care cost trend rate would increasethe postretirement benefit obligation at December 31, 2005 by $3.7 million andthe aggregate service and interest cost for 2005 by $0.2 million. A one percentdecrease in this rate would decrease the benefit obligation at December 31,2005 by $3.5 million and the aggregate service and interest cost for the 2005measurement period by $0.2 million.**

***Tax Matters***

**As acompany with principal operations in many states in the U.S., as well as in theUnited Kingdom and Canada, we record an estimated liability and expense forincome and other taxes based on what we determine will likely be paid in thevarious tax jurisdictions in which we operate. The liabilities ultimatelyrealized and paid are dependent on various matters including the resolution ofthe tax audits in the various affected tax jurisdictions and may differ fromthe amounts recorded.**

***Recently Issued Accounting Pronouncements***

**InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) 123R, “Share-BasedPayment.” The principal effect of SFAS 123R will be to require the inclusion inour earnings of a compensation expense for equity grants that previously wereonly reported as a disclosure in a note to our consolidated financial statements.We have adopted SFAS 123R on January 1, 2006, using the modified prospectivetransition method. SFAS 123R will require us to measure the cost of employeeservices received in exchange for an award of equity investments based on thefair value of the award on the grant date. That compensation expense must berecognized in the statement of operations over the vesting period of the award.Under the “modified prospective” transition method, awards that are granted,modified or settled beginning at the date of adoption will be measured andaccounted for in accordance with SFAS 123R. In addition, expense must berecognized in the statement of operations for unvested awards that were grantedprior to the date of adoption. The expense will be based on the fair valuedetermined at the grant date. We currently estimate total stock-basedcompensation expense for 2006 will be approximately $0.08 per diluted sharecomprised of an estimate of $0.03 per diluted share for restricted stockexpense and $0.05 per diluted share for stock option expense.**

**InDecember 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets” thatbecame effective for transactions occurring in fiscal periods beginning afterJune 15, 2005. The adoption of this standard did not have a material effect onour consolidated financial statements.**

**In May2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” thatreplaces Accounting Principles Board Opinion (“APB”) 20, “Accounting Changes.” Thenew standard generally requires retrospective treatment (restatement ofcomparable prior period information) rather than a**

51

----

**cumulativeeffect adjustment for the effect of a change in accounting principle or methodof application. We have adopted this standard effective January 1, 2006.**

In February 2006, the FASBissued SFAS 155, “Accounting for Certain Hybrid Financial Instruments—anamendment of FASB Statements No. 133 and 140.” The new standard is effectivefor years beginning after September 15, 2006 and is not expected to have a materialeffect on our results of operations or financial position.

**Item7A.**                Quantitative andQualitative Disclosures About Market Risk

**Interest RateMarket Risk**

Ourprimary market risk exposure is interest rate risk. We invest funds heldtemporarily for our clients in interest bearing instruments, earning interestincome in lieu of additional service fees. Interest income from client funds isrecorded as revenue net of any interest credits due clients, and changes ininterest rates impact interest revenue accordingly. In addition, we holdshort-term investments for our own account for liquidity purposes and issuedebt instruments, with related interest income and interest expense recorded assuch in the statement of operations. We have purchased interest rate derivativeinstruments and may do so in the future to modify our overall interest raterisk exposure. At December 31, 2005, we held no such instruments. Allinterest rate sensitive instruments are held in portfolios for investmentpurposes, and no such instruments are held in trading portfolios. Our interestrate risk exposures are summarized in the table below.

| ** **                       | ** ** | **Invested  Customer  Funds**       | ** ** | **Ceridian  Short-term  Investments** | ** ** | **Variable  Rate Debt  Instruments** | ** ** | **Net  Position** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|
| ** **                       | ** ** | **(dollars in millions)** | ** ** |
| ***Average  balances***          |       |                                |       |                                  |       |                                      |       |              |       |   |   |   |   |
| 2005                             |       | $                                   | 2,769.6    |                                  |       | $                                         | 256.5      |              |       |   | $ | (61.2 | ) |   | $ | 2,964.9 |   |
| 2004                             |       | $                                   | 2,435.2    |                                  |       | $                                         | 144.3      |              |       |   | $ | (125.2 | ) |   | $ | 2,454.3 |   |
| 2003                             |       | $                                   | 2,145.9    |                                  |       | $                                         | 117.4      |              |       |   | $ | (174.5 | ) |   | $ | 2,088.8 |   |
| ***Average  interest rate***     | ** ** | ** **                          | ** ** |                                  |       |                                      |       |              |       |   | ** ** | ** ** | ** ** |
| 2005                             |       | 3.81                                | %          |                                  | 3.05       | %                                         |       |              | 4.15       | % |   | 3.74 | % |
| 2004                             |       | 3.10                                | %          |                                  | 1.80       | %                                         |       |              | 1.97       | % |   | 3.09 | % |
| 2003                             |       | 2.90                                | %          |                                  | 1.70       | %                                         |       |              | 1.82       | % |   | 2.92 | % |
| ***Interest  income (expense)*** | ** ** | ** **                          | ** ** |                                  |       |                                      |       |              |       |   | ** ** | ** ** | ** ** |
| 2005                             |       | $                                   | 105.5      |                                  |       | $                                         | 7.8        |              |       |   | $ | (2.5 | ) |   | $ | 110.8 |   |
| 2004                             |       | $                                   | 75.6       |                                  |       | $                                         | 2.6        |              |       |   | $ | (2.5 | ) |   | $ | 75.7 |   |
| 2003                             |       | $                                   | 62.2       |                                  |       | $                                         | 2.0        |              |       |   | $ | (3.2 | ) |   | $ | 61.0 |   |

 

At December 31, 2005, our invested customer fundswere $4,331.4 million, short-term investments were $335.6 million andvariable rate debt instruments were $95.6 million. In 2005, our interestrevenue increased $29.9 million compared to 2004, with $19.3 milliondue to higher interest rates and $10.6 million due to higher investmentbalances. The increase in interest revenue from invested customer funds in 2004over 2003 of $13.4 million consisted of $5.0 million related tohigher interest rates and $8.4 million due to higher average investedbalances.

Theimpact of our interest rate derivative program was as follows:

| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **               | ** ** | **(dollars in millions)**         | ** ** |
| Realized gains  (losses) |       | $                                           | (2.3       | ) | $ | 30.0 |   | $ | 31.2 |   |
| Unrealized losses        |       | —                                      |       | (28.9 | ) | (15.7 | ) |
| Net gains  (losses)      |       | $                                           | (2.3       | ) | $ | 1.1 |   | $ | 15.5 |   |

 

52

----

We further discuss interest rate derivative contractsin Note A, “Accounting Policies—Cash and Investments, including Derivatives”and Note B, “Investing Activity” to our consolidated financial statementscontained in Part II, Item 8, “Financial Statements and Supplementary Data”of this report.

We manage our interest rate risk by modeling theimpact of changes in interest rates on interest income and interest expense,referred to below as “Net Interest Income.” Interest rate derivativeinstruments may be purchased as part of our risk management program and suchinstruments are modeled as part of our overall interest rate sensitivityposition. Our goal is to achieve a stable and predictable level of reported NetInterest Income over a range of expected changes in interest rates.

Thetable below illustrates the impact of changes in interest rates on our annualafter tax Net Interest Income.

| ** **                                   | ** ** | **Hypothetical Change in** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|
| **Change in Interest Rates**  | ** ** | **Net Interest Income**    | ** ** |
| **Expressed in Basis Points** | ** ** | ** **                           | ** ** | **from Base Scenario** | ** ** |
| ** **                                   | ** ** | **(dollars in millions)**  | ** ** |
| 300 Increase                                 |       |                                 | $          | 29.9 |   |   |
| 200 Increase                                 |       |                                 | 19.9       |   |   |
| 100 Increase                                 |       |                                 | 10.0       |   |   |
| 50 Increase                                  |       |                                 | 5.0        |   |   |
| 25 Increase                                  |       |                                 | 2.5        |   |   |
| Base Scenario (4.25%)                        |       |                                 |       |   |   |
| 25 Decrease                                  |       |                                 | (2.5       | ) |   |
| 50 Decrease                                  |       |                                 | (5.0       | ) |   |
| 100 Decrease                                 |       |                                 | (8.5       | ) |   |
| 200 Decrease                                 |       |                                 | (20.2      | ) |   |
| 300 Decrease                                 |       |                                 | (31.8      | ) |   |
|                                              |            |                                      |            |  |  |  |  |  |

 

The contents of the table show the estimated impact onannual after tax Net Interest Income of an immediate and sustained change ininterest rates from a base of 4.25% Federal Funds rate as of December 31,2005. Computations in the table are based on assumed levels of customer funds,short-term liquidity investments, debt instruments outstanding, interest ratederivative instruments, and U.S. and Canadian interest rates. We held nointerest rate derivative instruments at December 31, 2005. Prepayment riskexists in the form of callable securities we own, and we expect thesesecurities would be called in the -100 bp, -200 bp, and -300bp rate scenarios resulting in realized capital gains but offset by reducedinterest income as proceeds are reinvested at lower rates. We expect thatcallable securities will not be called in all rising rate scenarios and in the -25bp and -50 bp scenarios. The amount of prepayment risk of othersecurities in the portfolio is negligible, and therefore excluded from thetable’s contents.

The principal change inour interest rate risk position was the sale of all of our interest ratederivative instruments on February 4, 2005. After a review of interestrate market factors and trends, management decided that the best method tomaximize the realizable value of the interest rate derivative instruments wasto liquidate them at that time. We disposed of our interest rate derivativeinstruments for cash proceeds of $21.0 million which represented the fairmarket value of the contracts on the disposal date. From December 31, 2004to the disposal date, we received $3.5 million in cash for settlements onthese derivative instruments. The $2.3 million difference between the December 31,2004 carrying value of $26.8 million and the $24.5 million total cashreceived was recorded as a loss on interest rate derivative instruments in thefirst quarter of 2005. Interest rate risks associated with these instrumentsincluded mark-to-market valuations and interest receipts, all of which werereported as “(gain) loss on derivative instruments” in our consolidatedstatements of operations. We have subsequently made no purchases of interestrate derivative instruments.

53

----

**Fuel Price Market Risk**

Our revenue and net earnings of Comdata’stransportation services business is exposed to variability based on changes inthe price of diesel fuel and gasoline. For a portion of its transportationservices customers, Comdata earns fee revenue for card transactions based on apercentage of the total amount of each fuel purchase. An increase or decreasein the price of fuel increases or decreases the total dollar amount of fuelpurchases and Comdata revenue, accordingly.

We manage our fuel price risk by modeling the impactof changes in fuel prices on transaction fee revenue and net income. Fuelderivative instruments may be purchased as part of our risk management program andthe effects of these instruments are modeled as part of our overall fuel risksensitivity position. Our goal is to achieve a stable and predictable level ofreported net earnings through a range of expected changes in fuel prices.

As reported by the U.S. Department of Energy, theaverage price of highway diesel fuel number 2 was $2.40 in 2005, $1.81 in 2004,and $1.51 in 2003. These rising prices increased Comdata revenue approximately$10.4 million in 2005, $5.5 million in 2004 and $3.2 million in2003, which were offset by realized losses on diesel fuel derivative contractsof $8.2 million in 2005, $2.2 million in 2004 and $0.8 millionin 2003.

In thefourth quarter of 2005 and in January 2006, we entered into diesel fuelderivative instruments that have the effect of hedging approximately 80% of ouranticipated diesel fuel price exposure for 2006 with an average strike price of$2.55 per gallon. These instruments mature on December 31, 2006 and arenot accounted for as hedges under SFAS 133, “Accounting for DerivativeInstruments and Hedging Activities.” The hypothetical impact of changes indiesel fuel prices, including the impact of fuel derivative instruments isshown in the table below.

| ** **                               | ** ** | ** **                          | ** ** | **Change in** | ** ** | **Change in**      | ** ** |
|------------------------------------------|------------|-------------------------------------|------------|--------------------|------------|-------------------------|------------|
| **Change in Diesel**           | ** ** | **Change in**                  | ** ** | **(Gain)Loss**     | ** ** | **After Tax**      | ** ** |
| **Fuel Price per gallon** | ** ** | ** **                          | ** ** | **Revenue**        | ** ** | **On Derivatives** | ** ** | **Net Income** | ** ** |
| ** **                               | ** ** | **(dollars in millions)** | ** ** |
| $.30 Increase                            |       |                                | $          | 5.4                |       |                    |       | $ | 4.8 |   |   |   | $ | 0.4 |   |   |
| $.20 Increase                            |       |                                | 3.6        |               |       |                    | 3.4        |   |   |   | 0.1 |   |   |
| $.10 Increase                            |       |                                | 1.8        |               |       |                    | 1.9        |   |   |   | (0.1 | ) |   |
| Base Scenario  ($2.38/gallon)            |       |                                | —     |               |       |                    | 0.5        |   |   |   | (0.3 | ) |   |
| $.10 Decrease                            |       |                                | (1.8       | )                  |       |                    | (0.9       | ) |   |   | (0.6 | ) |   |
| $.20 Decrease                            |       |                                | (3.6       | )                  |       |                    | (2.4       | ) |   |   | (0.8 | ) |   |
| $.30 Decrease                            |       |                                | (5.4       | )                  |       |                    | (3.8       | ) |   |   | (1.0 | ) |   |
|                                          |            |                                     |            |                    |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

The contents of the table show the estimated annualimpact of an immediate and sustained change in diesel fuel prices from a baseof $2.38 per gallon at December 31, 2005. Computations in the table arebased on assumed levels of diesel fuel purchase transactions and amountscharged. The impact of payments in January 2006 on diesel fuel derivativecontracts maturing December 31, 2005 are excluded from the table’scalculations. Comdata does not otherwise hold instruments sensitive to fuelprice risk except for diesel fuel derivative instruments purchased as part ofits risk management program, which are held for investment purposes. The dieselfuel derivative instruments contain no puts, calls or other options.

Similar to diesel fuelprice risk, our Comdata transportation services business revenue and net incomeare subject to variability based on changes in gasoline prices. We estimatethat for each 10 cent change in the annual average price of gasoline, Comdata’srevenue and pretax income are impacted $0.8 million. Due to increases inthe average price of gasoline during 2005 and 2004, Comdata’s revenue was $2.5 millionhigher in 2005 and $2.3 million higher in 2004 from what it would havebeen had gasoline prices remained stable during those years. We may usegasoline derivative instruments as part of our fuel price risk managementprogram, but no such instruments were held during 2005.

54

----

**Other Market Risk**

We consider our exposureto foreign exchange risk related to our operations at Ceridian Canada andCeridian Centrefile to not be material to our consolidated financial conditionor results of operations. These foreign operations principally serve theirrespective domestic markets with nearly all revenue and expenses denominated inlocal currency. We further consider other intercompany charges between U.S. andnon-U.S. based operations to not be material. Translation adjustments oninvestments in foreign operations are not hedged and are reported in “accumulatedother comprehensive income” in our accompanying consolidated statements ofstockholders’ equity and comprehensive income contained in Part II, Item 8“Financial Statements and Supplementary Data” of this report.

55

----

**Item 8.**                        FinancialStatements and Supplementary Data

**1.**                 Indexto Consolidated Financial Statements.

Thefollowing financial statements and reports are filed as part of this report:

|                                                                                                                                           | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Management’s Report on Internal Control Over Financial  Reporting                                                                    |       | 57       |
| Report of Independent Registered Public Accounting  Firm                                                                                  |       | 58       |
| Report of Independent Registered Public Accounting  Firm                                                                                  |       | 60       |
| Consolidated  Statements of Operations for the years ended December 31, 2005, 2004  and 2003                                    |       | 61       |
| Consolidated Balance  Sheets as of December 31, 2005 and 2004                                                                        |       | 62       |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the years  ended December 31, 2005, 2004 and 2003 |       | 63       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005, 2004  and 2003                                    |       | 64       |
| Notes to  Consolidated Financial Statements for the three years ended December 31,  2005                                             |       | 65       |

 

56

----

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting. Internalcontrol over financial reporting is defined in Rule 13a-15(f) and 15d-15(f)promulgated under the Securities Exchange Act of 1934, as amended, as a processdesigned by, or under the supervision of, our principal executive and principalfinancial officers and effected by our Board of Directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in conformity with generally accepted accounting principles in theUnited States of America (“U.S. GAAP”), and includes those policies andprocedures that:

·       Pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of our assets;

·       Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in conformity with U.S. GAAP, and thatreceipts and expenditures are being made only in accordance with authorizationsfrom our management and directors; and

·       Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Ourmanagement assessed the effectiveness of our internal control over financialreporting as of December 31, 2005. This assessment identified the following “materialweakness” (as defined by the Public Company Accounting Oversight Board or“PCAOB” in its Auditing Standard No. 2, “An Audit of Internal Control OverFinancial Reporting Performed in Conjunction with an Audit of Financial Statements”(“Auditing Standard No. 2”)) in internal control over financial reporting as ofDecember 31, 2005:

Wedid not have personnel with sufficient technical knowledge to analyze complexmultiple element revenue arrangements to ensure that such transactions wereaccounted for in conformity with U.S. GAAP. Specifically, we did noteffectively identify and analyze the terms of certain complex multiple elementrevenue arrangements to ensure timely and accurate financial reporting. As aresult, accounting errors were identified related to revenue recognition,resulting in an understatement of deferred income and deferred costs and anoverstatement in revenue, cost of revenue, and net earnings in our preliminary2005 consolidated financial statements. These errors were corrected in ourconsolidated financial statements prior to issuance. Management has concludedthat this deficiency resulted in more than a remote likelihood that a materialmisstatement of our consolidated financial statements would not have beenprevented or detected. 

Inmaking our assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (“COSO”) in *Internal Control*—*Integrated Framework*.Because of the material weakness described above, management concluded that, asof December 31, 2005, our internal control over financial reporting was noteffective based on those criteria.

KPMG LLP, our independent registered public accountingfirm, has issued an audit report on our assessment of our internal control overfinancial reporting. This audit report appears on the next page of this Form10-K.

57

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofCeridian Corporation: 

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting (page 57), that Ceridian Corporation and subsidiaries (the “Company”)did not maintain effective internal control over financial reporting as ofDecember 31, 2005, because of the effect of a material weakness identifiedin management’s assessment, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Ceridian Corporation’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in conformity with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in conformity with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and(3) provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use, or disposition of the company’s assets thatcould have a material effect on the financial statements. 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment as of December 31,2005: 

The Company did not have personnel with sufficienttechnical knowledge to analyze complex multiple element revenue arrangements toensure that such transactions were accounted for in conformity with U.S. generallyaccepted accounting principles. Specifically, the Company did not effectivelyidentify and analyze the terms of certain complex multiple element revenuearrangements to ensure timely and accurate financial reporting. As a result,accounting errors were identified related to revenue recognition, resulting inan understatement of deferred income and deferred costs and an overstatement inrevenue, cost of revenue, and net earnings in the Company’s preliminary 2005 

58

----

consolidated financial statements. This deficiencyresulted in more than a remote likelihood that a material misstatement of theCompany’s consolidated financial statements would not be prevented or detected.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements of Ceridian Corporation and subsidiaries asof December 31, 2005 and 2004 and for each of the years in the three-yearperiod ended December 31, 2005. This material weakness was considered indetermining the nature, timing, and extent of audit tests applied in our auditof the 2005 consolidated financial statements, and this report does not affectour report dated March 16, 2006, which expressed an unqualified opinion onthose consolidated financial statements.

In our opinion,management’s assessment that Ceridian Corporation and subsidiaries did notmaintain effective internal control over financial reporting as ofDecember 31, 2005, is fairly stated, in all material respects, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Also,in our opinion, because of the effect of the material weakness described aboveon the achievement of the objectives of the control criteria, CeridianCorporation and subsidiaries have not maintained effective internal controlover financial reporting as of December 31, 2005, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO).

/s/ KPMGLLP

Minneapolis,MinnesotaMarch 16, 2006

59

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofCeridian Corporation:

We have audited the accompanying consolidated balancesheets of Ceridian Corporation and subsidiaries as of December 31, 2005and 2004, and the related consolidated statements of operations, cash flows andstockholders’ equity and comprehensive income for each of the years in thethree-year period ended December 31, 2005. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Ceridian Corporation and subsidiaries as of December 31, 2005and 2004, and the results of their operations and their cash flows for each ofthe years in the three-year period ended December 31, 2005, in conformitywith U.S. generally accepted accounting principles.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Ceridian Corporation’s internal controlover financial reporting as of December 31, 2005, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated March 16, 2006 expressed an unqualifiedopinion on management’s assessment of, and an adverse opinion on the effectiveoperation of, internal control over financial reporting.

/s/ KPMG LLP

Minneapolis, MinnesotaMarch 16, 2006

60

----

**CONSOLIDATEDSTATEMENTS OF OPERATIONS(Dollars in millions, except per share data)**

| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                     |       | $                                           | 1,459.0    |   | $ | 1,320.4 |   | $ | 1,213.9 |   |
| Costs and  Expenses                         |       |                                        |       |   |   |   |   |
| Cost of revenue                             |       | 791.7                                       |       | 745.2 |   | 689.4 |   |
| Selling, general and administrative         |       | 451.6                                       |       | 479.3 |   | 370.1 |   |
| Research and development                    |       | 28.1                                        |       | 26.1 |   | 18.8 |   |
| (Gain) loss on derivative instruments       |       | 11.6                                        |       | 0.3 |   | (14.7 | ) |
| Other expense (income)                      |       | 4.5                                         |       | 26.5 |   | (2.5 | ) |
| Interest income                             |       | (7.8                                        | )          | (2.6 | ) | (2.0 | ) |
| Interest expense                            |       | 5.5                                         |       | 4.4 |   | 4.6 |   |
| Total costs and expenses                    |       | 1,285.2                                     |       | 1,279.2 |   | 1,063.7 |   |
| Earnings before  income taxes               |       | 173.8                                       |       | 41.2 |   | 150.2 |   |
| Income tax provision                        |       | 45.9                                        |       | 4.3 |   | 51.4 |   |
| Net earnings                                |       | $                                           | 127.9      |   | $ | 36.9 |   | $ | 98.8 |   |
| Earnings per  share                         |       |                                        |       |   |   |   |   |
| Basic                                       |       | $                                           | 0.87       |   | $ | 0.25 |   | $ | 0.66 |   |
| Diluted                                     |       | $                                           | 0.86       |   | $ | 0.24 |   | $ | 0.66 |   |
| Shares used in  calculations (in thousands) |       |                                        |       |   |   |   |   |
| Weighted average shares (basic)             |       | 146,935                                     |       | 149,074 |   | 148,634 |   |
| Dilutive securities                         |       | 1,698                                       |       | 2,005 |   | 1,563 |   |
| Weighted average  shares (diluted)          |       | 148,633                                     |       | 151,079 |   | 150,197 |   |

 

See notes to consolidated financial statements.

61

----

**CONSOLIDATEDBALANCE SHEETS (Dollars in millions, except per share data)**

| ** **                                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                 |       |                  |       |   |   |
| Current assets                                                                             |       |                  |       |   |   |
| Cash and  equivalents                                                                      |       | $                     | 335.6      |   | $ | 220.7 |   |
| Trade and other  receivables, net                                                          |       | 584.8                 |       | 505.7 |   |
| Current deferred  income taxes                                                             |       | 16.5                  |       | 27.2 |   |
| Other current  assets                                                                      |       | 88.8                  |       | 75.6 |   |
| Total current  assets                                                                      |       | 1,025.7               |       | 829.2 |   |
| Property, plant  and equipment, net                                                        |       | 121.5                 |       | 140.9 |   |
| Goodwill                                                                                   |       | 936.5                 |       | 931.8 |   |
| Other intangible  assets, net                                                              |       | 35.6                  |       | 43.6 |   |
| Software and  development costs, net                                                       |       | 71.8                  |       | 75.7 |   |
| Deferred income  taxes                                                                     |       | 58.0                  |       | 26.7 |   |
| Investments                                                                                |       | 12.9                  |       | 16.4 |   |
| Derivative  instruments                                                                    |       | 0.5                   |       | 28.1 |   |
| Other noncurrent  assets                                                                   |       | 28.6                  |       | 23.7 |   |
| Total assets  before customer funds                                                        |       | 2,291.1               |       | 2,116.1 |   |
| Customer funds                                                                             |       | 4,341.2               |       | 4,096.0 |   |
| Total assets                                                                               |       | $                     | 6,632.3    |   | $ | 6,212.1 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                              |       |                  |       |   |   |
| Current liabilities                                                                        |       |                  |       |   |   |
| Short-term debt  and current portion of long-term obligations                              |       | $                     | 25.5       |   | $ | 14.9 |   |
| Accounts payable                                                                           |       | 67.7                  |       | 62.8 |   |
| Drafts and  settlements payable                                                            |       | 232.7                 |       | 153.4 |   |
| Customer advances                                                                          |       | 39.3                  |       | 31.1 |   |
| Deferred income                                                                            |       | 114.0                 |       | 87.4 |   |
| Accrued taxes                                                                              |       | 22.8                  |       | 28.7 |   |
| Employee  compensation and benefits                                                        |       | 67.8                  |       | 58.2 |   |
| Other accrued  expenses                                                                    |       | 54.7                  |       | 47.7 |   |
| Total current  liabilities                                                                 |       | 624.5                 |       | 484.2 |   |
| Long-term  obligations, less current portion                                               |       | 81.0                  |       | 85.8 |   |
| Deferred income  taxes                                                                     |       | 31.2                  |       | 32.5 |   |
| Employee benefit  plans                                                                    |       | 224.1                 |       | 208.4 |   |
| Other noncurrent  liabilities                                                              |       | 36.8                  |       | 38.3 |   |
| Total liabilities  before customer funds obligations                                       |       | 997.6                 |       | 849.2 |   |
| Customer funds  obligations                                                                |       | 4,342.9               |       | 4,067.2 |   |
| Total liabilities                                                                          |       | 5,340.5               |       | 4,916.4 |   |
| Stockholders’ equity                                                                  |       |                  |       |   |   |
| Common stock, $.01  par, authorized 500,000,000 shares, issued 151,567,406 and 151,073,244 |       | 1.5                   |       | 1.5 |   |
| Additional paid-in  capital                                                                |       | 931.0                 |       | 936.6 |   |
| Retained earnings                                                                          |       | 693.4                 |       | 565.5 |   |
| Treasury common  stock at cost, 6,848,402 and 1,650,117 shares                             |       | (144.1                | )          | (33.2 | ) |
| Accumulated other  comprehensive loss                                                      |       | (190.0                | )          | (174.7 | ) |
| Total  stockholders’ equity                                                           |       | 1,291.8               |       | 1,295.7 |   |
| Total liabilities  and stockholders’ equity                                           |       | $                     | 6,632.3    |   | $ | 6,212.1 |   |

 

See notes to consolidated financial statements.

62

----

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Dollars in millions)**

| ** **                                                                               | ** ** | **Amount** | ** ** | **Shares** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                               | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Common Shares Issued**                                                                 |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                                                                        |       | $          | 1.5        |       | $          | 1.5 |   | $ | 1.5 |   | 151,073,244 |   | 150,028,289 |   | 148,657,541 |   |
| Exercises of stock options                                                               |       | —     |       | —     |       | — |   | 299,736 |   | 849,273 |   | 1,040,523 |   |
| Restricted stock awards, net                                                             |       | —     |       | —     |       | — |   | 194,426 |   | 194,271 |   | 208,270 |   |
| Employee stock purchase plans                                                            |       | —     |       | —     |       | — |   | — |   | 1,411 |   | 121,955 |   |
| Ending balance—issued                                                               |       | $          | 1.5        |       | $          | 1.5 |   | $ | 1.5 |   | 151,567,406 |   | 151,073,244 |   | 150,028,289 |   |
| **Treasury Stock—Common Shares**                                                    |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                                                                        |       | $          | (33.2      | )          | $          | (0.1 | ) | $ | (1.6 | ) | (1,650,117 | ) | (5,848 | ) | (117,001 | ) |
| Repurchases                                                                              |       | (222.3     | )          | (80.3      | )          | (28.8 | ) | (10,736,450 | ) | (4,012,400 | ) | (1,844,100 | ) |
| Exercises of stock options                                                               |       | 108.3      |       | 44.5       |       | 26.3 |   | 5,389,255 |   | 2,246,762 |   | 1,684,502 |   |
| Restricted stock awards, net                                                             |       | (1.8       | )          | (1.5       | )          | — |   | (94,467 | ) | (87,706 | ) | 2,943 |   |
| Employee stock purchase plans                                                            |       | 4.9        |       | 4.2        |       | 4.0 |   | 243,377 |   | 209,075 |   | 267,808 |   |
| Ending balance—treasury                                                             |       | $          | (144.1     | )          | $          | (33.2 | ) | $ | (0.1 | ) | (6,848,402 | ) | (1,650,117 | ) | (5,848 | ) |
| **Common Shares Outstanding**                                                            |       |       |       |       |       |   |   | 144,719,004 |   | 149,423,127 |   | 150,022,441 |   |
| **Additional Paid-In Capital**                                                           |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                                                                        |       | $          | 936.6      |       | $          | 925.2 |   | $ | 906.3 |   |   |   |   |   |   |   |
| Exercises of stock options                                                               |       | (20.0      | )          | 2.5        |       | 10.7 |   |   |   |   |   |   |   |
| Tax benefit from stock options                                                           |       | 11.7       |       | 6.1        |       | 5.6 |   |   |   |   |   |   |   |
| Restricted stock awards, net                                                             |       | 3.7        |       | 3.5        |       | 1.3 |   |   |   |   |   |   |   |
| Employee stock purchase plans                                                            |       | (1.0       | )          | (0.7       | )          | 1.3 |   |   |   |   |   |   |   |
| Ending balance                                                                           |       | $          | 931.0      |       | $          | 936.6 |   | $ | 925.2 | * * | * * | * * | * * | * * | * * | * * |
| ** **                                                                               |       | ** ** |       | ** ** |       | ** ** |   | **Comprehensive Income** |   |
| ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Retained Earnings**                                                                    |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                                                                        |       | $          | 565.5      |       | $          | 528.6 |   | $ | 429.8 |   |   |   |   |   |   |   |
| Net earnings                                                                             |       | 127.9      |       | 36.9       |       | 98.8 |   | $ | 127.9 |   | $ | 36.9 |   | $ | 98.8 |   |
| Ending balance                                                                           |       | $          | 693.4      |       | $          | 565.5 |   | $ | 528.6 |   |   |   |   |   |   |   |
| **Accumulated Other Comprehensive  Income (Loss)**                                       |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Foreign currency  translation                                                            |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                                                                        |       | $          | 44.1       |       | $          | 21.2 |   | $ | (8.5 | ) |   |   |   |   |   |   |
| Rate changes, net                                                                        |       | 4.8        |       | 22.9       |       | 29.7 |   | 4.8 |   | 22.9 |   | 29.7 |   |
| Ending balance                                                                           |       | $          | 48.9       |       | $          | 44.1 |   | $ | 21.2 |   |   |   |   |   |   |   |
| Unrealized gain (loss) on  customer funds                                                |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                                                                        |       | $          | 18.5       |       | $          | — |   | $ | — |   |   |   |   |   |   |   |
| Change in unrealized gain (loss), net of income taxes  of $(10.5), $10.6 and $0.0   |       | (18.3      | )          | 18.9       |       | — |   | (18.3 | ) | 18.9 |   | — |   |
| Less realized net (gain) loss, net of income taxes of  $(0.6), $(0.3) and $0.0           |       | (1.1       | )          | (0.4       | )          | — |   | (1.1 | ) | (0.4 | ) | — |   |
| Ending balance                                                                           |       | $          | (0.9       | )          | $          | 18.5 |   | $ | — |   |   |   |   |   |   |   |
| Unrealized gain (loss) on  marketable securities                                         |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                                                                        |       | $          | 3.6        |       | $          | 3.9 |   | $ | 1.0 |   |   |   |   |   |   |   |
| Change in unrealized gain (loss), net of income taxes  of $1.3, $1.5 and $3.2       |       | 2.3        |       | 2.4        |       | 4.9 |   | 2.3 |   | 2.4 |   | 4.9 |   |
| Less realized net (gain) loss, net of income taxes of  $(1.6), $(1.7) and $(1.4)         |       | (2.7       | )          | (2.7       | )          | (2.0 | ) | (2.7 | ) | (2.7 | ) | (2.0 | ) |
| Ending balance                                                                           |       | $          | 3.2        |       | $          | 3.6 |   | $ | 3.9 |   |   |   |   |   |   |   |
| Pension liability  adjustment                                                            |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                                                                        |       | $          | (240.9     | )          | $          | (235.1 | ) | $ | (226.2 | ) |   |   |   |   |   |   |
| Pension liability change, net of income taxes of  $0.4, $2.7 and $5.0 (Note I) |       | (0.3       | )          | (5.8       | )          | (8.9 | ) | (0.3 | ) | (5.8 | ) | (8.9 | ) |
| Ending balance                                                                           |       | $          | (241.2     | )          | $          | (240.9 | ) | $ | (235.1 | ) |   |   |   |   |   |   |
| Total ending balance                                                                     |       | $          | (190.0     | )          | $          | (174.7 | ) | $ | (210.0 | ) |   |   |   |   |   |   |
| Total Stockholders’ Equity                                                          |       | $          | 1,291.8    |       | $          | 1,295.7 |   | $ | 1,245.2 |   |   |   |   |   |   |   |
| ***Total  Comprehensive Income***                                                        | * *   | * *   |       |       |       |   |   | $ | 112.6 |   | $ | 72.2 |   | $ | 122.5 |   |

 

See notes to consolidated financial statements.

63

----

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Dollars in millions)**

| ** **                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash Flows from Operating  Activities**                                            |       |                                        |       |   |   |   |   |
| Net earnings                                                                         |       | $                                           | 127.9      |   | $ | 36.9 |   | $ | 98.8 |   |
| Adjustments to reconcile  net earnings to net cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Deferred income tax provision (benefit)                                              |       | (11.4                                       | )          | (19.8 | ) | 34.2 |   |
| Depreciation and amortization                                                        |       | 85.3                                        |       | 124.7 |   | 79.3 |   |
| Provision for doubtful accounts                                                      |       | 11.2                                        |       | 9.7 |   | 11.2 |   |
| Net periodic pension costs                                                           |       | 11.6                                        |       | 6.0 |   | 7.6 |   |
| Asset write-downs                                                                    |       | 9.1                                         |       | 3.6 |   | — |   |
| Unrealized (gain) loss on derivative instruments                                     |       | 7.0                                         |       | 28.0 |   | 15.7 |   |
| Gain on sale of marketable securities                                                |       | (4.3                                        | )          | (4.5 | ) | (3.4 | ) |
| SourceWeb exit costs, net                                                            |       | —                                      |       | 28.5 |   | — |   |
| Contribution to retirement plan trusts                                               |       | —                                      |       | — |   | (105.5 | ) |
| Other                                                                                |       | 5.5                                         |       | 0.1 |   | (0.6 | ) |
| Decrease (increase) in trade and other receivables                                   |       | (91.7                                       | )          | (42.4 | ) | (48.1 | ) |
| Increase (decrease) in accounts payable                                              |       | 6.5                                         |       | 22.6 |   | 2.5 |   |
| Increase (decrease) in drafts and settlements payable                                |       | 79.3                                        |       | 39.7 |   | (7.1 | ) |
| Increase (decrease) in deferred income                                               |       | 25.5                                        |       | 22.4 |   | 16.5 |   |
| Increase (decrease) in employee compensation and  benefits                           |       | 10.1                                        |       | 0.9 |   | (6.0 | ) |
| Increase (decrease) in accrued taxes                                                 |       | 13.2                                        |       | 7.0 |   | (24.9 | ) |
| Increase (decrease) in other current assets and  liabilities                         |       | 0.8                                         |       | (10.9 | ) | (13.6 | ) |
| Net cash provided by operating activities                                            |       | 285.6                                       |       | 252.5 |   | 56.6 |   |
| **Cash Flows from Investing  Activities**                                            |       |                                        |       |   |   |   |   |
| Expended for property, plant and equipment                                           |       | (31.4                                       | )          | (32.9 | ) | (30.5 | ) |
| Expended for software and development costs                                          |       | (32.8                                       | )          | (32.9 | ) | (27.0 | ) |
| Proceeds from sales of businesses and assets                                         |       | 31.5                                        |       | 17.1 |   | 24.8 |   |
| Expended for acquisitions of investments and  businesses, less cash acquired         |       | (10.4                                       | )          | (19.3 | ) | (1.7 | ) |
| Net cash used for investing activities                                               |       | (43.1                                       | )          | (68.0 | ) | (34.4 | ) |
| **Cash Flows from Financing  Activities**                                            |       |                                        |       |   |   |   |   |
| Revolving credit facilities and overdrafts, net                                      |       | 11.5                                        |       | (59.6 | ) | (49.6 | ) |
| Repayment of other debt and long-term obligations                                    |       | (11.2                                       | )          | (4.1 | ) | (1.4 | ) |
| Repurchase of common stock                                                           |       | (222.3                                      | )          | (80.3 | ) | (28.8 | ) |
| Proceeds from stock option exercises and stock sales                                 |       | 92.2                                        |       | 50.5 |   | 42.3 |   |
| Net cash used for financing activities                                               |       | (129.8                                      | )          | (93.5 | ) | (37.5 | ) |
| **Effect of Exchange Rate Changes on Cash**                                          |       | 2.2                                         |       | 5.5 |   | 5.2 |   |
| Net Cash Flows Provided (Used)                                                       |       | 114.9                                       |       | 96.5 |   | (10.1 | ) |
| Cash and equivalents at beginning of year                                            |       | 220.7                                       |       | 124.2 |   | 134.3 |   |
| Cash and equivalents at end of year                                                  |       | $                                           | 335.6      |   | $ | 220.7 |   | $ | 124.2 |   |

 

| ** **                                     | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Interest and Income Taxes Paid  (Refunded)** |       |                                        |       |   |   |   |   |
| Interest paid                                  |       | $                                           | 6.3        |   | $ | 4.5 |   | $ | 4.7 |   |
| Income taxes paid                              |       | $                                           | 56.9       |   | $ | 33.2 |   | $ | 47.4 |   |
| Income taxes  refunded                         |       | $                                           | (7.0       | ) | $ | (17.1 | ) | $ | (1.1 | ) |

 

See notes to consolidated financial statements.

64

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (For the three years ended December 31, 2005) (Dollars in millions, except per share data)**

**INDEX TO NOTES**
|    | ** ** | **Note**                                       | ** ** | **Page** |
|----|------------|------------------------------------------------|------------|----------|
| A. |       | Accounting Policies                            |       | 65       |
| B. |       | Investing Activity                             |       | 76       |
| C. |       | Supplementary Data to Statements of Operations |       | 79       |
| D. |       | Trade and Other  Receivables, Net              |       | 80       |
| E. |       | Capital Assets                                 |       | 81       |
| F. |       | Financing                                      |       | 82       |
| G. |       | Customer Funds                                 |       | 84       |
| H. |       | Income Taxes                                   |       | 86       |
| I. |       | Retirement Plans                               |       | 88       |
| J. |       | Stock-Based Compensation  Plans                |       | 95       |
| K. |       | Commitments and  Contingencies                 |       | 98       |
| L. |       | Legal Matters                                  |       | 99       |
| M. |       | Segment Data                                   |       | 100      |
| N. |       | Supplementary  Quarterly Data (Unaudited)      |       | 103      |

 

**A.**   ACCOUNTING POLICIES

**General Nature ofOur Business**

Ceridian Corporation is aninformation services company principally in the human resource (“HR”),transportation and retail markets. Our human resource solutions businessenables customers to outsource a broad range of employment processes, fromrecruitment and applicant screening, to payroll, tax filing, human resourceinformation systems, employee self-service, time and labor management, benefitsadministration, employee assistance and work-life programs, to post-employmenthealth insurance portability compliance, and retirement plan administration. Wehave human resource solutions operations primarily in the United States, Canadaand the United Kingdom. Our Comdata subsidiary (which we refer to in this reportas “Comdata”) provides transaction processing, financial services andregulatory compliance services primarily to the transportation and retailindustries. Comdata’s products and services include payment processing and theissuance of credit, debit and stored value cards. Our products and services andbusiness segments are more fully described in Note M, “Segment Data.”

**Basis of Consolidation**

We include in our consolidated financial statementsthe subsidiaries and investments in which we have a majority interest. We alsoinclude in our consolidated financial statements grantor trusts that hold fundsprovided by our human resource solutions business (which we refer to in thisreport as “HRS”) payroll processing, tax filing and other HR services (“Payrolland Tax Services”) customers pending remittance to employees of those customersor tax authorities in the United States and Canada. The customer funds held intrust and customer deposits related to our Payroll and Tax Services and Comdataretail services businesses are separately identified as “customer funds” in ourconsolidated balance sheets. Further information on our accounting for thesefunds is provided in the section “Revenue Recognition” later in this Note A andin Note G, “Customer Funds.”

65

----

When we acquire between a 20% to 50% equity interestin another entity, we generally account for that investment under the equitymethod and record our share of its earnings or losses. During the reportingperiods included in this report, we held no investments representing an equityinterest between 20% and 50%. Our other investments may include debt or equitysecurities that may or may not be marketable securities. We discuss these otherinvestments in the section entitled “Cash and Investments, includingDerivatives” later in this Note A and in Note B, “Investing Activity.” Wereview our less-than-20%-owned investments to determine whether weexercise a degree of significant influence over their management that wouldrequire the application of the equity method.

All material intercompanytransactions have been eliminated from our consolidated financial statements.

**Recently IssuedAccounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)123R, “Share-Based Payment.” The principal effect of SFAS 123R will be torequire the inclusion in our earnings of a compensation expense for equitygrants that previously were only reported as a disclosure in a note to ourconsolidated financial statements. We have adopted SFAS 123R on January 1,2006, using the modified prospective transition method. SFAS 123R will requireus to measure the cost of employee services received in exchange for an awardof equity investments based on the fair value of the award on the grant date. Thatcompensation expense must be recognized in the statement of operations over thevesting period of the award. Under the “modified prospective” transitionmethod, awards that are granted, modified or settled beginning at the date ofadoption will be measured and accounted for in accordance with SFAS 123R. Inaddition, expense must be recognized in the statement of operations forunvested awards that were granted prior to the date of adoption. The expensewill be based on the fair value determined at the grant date. We currentlyestimate total stock-based compensation expense for 2006 will be approximately$0.08 per diluted share comprised of an estimate of $0.03 per diluted share forrestricted stock expense and $0.05 per diluted share for stock option expense.

In December 2004, the FASB issued SFAS 153, “Exchangesof Nonmonetary Assets” that became effective for transactions occurring infiscal periods beginning after June 15, 2005. The adoption of thisstandard did not have a material effect on our consolidated financialstatements.

In May 2005, the FASB issued SFAS 154, “AccountingChanges and Error Corrections” that replaces Accounting Principles BoardOpinion (“APB”) 20, “Accounting Changes.” The new standard generally requiresretrospective treatment (restatement of comparable prior period information)rather than a cumulative effect adjustment for the effect of a change inaccounting principle or method of application. We have adopted this standardeffective January 1, 2006.

In February 2006, theFASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments—anamendment of FASB Statements No. 133 and 140.” The new standard iseffective for years beginning after September 15, 2006 and is not expectedto have a material effect on our results of operations or financial position.

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of our 

66

----

financialstatements and our reported amounts of revenues and expenses during the reportingperiods. Actual results could differ from those estimates. Estimates that couldsignificantly affect our results of operations or financial condition involvethe assignment of fair values upon acquisition of goodwill and other intangibleassets and testing for impairment; the capitalization, amortization andimpairment testing of software and development costs; the determination of ourliability for pensions and other postretirement benefits; determination of theallowance for doubtful accounts and reserve for sales adjustment; and the resolutionof tax matters. Further discussion on these estimates can be found in relateddisclosures elsewhere in our Notes.

**Changes inPresentation**

We have reclassifiedcertain prior year amounts to conform to the current year’s presentation. Thesereclassifications had no effect on reported consolidated net earnings.

**Cash andInvestments, including Derivatives**

We classify investments that are readily convertibleto cash within three months of purchase as cash equivalents in our consolidatedbalance sheets and report those amounts at amortized cost (which approximatesfair value). We account for our investments in marketable securities under SFAS115, “Accounting for Certain Investments in Debt and Equity Securities,” andinvestments other than marketable securities or derivative instruments underAPB 18, “The Equity Method of Accounting for Investments in Common Stock.” Ourinvestments of customer funds in marketable securities were classified asheld-to-maturity, and carried at amortized cost until May 2004, when wereclassified these investments as “available for sale.” Customer funds andother investments in marketable equity or debt securities are classified asavailable-for-sale and reported in the balance sheet at fair value, withchanges in fair value reported in accumulated other comprehensive income asfurther discussed in Note B, “Investing Activity.”

We account for derivativesin accordance with SFAS 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended and interpreted. SFAS 133 requires that all derivativesbe measured at fair value on the balance sheet. The treatment of changes in thefair value of a derivative depends on the character of the transaction,including whether it has been designated and qualifies as part of a hedgingrelationship as defined under SFAS 133. Derivatives that do not meet the SFAS133 criteria for hedge accounting are designated as economic hedges and changesin the fair value associated with these instruments are included in theconsolidated statements of operations as (gain) loss on derivative instruments.In those cases where the derivative meets the SFAS 133 hedge accountingcriteria for a cash flow hedge, the change in fair value of the derivative thatis effective in offsetting changes in cash flows of the designated risk beinghedged is reported, net of related taxes, as accumulated other comprehensiveincome in stockholders’ equity until realized. The change in fair value of thederivative that is associated with ineffectiveness in the hedging relationshipis reported in current earnings. We enter into interest rate and fuel pricederivative instruments for the purpose of economically hedging revenue risk andnot for speculative activity. Our economic hedging activities may include theuse of contracts such as swaps, collars, caps and floors, as economic hedges ofvariable income from investments of customer funds and corporate cash, in thecase of interest rate derivatives, and, in the case of fuel price derivatives,from transportation revenue based on a percentage of the dollar value of thetransaction processed. We further discuss derivative instruments in Note B, “InvestingActivity.”

67

----

**Concentrations**

Cash deposits of client and corporate funds aremaintained primarily in large credit-worthy financial institutions in thecountries in which we operate. These deposits may exceed the amount of anydeposit insurance that may be available through government agencies. Alldeliverable securities are held in custody with large credit-worthy financialinstitutions which bear the risk of custodial loss. Non-deliverable securities,primarily money market securities, are restricted to large, credit-worthybroker-dealers and financial institutions.

Wecurrently provide work-life and employee assistance services to U.S. ArmedServices personnel under a contract with the U.S. Department of Defense. Ourcontract with the U.S. Department of Defense will expire on March 31, 2006.We are currently negotiating a contract extension with the U.S. Department ofDefense that would extend our relationship with them through approximately September 30,2006. It is our understanding that the U.S. Department of Defense intends toissue a request for proposal to enter into a long-term contract with a providerto begin on or about October 1, 2006. We intend to respond to this requestfor proposal.

**Trade and OtherReceivables, Net**

Tradeand other receivables balances are shown on the consolidated balance sheets netof the allowance for doubtful accounts of $13.9 and $13.3 as of December 31,2005 and 2004, respectively. Amounts recorded on the consolidated balancesheets approximate fair value.

**Property, Plant andEquipment**

Ourproperty, plant and equipment assets are carried at cost and depreciated forfinancial statement purposes generally using the straight-line method at ratesbased on the estimated lives of the assets, which are generally as follows:

| Buildings                |   | 40 years   |   |
|--------------------------|--------|------------|--------|
| Building  improvements   |   | 5-15 years |   |
| Machinery and  equipment |   | 3-8 years  |   |
| Computer equipment       |   | 3-6 years  |   |

 

We charge repairs and maintenance to expense as thecosts are incurred. We include gains or losses on dispositions in other expense(income) when realized. Capitalized interest included in software anddevelopment costs were not material.

We review the carryingvalue of long-lived assets whenever events or changes in circumstances such asmarket value, asset utilization, physical change, legal factors or othermatters indicate that the carrying value may not be recoverable. When thereview indicates that the carrying value of the asset or group of assetsrepresenting the lowest level of identifiable cash flows exceeds the sum of theexpected future cash flows (undiscounted and without interest charges), wedetermine the fair value of the impaired asset or asset group. If the fairvalue of the asset or asset group is less than the carrying value of the assetor asset group, we recognize an asset write-down charge against operations. Theamount of the impairment loss is the amount by which the carrying value exceedsthe fair value of the impaired asset or group of assets.

68

----

**Goodwill and OtherIntangibles**

Goodwill, which represents the excess purchase priceover the fair value of net assets of businesses acquired, is assigned tooperating units based on the benefits derived from the acquisition. Goodwill isnot amortized against earnings but instead goodwill balances are subject toimpairment review on at least an annual basis. The reporting units identifiedfor this assessment are our U.S.-based HRS operations, the HRS operations ofCeridian Centrefile and Ceridian Canada and Comdata—Transportation and Comdata—Retail.After consideration of the factors prescribed in SFAS 142, “Goodwill and OtherIntangible Assets,” that might indicate a risk of impairment, we found noindication of goodwill impairment at December 31, 2005, 2004 and 2003.

Ourother intangible assets represent amounts assigned to specifically identifiableintangible assets at the time of an acquisition. These costs are amortized on astraight-line basis generally over the following periods:

| Customer lists  and relationships |   | 5-15 years |   |
|-----------------------------------|--------|------------|--------|
| Technology                        |   | 3-8 years  |   |
| Non-compete agreements            |   | 2-5 years  |   |

 

We regularly review theserecorded amounts and assess their recoverability along with our other long-livedasset groups. Our review considers factors such as whether the amortization ofother intangible assets for each operating unit can be recovered throughforecasted undiscounted cash flows over their remaining economic life. Wediscuss the results of current reviews in Note C, “Supplementary Data to theStatement of Operations.”

**Software andDevelopment Costs**

Our software and development efforts are substantiallyfor internal use. Under the provisions of American Institute of CertifiedPublic Accountants (“AICPA”) Statement of Position (“SOP”) 98-1, “Accountingfor Costs of Computer Software Developed or Obtained for Internal Use,” wecapitalize costs associated with software developed or obtained for internaluse when both the preliminary project stage is completed and our management hasauthorized further funding for the project which it deems probable ofcompletion. Capitalized internal-use software costs include only: (1) externaldirect costs of materials and services consumed in developing or obtaining thesoftware; (2) payroll and payroll-related costs for employees who aredirectly associated with and who devote time to the project; and (3) interestcosts incurred, when material, while developing the software. Capitalization ofthese costs ceases no later than the point at which the project issubstantially complete and ready for its intended purpose. We do not includegeneral and administrative costs and overhead costs in capitalizable costs. Wecharge research and development costs and other computer software maintenancecosts related to software development to operations as incurred.

We generally amortize software development costs usingthe straight-line method over a range of two to five years, but not exceedingthe expected life of the software.

We regularly review thecarrying value of software and development costs in connection with ourimpairment analysis of other long-lived assets and recognize a loss when the valueof estimated undiscounted net cash flow benefit related to the asset groupfalls below the unamortized cost, or when abandoned.

69

----

**ReceivablesSecuritization**

We maintain a creditfacility under which we sell Comdata receivables to third parties through aconsolidated subsidiary of Comdata. The subsidiary is consolidated sinceComdata owns 100% of the equity, the subsidiary’s activities are virtually allon Comdata’s behalf, and the substantive risks and rewards of the assets restdirectly with Comdata. Additionally, the subsidiary has a unilateral right toreclaim all of the transferred assets. Therefore, we account for theoutstanding advances as secured borrowings under SFAS 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities”and the sold receivables and borrowings remain on our consolidated balancesheets. We further explain our policy and the operation of this facility inNote F, “Financing.”

**Revenue Recognition**

We recognize revenue fromthe sale of our products and services when the following criteria are met: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or serviceshave been rendered; (3) the seller’s price to the buyer is fixed ordeterminable; and (4) collectibility is reasonably assured. Generally, werely on a signed contract between us and the customer as the persuasiveevidence of a sales arrangement. We address these and the other criteria forrevenue recognition in the following discussion of types of revenue within ourbusiness.

***HRS***

***Repetitive Business***

The majority of our HRS revenue is generated byrecurring monthly or quarterly fees from our payroll processing, tax filing andother HR services (“Payroll and Tax Services”), benefit administration services(“Benefit Services”), work-life and employee assistance services (“LifeWorks”),and human resource outsourcing (“HRO”). This revenue is generated by servicefees, income from investment of customer funds in lieu of additional fees,software maintenance and subscription fees.

***Payroll and TaxServices.******  ***Generally,service fees for HRS payroll processing are contracted on a per transactionbasis and recognized as revenue when transaction services are provided and theamount is billable. We also recognize payroll services revenue from customerfunds held temporarily pending remittance to the customers’ employees. Thesepayroll deposits are primarily invested through grantor trusts. We derive andrecognize investment income in lieu of additional fees as a component ofrevenue as earned.

Our tax filing services consist primarily of: (1) collectingfunds for federal, state and local employment taxes from customers based on payrollinformation provided by the customers; (2) remitting funds collected tothe appropriate taxing authorities; (3) filing applicable returns; and (4) handlingrelated regulatory correspondence and amendments for customers. Revenue fromthese tax filing services is billed and recognized as the services areprovided, generally on a monthly basis. We hold our customers’ tax filingdeposits for the period between collection and remittance of the funds to theapplicable taxing authority. These tax filing deposits are invested through agrantor trust. We derive and recognize this investment income in lieu ofadditional fees as a component of revenue as earned.

Payroll processing and tax filing services are soldseparately; accordingly, we have objective evidence of standalone value for mostservices. Separate sales also establish the fair value of many of the servicessold in the event a customer contracts with us for multiple services. Wherefair value cannot be established on the undelivered element, revenue (and therelated direct costs of revenue) for the delivered elements 

70

----

are deferred andrecognized ratably over the remaining repetitive processing period commencingupon completion of implementation consulting services.

***Benefit Services.******  ***We provide employee health andwelfare benefits administration and qualified administration services to ourcustomers. Employee health and welfare benefits administration services includehealth insurance portability compliance services related primarily to COBRA(Consolidated Omnibus Budget Reconciliation Act). Health and welfare benefitsadministration services also encompass benefits provided to active employees,such as (1) annual health plan enrollment, (2) ongoing employeeenrollment and eligibility services, (3) tuition refund plans, (4) transportationreimbursement under the Transportation Equity Act, and (5) InternalRevenue Code Section 125 plans (Flexible Spending), which include fullyadministered and self-administered flexible spending accounts and premium-onlyplans.

We also provide retirement planning services thatinclude: (1) administration services for benefits provided to retired andinactive employees, which include retiree healthcare, disability, survivingdependent, family leave and severance benefits; and (2) qualified planadministration services which include 401(k) plan administration, profitsharing administration, defined benefit plan administration, ESOPadministration and Qualified Domestic Relations Order administration.

Revenue for COBRA services is generally earned andrecognized as the services are provided. Revenue associated with other healthand welfare benefits administration and retirement planning services isgenerally recognized monthly based on the number of employees that receive orparticipate in the benefit.

Benefits administration services are sold separately;accordingly, we have objective evidence of standalone value for most services. Separatesales also establish the fair value of many of the services sold in the event acustomer contracts with us for multiple services. Where fair value cannot beestablished on the undelivered element, revenue (and the related direct costsof revenue) for the delivered elements are deferred and recognized ratably overthe remaining repetitive processing period commencing upon completion ofimplementation consulting services.

***LifeWorks.******  ***We provide work-life andemployee assistance programs to our clients. LifeWorks are delivered throughon-line access and telephonically, and through face-to-face counseling providedby referral resources. Contracted fees for these services are generally billedmonthly or quarterly. Revenue is generally earned and recognized over the termof the contract based on the number of customer employees served and the levelof service.

***Human ResourceOutsourcing.******  ***Weprovide comprehensive human resource outsourcing solutions to our customers.HRO services can provide an entire suite of any of the HRS services outlinedabove, but to date typically involve: (1) conversion and implementationconsulting services; (2) processing and hosting services related topayroll, tax filing services and benefit needs; and (3) administration ofpayroll or benefits functions.

HRO services are soldseparately by us or by our competitors; accordingly, there is evidence of standalonevalue for the repetitive deliverables. In certain arrangements, a substantive statedrenewal rate in the contract provides evidence of the fair value for theundelivered repetitive processing services. In those situations where a substantivestated renewal rate is included in the arrangement, the use of the residualmethod afforded by Emerging Issues Task Force (“EITF”) Issue No. 00-21,“Revenue Arrangements with Multiple Deliverables” allows us to recognizerevenue on the delivered elements, generally consisting of non-repetitiveimplementation services. Where fair value cannot be established on the undeliveredelement, revenue (and the related direct costs of revenue) for the deliveredelements are 

71

----

deferredand recognized ratably over the remaining repetitive processing periodcommencing upon completion of implementation consulting services.

***Non-RepetitiveBusiness***

We generate revenue fromthe sale and installation of software and data conversion services in our HRSbusinesses (including non-repetitive HRO services discussed above). Theseservices may also include training and other consulting.

For our non-HRO business,the fees for these non-repetitive services are based upon published hourlyrates that are considered competitive with other providers and are consistentwith hourly rates billed for customization and consulting services performed byus on a standalone basis. Revenue from consulting services is non-refundable;is primarily determined on a time and materials basis; and is recognized overthe installation and conversion period, generally one to four months.

***Comdata***

***Transportation***

Comdata’s funds transfersystem is designed to enable truck drivers to obtain funding for purchases andcash advances at truck stops and other locations en route to their destinations.Drivers may use Comdata’s proprietary Comdata card to purchase fuel, lodgingand other approved items, obtain cash advances from automated teller machinesor through the use of Comchek drafts and make direct deposits of pay,settlements or trip advances to personal bank accounts. Revenue from fundstransfer transactions is based on a per transaction fee that is based on eithera fixed amount or a percentage of the face value of the transaction and isrecognized when the transaction is processed.

In connection with itstransportation services business, Comdata purchases accounts receivable due totrucking companies from manufacturers and shippers at a discount and withrecourse back to the trucking company in the event of non-payment. This serviceallows trucking companies to receive payment on shipping invoices sooner. Thenon-refundable discount represents adequate compensation charged for servicingthe receivables over a 30-day period. If the collection period extendsbeyond 30 days, a non-refundable additional fee is charged for each month ofservicing. After 90 days, an uncollected receivable can be returned to theseller for its face value. Comdata recognizes revenue from the discounted feein the month of the purchase and the additional fees for servicing as we becomeentitled to collect the fee.

Comdata also providesfueling centers with: (1) PC-based, point of sale systems that automatethe various transactions that occur at a fuel purchase desk; and (2) “payat the pump” systems which enable customers to transact card-based fuelpurchases at the pump. Revenue from the sale of PC-based point of saleequipment and pay at the pump equipment is recognized at the time the equipmentis received and accepted by the customer. Recurring service revenues for theseactivities are recognized as earned. Support and maintenance contracts aregenerally for 12 month periods and are invoiced annually with the revenuesrecognized on a straight-line basis over the maintenance period. These productsand services are all sold separately; accordingly, we have standalone value foreach product and service. Separate sales also establish the fair value of eachof the products and services sold in the event a customer contracts with us formultiple products and/or services.

72

----

***Retail Services***

Comdata sells stored valuecards and provides subsequent activation, reporting and transaction processingservices (“services”) through its wholly owned subsidiary Stored Value Systems,Inc. (referred to in this report as “SVS”). Customers may also choose topurchase cards alone, without a continuing obligation for services from SVS.SVS recognizes revenue for card sales without services upon shipment.

For card sales with futureprocessing services, revenue on both the card sales and services are deferredand reported on the consolidated balance sheets as deferred income. Costs ofthe cards sold are deferred and reported on the consolidated balance sheets inother current assets. Costs associated with the services are recognized as incurred.The deferred income and deferred cost on the card sale are both recognized inearnings over the estimated life of the card, which includes the transactionprocessing period. The recognition period is 30 months, beginning uponactivation of the card. The deferred income on the services where we charge afee upon card activation for unlimited transactions is recognized in earningsover the 30 month period, beginning when the fee is assessed. The deferredincome on the services where we charge a fee each time a transaction isprocessed is recognized in earnings over the same 30 month period, beginningwhen the fee is assessed. Our history of providing services to our customersindicates that (1) we can expect activation of a card within approximatelyseven months following card shipment, and (2) during the six monthsfollowing the activation of a card, approximately 90% of the services have beenperformed.

Sales of cards undereither arrangement do not include a right of return of the cards shipped.

***Gross Versus Net Revenue***

We include in revenueamounts that we bill for and remit to third-party vendors for associatedproducts and services as required on a gross basis as a principal rather thannet as an agent when the following conditions are met: (1) we are theprimary obligor in the arrangement with the customer; (2) we have creditrisk and inventory risk; (3) we have latitude in the establishment ofpricing, subject to general economic restraints; and (4) we have fulldiscretion in vendor selection.

**Costs and Expenses**

***Cost of Revenue***

We assign to cost ofrevenue those costs that directly benefit the delivery of our revenue-producingproducts and services. Most of these costs are recognized as incurred, that is,as we become obligated to pay for them. Some costs of revenue are recognized inthe period that a product is sold and delivered. Other costs of revenue arerecognized over the period of use or in proportion to the related revenue.

For HRS, a substantialportion of the costs included in cost of revenue are recognized as incurred andthe remaining costs are recognized over the period of use. The costs recognizedas incurred consist primarily of customer service staff costs, customertechnical support costs, consulting and purchased services, delivery servicesand royalties. The costs of revenue recognized over the period of use aredepreciation and amortization of tangible and software assets, rentals offacilities and equipment, and direct and incremental costs associated withdeferred implementation service revenue.

For Comdata, the principaltypes of costs included in cost of revenue that are recognized as incurredinclude customer service staff costs, banking fees and telecommunications costs.The principal Comdata cost of revenue that is recognized when the product isdelivered is the cost of equipment sold to customers. The principal Comdatacosts of revenue that are recognized over the period of use includedepreciation 

73

----

andamortization of tangible and software assets, and rentals of facilities andequipment. The purchase cost of retail card stock is deferred and recognized inproportion to and over the same period as the related revenue.

***Selling, Generaland Administrative Expense***

We include in sellingexpense costs related to maintaining a direct marketing infrastructure andsales force and other direct marketing efforts such as advertising,telemarketing, direct mail and trade shows.

General and administrativeexpense includes the cost of maintaining the infrastructure of the company thatis not directly related to delivery of products and services or selling efforts.Also included in this category are the provision for doubtful accountsreceivable, amortization of other intangible assets and net periodic pensioncosts.

***Research andDevelopment Expense***

We include inresearch and development expense those costs related to maintaining a technicalworkforce to the extent that their activities principally involve the followingsoftware development activities:

·       Conceptualformulation and design of possible product or process alternatives

·       Testingin search for or evaluation of product or process alternatives

·       Modificationof the formulation or design of a product or process

·       Engineering activityrequired to advance the design of a product to the point that it meets specificfunctional and economic requirements and is ready for production

***(Gain) Loss onDerivative Instruments***

We include in (gain) losson derivative instruments the change in the fair value of derivativeinstruments designated as economic hedges, which are derivatives that do notmeet the SFAS 133 criteria for hedge accounting treatment. We do not enter intoderivative instruments for speculative purposes. The effective portion ofchanges in the fair value of derivative contracts that meets the SFAS 133 hedgeaccounting requirements is reported in accumulated other comprehensive income. Asof December 31, 2005, we do not have any derivative contracts that meetthe SFAS 133 hedge accounting requirements. We discuss our policy on derivativeinstruments earlier in this Note A under the caption “Cash and Investments,including Derivatives.”

***Other Expense(Income)***

We include in otherexpense (income) the results of transactions that are not appropriatelyclassified in another costs and expenses category and that generally are notrecurring. Those transactions might relate to litigation and contractsettlements, currency exchange, asset sales, exit activities, and impairment ofasset values (asset write-downs).

**Operating Leases**

We conduct substantiallyall of our operations in leased facilities. We recognize rent holidays,including the time period during which we have access to the property forconstruction of improvements, as well as construction allowances and escalatingrent provisions on a straight-line basis over the term of the lease.

74

----

**Stock-BasedCompensation**

Weaccount for stock-based compensation under the intrinsic value methodprescribed by APB 25, “Accounting for Stock Issued to Employees” andrelated interpretations. Therefore, we generally do not record compensationexpense with respect to grants to employees or directors under our fixed stockoption plans, since the exercise price is set at the market price on the dateof grant. Compensation expense for our outstanding restricted stock awards,none of which are performance-based, is recognized by charging the fair valueof the award at the time of grant to operations ratably over the vesting period.We also report under the disclosure-only provisions of SFAS 123, “Accountingfor Stock-Based Compensation” and SFAS 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No. 123.”The following table illustrates the pro forma effect on net income and earningsper share as if we had applied the fair value recognition provision of SFAS 123to stock-based compensation:

| ** **                                                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Pro Forma Effect of Fair Value Accounting**                                                                 | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings as reported                                                                                                                    |       | $                                           | 127.9      |   | $ | 36.9 |   | $ | 98.8 |   |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects                                         |       | 1.5                                         |       | 1.5 |   | 0.8 |   |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  method for all awards, net of related tax effects |       | (10.9                                       | )          | (14.3 | ) | (15.6 | ) |
| Pro forma net  earnings                                                                                                                     |       | $                                           | 118.5      |   | $ | 24.1 |   | $ | 84.0 |   |
| Basic earnings  per share as reported                                                                                                       |       | $                                           | 0.87       |   | $ | 0.25 |   | $ | 0.66 |   |
| Pro forma basic  earnings per share                                                                                                         |       | $                                           | 0.81       |   | $ | 0.16 |   | $ | 0.57 |   |
| Diluted earnings  per share as reported                                                                                                     |       | $                                           | 0.86       |   | $ | 0.24 |   | $ | 0.66 |   |
| Pro forma diluted earnings  per share                                                                                                       |       | $                                           | 0.80       |   | $ | 0.16 |   | $ | 0.56 |   |
|                                                                                                                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Forpurposes of pro forma disclosures, the estimated fair value of the stock optionis amortized to expense over the option’s vesting period. The fair value ofthese stock options was estimated at the date of grant using a Black-Scholesoption pricing model with the following weighted-average assumptions:

| ** **                            | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| **Weighted-Average Assumptions** | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected lives in  years              |       | ** **3.90                              |       | ** **3.90 |   | ** **3.93 |   |
| Expected  volatility                  |       | 35.4                                        |       | 38.7 |   | 43.3 |   |
| Expected dividend  rate               |       | —                                      |       | — |   | — |   |
| Risk-free interest rate               |       | 4.1                                         |       | 2.6 |   | 2.3 |   |
|                                       |            |                                             |            |  |  |  |  |  |  |

 

| **Weighted Average Fair Values** | ** ** | ** ** | ** ** | **2005**            | ** ** | **2004**   | ** ** | **2003**            | ** ** |
|-------------------------------------------------|------------|------------|------------|---------------------|------------|------------|------------|---------------------|------------|
| ** **                                      | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Stock options  granted                          |       | 3,467,235  |       |                | $          | 6.01       |       |                | 3,291,708  |   |   | $ | 6.83 |   |   | 3,906,790 |   |   | $ | 5.41 |   |   |
|                                                 |            |            |            |                     |            |            |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Additional informationrelated to our stock option plans is detailed in Note J, “Stock-BasedCompensation Plans”.

**Income Taxes**

We base our provision forincome taxes on income recognized for financial statement purposes, whichincludes the effects of temporary differences between financial statementincome and income recognized 

75

----

for taxreturn purposes. We record a valuation allowance to reduce our deferred taxassets when uncertainty regarding realization of these assets exist.

**Earnings Per Share**

Basic earnings per sharerepresents earnings divided by the weighted average number of common sharesoutstanding for the reporting period. Diluted earnings per share representsearnings divided by the sum of the weighted average number of common sharesoutstanding plus shares derived from other potentially dilutive securities. Ourother potentially dilutive securities include “in the money” fixed stockoptions outstanding. The numbers of shares added for stock options isdetermined by the treasury stock method, which assumes exercise of theseoptions and the use of any proceeds plus related tax benefits to repurchase aportion of these shares at the average market price for the period. The optionshares excluded from the calculation of our other potentially dilutivesecurities (because the exercise price exceeded the average market price forthe year) were 5,665,289, 6,455,760 and 9,051,000 at December 31, 2005,2004 and 2003, respectively.

**Translation of Foreign Currencies**

We have determined thatlocal currencies serve as functional currencies for our internationaloperations. We translate foreign currency balance sheets at the end-of-periodexchange rates and foreign currency statements of operations at the weightedaverage exchange rates for each period. We report the effect of changes in theU.S. dollar carrying values of assets and liabilities of our internationaloperations that are due to changes in exchange rates between the U.S. dollarand their functional currency as “foreign currency translation” in “accumulatedother comprehensive income” in the accompanying consolidated statements ofstockholders’ equity and comprehensive income. Gains and losses fromtransactions and translation of assets and liabilities denominated incurrencies other than the functional currency of the international operationare recorded in results of operations as “other expense (income).”

**B.**   INVESTING ACTIVITY

**DerivativeInstruments**

***Interest Rate***

During the three-year period ended December 31,2005, we maintained interest rate derivative instruments for the purpose ofmitigating interest rate risk on customer funds. The counterparties to thesearrangements were commercial banks with debt ratings of A or better. Thesearrangements, which did not require collateral, required the banks to pay usthe amount by which a one-month LIBOR index of short-term interest rates fellbelow a specified floor strike level. Alternatively, when this index exceeded aspecified cap strike level, we paid out to the banks the excess above the capstrike level.

As of December 31, 2005,we held no such instruments. On February 4, 2005, we disposed of ourinterest rate derivative instruments for cash proceeds of $21.0 whichrepresented the fair market value of the contracts on the disposal date. FromDecember 31, 2004 to the disposal date, we received $3.5 in cash forsettlements on these derivative instruments. The $2.3 difference between theDecember 31, 2004 carrying value of $26.8 and the $24.5 total cashreceived was recorded as a loss on interest rate derivative instruments in thefirst quarter of 2005. No interest rate derivative instruments weresubsequently entered into during 2005.

76

----

At December 31, 2004, we held interest ratederivative instruments with an aggregate notional amount of $800.0. Theseinterest rate derivative instruments had remaining terms of 6 to 35 months,floor strike levels ranging from 3.85% to 6.00% (averaging 4.99%) and capstrike levels ranging from 3.85% to 7.08% (averaging 5.69%). These derivativeinstruments did not qualify for hedge accounting treatment so cash settlementsand changes in fair value were included in results of operations as “(gain)loss on derivative instruments.” The fair market value of our interest ratederivative instruments was $26.8 at December 31, 2004.

***Fuel Price***

The revenue and net income of Comdata’s transportationservices business is exposed to variability based on changes in fuel (bothdiesel fuel and gasoline) prices. For a portion of its transportation servicescustomers, Comdata earns fee revenue for card transactions based on apercentage of the total amount of each fuel purchase. An increase or decreasein the price of fuel increases or decreases the total dollar amount of fuelpurchases and Comdata revenue. Accordingly, we estimate that for each 10¢change in the average price per gallon of diesel fuel per year, Comdata revenueand pre-tax earnings are impacted by $1.8, absent the effect of any diesel fuelprice derivative instruments. In addition, we estimate that for each 10¢ changein the average price per gallon of gasoline per year, Comdata revenue andpre-tax earnings are impacted by $0.8, absent the effect of any gasoline pricederivative instruments.

Our fuel price risk management objective is to protectComdata earnings from the effects of falling fuel prices by entering intoderivative instruments that convert the floating price of fuel used in revenuecalculations to a fixed price. During 2004, we entered into a diesel fuel pricederivative instruments covering approximately 66% of our total risk for theperiod July 1, 2004 through December 31, 2004 with a strike price of$1.51 per gallon. For 2005, we covered approximately 100% of our diesel fuelprice risk for the full year with a combination of diesel fuel price derivativeinstruments with similar terms and an average strike price of $1.92 per gallon.During 2005, there were payments of $8.2 to counterparties as well as anunrealized loss of $1.1, resulting in a $9.3 net loss reported in (gain) losson derivative instruments on our consolidated statement of operations. During2004, there were payments of $2.2 to counterparties as well as an unrealizedgain of $0.8, resulting in a $1.4 net loss reported in (gain) loss onderivative instruments on our consolidated statement of operations. Our dieselfuel price derivative instruments are carried at fair market value and werereported as an asset of $0.5 and a liability of $0.8 recorded in othernoncurrent liabilities at December 31, 2005.

We continuously monitor fuel price volatility and thecost of derivative instruments. In October 2005, we entered into a dieselfuel price derivative instrument with a strike price of $2.61 per gallon onapproximately 20% of our estimated diesel fuel price exposure effective from January 1until December 31, 2006. In January 2006, we entered into additionaldiesel fuel price derivative instruments bringing the total risk covered in2006 to 80% of our anticipated diesel fuel price related earnings exposure withan average strike price of $2.55 per gallon effective until December 31,2006. We expect to carry these diesel fuel price derivative instruments at fairmarket value for 2006.

77

----

**Investments and Acquisitionsof Businesses**

At December 31,2005 and 2004, we held the following publicly-held investments that wereaccounted for under SFAS 115, “Accounting for Certain Investments in Debt andEquity Securities” as “available for sale,” and privately-held investments thatwere accounted for on a cost basis:

| **Investment**                                                 | ** ** | ** **  | ** ** | ** ** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------|------------|-------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **Holding** | ** ** | **Amount** | ** ** | **% Owned**                | ** ** | **Amount**                      | ** ** | **% Owned** | ** ** |
| The Ultimate  Software Group, Inc. (“Ultimate”) |       | Public      |       |       | $          | 6.5                             |       |                            | under 5%   |   |   | $ | 7.7 |   |   | under 5% |   |
| U.S.I. Holdings  Corporation (“USIH”)                |       | Public      |       |       | —     |                            |       | —                          |       |   | 2.3 |   |   | under 5% |   |
| Priority  Transportation                                       |       | Private     |       |       | 2.5        |                            |       | under 5%                        |       |   | 2.5 |   |   | under 5% |   |
| iSarla, Inc.                                              |       | Private     |       |       | 1.6        |                            |       | 19.9%                           |       |   | 1.6 |   |   | 19.9% |   |
| ProfitPoint, Inc.                                         |       | Private     |       |       | 1.5        |                            |       | 17.5%                           |       |   | 1.5 |   |   | 17.5% |   |
| SASH Management,  LLC                                          |       | Private     |       |       | 0.6        |                            |       | 19.9%                           |       |   | 0.6 |   |   | 19.9% |   |
| Other                                                          |       | Private     |       |       | 0.2        |                            |       |                            |       |   | 0.2 |   |   |   |   |
| Total Investments                                              |       |        |       |       | $          | 12.9                            |       |                            |       |   |   | $ | 16.4 |   |   |   |   |

 

***Publicly held investments***

At December 31, 2005, we held 340,922 shares ofUltimate common stock. During 2005, we sold 290,789 shares of Ultimate commonstock for proceeds of $4.8 and a net gain of $3.6. During December 2005,we paid $0.3 to exercise a warrant for 75,000 shares of Ultimate common stock. Alsoduring December 2005, we sold all the remaining 199,311 shares of USIHcommon stock for proceeds of $2.7 and a net gain of $0.7. Gains and losses onsales of marketable securities are reported in other expense (income) in ourconsolidated statements of operations.

At December 31, 2004, we held 556,711 shares ofUltimate common stock and a warrant to purchase an additional 75,000 Ultimatecommon shares at a price of $4.00 per share. In 2004, we sold 193,289 shares ofUltimate common stock for $2.4 and a net gain of $1.6. In addition, we held199,311 shares of common stock of USIH at December 31, 2004. In 2004, wesold 582,758 shares of common stock of USIH for $8.7 and a net gain of $2.9.

TheUltimate and USIH securities are treated as “available for sale” securities. Thecarrying value of these securities has been adjusted at each balance sheet dateto reflect the market price reported by the stock exchange that lists thosesecurities. The amount of this change is reported as unrealized gain or lossfrom marketable securities in accumulated other comprehensive income. The costand fair values of securities available for sale at December 31, 2005 and2004 were as follows:

| ** **                       | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Fair Value** | ** ** |
|----------------------------------|------------|----------|------------|------------------------------|------------|---------------------|------------|
| **At December 31, 2005**    |       |     |       |                         |       |                |       |   |   |   |   |
| Ultimate                         |       | $        | 1.4        |                         |       | $                   | 5.1        |   |   |   | $ | 6.5 |   |   |
| **At December 31, 2004**    |       |     |       |                         |       |                |       |   |   |   |   |
| Ultimate                         |       | $        | 2.3        |                         |       | $                   | 5.4        |   |   |   | $ | 7.7 |   |   |
| USIH                             |       | 2.0      |       |                         | 0.3        |                |       |   | 2.3 |   |   |
| Total at  December 31, 2004 |       | $        | 4.3        |                         |       | $                   | 5.7        |   |   |   | $ | 10.0 |   |   |

 

78

----

***Acquisitions of businesses, including privately heldinvestments***

In the first quarter of2005, Comdata acquired Tranvia, Inc. (“Tranvia”), a merchant processor forcredit, debit, prepaid and e-commerce activities, for $8.2, and recordedgoodwill of $5.1, other intangible assets totaling $3.4 and net liabilities of$0.3. The results of operations for Tranvia have been included in ourconsolidated reports of operations since the date of acquisition. During 2005,we also paid out $1.8 in payments related to agreements on prior acquisitions.

In April 2004, we paid $11.0 for the acquisitionof Recruiting Solutions International, Inc., a provider of web-basedrecruiting products. This acquisition resulted in the recording of $10.1 ofgoodwill and intangible assets. We also paid $0.9 for a customer base for COBRAservices from a major insurance company near the end of the first quarter of2004. In July 2004, we paid net cash of $0.7 to acquire ITS InformationTechnology Systems Ltd., a leading provider of HR software solutions inIreland, and $1.5 for a minority interest in ProfitPoint, Inc., a loyaltyand gift card business. During October 2004, we paid $4.1 to acquireDatamark Technologies, Inc., a provider of stored value and customerloyalty programs. During December 2004, we paid $1.1 for certain customerrelationships from Stone Partners, Inc. These acquisitions were all forthe benefit of our HRS business segment except for Datamark Technologies, Inc.and ProfitPoint, Inc. which were for the benefit of Comdata.

Pro forma financialinformation relating to these acquisitions has not been presented because theimpact of these acquisitions is not material.

**C.**   SupplementaryData to Statements of Operations

| ** **                                     | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| **Other Expense (Income)**           | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Asset write-downs                              |       | $                                           | 9.1        |   | $ | 3.6 |   | $ | — |   |
| Foreign currency  translation expense (income) |       | 0.2                                         |       | (0.8 | ) | (0.2 | ) |
| Gain on sale of  assets                        |       | (0.5                                        | )          | (0.6 | ) | (1.6 | ) |
| Gain on sale of  marketable securities         |       | (4.3                                        | )          | (4.5 | ) | (3.4 | ) |
| SourceWeb exit  costs, net of recoveries       |       | —                                      |       | 28.5 |   | — |   |
| Other expense                                  |       | —                                      |       | 0.3 |   | 2.7 |   |
| Total                                          |       | $                                           | 4.5        |   | $ | 26.5 |   | $ | (2.5 | ) |
|                                                |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

**Asset write-downs**

During 2005, we had assetwrite-downs of $9.1, of which $7.8 was due to abandonment of software projects.During 2004, we had asset write-downs of $3.6, of which $3.2 was due toabandonment of software projects.

**SourceWeb exitcosts, net of recoveries**

SourceWeb was a payrollplatform within the small business division of our HRS business segment. On December 31,2004, we sold certain customer relationships and other assets associated withour SourceWeb payroll platform (the “SourceWeb Assets”) to RSM McGladrey EmployerServices, Inc. (“RSM”) for $4.0 pursuant to the terms and conditions of anAsset Purchase Agreement. In accordance with the provisions of SFAS 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” we recorded a $9.1pre-tax impairment charge on assets associated with this platform representingthe excess of net book value of the SourceWeb Assets over sale proceeds. Theimpaired assets primarily consisted of a purchased software license fromUltimate and capitalized software development costs. In addition to this 

79

----

assetimpairment, we also recorded a $19.4 pre-tax loss on disposal which comprisedthe fair value of the future minimum royalty obligations to Ultimate of $19.2and $0.2 of employee severance costs.

***D.***   TRADE AND OTHER RECEIVABLES,NET

| ** **                                                                   | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Trade receivables  from customers                                            |       | $                     | 585.5      |   | $ | 508.0 |   |
| Interest  receivable from invested customer funds                            |       | 20.7                  |       | 17.5 |   |
| Other                                                                        |       | 7.8                   |       | 1.5 |   |
| Total gross  receivables                                                     |       | 614.0                 |       | 527.0 |   |
| Less: long-term  portion of trade receivables                                |       | (0.4                  | )          | (1.0 | ) |
| Less: long-term  portion of interest receivable from invested customer funds |       | (6.7                  | )          | — |   |
| Less: allowance  for doubtful accounts                                       |       | (13.9                 | )          | (13.3 | ) |
| Less: reserve for  sales adjustment                                          |       | (8.2                  | )          | (7.0 | ) |
| Trade and other  receivables, net                                            |       | $                     | 584.8      |   | $ | 505.7 |   |

 

A portion of the trade receivables serve as collateralunder the Comdata receivables securitization facility discussed in Note F, “Financing.”The aggregate amount serving as collateral under this facility amounted to$230.2 and $191.9 at December 31, 2005 and 2004, respectively. Thelong-term portion of trade receivables is included in other noncurrent assetson our consolidated balance sheets. The carrying value of trade and otherreceivables, net approximates fair value.

The interest earnings oninvested customer funds is included in revenue as discussed in Note G, “CustomerFunds.”

| **Allowance for Doubtful Accounts** | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Balance at  beginning of year                      |       | $                                           | 13.3       |   | $ | 15.4 |   | $ | 18.4 |   |
| Provision for  doubtful accounts                   |       | 11.2                                        |       | 9.7 |   | 11.2 |   |
| Charge-offs, net  of recoveries                    |       | (10.6                                       | )          | (11.8 | ) | (14.2 | ) |
| Balance at end of year                             |       | $                                           | 13.9       |   | $ | 13.3 |   | $ | 15.4 |   |

 

80

----

**E.**   CAPITAL ASSETS

| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Capital Assets**                                                              | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Property, Plant and Equipment*                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Land                                                                                 |       | $                     | 3.0        |   | $ | 10.2 |   |
| Machinery and  equipment (accumulated depreciation of $200.8 and $214.7)             |       | 264.8                 |       | 288.6 |   |
| Buildings and  improvements (accumulated depreciation of $44.3 and $44.7)            |       | 98.8                  |       | 101.5 |   |
| Total property,  plant and equipment                                                 |       | 366.6                 |       | 400.3 |   |
| Accumulated  depreciation                                                            |       | (245.1                | )          | (259.4 | ) |
| Property, plant  and equipment, net                                                  |       | $                     | 121.5      |   | $ | 140.9 |   |
| *Goodwill,  net of amortization*                                                     |       |                  |       |   |   |
| At beginning of  year                                                                |       | $                     | 931.8      |   | $ | 918.6 |   |
| Acquisitions in  the current period (Note B)                                         |       | 5.2                   |       | 7.6 |   |
| Translation and  other adjustments                                                   |       | (0.5                  | )          | 5.6 |   |
| At end of year                                                                       |       | $                     | 936.5      |   | $ | 931.8 |   |
| Tax-deductible  goodwill at end of year                                              |       | $                     | 274.1      |   | $ | 270.1 |   |
| *Other  Intangible Assets*                                                           |       |                  |       |   |   |
| Customer lists  and relationships (accumulated amortization of $34.1 and $29.0)      |       | $                     | 56.1       |   | $ | 54.0 |   |
| Trademarks  (accumulated amortization of $0.7 and $50.5)                             |       | 0.9                   |       | 51.1 |   |
| Technology  (accumulated amortization of $51.3 and $76.0)                            |       | 62.3                  |       | 89.8 |   |
| Non-compete agreements  (accumulated amortization of $7.9 and $7.8)                  |       | 10.3                  |       | 12.0 |   |
| Total other  intangible assets                                                       |       | 129.6                 |       | 206.9 |   |
| Accumulated  amortization                                                            |       | (94.0                 | )          | (163.3 | ) |
| Other intangible  assets, net                                                        |       | $                     | 35.6       |   | $ | 43.6 |   |
| *Software  and Development Costs*                                                    |       |                  |       |   |   |
| Purchased software  (accumulated amortization of $47.2 and $44.2)                    |       | $                     | 69.3       |   | $ | 67.5 |   |
| Internally  development software costs (accumulated amortization of $60.1 and $48.5) |       | 109.8                 |       | 100.9 |   |
| Total software  and development costs                                                |       | 179.1                 |       | 168.4 |   |
| Accumulated  amortization                                                            |       | (107.3                | )          | (92.7 | ) |
| Software and development  costs, net                                                 |       | $                     | 71.8       |   | $ | 75.7 |   |
|                                                                                      |            |                       |            |  |  |  |  |  |  |

 

| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| **Depreciation and Amortization**     | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Depreciation of  property, plant and equipment  |       | $                                           | 41.4       |   | $ | 42.3 |   | $ | 43.1 |   |
| Amortization of  other intangible assets        |       | 15.2                                        |       | 56.9 |   | 15.1 |   |
| Amortization of  software and development costs |       | 28.7                                        |       | 25.5 |   | 21.1 |   |
| Total                                           |       | $                                           | 85.3       |   | $ | 124.7 |   | $ | 79.3 |   |
|                                                 |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

In 2004, the CobraServ trademark that was capitalizedas part of our 1999 acquisition of Benefit Services was phased out of operation.As part of this abandonment, we accelerated the amortization of the remainingnet book value of $42.6 throughout 2004 and removed both the asset and therelated accumulated amortization in 2005.

81

----

The weighted averageremaining useful life of the other intangible assets is 2 years (3 years forcustomer lists and relationships, less than one year for trademarks, 2 yearsfor technology and 1 year for non-compete agreements). We estimate thatamortization of other intangible assets held at December 31, 2005 will be$11.7 for 2006, $10.8 for 2007, $5.6 for 2008, $3.9 for 2009, and $1.5 for2010.

**F.**   FINANCING

**Debt and Capital Lease Obligations**

Thetable below presents our debt and capital lease obligations, followed by adiscussion of each of these obligations.

| ** **                                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Debt and Capital Lease Obligations**                                 | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Ceridian  revolving credit facility                                                        |       | $                     | 40.6       |   | $ | — |   |
| Comdata  receivable securitization facility                                                |       | 55.0                  |       | 75.0 |   |
| Ceridian  Centrefile overdraft facility                                                    |       | —                |       | 9.0 |   |
| Total revolving  credit facilities and overdrafts                                          |       | 95.6                  |       | 84.0 |   |
| Capital lease  obligations                                                                 |       | 10.9                  |       | 16.7 |   |
| Total debt and  capital lease obligations                                                  |       | 106.5                 |       | 100.7 |   |
| Less short-term debt and current portions of  long-term debt and capital lease obligations |       | 25.5                  |       | 14.9 |   |
| Long-term obligations,  less current portions                                              |       | $                     | 81.0       |   | $ | 85.8 |   |
|                                                                                            |            |                       |            |  |  |  |  |  |  |

 

***Revolving Credit Facility***

On November 18, 2005, we entered into afive-year, $250.0 revolving credit agreement (“2005 Revolving Credit Facility”)and terminated the existing revolving credit agreement dated January 31,2001. The 2005 Revolving Credit Facility provides for up to $250.0 (subject topossible increase, at our request as authorized by our Board of Directors, toup to $400.0) for a combination of advances and letters of credit until November 18,2010. The interest rate on this facility is 57.5 basis points over theEurocurrency Rate (3.89% at December 31, 2005). This facility includes a $25.0sublimit for swingline loans, a $100.0 U.S. dollar equivalent sublimit forloans made in Canadian dollars to Ceridian Canada (“Canadian subfacility”) anda $50.0 U.S. dollar equivalent sublimit for multicurrency borrowings in certaincurrencies. The Canadian subfacility is to be used to meet the ongoing workingcapital, capital expenditures and general corporate needs of Ceridian Canada. Advancesunder the 2005 Revolving Credit Facility are unsecured. The amount outstandingunder the 2005 Revolving Credit Facility was $40.6 along with $2.8 of lettersof credit at December 31, 2005. As of December 31, 2005, we hadunused borrowing capacity under the 2005 Revolving Credit Facility amounting to$206.6 of which we have designated $55.0 as backup for the amount outstandingat that date under the Comdata receivables securitization facility. The terms ofthe 2005 Revolving Credit Facility require that our consolidated debt must notexceed 50% of our consolidated net worth, as defined in the agreement, as ofthe end of any fiscal quarter and the ratio of earnings before interest andtaxes to interest expense on a rolling four quarter basis must be at least 2.75to 1. The 2005 Revolving Credit Facility also contains covenants that,among other things, limit liens, subsidiary debt, contingent obligations,operating leases, minority equity investments and divestitures. There is norequirement under the terms of the 2005 Revolving Credit Facility agreement tomake any principal payments until the agreement expires on November 18,2010.

82

----

In connection with therepatriation of funds from Ceridian Canada to Ceridian Corporation in December 2005,Ceridian Canada’s net borrowings under the 2005 Revolving Credit Facility as ofDecember 31, 2005 was $40.6. We have classified $20.7 to current based onmanagement’s intent to repay this amount during 2006. The carrying amountapproximates fair value. As of December 31, 2005, we utilized $2.8 of the2005 Revolving Credit Facility for letters of credit leaving an unusedborrowing capacity of $206.6, of which we have designated $55.0 as backup tothe Comdata receivables securitization facility.

***Comdata Receivables Securitization Facility***

In June 2002, Comdata entered into a $150.0receivables securitization facility (the “Comdata Credit Facility”) with athree-year term involving certain of its trade receivables (the “Receivables”).In June 2005, this facility was amended to extend the maturity date to June 15,2008. The Comdata Credit Facility is subject to financial covenants similar tothose included in the 2005 Revolving Credit Facility and consists of two steps.

In the first step, Comdata Funding Corporation (“CFC”),a bankruptcy-remote special purpose subsidiary of Comdata, buys and acceptscapital contributions of the Receivables in transactions intended to constitutetrue sales or other outright conveyances.

In the second step, CFC sells undivided interests inthose Receivables to a third-party multi-seller commercial paper conduit (the “Conduit”)or its liquidity banks (together with the Conduit, “Purchasers”) intransactions reported as secured loans.

Although title to the Receivables passes to CFC underthe first step of the facility and the Receivables are no longer available tosatisfy claims of Comdata’s creditors, Comdata has agreed to act as the servicingagent for the Receivables acquired by CFC in exchange for a servicing fee of 1%per annum on the average outstanding balance of the Receivables. CeridianCorporation has guaranteed Comdata’s performance as both originator of andservicing agent for the Receivables.

CFC may increase or decrease its use of the ComdataCredit Facility up to four times a month provided sufficient qualifiedReceivables exist to support the Purchasers’ investment under the second step. CFCis obligated to pay interest on the invested amount outstanding either at theConduit’s pooled A-1/P-1 commercial paper rate (which was 4.26% at December 31,2005), or, in the event the Conduit is unable to issue commercial paper, at CFC’schoice of the prime rate or LIBOR plus 1.5% per annum. In addition, CFC mustpay a monthly program fee of 0.20% per annum on the average invested amountoutstanding during the preceding month and a monthly facility fee equal to0.20% per annum on 102% of the average facility size (whether used or unused)during the preceding month. Both of these fees are included in interestexpense.

The amount outstandingunder the Comdata Credit Facility at December 31, 2005 and 2004 was $55.0and $75.0, respectively. The carrying amount approximates fair value. Theaggregate amount of Receivables serving as collateral amounted to $230.2 and$191.9 at December 31, 2005 and 2004, respectively. The amount outstandingis accounted for as long-term debt and the Receivables remain on our consolidatedbalance sheet, even though the Receivables are not available to satisfy claimsof creditors of any of the companies other than CFC.

***Other Debt Financing***

At December 31, 2005 and 2004, CeridianCentrefile maintained two overdraft facilities totaling £7.5 million. Therewere no amounts outstanding as of December 31, 2005. The balanceoutstanding as of 

83

----

December 31, 2004 was£4.7 million ($9.0). The overdraft facility in the amount of £6.5 million is inthe process of being renewed.

In addition to theCanadian subfacility, Ceridian Canada had available at December 31, 2005and 2004 a committed bank credit facility that provided up to CDN $5.0 millionfor issuance of letters of credit and guarantees that is renewed annually bythe granting bank. The amounts of letters of credit outstanding under thisfacility were CDN $4.1 million ($3.5) at December 31, 2005 and CDN $1.0million ($0.7) at December 31, 2004.

***Capital Lease Obligations***

During 2003, we entered into two leasing agreementswith different lessors related to data storage technology. One arrangementinvolved the sale and leaseback of storage equipment acquired by us. Wereceived $6.3 in cash proceeds from the sale of the equipment, which isreported as an investing cash inflow. We accounted for the leaseback of thisequipment, which has a 3-year term commencing on May 1, 2003 and anegligible residual value, as a capital lease. We recorded the capital leaseasset in machinery and equipment at $6.5, net of a deferred gain, and therelated capital lease obligation in long-term debt at $6.9 with no effect oncash flows. The carrying value of the capital lease asset is being amortized ona straight line basis over the term of the lease.

The other leasingarrangement involved the replacement of data storage equipment we owned orleased. Under this arrangement, we received $5.8 as cash proceeds from the saleof owned equipment at its carrying value, which is reported as an investingcash inflow. We accounted for the lease of new storage equipment, which has a 5-yearterm commencing on June 1, 2003 and negligible residual value, as acapital lease. We recorded the capital lease asset in machinery and equipmentat $13.4, net of a deferred gain, and the capital lease obligation in long-termdebt at $15.3 with no effect on cash flows. The lease allows us access toincreased levels of data storage capacity at months 10 and 22 according to acontractual schedule that correlates additional capacity with the lease paymentschedule.

***Equity Activities***

On July 27, 2005, ourBoard of Directors authorized the Company to repurchase up to 20,000,000additional shares of common stock. The repurchase program is being effectedfrom time to time, depending on market conditions and other factors, throughopen market purchases and privately negotiated transactions. During 2005, werepurchased 10,736,450 shares of our common stock for $222.3 on the open marketat an average net price of $20.71 per share. We also repurchased 4,012,400shares of our common stock during 2004 for $80.3 on the open market at anaverage net price of $20.01. The total remaining authorization under therepurchase program was 15,614,050 shares as of December 31, 2005. Therepurchase program has no set expiration or termination date. We generally useour treasury stock to address our obligations under our stock compensationplans.

**G.**   CUSTOMER FUNDS

In connection with our U.S. and Canadian Payroll andTax Services, we collect funds for payment of payroll and taxes; temporarilyhold such funds in trust until payment is due; remit the funds to the clients’ employeesand appropriate taxing authority; file federal, state and local tax returns;and handle related regulatory correspondence and amendments. In connection withour Benefit Services operation, we receive funds on behalf of our customers forremittances to employees, insurance providers and others. Comdata also holdsnon-interest bearing funds in a trust for its eCash customers.

84

----

We invest the U.S. customer funds primarily in highquality collateralized short-term investments or money market mutual funds. Wemay also invest these funds in U.S. Treasury and Agency securities, AAA ratedasset-backed securities and corporate securities rated A3/A- or better. OurCanadian trust funds are invested in securities issued by the government andprovinces of Canada, highly rated Canadian banks and corporations, asset-backedtrusts and mortgages.

Investment income from invested customer fundsconstitutes a component of our compensation for providing services underagreements with our customers. Investment income from invested customer fundsincluded in revenue amounted to $105.5, $75.6 and $62.2 for the years ended December 31,2005, 2004 and 2003, respectively. Investment income includes realized gainsand losses from sales of customer funds investments. We further discuss ouraccounting for this investment income in the section entitled “RevenueRecognition” of Note A, “Accounting Policies.”

Theamortized cost and fair values of investments of customer funds available forsale at December 31, 2005 and 2004 were as follows:

| ** **                                                                                | ** ** | **Amortized** | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------|------------|---------------------------|------------|------------|------------|
| **Investments of Customer Funds at December 31, 2005** | ** ** | ** **    | ** ** | **Cost**                  | ** ** | **Gain**   | ** ** | **Loss** | ** ** | **Fair Value** | ** ** |
| Money market  securities and other cash equivalents                                       |       |          | $          | 2,705.1                   |       |       | $          | — |   | $ | — |   |   | $ | 2,705.1 |   |   |
| Available for sale  investments:                                                          |       |          |       |                      |       |       |       |   |   |   |   |   |   |
| U.S. government  and agency securities                                                    |       |          | 905.9      |                      |       | 1.4        |       | (11.9 | ) |   | 895.4 |   |   |
| Canadian and  provincial government securities                                            |       |          | 381.2      |                      |       | 9.6        |       | (0.2 | ) |   | 390.6 |   |   |
| Corporate debt  securities                                                                |       |          | 248.0      |                      |       | 1.2        |       | (2.1 | ) |   | 247.1 |   |   |
| Asset-backed  securities                                                                  |       |          | 63.1       |                      |       | 0.6        |       | (0.2 | ) |   | 63.5 |   |   |
| Mortgage-backed  and other securities                                                     |       |          | 29.8       |                      |       | 0.1        |       | (0.2 | ) |   | 29.7 |   |   |
| Total available  for sale investments                                                     |       |          | 1,628.0    |                      |       | 12.9       |       | (14.6 | ) |   | 1,626.3 |   |   |
| Invested customer  funds                                                                  |       |          | 4,333.1    |                      |       | $          | 12.9       |   | $ | (14.6 | ) |   | 4,331.4 |   |   |
| Trust receivables                                                                         |       |          | 9.8        |                      |       |       |       |   |   |   | 9.8 |   |   |
| Total customer funds                                                                      |       |          | $          | 4,342.9                   |       |       |       |   |   |   |   | $ | 4,341.2 |   |   |
|                                                                                           |            |               |            |                           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                                                | ** ** | **Amortized** | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------|------------|---------------------------|------------|------------|------------|
| **Investments of Customer Funds at December 31, 2004** | ** ** | ** **    | ** ** | **Cost**                  | ** ** | **Gain**   | ** ** | **Loss** | ** ** | **Fair Value** | ** ** |
| Money market  securities and other cash equivalents                                       |       |          | $          | 2,619.4                   |       |       | $          | — |   | $ | — |   |   | $ | 2,619.4 |   |   |
| Available for sale  investments:                                                          |       |          |       |                      |       |       |       |   |   |   |   |   |   |
| U.S. government  and agency securities                                                    |       |          | 750.4      |                      |       | 8.8        |       | (0.5 | ) |   | 758.7 |   |   |
| Canadian and  provincial government securities                                            |       |          | 323.0      |                      |       | 14.0       |       | — |   |   | 337.0 |   |   |
| Corporate debt  securities                                                                |       |          | 243.1      |                      |       | 5.3        |       | (0.6 | ) |   | 247.8 |   |   |
| Asset-backed  securities                                                                  |       |          | 77.7       |                      |       | 1.4        |       | (0.3 | ) |   | 78.8 |   |   |
| Mortgage-backed  and other securities                                                     |       |          | 40.0       |                      |       | 0.8        |       | (0.1 | ) |   | 40.7 |   |   |
| Total available  for sale investments                                                     |       |          | 1,434.2    |                      |       | 30.3       |       | (1.5 | ) |   | 1,463.0 |   |   |
| Invested customer  funds                                                                  |       |          | 4,053.6    |                      |       | $          | 30.3       |   | $ | (1.5** **  (1.5 | ) |   | 4,082.4 |   |   |
| Trust receivables                                                                         |       |          | 13.6       |                      |       |       |       |   |   |   | 13.6 |   |   |
| Total customer funds                                                                      |       |          | $          | 4,067.2                   |       |       |       |   |   |   |   | $ | 4,096.0 |   |   |
|                                                                                           |            |               |            |                           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

85

----

Thefollowing represents the gross unrealized losses and the related fair value ofthe investments of customer funds available for sale, aggregated by investmentcategory and length of time that individual securities have been in acontinuous unrealized loss position at December 31, 2005.

| ** **                                     | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**              | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **Unrealized  Losses**                 | ** ** | **Fair  Value**                      | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| U.S. government  and agency securities         |       |                                   | $          | (11.2                                | )          |                   | $          | 718.5 |   |   | $ | (0.7 | ) |   | $ | 25.4 |   |   | $ | (11.9 | ) |   | $ | 743.9 |   |
| Canadian and  provincial government securities |       |                                   | (0.2       | )                                    |       | 32.5                   |       |   | — |   |   | — |   |   | (0.2 | ) |   | 32.5 |   |
| Corporate debt  securities                     |       |                                   | (0.8       | )                                    |       | 64.3                   |       |   | (1.3 | ) |   | 39.3 |   |   | (2.1 | ) |   | 103.6 |   |
| Asset-backed  securities                       |       |                                   | (0.1       | )                                    |       | 2.2                    |       |   | (0.1 | ) |   | 13.2 |   |   | (0.2 | ) |   | 15.4 |   |
| Mortgage-backed  and other securities          |       |                                   | (0.1       | )                                    |       | 16.2                   |       |   | (0.1 | ) |   | 1.5 |   |   | (0.2 | ) |   | 17.7 |   |
| Total available for sale  investments          |       |                                   | $          | (12.4                                | )          |                   | $          | 833.7 |   |   | $ | (2.2 | ) |   | $ | 79.4 |   |   | $ | (14.6 | ) |   | $ | 913.1 |   |

 

Management does not believe any individual unrealizedlosses as of December 31, 2005 represents an other-than-temporaryimpairment. The unrealized losses are primarily attributable to changes ininterest rates and not credit deterioration. We currently have both the intentand ability to hold the securities for the time necessary to recover theamortized cost.

Theamortized cost and fair value of investment securities available for sale at December 31,2005, by contractual maturity are shown below. Expected maturities will differfrom contractual maturities because borrowers may have the right to call orprepay obligations with or without call or prepayment penalties.

| ** **                                                                       | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **Investments of Customer Funds by Maturity Date** | ** ** | **Cost**                        | ** ** | **Fair Value** | ** ** |
| Due in one year  or less                                                         |       | $                               | 2,843.8    |   |   | $ | 2,844.0 |   |   |
| Due in one to  three years                                                       |       | 486.0                           |       |   | 484.1 |   |   |
| Due in three to  five years                                                      |       | 498.1                           |       |   | 492.3 |   |   |
| Due after five  years                                                            |       | 505.2                           |       |   | 511.0 |   |   |
| Total                                                                            |       | $                               | 4,333.1    |   |   | $ | 4,331.4 |   |   |

 

Totalproceeds and gross realized gains and losses from the sale of investmentsecurities available for sale, including calls of securities resulting in again or loss, for each of the three years ended December 31 were:

| ** **   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
| Proceeds     |       | $        | 130.6      |     | $          | 104.3    |       | $ | 36.2 |   |
| Gross gains  |       | $        | 1.7        |     | $          | 3.2      |       | $ | 0.6 |   |
| Gross losses |       | $        | —     |     | $          | (3.1     | )          | $ | — |   |

 

**H.**   INCOME TAXES

In 2005, we favorably settled a tax matter thatresulted in a $13.0 reduction in tax expense. We also repatriated $130.3 ofearnings from Ceridian Canada pursuant to the American Jobs Creation Act of2004 resulting in an additional tax expense of $5.2. In addition, a formeraffiliate settled an audit that resolved our potential tax obligations from aprevious spin-off transaction resulting in a reduction of our tax expense by$5.9. Finally, the expiration of the statue of limitations and otheradjustments to our tax contingent liabilities resulted in a $6.2 reduction inour tax expense. We consider our tax accruals adequate to cover any U.S. andinternational tax deficiencies not recoverable through deductions in futureyears.

86

----

Theincome tax expense for 2004 was lower primarily due to lower earnings. We alsoprovided additional tax expense of $12.3 for a proposed tax adjustment oninternational earnings. We reduced tax expense by $16.3 related to taxsettlements and $7.0 related to a valuation allowance realization.

| ** **                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Components of Earnings and Taxes from Operations** | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| *Earnings Before Income Taxes*                                                     |       |                                        |       |   |   |   |   |
| U.S.                                                                               |       | $                                           | 141.2      |   | $ | 9.1 |   | $ | 121.6 |   |
| International                                                                      |       | 32.6                                        |       | 32.1 |   | 28.6 |   |
| Total                                                                              |       | $                                           | 173.8      |   | $ | 41.2 |   | $ | 150.2 |   |
| *Income Tax Provision*                                                             |       |                                        |       |   |   |   |   |
| Current                                                                            |       |                                        |       |   |   |   |   |
| U.S.                                                                               |       | $                                           | 39.4       |   | $ | 25.9 |   | $ | 4.8 |   |
| State and local                                                                    |       | 2.4                                         |       | (10.8 | ) | (0.1 | ) |
| International                                                                      |       | 15.5                                        |       | 9.0 |   | 12.5 |   |
|                                                                               |       | 57.3                                        |       | 24.1 |   | 17.2 |   |
| Deferred                                                                           |       |                                        |       |   |   |   |   |
| U.S.                                                                               |       | (10.9                                       | )          | (21.9 | ) | 35.7 |   |
| State and local                                                                    |       | (0.9                                        | )          | (1.9 | ) | 2.1 |   |
| International                                                                      |       | 0.4                                         |       | 4.0 |   | (3.6 | ) |
|                                                                               |       | (11.4                                       | )          | (19.8 | ) | 34.2 |   |
| Total                                                                              |       | $                                           | 45.9       |   | $ | 4.3 |   | $ | 51.4 |   |
|                                                                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

|  

** **                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Effective Rate Reconciliation**                         | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| U.S. statutory  rate                                                |       | 35                                          | %          | 35 | % | 35 | % |
| Income tax provision at U.S. statutory rate                         |       | $                                           | 60.8       |   | $ | 14.4 |   | $ | 52.6 |   |
| Tax on  international earnings                                      |       | (13.0                                       | )          | 12.3 |   | — |   |
| Tax settlements                                                     |       | (6.2                                        | )          | (16.3 | ) | (3.9 | ) |
| Tax sharing  agreement settlements                                  |       | (5.9                                        | )          | — |   | — |   |
| Valuation  allowance change                                         |       | 0.6                                         |       | (7.0 | ) | — |   |
| Meals and  entertainment                                            |       | 1.0                                         |       | 1.0 |   | 0.8 |   |
| State income  taxes, net of federal benefit and valuation allowance |       | 3.5                                         |       | 1.0 |   | 1.2 |   |
| Foreign earnings  repatriation                                      |       | 5.2                                         |       | — |   | — |   |
| Other                                                               |       | (0.1                                        | )          | (1.1 | ) | 0.7 |   |
| Income tax  provision                                               |       | $                                           | 45.9       |   | $ | 4.3 |   | $ | 51.4 |   |
|                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

87

----

 

| **Tax Effect of Items That Comprise a Significant Portion of the** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Net Deferred Tax Asset and Deferred Tax Liability**                             | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Deferred Tax Asset*                                                                                                 |       |                  |       |   |   |
| Employment  related accruals                                                                                         |       | $                     | 93.1       |   | $ | 87.1 |   |
| Accrued  liabilities                                                                                                 |       | 16.6                  |       | 21.2 |   |
| Net operating  loss carryforwards                                                                                    |       | 23.9                  |       | 18.7 |   |
| Total gross deferred tax asset                                                                                       |       | 133.6                 |       | 127.0 |   |
| Valuation allowance                                                                                                  |       | (19.4                 | )          | (15.1 | ) |
| Total deferred tax asset                                                                                             |       | 114.2                 |       | 111.9 |   |
| *Deferred  Tax Liability*                                                                                            |       |                  |       |   |   |
| Intangibles                                                                                                          |       | (51.9                 | )          | (65.2 | ) |
| Other                                                                                                                |       | (19.0                 | )          | (25.3 | ) |
| Total deferred tax liability                                                                                         |       | (70.9                 | )          | (90.5 | ) |
| Net deferred tax asset                                                                                               |       | $                     | 43.3       |   | $ | 21.4 |   |
| **Net  Deferred Tax by Geography**                                                                                   |       |                  |       |   |   |
| United States                                                                                                        |       | $                     | 68.1       |   | $ | 48.3 |   |
| International                                                                                                        |       | (24.8                 | )          | (26.9 | ) |
| Total                                                                                                                |       | $                     | 43.3       |   | $ | 21.4 |   |
|                                                                                                                      |            |                       |            |  |  |  |  |  |  |

 

At December 31, 2005, we had total net operatingloss carryforwards of approximately $248.5. Amounts available to reduce futuretaxable income include $9.4 of U.S. federal net operating loss carryforwards,$230.6 of U.S. state net operating loss carryforwards, and $8.5 of internationalnet operating loss carryforwards. If unused, these carryforwards will expirebetween 2006 and 2025.

We have recorded valuation allowances related tocertain state and international net operating losses because it is consideredmore likely than not that these benefits will not be realized. The valuationallowance increased $4.3 from 2004 to 2005. At December 31, 2005, thevaluation allowance relating to state tax operating loss carryforwards wasapproximately $17.9 and the allowance related to international operating losscarryforwards was approximately $1.5. We believe that the remainder of ourdeferred tax asset is realizable.

We consider earnings frominternational subsidiaries to be indefinitely reinvested and accordingly, we donot provide U.S. income taxes or withholding taxes on these earnings. At December 31,2005, due to the distribution of earnings under the American Jobs Creation Actof 2004, we do not have any undistributed earnings from our internationalsubsidiaries.

**I.**   RETIREMENT PLANS

**Pension Benefits**

We provide retirement income benefits to our employeesthrough a combination of defined benefit and defined contribution plans. Ourprincipal pension plan is a contributory (salary reduction) defined benefitplan for U.S. employees that closed to new participants on January 2, 1995.Assets of this plan are held in an irrevocable trust, do not include anyCeridian securities and consist principally of equity securities, U.S.government securities, and other fixed income obligations. Benefits under thisplan are generally calculated on final or career average earnings and years ofparticipation in the plan. Most participating employees are required to permitsalary reduction contributions to the plan on their behalf by the employer as acondition of active participation. Retirees and other former employees areinactive 

88

----

participants in this planand constitute approximately 94% of the plan participants. This plan is fundedin accordance with funding requirements under the Employee Retirement IncomeSecurity Act of 1974, based on determinations of an independent consultingactuary. We made no contribution in 2005 and 2004 to the principal pension plan.We are evaluating making contributions to this plan, the amount and timing of whichwill depend on the final provisions of pension legislation under considerationby Congress at this time. We also sponsor a nonqualified supplemental definedbenefit plan, which is unfunded and provides benefits to selected U.S.employees in addition to the principal pension plan. We expect to makecontributions amounting to $2.4 to the supplemental plan in 2006 to cover 2006payments under the supplemental plan.

In the fourth quarter of 2004, we changed ourmeasurement date for our U.S. pension and postretirement plans from September 30to December 31. We considered the December 31 measurement date to bepreferable since that date allows for the use of more current information indetermining the funded status and net periodic cost as of the end of our reportingyear. We determined the effect of this change with the assistance of ourindependent consulting actuary, which resulted in a reduction of net periodicpension cost of $4.9 as shown in a table later in this discussion. Thereduction in net periodic pension cost was significantly affected by anemployer contribution of $75.0 in December 2003 and by asset growth duringthe fourth quarter of 2004, which effect is heightened by the low level ofactive participants in the principal pension plan.

We provide a funded pension plan for our employees inthe United Kingdom (the “UK Plan”). The UK Plan contains both defined benefitand defined contribution elements. The assets held by the UK Plan on behalf ofits defined benefit participants amounted to £19.6 million ($33.9), at December 31,2005 and consisted primarily of equity securities (85%) and debt securities(15%). The weighted average long-term rate of return on these assets was 7.15%.The investment policy for the UK Plan is to have sufficient monies at all timesto meet its obligations as and when they occur in the future. Effective in October 2003,the UK Plan was amended to freeze the defined benefit element and enhance thedefined contribution element of the plan. For U.S. reporting, this resulted inboth a $1.8 reduction of the projected benefit obligation and an equalreduction in the net unrecognized loss of the plan. The benefit of thisreduction will be amortized through net periodic pension cost over the averageexpected remaining service life of defined benefit participants. We expect tomake contributions to this plan amounting to £856,000 ($1.5) during 2006.

We account for our defined benefit pension plans usingactuarial models required by present accounting rules under SFAS 87, “Employers’Accounting for Pensions.” This model uses an attribution approach thatgenerally spreads the effect of individual events over the service lives of theemployees in the plan. These events include plan amendments and changes inactuarial assumptions such as the expected long-term rate of return on planassets, discount rate related to the benefit obligation, rate of activeparticipants’ compensation increases and mortality rates. The principleunderlying the required attribution approach is that employees render serviceover their service lives on a relatively smooth basis and, therefore, the statementof operations effects of pensions are earned in, and should follow, the samepattern.

One of the principal components of the net periodicpension calculation is the expected long-term rate of return on plan assets. Therequired use of expected long-term rate of return on plan assets may result inrecognized pension income that is greater or less than the actual returns ofthose plan assets in any given year. Over time, however, the expected long-termreturns are designed to approximate the actual long-term returns thatcontribute to the settlement of the liability. Differences between actual andexpected returns are recognized in the net periodic pension calculation overfive years. We use long-term 

89

----

historical actual returninformation, the mix of investments that comprise plan assets, and futureestimates of long-term investment returns by reference to external sources todevelop our expected return on plan assets.

The discount rate assumption used for pension planaccounting is used to determine the benefit obligation and the interest portionof the net periodic pension cost (credit) for the following year. The 2005discount rate for the U.S. pension plans was selected by reference to theMoody’s Aa Corporate Bond Index, the Citigroup Pension Discount Curve and theHewitt Yield Curve. The Hewitt Yield Curve was designed by Hewitt Associates toprovide a means for plan sponsors to value the liabilities of their benefitplans. Similar to the Citigroup Pension Discount Curve, the Hewitt Yield Curveis a hypothetical Aa yield curve represented by a series of annualizedindividual discount rates. Each bond issue underlying the Hewitt Yield Curve isrequired to have a rating of Aa or better by Moody’s Investor Service, Inc. ora rating of AA or better by Standard & Poor’s.

The three reference rates were compared in arriving atthe discount rate for 2005. We determine the assumed rate of compensationincrease based upon our long-term plans for such increases. We will continue toevaluate all of our actuarial assumptions on an annual basis, including theexpected long-term rate of return on assets and the discount rate, and willadjust as necessary. Actual pension expense will depend on future investmentperformance, changes in future discount rates, the level of contributions wemay make and various other factors.

The investment policy for our principal pension planspecifies the objective is to earn the highest possible total returnsconsistent with the preservation of capital and anticipated liquidityrequirements while minimizing the volatility of returns. Target assetallocation ranges specified in the policy are designed to achieve policyobjectives and are based upon actuarial and capital market studies performed byexperienced outside consultants. On a regular basis we rebalance assets tomaintain asset allocations within policy ranges. Within asset categories we usea range of passive and active investment management styles to achieve ourprincipal pension plan’s investment objectives and hire outside managers tomanage all assets. The principal pension plan currently has no allocation toreal estate, derivative instruments, or other alternative investmentstrategies; however a small amount of real estate and venture capitalinvestments from prior investments is shown in “Cash and Other Assets.” Certainasset managers may use futures contracts within limitations to achieveobjectives under their assigned investment mandate. Investment of the principalpension plan assets in securities of Ceridian Corporation is prohibited by theinvestment policy.

In thetable below we present the allocation of assets held for the principal pensionplan, which is by far the largest of our defined benefit plans, as of themeasurement date.

| ** **             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | ** **   | ** ** |
|------------------------|------------|-----------------------|------------|-----------------------|------------|--------------|------------|
| ** **             | ** ** | **2005**              | ** ** | **2004**              | ** ** | **Target %** | ** ** |
| Domestic Equity        |       | $                     | 263.4      |                  | 51.5       | %            | $          | 269.2 |   | 50.5 | % | 50% +/-8 | % |
| Domestic Fixed  Income |       | 169.4                 |       | 33.1                  | %          | 178.4        |       | 33.5 | % | 35% +/-5 | % |
| International  Equity  |       | 78.4                  |       | 15.4                  | %          | 85.4         |       | 16.0 | % | 15% +/-4 | % |
| Total Invested  Assets |       | 511.2                 |       | 100.0                 | %          | 533.0        |       | 100.0 | % | 100 | % |
| Cash and Other  Assets |       | 5.2                   |       |                  |       | 5.5          |       |   |   |   |   |
| Total Assets           |       | $                     | 516.4      |                  |       |         | $          | 538.5 |   |   |   |   |   |

 

The accumulated benefit obligation of all threedefined benefit plans exceeded the fair value of plan assets by $168.8 and$157.9 at December 31, 2005 and 2004, respectively. Under pensionaccounting rules, 

90

----

this condition requiredthat we reclassify the prepaid pension cost related to the plans to recognizethis unfunded liability and record the remainder (net of deferred income taxesand a small intangible asset amount) as a loss in accumulated othercomprehensive income, which reduces stockholders’ equity. The funded status ofthe plans represents the difference between the projected benefit obligationand the plans’ assets at fair value. As of December 31, 2005 and 2004, theplans were underfunded by $193.8 and $181.7, respectively.

The amount included inother comprehensive income arising from the change in the additional minimumpension liability for each of the past three years is presented in theaccompanying consolidated statements of stockholders’ equity and comprehensiveincome. At December 31, 2005 and 2004, our prepaid pension cost assetrepresented $8.9 and $12.8 held in benefit protection trusts for certainnonqualified plan participants and an intangible pension asset of $0.2 and $0.3.We recognized expense of $15.6, $15.2 and $12.7 for the years ended December 31,2005, 2004 and 2003, respectively, with respect to employer contributions toour defined contribution retirement plans.

**BenefitsExpected to be Paid in Future Years as of December 31, 2005**

| **Years Ended December 31** | ** ** |
|--------------------------------------------|------------|
| **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011-2015** | ** ** |
| $46.7                                      |       | $ | 47.1 |   | $ | 48.5 |   | $ | 49.3 |   | $ | 49.9 |   |   | $ | 259.1 |   |   |
|                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

91

----

Theaccompanying tables reflect the combined funded status and net periodic pensioncost (credit) and blended supporting assumptions for the defined benefit elementsof all three plans.

| **Funded Status of Defined Benefit**              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|
| **Retirement Plans at Measurement Date**          | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Accumulated  Benefit Obligation*                                     |       | $                     | 719.1      |   | $ | 727.0 |   |
| *Change  in Projected Benefit Obligation During the Period*           | ** ** |                  |       | ** ** | ** ** |
| Projected benefit obligation at beginning of period                   |       | $                     | 750.8      |   | $ | 697.4 |   |
| Service cost                                                          |       | 4.1                   |       | 3.6 |   |
| Interest cost                                                         |       | 40.9                  |       | 41.8 |   |
| Employee contributions to the UK Plan                                 |       | —                |       | 0.1 |   |
| Currency translation                                                  |       | (5.4                  | )          | 6.1 |   |
| Actuarial (gain) loss                                                 |       | 13.5                  |       | 62.0 |   |
| Benefits paid                                                         |       | (59.8                 | )          | (60.2 | ) |
| Projected benefit obligation at end of period                         |       | $                     | 744.1      |   | $ | 750.8 |   |
| *Change  in Fair Value of Plan Assets During the Period*              |       |                  |       |   |   |
| Plan assets at fair value at beginning of period                      |       | $                     | 569.1      |   | $ | 457.8 |   |
| Actual return on plan assets                                          |       | 37.2                  |       | 88.6 |   |
| Currency translation                                                  |       | (3.5                  | )          | 3.6 |   |
| Employer contributions                                                |       | 7.3                   |       | 79.3 |   |
| Benefits paid                                                         |       | (59.8                 | )          | (60.2 | ) |
| Plan assets at fair value at end of period                            |       | $                     | 550.3      |   | $ | 569.1 |   |
| *Reconciliation  of Prepaid Pension Cost and Total Amount Recognized* |       |                  |       |   |   |
| Funded status of plan                                                 |       | $                     | (193.8     | ) | $ | (181.7 | ) |
| Unrecognized prior service cost                                       |       | 0.1                   |       | — |   |
| Unrecognized net loss                                                 |       | 396.2                 |       | 393.1 |   |
| Total prepaid pension cost                                            |       | $                     | 202.5      |   | $ | 211.4 |   |
| *Balance  Sheet Presentation*                                         |       |                  |       |   |   |
| Prepaid and intangible pension asset                                  |       | $                     | 1.5        |   | $ | 0.3 |   |
| Accrued benefit liability                                             |       | (168.8                | )          | (157.9 | ) |
| Accumulated other comprehensive income, net of tax                    |       | 241.2                 |       | 240.9 |   |
| Deferred income tax                                                   |       | 128.6                 |       | 128.1 |   |
| Total amount  recognized                                              |       | $                     | 202.5      |   | $ | 211.4 |   |
|                                                                       |            |                       |            |  |  |  |  |  |  |

 

| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Assumptions Used in Calculations**        | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate  used to determine net benefit cost (credit) |       | 5.53                                        | %          | 5.99 | % | 6.70 | % |
| Rate of  compensation increase                             |       | 4.00                                        | %          | 4.00 | % | 3.78 | % |
| Expected return  on plan assets                            |       | 8.69                                        | %          | 8.70 | % | 8.70 | % |
| Discount rate used to  determine benefit obligations       |       | 5.53                                        | %          | 5.53 | % | 5.99 | % |
|                                                            |            |                                             |            |  |  |  |  |  |  |

 

92

----

 

| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Net Periodic Pension Cost (Credit)** | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                                               |       | $                                           | 4.1        |   | $ | 3.6 |   | $ | 3.8 |   |
| Interest cost                                              |       | 40.9                                        |       | 41.8 |   | 42.9 |   |
| Expected return  on plan assets                            |       | (46.7                                       | )          | (46.6 | ) | (45.7 | ) |
| Net amortization  and deferral                             |       | 16.2                                        |       | 15.4 |   | 9.0 |   |
| Total before effect of change in measurement date          |       | 14.5                                        |       | 14.2 |   | 10.0 |   |
| Effect of change  attributable to current year             |       | —                                      |       | (4.0 | ) | — |   |
| Effect of change  attributable to prior years              |       | —                                      |       | (0.9 | ) | — |   |
| Total after  effect of change in measurement date          |       | $                                           | 14.5       |   | $ | 9.3 |   | $ | 10.0 |   |
|                                                            |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

**Postretirement Benefits**

We provide health care and life insurance benefits foreligible retired employees, including individuals who retired from operationswe subsequently sold or discontinued. We sponsor several health care plans inthe U.S. for both pre- and post-age 65 retirees. Our contributions to theseplans differ for various groups of retirees and future retirees. Most retireesoutside the U.S. are covered by governmental health care programs, and our costis not significant. As previously described in this Note, we changed themeasurement date for postretirement benefit plans from September 30 to December 31effective for the 2004 reporting year. This change did not have a materialeffect on our postretirement liability or net periodic postretirement benefitcost. We implemented Financial Accounting Standards Board Staff Position No. (“FSP”)106-2, “Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003” in 2004, whichaddressed the accounting for the federal subsidy for the sponsors of singleemployer defined benefit postretirement healthcare plans that commences in 2006.The implementation of FSP 106-2 reduced our accumulated postretirementbenefit obligation by $4.8 and our net periodic postretirement benefit cost for2004 by $0.5.

93

----

Theaccompanying tables present the amounts and changes in the aggregate benefitobligation at the beginning and end of and for each of the last two measurementperiods and the components of net periodic postretirement benefit cost for U.S.plans for the last three years. We do not prefund these costs.

| **Funded Status of Postretirement**                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
| **Health Care and Life Insurance Plans** | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Change in Benefit Obligation*                                    |       |                  |       |   |   |   |   |
| At beginning of period                                            |       |                  | $          | 57.4 |   |   | $ | 61.3 |   |
| Service cost                                                      |       |                  | 0.1        |   |   | 0.1 |   |
| Interest cost                                                     |       |                  | 3.0        |   |   | 3.3 |   |
| Participant contributions                                         |       |                  | 3.2        |   |   | 4.2 |   |
| Actuarial loss (gain)                                             |       |                  | (2.0       | ) |   | (1.9 | ) |
| Benefits paid                                                     |       |                  | (6.2       | ) |   | (9.6 | ) |
| At end of period                                                  |       |                  | $          | 55.5 |   |   | $ | 57.4 |   |
| *Change  in Plan Assets*                                          |       |                  |       |   |   |   |   |
| At beginning of period                                            |       |                  | $          | — |   |   | $ | — |   |
| Company contributions                                             |       |                  | 3.0        |   |   | 5.4 |   |
| Participant contributions                                         |       |                  | 3.2        |   |   | 4.2 |   |
| Benefits paid                                                     |       |                  | (6.2       | ) |   | (9.6 | ) |
| At end of period                                                  |       |                  | $          | — |   |   | $ | — |   |
| *Funded  Status of Plan*                                          |       |                  |       |   |   |   |   |
| Benefit obligation, net                                           |       |                  | $          | 55.5 |   |   | $ | 57.4 |   |
| Unrecognized actuarial gain (loss)                                |       |                  | (8.1       | ) |   | (10.3 | ) |
| At end of period                                                  |       |                  | $          | 47.4 |   |   | $ | 47.1 |   |
|                                                                   |            |                       |            |  |  |  |  |  |  |  |  |

 

| ** **                                                       | ** ** | **Years Ended December 31,** | ** **    |
|------------------------------------------------------------------|------------|---------------------------------------------|---------------|
| **Net Periodic Postretirement Benefit Cost** | ** ** | ** **                                  | ** **    | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                                                     |       | $                                           | ** **0.1 |   | $ | ** **0.1 |   | $ | ** **0.1 |   |
| Interest cost                                                    |       | 3.0                                         |          | 3.3 |   | 3.5 |   |
| Actuarial loss  amortization                                     |       | 0.5                                         |          | 0.3 |   | 0.1 |   |
| Net periodic  benefit cost                                       |       | $                                           | 3.6           |   | $ | 3.7 |   | $ | 3.7 |   |
|                                                                  |            |                                             |               |  |  |  |  |  |  |  |  |  |

 

The assumed health care cost trend rate represents therate at which health care costs are assumed to increase. The assumed healthcare cost trend rate used in measuring the benefit obligation in 2005 is 9.5%for pre-age 65 retirees and 11.5% for post-age 65 retirees. These rates areassumed to decrease gradually to the ultimate health care cost trend rate of5.0% in 2016 for both groups. A one percent increase in this rate wouldincrease the benefit obligation at December 31, 2005 by $3.7 and the aggregateservice and interest cost for 2005 by $0.2. A one percent decrease in this ratewould decrease the benefit obligation at December 31, 2005 by $3.5 and theaggregate service and interest cost for the 2005 measurement period by $0.2. Theweighted average discount rates used in determining the net periodicpostretirement benefit cost were 5.50%, 6.00% and 6.75% for 2005, 2004 and2003, respectively. The weighted average discount rates used in determining thebenefit obligation at the measurement dates were 5.50% for 2005 and 2004. Weused the same discount rate for measuring our postretirement benefit planobligations as for measuring the defined benefit retirement obligations. Due tothe small size of the participant base, the similarity in characteristics ofexpected payment obligations to the defined benefit plan participant base, anddue to 

94

----

very little variability ininterest rates over different time periods, using a different discount rate forthe postretirement benefits plan would not result in a materially differentamount of total benefit obligation.

Theprojected future postretirement benefit payments and future receipts from thefederal subsidy for each of the next five years and the five-year periodfollowing are included in the table below.

| ** ** | ** ** | **Payments** | ** ** | **Receipts** | ** ** |
|------------|------------|--------------|------------|--------------|------------|
| 2006       |       |         | $          | 4.9          |       |   |   | $ | 0.5 |   |   |
| 2007       |       |         | 5.0        |         |       |   | 0.5 |   |   |
| 2008       |       |         | 5.1        |         |       |   | 0.6 |   |   |
| 2009       |       |         | 5.2        |         |       |   | 0.6 |   |   |
| 2010       |       |         | 5.2        |         |       |   | 0.6 |   |   |
| 2011-2015  |       |         | 25.4       |         |       |   | 3.1 |   |   |

 

**J.**   STOCK-BASED COMPENSATION PLANS

During the three-year period ended December 31,2005, we maintained stock-based compensation plans for non-employee directors,officers, employees, consultants and independent contractors.

Our 2004 Long-Term Stock Incentive Plan (“2004 LTSIP”)authorizes the issuance until May 11, 2014 of up to 6,000,000 commonshares in connection with awards of stock options, stock appreciation rights,restricted stock, restricted stock units, dividend equivalents, performanceawards, stock awards and other stock-based awards. Eligible participants in the2004 LTSIP include our employees, officers, consultants, advisors andnon-employee directors.

Our Amended and Restated 2001 Long-Term StockIncentive Plan (“2001 LTSIP”) authorizes the issuance until November 27,2010 of up to 27,000,000 common shares in connection with similar awards. Eligibleparticipants in the 2001 LTSIP include our employees and non-employeedirectors, consultants and independent contractors.

In connection with the approval by our stockholders ofthe 2004 LTSIP, the 2002 Employee Stock Incentive Plan (“2002 ESIP”), underwhich only non-qualified stock options were issued to employees who were notexecutive officers or directors of Ceridian, was terminated on May 12,2004. 41,843 common shares remained available for issuance under the 2002 ESIPat the time of termination. All outstanding awards granted under the 2002 ESIPremained in effect at the time of termination pursuant to the terms of suchawards.

Stock options awarded under the 2004 LTSIP, 2001 LTSIPand 2002 ESIP generally vest annually either over a three-year period or on aspecific date if certain performance criteria were satisfied, have either a 5-yearor 10-year term and have an exercise price that may not be less than thefair market value of the underlying stock at the date of grant.

The Compensation and Human Resources Committee of ourBoard of Directors has the discretion to determine the effect that a change ofcontrol of Ceridian, as defined in the plan agreements and award agreements,will have upon awards made under these plans. Currently, the vesting of equityawards granted under these plans will accelerate upon a change of control ofCeridian.

Our Amended and Restated 2001 Director PerformanceIncentive Plan (“2001 DPIP”), which expired in May 2005, authorized theissuance of up to 350,000 common shares in connection with awards of stockoptions, restricted stock and deferred restricted stock units to ournon-employee directors. 187,608 common shares remained available for issuanceunder the 2001 DPIP at the time of expiration. All 

95

----

outstanding awards underthe 2001 DPIP remained in effect at the time of expiration of this plan. Sincethe expiration of the 2001 DPIP, equity awards are made to non-employeedirectors under the 2004 LTSIP.

Prior to January 1, 2006, an annual grant of anon-qualified stock option to purchase 4,000 shares was made to each eligiblenon-employee director at the time of election or re-election to the Board, withsuch grants becoming fully exercisable six months after the date of grant. Theexercise price of the options was the fair market value of the underlying stockat the date of grant, and the options expire in ten years. Effective January 1,2006, the amount of shares underlying the annual grant of non-qualified stockoptions was increased to 8,000 shares. Such grants will vest over three yearsafter the date of grant. The exercise price of the options will be the fairmarket value of the underlying stock at the date of grant, and the options willexpire in five years.

Additionally, at least 50% of the annual Boardretainer for each non-employee director is provided in the form of restrictedstock, deferred restricted stock units or a combination of the two.Non-employee directors may elect to receive up to 100% of their annual Boardretainer and up to 100% of any Board committee chair fees in the form ofrestricted stock, deferred restricted stock units or a combination of the two.Such restricted stock and deferred restricted stock units are subject toforfeiture on a pro rata basis if a director’s service on the Board terminatesbefore December 31 in the year of grant other than following a change ofcontrol, and the restrictions on transfer of such awards lapse at theconclusion of the director’s service.

A one-time award of restricted stock is made to eachnon-employee director when the director first joins the Board with restrictionson transfer that ordinarily lapse annually over a five-year period. Prior to January 1,2006, the number of shares awarded had a fair market value equal to two andone-half times the then-current annual Board retainer paid to non-employeedirectors. Subsequent to January 1, 2006, the number of shares awardedwill have a fair market value of $150,000.

We have reserved 500,000 common shares for issuanceunder the 2001 Savings-Related Share Option Plan (“2001 SAYE”) stock-basedcompensation plan for our employees in the United Kingdom. At December 31,2005, there remain 60,124 shares of common stock eligible to be purchased underthe 2001 SAYE. No future participation will be permitted in this plan.

Our Amended and Restated Employee Stock Purchase Plan(“ESPP”) was terminated on December 15, 2005. The ESPP provided for theissuance of up to 1,600,000 newly issued or treasury common shares to eligibleemployees of Ceridian. The purchase price of the common shares was 85% of thelesser of the fair market value on either the first day or the last day of theapplicable three-month offering period. 419,359 common shares remainedavailable under the ESPP at the time of termination. The weighted average fairvalue of the amount representing the discount from fair market value for theyears ended December 31, 2005, 2004 and 2003 was $3.65, $4.33 and $3.48per share, respectively.

96

----

Thefollowing table presents stock option, restricted stock and ESPP activity forthe three year period ended December 31, 2005 and weighted average pricesfor stock option activity and outstanding grants.

| **Stock Plans**                           | ** ** | ** **         | ** **          | **Option Price  Per Share** | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** | **Shares  Available** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|------------------------------------------------|------------|--------------------|---------------------|---------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------------|------------|-----------------------------------------|------------|
| At  December 31, 2002                     |       | $                  | 4.80 – $31.6   | 6                                     | 21,108,099 |            | 12,735,927 |            | 8,099,204  |                  |       | $                                       | 16.43      |   |   |
| Granted                                        |       | 13.65 – 21.50 |                | 3,906,790                             |       | —          |       | (3,906,790      | )          |                  | 15.03      |                                    |       |
| Became  exercisable                            |       | 11.88 – 22.22 |                | —                                |       | 3,545,499       |       | —          |       |                  |       |                                    |       |
| Exercised                                      |       | 4.80 – 20.70  |                | (2,725,025                            | )          | (2,725,025      | )          | —          |       |                  | 13.57      |                                    |       |
| Canceled                                       |       | 5.37 – 24.57  |                | (894,185                              | )          | (300,901        | )          | 894,185         |       |                  | 16.59      |                                    |       |
| Expired                                        |       | 5.37 – 18.66  |                | (74,161                               | )          | (74,161         | )          | 74,161          |       |                  | 18.66      |                                    |       |
| ESPP purchases                                 |       | —             |                | —                                |       | —          |       | (308,879        | )          |                  |       |                                    |       |
| Restricted stock,  net                         |       | —             |                | —                                |       | —          |       | (213,007        | )          |                  |       |                                    |       |
| At  December 31, 2003                     |       | $                  | 4.80 – $31.6   | 6                                     | 21,321,518 |            | 13,181,339 |            | 4,638,874  |                  |       | $                                       | 16.57      |   |   |
| Authorized, net                                |       | —             |                | —                                |       | —          |       | 6,558,157       |       |                  |       |                                    |       |
| Granted                                        |       | $                  | 18.00 – $22.64 |                                  | 3,291,708  |            | —     |            | (3,291,708 | )                     |       | $                                       | 20.59      |   |   |
| Became exercisable                             |       | 8.96 – 22.22  |                | —                                |       | 4,250,193       |       | —          |       |                  |       |                                    |       |
| Exercised                                      |       | 4.80 – 21.95  |                | (3,096,035                            | )          | (3,096,035      | )          | —          |       |                  | 15.19      |                                    |       |
| Canceled                                       |       | 13.71 – 24.57 |                | (937,292                              | )          | (236,367        | )          | 790,147         |       |                  | 18.18      |                                    |       |
| Expired                                        |       | 8.77 – 8.96   |                | (3,533                                | )          | (3,533          | )          | 3,533           |       |                  | 8.81       |                                    |       |
| ESPP purchases                                 |       | —             |                | —                                |       | —          |       | (209,075        | )          |                  |       |                                    |       |
| Restricted stock,  net                         |       | —             |                | —                                |       | —          |       | (153,252        | )          |                  |       |                                    |       |
| At  December 31, 2004                     |       | $                  | 7.81 – $31.6   | 6                                     | 20,576,366 |            | 14,095,597 |            | 8,336,676  |                  |       | $                                       | 17.34      |   |   |
| Expirations of  Director & ESPP Plans |       | —             |                | —                                |       | —          |       | (606,967        | )          |                  |       |                                    |       |
| Granted                                        |       | $                  | 17.20 – $24.14 |                                  | 3,467,235  |            | —     |            | (3,467,235 | )                     |       | $                                       | 18.26      |   |   |
| Became  exercisable                            |       | 13.65 – 22.64 |                | —                                |       | 3,350,569       |       | —          |       |                  |       |                                    |       |
| Exercised                                      |       | 7.81 – 24.09  |                | (5,688,991                            | )          | (5,688,991      | )          | —          |       |                  | 15.73      |                                    |       |
| Canceled                                       |       | 13.71 – 28.94 |                | (1,780,876                            | )          | (595,962        | )          | 1,600,615       |       |                  | 19.19      |                                    |       |
| Expired                                        |       | 15.55 – 15.55 |                | (1,228                                | )          | (1,228          | )          | 1,228           |       |                  | 15.55      |                                    |       |
| ESPP purchases                                 |       | —             |                | —                                |       | —          |       | (196,932        | )          |                  |       |                                    |       |
| Restricted stock,  net                         |       | —             |                | —                                |       | —          |       | (88,780         | )          |                  |       |                                    |       |
| At December 31,  2005                     |       | $                  | 11.88 – $31.6  | 6                                     | 16,572,506 |            | 11,159,985 |            | 5,578,605  |                  |       | $                                       | 17.92      |   |   |

 

Common shares reserved for future issuance under allplans at December 31, 2005 were 22,211,235.

97

----

Additionalinformation on outstanding and exercisable stock options by exercise pricerange as of the end of the current year is disclosed in the following table.

| **Stock Option Information as of December 31, 2005** | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices ($)**                                    | ** ** | ** **                   | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $11.88 – $13.71                                                                    |       | 310,373                      |       |                         | 0.35       |   |   |   | $ | 13.61 |   |   | 307,040 |   |   | $ | 13.61 |   |   |
| $13.83 – $14.55                                                                    |       | 1,863,992                    |       |                         | 2.10       |   |   |   | $ | 14.53 |   |   | 1,145,758 |   |   | $ | 14.53 |   |   |
| $14.59 – $14.85                                                                    |       | 2,078,228                    |       |                         | 3.25       |   |   |   | $ | 14.81 |   |   | 2,078,228 |   |   | $ | 14.81 |   |   |
| $14.89 – $18.11                                                                    |       | 3,616,401                    |       |                         | 1.51       |   |   |   | $ | 17.24 |   |   | 3,528,404 |   |   | $ | 17.24 |   |   |
| $18.16 – $18.16                                                                    |       | 2,867,415                    |       |                         | 4.15       |   |   |   | $ | 18.16 |   |   | 10,000 |   |   | $ | 18.16 |   |   |
| $18.20 – $20.35                                                                    |       | 2,521,895                    |       |                         | 2.66       |   |   |   | $ | 19.87 |   |   | 2,421,687 |   |   | $ | 19.90 |   |   |
| $20.42 – $20.56                                                                    |       | 2,317,910                    |       |                         | 3.13       |   |   |   | $ | 20.56 |   |   | 869,704 |   |   | $ | 20.56 |   |   |
| $20.65 – $31.66                                                                    |       | 996,292                      |       |                         | 2.93       |   |   |   | $ | 22.83 |   |   | 799,164 |   |   | $ | 23.17 |   |   |
| $11.88 – $31.66                                                                    |       | 16,572,506                   |       |                         |       |   |   |   | $ | 17.92 |   |   | 11,159,985 |   |   | $ | 17.67 |   |   |
|                                                                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**K.**   COMMITMENTS AND CONTINGENCIES

**Guarantees and Indemnifications**

As a result of the sale of the SourceWeb Assets in2004, we recorded a pre-tax charge and accrued a liability of $19.2representing the fair value of an associated guaranteed future minimum royaltyobligation to Ultimate. As of December 31, 2005 the remaining liabilitywas $13.9. Future payments of principal and interest under this obligation willamount to $6.3 in 2006, $6.6 in 2007 and $1.7 in 2008.

Our general terms andconditions in customer contracts frequently include a statement indicating wewill indemnify and hold our customer harmless from and against any and allclaims alleging that the services and materials furnished by us violate anythird party’s patent, trade secret, copyright or other intellectual propertyright. We are not aware of any material pending litigation concerning theseindemnities.

**Leasing**

We conduct substantially all of our operations inleased facilities. Most of our leases contain renewal options and requirepayments for taxes, insurance and maintenance.

Substantially all our leasing arrangements forequipment and facilities are operating leases and the rental payments underthese leases are charged to operations as incurred. The amounts in theaccompanying tables do not include capital lease obligations recorded asliabilities.

Ourrental expense and sublease income for each of the three years ended December 31,2005 appear in the following table:

| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| **Rental Expense** | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Rental expense          |       | $                                           | 53.0       |   | $ | 54.2 |   | $ | 54.1 |   |
| Sublease rental income  |       | (0.2                                        | )          | (0.6 | ) | (0.4 | ) |
| Net rental expense      |       | $                                           | 52.8       |   | $ | 53.6 |   | $ | 53.7 |   |
|                         |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

98

----

Ourfuture minimum noncancelable lease payments on existing operating leases at December 31,2005 are presented in the following table:

| **Future Minimum Lease Payments** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                             |       | $          | 43.7       |       |
| 2007                                             |       | 40.8       |       |
| 2008                                             |       | 35.9       |       |
| 2009                                             |       | 28.7       |       |
| 2010                                             |       | 22.3       |       |
| Thereafter                                       |       | 75.6       |       |
|                                                  |            |            |            |            |            |  |

 

**L.**   LEGAL MATTERS

Ceridian and its subsidiaries are involved in a numberof judicial and administrative proceedings considered normal in the course ofour current and past operations, including employment-related disputes,contract disputes, government proceedings, customer disputes, and tort claims.In some proceedings, the claimant seeks damages as well as other relief, which,if granted, would require substantial expenditures on our part.

Some of these mattersraise difficult and complex factual and legal issues, and are subject to manyuncertainties, including the facts and circumstances of each particular action,and the jurisdiction, forum and law under which each action is proceeding.Because of this complexity, final disposition of some of these proceedings maynot occur for several years. As such, we are not always able to estimate theamount of our possible future liabilities. There can be no certainty that wemay not ultimately incur charges in excess of presently established or futurefinancial accruals or insurance coverage. Although occasional adverse decisions(or settlements) may occur, it is management’s opinion that the finaldisposition of these proceedings will not, considering the merits of the claimsand available reserves and insurance and based upon the facts and circumstancescurrently known, have a material adverse effect on our financial position orresults of operations.

**Securities Class Actions**

Since August 6, 2004, six shareholder lawsuitshave been filed against Ceridian Corporation and certain executive officers inUnited States District Court, District of Minnesota. On March 7, 2005,those lawsuits were consolidated into a single case captioned *In re Ceridian Corporation Securities Litigation,*Case No. 04-cv-03704MJD-JGL. This consolidated action purports to be a class action filed on behalfof all persons who purchased or otherwise acquired common stock of the Companybetween April 17, 2003 through and including March 17, 2005, andalleges claims against the Company and certain of its officers under Sections10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffschallenge the accuracy of certain public disclosures made by Ceridian regardingits financial performance, and in particular Ceridian’s accounting for revenueand expenses, capitalization, derivatives, long-term leases and trademarks. Plaintiffsallege, in essence, that the Company’s series of restatements constituted aviolation of Section 10(b) and 20(a) of the Securities ExchangeAct of 1934.

Ceridian believes theseclaims are without merit and intends to vigorously defend itself in thisaction. We cannot estimate the possible loss or range of loss from thesematters.

99

----

**Derivative Actions**

Since August 13, 2004, two shareholders havefiled derivative suits on behalf of Ceridian against Ceridian, as nominaldefendant, its directors and certain of its executive officers in United StatesDistrict Court, District of Minnesota: *James Park, DerivativelyOn Behalf of Ceridian Corporation v. Ronald L. Turner, et al.*, and *Anthony Santiamo, Derivatively On Behalf of Ceridian Corporation v.Ronald L. Turner, et al.*, both served August 19, 2004. Thesecomplaints have been consolidated into a single lawsuit. The consolidatedlawsuit alleges that the Ceridian Board of Directors and certain executiveofficers breached fiduciary duties, through abuse of control, grossmismanagement, waste of corporate assets and unjust enrichment. Thesecomplaints rely on the same factual allegations as the purported class actionshareholder lawsuits described above.

Ceridian willappropriately defend itself in the consolidated action. We cannot estimate thepossible loss or range of loss from these matters.

**SEC Investigation**

On January 22, 2004,we filed a Current Report on Form 8-K, under Item 5, stating that weannounced that we are responding to a document request from the Securities andExchange Commission, and that we have been advised that the SEC has issued aformal order of investigation. In February 2004, we provided documentsresponsive to the SEC. In July 2004, we advised the SEC of theinvestigation being directed by the Audit Committee of our Board of Directors. Wehave kept the SEC advised on a regular basis of the Audit Committee’sinvestigation. On December 10, 2004, we received a further formalconfidential document request from the SEC. The second request broadened theareas of inquiry to include, among other things, Ceridian’s restatements,revenue recognition, capitalization, expense recognition, how we respond to anyinternal ethics complaints, and Ceridian’s accounting policies and procedures. Theformal document requests state that the SEC investigation is a non-public,fact-finding inquiry, and that the investigation and document requests do notmean that the SEC has concluded that we have violated any securities laws. Asis common in SEC investigations, on June 15, 2005, we received a subpoenafrom the SEC seeking certain additional documents that relate to some of theareas of inquiry identified above. The subpoena is consistent withinvestigations of this type and was anticipated. We continue to fully cooperatewith the SEC and are in the process of responding to the SEC’s additionaldocument request and subpoena and cannot estimate when such investigation willconclude.

**M.**   SEGMENT DATA

Ceridian Corporation is an information servicescompany principally in the human resource, transportation and retail markets. OurHRS business enables customers to outsource a broad range of employmentprocesses, from recruitment and applicant screening, to payroll, tax filing,human resource information systems, employee self-service, time and labormanagement, benefits administration, employee assistance and work-lifeprograms, to post-employment health insurance portability compliance, andretirement plan administration. We have human resource solutions operations primarilyin the United States, Canada and the United Kingdom. Our Comdata businessprovides transaction processing, financial services and regulatory complianceservices primarily to the transportation and retail industries. Comdata’sproducts and services include payment processing and the issuance of credit,debit and stored value cards. Our HRS and Comdata business segments aredistinguished primarily by reference to the markets served and the nature ofthe services provided.

100

----

Wemeasure business segment results by reference to earnings before interest andtaxes (“EBIT”) because interest income and interest expense are not allocatedto our segments. Revenue between business segments is not material and iseliminated upon consolidation. The “Other” reporting element includes theunallocated amounts related to our corporate center operations. The assets ofcorporate center operations include cash and equivalents as well as deferredincome tax and pension-related assets and liabilities. Expenses incurred bycorporate center operations are charged or otherwise allocated to the businesssegments. Corporate center costs include medical, workers compensation,casualty and property insurance, retirement plan expenses, treasury services,tax services, audit services, accounting services, general management servicesand other corporate overhead such as occupancy and aircraft costs. Certain ofthese costs are charged to the business segment based on usage and theremainder is allocated on a consistent basis based on a percentage of revenue.For the years ended December 31, 2005, 2004 and 2003, approximately 77% ofsuch costs were allocated to HRS and 23% were allocated to Comdata.

| **Business Segments**                  | ** ** | ** ** | ** ** | **HRS** | ** ** | **Comdata** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|------------|------------|---------|------------|-------------|------------|-----------|------------|-----------|------------|
| Year Ended  December 31, 2005          |       |       |       |    |       |        |       |      |       |      |       |
| Revenue                                     |       | $          | 1,050.1    |    |       | $           | 408.9      |      |       | $         | —     |   | $ | 1,459.0 |   |
| EBIT                                        |       | 44.6       |       |    | 126.9      |        |       | —    |       | 171.5     |       |
| Total assets before customer funds          |       | 1,250.6    |       |    | 778.2      |        |       | 262.3     |       | 2,291.1   |       |
| Customer funds                              |       | 4,322.2    |       |    | 19.0       |        |       | —    |       | 4,341.2   |       |
| Total assets at December 31            |       | 5,572.8    |       |    | 797.2      |        |       | 262.3     |       | 6,632.3   |       |
| Goodwill                                    |       | 814.5      |       |    | 122.0      |        |       | —    |       | 936.5     |       |
| Depreciation and amortization               |       | 68.6       |       |    | 15.8       |        |       | 0.9       |       | 85.3      |       |
| Expended for property, plant and equipment  |       | 23.5       |       |    | 7.3        |        |       | 0.6       |       | 31.4      |       |
| Year Ended  December 31, 2004          |       |       |       |    |       |        |       |      |       |      |       |
| Revenue                                     |       | $          | 964.4      |    |       | $           | 356.0      |      |       | $         | —     |   | $ | 1,320.4 |   |
| EBIT                                        |       | (72.6      | )          |    | 115.6      |        |       | —    |       | 43.0      |       |
| Total assets before customer funds          |       | 1,338.0    |       |    | 650.8      |        |       | 127.3     |       | 2,116.1   |       |
| Customer funds                              |       | 4,079.6    |       |    | 16.4       |        |       | —    |       | 4,096.0   |       |
| Total assets at December 31            |       | 5,417.6    |       |    | 667.2      |        |       | 127.3     |       | 6,212.1   |       |
| Goodwill                                    |       | 814.8      |       |    | 117.0      |        |       | —    |       | 931.8     |       |
| Depreciation and amortization               |       | 110.5      |       |    | 13.3       |        |       | 0.9       |       | 124.7     |       |
| Expended for property, plant and equipment  |       | 25.6       |       |    | 7.0        |        |       | 0.3       |       | 32.9      |       |
| Year Ended  December 31, 2003          |       |       |       |    |       |        |       |      |       |      |       |
| Revenue                                     |       | $          | 894.2      |    |       | $           | 319.7      |      |       | $         | —     |   | $ | 1,213.9 |   |
| EBIT                                        |       | 48.5       |       |    | 104.3      |        |       | —    |       | 152.8     |       |
| Total assets before customer funds          |       | 1,386.1    |       |    | 586.1      |        |       | 55.9      |       | 2,028.1   |       |
| Customer funds                              |       | 3,143.5    |       |    | 9.2        |        |       | —    |       | 3,152.7   |       |
| Total assets at December 31            |       | 4,529.6    |       |    | 595.3      |        |       | 55.9      |       | 5,180.8   |       |
| Goodwill                                    |       | 801.6      |       |    | 117.0      |        |       | —    |       | 918.6     |       |
| Depreciation and amortization               |       | 65.2       |       |    | 13.2       |        |       | 0.9       |       | 79.3      |       |
| Expended for  property, plant and equipment |       | 25.1       |       |    | 4.6        |        |       | 0.8       |       | 30.5      |       |

 

101

----

| ** **                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Reconciliation of EBIT to Earnings before Income Taxes** | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| EBIT                                                                                          |       |                                        |       |   |   |   |   |
| HRS.                                                                                          |       | $                                           | 44.6       |   | $ | (72.6 | ) | $ | 48.5 |   |
| Comdata                                                                                       |       | 126.9                                       |       | 115.6 |   | 104.3 |   |
| Total EBIT                                                                                    |       | $                                           | 171.5      |   | $ | 43.0 |   | $ | 152.8 |   |
| Interest income (expense), net (not allocated to  business segments)                          |       | 2.3                                         |       | (1.8 | ) | (2.6 | ) |
| Earnings before  income taxes                                                                 |       | $                                           | 173.8      |   | $ | 41.2 |   | $ | 150.2 |   |
|                                                                                               |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Revenueby product and services are as follows:

| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| *HRS Revenue*            |       |                                        |       |   |   |   |   |
| Payroll and Tax Services |       | $                                           | 739.9      |   | $ | 674.3 |   | $ | 633.1 |   |
| Benefit Services         |       | 151.1                                       |       | 146.1 |   | 135.9 |   |
| LifeWorks                |       | 159.1                                       |       | 144.0 |   | 125.2 |   |
| Total HRS revenue        |       | $                                           | 1,050.1    |   | $ | 964.4 |   | $ | 894.2 |   |
| *Comdata  Revenue*       |       |                                        |       |   |   |   |   |
| Transportation           |       | $                                           | 284.7      |   | $ | 257.1 |   | $ | 242.0 |   |
| Retail services          |       | 124.2                                       |       | 98.9 |   | 77.7 |   |
| Total Comdata revenue    |       | $                                           | 408.9      |   | $ | 356.0 |   | $ | 319.7 |   |
| Total Revenue            |       | $                                           | 1,459.0    |   | $ | 1,320.4 |   | $ | 1,213.9 |   |

 

Our operations are conducted primarily in the U.S. andrevenue from sales between U.S. and non-U.S. entities is not material. Operationsin Canada and the United Kingdom relate almost entirely to the HRS segment. Geographicdata for or at the end of each of the last three years, presented below, isdetermined by reference to the location of operation.

Revenueand property, plant and equipment by geographic area are as follows:

| ** **                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| *Revenue*                                            |       |                                        |       |   |   |   |   |
| U.S.                                                 |       | $                                           | 1,208.7    |   | $ | 1,087.5 |   | $ | 1,007.4 |   |
| Canada                                               |       | 158.1                                       |       | 141.1 |   | 127.2 |   |
| United Kingdom                                       |       | 92.2                                        |       | 91.8 |   | 79.3 |   |
| Total International                                  |       | 250.3                                       |       | 232.9 |   | 206.5 |   |
| Total Revenue                                        |       | $                                           | 1,459.0    |   | $ | 1,320.4 |   | $ | 1,213.9 |   |
| *Property,  plant and equipment at December 31* |       |                                        |       |   |   |   |   |
| U.S.                                                 |       | $                                           | 106.6      |   | $ | 127.1 |   | $ | 136.8 |   |
| Canada                                               |       | 8.4                                         |       | 8.0 |   | 7.7 |   |
| United Kingdom                                       |       | 6.5                                         |       | 5.8 |   | 3.5 |   |
| Total International                                  |       | 14.9                                        |       | 13.8 |   | 11.2 |   |
| Total Property,  plant and equipment                 |       | $                                           | 121.5      |   | $ | 140.9 |   | $ | 148.0 |   |

 

102

----

**N.**   SUPPLEMENTARY QUARTERLY DATA (UNAUDITED)

| ** **                                      | ** ** | **2005**       | ** ** | **2004**    | ** ** |
|-------------------------------------------------|------------|----------------|------------|-------------|------------|
| ** **                                      | ** ** | **Fourth**     | ** ** | **Third**   | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                      | ** ** | **Quarter(1)** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Revenue                                         |       |           | $          | 379.5       |       |   | $ | 364.1 |   | $ | 358.0 |   | $ | 357.4 |   | $ | 361.3 |   | $ | 328.7 |   | $ | 316.5 |   | $ | 313.9 |   |
| Costs and Expenses                              |       |           |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue                                 |       |           | 200.5      |        |       | 198.9 |   | 199.3 |   | 193.0 |   | 199.6 |   | 192.4 |   | 177.1 |   | 176.1 |   |
| Selling, general  and administrative       |       |           | 115.6      |        |       | 112.3 |   | 109.6 |   | 114.1 |   | 121.2 |   | 121.5 |   | 118.2 |   | 118.4 |   |
| Research and  development                       |       |           | 8.5        |        |       | 6.1 |   | 7.1 |   | 6.4 |   | 6.7 |   | 6.8 |   | 8.1 |   | 4.5 |   |
| (Gain) loss on  derivative instruments          |       |           | (0.9       | )           |       | 3.1 |   | (0.1 | ) | 9.5 |   | 2.9 |   | (7.9 | ) | 19.0 |   | (13.7 | ) |
| Other expense  (income)(2)                      |       |           | 1.6        |        |       | 4.6 |   | (0.7 | ) | (1.0 | ) | 29.0 |   | (0.8 | ) | (2.9 | ) | 1.2 |   |
| Interest income                                 |       |           | (2.4       | )           |       | (2.0 | ) | (2.0 | ) | (1.4 | ) | (0.9 | ) | (0.7 | ) | (0.5 | ) | (0.5 | ) |
| Interest expense                                |       |           | 1.6        |        |       | 1.0 |   | 1.3 |   | 1.6 |   | 1.2 |   | 1.2 |   | 0.9 |   | 1.1 |   |
| Total costs and  expenses                       |       |           | 324.5      |        |       | 324.0 |   | 314.5 |   | 322.2 |   | 359.7 |   | 312.5 |   | 319.9 |   | 287.1 |   |
| **Earnings  (loss) before income taxes**        |       |           | 55.0       |        |       | 40.1 |   | 43.5 |   | 35.2 |   | 1.6 |   | 16.2 |   | (3.4 | ) | 26.8 |   |
| Income tax  provision (benefit)                 |       |           | 8.3        |        |       | 14.4 |   | 10.0 |   | 13.2 |   | (9.4 | ) | 5.3 |   | (1.1 | ) | 9.5 |   |
| **Net  earnings (loss)**                        |       |           | $          | 46.7        |       |   | $ | 25.7 |   | $ | 33.5 |   | $ | 22.0 |   | $ | 11.0 |   | $ | 10.9 |   | $ | (2.3 | ) | $ | 17.3 |   |
| **Earnings (loss) per share(3)**                | ** ** |           |       |        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                           |       |           | $          | 0.32        |       |   | $ | 0.18 |   | $ | 0.23 |   | $ | 0.15 |   | $ | 0.07 |   | $ | 0.07 |   | $ | (0.02 | ) | $ | 0.12 |   |
| Diluted                                         |       |           | $          | 0.32        |       |   | $ | 0.17 |   | $ | 0.22 |   | $ | 0.15 |   | $ | 0.07 |   | $ | 0.07 |   | $ | (0.02 | ) | $ | 0.11 |   |
| **Shares used in calculations (in  thousands)** | ** ** |           |       |        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  shares (basic)                |       |           | 144,737    |        |       | 145,543 |   | 147,826 |   | 149,637 |   | 149,343 |   | 149,098 |   | 148,607 |   | 149,250 |   |
| Dilutive  securities                            |       |           | 2,507      |        |       | 1,929 |   | 1,182 |   | 1,025 |   | 1,237 |   | 1,544 |   | — |   | 2,422 |   |
| Weighted average  shares (diluted)              |       |           | 147,244    |        |       | 147,472 |   | 149,008 |   | 150,662 |   | 150,580 |   | 150,642 |   | 148,607 |   | 151,672 |   |

----

(1)          Certain out-of-periodadjustments were identified in the fourth quarter of 2005 that relate to priorperiods. Upon identification of these out-of-period adjustments, we analyzedtheir effect and concluded that in the aggregate, they were not material to theinterim or annual periods presented.

(2)          In the fourth quarter of2004 we incurred a $28.5 charge related to the sale of the SourceWeb Assets asdescribed in Note C, “Supplementary Data to Statements of Operations.”

(3)          For information on thecalculation of earnings per share, see the section entitled “Earnings per Share”in Note A, “Accounting Policies.”

103

----

 

 

 

 

**Item 9.**                        Changes Inand Disagreements with Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**                Controls andProcedures

**Disclosure Controls and Procedures**

We carried out an evaluation, under the supervisionand with the participation of our management, including our President and ChiefExecutive Officer and our Executive Vice President and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended (“Exchange Act”)), as of December 31,2005**.**As a result of the material weaknessidentified in our “Management’s Report on Internal Control Over FinancialReporting” as set forth in Part II, Item 8 of this report, we have concludedthat as of December 31, 2005, our disclosure controls and procedures were noteffective. However, to address the material weakness described in ourManagement’s Report on Internal Control Over Financial Reporting, we havesignificantly expanded our closing process to include additional analysis andother post-closing procedures to ensure that the financial statements includedin this report fairly present in all material respects our financial condition,results of operations and cash flows for the periods presented.

Other than such actionsnoted below under the heading “Remediation Steps to Address Material Weaknessesand Other Deficiencies in Internal Control Over Financial Reporting,” therehave been no changes to our internal control over financial reporting duringthe quarter ended December 31, 2005 that have materially affected, or arelikely to materially affect, our internal control over financial reportingexcept that during the quarter ended December 31, 2005, we identified andcorrected improper segregation of duties in our tax filing services operation. Suchservices temporarily hold customer funds pending remittance to the appropriatetaxing authorities.

**InternalControl Over Financial Reporting**

Management’s Report onInternal Control Over Financial Reporting and the audit report of KPMG LLP, ourindependent registered public accounting firm, on management’s assessment ofinternal control over financial reporting are included at the beginning of Part II,Item 8 “Financial Statements and Supplementary Data” of this report and areincorporated by reference into this item of the report.

**Remediationof Material Weaknesses Previously Reported**

As discussed in our“Management’s Report on Internal Control Over Financial Reporting” as set forthin Part II, Item 8 “Financial Statements and Supplementary Data” in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2004 (the “2004 Form10-K”), management concluded that, as of December 31, 2004, our internalcontrol over financial reporting was not effective based on the criteria setforth in *Internal Control—Integrated Framework*published by COSO. Our management’s conclusion set forth in the 2004 Form 10-Kresulted from the identification of the following deficiencies in our internalcontrol over financial reporting, each of which, in the determination of ourmanagement, individually constituted a material weakness in our internalcontrol over financial reporting as of December 31, 2004: (1) inadequatecompany-level controls, (2) inadequate financial statement preparation andreview procedures, (3) inadequate financial reporting processes and informationsystems in our United Kingdom subsidiary, (4) inadequate controls associatedwith the accounting for capitalized software costs and related amortization and(5) inadequate controls over complex transactions and accounting matters. Theremedial 

104

----

 

 

 

 

actionsimplemented in 2004 and 2005 related to these material weaknesses are describedbelow in “Remediation Steps to Address Material Weaknesses and OtherDeficiencies in Internal Control Over Financial Reporting.” We believe that thechanges to our internal control over financial reporting described below haveremediated all of the material weaknesses identified in connection with ourassessment of our internal control over financial reporting as of December 31,2004, other than the material weakness in our internal control over financialreporting related to certain complex multiple element revenue arrangements.

**RemediationSteps to Address Material Weaknesses and Other Deficiencies in Internal ControlOver Financial Reporting**

In order to remediate the material weaknesses ininternal control over financial reporting set forth in our 2004 Form 10-Kand to ensure the integrity of our financial reporting processes, weimplemented the following actions in 2004 and 2005:

1.                *Inadequate company-level controls.*

·        continuedto enhance existing policies and procedures and created and implemented newpolicies and procedures to ensure proper conformity with generally accepted accountingprinciples in the United States of America (“U.S. GAAP”) in the financialreporting process;

·        realignedthe finance and accounting functions to improve the execution of identifiedcontrols;

·        hireda new Chief Financial Officer and a new Controller in February 2005 and June 2005,respectively;

·        hiredadditional accounting and internal controls expertise;

·        increasedour internal audit staff to monitor internal controls;

·        tookcertain disciplinary actions and terminated certain individuals;

·        providedadditional training for finance, accounting and certain other personnel in (i) appropriateaccounting for the capitalization and amortization of internally developedsoftware, (ii) month-end expense cut-off and cost and expense accrualprocesses, (iii) revenue recognition and (iv) internal controls andthe related responsibilities under the Sarbanes-Oxley Act of 2002;

·        implementeda formal risk assessment process to identify and monitor risks of the businessand the impact on financial reporting;

·        continuedto emphasize the importance of establishing the appropriate environment inrelation to accounting, financial reporting and internal control over financialreporting, and the importance of identifying areas of improvement;

·        communicatedinternal control roles and responsibilities across the organization;

·        implementeda quarterly internal control certification process;

·        completeda comprehensive review of internal control over financial reporting through ourongoing review being carried out in connection with our efforts to comply with Section 404of 

105

----

 

 

 

 

the Sarbanes-Oxley Act of2002 and the rules issued thereunder, including additional remediation asnecessary; and

·        continuedto enhance the general computer processes, procedures and controls.

2.                *Inadequate financial statement preparation and review procedures.*

·        implementeda review of the appropriate documentation and the approval of journal entriesat corporate and U.S. and U.K. payroll divisions;

·        providedadditional training for finance, accounting and certain other personnel inmonth-end expense cut-off and cost and expense accrual processes;

·        establisheda process to ensure the completeness of the expense cut-off and cost andexpense accrual procedures;

·        establishedquarterly monitoring of expense cut-off by Internal Audit to ensure accuratefinancial reporting;

·        segregatedthe functions of accounting and financial analysis and defined the relatedresponsibilities;

·        implementeda process of accounting review and approval of all changes to the chart ofaccounts to ensure proper classification of expenses;

·        implementeda periodic review of details supporting the consolidated statements ofoperations to determine whether significant costs and expenses are beingclassified appropriately on a historical and recurring basis and to reclassifywhere appropriate;

·        establisheda process to ensure that differences between international accounting standardsand U.S. GAAP are identified and addressed for U.S. GAAP reporting;

·        implementeda review of the calculation and recording of consolidation entries for ourinternational subsidiaries;

·        redesignedour account reconciliation process to ensure that, among other things, suchaccounts are being reconciled on a timely basis, the reconciliations are beingindependently reviewed, any reconciling items are cleared on a timely basis,and the accuracy of the underlying supporting detail, or subledger, has beensubstantiated and independently reviewed; and

·        redesignedthe lease process to ensure accounting personnel (i) determine the propercapital and operating lease classification and (ii) determine theappropriate accounting treatment for lease agreements.

3.                *Inadequate financial reporting processes and information systems in ourUnited Kingdom subsidiary.*

·        redesigned,documented and implemented a new internal control structure;

·        redefined,remediated and tested significant controls around end-user computing and thegeneral computer controls environment;

·        identifiedmitigating controls related to general computer controls still in remediation;

106

----

 

 

 

 

·        retaineda new Chief Executive Officer, Chief Financial Officer and Controller;

·        createdthe new position of Internal Control Manager and retained an individual forthat new position;

·        increasedU.S. management oversight, including direct reporting by the U.K. ChiefFinancial Officer to Ceridian’s Chief Financial Officer;

·        implementeda process to ensure U.S. management oversight on all significant revenue transactions;

·        addedadditional skilled staff to the U.K. Financial Planning and Reporting teamincluding qualified accountants; and

·        providedrevenue recognition training and U.S. GAAP training to key finance staff.

4.                *Inadequate controls associated with the accounting for capitalizedsoftware costs and related amortization.*

·        implementeda new internally developed software capitalization and amortization policy andformal procedures that are consistent with U.S. GAAP;

·        createda project accounting function to centralize the accounting for internallydeveloped software projects;

·        providedadditional training for finance, accounting and certain other personnel inappropriate accounting for the capitalization and amortization of internallydeveloped software;

·        implementeda process to require support for each project capitalized;

·        establisheda Financial Authorization Board to review and approve software projects; and

·        establishedquarterly monitoring of software development projects by Internal Audit toensure accurate financial reporting.

5.                *Inadequate controls over complex transactions and accounting matters.*

a.                  *Inadequate revenue recognition procedures and controls.*

·                     implementeddetailed, new revenue recognition policies at HRS that are consistent with U.S.GAAP;

·                     createda customer revenue accounting function to: (i) review and coordinate theimplementation of new revenue-related pronouncements and regulations and (ii) centralizethe review of significant customer revenue agreements to ensure appropriateaccounting treatment under U.S. GAAP;

·                     createda new position, Director of GAAP Compliance, to provide additional managementmonitoring of significant customer revenue agreements to ensure appropriateaccounting treatment under U.S. GAAP;

·                     createda Revenue Recognition Steering Committee comprised of financial and accountingpersonnel to discuss and review revenue recognition issues at HRS for policyamendments and interpretations; and

107

----

 

 

 

 

·                     providedadditional training for finance, accounting and certain other personnel inrevenue recognition.

b.                 *Statement of Financial Accounting Standards (FAS) 133, “Accounting forDerivative Instruments and Hedging Activities.”*

·       establisheda process for senior management review of all potential derivative transactionsfor proper accounting treatment.

c.                  *Application of FAS 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”*

·       providedadditional training to business and financial personnel on the requirements ofFAS 144; and

·       improvedthe quarterly process to review changes in the business, identified bybusiness, legal and financial senior management, and the related impact onlong-lived assets.

We believe that theabove changes in internal control over financial reporting have remediated thematerial weaknesses in internal control over financial reporting set forth inour 2004 Form 10-K except as disclosed in our “Management’s Report on InternalControl Over Financial Reporting” as set forth in Part II, Item 8 ofthis report. 

To remediate thematerial weakness identified in our “Management’s Report on Internal ControlOver Financial Reporting” as set forth in Part II, Item 8 of this report,we are in the process of implementing the following actions:

•     increasing the frequency anddepth of the Revenue Recognition Steering Committee meetings and improving theresulting documentation;

•     providing additional trainingfor finance, accounting and certain other personnel related to revenuerecognition for complex multiple element revenue arrangements;

•     increasing the scope ofreview of complex multiple element revenue arrangements; and 

•     designing and implementinginternal controls to ensure proper identification and analysis of complexmultiple element revenue arrangements.

Our testing and evaluation of the operatingeffectiveness and sustainability of the changes to our internal control overfinancial reporting with respect to this material weakness have not yet beencompleted as the above-referenced remediation actions are still in theimplementation process. As a result, we may identify additional changes thatare required to remediate or improve this material weakness.

In addition, although wehave remediated the other material weaknesses identified in connection with ourassessment of our internal control over financial reporting as of December 31,2004, “significant deficiencies” and “control deficiencies” (as defined by thePCAOB in its Auditing Standard No. 2) remain in our internal control overfinancial reporting as of December 31, 2005. We will continue to monitor theeffectiveness and sustainability of new controls on an ongoing basis and seekto identify improvements to existing controls.

**Item 9B.**               Other Information.

None.

108

----

**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

We refer you to our Proxy Statement for our 2006Annual Meeting of Stockholders, which will be filed with the SEC within 120days after the close of our fiscal year, and the heading “Election of Directors(Item 1)” for information regarding our directors and nominees for director. Thisinformation is incorporated by reference into this item of the report.

Information regarding our executive officers is foundin Part I, Item 1 of this report under the heading “Executive Officers ofRegistrant.”

We refer you to our Proxy Statement for our 2006Annual Meeting of Stockholders, which will be filed with the SEC within 120days after the close of our fiscal year, and the heading “Meetings of the Boardof Directors and Committees of the Board” for information regarding our “auditcommittee financial expert” and our Audit Committee. This information isincorporated by reference into this item of the report.

We refer you to our Proxy Statement for our 2006Annual Meeting of Stockholders, which will be filed with the SEC within 120days after the close of our fiscal year, and the heading “Other Matters—Section 16(a) BeneficialOwnership Reporting Compliance” for information regarding compliance with Section 16(a) ofthe Securities Exchange Act of 1934. This information is incorporated byreference into this item of the report.

We have a code of conductfor all of our employees, including our principal executive, financial andaccounting officers and our controller, and each of the non-employee directorson our Board of Directors. The Ceridian Corporation Code of Conduct may befound on our web site at *www.ceridian.com*in the “Corporate Governance” section. We intend to satisfy the disclosurerequirement under Item 5.05 of Form 8-K regarding an amendment to,or a waiver from, a provision of the Code of Conduct by our executive officersor directors by posting such information on our website, at the address andlocation specified above.

**Item 11.**                 ExecutiveCompensation

We refer you to our ProxyStatement for our 2006 Annual Meeting of Stockholders, which will be filed withthe SEC within 120 days after the close of our fiscal year, and the headings “DirectorCompensation,” “Executive Compensation” and “Employment Agreements and Changeof Control Arrangements.” This information is incorporated by reference intothis item of the report.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

We refer you to our Proxy Statement for our 2006Annual Meeting of Stockholders, which will be filed with the SEC within 120days after the close of our fiscal year, and the heading “Share OwnershipInformation.” This information is incorporated by reference into this item ofthe report.

109

----

Thefollowing table and accompanying notes provide information about our commonstock that may be issued under all of our existing equity compensation plans asof December 31, 2005.

| ** **                                                  | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                              | ** ** | **(c)**                                                                                                     | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of securities to  be issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average exercise  price of outstanding  options, warrants and  rights** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation plans  (excluding securities reflected in  Column (a))** | ** ** |
| Equity  compensation plans approved by security holders     |       |       | 14,662,069 | (1)                                                                                                                                                  |       |                                                                                                        | $          | 17.83 |   |   |   | 5,578,605 | (2) |   |
| Equity  compensation plans not approved by security holders |       |       | 1,910,437  |                                                                                                                                                 |       |                                                                                                        | $          | 18.61 |   |   |   | 60,124 | (3) |   |
| Total                                                       |       |       | 16,572,506 |                                                                                                                                                 |       |                                                                                                        |       |   |   |   | 5,638,729 |   |   |
|                                                             |            |            |            |                                                                                                                                                      |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

----

(1)          The Ceridian CorporationDeferred Compensation Plan allows executive officers the opportunity to investin various book accounts, including one that tracks the performance of ourcommon stock (referred to as “phantom stock”). Upon distribution, suchparticipants will receive the amounts invested in phantom stock in the form ofshares of Ceridian common stock from either the Ceridian Corporation Amendedand Restated 2001 Long-Term Stock Incentive Plan, the Ceridian Corporation 2004Long-Term Stock Incentive Plan or a successor plan. Column (a) does notinclude the number of shares that are currently credited to participants’phantom stock accounts and would be issued as Ceridian common stock upon acomplete distribution of all amounts in the phantom stock account as of December 31,2005. Furthermore, Column (a) does not include any unvested restrictedstock awards that have been issued.

(2)          Thefollowing number of shares remained available for issuance under each of ourequity compensation plans that have been approved by our stockholders as of December 31,2005. Grants under these plans may be in the form of any of the listed types ofawards:

| **Plan**                                                  | ** ** | ** ** | ** ** | **Number of Shares** | ** ** | **Types of Awards**                                                                                                                                              | ** ** |
|-----------------------------------------------------------|------------|------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Amended and  Restated 2001 Long-Term Stock Incentive Plan |       |       | 1,069,805  |                           |       | Stock options, restricted stock, performance units                                                                                                                         |       |
| 2004 Long-Term  Stock Incentive Plan                      |       |       | 4,508,800  |                           |       | Stock options,  stock appreciation rights, restricted stock, restricted stock units, dividend  equivalents, performance awards, stock awards, and other stock-based awards |       |

 

(3)          In2001, our Board of Directors adopted the Ceridian Corporation 2001Savings-Related Share Option Plan (“2001 SAYE”). The 2001 SAYE has not beenapproved by our stockholders. This plan was available to employees of Ceridian’ssubsidiaries in the United Kingdom and had been approved by Inland Revenueunder a “save-as-you-earn” plan design. Under the 2001 SAYE, employee-participants could commit to save a specifiedamount from after-tax pay for a fixed period (either three or five years). Atthe end of the period chosen, participants have the choice to receive thesavings amount and accumulated tax-free interest credits either in cash or touse the amount to purchase common stock from Ceridian at an exercise priceequal to the market price of the stock as of the beginning of the savingscontract period, less a 15% discount. As of December 31, 2005, 60,124shares of common stock are eligible to be purchased under the 2001 SAYEpursuant to savings schemes that were in effect prior to December 31, 2005.In October 2005, the Compensation and 

110

----

Human ResourcesCommittee determined not to permit future savings schemes****underthe 2001 SAYE.

**Item 13.**                 CertainRelationships and Related Transactions

We refer you to our ProxyStatement for our 2006 Annual Meeting of Stockholders, which will be filed withthe SEC within 120 days after the close of our fiscal year, and the heading “CertainRelationships and Related Transactions.” This information is incorporated byreference into this item of the report.

**Item 14.**                 PrincipalAccounting Fees and Services

We refer you to our Proxy Statement for our 2006Annual Meeting of Stockholders, which will be filed with the SEC within 120days after the close of our fiscal year, and the heading “IndependentRegistered Public Accounting Firm Fees.” This information is incorporated byreference into this item of the report.

111

----

**PART IV**

**Item 15.**                 Exhibits,Financial Statement Schedules

**(a) 1.   Financial Statements ofRegistrant**

We refer you to the “Index to Consolidated FinancialStatements” included in Part II, Item 8 of this report.

**(a) 2.   Financial Statement Schedules ofRegistrant**

None

**(a) 3.   Exhibits**

Thefollowing is a complete list of exhibits filed or incorporated by reference aspart of this report.

| Exhibit | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.01    |       | Amended and Restated Certificate of Incorporation of  Ceridian Corporation, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.02    |       | Amended and Restated  Bylaws of Ceridian Corporation (formerly known as New Ceridian Corporation)  (incorporated by reference to Exhibit 3.2 to Ceridian’s Registration  Statement on Form 10 (File No. 001-16149)).                                                                                                                                                                                                                                                                                                 |
| 4.01    |       | Rights Agreement, dated  as of November 6, 2001, between Ceridian Corporation and The Bank of New  York, as Rights Agent, including the form of Certificate of Designation, Preferences  and Rights of Series A Preferred Stock as Exhibit A, the form of  Rights Certificate as Exhibit B and the Summary of Rights to Purchase  Preferred Stock as Exhibit C (incorporated by reference to  Exhibit 4.1 to Ceridian’s Current Report on Form 8-K filed by  Ceridian on November 6, 2001). |
| 10.01   |       | Distribution Agreement  between Arbitron Inc., formerly known as Ceridian Corporation, and Ceridian  Corporation, formerly known as New Ceridian Corporation, dated  February 14, 2001 (exhibits and schedules omitted) (incorporated by  reference to Exhibit 10.1 to Ceridian’s Registration Statement on  Form 10 (File No. 001-16149)).                                                                                                                                                                     |
| 10.02   |       | Amendment No. 1 to  Distribution Agreement between Arbitron Inc., formerly known as Ceridian  Corporation, and Ceridian Corporation, formerly known as New Ceridian  Corporation, dated March 30, 2001 (exhibits and schedules omitted)  (incorporated by reference to Exhibit 10.02 to Ceridian’s Annual Report  on Form 10-K for the year ended December 31, 2000 (File  No. 001-16149)).                                                                                                           |
| 10.03   |       | Personnel Agreement  between Arbitron Inc., formerly known as Ceridian Corporation, and Ceridian  Corporation, formerly known as New Ceridian Corporation, dated  February 14, 2001 (incorporated by reference to Exhibit 10.2 to  Ceridian’s Registration Statement on Form 10 (File No. 001-16149)).                                                                                                                                                                                                          |
| 10.04   |       | Amendment No. 1 to  Personnel Agreement between Arbitron Inc., formerly known as Ceridian  Corporation, and Ceridian Corporation, formerly known as New Ceridian  Corporation, dated as of April 3, 2001 (incorporated by reference to  Exhibit 10.02 to Ceridian’s Quarterly Report on Form 10-Q,  for the quarterly period ended March 31, 2001).                                                                                                                                                        |
| 10.05   |       | Tax Matters Agreement  between Arbitron Inc., formerly known as Ceridian Corporation, and Ceridian  Corporation, formerly known as New Ceridian Corporation, dated  February 14, 2001 (incorporated by reference to Exhibit 10.3 to  Ceridian’s Registration Statement on Form 10 (File No. 001-16149)).                                                                                                                                                                                                        |

112

----

 

| 10.06  |   | Transition Services Agreement between Arbitron Inc.,  formerly known as Ceridian Corporation, and Ceridian Corporation, formerly  known as New Ceridian Corporation, dated February 14, 2001 (incorporated  by reference to Exhibit 10.4 to Ceridian’s Registration Statement on  Form 10 (File No. 001-16149)). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.07  |   | Sublease Agreement  between Arbitron Inc., formerly known as Ceridian Corporation, and Ceridian  Corporation, formerly known as New Ceridian Corporation, dated  February 14, 2001 (incorporated by reference to Exhibit 10.5 to  Ceridian’s Registration Statement on Form 10 (File No. 001-16149)).            |
| 10.08* |   | Executive Employment  Agreement between Ceridian Corporation and Ronald L. Turner, dated  January 29, 2002 (incorporated by reference to Exhibit 10.08 to  Ceridian’s Annual Report on Form 10-K for the year ended  December 31, 2001).                                                                         |
| 10.09* |   | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and Ronald L.  Turner, dated November 21, 2002 (incorporated by reference to  Exhibit 10.09 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2002).                                            |
| 10.10* |   | Executive Employment  Agreement between Ceridian Corporation and John R. Eickhoff, dated  April 22, 2002 (incorporated by reference to Exhibit 10.01 to  Ceridian’s Quarterly Report on Form 10-Q for the quarterly period  ended March 31, 2002).                                                               |
| 10.11* |   | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and John R.  Eickhoff, dated November 21, 2002 (incorporated by reference to  Exhibit 10.11 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2002).                                            |
| 10.12* |   | Executive Employment  Agreement between Ceridian Corporation and Robert H. Ewald, dated  July 21, 2003 (incorporated by reference to Exhibit 10.02 to  Ceridian’s Quarterly Report on Form 10-Q for the quarter period  ended June 30, 2003).                                                                    |
| 10.13* |   | Mutual Termination  Agreement dated March 25, 2005 between Ceridian Corporation and Robert  H. Ewald (incorporated by reference to Exhibit 10.1 to Ceridian’s  Current Report on Form 8-K dated March 31, 2005).                                                                                                 |
| 10.14* |   | Executive Employment  Agreement between Ceridian Corporation and Gary A. Krow, dated  January 29, 2002 (incorporated by reference to Exhibit 10.11 to  Ceridian’s Annual Report on Form 10-K for the year ended  December 31, 2001).                                                                             |
| 10.15* |   | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and Gary A.  Krow, dated November 21, 2002 (incorporated by reference to  Exhibit 10.13 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2002).                                                |
| 10.16* |   | Executive Employment  Agreement between Ceridian Corporation and Gary M. Nelson, dated  January 29, 2002 (incorporated by reference to Exhibit 10.12 to  Ceridian’s Annual Report on Form 10-K for the year ended  December 31, 2001).                                                                           |
| 10.17* |   | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and Gary M.  Nelson, dated November 21, 2002 (incorporated by reference to  Exhibit 10.15 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2002).                                              |
| 10.18* |   | Executive Employment  Agreement between Ceridian Corporation and Douglas C. Neve, dated March 14,  2005 (incorporated by reference to Exhibit 10.1 to Ceridian’s Current  Report on Form 8-K dated March 14, 2005).                                                                                              |

113

----

 

| 10.19* |   | Ceridian Corporation 2004 Long-Term Stock Incentive  Plan, as amended (incorporated by reference to Exhibit 10.1 to  Ceridian’s Current Report on Form 8-K with the earliest event  reported dated March 8, 2006 and filed with the Securities and Exchange  Commission on March 9, 2006).                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20* |   | Form of Ceridian  Corporation Non-Qualified Stock Option Award Agreement (under the Ceridian Corporation  2004 Long-Term Stock Incentive Plan) (incorporated by reference to  Exhibit 10.2 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated February 17, 2006 and filed with the  Securities and Exchange Commission on February 23, 2006).                                           |
| 10.21* |   | Form of Ceridian  Corporation Restricted Stock Unit Agreement (under the Ceridian Corporation  2004 Long-Term Stock Incentive Plan) (incorporated by reference to  Exhibit 10.1 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated February 17, 2006 and filed with the  Securities and Exchange Commission on February 23, 2006).                                                      |
| 10.22* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (under the Ceridian Corporation  2004 Long-Term Stock Incentive Plan) (incorporated by reference to  Exhibit 10.3 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated February 17, 2006 and filed with the  Securities and Exchange Commission on February 23, 2006).                                                     |
| 10.23* |   | Form of Ceridian  Corporation Non-Qualified Stock Option Award Agreement (for Non-Employee  Director Awards under the Ceridian Corporation 2004 Long-Term Stock Incentive  Plan) (incorporated by reference to Exhibit 10.3 to Ceridian’s Current  Report on Form 8-K with the earliest event reported dated  March 8, 2006 and filed with the Securities and Exchange Commission on  March 9, 2006).                 |
| 10.24* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (for Non-Employee Director  Awards under the Ceridian Corporation 2004 Long-Term Stock Incentive Plan)  (incorporated by reference to Exhibit 10.4 to Ceridian’s Current Report  on Form 8-K with the earliest event reported dated March 8,  2006 and filed with the Securities and Exchange Commission on March 9,  2006).                           |
| 10.25* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (for Non-Employee Director  Retainer Restricted Share Awards under the Ceridian Corporation 2004  Long-Term Stock Incentive Plan) (incorporated by reference to  Exhibit 10.5 to Ceridian’s Current Report on Form 8-K with the  earliest event reported dated March 8, 2006 and filed with the  Securities and Exchange Commission on March 9, 2006). |
| 10.26* |   | Ceridian Corporation  2002 Employee Stock Incentive Plan (incorporated by reference to  Exhibit 10.20 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                                                                                                                                                                          |
| 10.27* |   | Ceridian Corporation  Amended and Restated 2001 Long-Term Stock Incentive Plan (incorporated by  reference to Exhibit 10.13 to Ceridian’s Annual Report on Form 10-K  for the year ended December 31, 2001).                                                                                                                                                                                                                    |
| 10.28* |   | Form of Ceridian  Corporation Non-Statutory Stock Option Award Agreement (under the Amended and  Restated 2001 Long-Term Stock Incentive Plan) (incorporated by reference to  Exhibit 10.14 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                                                                               |
| 10.29* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (under the Amended and Restated  2001 Long-Term Stock Incentive Plan) (incorporated by reference to  Exhibit 10.15 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                                                                                         |

114

----

 

| 10.30* |   | Ceridian Corporation Non-Employee Director  Compensation Program (incorporated by reference to Exhibit 10.2 to  Ceridian’s Current Report on Form 8-K with the earliest event  reported dated March 8, 2006 and filed with the Securities and Exchange  Commission on March 9, 2006).                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.31* |   | Ceridian Corporation  Amended and Restated Employee Stock Purchase Plan (incorporated by reference  to Exhibit 10.02 to Ceridian’s Quarterly Report on Form 10-Q  for the quarterly period ended June 30, 2004).                                                                                                                                                                    |
| 10.32* |   | Ceridian Corporation  Amended and Restated 2001 Director Performance Incentive Plan (incorporated  by reference to Exhibit 10.17 to Ceridian’s Annual Report on  Form 10-K or the year ended December 31, 2001).                                                                                                                                                                    |
| 10.33* |   | Form of Ceridian  Corporation Non-Statutory Stock Option Award Agreement (under the Amended and  Restated 2001 Director Performance Incentive Plan) (incorporated by reference  to Exhibit 10.18 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                              |
| 10.34* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (under the Amended and Restated  2001 Director Performance Incentive Plan) (incorporated by reference to  Exhibit 10.19 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                                        |
| 10.35* |   | Ceridian Corporation  Benefit Equalization Plan, as amended (incorporated by reference to  Exhibit 10.14 to Arbitron Inc.’s (formerly known as Ceridian  Corporation) Annual Report on Form 10-K for the year ended  December 31, 1994 (File No. 1-1969)).                                                                                                                     |
| 10.36* |   | Ceridian Corporation  Benefit Equalization Plan, First Declaration of Amendment (incorporated by reference to  Exhibit 10.18 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2000 (File No. 001-16149)).                                                                                                                                             |
| 10.37* |   | Ceridian Corporation  Benefit Equalization Plan, Second Declaration of Amendment (incorporated by reference to  Exhibit 10.19 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2000 (File No. 001-16149)).                                                                                                                                            |
| 10.38* |   | Ceridian Corporation  Benefit Equalization Plan, Third Declaration of Amendment (incorporated by  reference to Exhibit 10.20 to Ceridian’s Annual Report on Form 10-K  for the year ended December 31, 2000 (File No. 001-16149)).                                                                                                                                             |
| 10.39* |   | Ceridian Corporation  Employees’ Benefit Protection Trust Agreement, dated as of December 1,  1994, between Ceridian Corporation and First Trust National Association  (incorporated by reference to Exhibit 10.15 to Arbitron Inc.’s (formerly  known as Ceridian Corporation) Annual Report on Form 10-K for the  year ended December 31, 1994 (File No. 1-1969)). |
| 10.40* |   | First Declaration of  Amendment to Ceridian Corporation Employees’ Benefit Protection Trust  Agreement, effective as of January 1, 1999, between Ceridian Corporation  and US Bank National Association (incorporated by reference to  Exhibit 10.22 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2000 (File No. 001-16149)).           |
| 10.41* |   | Second Declaration of  Amendment to Ceridian Corporation Employees’ Benefit Protection Trust Agreement,  dated as of March 26, 2001, between Ceridian Corporation and US Bank  National Association (incorporated by reference to Exhibit 10.23 to  Ceridian’s Annual Report on Form 10-K for the year ended  December 31, 2000 (File No. 001-16149)).               |
| 10.42* |   | Third Declaration of  Amendment to Ceridian Corporation Employees’ Benefit Protection Trust  Agreement, dated as of August 1, 2001, between Ceridian Corporation and  US Bank National Association (incorporated by reference to Exhibit 10.02  to Ceridian’s Quarterly Report on Form 10-Q for the quarterly  period ended September 30, 2001).                          |

115

----

 

| 10.43* |   | Ceridian Corporation  Deferred Compensation Plan (2002 Revision) (incorporated by reference to  Exhibit 10.01 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.44* |   | Split Dollar Agreement  between Ronald L. Turner and Ceridian Corporation (incorporated by reference  to Exhibit 10.06 to Ceridian’s Quarterly Report on Form 10-Q  for the quarterly period ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.45* |   | Form of  Indemnification Agreement between Ceridian Corporation and its Directors  (incorporated by reference to Exhibit 10.01 to Ceridian’s Quarterly  Report on Form 10-Q for the quarterly period ended June 30,  2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.46* |   | Ceridian Corporation  2001 Savings-Related Share Option Plan (incorporated by reference to  Exhibit 10.38 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.47  |   | Credit Agreement, dated  as of November 18, 2005, among Ceridian Corporation, as the Borrower, Ceridian  Canada Ltd, as the Canadian Borrower, Bank of America, N.A., as the  Administrative Agent, Swingline Lender and L/C Issuer, Bank of America, N.A.,  acting through its Canada branch, as the Canadian Subfacility Agent, JPMorgan  Chase Bank, NA and Wachovia Bank, National Association, as Co-Syndication  Agents, PNC Bank, National Association and Wells Fargo Bank, National  Association, as Co-Documentation Agents, the other lenders party hereto and  Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager  (schedules omitted)(incorporated by reference to Exhibit 10.1 to  Ceridian’s Current Report on Form 8-K with the earliest event  reported dated November 18, 2005 and filed with the Securities and  Exchange Commission on November 21, 2005). |
| 10.48  |   | Receivable Sales  Agreement, dated as of June 24, 2002, between Comdata Network, Inc.  and Comdata Funding Corporation (incorporated by reference as  Exhibit 10.01 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.49  |   | Receivable Purchase  Agreement, dated as of June 24, 2002, among Comdata Funding Corporation,  Comdata Network, Inc., Jupiter Securitization Corporation, the Financial  Institutions party thereto and Bank One, NA (incorporated by reference to  Exhibit 10.02 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.50  |   | Performance Undertaking,  dated as of June 24, 2002, executed by Ceridian Corporation in favor of  Comdata Funding Corporation (incorporated by reference to Exhibit 10.03  to Ceridian’s Quarterly Report on Form 10-Q for the quarterly  period ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.51  |   | Amendment No. 1 to  Receivables Purchase Agreement entered into as of June 20, 2003 among  Comdata Funding Corporation, Comdata Network, Inc., Jupiter  Securitization Corporation, each Financial Institution party thereto, and  Bank One, NA (incorporated by reference to Exhibit 10.01 to Ceridian’s  Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.52  |   | Amendment No. 2 to  Receivables Purchase Agreement entered into as of June 17, 2004 among  Comdata Funding Corporation, Comdata Network, Inc., Jupiter  Securitization Corporation, each Financial Institution party thereto, and  Bank One, NA (incorporated by reference to Exhibit 10.02 to Ceridian’s  Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

116

----

 

| 10.53 |   | Amendment No. 3 to Receivables Purchase  Agreement and Amendment No. 1 to Performance Undertaking entered into as  of August 4, 2004 among Comdata Funding Corporation, Comdata  Network, Inc., Jupiter Securitization Corporation, each Financial  Institution party thereto, and Bank One, NA (incorporated by reference to  Exhibit 10.01 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 2004).                                                                               |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.54 |   | Amendment No. 4 to  Receivables Purchase Agreement and Amendment No. 2 to Performance  Undertaking entered into as of September 30, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation, each  Financial Institution party thereto, and Bank One, NA (incorporated by  reference to Exhibit 10.02 to Ceridian’s Quarterly Report on  Form 10-Q for the quarterly period ended September 30, 2004).                                                                           |
| 10.55 |   | Amendment No. 5 to  Receivables Purchase Agreement and Amendment No. 3 to Performance  Undertaking entered into as of November 9, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA (incorporated by  reference to Exhibit 10.11 to Ceridian’s Quarterly Report on  Form 10-Q for the quarterly period ended September 30, 2004).                                                                             |
| 10.56 |   | Amendment No. 6 to  Receivables Purchase Agreement and Amendment No. 4 to Performance  Undertaking entered into as of December 31, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA. (incorporated by  reference to Exhibit 10.12 to Ceridian’s Quarterly Report on Form 10-Q  for the quarterly period ended September 30, 2004).                                                                           |
| 10.57 |   | Amendment No. 7 to  Receivables Purchase Agreement and Amendment No. 5 to Performance  Undertaking entered into as of January 14, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and JPMorgan Chase Bank, N.A., as  successor in merger to Bank One, NA (incorporated by reference to  Exhibit 10.13 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 2004).                       |
| 10.58 |   | Amendment No. 8 to  Receivables Purchase Agreement and Amendment No. 6 to Performance  Undertaking entered into as of March 31, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and JPMorgan Chase Bank, N.A., as  successor in merger to Bank One, NA. (incorporated by reference to  Exhibit 10.62 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2004).                                        |
| 10.59 |   | Amendment No. 9 to  Receivables Purchase Agreement and Amendment No. 6 to Performance  Undertaking entered into as of May 15, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and JPMorgan Chase Bank, N.A., as  successor in merger to Bank One, NA (incorporated by reference to  Exhibit 10.02 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended March 31, 2005).                               |
| 10.60 |   | Amendment No. 10 to  Receivables Purchase Agreement entered into as of June 16, 2005 among  Comdata Funding Corporation, Comdata Network, Inc., Jupiter  Securitization Corporation, each Financial Institution party thereto, and  JPMorgan Chase Bank, N.A., as successor in merger to Bank One, NA (incorporated  by reference to Exhibit 10.01 to Ceridian’s Current Report on  Form 8-K with the earliest event reported dated June 16, 2005  and filed with the Securities and Exchange Commission on June 22, 2005). |

117

----

 

| 10.61 |   | Amendment No. 1 to Receivables Sales Agreement  and Amendment No. 11 to Receivables Purchase Agreement entered into as  of November 7, 2005 among Comdata Funding Corporation, Comdata  Network, Inc., each Financial Institution party thereto, Jupiter  Securitization Corporation and JPMorgan Chase Bank, N.A. (incorporated by  reference to Exhibit 10.01 to Ceridian’s Quarterly Report on  Form 10-Q for the quarterly period ended September 30, 2005). |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.01 |   | Subsidiaries of  Ceridian.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 23.01 |   | Consent of Independent  Registered Public Accounting Firm-KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 24.01 |   | Power of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.01 |   | Certification of our  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.02 |   | Certification of our  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.01 |   | Certification of our  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.02 |   | Certification of our  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                           |

----

*                    Managementcontract or compensatory plan or arrangement required to be filed as an exhibitto this report.

We will provide our stockholders with copies of any ofthe exhibits listed above, upon request and payment of our reasonable expensesin furnishing such exhibits. We will also provide to the Securities andExchange Commission, upon request, any exhibit or schedule to any of theforegoing exhibits which has not been filed.

118

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, as of March 16,2006.

|            | **CERIDIAN CORPORATION** |
|------------|--------------------------|
| ** ** | By                       | /s/ RONALD L. TURNER |
| ** ** |                     | Ronald L. Turner |
| ** ** | * *                 | *Chairman, President and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities indicated as of March 16, 2006.

| /s/ RONALD  L. TURNER                                                             |   |                                                                                  | /s/ DOUGLAS  C. NEVE            |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|---------------------------------|--------|
| Ronald L. Turner                                                                  |   | Douglas C. Neve                                                                       |
| *Chairman, President and Chief Executive Officer  (Principal Executive Officer)*  |   | *Executive Vice President and Chief Financial  Officer (Principal Financial Officer)* |
| /s/RANDY W. STROBEL                                                          |   |                                                                                  |                            |   |
| Randy W. Strobel

Vice President and Controller

*(Principal Accounting Officer)* |   |                                                                                  |
| /s/ NICHOLAS D. CHABRAJA                                                          |   |                                                                                  | /s/ RONALD T. LEMAY             |   |
| Nicholas D. Chabraja, *Director*                                                  |   | Ronald T. LeMay, *Director*                                                           |
| /s/ GEORGE R. LEWIS                                                               |   |                                                                                  | /s/ L. WHITE MATTHEWS, III |   |
| George R. Lewis, *Director*                                                       |   | L. White Matthews, III                                                           |
| /s/ ALAN F. WHITE                                                                 |   |                                                                                  |                            |   |
| Alan F. White, *Director*                                                         |   |                                                                                  |

 

119

----

**CERIDIANCORPORATIONANNUAL REPORT ON FORM 10-K**

**Exhibit Index**

| Exhibit | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                          |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.01    |       | Amended and Restated Certificate of Incorporation of  Ceridian Corporation, as amended.                                                                                                                                                                                                                                                                                                  |
| 3.02*   |       | Amended and Restated  Bylaws of Ceridian Corporation (formerly known as New Ceridian Corporation).                                                                                                                                                                                                                                                                                       |
| 4.01*   |       | Rights Agreement, dated  as of November 6, 2001, between Ceridian Corporation and The Bank of New  York, as Rights Agent, including the form of Certificate of Designation,  Preferences and Rights of Series A Preferred Stock as Exhibit A,  the form of Rights Certificate as Exhibit B and the Summary of Rights to  Purchase Preferred Stock as Exhibit C. |
| 10.01*  |       | Distribution Agreement  between Arbitron Inc., formerly known as Ceridian Corporation, and Ceridian  Corporation, formerly known as New Ceridian Corporation, dated February 14,  2001 (exhibits and schedules omitted).                                                                                                                                                            |
| 10.02*  |       | Amendment No. 1 to  Distribution Agreement between Arbitron Inc., formerly known as Ceridian  Corporation, and Ceridian Corporation, formerly known as New Ceridian  Corporation, dated March 30, 2001 (exhibits and schedules omitted).                                                                                                                                       |
| 10.03*  |       | Personnel Agreement  between Arbitron Inc., formerly known as Ceridian Corporation, and Ceridian  Corporation, formerly known as New Ceridian Corporation, dated February 14,  2001.                                                                                                                                                                                                |
| 10.04*  |       | Amendment No. 1 to  Personnel Agreement between Arbitron Inc., formerly known as Ceridian  Corporation, and Ceridian Corporation, formerly known as New Ceridian  Corporation, dated as of April 3, 2001.                                                                                                                                                                      |
| 10.05*  |       | Tax Matters Agreement  between Arbitron Inc., formerly known as Ceridian Corporation, and Ceridian  Corporation, formerly known as New Ceridian Corporation, dated February 14,  2001.                                                                                                                                                                                              |
| 10.06*  |       | Transition Services  Agreement between Arbitron Inc., formerly known as Ceridian Corporation, and  Ceridian Corporation, formerly known as New Ceridian Corporation, dated February 14,  2001.                                                                                                                                                                                      |
| 10.07*  |       | Sublease Agreement  between Arbitron Inc., formerly known as Ceridian Corporation, and Ceridian  Corporation, formerly known as New Ceridian Corporation, dated February 14,  2001.                                                                                                                                                                                                 |
| 10.08*  |       | Executive Employment  Agreement between Ceridian Corporation and Ronald L. Turner, dated January 29,  2002.                                                                                                                                                                                                                                                                         |
| 10.09*  |       | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and Ronald L.  Turner, dated November 21, 2002.                                                                                                                                                                                                                                            |
| 10.10*  |       | Executive Employment  Agreement between Ceridian Corporation and John R. Eickhoff, dated April 22,  2002.                                                                                                                                                                                                                                                                           |
| 10.11*  |       | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and John R.  Eickhoff, dated November 21, 2002.                                                                                                                                                                                                                                            |
| 10.12*  |       | Executive Employment  Agreement between Ceridian Corporation and Robert H. Ewald, dated July 21,  2003.                                                                                                                                                                                                                                                                             |
| 10.13*  |       | Mutual Termination  Agreement dated March 25, 2005 between Ceridian Corporation and Robert  H. Ewald.                                                                                                                                                                                                                                                                               |
| 10.14*  |       | Executive Employment  Agreement between Ceridian Corporation and Gary A. Krow, dated January 29,  2002.                                                                                                                                                                                                                                                                             |
| 10.15*  |       | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and Gary A.  Krow, dated November 21, 2002.                                                                                                                                                                                                                                                |

----

 

| 10.16* |   | Executive Employment  Agreement between Ceridian Corporation and Gary M. Nelson, dated January 29,  2002.                                                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17* |   | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and Gary M.  Nelson, dated November 21, 2002.                                                                        |
| 10.18* |   | Executive Employment  Agreement between Ceridian Corporation and Douglas C. Neve, dated March 14,  2005.                                                                                                      |
| 10.19* |   | Ceridian Corporation  2004 Long-Term Stock Incentive Plan, as amended.                                                                                                                                             |
| 10.20* |   | Form of Ceridian  Corporation Non-Qualified Stock Option Award Agreement (under the Ceridian  Corporation 2004 Long-Term Stock Incentive Plan).                                                               |
| 10.21* |   | Form of Ceridian  Corporation Restricted Stock Unit Agreement (under the Ceridian Corporation  2004 Long-Term Stock Incentive Plan).                                                                          |
| 10.22* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (under the Ceridian Corporation  2004 Long-Term Stock Incentive Plan).                                                                         |
| 10.23* |   | Form of Ceridian  Corporation Non-Qualified Stock Option Award Agreement (for Non-Employee  Director Awards under the Ceridian Corporation 2004 Long-Term Stock Incentive  Plan).                             |
| 10.24* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (for Non-Employee Director  Awards under the Ceridian Corporation 2004 Long-Term Stock Incentive Plan).                                        |
| 10.25* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (for Non-Employee Director  Retainer Restricted Share Awards under the Ceridian Corporation 2004  Long-Term Stock Incentive Plan).             |
| 10.26* |   | Ceridian Corporation  2002 Employee Stock Incentive Plan.                                                                                                                                                          |
| 10.27* |   | Ceridian Corporation  Amended and Restated 2001 Long-Term Stock Incentive Plan.                                                                                                                                    |
| 10.28* |   | Form of Ceridian  Corporation Non-Statutory Stock Option Award Agreement (under the Amended and  Restated 2001 Long-Term Stock Incentive Plan).                                                               |
| 10.29* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (under the Amended and Restated  2001 Long-Term Stock Incentive Plan).                                                                         |
| 10.30* |   | Ceridian Corporation  Non-Employee Director Compensation Program.                                                                                                                                                  |
| 10.31* |   | Ceridian Corporation  Amended and Restated Employee Stock Purchase Plan.                                                                                                                                           |
| 10.32* |   | Ceridian Corporation  Amended and Restated 2001 Director Performance Incentive Plan.                                                                                                                               |
| 10.33* |   | Form of Ceridian  Corporation Non-Statutory Stock Option Award Agreement (under the Amended and  Restated 2001 Director Performance Incentive Plan).                                                          |
| 10.34* |   | Form of Ceridian Corporation  Restricted Stock Award Agreement (under the Amended and Restated 2001  Director Performance Incentive Plan).                                                                    |
| 10.35* |   | Ceridian Corporation  Benefit Equalization Plan, as amended.                                                                                                                                                       |
| 10.36* |   | Ceridian Corporation  Benefit Equalization Plan, First Declaration of Amendment.                                                                                                                                   |
| 10.37* |   | Ceridian Corporation  Benefit Equalization Plan, Second Declaration of Amendment.                                                                                                                                  |
| 10.38* |   | Ceridian Corporation  Benefit Equalization Plan, Third Declaration of Amendment.                                                                                                                                   |
| 10.39* |   | Ceridian Corporation  Employees’ Benefit Protection Trust Agreement, dated as of December 1,  1994, between Ceridian Corporation and First Trust National Association.                                   |
| 10.40* |   | First Declaration of  Amendment to Ceridian Corporation Employees’ Benefit Protection Trust  Agreement, effective as of January 1, 1999, between Ceridian Corporation  and US Bank National Association. |

----

 

| 10.41* |   | Second Declaration of  Amendment to Ceridian Corporation Employees’ Benefit Protection Trust  Agreement, dated as of March 26, 2001, between Ceridian Corporation and  US Bank National Association.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.42* |   | Third Declaration of  Amendment to Ceridian Corporation Employees’ Benefit Protection Trust  Agreement, dated as of August 1, 2001, between Ceridian Corporation and  US Bank National Association.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.43* |   | Ceridian Corporation  Deferred Compensation Plan (2002 Revision).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.44* |   | Split Dollar Agreement  between Ronald L. Turner and Ceridian Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.45* |   | Form of  Indemnification Agreement between Ceridian Corporation and its Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.46* |   | Ceridian Corporation  2001 Savings-Related Share Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.47* |   | Credit Agreement, dated  as of November 18, 2005, among Ceridian Corporation, as the Borrower,  Ceridian Canada Ltd, as the Canadian Borrower, Bank of America, N.A., as the  Administrative Agent, Swingline Lender and L/C Issuer, Bank of America, N.A.,  acting through its Canada branch, as the Canadian Subfacility Agent, JPMorgan  Chase Bank, NA and Wachovia Bank, National Association, as Co-Syndication  Agents, PNC Bank, National Association and Wells Fargo Bank, National Association,  as Co-Documentation Agents, the other lenders party hereto and Banc of  America Securities LLC, as Sole Lead Arranger and Sole Book Manager  (schedules omitted). |
| 10.48* |   | Receivable Sales  Agreement, dated as of June 24, 2002, between Comdata Network, Inc.  and Comdata Funding Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.49* |   | Receivable Purchase  Agreement, dated as of June 24, 2002, among Comdata Funding Corporation,  Comdata Network, Inc., Jupiter Securitization Corporation, the Financial  Institutions party thereto and Bank One, N.A.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.50* |   | Performance Undertaking,  dated as of June 24, 2002, executed by Ceridian Corporation in favor of  Comdata Funding Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.51* |   | Amendment No. 1 to  Receivables Purchase Agreement entered into as of June 20, 2003 among  Comdata Funding Corporation, Comdata Network, Inc., Jupiter  Securitization Corporation, each Financial Institution party thereto, and  Bank One, NA.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.52* |   | Amendment No. 2 to  Receivables Purchase Agreement entered into as of June 17, 2004 among  Comdata Funding Corporation, Comdata Network, Inc., Jupiter  Securitization Corporation, each Financial Institution party thereto, and  Bank One, NA.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.53* |   | Amendment No. 3 to  Receivables Purchase Agreement and Amendment No. 1 to Performance  Undertaking entered into as of August 4, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA.                                                                                                                                                                                                                                                                                                                                                              |
| 10.54* |   | Amendment No. 4 to  Receivables Purchase Agreement and Amendment No. 2 to Performance  Undertaking entered into as of September 30, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA.                                                                                                                                                                                                                                                                                                                                                          |
| 10.55* |   | Amendment No. 5 to  Receivables Purchase Agreement and Amendment No. 3 to Performance  Undertaking entered into as of November 9, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA.                                                                                                                                                                                                                                                                                                                                                            |
| 10.56* |   | Amendment No. 6 to  Receivables Purchase Agreement and Amendment No. 4 to Performance  Undertaking entered into as of December 31, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA.                                                                                                                                                                                                                                                                                                                                                           |

----

 

| 10.57* |   | Amendment No. 7 to  Receivables Purchase Agreement and Amendment No. 5 to Performance  Undertaking entered into as of January 14, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation, each  Financial Institution party thereto, and JPMorgan Chase Bank, N.A., as  successor in merger to Bank One, NA. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.58* |   | Amendment No. 8 to  Receivables Purchase Agreement and Amendment No. 6 to Performance  Undertaking entered into as of March 31, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and JPMorgan Chase Bank, N.A., as  successor in merger to Bank One, NA.   |
| 10.59* |   | Amendment No. 9 to  Receivables Purchase Agreement and Amendment No. 6 to Performance  Undertaking entered into as of May 15, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and JPMorgan Chase Bank, N.A., as successor  in merger to Bank One, NA.     |
| 10.60* |   | Amendment No. 10 to  Receivables Purchase Agreement entered into as of June 16, 2005 among  Comdata Funding Corporation, Comdata Network, Inc., Jupiter  Securitization Corporation, each Financial Institution party thereto, and  JPMorgan Chase Bank, N.A., as successor in merger to Bank One, NA.                                                        |
| 10.61* |   | Amendment No. 1 to  Receivables Sales Agreement and Amendment No. 11 to Receivables Purchase  Agreement entered into as of November 7, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., each Financial Institution party  thereto, Jupiter Securitization Corporation and JPMorgan Chase Bank, N.A.                                       |
| 21.01  |   | Subsidiaries of  Ceridian.                                                                                                                                                                                                                                                                                                                                                   |
| 23.01  |   | Consent of Independent  Registered Public Accounting Firm-KPMG LLP.                                                                                                                                                                                                                                                                                                          |
| 24.01  |   | Power of Attorney.                                                                                                                                                                                                                                                                                                                                                           |
| 31.01  |   | Certification of our  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                               |
| 31.02  |   | Certification of our  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                               |
| 32.01  |   | Certification of our  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                               |
| 32.02  |   | Certification of our  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                               |

----

*                    Incorporatedby Reference.

----