**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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FORM 10-K

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Annual Report Pursuant to Section 13or 15(d)of the Securities Exchange Act of 1934

**Forthe fiscal year ended December 31, 2004**

**CommissionFile Number 1-15168**

**CERIDIAN CORPORATION**

(Exact name of Registrantas specified in its charter)

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

 

**3311 East Old ShakopeeRoadMinneapolis, Minnesota 55425**

(Address of principalexecutive offices)

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

(Registrant’s telephonenumber, including area code)

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SecuritiesRegistered Pursuant to Section 12(b) of the 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 markwhether the Registrant (1) has filed all reports required by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. x Yes o No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes x No o

The aggregate market valueof the voting stock of Ceridian held by non-affiliates of Ceridian on June 30,2004 was $3,340,012,388, based on the closing sales price of Ceridian commonstock as reported on the New York Stock Exchange on June 30, 2004.

The number of shares ofCeridian common stock outstanding as of March 31, 2005 was 149,729,131.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the ProxyStatement for Annual Meeting of Stockholders to be held on May 26, 2005:Part III

 

 

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**CERIDIAN CORPORATIONAnnual Report on Form 10-KFor the fiscal year ended December 31, 2004**

**Table of Contents**
|               | ** **                                                                                                              | ** ** | **Page** | ** ** |
|---------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |                                                                                                                    |       |     |       |
| Item 1.       | Business                                                                                                                |       | 1        |       |
| Item 1A.      | Executive Officers of the Registrant                                                                                    |       | 15       |       |
| Item 2.       | Properties                                                                                                              |       | 16       |       |
| Item 3.       | Legal Proceedings                                                                                                       |       | 16       |       |
| Item 4.       | Submission of Matters to a Vote of Security Holders                                                                     |       | 18       |       |
| PART II  |                                                                                                                    |       |     |       |
| Item 5.       | Market for Registrant’s Common Equity, Related Stockholder Matters and  Issuer Purchases of Equity Securities |       | 19       |       |
| Item 6.       | Selected Financial Data                                                                                                 |       | 20       |       |
| Item 7.       | Management’s Discussion and Analysis of Financial Condition and Results  of Operations                             |       | 21       |       |
| Item 7A.      | Quantitative and Qualitative Disclosures About Market Risk                                                              |       | 54       |       |
| Item 8.       | Financial Statements and Supplementary Data                                                                             |       | 57       |       |
| Item 9.       | Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure          |       | 122      |       |
| Item 9A.      | Controls and Procedures                                                                                                 |       | 122      |       |
| Item 9B.      | Other Information                                                                                                       |       | 124      |       |
| PART III |                                                                                                                    |       |     |       |
| Item 10.      | Directors and Executive Officers of the Registrant                                                                      |       | 125      |       |
| Item 11.      | Executive Compensation                                                                                                  |       | 125      |       |
| Item 12.      | Security Ownership of Certain Beneficial Owners and Management and  Related Stock Matters                     |       | 125      |       |
| Item 13.      | Certain Relationships and Related Transactions                                                                          |       | 127      |       |
| Item 14.      | Principal Accountant Fees and Services                                                                                  |       | 127      |       |
| PART IV  |                                                                                                                    |       |     |       |
| Item 15.      | Exhibits and Financial Statement Schedules                                                                              |       | 128      |       |

 

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**CERIDIANCORPORATION**

**PART I**

*This Annual Reporton Form 10-K contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. The statements regardingCeridian Corporation and its subsidiaries contained in this report that are nothistorical in nature, particularly those that utilize terminology such as “may,”“will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes”or “plans,” or comparable terminology, are forward-looking statements based oncurrent expectations and assumptions, and entail various risks anduncertainties that could cause actual results to differ materially from thoseexpressed in such forward-looking statements. Important factors known tous that could cause material differences are identified in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” underthe caption “Cautionary Factors That Could Affect Future Results,” included in Part II,Item 7 of this report. You should carefully consider each cautionary factor andall of the other information in this report. We undertake no obligation tocorrect or update any forward-looking statements, whether as a result of newinformation, future events or otherwise. You are advised, however, to consultany future disclosures we make on related subjects in future reports to theSecurities and Exchange Commission.*

We own or have the rightsto various trademarks, trade names or service marks, including the following: BusinessLinkTM,Ceridian Corporation and logo, CeridianÒ,ComchekÒ,Comchek eCashÒ,Comdata CorporationÒand logo, ComdataÒ,LifeWorksÒ,and Stored Value SystemsÒand logo. The trademarks American ExpressÒ,DiscoverÒ,MasterCardÒ,VisaÒand WindowsÒreferred to in this report are the registered trademarks 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 servicescompany principally in the human resource, transportation and retail markets. Ourhuman resource solutions business enables customers to outsource a broad rangeof employment processes, from recruitment and applicant screening, to payroll,tax filing, human resource information systems, employee self-service, time andlabor management, benefits administration, employee assistance and work-lifeprograms, to post-employment COBRA, HIPAA, and retirement plan administration. Wehave human resource solutions operations primarily in the United States, Canadaand the United Kingdom. Our Comdata business 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 the spin-offof the human resource solutions division and human resource solutions andComdata subsidiaries of Arbitron Inc., formerly known as Ceridian Corporation(which entity is referred to in this report as “Ceridian’s predecessor”). On March 30,2001, we became an independent public company when Ceridian’s predecessordistributed all of our outstanding common stock to its stockholders in atax-free spin-off transaction (which transaction is referred to in this reportas the “spin-off” or the “Arbitron spin-off”). Despite the legal form of thespin-off, because of the relative significance of our businesses to Ceridian’spredecessor, we are considered the divesting entity and treated as the “accountingsuccessor” to Ceridian’s predecessor for financial reporting purposes. As usedin this report, references to “Ceridian,” the “Company,” “we,” “our” or “us”mean Ceridian Corporation, formerly known as New Ceridian Corporation, togetherwith our consolidated subsidiaries, and include the historical operating resultsand activities of the businesses and operations that constituted Ceridian’s 

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predecessor prior to thespin-off, as well as the continuing operations of the operations that weretransferred to us by Ceridian’s predecessor in the spin-off, unless the contextotherwise 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 E, *Segment Data* to our consolidated financial statements forfinancial information about our business segments. This information may befound in Part II, Item 8 of this report.

**Human ResourceSolutions**

Thebusinesses comprising our human resource solutions business (referred to inthis report as “HRS”) offer a broad range of managed human resource solutionsdesigned to help companies maximize the value of their people by moreeffectively managing their work forces and the information that is integral tohuman resource processes. Our human resource management products and servicesare provided principally in the United States, Canada and the United Kingdom. HRS’srevenue for the years ended December 31, 2004, 2003 and 2002 was asfollows:

| ** **     | **2004** | ** ** | ** **    | ** ** | **2003** | ** **    | ** ** | ** ** | **2002** | ** ** | ** ** |
|----------------|----------|------------|---------------|------------|----------|---------------|------------|------------|----------|------------|------------|
| $964.4 million |     | $          | 894.2 million |       | $        | 847.3 million |       |
|                |          |            |               |            |          |               |            |            |          |            |            |  |  |

 

In 2004, about 71.0% of our HRS revenue came frompayroll processing and tax filing services, 15.2% from benefits services and13.8% from employee assistance programs. Further, about 75.9% of our 2004 HRSrevenue was from operations located in the United States, about 14.6% fromCanada, and about 9.5% from the United Kingdom.

Because the volume of payroll items processedincreases in the fourth quarter of each year in connection with employers’year-end reporting requirements, and because the amount of tax filing depositsalso tends to be greatest in the first quarter, our HRS revenue andprofitability tend to be greater in those quarters.

Our HRS revenue includesinvestment income earned in lieu of fees from customer deposits temporarilyheld in the United States and Canada pending remittance to taxing authorities,customer employees or other third parties. About $75.6 million of revenue in2004 was attributable to this investment income earned in lieu of fees. Allcustomer funds temporarily held by us are held in either a trust or insegregated accounts. Funds from U.S. customers are invested primarily in moneymarket mutual funds, short-term repurchase agreements with high qualitycounterparties, U.S. Treasury and Agency securities, AAA rated asset andmortgage backed securities, and corporate bonds rated A3/A- or better. Fundsfrom Canadian customers are invested primarily in securities issued by thegovernment and provinces of Canada, highly rated Canadian banks andcorporations, asset backed trusts and mortgages. The maturity of theseinvestments is carefully managed to meet the related payment obligations. Investmentincome is earned on these funds in lieu of charging additional fees to ourcustomers. Due to the significance of this investment income, our quarterlyrevenue and profitability fluctuate as a result of changes in interest ratesand in the amount of customer deposits held.

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***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 350 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             |       | 350 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—has the greatest reliance on their integral legacy  systems which increase integration complexity and challenge outsourcing and  migration decisions |

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*                    This column ofthe table reflects the employer size of U.S. customers in 2004. In Canada andthe United Kingdom, the employer segment sizes are typically smaller, althoughthe characteristics of such segments are similar in nature.

We believe, however, thatwith regard to any size employer, a provider of a core transaction-basedservice, such as payroll processing or tax filing services, is affordedattractive opportunities to complement that core service with additionalproducts and services that are natural adjuncts to that service, such as timeand labor management, COBRA and HIPAA compliance administration, flexiblespending account administration, employee self-service, benefits eligibilityand enrollment, employee assistance and work-life services, and retirement planadministration. Our ability to wrap value-added services around a core 

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serviceor product in an integrated manner will, we believe, lead to revenue growth andour ability to achieve higher margins. Further, we believe that customers areincreasingly seeking providers that can take responsibility for entire humanresource management processes. These human resource outsourcing (referred to inthis report as “HRO”) relationships transfer responsibility for managing eachcore process from the employer to the provider. In 2003, we began entering intoHRO arrangements with larger customers. Although these HRO arrangements areexpected to reduce our margins in the short term, we believe that our abilityto continue to assume responsibility for our clients’ HR processes in HROrelationships will over time further expand long-term growth in revenue andmargins for this business.

***Products and Services***

Our human resourcemanagement solutions include:

·       payrollprocessing and integrated human resource information systems solutions;

·       taxfiling services;

·       benefitsadministration, qualified retirement and other plan administration andregulatory compliance services; and

·       work-lifeand employee assistance programs.

***Payroll Processing and IntegratedHuman Resource Information Systems Solutions.  ***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. Wealso supply quarterly and annual social security, Medicare and federal, stateand local income tax withholding reports and forms that are required to befiled 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 (Source 500) provides anintegrated HR/payroll and benefits solution with outsourced payroll and taxfiling services to customers primarily in the corporate and enterprise customermarkets. It is available in a hosted “application service provider” environment(HR/Payroll Assist) or can be managed in-house as an installed application. Ourhosted solutions provide customers with secure 24/7 access to our solutionsusing a standard web browser.

Our HR/Payroll Web product (eSource) is a web-enabled,fully hosted integrated payroll and human resource administration solution,designed specifically for the corporate and enterprise customer 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 payrollprocessing, tax filing, unemployment compensation management and relatedservices for small employers located in the United States and Canada. Our SmallBusiness HR/Payroll product is a web-based solution that allows customers tocomplete payroll transactions via the Internet. The Small Business HR/Payrollproduct also provides small businesses with 

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access to services, suchas new hire reporting, tax filing, direct deposit, optional benefits programs,unemployment filing and special reports services that were previously onlyavailable to larger companies.

***Tax Filing Services.  ***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 stand alone tax services provided directly to employers. Payroll-relatedtax filing services are typically priced on a fee-per-item-processed basis.

***Benefits Administration,Qualified Retirement and Other Plan Administration and Regulatory ComplianceServices.  ***We provide employee health and welfarebenefits administration and qualified plan administration services to ourcustomers. Employee health and welfare benefits administration services includehealth insurance portability (*i.e*., theConsolidated Omnibus Budget Reconciliation Act, or COBRA, and the HealthInsurance Portability and Accountability Act of 1996, or HIPAA) complianceservices. Health and welfare benefits administration services also encompassbenefits provided to active employees, such as annual health plan enrollment,ongoing employee enrollment and eligibility services, tuition refund plans,transportation reimbursement under the Transportation Equity Act, and InternalRevenue Code Section 125 plans including fully administered andself-administered flexible spending accounts and premium-only plans. We alsoprovide administration services for benefits provided to retired and inactiveemployees, including retiree healthcare, disability, surviving dependent,family leave and severance benefits.

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 and Employee AssistancePrograms.  ***We provide customers and their employees(and the U.S. military) with a single source for fully integrated work-life andemployee assistance programs to clients of all sizes. Services are deliveredthrough on-line access and telephonically, and through face-to-face meetingsprovided by referral resources.

The services and programswe provide may be customized to meet an individual customer’s particular needs.Our portfolio of products allows a customer to choose the mix, level and modeof access to services that best meet its needs. These products range from “hightouch technology” capabilities allowing employees to access specificinformation on-line to comprehensive “person-to-person” consultation andreferral services. Also included are specialized service options, such asassistance with college selection, elder care assessment and facility reviewservices, and health and wellness services. These services address employeeeffectiveness issues and seek to improve employee retention and productivity,and to reduce absenteeism as well as increase the customers’ recruitmentsuccess. Consultants provide confidential assistance 24 hours a day tocustomers’ employees to help them address issues ranging from everyday mattersto crisis situations. Supporting these consultants are research and subjectmatter experts 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.

***International Operations***

Our international HRS operations are primarilyconducted in the United Kingdom, through Ceridian Centrefile Limited, and inCanada, through Ceridian Canada Ltd. Ceridian Centrefile Limited provides humanresource services, payroll processing services, HRIS solutions, work-life andemployee assistance 

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programs and recruitmentservices primarily in the United Kingdom. Ceridian Centrefile’s servicesgenerally do not involve the handling or transmission of customer funds. In avery few instances, Ceridian Centrefile holds client funds for a short periodof time in non-interest bearing segregated accounts prior to disbursementpursuant to Ceridian Centrefile’s client’s instructions.

Ceridian Canada’s operations provide payrollprocessing services, HRIS solutions, tax filing services, work-life andemployee assistance programs and recruitment services to its customers. CeridianCanada handles payroll as well as tax filing funds for our Canadian customers. TheseCanadian operations collect payroll and payroll tax amounts from customers andremit tax amounts to applicable governmental authorities and make directdeposits of payroll amounts to employees’ bank accounts. As a result, revenuefrom our payroll processing services in Canada includes investment incomereceived in lieu of fees from temporarily holding these amounts in trust. Wealso charge fees for services to our Canadian customers that are similar innature to those provided in the United States.

We have begun to expand our international payrollservices into other countries, principally in Europe, by engaging partnerswithin a country to provide us with payroll administration and processingservices for that country. We in turn have contracted with multinationalcustomers for their international requirements, and deliver a fully outsourcedpayroll service to these customers.

There are risks associatedwith operating internationally. We refer you to our “Management’s Discussionand Analysis of Financial Condition and Results of Operations” contained in Part II,Item 7 of this report, and specifically to the section of that discussionentitled “Cautionary Factors That Could Affect Future Results.”

***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 complexity of the services involved,the amount of customization of services required and the number of locations inwhich the customer’s employees are located. The longer we are able to retain acustomer, the more profitable that contract will likely be.

***Sales and Marketing***

Payroll processing, tax filing and human resourcemanagement services are marketed in the United States through our direct salesforce operating throughout the country. We currently utilize, and seek todevelop other, cooperative marketing relationships with other companiesoffering products or services that complement our businesses as well asinformal and formal marketing alliances with human resource consulting firmsand other outsourcing firms. 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 operations located in the United Kingdom and Canada utilize theirown direct sales forces. Customer leads for the products and services of thesebusinesses are generally obtained through referrals, trade shows, productdemonstration seminars, third party resellers and direct sales efforts.

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We utilize cooperativemarketing relationships with other companies offering products or services thatcomplement our businesses as well as informal marketing alliances with humanresource consulting firms. We are exploring similar cooperative arrangementswith other software, broker and human resource services providers. We are alsoseeking to further integrate and coordinate the sales and marketing efforts ofour businesses and to sell a greater variety of our products and services tothe customers of our various businesses.

***Competition***

The human resource solutions industry is highlycompetitive. Competition comes from national, regional and local third partytransaction processors, as well as from software companies, consulting firms,governments, enterprise wide providers of financial services, completeenterprise outsourcing providers, including information technology providers,and internally developed and operated systems and software.

We believe that the majority of all payroll processingand tax filing in the United States, Canada and the United Kingdom is supportedin-house, with the remainder supported by third party providers. In the UnitedStates, Automatic Data Processing, Inc. (“ADP”) is the largest third partyprovider of payroll processing in terms of revenue, with Paychex, Inc. andCeridian comprising the other two large, national providers in terms of revenue.ADP serves all sizes of employers, while Paychex generally focuses on smallemployers. Other third party payroll and tax filing providers are generallyregional and local competitors, although larger, national providers of benefitsadministration, 401(k) processing services or financial institutions mayexpand further into outsourced payroll processing. 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. In Canada, we believethat our Ceridian Canada subsidiary is the second largest outsourced payrollprocessing provider in terms of revenue, facing a similar competitiveenvironment as in the United Kingdom. Competition in both the payroll processingand HRIS areas also comes from a number of large, national software companiesthat provide both payroll processing software for in-house processing as wellas HRIS software, often in conjunction with other enterprise managementsoftware applications.

Apart from payroll processing and tax filing, ourother human resource solutions generally compete with a variety of national andregional application software companies, consulting firms, financial servicescompanies and human resource services providers. Generally, the market forthese products and services is evolving and is not dominated by a small numberof competitors.

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

·       customerservice;

·       leadershipin technology applications;

·       choiceof services;

·       integratedplatforms;

·       performance;

·       price;

·       functionality;

·       easeand flexibility of use; and

·       expertisein HR processes.

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We believe that theability to integrate human resource management solutions with customers’ otheracquired 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.

***Research and Development***

We intend to continue to invest resources to extendthe functionality of our proprietary payroll processing systems and furtherdevelop a comprehensive and fully integrated suite of employee administrativeservices.

Thetable below reflects the amount of research and development expenses for ourHRS businesses for the periods indicated.
| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                | ** ** | **(dollars in millions)**         | ** ** |
| Research and  development |       | $                                           | 22.4       |   | $ | 16.3 |   | $ | 12.6 |   |
| Percent of revenue        |       | 2.3                                         | %          | 1.8 | % | 1.5 | % |
|                           |            |                                             |            |  |  |  |  |  |  |  |

 

**Comdata**

Our Comdata subsidiary (which we refer to in thisreport as “Comdata”) provides transaction processing, financial services andregulatory compliance services primarily to the transportation and retailindustries. Comdata’s revenue from products and services for the years ended December 31,2004, 2003 and 2002 was as follows:
| ** **     | **2004** | ** ** | ** **    | ** ** | **2003** | ** **    | ** ** | ** ** | **2002** | ** ** | ** ** |
|----------------|----------|------------|---------------|------------|----------|---------------|------------|------------|----------|------------|------------|
| $356.0 million |     | $          | 319.7 million |       | $        | 313.0 million |       |
|                |          |            |               |            |          |               |            |            |          |            |            |  |  |

 

Approximately 72.2% ofComdata’s revenue for 2004 was attributable to Comdata’s transportationbusiness and 27.8% was attributable to Comdata’s retail services business.

***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. Theless-than-truckload component, which involves trucks that make multiple stopsto 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. Manyof these carriers use a combination of company-employed drivers and driverscontracted 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. Truckloadcarriers are challenged to monitor and control fuel purchases, provide driverservices to aid in 

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recruitment and improveretention, obtain necessary licenses and permits, and effectively manage therouting and logistics 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. Customersin this segment include, by way of example, local delivery companies, homemaintenance 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 (1) use traditionalpaper gift certificates or gift cards, (2) give store credits inconnection with the return of products, and (3) make monetary orstored-value-based loyalty promotions. SVS markets its private label cash cardto these merchants, namely major retailers, for use with their customers, bothas “gift cards” and loyalty building tools. Additionally, SVS markets ancillarysupport services including card inventory management and assistance indesigning and supervising the production of plastic cards. Comdata’s retailservices division also provides a card-based funds transfer system for use byemployers and others for, among other things, expense reimbursements, payrolldelivery and termination pay. Comdata markets this card-based funds transfersystem to a variety of employers, such as temporary staffing companies,professional employment organizations, custodial companies, the restaurant andhospitality industries, and retailers, including the customers of SVS.

***Services***

Comdata provides transaction processing, financialservices, and regulatory compliance services primarily to the transportationindustry. Comdata also provides transaction processing services to otherindustries, including the retail, temporary staffing, oil company, restaurantand grocery store sectors. Comdata provides services to trucking companies,truck stops and truck drivers in the long haul segment of the truckingindustry, and to the local fleet segment. These services primarily involve theuse of a proprietary funds transfer card that facilitates truck drivertransactions and provides transaction control and trip information for truckingfirms. Additionally, Comdata markets “co-branded” cards and transaction processingin association with MasterCard networks. Comdata also provides assistance inobtaining regulatory permits, pilot car services, and other complianceservices, such as fuel tax reporting and driver log auditing, local fuelingservices and discounted telecommunications services in its markets. ThroughComdata’s retail services division (which includes SVS), Comdata provides itsspecialty card products and services to customers outside of the transportationindustry. Comdata operations are located substantially in the United Stateswith some operations in Canada and prospects for expanding operations into Latinand South America and Europe.

***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 employees. The BusinessLink card allows businessesto authenticate and authorize individual employee purchases and provide payrollto employees. Through BusinessLink a business can review reports oftransactions made by its employees over the Internet, as well as request theissuance of new employee cards. BusinessLink offers businesses the capabilityof performing these services on a single, customizable employee card. TheBusinessLink card may be customized for each individual employee within abusiness. Comdata intends to expand the services currently available under theBusinessLink card. BusinessLink has been initially introduced to Comdata’sprincipal markets, transportation and retail. Comdata believes that theBusinessLink card has application to businesses in other industries. In 2004,more than 2,050 customers used BusinessLink.

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***Trucking Company Services (TheComdata card)*.  **Comdata’s funds transfer system,most commonly initiated through the use of Comdata’s proprietary Comdata card,is designed to enable truck drivers to obtain funding for purchases and cashadvances at truck stops and other locations en route to their destination.Drivers may use the Comdata card to purchase fuel, lodging and other approveditems, obtain cash advances from ATM machines or through the use of Comchekdrafts, make long distance phone calls and make direct deposits of pay,settlements (for non-employee owner-operators) or trip advances topersonal bank accounts. In 2004, Comdata processed approximately 88.3 millionfunds transfer transactions involving approximately $17.0 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,the frequency with which they may be used, phone numbers which may be called andthe amount of authorized use. Use of a Comdata card also enables Comdata tocapture and provide transaction and trip-related information to truckingcompany customers (usually within 24 hours after the completion of a giventrip). This information greatly enhances a customer’s ability to track and planfuel purchases and other trip expenses and settle with drivers. Comdata alsoprovides trucking companies with a Windows-based software applicationthat provides trucking companies with on-line access to Comdata’s computersystem for data on fuel purchases and other trip information, and facilitatespre- and post-trip planning functions. Comdata’s iConnectData and MOTRS(Modular Over The Road System) web-based applications enable customers to goon-line for local dial-up access, interactive reporting capabilities, thelatest diesel fuel prices and related information from their computer.

Use of a Comdata account, in many instances, generatesa Comchek draft, which is payable through a Comdata bank account. Comdata fundsthe underlying transaction when the truck stop (or other payee) negotiates thedraft by depositing it in its bank account. Comdata bills the trucking companyfor the amount of the draft plus a portion of the service fee, and collectsfrom the truck stop the balance of the service fee. The trucking company remitspayment to Comdata by wire transfer or check, typically within six days,although Comdata may bill trucking companies in advance for all funds transfersauthorized for any purpose in connection with a particular trip. Risksassociated with fraudulent or unauthorized transactions are allocated betweenComdata and its customers based upon which party may be at fault under aspecific circumstance and based upon which party is in the better position tocontrol or eliminate these types of transactions. Comdata believes thathistorically the number of fraudulent or unauthorized transactions attributableto this aspect of its 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.

When a truck driver makes a request at a truck stopfor a funds transfer, Comdata verifies that the driver’s company hasestablished sufficient credit. Upon presentation of valid identification, thetruck stop obtains an authorization number from Comdata and issues a Comchekdraft. Comdata also provides information gathering and processing services inconnection with fueling transactions that Comdata does not fund, but insteadare billed directly by the truck stop to the trucking company. Fees for these “directbill” transactions are substantially lower. Comdata also provides fuel pricetracking reports and management within a network of truck stops, includingcost/plus fuel purchase programs.

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 a truck stop where they can be picked up by the driver. Comdata alsoprovides regulatory compliance services, such as processing and auditing ofdriver trip logs, reporting of fuel taxes, annual licensing and motor vehicleregistration verification. Vehicle escort services for oversized loads are alsoprovided.

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***Truck Stop Services*.  **Comdatamaintains a nationwide electronic data network with 24-hour independenttruck stop service centers that utilize point-of-sale devices and othercomputer equipment to facilitate communication with Comdata’s database andoperations centers. The service centers act as Comdata’s agents pursuant to aservice center agreement, and typically also offer the funds transfer servicesof other companies.

Comdata’s merchant services division provides fuelingcenters with PC-based, point of sale systems that automate the varioustransactions that occur at a fuel purchase desk, systems which enable customersto transact card-based fuel purchases at the fuel pump. These systems acceptmany types of fuel purchase cards currently used by drivers. The merchantservices division additionally offers point-of-sale systems for use atprivately owned truck terminals and unattended fuel sites.

***Local Fueling*.  **Comdatais a provider of fuel management and payment systems for local transportationfleets. Comdata provides local fleet operators with Comdata MasterCardcorporate fleet cards that offer the fleet operators transaction control andtrip-related information gathering features similar to those of the Comdatacard.

***Financial Services.  ***Comdataoperates a factoring business known as Financial Services. Generally, FinancialServices purchases accounts receivable due to trucking companies frommanufacturers and shippers at a discount and with recourse back to the truckingcompany in the event of non-payment. This permits trucking companies to receivepayment on shipping invoices sooner than they may otherwise receive paymentfrom shippers. While the majority of the Financial Services’ portfolio relatesto trucking company operations as described above, Comdata may, on occasion,enter into a factoring arrangement with a business outside the truckingindustry.

***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, debit card programs to major retailers that are used as gift cards,gift certificates, credits for returned product, loyalty promotions and retailpromotions. 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.

Comdata’s payment services division provides pay cardsused by its customers to pay their employees. Comchek eCash is a card-basedservice allowing employers to post or load payment of wages and other payments,such as expense reimbursements, to cards issued to employees and otherrecipients. Cardholders, in turn, may access these funds in a number of ways,including withdrawal of cash from ATMs, point-of-sale purchases at stores orissuance of a Comdata negotiable draft. Long distance telephone service is alsoavailable through the card.

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***Sales and Marketing***

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 through adirect sales force located at its headquarters in Brentwood, Tennessee, andoperating throughout the United States and Canada. Comdata provides services tomore than 20,000 over-the-road and local trucking fleets with more than 900,000active fuel cards. Comdata also provides services to more than 8,500 truckstops, travel centers and repair facilities nationwide. Contracts generallyrange from one to three years in duration.

Through SVS, Comdatamarkets its private label cash cards, electronic payroll cards and ancillaryservices through a direct sales force located in Louisville, Kentucky,operating throughout the United States, Canada, and expanding to Europe, mostnotably in the United Kingdom. In 2004, SVS provided cash cards and/or payrolldistribution services to more than 400 customers. The contracts with thesecustomers are generally three years in duration.

***Competition***

The principal competitive factors relevant to fundstransfers are marketing efforts, pricing, reliability of computer andcommunications systems and time required to effect transactions. The majorcredit and debit card associations and companies, such as Visa, MasterCard,American Express and Discover, are significant competitors of Comdata sincethey make cash available to, and facilitate purchases of fuel and otherproducts by, holders of their cards on a nationwide basis. Several othercompanies also offer similar funds transfer services, including First DataCorporation (as a result of First Data’s merger with Concord EFS, Inc. on February 26,2004), T-Chek Systems, Inc., TransPlatinum Service Corp., Fleet One,L.L.C., Fleet Cor and Wright Express Corp. In addition, truck stops oftennegotiate directly with trucking companies for a direct billing relationship. Someof 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 service centers, such as truck stops, that offer similar productsand services. Comdata also faces increasing competition in the funds transferarea from ATMs that participate in national networks.

While the majority of regulatory services continue tobe performed in-house, at least one other nationwide company, Xero-Fax, Inc.,and several regional companies, including The Permit Company, provide permitservices similar to those provided by Comdata. Competition in this market isinfluenced by price, the expertise of personnel and the ease with which permitsmay be ordered and received. In addition, Comdata believes that technologicaladvances, such as the Internet, will impact the way regulatory services aredelivered. These advances may give rise to new competitors or change the waythis service is offered.

Comdata believesthat its competitive 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.

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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. Comdata’sretail services division competes on the bases of breadth of services offered,systems, technology and price. Comdata believes that one of the competitiveweaknesses of its retail services division is that most of its competitors haveestablished relationships with many of the potential customers of Comdata’sretail services division because these competitors provide additional andunrelated products and services to these customers, such as credit cardprocessing and check authorization services. By providing these other serviceswhich Comdata’s retail services division does not provide, these competitorshave an advantage of being able to bundle their products and services togetherand present them to existing customers with whom they have establishedrelationships. Another competitive weakness of Comdata’s retail servicesdivision is that its competitors have greater financial, sales and marketingresources and better brand name recognition than Comdata’s retail servicesdivision.

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

·       experiencein transaction processing and related services providing for high qualitycontrol and 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 in connectionwith various activities. Comdata receives telecommunications services fromSprint Corporation and MCI, Inc.

***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 to its customers inthose states. Comdata believes that it is currently in compliance in allmaterial respects with the regulatory requirements applicable to its business. Thefailure to comply with the requirements of any particular state couldsignificantly harm Comdata’s business in that state.

***Research and Development***

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

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Thetable below reflects the amount of research and development expenses forComdata for the periods indicated.
| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **  2004  **            | ** ** | **  2003  ** | ** ** | **  2002  ** | ** ** |
| ** **                | ** ** | **(dollars in millions)**         | ** ** |
| Research and  development |       |                                        | $          | 4.4 | ** ** |   |   | $ | 3.1 | ** ** |   |   | $ | 2.4 |   |   |
| Percent of revenue        | ** ** | ** **                                  | 1.2        | % |   |   | 1.0 | % |   |   | 0.8 | % |   |

 

**Other Investments and Divestitures**

In addition to thespin-off transaction and the sale of our SourceWeb Assets described previouslyunder the heading “General”, we refer you to Note D, *SupplementaryData to Statement of Operations*, and Note H, *InvestingActivity,* to our consolidated financial statements for furtherinformation on our investing and divesting activities. This information may befound in Part II, Item 8 of this report.

**Intellectual Property**

We own or license a numberof trademarks, tradenames, copyrights, service marks, trade secrets and otherintellectual property rights that relate to our products and services,including several mentioned in this report. U.S. trademark and service markregistrations are generally for a term of 10 years, renewable every 10 years aslong as the trademark or service mark is used in the regular course of trade. Althoughwe believe that these intellectual property rights are, in the aggregate, ofmaterial importance to our businesses, we believe that none of our businessesis materially dependent upon any particular trademark, tradename, copyright,service mark, license or other intellectual property right. We believe,however, that the “Ceridian” and “Comdata” names, marks and logos are ofmaterial importance to us.

We have entered intoconfidentiality agreements with most of our employees and consultants. Inaddition, we have entered into license agreements with customers of ourbusinesses, which agreements impose restrictions on these customers’ use of ourproprietary software and other intellectual property rights.

**Employees**

As of March 31, 2005,we employed approximately 9,464 people on a full- or part-time basis, including7,350 full-time and 493 part-time employees of HRS, 1,455 full-time and 69part-time employees of Comdata, and 97 full-time corporate employees.

We are currentlynegotiating a first collective bargaining agreement relating to approximately108 employees at our Eagan, Minnesota, work-life service center facility. Noneof our other employees are covered by collective bargaining agreements. We havenever experienced a work stoppage and we believe our employee relationsare good.

**Backlog**

Although our businessesare typically characterized by long-term customer relationships that result in ahigh level of recurring revenue, a substantial portion of our customercontracts used by our businesses are terminable by our customers uponrelatively short notice periods, including contracts that have been extendedbeyond their original terms. In addition, orders for products and services areterminable by our customers, and no order for one of our products or servicesis considered firm until it is delivered. The timing of the delivery of our productsand services is largely dependent upon the customer. As such, we do not havebacklog information that can 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. Althoughnot a reported 

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number,this metric is used by management as a planning tool relating to resourcesneeded to install products and services, and a means of assessing our performanceagainst installation timing expectations of us and our customers.

**Available Information**

Our Internet website is *http://www.ceridian.com.* You may access, free of charge,through the “Investor Relations” portion of our website, our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments 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 all of ourcharters for each of our committees of the Board of Directors, corporategovernance policies and guidelines, code of conduct and other corporategovernance documents contained in the Corporate Governance section of ourwebsite are available in print without charge to any stockholder by writingCeridian Corporation, Attention: Corporate Secretary, 3311 East Old ShakopeeRoad, Minneapolis, Minnesota 55425-1640. Our Internet website and theinformation contained on or connected to the website are not intended to beincorporated by reference into this report.

**Item1A.**                ExecutiveOfficers of the Registrant

Ourexecutive officers as of March 31, 2005 are:
| **Name (Age)**        | ** ** | ** **                                                                                        | ** ** | **Current Position** |
|-----------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------|
| Ronald L. Turner (58) |       | Chairman, President and  Chief Executive Officer                                                  |
| Gary A. Krow (50)     |       | Executive Vice  President and President of Comdata                                                |
| Gary M. Nelson (53)   |       | Executive Vice  President, Chief Administrative Officer, General Counsel and Corporate  Secretary |
| Douglas C. Neve (49)  |       | Executive Vice  President and Chief Financial Officer                                             |

 

Our executive officers areannually elected by our Board of Directors and serve at the pleasure of theBoard of Directors and the Chief Executive Officer. There are no immediatefamily relationships between or among any of our executive officers.

Upon the completion of ourspin-off from Ceridian’s predecessor on March 31, 2001, with the exceptionof Mr. Neve, each of our executive officers resigned as an executiveofficer from Ceridian’s predecessor and was thereafter reappointed to theequivalent 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 hasserved as a director since July 1998; Chairman since May 2000; ChiefExecutive Officer since January 2000; and President since April 1998.Mr. Turner was Chief Operating Officer from April 1998 to January 2000.

Gary A. Krow has served asExecutive Vice President and President of our Comdata subsidiary since November 1999.

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Gary M. Nelson has servedas Executive Vice President since October 2001; Chief AdministrativeOfficer since January 2005; General Counsel since July 1997; andCorporate Secretary since October 1998. Mr. Nelson was Vice Presidentfrom July 1997 until October 2001.

Douglas C. Neve has servedas Executive Vice President and Chief Financial Officer since February 2005.Mr. Neve was a senior audit partner with Deloitte & Touche LLP,an international public accounting firm, from June 2002 until February 2005and an audit partner with Arthur Andersen, an international public accountingfirm, from September 1989 through May 2002.

**Item 2.**                        Properties

Our principal executiveoffices are located at 3311 East Old Shakopee Road, Minneapolis, Minnesota55425. As of March 31, 2005, the principal computer and office facilitiesused in our businesses were located in the metropolitan areas of Minneapolis,Minnesota; Atlanta, Georgia; Los Angeles, California; Chicago, Illinois; EastHanover, New Jersey; Louisville, Kentucky; Nashville, Tennessee; Dallas, Texas;Boston, Massachusetts; St. Petersburg, Florida; Philadelphia,Pennsylvania; Manitoba, Ontario, and Quebec, Canada; and London, England.

The following tablesummarizes the usage and location of our facilities as of March 31, 2005:

**Facilities(in thousands of square feet)**
| ** **                               | ** ** | **U.S.**   | ** ** | **Non-U.S.** | ** ** | **Total**  | ** ** |
|------------------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| **Type of  Property Interest**           | ** ** | ** ** | ** ** |         | ** ** | ** ** |       | ** ** | ** ** |
| Owned                                    |       | 393        |       |         | 0          | ** ** |       | 393 |   |
| Leased                                   |       | 1,970      |       |         | 391        | ** ** |       | 2,361 |   |
| Total                                    |       | 2,363      |       |         | 391        | ** ** |       | 2,754 |   |
| **Property Interest by Segment**         | ** ** | ** ** | ** ** |         | ** ** | ** ** |       | ** ** | ** ** |
| HRS                                      |       | 1,687      |       |         | 375        | ** ** |       | 2,062 |   |
| Comdata                                  |       | 441        |       |         | 16         | ** ** |       | 457 |   |
| Corporate                                |       | 235        |       |         | 0          | ** ** |       | 235 |   |
| Total                                    |       | 2,363      |       |         | 391        | ** ** |       | 2,754 |   |
| **Utilization of Property**              | ** ** | ** ** | ** ** |         | ** ** | ** ** |       | ** ** | ** ** |
| Office, Computer Center & Other |       | 2,199      |       |         | 391        | ** ** |       | 2,590 |   |
| Leased or Subleased to Others            |       | 164        |       |         | 0          | ** ** |       | 164 |   |
| Total                                    |       | 2,363      |       |         | 391        | ** ** |       | 2,754 |   |

 

We conduct a substantialportion of our operations in leased facilities, including our 211,000 squarefeet Minneapolis headquarters complex in Minneapolis, Minnesota. Most of theseleases contain renewal options and require payment for taxes, insurance andmaintenance.

None of our ownedfacilities is subject to any major encumbrances. We believe that our facilitiesare adequate for their intended purposes, are adequately maintained and arereasonably 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.

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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.

**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. *EdmundBiancarelli v. Ceridian Corp., et al.*, filed August 16, 2004; *Garco Investments v. Ceridian Corp., et al.*, filed September 2,2004; *Ellen Lear v. Ceridian Corp., et al.*,filed August 26, 2004; *Bruce Valentine Mickan v.Ceridian Corp., et al.*, filed September 24, 2004; *Richard Shaller v. Ceridian Corp., et al.*, filed August 6,2004; and *Sharon Zaks v. Ceridian Corp., et al.*,filed August 25, 2004. The complaints for these actions are virtuallyidentical. In an order dated March 7, 2005, the Court consolidated thecases into a case captioned *In re: CeridianCorporation Securities Litigation*. These consolidated actionspurport to be class actions filed on behalf of all persons who purchased orotherwise acquired common stock of the company between April 17, 2003through and including July 19, 2004, and allege claims against the companyand certain of its officers under Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934. Plaintiffs challenge the accuracy of certainpublic disclosures made by Ceridian regarding its financial performance, and inparticular Ceridian’s accounting for revenue at its Stored Value Systemsbusiness unit and accounting for capitalization and expensing of certain costsin Ceridian’s U.S. Human Resource Solutions business.

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

**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. The consolidated lawsuit alleges that theCeridian Board of Directors and certain executive officers breached fiduciaryduties, through abuse of control, gross mismanagement, waste of corporateassets and unjust enrichment. These complaints rely on the same factualallegations as the purported class action shareholder lawsuits as describedabove.

Ceridian is awaiting thefiling of an amended complaint. Ceridian intends to appropriately defend itselfin the consolidated action. We cannot estimate the possible loss or range ofloss 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 aninvestigation the 

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AuditCommittee of the Board of Directors was directing (the “Audit CommitteeInvestigation”). We kept the SEC advised on a regular basis of the AuditCommittee Investigation. On December 10, 2004, we received a furtherformal confidential document request from the SEC. The second request hasbroadened the areas of inquiry to include, among other things, Ceridian’srestatement, revenue recognition, capitalization, expense recognition, how werespond to any internal ethics complaints, and Ceridian’s accounting policiesand procedures. The formal document requests state that the SEC investigationis a non-public, fact-finding inquiry, and that the investigation and documentrequests do not mean that the SEC has concluded that we have violated anysecurities laws. We are cooperating with the SEC and are in the process ofresponding to the SEC’s additional document request.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

No matters were submitted to a vote of our stockholdersduring the fourth quarter of 2004.

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**PART II**

**Item5.**                        MarketFor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

Our common stock is listed and trades on The New YorkStock Exchange under the symbol “CEN”. The number of holders of record of ourcommon stock on March 30, 2005 was 11,029. We have not declared or paidany cash dividends on our common stock since our inception, and our Board ofDirectors presently intends to retain all earnings for use in the business forthe foreseeable future. The transfer agent and registrar for our common stockis the Bank of New York.

Thefollowing table sets forth the high and low sale prices of our common stock asreported on the NYSE Composite Tape for each quarterly period during the fiscalyears ending December 31, 2004 and December 31, 2003.
| **2004** | ** ** | ** ** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
|----------|------------|------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| High     |       | $          | 22.56      |   | $          | 23.41  |       | $      | 22.57      |   | $          | 19.42 |   |
| Low      |       | 16.69      |       | 19.70  |       | 17.05  |       | 16.25  |       |
|          |            |            |            |        |            |        |            |        |            |        |            |  |  |  |  |

 
| **2003** | ** ** | ** ** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
|----------|------------|------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| High     |       | $          | 16.05      |   | $          | 17.99  |       | $      | 20.35      |   | $          | 21.85 |   |
| Low      |       | 12.58      |       | 13.30  |       | 16.71  |       | 18.70  |       |
|          |            |            |            |        |            |        |            |        |            |        |            |  |  |  |  |

 

We did not repurchase any of our common stock duringthe three months ended December 31, 2004. On July 24, 2002, our Boardof Directors approved a share repurchase program, pursuant to which up to12,500,000 shares of our common stock may be repurchased. We disclosed thisrepurchase program in our periodic reports filed with the SEC, including theAmendment No. 1 on Form 10-K/A to our Annual Report on Form 10-Kfor the year ended December 31, 2003. The repurchase program is beingeffected from time to time, depending on market conditions and other factors,through open market purchases and privately negotiated transactions. The totalremaining authorization under the repurchase program was 6,350,500 shares as ofJanuary 1, 2005. The repurchase program has no set expiration ortermination date.

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**Item 6.**                        SelectedFinancial Data

Thefollowing information has been restated for 2003 and prior years to reflectadjustments that are further discussed in Note B, “Restatement of FinancialStatements” to our consolidated financial statements included in Part II, Item8, “Financial Statements and Supplementary Data” of this Form 10-K. You shouldread the selected consolidated historical financial information set forth belowalong 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 Form 10-K.

(Dollars in millions, except per share data)
| ** **                                                | ** ** | **Years Ended December 31,**                                                  | ** **  |
|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|-------------|
| ** **                                                | ** ** | **       2004       ** | ** **  | **       2003       ** | ** ** | **       2002       ** | ** ** | **       2001       ** | ** ** | **       2000       ** | ** ** |
| ** **                                                | ** ** | ** **                                                                                   | ** **  | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| **Revenue**                                               | ** ** |                                                                                         | **$**       | **1,320.4** |   |   |   | $ | 1,213.9 |   |   |   | $ | 1,160.3 |   |   |   | $ | 1,167.0 |   |   |   | $ | 1,174.8 |   |   |
| Earnings  from continuing operations(1)                   | ** ** |                                                                                         | **$**       | **36.9** |   |   |   | $ | 98.8 |   |   |   | $ | 111.5 |   |   |   | $ | 54.5 |   |   |   | $ | 70.0 |   |   |
| Discontinued  operations of Arbitron(2)                   | ** ** |                                                                                         | **—**  |   |   |   | — |   |   |   | — |   |   |   | 5.2 |   |   |   | 20.7 |   |   |
| Net  earnings                                             | ** ** |                                                                                         | **$**       | **36.9** |   |   |   | $ | 98.8 |   |   |   | $ | 111.5 |   |   |   | $ | 59.7 |   |   |   | $ | 90.7 |   |   |
| **Earnings Per Common Share**                             |       |                                                                                         | ** **  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Basic**                                                 |       |                                                                                         | ** **  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing  operations                                    | ** ** |                                                                                         | **$**       | **0.25** |   |   |   | $ | 0.66 |   |   |   | $ | 0.75 |   |   |   | $ | 0.37 |   |   |   | $ | 0.48 |   |   |
| Net  earnings                                             | ** ** |                                                                                         | **$**       | **0.25** |   |   |   | $ | 0.66 |   |   |   | $ | 0.75 |   |   |   | $ | 0.41 |   |   |   | $ | 0.62 |   |   |
| **Diluted**                                               |       |                                                                                         | ** **  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing  operations                                    | ** ** |                                                                                         | **$**       | **0.24** |   |   |   | $ | 0.66 |   |   |   | $ | 0.74 |   |   |   | $ | 0.37 |   |   |   | $ | 0.48 |   |   |
| Net  earnings                                             | ** ** |                                                                                         | **$**       | **0.24** |   |   |   | $ | 0.66 |   |   |   | $ | 0.74 |   |   |   | $ | 0.40 |   |   |   | $ | 0.62 |   |   |
| **Shares used in calculations (in  thousands)**           |       |                                                                                         | ** **  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                     | ** ** |                                                                                         | **149,074** |   |   |   | 148,634 |   |   |   | 148,029 |   |   |   | 146,069 |   |   |   | 145,229 |   |   |
| Diluted                                                   | ** ** |                                                                                         | **151,079** |   |   |   | 150,197 |   |   |   | 149,633 |   |   |   | 147,669 |   |   |   | 146,182 |   |   |
| **Balance Sheet Data at end  of year**                    |       |                                                                                         | ** **  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Working  capital                                          | ** ** |                                                                                         | **$**       | **345.0** |   |   |   | $ | 302.6 |   |   |   | $ | 246.6 |   |   |   | $ | 189.6 |   |   |   | $ | 237.7 |   |   |
| Total  assets before customer funds                       | ** ** |                                                                                         | **$**       | **2,110.9** |   |   |   | $ | 2,028.1 |   |   |   | $ | 2,006.9 |   |   |   | $ | 1,858.9 |   |   |   | $ | 2,039.5 |   |   |
| Customer  funds                                           | ** ** |                                                                                         | **$**       | **4,096.0** |   |   |   | $ | 3,152.7 |   |   |   | $ | 2,446.6 |   |   |   | $ | 2,177.6 |   |   |   | $ | 2,984.1 |   |   |
| Total  assets                                             | ** ** |                                                                                         | **$**       | **6,206.9** |   |   |   | $ | 5,180.8 |   |   |   | $ | 4,453.5 |   |   |   | $ | 4,036.5 |   |   |   | $ | 5,023.6 |   |   |
| Debt  obligations                                         | ** ** |                                                                                         | **$**       | **100.7** |   |   |   | $ | 163.5 |   |   |   | $ | 193.5 |   |   |   | $ | 237.9 |   |   |   | $ | 500.6 |   |   |
| Stockholders’  equity                                | ** ** |                                                                                         | **$**       | **1,295.7** |   |   |   | $ | 1,245.2 |   |   |   | $ | 1,102.3 |   |   |   | $ | 1,049.3 |   |   |   | $ | 934.6 |   |   |
| **Equity Per Common Share**                               | ** ** |                                                                                         | **$**       | **8.67** |   |   |   | $ | 8.30 |   |   |   | $ | 7.42 |   |   |   | $ | 7.16 |   |   |   | $ | 6.41 |   |   |
| Common  shares outstanding at end of  year (in thousands) | ** ** |                                                                                         | **149,423** |   |   |   | 150,022 |   |   |   | 148,541 |   |   |   | 146,485 |   |   |   | 145,754 |   |   |
| **Number of Employees at end  of year(3)**                | ** ** |                                                                                         | **9,517**   |   |   |   | 9,349 |   |   |   | 9,412 |   |   |   | 9,546 |   |   |   | 9,667 |   |   |

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(1)          Earningsfrom continuing operations include unusual losses of $68.2 ($42.9 after-tax) in2004, unusual gains of $3.1 ($2.0 after-tax) in 2003 and unusual losses of$33.6 ($21.4 after-tax) in 2002, $50.9 ($33.4 after-tax) in 2001 and $30.5($18.7 after-tax) in 2000. The unusual gains and losses in 2004, 2003 and 2002are further described in the section entitled “Unusual Items” in Part II,Item 7 of this Form 10-K.

(2)          Includes earnings, net of costs related to the Arbitron spin-off, asfurther described in Note D, “Supplementary Data to Statements of Operations,”to the consolidated financial statements contained in Part II, Item 8 of this Form 10-K.

(3)          Continuing operations only.

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**Item7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunctionwith our consolidated financial statements and the notes related to thoseconsolidated financial statements contained in Part II, Item 8, “FinancialStatements and Supplementary Data” of this Form 10-K. Any reference to a “Note”in this discussion relates to the accompanying notes to the consolidatedfinancial statements unless otherwise indicated. All applicable disclosures inthe following discussion have been modified to reflect the Restatement, asdescribed below.

The Company has not amended and does not intend toamend its previously filed Amendment No. 1 on Form 10-K/A to its Annual Reporton Form 10-K for the fiscal year ended December 31, 2003 or its previouslyfiled Annual Reports on Form 10-K or Quarterly Reports on Form 10-Qfor the periods affected by the Restatement that ended prior to December 31,2003. For this reason, the consolidated financial statements, auditors’ reportsand related financial information for the affected periods contained in suchreports should no longer be relied upon.

The Company does plan toamend its Quarterly Reports on Form 10-Q for each of the first three quartersin the year ended December 31, 2004.

**Restatement**

We have restatedour consolidated financial statements for the years 2000 through 2003 and forthe first nine months of 2004 (the “Restatement”). The determination to restatethese financial statements was made after errors were discovered in March andApril 2005. In addition, certain disclosures in the notes to ourconsolidated financial statements have been restated to reflect the Restatementadjustments. In the Restatement, we have:

·  recordedaccelerated amortization of the CobraServ trademark

·  correctedthe accounting for certain leases

·  correctederrors in the accounting for international acquisitions

·  correctedother accounting errors related to the accrual of costs and expenses

·  reducedincome tax reserves

·  correctedbalance sheet amounts for customer funds and employee benefits

The Restatement reducedour earnings before income taxes for the years 2000 through 2003 and the firstnine months of 2004 by $37.8 million consisting of $30.6 million related to theCobraServ trademark amortization, $7.2 million related to leases and $0.1million related to the accrual of costs and expenses, partially offset by a$0.1 million expense reduction related to international acquisition accounting.The impact of the Restatement on the consolidated statements of operations forthese periods is shown in the table below. Further information on the natureand impact of these adjustments is provided in Note B, “Restatement ofFinancial Statements.” In addition, the quarterly impact of the Restatement for2003 and 2004 is presented in Note O, “Supplementary Quarterly Data.”

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**EarningsAdjustments Related to the Restatement(Dollars in millions)**
| ** **                              | ** ** | **First Nine** | ** ** | ** **                                           | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                              | ** ** | **Months**          | ** ** | **For Years Ended December 31,** | ** ** |
| ** **                              | ** ** | **of 2004**    | ** ** | **   2003   **         | ** ** | **   2002   ** | ** ** | **   2001   ** | ** ** | **   2000   ** | ** ** |
| Trademark amortization                  |       |                | $          | 30.6                                                 |       |                                         |       | $                                            | —     |                                         |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Lease accounting                        |       |                | 1.5        |                                                 |       |                                         | 2.1        |                                         |       |                                         | 1.1        |   |   |   | 1.6 |   |   |   | 0.9 |   |   |
| International acquisition accounting    |       |                | (0.6       | )                                                    |       |                                         | (0.8       | )                                            |       |                                         | 1.3        |   |   |   | (0.5 | ) |   |   | 0.5 |   |   |
| Accrual of costs and expenses           |       |                | (0.3       | )                                                    |       |                                         | —     |                                         |       |                                         | 0.3        |   |   |   | 0.1 |   |   |   | — |   |   |
| Costs and expenses increase             |       |                | 31.2       |                                                 |       |                                         | 1.3        |                                         |       |                                         | 2.7        |   |   |   | 1.2 |   |   |   | 1.4 |   |   |
| Total pretax earnings decrease          |       |                | (31.2      | )                                                    |       |                                         | (1.3       | )                                            |       |                                         | (2.7       | ) |   |   | (1.2 | ) |   |   | (1.4 | ) |   |
| Tax effect of  restatement(1)           |       |                | (10.8      | )                                                    |       |                                         | (1.4       | )                                            |       |                                         | (1.0       | ) |   |   | (0.4 | ) |   |   | (0.4 | ) |   |
| Total net earnings  increase (decrease) |       |                | $          | (20.4                                                | )          |                                         |       | $                                            | 0.1        |                                         |       |   | $ | (1.7 | ) |   |   | $ | (0.8 | ) |   |   | $ | (1.0 | ) |   |

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(1)   2003 includes a $0.9 million tax reserve adjustment in addition tothe $0.5 million tax effect of the pretax earnings decrease of $1.3 million.

Adjustments for periodsprior to 2000 of $2.2 million before income taxes decreased opening retainedearnings as of January 1, 2000 by $1.6 million, net of tax. The $2.2million pretax decrease consisted of $0.3 million for leases and $2.4million for international acquisition accounting, partially offset by a $0.5 millionincrease related to accruals of costs and expenses.

The primary impact of theabove adjustments on the December 31, 2003 consolidated balance sheet wasto intangible assets due to international acquisition adjustments, customerfunds, and other noncurrent liabilities due to lease adjustments. The impact ofthe Restatement on our consolidated balance sheet at December 31, 2003 isshown in tables accompanying Note B, “Restatement of Financial Statements.”

The Restatement had noimpact on historical cash balances or total cash flows from operating,investing or financing activities for the years ended December 31, 2003and 2002. The only impact on the consolidated statements of cash flows was to reclassifycertain amounts within operating cash flows.

**Overview**

Ceridian Corporationprovides human resource solutions to employers through our Human ResourceSolutions business segment operations located primarily in the United States,Canada and the United Kingdom. We also provide transaction processing andrelated services primarily to the transportation and retail industries throughour Comdata business segment operations located principally in the UnitedStates. Our businesses are more fully described in Part I, Item 1, “Business”and in Note E, “Segment Data.”

Thisdiscussion presents our views on our earnings and cash flow performance overthe most recent three-year period and our financial condition at the end of thetwo most recent years in the following manner:

·       Webegin this discussion with a management summary in which we provide a contextfor a review of our financial performance over the past three years andhighlight those factors that we believe are most meaningful in assessing thatperformance. This includes highlights of our results of operations for the pastthree years and changes in our financial condition during 2004, as well as adiscussion of a number of events or arrangements that had or will have asignificant effect on our financial condition and performance.

·       Wethen address our earnings performance in a section entitled “Results ofOperations.” There we compare our performance from 2004 to 2003 and 2003 to2002 on a consolidated basis for the whole company as well as for our HumanResource Solutions and Comdata business segments. 

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Transactionsaffecting earnings that we consider unusual or nonrecurring are discussed in asubsection entitled “Unusual Items.”

·       Wecontinue by discussing our balance sheets and cash flow performance in furtherdetail. There we describe the impact of particular developments that affectedour cash balance through our operating, investing and financing activities. Ina subsection entitled “Liquidity and Capital Resources,” we also discuss ourplans for funding future major expenditures and any financial commitments,including those that are not reported on our consolidated balance sheet undercurrent accounting rules.

·       Weconclude our discussion by describing what we believe to be the most criticalaccounting policies in determining our financial condition and results ofoperations and the most significant risks and uncertainties facing ourbusinesses.

In thefollowing tables and text, we use certain abbreviations described below:

·       “SG&Aexpense” represents selling, general and administrative expense

·       “R&Dexpense” represents research and development expense

·       “HRS”represents our human resource solutions business segment

·       “Comdata”represents our transportation and retail services business segment

·       “Other”relates to the results of our corporate center operations that were notallocated to our HRS and Comdata business segments

·       “NM”represents percentage relationships in the tables that are not meaningful

·       “U.S.”represents the United States

**Management’sSummary**

Ceridian Corporation is aninformation services company principally in the human resource, transportationand retail markets. Our human resource solutions business enables customers tooutsource a broad range of employment processes, from recruitment and applicantscreening, to payroll, tax filing, human resource information systems, employeeself-service, time and labor management, benefits administration, employeeassistance and work-life programs, to post-employment COBRA, HIPAA andretirement plan administration. We have HRS operations in the United States,Canada and the United Kingdom. Our Comdata business provides transactionprocessing, financial services and regulatory compliance services primarily tothe transportation and retail industries. Comdata’s products and servicesinclude payment processing and the issuance of credit, debit and stored valuecards.

Theperiod covered by this discussion featured a number of events or arrangementsthat had or will have a significant effect on our financial condition andperformance. You will find the following matters described in this discussionor through a reference to the notes to our consolidated financial statements.

·       *Phase-Out of CobraServ Trademark.  *As a result of thedetermination to rename the CobraServ product offering, we began phasing outuse of the CobraServ trademark over the course of 2004. We concluded that theeconomic life of this trademark as of January 1, 2004 was one year andthat the originally scheduled amortization for 2005 and beyond of $40.9 millionshould be amortized ratably over the year ended December 31, 2004. Thisaccelerated amortization is reported in general and administrative expense inHRS U.S. operations and is discussed further in the “Results of Operations” and“Unusual Items” sections of this discussion and in Note B, “Restatement ofFinancial Statements,” Note G, “Capital Assets” and Note O, “SupplementaryQuarterly Data.”

·       *Our software development arrangement with Ultimate Software.  *InMarch 2001, we entered into an agreement with The Ultimate Software Group, Inc.(“Ultimate”), amended in August 2001 and February 2002, that providedus with a non-exclusive license to use Ultimate’s software as part of a 

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Web-enabledintegrated payroll/HR/self-service offering to our small business customers. Pursuantto the February 2002 amendment, the license agreement provided for amonthly royalty commencing in January 2003, based on the number of ourcustomers’ employees paid by using the software and subject to minimum andmaximum amounts. The minimum obligation required monthly payments of $0.5million per month from January 2004 until January 1, 2006, when theper-employee monthly charge escalates at a rate of 5% per annum until theend of the noncancelable term in March 2008. On December 31, 2004, wesold certain customer relationships and other assets associated with ourSourceWeb payroll platform and ceased use of this contractual relationship. Weremained obligated to make future minimum royalty payments totaling $20.7million as of December 31, 2004. A further description of this contractarrangement is presented in the section of this discussion entitled “Liquidityand Capital Resources” and in the section entitled “Contracts” of Note L, “Commitmentsand Contingencies.” A description of the SourceWeb Assets sale is presented inNote D, “Supplementary Data to Statements of Operations.”

·       *Derivative instruments.  *Our interest rate derivativeinstruments contributed significantly to the variability of earnings during thereported periods in this Form 10-K as further discussed in the “Results ofOperations” section of this discussion, the section in Note A, “AccountingPolicies—Cash and Investments, including Derivatives,” and in Note H, “InvestingActivity—Derivative Instruments.”

·       *Our principal defined benefit pension plan.  *Declinesin equity securities market values and in interest rates resulted in our principalpension plan becoming an under-funded plan. This change in funded statusrequired that we reclassify the amount formerly reported as a pension assetinto a combined reduction of our equity and an increase in our liabilities. Asa further result of this change in funded status, the additional net periodicpension cost reduced earnings before income taxes by $12.3 million in 2003compared to 2002. In December 2004, we determined that the measurementdate for this plan, and for our other defined benefit plans, should be changedfrom September 30 to December 31. The later measurement date wouldpermit the use of more current data and coincide with the end of our reportingyear. The change in measurement date resulted in a reduction in 2004 netperiodic pension cost of $4.9 million for this plan. We made cash contributionsto this plan during 2003 of $103.7 million. We made no additional contributionsto this plan in 2004 and do not anticipate making additional contributions in2005 although subsequent investment performance, interest rate changes orregulatory actions may require a reconsideration of this position. We discussour pension and postretirement obligations in the “Liquidity and CapitalResources” section of this discussion and in Note I, “Retirement Plans.”

·       *The effect of changing currency exchange rates.  *Thestrength of the Canadian dollar and British pound sterling against the U.S.dollar in 2004 and 2003 significantly increased revenue and costs and expensesfor our Ceridian Canada and Ceridian Centrefile subsidiaries during thoseperiods.

·       *New services offerings.  *New offerings have contributedsignificantly to revenue growth in 2004 and 2003 in our HRS segment (includingeSource) and in our Comdata segment (examples include BusinessLink and eCash). Theseservice offerings are more fully described in Part I, Item 1 of this Form 10-K.

·       *Acceleration of W-2 information delivery.  *In 2003, we advancedthe processing, delivery and billing of W-2 information for our customers. Thisresulted in the recognition of $9.2 million of revenue in December 2003that otherwise would have been recognized in January 2004. Because thecosts associated with W-2 activities are reported as incurred throughout theyear, essentially all of this amount was reflected in 2003 earnings beforeincome taxes. This means that 2003 revenue included two contributions for W-2activities; one in the first quarter of 2003 relating to 2002 annual W-2s andanother in the fourth quarter of 2003 relating to 2003 annual W-2s. The 2004results included only the W-2 revenue recognized in the fourth quarter relatingto 2004 W-2s.

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**Comparison of Annual Periods Ended December 31, 2004,2003 and 2002**

**ConsolidatedStatements of Operations Highlights(Dollars in millions, except per share data)**
| ** **                                         | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Revenue                                            |       | $                                           | 1,320.4    |   | $ | 1,213.9 |   | $ | 1,160.3 |   |
| Net earnings                                       |       | $                                           | 36.9       |   | $ | 98.8 |   | $ | 111.5 |   |
| Diluted shares used in calculations (in thousands) |       | 151,079                                     |       | 150,197 |   | 149,633 |   |
| Net earnings per diluted  share                    |       | $                                           | 0.24       |   | $ | 0.66 |   | $ | 0.74 |   |

 

**Resultsof Operations Overview for the Three Years Ended December 31, 2004**

Revenue of $1,320.4million increased by $106.5 million over 2003 revenue of $1,213.9 million andby $53.6 million over 2002 revenue of $1,160.3 million as both HRS and Comdatacontributed to the improved results. Net earnings of $36.9 million in 2004 (24¢per diluted share) decreased by $61.9 million from 2003 net earnings of $98.8million (66¢ per diluted share). Net earnings in 2003 decreased by $12.7million to $98.8 million (66¢ per diluted share) from $111.5 million (74¢ perdiluted share) in 2002. Unusual losses (gains or recoveries), net of incometaxes, amounted to $42.9 million (28¢ per diluted share) in 2004, $(2.0)million (1¢ per diluted share) in 2003 and $21.4 million (14¢ per dilutedshare) in 2002. Further information on results of operations is presented inthe following section of this discussion entitled “Results of Operations” andin the subsection of that section entitled “Unusual Items.”

**Results of Operations**

**2004 Compared to 2003**

**Statementsof Operations(Dollars in millions, except per share data)**
| ** **                             | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **2004**   | ** ** | **2003**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **(restated)**           | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                |       | $          | 1,320.4    |                     | $          | 1,213.9                    |       | 106.5 |   | 8.8 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                        |       | 748.3      |       | 693.8                    |       | 54.5                       |       | 7.9 |   | 56.7 |   | 57.2 |   |
| SG&A expense                       |       | 475.5      |       | 365.1                    |       | 110.4                      |       | 30.3 |   | 36.0 |   | 30.1 |   |
| R&D expense                        |       | 26.8       |       | 19.4                     |       | 7.4                        |       | 38.2 |   | 2.0 |   | 1.6 |   |
| (Gain) loss on  derivative instruments |       | 0.3        |       | (14.7                    | )          | 15.0                       |       | NM |   | 0.0 |   | (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 taxes                           |       | 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 |   |

 

***ConsolidatedResults—Overview***

The following factors,which significantly influenced the revenue or costs and expenses performancesof our business segments in 2004, are discussed briefly below and further inthe following section of this discussion entitled “Business Segment Results.”

RevenueFactors

·       Growthin Comdata’s retail cards in use and processing transactions

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·       Newcustomers and service offerings in both business segments

·       Impactof currency rate changes on HRS international results of operations

·       Higherlevels of HRS invested customer funds balances and yields

·       Accelerationof annual W-2 processing, delivery and billing beginning in December 2003

Costsand Expenses Factors

·       Acceleratedamortization of the HRS CobraServ trademark in 2004

·       SourceWebexit costs, net of recoveries

·       Gainsand losses on interest rate derivative instruments

·       Accountingcompliance costs

Revenue from the return oninvested customer funds increased by $13.4 million in 2004 compared to 2003including $10.9 million for U.S. payroll and tax filings, $1.2 million for U.S.benefits services and $1.3 million for Ceridian Canada. The benefit of a higheraverage invested balance contributed $8.4 million to the total increase while ahigher average yield increased revenue by $5.0 million. The average balance ofinvested customer funds increased by $289.3 million, or 13.5%, to $2,435.2million in 2004 from $2,145.9 million in 2003 largely due to growth in a newdirect deposit payroll service, higher levels of customer tax obligations and,to a lesser extent, the effect of the strengthening Canadian dollar on CeridianCanada invested customer funds. We do not include the average balances ofComdata customer funds since these amounts were not interest-bearing. Theaverage yield on invested customer funds increased to 3.10% in 2004 from 2.90%in 2003.

(Gain) loss on derivativeinstruments included both realized gains or losses from cash settlements andunrealized gains or losses from revaluation of the future expected cash flowsassociated with these instruments over their remaining terms. The valuation ofthe interest rate derivative instruments is based upon future expected interestrates as determined from LIBOR futures prices in effect at the end of thereporting year. As further discussed in Note H, “Investing Activity,” we soldour interest rate derivative instruments in February 2005. The valuationof fuel price derivative instruments is based on a national average of dieselfuel purchase transactions involving Comdata customers correlated with the U.S.Department of Energy national average price for diesel fuel. The gains andlosses from derivative instruments are discussed in the following sectionentitled “Business Segment Results.”

Other expense (income)includes the results of transactions that are not appropriately classified inanother costs and expenses category and that generally are not recurring. Theresults of these transactions are discussed in the following section entitled “BusinessSegment Results.”

Our 2004 interest incomeincreased by $0.6 million compared to 2003 due to both a higher average levelof cash and equivalents and higher interest rates.

Our 2004 total financingcost for debt obligations was unchanged compared to 2003 as a lower level ofoutstanding debt offset the effect of rising interest rates. This totalfinancing cost comparison included a $0.2 million decrease in interest expenseand a $0.2 million increase in capitalized interest. Our average outstandingborrowings under U.S. credit facilities decreased from $174.5 million for 2003to $125.2 million for 2004. Our average effective interest rate on thesefacilities increased from 2.64% for 2003 to 3.51% for 2004. A furtherdiscussion of our financing arrangements can be found in Note K, “Financing”and in the sections of this discussion entitled “Cash Flows-Financing Activities”and “Liquidity and Capital Resources.”

Income taxes decreased by$47.1 million from 2003 to 2004 primarily due to the decrease in earningsbefore income taxes, the realization of a valuation allowance and favorable taxsettlements. The reported effective tax rate was 10.4% for 2004 and 34.2% for2003. Income taxes decreased by $48.5 million from 2003 to 2004 primarily dueto the decrease in earnings before income taxes, the realization of a valuationallowance and favorable tax settlements.

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***Business SegmentResults***

**SegmentComparisons(Dollars in millions)**
| ** **                             | ** ** | **Amount** | ** ** | **Increase (Decrease)** | ** ** | **% of Revenue** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **2004**   | ** ** | **2003**                     | ** ** | **$**                      | ** ** | **     %     ** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **(restated)**               | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue**                            |       |       |       |                         |       |                       |       |   |   |   |   |   |   |   |   |
| HRS                                    |       | $          | 964.4      |                         | $          | 894.2                      |       | 70.2 |   |   | 7.9 |   |   | 73.0 |   | 73.7 |   |
| Comdata                                |       | 356.0      |       | 319.7                        |       | 36.3                       |       |   | 11.4 |   |   | 27.0 |   | 26.3 |   |
| Total                                  |       | $          | 1,320.4    |                         | $          | 1,213.9                    |       | 106.5 |   |   | 8.8 |   |   | 100.0 |   | 100.0 |   |
| **Earnings before interest and taxes** |       |       |       |                         |       |                       |       |   |   |   |   |   |   |   |   |
| HRS                                    |       | $          | (72.6      | )                            | $          | 48.5                       |       | (121.1 | ) |   | NM |   |   | (7.5 | ) | 5.4 |   |
| Comdata                                |       | 115.6      |       | 104.3                        |       | 11.3                       |       |   | 10.9 |   |   | 32.5 |   | 32.6 |   |
| Total                                  |       | $          | 43.0       |                         | $          | 152.8                      |       | (109.8 | ) |   | (71.9 | ) |   | 3.3 |   | 12.6 |   |

 

We measure the financialperformance of our business segments by reference to earnings before interestand taxes since consolidated interest income and interest expense are notallocated to those segments.

***HRS.  ***Theincrease of $70.2 million in HRS revenue in 2004 compared to 2003 reflectedincreases of $43.8 million from U.S. operations, $13.9 million from CeridianCanada and $12.5 from Ceridian Centrefile. As described in the section entitled“Management’s Summary” earlier in this discussion, the acceleration of W-2information delivery to customers of U.S. operations, made possible bytechnological advances first accomplished at the end of 2003, resulted in therecognition of $9.2 million of revenue in December 2003 that would otherwisenot have been recognized until the first quarter of 2004. This resulted inrevenue related to two W-2 years (2003 and 2002) being recognized in 2003while the 2004 revenue includes only the W-2 revenue recognized in the fourthquarter relating to 2004 W-2s. Strengthening of the Canadian dollar and Britishpound sterling against the U.S. dollar added $21.6 million to 2004 revenue forour international operations.

Revenue from U.S.operations benefited in 2004 from increases of $16.1 million in payroll and taxfiling services, $10.2 million in benefits services and $17.5 million from ourwork life and employee assistance programs (“LifeWorks”). Without regard to the$9.2 million of additional W-2 revenue in 2003, the 2004 increase inpayroll and tax filing revenue amounted to $25.3 million including $10.9million resulting from a greater return on invested customer funds as describedearlier in this discussion. The additional increase of $14.4 million resultedfrom net additions of customers receiving repetitive services and growth insales of add-on services offset in part by price concessions and lowernon-repetitive revenue. Employee populations for our continuing customersstabilized during 2004 and were little changed from 2003. The $10.2 millionincrease in benefits services revenue in 2004 over 2003 related primarily tothe addition of customers and higher levels of individuals being served. 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.

Ceridian Canada revenueincreased by $13.9 million in U.S. dollar terms in 2004 including an increaseof $11.9 million due to changes in currency exchange rates. The remaining $2.0million increase in revenue at Ceridian Canada reflected increases from smallbusiness services, managed payroll services and employee assistance services,which more than offset the decrease in revenue resulting from lower non-repetitiverevenue and investment income from customer funds. Ceridian Centrefile reported$12.5 million more revenue in 2004 compared to 2003 in U.S. dollar terms. Withoutregard to an increase of $9.7 million from currency rate changes, CeridianCentrefile revenue increased by $2.8 million in 2004 over 2003 due primarily togrowth in small business services and managed payroll services.

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HRS costs and expenses,excluding net interest, increased by $191.3 million in 2004 compared to 2003including $40.9 in accelerated amortization charges in 2004, a $14.4 millionreduction in the gains from our interest rate derivative instruments, a netincrease in other expense (income) of $30.1 million and an increase in othercosts and expenses of $105.9 million. As a result of the determination torename the CobraServ product offering, we phased out use of the CobraServtrademark over the course of 2004. We concluded that the economic life of thistrademark as of January 1, 2004 was one year and that the originallyscheduled amortization for 2005 and beyond of $40.9 million should be amortizedratably over the year ended December 31, 2004. This accelerated amortizationis reported in general and administrative expense in HRS U.S. operations for2004. The reduction of $14.4 million in gains from interest rate derivativeinstruments in 2004 compared to 2003 included a decrease in realized gains of$1.2 million from cash settlements and a decrease in unrealized gains of $13.2 millionfrom revaluation of the future expected benefit from these instruments overtheir remaining terms. These results reflected the rise of interest ratesduring 2004. Other expense (income) for HRS in 2004 included a loss of $28.5million associated with the sale of the SourceWeb assets described earlier inthis discussion. In addition, we also recognized gains on sale of marketablesecurities of $4.5 million offset in part by asset write-downs. Other expense(income) for HRS in 2003 reflected income of $4.4 million largely from a netgain from the sale of marketable securities and land not used in our business. Furtherinformation on HRS other expense (income) is provided in a following section ofthis discussion entitled “Unusual Items.”

Cost of revenue for HRSincreased by $37.7 million in 2004 compared to 2003. In U.S. operations, costof revenue increased by $28.4 million in 2004 over 2003. Cost of revenue forU.S. payroll and tax filing operations increased by $15.1 million asimplementation costs increased by $6.8 million. Staff additions andcompensation added $4.9 million in 2004, which offset in part cost reductionsof $6.0 million resulting from reassignment of staff from production to sellingactivities. The remaining increase in 2004 over 2003 of $9.4 million in U.S.payroll and tax filing operations cost of revenue related primarily to highercosts associated with the amortization of internally developed software. Theacceleration of 2003 W-2 revenue into December 2003 did not have amaterial effect on the cost of revenue comparison, since the timing ofincurrence of related costs was largely unaffected. Cost of revenue forbenefits services increased by $4.7 million in 2004 over 2003 largely as aresult of increased revenue. Cost of revenue increases for benefits services reflectedstaff additions, compensation increases and higher levels of contractedservices and software amortization. Cost of revenue for LifeWorks increased by$8.6 million in 2004 due largely to support of the U.S. Department of Defensecontract for a full year in 2004 compared to the last five months of 2003 and ahigher level of activities under this contract in 2004.

Cost of revenue inCeridian Canada operations increased by $3.1 million in 2004 compared to 2003as currency exchange rate changes contributed $5.3 million to the comparison. Withoutregard to the currency effect, Ceridian Canada cost of revenue declined by $2.2million due to cost reduction efforts, which more than recovered $1.5 millionof severance cost recorded in the first quarter of 2004. Cost of revenue inCeridian Centrefile operations increased by $6.2 million as currency exchangerate changes added $4.8 million and additional costs, primarily associated withgeographic market expansion and new customer implementations, added $1.4million.

The 2004 increase inSG&A expense for HRS compared to 2003 amounted to $103.2 million includingthe $40.9 million charge for accelerated amortization of the CobraServtrademark. Without regard to this charge, the increase amounted to $62.3million of which $24.8 million related to selling and $37.5 million related togeneral and administrative.

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Selling expense in HRSgrew by $24.8 million in 2004 over 2003 with an increase of $19.2 million inU.S. operations and $5.6 million in international operations. The increase of$19.2 million in U.S. operations included $9.4 million from staff additions including$6.0 million for staff reassigned from production to selling. The remainingincrease in U.S. HRS selling expense of $9.8 million in 2004 over 2003 relatedprimarily to higher occupancy costs, royalties and contracted services. CeridianCanada selling expense increased by $4.9 million from 2003 to 2004 including a$1.1 million impact from currency exchange rate changes and $3.8 millionresulting from additions to the sales staff, higher commissions and increasedadvertising. Ceridian Centrefile selling expense increased by $0.7 million in2004 compared to 2003 including $1.2 million due to currency exchange rate changes.

General and administrativeexpense for HRS increased in 2004 over 2003 by $78.4 million including theCobraServ trademark accelerated amortization charge of $40.9 million. Withoutthe accelerated amortization charge, the increase for HRS would have been $37.5million of which $28.5 related to U.S. operations and $9.0 million to CeridianCanada and Ceridian Centrefile operations. The $28.5 million increase for U.S.operations resulted primarily from an increase in allocated expenses of $9.4million for accounting compliance costs and $7.1 million from higher technologysupport costs. The remaining $12.0 million primarily reflected additional staffcompensation as well as higher expenses for business meetings and managementreorganization efforts. The $6.4 million increase for Ceridian Canada included$2.2 million related to currency exchange rate changes with the remainingincrease due largely to higher compensation expense and managementreorganization costs in 2004. The $2.6 million increase for Ceridian Centrefileincluded $4.0 million for currency exchange rate changes that was more than offsetby reduced pension expense.

R&D expense for HRS in2004 increased by $6.1 million compared to 2003 due entirely to a higher levelof software development efforts in U.S. operations.

***Comdata.  ***Comdatarevenue increased by $36.3 million in 2004 compared to 2003 as revenue fromretail services grew by $21.2 million and revenue from transportation servicesgrew by $15.1 million. Revenue from retail services grew in 2004 over 2003 dueto higher levels of cards in use, greater transaction volume and the additionof new customers. As described in the “Revenue Recognition” section of Note A,“Accounting Policies,” revenue from retail services is generally deferred andrecognized largely over a six-month period following the activation of a card,which typically takes place about seven months after the shipment of the cardto the retailer. The amount of gross billable fees for retail services added todeferred revenue during 2004 increased by $23.0 million, or 29%, over theamount added in 2003. The $15.1 million increase in transportation servicesrevenue in 2004 over 2003 related primarily to revenue from the over-the-roadbusiness, which increased by $12.2 million including $5.5 million resultingfrom higher fuel prices. A higher level of transactions in 2004 over 2003,including the impact of the growing acceptance of the BusinessLink card,provided the remaining $6.7 million increase in over-the-road revenue. Businessfleet revenue grew by $3.5 million in 2004 over 2003, including $2.3 millionfrom higher fuel prices, as major local fueling customers increased theirutilization of Comdata products and services, including the BusinessLink card.The remaining net decrease in transportation services revenue in 2004 comparedto 2003 of $0.6 million reflected lower revenue from phone services and pointof sale terminal equipment sales that were offset in part by modest increasesin revenue for financial services and regulatory compliance services.

Comdata costs andexpenses, excluding net interest, increased by $25.0 million in 2004 comparedto 2003. Cost of revenue increased by $16.8 million in 2004 over 2003 includingan increase of $17.5 million from retail services due to the higher revenuelevel. The remaining decrease in cost of revenue included increases totaling$1.6 million in bank fees and costs related to point of sale terminal equipmentsales, which were more than offset by cost savings from restructuring and othercost reduction actions.

Comdata SG&A expenseincreased by $7.3 million in 2004 compared to 2003. Selling expense increasedby $1.7 million as a result of increases in staffing, compensation andadvertising, largely related 

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toretail services and regulatory compliance. General and administrative expenseincreased $5.6 million in 2004 over 2003 due primarily to an increase of $4.6million in compensation expense and an increase of $3.7 million in contractedservices. The increase of $4.6 million in compensation expense in 2004 over2003 included incentives related to improved operating performance and anaddition to the executive staff. The increase of $3.7 million in contractedservices included $2.9 million for accounting compliance efforts in addition tolegal and other professional services. These increases were offset in part by areduction of $2.7 million in the provision for doubtful accounts. The reductionin the provision for doubtful accounts reflected improved credit checking andcollection performance as well as the impact of a $1.2 million provision for aparticular doubtful account in the first quarter of 2003.

R&D expense increasedin 2004 over 2003 by $1.3 million due primarily to a higher level of productenhancement activities. The loss on derivative instruments related to thediesel fuel price contracts increased to $1.4 million in 2004 from $0.8 millionin 2003 and offset in part the favorable impact of higher fuel prices reportedin revenue. Other expense (income) decreased by $1.1 million in 2004 ascompared with 2003 due primarily to a $1.9 million charge in 2003 to settle adispute with a vendor as further described in the section below entitled “UnusualItems.”

**2003 Compared to2002**

**Statements ofOperations**

**(Dollarsin millions, except per share data)**
| ** **                             | ** ** | **Amount**     | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|----------------------------------------|------------|----------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **2003**       | ** ** | **2002**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                             | ** ** | **(restated)** | ** ** | **(restated)**           | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                |       | $              | 1,213.9    |                     | $          | 1,160.3                    |       | 53.6 |   | 4.6 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                        |       | 693.8          |       | 654.2                    |       | 39.6                       |       | 6.0 |   | 57.2 |   | 56.4 |   |
| SG&A expense                       |       | 365.1          |       | 353.8                    |       | 11.3                       |       | 3.1 |   | 30.1 |   | 30.5 |   |
| R&D expense                        |       | 19.4           |       | 15.0                     |       | 4.4                        |       | 29.5 |   | 1.6 |   | 1.3 |   |
| (Gain) loss on  derivative instruments |       | (14.7          | )          | (73.3                    | )          | 58.6                       |       | (80.0 | ) | (1.2 | ) | (6.3 | ) |
| Other expense (income)                 |       | (2.5           | )          | 33.1                     |       | (35.6                      | )          | NM |   | (0.2 | ) | 2.9 |   |
| Interest (income)                      |       | (2.0           | )          | (2.1                     | )          | 0.1                        |       | (5.4 | ) | (0.2 | ) | (0.2 | ) |
| Interest expense                       |       | 4.6            |       | 6.3                      |       | (1.7                       | )          | (26.5 | ) | 0.4 |   | 0.5 |   |
| Total costs and expenses               |       | 1,063.7        |       | 987.0                    |       | 76.7                       |       | 7.8 |   | 87.6 |   | 85.1 |   |
| Earnings before income  taxes          |       | 150.2          |       | 173.3                    |       | (23.1                      | )          | (13.3 | ) | 12.4 |   | 14.9 |   |
| Income taxes                           |       | 51.4           |       | 61.8                     |       | (10.4                      | )          | (16.8 | ) | 4.2 |   | 5.3 |   |
| Net earnings                           |       | $              | 98.8       |                     | $          | 111.5                      |       | (12.7 | ) | (11.3 | ) | 8.1 |   | 9.6 |   |
| Diluted earnings per common share      |       | $              | 0.66       |                     | $          | 0.74                       |       | (0.08 | ) | (10.8 | ) | NM |   | NM |   |

 

***ConsolidatedResults—Overview***

Thefollowing factors, which significantly influenced the revenue and profitabilityperformances of our business segments in 2003, are discussed in the followingsection of this discussion entitled “Business Segment Results.”

·       Loweryields on invested customer funds

·       Gainsand losses on interest rate derivative instruments

·       Contributionsfrom businesses acquired for HRS in 2002

·       Impactof currency rate changes on HRS international results of operations

·       Growthin Comdata’s retail cards in use and processing

·       Newcustomers and service offerings in both business segments

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·       Higherlevels of HRS invested customer funds

·       Accelerationof annual W-2 processing, delivery and billing beginning in December 2003

·       Lowersales of equipment and permitting services by Comdata

·  Increased expenses related to technologysupport

(Gain) loss on derivative instruments included bothrealized gains or losses from cash settlements and unrealized gains or lossesfrom revaluation of the future expected cash flows associated with theseinstruments over their remaining terms. The valuation of the interest rate derivativeinstruments is based upon future expected interest rates as determined fromLIBOR futures prices in effect at the end of the reporting year. The valuationof fuel price derivative instruments is based on a national average of dieselfuel purchase transactions involving Comdata customers correlated with the U.S.Department of Energy national average price for diesel fuel. The gains andlosses from derivative instruments are discussed in the following sectionentitled “Business Segment Results.”

Our 2003 interest income decreased by $0.1 millioncompared to 2002 as the benefit of a higher average level of cash andequivalents was more than offset by lower interest rates.

Our 2003 total financing cost for debt obligationsdeclined by $1.8 million compared to 2002 as a result of a lower level ofoutstanding debt and lower interest rates. This decrease included a $1.7million decrease in interest expense and a $0.1 million decrease in capitalizedinterest. Our average outstanding borrowings under U.S. credit facilitiesdecreased from $207.3 million for 2002 to $174.5 million for 2003. Our averageeffective interest rate on these facilities declined from 3.04% for 2002 to 2.64%for 2003. A further discussion of our financing arrangements can be found inNote K, “Financing” and in the Cash Flows sections of this discussion entitled“Cash Flows—Financing Activities” and “Liquidity and Capital Resources.”

Income taxes decreased by$10.4 million from 2002 to 2003 due largely to the decrease in earnings beforeincome taxes. The reported effective tax rate decreased to 34.2% for 2003 from35.7% for 2002.

***Business SegmentResults***

**Segment Comparisons**

**(Dollars inmillions)**
| ** **                              | ** ** | **Amount**     | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|-----------------------------------------|------------|----------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2003**       | ** ** | **2002**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                              | ** ** | **(restated)** | ** ** | **(restated)**           | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue**                             |       |           |       |                     |       |                       |       |   |   |   |   |   |   |
| HRS                                     |       | $              | 894.2      |                     | $          | 847.3                      |       | 46.9 |   | 5.5 |   | 73.7 |   | 73.0 |   |
| Comdata                                 |       | 319.7          |       | 313.0                    |       | 6.7                        |       | 2.1 |   | 26.3 |   | 27.0 |   |
| Total                                   |       | $              | 1,213.9    |                     | $          | 1,160.3                    |       | 53.6 |   | 4.6 |   | 100.0 |   | 100.0 |   |
| **Earnings before interest and  taxes** |       |           |       |                     |       |                       |       |   |   |   |   |   |   |
| HRS                                     |       | $              | 48.5       |                     | $          | 81.9                       |       | (33.4 | ) | (40.7 | ) | 5.4 |   | 9.7 |   |
| Comdata                                 |       | 104.3          |       | 91.5                     |       | 12.8                       |       | 14.1 |   | 32.6 |   | 29.2 |   |
| Other                                   |       | —         |       | 4.1                      |       | (4.1                       | )          | NM |   | NM |   | NM |   |
| Total                                   |       | $              | 152.8      |                     | $          | 177.5                      |       | (24.7 | ) | (13.9 | ) | 12.6 |   | 15.3 |   |

 

We measure the financial performance of our businesssegments by reference to earnings before interest and taxes since consolidatedinterest income and interest expense are not allocated to those segments.

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***HRS.  ***Theincrease of $46.9 million in HRS revenue in 2003 compared to 2002 reflectedincreases of $31.9 million from U.S. operations, $14.3 million from CeridianCanada and $0.7 million from Ceridian Centrefile. Businesses acquired during2002 contributed $18.2 million of post-acquisition revenue growth to U.S.operations in 2003. The accelerated processing, delivery and billing of 2003W-2 forms in December 2003, described in the section entitled “Management’sSummary” earlier in this discussion, contributed $9.2 million to the revenueincrease from U.S. operations. Strengthening of the Canadian dollar and Britishpound sterling against the U.S. dollar added $19.7 million to 2003 revenue forour international operations.

Revenue from the return on invested customer fundsdecreased by $2.4 million in 2003 with the benefit of a higher average investedbalance contributing $7.6 million while a lower average yield reduced revenueby $10.0 million. The average balance of invested customer funds increased by $214.0million, or 11.1%, to $2,145.9 million in 2003 from $1,931.9 million in 2002largely due to growth in a new direct deposit payroll service and the effect ofthe strengthening Canadian dollar on Ceridian Canada invested customer funds. Theaverage yield on invested customer funds declined to 2.90% in 2003 from 3.34%in 2002.

Revenue from U.S. operations benefited in 2003 fromincreases of $18.8 million in payroll and tax filing services, $11.1 million inbenefits services revenue and $2.0 million from LifeWorks. In addition to adecrease of $5.5 million in the return on invested customer funds and $9.2million of additional W-2 revenue, the 2003 increase in payroll and tax filingrevenue included an additional $17.2 million from net additions of customersreceiving repetitive services and growth in sales of add-on services. The netbenefit to payroll and tax filing revenue from price increases in 2003 amountedto $5.3 million. Employee populations for our continuing customers declinedabout 1% from the 2002 level, reducing payroll and tax filing revenue by $8.0million in 2003. The $11.1 million increase in benefits services revenue in2003 substantially related to the contribution of Great Lakes Strategies, abusiness that we acquired in December 2002. The $2.0 million increase inLifeWorks revenue reflected an additional $6.1 million from the commencement ofservice deliveries during the last half of 2003 under a U.S. Department ofDefense contract, which largely offset the revenue decrease from customerlosses.

Ceridian Canada revenue increased by $14.3 million inU.S. dollar terms in 2003 and by $1.9 million without regard to changes incurrency exchange rates. Increased revenue at Ceridian Canada from smallbusiness customers, add-on services and employee assistance services more thanoffset the decrease in revenue resulting from a reduced number of customeremployees. Ceridian Centrefile reported $0.7 million more revenue in 2003 inU.S. dollar terms. Without regard to currency changes, Ceridian Centrefilerevenue declined by $6.6 million in 2003. Major factors contributing toCeridian Centrefile’s revenue decline included 2002 non-repetitive services fora major customer that was not replaced, lower levels of customer employees, andslippage of installations from late 2003 to 2004.

HRS costs and expenses, excluding net interest,increased by $80.3 million in 2003 compared to 2002 including a $57.9 millionreduction in the gains from our interest rate derivative instruments, a netreduction in other expense (income) of $29.4 million and an increase in othercosts and expenses of $51.8 million.

The reduction of $57.9 million in gains from interestrate derivative instruments in 2003 compared to 2002 included an increase inrealized gains of $4.9 million from cash settlements and a decrease inunrealized gains of $62.8 million from revaluation of the future expectedbenefit from these instruments over their remaining terms.

Other expense (income) for HRS in 2002 includedunusual items that resulted in a net expense of $25.0 million that includedwrite-downs of marketable securities and software, severance and other exitcosts. We discuss these items in a section of this discussion entitled “UnusualItems.” In 2003, HRS other expense (income) reflects income of $4.4 millionlargely from a net gain from the sale of marketable 

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securities and land notused in our business. Factors generally affecting the comparison of 2003 HRScosts and expenses to 2002 included costs associated with businesses acquiredin 2002, the effect of currency exchange rate changes in 2003, and higher 2003employee benefit costs and software development expense, including SourceWeb.

Cost of revenue for HRS increased by $34.5 million in2003. In U.S. operations, cost of revenue increased by $26.4 million in 2003compared to 2002. Cost of revenue for U.S. payroll and tax filing operationsincreased by $24.8 million due largely to higher costs associated with theintroduction and continued development of internally developed software. Costsassociated with the development and implementation of the 2003 offering ofSourceWeb added $16.0 million to cost of revenue. Other technology support andimplementation costs added $12.3 million to cost of revenue in 2003 compared to2002. Acquisitions completed in 2002 added $4.4 million. Lower production andsupplies costs and external contract and consulting costs reduced cost ofrevenue by $7.9 million. The acceleration of 2003 W-2 revenue into December 2003did not have a material effect on the cost of revenue comparison, since thetiming of incurrence of related costs was largely unaffected. Cost of revenuefor benefits services increased by $2.1 million. The additional cost of revenuefor Great Lakes Strategies, acquired in December 2002, and the impact ofstaff increases were offset in part by a reduction of external consulting costsincurred in connection with the transfer of certain benefits servicesoperations begun in 2002 and completed in 2003. Cost of revenue for LifeWorksdecreased by $0.5 million in 2003 primarily due to staff reductions.

Cost of revenue in Ceridian Canada operationsincreased by $4.1 million in 2003 as currency exchange rate changes added $6.4million to the 2003 amount. Without regard to the currency effect, CeridianCanada cost of revenue declined by $2.3 million due to changes in services mixand cost reduction efforts, particularly in the last half of 2003. Cost ofrevenue in Ceridian Centrefile operations increased by $4.0 million as currencyexchange rate changes added $3.4 million, while the remaining increase wasprimarily the result of revenue growth and geographic market expansion.

The 2003 increase in SG&A expense for HRS amountedto $13.5 million over the 2002 amount. Selling expense in HRS grew by $7.0million in 2003 of which $1.5 million occurred in U.S. operations and $5.5million in international operations. The increase of $1.5 million in U.S.operations primarily related to incremental costs associated with businessesacquired in 2002. The $5.5 million increase in selling expense for CeridianCanada and Ceridian Centrefile operations included a $1.7 million impact fromcurrency exchange rate changes and $3.8 million related in large part to increasedmarketing efforts and small business development.

General and administrative expense for HRS increasedin 2003 over 2002 by $6.5 million including increases of $3.1 million for U.S.operations and $3.4 million for Ceridian Canada and Ceridian Centrefileoperations. The $3.1 million increase for U.S. operations resulted primarilyfrom an increase in allocated expenses of $9.3 million for pensions and otheremployee benefit programs, which more than offset the effects of staffreductions and reduced provisions for incentive payouts in 2003. The $2.2million increase for Ceridian Canada included $2.4 million related to currencyexchange rate changes and the $1.2 million increase for Ceridian Centrefileincluded $2.4 million for currency exchange rate changes.

R&D expense for HRS in 2003 increased by $3.8million compared to 2002 due to a higher level of software development effortsin U.S. operations.

***Comdata.***   Comdata revenue increased by $6.7million in 2003 compared to 2002 as revenue from retail services grewsignificantly and improving general economic conditions began to benefittransportation revenue performance. Revenue from retail services increased by $14.8million in 2003 over 2002 due to a higher level of cards in use, greatertransaction volume and the addition of new customers. Revenue in theover-the-road business in 2003 increased by $1.5 million compared to 2002 asadditional revenue from card services more than offset the effect of lowerrevenue from fuel transactions. Revenue from sales of equipment to truck stopsdecreased by $6.6 million in 2003 and truck stop service fees 

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decreased by $0.7 million.Business fleet revenue grew by $2.8 million in 2003 over 2002 as major localfueling customers increased their utilization of Comdata products and services.Phone services revenue declined by $2.9 million in 2003. Regulatory compliancerevenue, including permitting and pilot services, declined by $2.0 millioncompared to 2002 as cooperative efforts by permit issuers continued to reducethe volume of transactions.

Comdata costs and expenses, excluding net interest,decreased by $6.1 million in 2003 compared to 2002. Cost of revenue increasedby $5.1 million in 2003. Costs related to SVS card sales and processingincreased by $9.2 million. The change in cost of revenue included a $4.1million reduction for equipment sales to truck stops and an increase in bankfees of $1.7 million.

Comdata SG&A expense decreased by $1.8 million in2003 compared to 2002. The decrease related primarily to a reduction of $4.3million in the provision for doubtful accounts and $3.7 million due to theconclusion of certain contracted services and amortization on certain intangibleassets in late 2002. The reduction in the provision for doubtful accountsreflected continued improvement in the quality of receivables in 2003 and abankruptcy filing by a major customer in 2002. These decreases were offset inpart by higher compensation and benefits expense including $3.9 million ofallocated corporate costs related to increased employee benefits costs. Theloss on fuel derivative instruments in 2003 was $0.8 million. Comdata held noderivative instruments in 2002. Other expense (income) decreased by $11.0 millionin 2003 due primarily to the 2002 factoring receivables loss of $9.8 millionand a September 2003 payment of $1.9 million to settle a dispute with avendor. These costs are further described in the section below entitled “UnusualItems.”

***Other.  ***Thereported other income of $4.1 million for 2002 results from reduction of apreviously established accrual for environmental cleanup, based on a periodicreview that took place in the first quarter of 2002.

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**Unusual Items**

The comparison of ourearnings from continuing operations is significantly affected by a number ofunusual events and transactions. We also have presented information on thissubject in the Notes to our Consolidated Financial Statements including Note D,“Supplementary Data to Statements of Operations.”

**UnusualLosses (Gains or Recoveries)**

**(Dollars inmillions)**
| ** **                                                 | ** ** | **Years Ended December 31** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ***By  transaction type:***                                |       |                                       |       |   |   |   |   |
| SourceWeb exit costs, net of recoveries                    |       | $                                          | 28.5       |   | $ | — |   | $ | — |   |
| Litigation and contract settlement costs                   |       | —                                     |       | 1.9 |   | 0.8 |   |
| Gain on sale of assets                                     |       | (0.6                                       | )          | (1.6 | ) | — |   |
| (Gain) loss on marketable securities                       |       | (4.5                                       | )          | (3.4 | ) | 6.3 |   |
| Accrued exit costs, net of recoveries                      |       | 0.3                                        |       | — |   | 13.5 |   |
| Factoring receivables loss                                 |       | —                                     |       | — |   | 9.8 |   |
| Asset write-downs                                          |       | 3.6                                        |       | — |   | 7.3 |   |
| Reduction in environmental accrual                         |       | —                                     |       | — |   | (4.1 | ) |
| Total unusual losses reported in other expense  (income)   |       | $                                          | 27.3       |   | $ | (3.1 | ) | $ | 33.6 |   |
| Acceleration of trademark amortization (SG&A  expense) |       | 40.9                                       |       | — |   | — |   |
| Total unusual losses (gains or recoveries)                 |       | $                                          | 68.2       |   | $ | (3.1 | ) | $ | 33.6 |   |

 
| ***By  segment:***                         |   |   |   |   |   |   |   |
|--------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| HRS                                        |   | $      | 67.9   |   | $      | (5.0   | )      | $ | 25.0 |   |
| Comdata                                    |   | 0.3    |   | 1.9    |   | 12.7   |   |
| Other                                      |   | — |   | — |   | (4.1   | )      |
| Total unusual losses (gains or recoveries) |   | $      | 68.2   |   | $      | (3.1   | )      | $ | 33.6 |   |

 

***SourceWeb exitcosts, net of recoveries***

On December 31, 2004we sold the SourceWeb Assets to RSM for $4.0 million pursuant to the terms andconditions of an Asset Purchase Agreement. In accordance with the provisions ofStatement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” we recorded a $9.1 million pre-taximpairment charge on assets associated with this platform representing theexcess 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 assetimpairment, we also recorded a $19.4 million pre-tax loss on disposal whichcomprised the fair value of the future minimum royalty obligations to Ultimateof $19.2 million and $0.2 million of employee severance costs.

SourceWeb was a payrollplatform within the small business division of our HRS business segment. Pursuantto the terms of the Asset Purchase Agreement, we agreed to provide certaintransitional and third party services to RSM for up to nine months from December 31,2004.

***Litigation andcontract settlement costs***

During the third quarterof 2003, Comdata paid $1.9 million to settle out of court with a former vendor.In the fourth quarter of 2002, we also recorded $0.8 million of other unusualcosts in HRS for a litigation settlement.

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***(Gain) loss onmarketable securities***

During 2004, we sold193,289 common shares of Ultimate for proceeds of $2.4 million and a net gainof $1.6 million. Also in 2004, we sold 582,758 common shares of USIH forproceeds of $8.7 million and a net gain of $2.9 million.

During September 2003,we sold 785,000 common shares of Ultimate for proceeds of $5.9 million and anet gain of $3.0 million. In addition, we sold 137,158 common shares of USIHfor proceeds of $1.8 million and a net gain of $0.4 million. We furtherdescribe these transactions in Note H, “Investing Activity.”

During the fourth quarterof 2002, HRS recorded a $6.3 million write-down of the carrying value ofcertain marketable equity securities. The investment write-down relatedprimarily to our December 2001 cost-based investment in preferred stock ofUSIH, which was converted to common stock as a result of an initial publicoffering in October 2002.

***Accrued exit costs,net of recoveries***

During the third quarterof 2004, we announced a shut-down of a Comdata facility that resulted inaccrued exit costs of $0.3 million of which $0.2 million was for severance and$0.1 million was related to the lease of the facility.

During the first quarterof 2002, we announced two separate series of actions intended to consolidatecertain operations in each of our business segments and recorded accrued exitcosts of $9.0 million. A plan to consolidate certain HRS payroll and tax filingprocessing services, previously conducted in 25 district offices, into fourregional processing centers resulted in the accrual of $7.5 million for exitcosts. Of the $7.5 million accrual, $5.3 million related to severance costs for317 employees all of whom were terminated by December 31, 2002, and $2.2million represented other exit costs, primarily related to lease terminations. Consolidationof certain Comdata facilities resulted in accrued severance costs of $1.0million for 76 employees, all of whom were terminated by December 31,2003, and other exit costs of $0.5 million, primarily related to leaseterminations.

In the fourth quarter of2002, we reviewed the status of accrued exit costs and revised the estimatedamounts to reduce the severance cost provisions made in prior years by $1.4million. The revisions by HRS included $0.8 million related to provisionsrecorded in the first quarter of 2002 and $0.3 million recorded in the firstquarter of 2000. The revisions by Comdata amounted to $0.3 million related toprovisions recorded in the first quarter of 2002. We also incurred additionalexpense in HRS for severance costs of $1.3 million, involving81 employees, and other exit costs of $2.9 million and in Comdata forseverance costs of $0.6 million, involving 41 employees, and other exit costsof $1.1 million. We paid all of the additional HRS severance costs during thefourth quarter of 2002. The other exit costs largely represented leasecommitments, net of expected recoveries.

***Factoringreceivables loss***

During the third quarterof 2002, we examined purchases of receivables from a certain trucking companyby Comdata’s factoring business that had grown rapidly during 2002 and foundthat the debtors could not be verified. In the meantime, the parties that hadsold us the receivables declared bankruptcy. We recorded the full amount of theloss of $9.8 million, including $0.3 million of investigative costs incurred. Dueto the unusual and non-recurring nature of the loss, we have reported the lossas other expense (income). We also made certain modifications to our policiesand procedures related to the factoring business.

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***Asset write-downs***

In January 2004, wecommitted to the internal development of a replacement for our LifeWorkscustomer management system as a result of the failure of an external contractorto meet our requirements for such a project. We recorded an asset write-down of$2.3 million in the first quarter of 2004 representing the carrying value ofthe capitalized software related to the work performed by the externalcontractor that was abandoned and determined to have no future value to us. Inaddition, during the fourth quarter of 2004, we recorded an asset write-down of$0.9 million due to an impairment of an internally developed software productin HRS.

HRS recorded a $4.9million asset write-down of internally developed software costs in the firstquarter of 2002 as a result of the February 2002 acceptance of thesoftware technology provided under a March 2001 agreement with Ultimatefurther described in Note L, “Commitments and Contingencies.” An additionalsoftware asset write-down of $0.6 million was recorded in the second quarter of2002. Also in the fourth quarter of 2002, HRS recorded a $1.5 millionwrite-down of the carrying values of certain cost-based investments and wroteoff the $0.3 million carrying value of an abandoned software product.

***Reduction inenvironmental accrual***

During the first quarterof 2002, we conducted a periodic reassessment of our environmental obligation. Thisobligation relates to the 1989 sale by our predecessor (Control DataCorporation) of its disk drive operations, which involved remediableenvironmental sites. The sale agreement provided terms describing how remedialcosts related to remediable environmental sites would be shared between thebuyer and us as the seller. The terms of the agreement included periodic jointreviews of the obligation by the buyer and us. Our obligations covered onlythose sites identified prior to the fifth anniversary of the sale. At the timeof the sale, we established an accrual for our estimated costs that might occuras a result of this agreement. During the first 10 years following the sale,both parties incurred significant costs, which then began to decrease as thesesites entered a water extraction and monitoring stage. During the first quarterof 2002, we participated in a periodic review of the status of this obligationwith the environmental officer of the buyer. A site visit was made by ourenvironmental representative at that time, and it was determined that ourestimated liability was $4.1 million less than previously determined. Theexcess accrual was then credited back to earnings as a component of otherexpense (income).

***Acceleration oftrademark amortization***

In March 2005, wediscovered that the CobraServ  trademarkcapitalized as part of a 1999 acquisition of our HRS benefits services businesswas no longer being used. This discovery caused us to restate the amortizationexpense in our consolidated financial statements for the first three quartersof 2004 as discussed in Note B, “Restatement of Financial Statements.” Itwas determined that the decision to abandon the CobraServ trademark was made inJanuary 2004 and to stop use of the CobraServ trademark in December 2004.As part of this abandonment, the scheduled amortization expense for 2005 andfuture years of $40.9 million was accelerated and amortized ratably during 2004as a change in accounting estimate under APB No. 20, “Accounting Changes.”

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**BalanceSheets at December 31, 2004 and 2003**

**ConsolidatedBalance Sheet Comparisons(Dollars in millions, except per share data)**
| ** **                                       | ** ** | **Amount**    | ** ** | **Inc (Dec)** | ** ** | **% of Total** | ** ** |
|--------------------------------------------------|------------|---------------|------------|--------------------|------------|--------------------------|------------|
| ** **                                       | ** ** | **Dec  2004** | ** ** | **Dec  2003**      | ** ** | **$**                    | ** ** | **%** | ** ** | **Dec  2004** | ** ** | **Dec  2003** | ** ** |
| ** **                                       | ** ** | ** **    | ** ** | **(restated)**     | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and  equivalents                            |       | $             | 220.7      |               | $          | 124.2                    |       | 96.5 |   | 77.7 |   | 26.8 |   | 18.4 |   |
| Receivables, net                                 |       | 505.7         |       | 467.3              |       | 38.4                     |       | 8.2 |   | 61.4 |   | 69.1 |   |
| Other current  assets                            |       | 97.6          |       | 84.5               |       | 13.1                     |       | 15.5 |   | 11.8 |   | 12.5 |   |
| Total current  assets                            |       | $             | 824.0      |               | $          | 676.0                    |       | 148.0 |   | 21.9 |   | 100.0 |   | 100.0 |   |
| Capital assets                                   |       | $             | 1,192.0    |               | $          | 1,243.0                  |       | (51.0 | ) | (4.1 | ) | 92.6 |   | 91.9 |   |
| Investments,  including derivatives              |       | 44.5          |       | 78.6               |       | (34.1                    | )          | (43.4 | ) | 3.5 |   | 5.8 |   |
| Other noncurrent  assets                         |       | 50.4          |       | 30.5               |       | 19.9                     |       | 65.2 |   | 3.9 |   | 2.3 |   |
| Total noncurrent  assets                         |       | $             | 1,286.9    |               | $          | 1,352.1                  |       | (65.2 | ) | (4.8 | ) | 100.0 |   | 100.0 |   |
| Total operating assets                           |       | $             | 2,110.9    |               | $          | 2,028.1                  |       | 82.8 |   | 4.1 |   | 34.0 |   | 39.1 |   |
| Customer funds                                   |       | 4,096.0       |       | 3,152.7            |       | 943.3                    |       | 29.9 |   | 66.0 |   | 60.9 |   |
| Total assets                                     |       | $             | 6,206.9    |               | $          | 5,180.8                  |       | 1,026.1 |   | 19.8 |   | 100.0 |   | 100.0 |   |
| Current debt                                     |       | $             | 14.9       |               | $          | 6.5                      |       | 8.4 |   | 129.2 |   | 3.1 |   | 1.7 |   |
| Drafts and  settlements payable                  |       | 153.4         |       | 113.7              |       | 39.7                     |       | 34.9 |   | 32.0 |   | 30.5 |   |
| Other current  liabilities                       |       | 310.7         |       | 253.2              |       | 57.5                     |       | 22.7 |   | 64.9 |   | 67.8 |   |
| Total current  liabilities                       |       | $             | 479.0      |               | $          | 373.4                    |       | 105.6 |   | 28.3 |   | 100.0 |   | 100.0 |   |
| Noncurrent debt                                  |       | $             | 85.8       |               | $          | 157.0                    |       | (71.2 | ) | (45.4 | ) | 23.5 |   | 38.3 |   |
| Employee benefit  plans                          |       | 208.4         |       | 196.0              |       | 12.4                     |       | 6.3 |   | 57.1 |   | 47.9 |   |
| Other noncurrent  liabilities                    |       | 70.8          |       | 56.5               |       | 14.3                     |       | 25.3 |   | 19.4 |   | 13.8 |   |
| Total noncurrent  liabilities                    |       | $             | 365.0      |               | $          | 409.5                    |       | (44.5 | ) | (10.9 | ) | 100.0 |   | 100.0 |   |
| Total operating liabilities                      |       | $             | 844.0      |               | $          | 782.9                    |       | 61.1 |   | 7.8 |   | 13.6 |   | 15.1 |   |
| Customer funds  obligations                      |       | 4,067.2       |       | 3,152.7            |       | 914.5                    |       | 29.0 |   | 65.5 |   | 60.9 |   |
| Stockholders’  equity                       |       | 1,295.7       |       | 1,245.2            |       | 50.5                     |       | 4.1 |   | 20.9 |   | 24.0 |   |
| Total liabilities  and stockholders’ equity |       | $             | 6,206.9    |               | $          | 5,180.8                  |       | 1,026.1 |   | 19.8 |   | 100.0 |   | 100.0 |   |
| Total Debt                                       |       | $             | 100.7      |               | $          | 163.5                    |       | (62.8 | ) | (38.4 | ) | 7.2 |   | 11.6 |   |
| Stockholders’  Equity                       |       | 1,295.7       |       | 1,245.2            |       | 50.5                     |       | 4.1 |   | 92.8 |   | 88.4 |   |
| Total Capitalization                             |       | $             | 1,396.4    |               | $          | 1,408.7                  |       | (12.3 | ) | (0.9 | ) | 100.0 |   | 100.0 |   |

 

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, areinvested in high-quality short-term investments or highly-rated fixedincome securities and are not utilized in our operations except for earningsfrom these investments that are included in our revenue. Additional informationon customer funds assets and liabilities can be found in Note M, “CustomerFunds.”

Our operating assets increased by $82.8 million during2004 as current assets increased by $148.0 million and noncurrent assetsdecreased by $65.2 million. Our current assets increase was due primarily toincreases of $96.5 million in cash and equivalents and $38.4 million inreceivables. The increase in cash and equivalents reflected to some extent ourdecision to suspend repurchases of our common stock during the last half of2004. The increase in receivables is largely related to Comdata and reflectsthe impact of higher 

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fuel prices, which morethan offset the benefit of improved collection results. We discuss changes incash and equivalents in a following section of this discussion entitled “CashFlows.”  Our noncurrent assets decreasedby $65.2 million as the carrying value of goodwill and other intangible assetsdeclined by $31.1 million and investments (including derivatives) declined by$34.1 million. The decrease in goodwill and other intangible assets included areduction of $40.9 million related to our decision to phase out the use of theCobraServ trademark during 2004 as further discussed in Note B, “Restatement ofFinancial Statements” and Note G, “Capital Assets.”  The decrease in the carrying value ofinvestments reflected both the disposition of equity securities as well assettlements and revaluation of derivative instruments. As described in Note H, “InvestingActivity—Interest Rate Contracts,” we disposed of our interest rate derivativeinstruments in February 2005. While the customer funds assets balance on December 31,2004 was $943.3 million higher than the balance on December 31, 2003, theaverage invested balance for the year 2004 was $288.2 million higher than forthe year 2003. The higher average balance largely reflected increasingacceptance of our direct deposit payroll service and higher levels of customertax obligations.

Current liabilitiesincreased by $105.6 million during 2004 as current debt increased by $8.4million and Comdata drafts and settlements payable increased by $39.7 million. Highertrade accounts payable and deferred income, related primarily to Comdata retailservices, represented most of the remaining increase. The increase in currentdebt largely represents drawings by Ceridian Centrefile on its bank overdraftfacility. The decrease of $44.5 million in noncurrent liabilities includes areduction in borrowings under our Comdata receivables securitization facilityof $65.0 million, as well as an increase in the noncurrent portion of deferredincome. Customer funds obligations increased by $914.5 million together withthe increase in customer funds assets, without regard to unrealized gains addedto the assets as a result of revaluing these securities at market prices. Theincrease of $50.5 million in stockholders’ equity includes net earnings of $36.9million, unrealized gains from customer funds and marketable securities of$18.2 million and currency translation of $22.9 million, further increased by$58.6 million from employee stock plans and reduced by $80.3 millionrepresenting the cost of reacquired Ceridian common shares held as treasurystock and a pension liability adjustment of $5.8 million.

**CashFlows**

**ConsolidatedStatements of Cash Flows Highlights(Dollars in millions)**
| ** **                                       | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Operating  activities                            |       | $                                           | 252.9      |   | $ | 56.6 |   | $ | 137.4 |   |
| Investing  activities                            |       | (68.4                                       | )          | (34.4 | ) | (104.4 | ) |
| Financing  activities                            |       | (93.5                                       | )          | (37.5 | ) | (15.1 | ) |
| Effect of  exchange rate on cash and equivalents |       | 5.5                                         |       | 5.2 |   | 0.2 |   |
| Net cash flows  provided (used)                  |       | $                                           | 96.5       |   | $ | (10.1 | ) | $ | 18.1 |   |
| Cash and  equivalents at end of year             |       | $                                           | 220.7      |   | $ | 124.2 |   | $ | 134.3 |   |

 

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**Reconciliationof Earnings to Cash Inflows (Outflows) from Operating Activities(Dollars in millions)**
| ** **                                        | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | ** **                                  | ** ** | ** (restated) ** | ** ** | ** (restated) ** | ** ** |
| Net earnings                                      |       | $                                           | 36.9       |   |   | $ | 98.8 |   |   |   | $ | 111.5 |   |   |
| Deferred income  tax provision (benefit)          |       | (19.8                                       | )          |   | 34.2 |   |   |   | 24.7 |   |   |
| Depreciation and  amortization                    |       | 124.7                                       |       |   | 79.3 |   |   |   | 75.8 |   |   |
| Provision for  doubtful accounts                  |       | 9.7                                         |       |   | 11.2 |   |   |   | 17.0 |   |   |
| SourceWeb exit  costs, net of recoveries          |       | 28.5                                        |       |   | — |   |   |   | — |   |   |
| Asset write-downs                                 |       | 3.6                                         |       |   | — |   |   |   | 7.3 |   |   |
| Unrealized (gain)  loss on derivative instruments |       | 28.0                                        |       |   | 15.7 |   |   |   | (47.1 | ) |   |
| (Gain) loss on  marketable securities             |       | (4.5                                        | )          |   | (3.4 | ) |   |   | 6.3 |   |   |
| Contribution to  retirement plan trusts           |       | —                                      |       |   | (105.5 | ) |   |   | (3.3 | ) |   |
| Other                                             |       | 6.5                                         |       |   | 7.0 |   |   |   | (10.4 | ) |   |
| From earnings                                     |       | 213.6                                       |       |   | 137.3 |   |   |   | 181.8 |   |   |
| From working  capital activities                  |       | 39.3                                        |       |   | (80.7 | ) |   |   | (44.4 | ) |   |
| Cash flows provided by  operating activities      |       | $                                           | 252.9      |   |   | $ | 56.6 |   |   |   | $ | 137.4 |   |   |

 

***Cash Balances andOperating Activities***

During 2004, our cash andequivalents increased by $96.5 million to $220.7 million as we used operatingcash flows and cash balances to fund investing activities, repay debt andrepurchase stock. In 2003, our cash and equivalents decreased by $10.1 milliondue largely to operating activities. The cash flows from operating activitiesfor 2003 included payments of $105.5 million for employer contributions to ourpension plans for employees in the U.S. and the United Kingdom. In 2002, ourcash and equivalents increased by $18.1 million to $134.3 million as cash flowsfrom operating activities provided funds for investing and to reduce debt.

Our operating cash flowsincreased $196.3 million during 2004 as compared to 2003 due mostly to pensioncontributions of $105.5 million in 2003 and an increase in working capitalactivities of $120.0 million due mostly to an increase in accrued taxes,accounts payable and drafts settlements payable. Although the impact of thechange in receivables changed little in the comparative periods, a Comdataeffort to improve receivables management and collection processes contributedsignificantly to 2004 operating cash flows compared to 2003. This increase wasmore than offset by the effect of rising fuel prices included in Comdatareceivables.

During 2003, our operatingcash flows were $56.6 million compared to $137.4 million in 2002. This decreaseof $80.8 million was due mostly to an increase in pension contributions of$102.2 million. When comparing the working capital cash flows for 2003 and2002, the $36.3 million additional cash usage is largely due to decreases inaccrued taxes and Comdata drafts and settlements payable.

***InvestingActivities***

Ournet cash outflows from investing activities amounted to $68.4 million in 2004, $34.4million in 2003 and $104.4 million in 2002 as set forth in the following table.
| ** **                                    | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|----------|------------|----------|------------|
| ** **                                    | ** ** | **(dollars in millions)** | ** ** |
| Capital  expenditures                         |       | $                                   | (66.2      | )        | $          | (57.5    | )          | $ | (54.6 | ) |
| Acquisitions of  investments and businesses   |       | (19.3                               | )          | (1.7     | )          | (50.3    | )          |
| Proceeds from  sales of businesses and assets |       | 17.1                                |       | 24.8     |       | 0.5      |       |
| Net cash inflows  (outflows)                  |       | $                                   | (68.4      | )        | $          | (34.4    | )          | $ | (104.4 | ) |

 

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During 2004, our capitalexpenditures included $32.9 million for property and equipment and $33.3million for software and development costs. Our expenditures for acquisitionsof investments and businesses (net of cash acquired) amounted to $19.3 millionwith the HRS acquisition of Recruiting Solutions, Inc., a provider ofweb-based recruiting products, for $11.0 million and the Comdata 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 $8.7 million from thesale of 582,758 common shares of U.S.I. Holdings Corporation (“USIH”), $2.4million from the sale of 193,289 common shares of Ultimate and $4.0 millionfrom the sale of the SourceWeb Assets.

Our 2003 investingactivities included capital expenditures of $30.5 million for property andequipment and $27.0 million for software and development costs. In March 2003,we spent $3.0 million to acquire 750,000 shares and a warrant to purchase anadditional 75,000 shares of Ultimate. During September 2003, we sold785,000 Ultimate common shares purchased on the open market in years prior to2003 for $5.9 million and 137,158 common shares of USIH for $1.8 million. Alsoduring 2003, we received $1.4 million returned from an earn-out escrow relatedto the acquisition of GLS Benefits Services LLC, a benefits administrationoutsourcing firm (“Great Lakes Strategies”) in 2002, $12.1 million for assetssold relative to two sale leaseback transactions, and $4.3 million for sale ofland not used in our businesses.

During 2002, our investmentin capital expenditures included $31.1 million for property and equipment and$23.5 million for software and development costs. The software developmentcosts included $4.7 million for development of SourceWeb. During 2002, we alsospent $15.6 million to acquire SYLINQ Corporation (“SYLINQ”), $8.9 million forHR Comply, $19.0 million for Great Lakes Strategies and a total of $6.8 millionfor other acquisitions. We described these transactions further in Note H, “InvestingActivity.”

***Financing Activities***

Ournet cash outflows from financing activities amounted to $93.5 million in 2004,$37.5 million in 2003 and $15.1 million in 2002 as set forth in the followingtable.
| ** **                                            | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------|------------|----------|------------|----------|------------|
| ** **                                            | ** ** | **(dollars in millions)** | ** ** |
| Revolving credit  facilities and overdrafts, net      |       | $                                   | (59.6      | )        | $          | (49.6    | )          | $ | (44.6 | ) |
| Repayment of  other debt                              |       | (4.1                                | )          | (1.4     | )          | —   |       |
| Repurchase of  common stock                           |       | (80.3                               | )          | (28.8    | )          | (5.4     | )          |
| Proceeds from  stock option exercises and stock sales |       | 50.5                                |       | 42.3     |       | 34.9     |       |
| Net cash inflows  (outflows)                          |       | $                                   | (93.5      | )        | $          | (37.5    | )          | $ | (15.1 | ) |

 

Our financing activitiesfor 2004 included the repurchase of 4,012,400 shares of our common stock for$80.3 million on the open market at an average net price of $20.01 per share. Wealso received proceeds of $50.5 million for exercises of stock options andemployee stock plan purchases. Also during 2004, we paid $65.0 million on ourComdata receivable securitization facility. At December 31, 2004, underour $350.0 million domestic revolving credit facility, we had $347.5 million ofunused borrowing capacity. Of that amount, we have designated $75.0 million asbackup for the amount outstanding under the Comdata receivables securitizationfacility, which leaves $272.7 million available for other purposes.

During 2003, werepurchased 1,844,100 shares of our common stock for $28.8 million on the openmarket at an average net price of $15.60 per share. Proceeds from exercises ofstock options and employee stock plan purchases amounted to $42.3 millionduring 2003 compared to $34.9 million in 2002. Also during 2003, we enteredinto two capital lease arrangements resulting in an obligation of $22.2 millionto be paid over a 60-month period. We also reduced our borrowings under ourdomestic revolving credit facility by $40.0 million and our Comdata receivablesecuritization facility by $10.0 million.

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In June 2002, Comdataentered into a $150.0 million receivables securitization facility. The facilityhas up to a three-year term and uses certain of Comdata’s trade receivables ascollateral for borrowings. At December 31, 2002, $150.0 million had beendrawn against and remained outstanding under this facility. We used thoseproceeds and additional payments of $45.0 million to reduce borrowings underour $350.0 million revolving credit facility to $40.0 million at the end of2002. Proceeds from exercises of stock options and employee stock planpurchases during 2002 amounted to $34.9 million. We purchased 393,000 shares ofour common stock on the open market during the last half of 2002 for $5.4million at an average price, including commissions, of $13.74 per share.

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

**Liquidity andCapital Resources**

We expect to meet ourliquidity needs from existing cash balances, cash flows from operations andborrowings under external credit facilities. Cash balances and cash flows arediscussed under the section of this discussion entitled “Cash Flows.” Cashflows from operations are primarily influenced by the same factors thatinfluence revenue as discussed in a preceding section of this discussionentitled “Results of Operations” and in several of the items in the followingsection entitled “Cautionary Factors That Could Affect Future Results.”Cautionary factors of particular relevance include those that refer to theeffects of government regulations on such matters as the timing of taxpayments, interest rates, employee benefits, and funds transfer activities; ourability to attract new customers and retain our existing customers; and generaleconomic conditions.

At December 31, 2004,our committed credit arrangements included a domestic revolving credit facilitythat provides up to $350.0 million for a combination of advances of which up to$50.0 million can be used for letters of credit until March 2006. Inaddition at December 31, 2004, we had a $150.0 million receivablessecuritization facility with a term ending in June 2005, which usesselected Comdata trade receivables as collateral for borrowing. In May 2004,Ceridian Centrefile replaced its £3.0 million overdraft facility with a £6.5million overdraft facility available through April 2005.

As of December 31,2004, we have unused borrowing capacity under the $350.0 million revolvingcredit facility amounting to $347.5 million of which we have designated $75.0million as backup for the amount outstanding at that date under the Comdatareceivables securitization facility. The interest rate for borrowings under therevolving credit facility is 1% per annum over LIBOR, subject to change basedon our senior unsecured debt ratings. The revolving credit facility containscertain covenants that require that our consolidated debt must not exceed ourstockholders’ equity, as defined in the agreement, as of the end of anyquarter, and the ratio of earnings before interest and taxes to interestexpense on a rolling four quarter basis to be at least 2.75 to 1 and alsolimit liens, subsidiary debt, contingent obligations, operating leases,minority equity investments and divestitures, among other things. In late 2004and early 2005, we amended our domestic revolving credit facility to allowadditional time to deliver our quarterly reports on Form 10-Q for thesecond and third quarters of 2004 and this Form 10-K to our lenderswithout the delayed delivery constituting a default under this agreement. Wehave also further amended this agreement to apply the provisions with respectto amortization and/or impairment of goodwill as are in effect under GAAP on March 31,2005 for the fourth quarter 2004 and periods thereafter for the calculation offinancial ratios and other financial requirements set forth in such agreement. Weare in compliance with all covenants related to the amended credit facilities.

Our planned expendituresfor capital assets in 2005 are expected to be between $80.0 million and $85.0million with an estimated allocation of 87% to HRS and 13% to Comdata. We alsoplan to continue to grow our businesses through strategic acquisitions.

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As described in thepreceding discussion of financing activities in the “Cash Flows” section ofthis discussion, we have been repurchasing Ceridian common stock pursuant toour stock repurchase program since late 2002. We repurchased 393,000 shares in2002 and 1,844,100 shares in 2003. In2004, we suspended the program in mid-year due to delays in filing our periodicSEC reports. At the time we suspended our repurchase effort, we had repurchased4,012,400 shares during 2004 for a total of $80.3 million. As of December 31,2004, we were authorized to purchase up to 6,350,500 additional shares of ourcommon stock under the authorization from our Board of Directors. Wegenerally use our treasury stock to address our obligations under our stockcompensation and employee stock purchase plans. We expect to resume our stockrepurchase program following the release of first quarter 2005 results.

Thetable below describes the annual cash payments for which we are obligated underour financing agreements, which are reported on our balance sheet, and our operatinglease agreements and significant contractual commitments, which are not on ourbalance sheet, at that date.

**ContractualObligations at December 31, 2004(Dollars in millions)**
| ** **                         | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **Total**  | ** ** | **Less than  one year**         | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 years** | ** ** |
| Long-term debt  and capital leases |       | $          | 100.7      |                                      |       | $ | 89.9 |   |   | $ | 9.0 |   | $ | 1.8 |   |   | $ | — |   |   |
| Operating leases                   |       | 294.2      |       |                                      | 52.7       |   |   | 87.4 |   | 62.6 |   |   | 91.5 |   |   |
| Purchase  obligations              |       | 22.9       |       |                                      | 8.2        |   |   | 12.9 |   | 1.8 |   |   | — |   |   |
| Retirement plans                   |       | 551.0      |       |                                      | 51.1       |   |   | 104.2 |   | 109.6 |   |   | 286.1 |   |   |
| Total                              |       | $          | 968.8      |                                      |       | $ | 201.9 |   |   | $ | 213.5 |   | $ | 175.8 |   |   | $ | 377.6 |   |   |

 

Our long-term debt andcapital lease obligations are described in the “Cash Flows” section of thisdiscussion and in Note K, “Financing.” Since we have the capability andintention of continuing our use of short-term borrowings under our Comdatareceivables securitization facility when it matures in June 2005 and ourrevolving credit facility when that facility matures in 2006, the outstandingbalances are reported as noncurrent liabilities on our consolidated balancesheet. The table above reflects the $75.0 million due under the Comdatareceivables securitization facility according to the contractual 2005 maturitydate.

We conduct a substantialportion of our operations in leased facilities. Most of these leases containrenewal options and require payments for taxes, insurance and maintenance. Wealso lease equipment for use in our businesses. In the table above, we includeour on-balance-sheet capital lease obligations with our debt payments and ouroff-balance-sheet operating lease commitments as lease payments.

In March 2001, weentered into an agreement with Ultimate, amended in August 2001 and February 2002,that provided us with a non-exclusive license to use Ultimate’s software aspart of a Web-enabled integrated payroll/HR/self-service offering to our smallbusiness customers. Pursuant to the February 2002 amendment, the licenseagreement provided for a monthly royalty commencing in January 2003, whichis based on the number of our customers’ employees paid by using the softwareand subject to minimum and maximum amounts. The minimum obligation requiredmonthly payments of $0.5 million per month from January 2004 until January 1,2006, when the per-employee monthly charge escalates at a rate of 5% per annumuntil the end of the noncancelable term in March 2008. On December 31,2004, we sold certain customer relationships and other assets associated withour SourceWeb payroll platform and ceased use of this contractual relationship.As of December 31, 2004 we remained obligated to make minimum royaltypayments totaling $20.7 million, which are included in the table above. A furtherdescription of this contract arrangement is presented in Note L, “Commitmentsand Contingencies” and a description of the sale of the SourceWeb Assets ispresented in Note D, “Supplementary Data to Statements of Operations.”

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In connection with theacquisition of certain call center assets in December 2002, we enteredinto royalty and services arrangements that are noncancelable for the first 36months. Under these arrangements, we are obligated to make minimum payments of$2.2 million in 2005.

Our payment obligationsfor employee benefit plans are further described in Note I, “Retirement Plans.”

**CriticalAccounting Policies and Estimates**

The preparation of thefinancial statements in accordance with generally accepted accountingprinciples requires us to make judgments, estimates, and assumptions regardinguncertainties that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities, and the reported amounts ofrevenues and expenses. Areas that require significant judgments, estimates, andassumptions include the assignment of fair values upon acquisition of goodwilland other intangible assets and testing for impairment, the capitalization,amortization and impairment testing of software and development costs, thedetermination of our liability for pensions and other postretirement benefits,and 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 our Management’sDiscussion and Analysis of Financial Condition and Results of Operations andconsolidated financial statements and related notes provide a meaningful andfair perspective of our company. Further discussion of the judgments anduncertainties associated with our business can be found in the section of thisdiscussion entitled “Cautionary Factors That Could Affect Future Results” and Part II,Item 7A of this report.

***Assignment of fairvalues upon acquisition of goodwill and other intangible assets and testing forimpairment***

In the event of a businesscombination where we are the acquiring party, we are required to assign fairvalues to all identifiable assets and liabilities acquired, includingintangible assets such as customer lists, trademarks, technology and covenantsnot to compete. We are also required to determine the useful life foramortizable assets acquired. These determinations require significantjudgments, estimates, and assumptions; and, when material amounts are involved,we generally utilize the assistance of independent valuation consultants. Theremainder of the purchase cost of the acquired business not assigned toidentifiable assets or liabilities is then recorded as goodwill. Althoughgoodwill is no longer subject to amortization after January 1, 2002, thecarrying value is subject to periodic review, at least annually, for impairmentof that value.

We reassess the carryingvalue of goodwill annually, or more frequently when certain developments occur.A number of significant assumptions and estimates are involved in determiningthe current fair value of the reporting unit including operating cash flows,markets and market share, sales volumes and prices, costs to produce, andworking capital changes. We consider historical experience and all availableinformation at the time the fair values of our reporting units are estimated. However,actual fair values that could be realized in an actual transaction may differfrom those used to evaluate the impairment of goodwill. The evaluation ofimpairment involves comparing the current fair value of the reporting units tothe recorded value (including goodwill).

Ifthe recorded value (including goodwill) of a reporting unit exceeds its currentfair value, then to the extent that the recorded value of goodwill of the reportingunit exceeds the implied fair value of the reporting unit’s goodwill animpairment loss is recognized. The implied fair value of goodwill is determinedin the same manner as the amount of goodwill recognized in a business combinationis determined. That is, the fair value of a reporting unit is allocated to allof the assets and liabilities of that reporting unit including any unrecognizedintangible assets and the excess is the implied fair value of goodwill.

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We alsotest long-lived assets, including other intangible assets, under the guidanceof Statement of Financial Accounting Standards No. 144 (“FAS 144”), “Accountingfor the Impairment or Disposal of Long-Lived Assets,” whenever events orchanges in circumstances indicate that the carrying value of such an asset orgroup 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

·       asignificant adverse change in legal factors or in the business climate thatcould affect the value of the asset or asset group, including an adverse actionor assessment 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.

When the need for such atest is indicated, we consider such factors as whether the amortization of thecarrying values for these assets for each operating unit can be recoveredthrough forecasted undiscounted cash flows over their remaining economic life.

***Capitalization,amortization and impairment testing of software and development costs***

Our software anddevelopment efforts are substantially for internal use and, as indicated inNote A, “Accounting Policies—Software and Development Costs” to ourconsolidated financial statements, we rely on AICPA Statement of Position 98-1(“SOP 98-1”) for accounting guidance. Therefore, for our modification ordevelopment efforts, we need to identify by nature and by stage of developmentthose costs which are to be capitalized rather than charged to operations asincurred. We also need to identify the point at which the modified or developedsoftware is ready for use, capitalization of cost will cease and amortizationof that cost will begin. Costs incurred subsequent to the ready for use datewill generally be charged to operations and only capitalized if justified as amaterial improvement in the functionality of the capitalized software product.

With regard to therecoverability of capitalized software and development costs, we regularlyperform an assessment of our ability to recover the costs invested in theseassets. The net amount of these costs shown on our consolidated balance sheetat December 31, 2004 was $75.7 million. The elements of software anddevelopment costs were purchased software of $23.3 million and internallydeveloped software of $52.4 million. These amounts represent the costs we haveinvested in these assets, reduced by amortization expense charged against ourearnings as the software was used in our operations and by any write-downs as aresult of our recoverability analysis. Our recoverability analysis considersprojected future cash flows from the utilization of the underlying software inthe respective components of the business. Our projections of future cash flowsare affected by such factors as technological change, competitive offerings,marketplace expectations and project development. Changes in any of thesefactors may result in future write-downs of the carrying value of these orother assets. The amount of the write-down, if any, is largely dependent on ourestimates of future cash flows and the selection of an appropriate discountrate. As a result of our assessments during the past three years, we recorded$3.2 million in 2004 for abandoned software projects, none in 2003, and $5.8million in 2002 for abandoned software projects.

***Determination of our liability for pensions and otherpostretirement benefits***

We present informationabout our pension and postretirement benefit plans in Note I, “Retirement Plans”to our consolidated financial statements. The determination of the liabilitiesand expenses for 

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pensionsand other 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 rate used to discount futureestimated liabilities is determined considering the rates available at year-endon debt instruments that could be used to settle the obligations of the plan. Theimpact on the liabilities of a change in the discount rate of 1⁄4 of 1% would beapproximately $18.2 million and approximately $0.3 million to pre-taxearnings in the following year. The long-term rate of return is estimated byconsidering historical returns and expected returns on current and projectedasset allocations and is generally applied to a five-year average market valueof assets. A change in the assumption for the long-term rate of return on planassets of 1⁄4 of 1% would impact pre-tax earnings by approximately $1.3 millionfor 2005.

***Tax matters***

As a company withoperations in many states in the U.S. as well as in the United Kingdom andCanada, we record an estimated liability and expense for income and other taxesbased on what we determine will likely be paid in the various tax jurisdictionsin which we operate. The liabilities ultimately realized and paid are dependenton various matters including the resolution of the tax audits in the variousaffected tax jurisdictions and may differ from the amounts recorded. Anadjustment to the estimated liability would be recorded through income in the periodin which it becomes probable that the amount of the actual liability differsfrom the amount recorded.

**CautionaryFactors That Could Affect Future Results**

In connection with the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, wepresent the cautionary statements set forth below, identifying importantfactors that could cause our actual results to differ materially from thoseprojected in forward-looking statements made by us. You should carefullyconsider each of the following risks and all of the other information in thisreport. The risks and uncertainties described below and contained in thisreport are not the only ones we will face. Additional risks and uncertaintiesnot presently known to us or that we currently believe to be immaterial mayalso adversely affect our businesses. If any of the risks and uncertaintiesdevelops into actual events, our business, financial condition or results ofoperations could be materially affected. If that happens, the trading price ofour common stock could decline significantly.

***Our revenue dependsin large part on our ability to retain customers.***

Customerretention is an important factor in the amount and predictability of revenueand profits in each of our businesses. Our ability to retain our customersdepends on a number of factors, including:

·       customersatisfaction;

·       productand service offerings by competitors;

·       customerservice levels;

·       price;and

·       customerviability.

In providing some of ourservices, particularly services provided by our HRS business, we incurinstallation and conversion costs in connection with new customers that willneed to be recovered before the contractual relationship will provideincremental profit. Longer customer relationships are likely to be moreprofitable.

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***Changes in or the elimination of governmentalregulations may negatively impact our revenue and earnings.***

Changes in or theelimination of governmental regulations may adversely affect our revenue andearnings and the way we conduct our businesses. 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 the amount and type of federal or state taxes employersand employees are required to pay will affect the associated new products orservices that we may sell. As another example, Comdata is currently licensed onthe state level by the banking or financial institutions departments ofnumerous states. Continued licensing by these states is subject to ongoingsatisfaction of compliance requirements regarding safety and soundness,including, for example, posting of surety bonds to guarantee payment of fundsin transit. Changes in this regulatory environment, including theimplementation of new or varying measures by the U.S. federal government,may significantly affect or change the manner in which Comdata currentlyconducts some of the aspects of its business.

***Our future revenuegrowth will depend on our ability to continue selling our products and servicesto our existing customers, introducing new or enhanced products and services,attracting and retaining new customers and selling additional products andservices to existing customers.***

Weexpect that a portion of our anticipated future revenue growth in each of ourbusiness segments will be derived from:

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

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

·       theselling of products and services to new customers; and

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

Howsuccessful we will be in these efforts will depend on a variety of factors,including:

·       thequality and perceived value of our product and service offerings;

·       effectivesales and marketing efforts;

·       ourability to attract new and retain new and existing customers;

·       thelevel of market acceptance and the avoidance of difficulties or delays indevelopment or introduction of new products and services;

·       ourability to integrate technology and information systems into our products andservices;

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

·       theregulatory needs and requirements facing 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 growth objectives from our cross-sellingefforts and selling of new products and services. The inability to cross-sellour products and services, attract new and retain new and existing customers orsuccessfully develop and implement new and enhanced products and services couldharm our businesses.

***Economic factors may harm our business and operatingresults.***

Trade, monetary and fiscalpolicies, and political and economic conditions may substantially change, withcorresponding impacts on the industries that we serve, particularly those moreeconomically sensitive industries such as trucking and retail. Approximately72 percent of Comdata’s revenue for 2004 was attributable to itstransportation business. Comdata’s results of operations are, therefore,dependent on the level of activity in the transportation industry, which, inturn, is affected by general economic 

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conditions.For example, a decrease in the number of truck drivers would decrease thenumber of Comchek transactions and could adversely affect Comdata’s revenues. Similarly,since a significant portion of our fueling transactions are priced by referenceto the amount spent on the transaction, our revenue can be significantlyaffected by changes in fuel prices. Falling fuel prices directly reduce theamounts of revenue and earnings related to these transactions. Rising fuelprices increase our revenue and earnings but also increase the working capitalrequirements of Comdata and subject Comdata to greater credit or bad debt riskswith respect to its customers that purchase fuel using a Comdata paymentmethod.

Changes in trade, monetaryand fiscal policies, and political and economic conditions could also affectemployment levels, with a corresponding impact on our payroll processing andtax filing businesses. Decreased employment levels, as well as slowed economicconditions, could negatively affect wage and bonus payments, orders and thetiming of product installations, and negatively impact the operating results ofour HRS business.

***Litigation andgovernmental investigations may harm our financial results.***

Our future operatingresults may be harmed by adverse judgments, settlements, unanticipated costs orother effects of legal and administrative proceedings now pending or that maybe instituted in the future, or from investigations by the Securities andExchange Commission and other administrative agencies.

We arecurrently responding to document requests from the SEC, and we have beenadvised that the SEC has issued a formal order of investigation. We arecooperating with the SEC in its investigation. We cannot predict the outcome ofthe SEC’s investigation or when the investigation will be resolved. An adverseoutcome of this investigation could have a material adverse effect on us andresult in:

·       theinstitution of administrative or civil proceedings;

·       sanctionsand the payment of fines and penalties;

·       therestatement of our financial results for the years under review;

·       changesin personnel;

·       stockholderlawsuits; and

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

In February 2004, werestated our financial results for the years ended December 31, 2002, 2001and 2000 and the first, second and third quarters of 2003 to reflect a changein accounting relating to the revenue recognition policy of Comdata’s StoredValue Systems unit.

In July 2004, weannounced a postponement of our second quarter 2004 earnings release and theinvestigation being directed by the Audit Committee of our Board of Directorsfocusing on the capitalization and expensing of certain costs in our HRSbusiness.

In August 2004, anumber of shareholder class actions and derivative suits were filed against thecompany. The judgment, settlement and costs of this litigation could have anadverse effect on our financial results.

In addition, we restatedour consolidated financial statements for the years 1999 through 2003 and forthe quarterly period ended March 31, 2004 to correct errors in accountingrelating principally to the capitalization of internally developed software,the commencement of amortization of capitalized software development costs,accounting for interest rate and fuel price derivative instruments and theaccrual of costs and expenses. The determination to restate these consolidatedfinancial statements was made after errors were discovered in October 2004 andJanuary 2005. We refer you to the note entitled “Restatement of FinancialStatements” contained in Part II, Item 8, “Financial Statements andSupplementary Data” in Amendment No. 1 on Form 10-K/A to our annual report onForm 10-K for the year ended December 31, 2003 for additional discussion ofthis restatement. Further, we restated our consolidated financial 

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statementsfor the years 2000 through 2003 and the first, second and third quarterlyperiods in 2004 to correct errors in accounting related principally to theCobraServ trademark amortization, leases, international acquisitions, accrualof costs and expenses, and income tax reserves. The determination to restatethese consolidated financial statements was made after errors were discoveredin March and April 2005. We refer you to Note B, “Restatement of FinancialStatements” and Note O, “Supplementary Quarterly Data” contained in Part II, Item8, “Financial Statements and Supplementary Data” contained in Part II, Item 8,“Financial Statements and Supplementary Data” in this Form 10-K for additionaldiscussion of this restatement. These restatements could result in newlitigation or expand existing litigation. The judgments, settlement and costsof such litigation could have an adverse effect on our financial results.

***Any problems or delays we may experience inimplementing system upgrades and conversions could harm our business.***

We expect to continue ourefforts to transition to new or enhanced data processing systems and/orsoftware in several of our business units, including systems that processcustomer data and internal management information systems which provideenhanced data and information services. The successful implementation of thesenew or enhanced systems will be critical to the effective delivery of productsand services and the efficient operation of our businesses. Problems or delayswith the installation or initial operation of the new or enhanced systems coulddisrupt or increase costs in connection with our delivery of services and withour operations planning, financial reporting and management. From time to time,we have experienced these types of problems or delays.

***Our ability toremain competitive depends on our ability to adapt to changing technology.***

As a provider ofinformation management and data processing services, we will need to adapt andrespond to the technological advances offered by our competitors and the technologicalrequirements of our customers, including those related to the Internet, inorder to maintain and improve upon our competitive position. For example,Comdata’s credit, debit and cash cards could be replaced by a next-generationpayment method. There can be no assurance that we will develop and release newproducts and services or product and service enhancements within the requiredtime frames and within targeted costs. Significant delays, difficulties oradded costs in introducing new products and services or enhancements, eitherthrough internal development, acquisitions or cooperative relationships withother companies, could adversely affect the market acceptance of our productsand services and our operating results.

***Our strategy tomake acquisitions of and investments in complementary businesses, products andtechnologies involves risks that could harm our business and operating results.***

One ofour growth strategies is to make acquisitions of and investments incomplementary businesses, products and technologies that will enable us to addproducts and services for our core customer base and for adjacent markets, andto expand each of our businesses geographically. Our ability to make theseacquisitions and investments will depend on:

·       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.

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 develop, and we cannot guarantee that anyacquisition or investment will in fact produce the revenue, earnings orbusiness synergies that we anticipated.

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In addition,implementation of this strategy entails a number of 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, someacquisitions and investments may require the consent of the lenders under our$350 million revolving credit****and ourComdata receivables securitization facilities, and we cannot predict whetherapprovals would be forthcoming or the terms on which the lenders would approvethese transactions. Also, from an accounting perspective, acquisitions andinvestments may involve non-recurring charges and significant charges fromperiodic reassessments of the recoverable value of goodwill and otherintangible assets arising from acquisitions that could harm our operatingresults.

***Our $350 millionrevolving credit and Comdata receivables securitization facilities may restrictour operating flexibility.***

The governingdocuments for our $350 million revolving credit and Comdata receivables securitizationfacilities contain a number of significant provisions 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;

·       engagein mergers or consolidations; and

·       engagein transactions with our affiliates.

These restrictions couldhurt 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 ofour credit facilities, the lenders under the other facility could elect todeclare all of the outstanding borrowings, as well as accrued interest andfees, to be due and payable and require us to apply all of our available cashto repay those borrowings. In addition, a default may result in higher rates ofinterest and the inability to obtain additional capital.

***The markets weserve may attract new competitors or cause current competitors to focus more onthese markets, which could harm our business.***

New competitors coulddecide to enter the markets we serve or current competitors could decide tofocus more on these markets, and thereby intensify the highly competitiveconditions that already exist. These new entrants and existing competitorscould offer or introduce new technologies or a different 

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servicemodel, or could treat the services to be provided by one of our businesses asone component of a larger product or service offering. These developments couldenable these new and existing competitors to offer similar products or servicesat reduced prices. Any of these or similar developments could harm our businessand results of operations. 

***We will be subjectto risks related to our international operations, which may harm our operatingresults.***

Approximately 24percent of HRS revenue in 2004 was obtained from our international operations.Our Ceridian Centrefile subsidiary provides human resource services, payrollprocessing services and human resource information systems software in theUnited Kingdom. Ceridian Centrefile is expanding its payroll services intonumerous countries by engaging a partner within a country to provide us withpayroll administration and processing services for that country. Our CeridianCanada operations handle and hold payroll as well as tax filing funds for ourCanadian customers. Comdata also operates in Canada, and has prospects forexpanding its business into Latin and South America and Europe. In addition tothe risks otherwise described herein, international operations are subject to furtheradditional risks that could adversely affect those operations or our businessas a whole, including: 

·       costsof customizing products and services for foreign customers;

·       difficultiesin managing and staffing international operations;

·       difficultieswith or inability to engage partners in Europe;

·       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;

·  exposure to legal jurisdictions which may notrecognize or interpret customer contracts in predictable ways;

·       exposureto local economic and political conditions; and

·       unfavorablecurrency exchange rates.

***We expect tocontinue to invest in and improve the performance of our U.S. HRSbusiness, and we cannot assure you that our efforts and the amount we invest inthese plans will improve the financial performance of our U.S. HRSbusiness.***

We have ongoing andcontinued initiatives to invest in and improve the performance of ourU.S. HRS business. These initiatives include: 

·       transitioningsmall and medium size business customers to our Internet payroll products;

·       improvingour customer service model;

·       improvingcustomer retention;

·       continuingproduct enhancements;

·       investingin our Six Sigma program, an effort that focuses on helping organizationsdesign and produce products and services better, faster and cheaper;

·       consolidatingand improving efficiencies at our payroll processing centers and benefitsadministration operations; and

·       increasingthe effectiveness of our sales efforts.

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We cannot assure you thatour efforts and the amount we invest in this process will improve the financialperformance of our U.S. HRS business, and if so, by how much. If theseinitiatives are less successful than planned, or the level of investment needsto be increased, our business could be harmed. 

***Governmentregulation changes on timing or amount of remittances and changes in interestrates may reduce our investment income from customer 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.

***Our ability toimprove operating margins in our HRS business will depend on the degree towhich and the speed with which we will be able to increase operationalefficiencies and 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 will be able to increaseoperational efficiencies and reduce operating costs. Delays or difficulties inimplementing and consolidating process improvements, such as those designed toreduce printing, telecommunication and customer service costs, or quickly andeffectively installing new customers or new products and services, and inconsolidating various functions, including administrative functions,eliminating duplicate operations and consolidating facilities could adverselyaffect the timing or effectiveness of cost reduction and margin improvementefforts.

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

Our HRS customers transfer to our HRS division or itssubsidiaries contributed employer and employee tax funds. Our HRS division orits subsidiaries process the data received from its customers and remit thefunds along with a tax return to the appropriate taxing authorities when due.Retirement plan assets are remitted directly by our customers to investmentvehicles selected by the plan administrator or plan sponsor. Tracking,processing and paying these tax liabilities and administering retirement plansis complex. Mistakes may occur in connection with this service. Our HRSdivision or its subsidiaries and its customers are subject to large cashpenalties imposed by tax authorities for late filings or underpayment of taxesor required plan contributions.

As a result of the benefits services our benefitservices subsidiary provides, it may be subject to potential legal liability asa provider of portability compliance services. As a provider of COBRA(Consolidated Omnibus Budget Reconciliation Act) compliance services, ourbenefit services subsidiary is subject to excise taxes for noncompliance withprovisions of COBRA. In addition to the excise tax liability that may beimposed on our benefit services subsidiary, substantial excise taxes may beimposed under COBRA on our customers. In addition, as a provider of HIPAA (HealthInsurance Portability and Accountability Act of 1996) 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.

Under various serviceagreements with its customers, our HRS division or its subsidiaries assumefinancial responsibility for the payment of the taxes, penalties andliabilities assessed against its customers 

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arisingout of the failure of our HRS division or its subsidiaries to fulfill itsobligations under its agreements with these customers, unless these taxes,penalties or liabilities are attributable to the customer's failure to complywith the terms of the agreement the customer has with our HRS division or itssubsidiaries. These taxes, penalties and liabilities could, in some cases, besubstantial and could harm its business and operating results. Additionally,the failure of our HRS division or its subsidiaries to fulfill its obligationsunder its customer agreements could harm our reputation, its relationship withour customers and its ability to gain new customers. 

***Our HRS businessexperiences generally higher revenues during first and fourth quarters whichmay cause our operating results to fluctuate significantly.***

Our HRS businessexperiences generally higher revenues during the first quarter as a result ofhigher payroll funds being processed due to year-end bonuses being paid andadditional year-end services required during the fourth quarter as result ofspecial reporting requirements. We expect this trend to continue, which couldcause our quarterly operating results to fluctuate significantly. 

***Our business andresults of operations are dependent on several vendors and suppliers, the lossof whom could adversely affect our consolidated results of operations.***

Our business is dependenton several significant vendors and suppliers, the loss of whom could adverselyaffect our consolidated results of operations. In particular, Comdata's currentbusiness relies upon its relationships with third party suppliers, such asMasterCard, to effect and support transactions, including access to the CirrusATM network and the Maestro point-of-sale debit network. The ability of Comdatato continue to provide some of its services in the manner in which it currentlydelivers them may be affected by actions taken by third party suppliers,including MasterCard or other similar card associations. Comdata is consideringalternatives to its existing third party relationships, and is in the processof forming a Utah industrial bank (“Comdata Bank”) which Comdata anticipateswould likely become a direct participant in the MasterCard credit and debitnetworks. The Comdata Bank application is awaiting FDIC approval which iscurrently pending until the issues with the SEC investigation are substantivelyresolved. Any adverse change in Comdata's relationship with these vendors orComdata’s inability to timely and effectively establish the Comdata Bank orfind other timely and effective alternatives to these vendor relationshipscould likely adversely affect Comdata's business and results of operations andcould harm our consolidated results of operations as well. 

***We have foundmaterial weaknesses in our internal controls that require remediation andconcluded, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, that ourinternal controls over financial reporting at December 31, 2004 were noteffective.***

As we disclose in our Management’s Report on InternalControl over Financial Reporting in Part II, Item 8 “FinancialStatements and Supplementary Data,” and as disclosed in Part II,Item 9A, “Controls and Procedures” of this Form 10-K, we havediscovered deficiencies, including material weaknesses, in our internal controlover financial reporting. While we are taking immediate steps to correct ourinternal control weaknesses, the material weaknesses that have been discoveredwill not be considered remediated until the new and improved internal controlsoperate for a period of time, are tested and it is concluded that such new andimproved internal controls are operating effectively. Pending the successfulcompletion of such testing, we will perform mitigating procedures relating toour internal control weaknesses. If we fail to remediate any materialweaknesses, 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 opinion or a disclaimed opinion would have upon our stockprice or business.

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**Item7A.**                Quantitativeand Qualitative Disclosures About Market Risk

**Interest Rate Market 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 service fees. Interest income from client funds is recordedas revenue net of any interest credits due clients, and changes in interestrates impact interest revenue accordingly. In addition we hold short-terminvestments for our own account for liquidity purposes and issue debtinstruments, with related interest income and interest expense recorded as suchin the income statement. We also purchase interest rate derivative instrumentsto modify our overall interest rate risk exposure. All interest rate sensitiveinstruments are held in portfolios for investment purposes, and no suchinstruments are held in trading portfolios. Our interest rate risk exposuresare summarized in the table below.
| ** **                                                   | ** ** | **Invested  Customer  Funds** | ** ** | **Ceridian  Short-term  Investments** | ** ** | **Variable  Rate Debt  Instruments** | ** ** | **Net  Position** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|
| ***Average  balances***                                      |       |                          |       |                                  |       | ** **                                |       |              |       | ** ** |   | ** ** | ** ** |
| 2004                                                         |       | $                             | 2,435.2    |                                  |       | $                                         | 144.3      |              |       |   | $ | (125.2 | ) |   | $ | 2,454.3 |   |
| 2003                                                         |       | 2,145.9                       |       |                                  | 117.4      |                                      |       |              | (174.5     | ) |   | 2,088.8 |   |
| 2002                                                         |       | 1,931.9                       |       |                                  | 87.3       |                                      |       |              | (207.3     | ) |   | 1,811.9 |   |
| ***Average  interest rate***                                 |       |                          |       |                                  |       | ** **                                |       |              |       | ** ** |   | ** ** | ** ** |
| 2004                                                         |       | 3.10                          | %          |                                  | 1.80       | %                                         |       |              | 3.51       | % |   | 3.01 | % |
| 2003                                                         |       | 2.90                          | %          |                                  | 1.70       | %                                         |       |              | 2.64       | % |   | 2.85 | % |
| 2002                                                         |       | 3.34                          | %          |                                  | 2.41       | %                                         |       |              | 3.04       | % |   | 3.33 | % |
| ***Interest  income (expense) per statement of operations*** |       |                          |       |                                  |       | ** **                                |       |              |       | ** ** |   | ** ** | ** ** |
| 2004                                                         |       | $                             | 75.6       |                                  |       | $                                         | 2.6        |              |       |   | $ | (4.4 | ) |   | $ | 73.8 |   |
| 2003                                                         |       | 62.2                          |       |                                  | 2.0        |                                      |       |              | (4.6       | ) |   | 59.6 |   |
| 2002                                                         |       | 64.6                          |       |                                  | 2.1        |                                      |       |              | (6.3       | ) |   | 60.4 |   |

 

The $13.4 million increase in interest revenue frominvested customer funds in 2004 over 2003 consisted of $5.0 million related tohigher interest rates and $8.4 million due to higher average invested balances.The net decrease of $2.4 million in 2003 compared to 2002 consisted of $10.0related to lower interest rates, largely offset by an increase of $7.6 due tohigher average invested balances.

Theimpact of our interest rate derivative program was as follows:
| ** **                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Realized gains             |       | $        | 30.0       |     | $          | 31.2     |       | $ | 26.2 |   |
| Unrealized gains  (losses) |       | (28.9    | )          | (15.7    | )          | 47.1     |       |
| Net gain                   |       | $        | 1.1        |     | $          | 15.5     |       | $ | 73.3 |   |

 

We further discuss interest rate derivative contractsin Note A, “Accounting Policies—Cash and Investments, including Derivatives”and Note H, “Investing Activity.”

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We manage our interest rate risk by modeling theimpact of changes in interest rates on combined net interest revenue, interestincome, and interest expense, referred to as Net Interest Income. Interest ratederivative instruments may be purchased as part of our risk management programand such instruments are modeled as part of our overall interest ratesensitivity position. Our goal is to achieve a stable and predictable level ofreported Net Interest Income over a range of expected changes in interest rates.

Thetable below illustrates the impact of changes in interest rates on our aftertax Net Interest Income.
| ** **                                   | ** ** | **Hypothetical Change in **  | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| **Change in Interest Rates**  | ** ** | **Net Interest Income**           | ** ** |
| **Expressed in Basis Points** | ** ** | ** **                                  | ** ** | **from Base Scenario** | ** ** |
| ** **                                   | ** ** | **(in millions of dollars)** | ** ** |
| 300 Increase                                 |       |                                        | $          | 22.0 |   |   |
| 200 Increase                                 |       |                                        | 14.7       |   |   |
| 100 Increase                                 |       |                                        | 7.4        |   |   |
| 50 Increase                                  |       |                                        | 3.7        |   |   |
| 25 Increase                                  |       |                                        | 1.8        |   |   |
| Base Scenario  (2.25%)                       |       |                                        |       |   |   |
| 25 Decrease                                  |       |                                        | (0.7       | ) |   |
| 50 Decrease                                  |       |                                        | (2.8       | ) |   |
| 100 Decrease                                 |       |                                        | (6.9       | ) |   |
| 200 Decrease                                 |       |                                        | (15.2      | ) |   |
|                                              |            |                                             |            |  |  |  |  |  |

 

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 2.25% Federal Funds rates as of December 31,2004. 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. The impact ofinterest rate derivative instruments we held on December 31, 2004 isexcluded from the computations. All of these instruments were terminated on February 4,2005, and any impact of these instruments is therefore excluded from results. Optionalityexists in the form of callable securities we own, and these securities areassumed to all be called in falling rate scenarios and all go to maturity inrising rate scenarios. The amount of prepayment risk of other securities in theportfolio is negligible, and therefore excluded from the table contents.

The principal change inour interest rate risk position was the termination of all of our interest ratederivative instruments on February 4, 2005. Interest rate risks associatedwith these instruments included mark-to-market valuations and interestreceipts, all of which were reported as “(gain) loss on derivative instruments”in our consolidated statements of operations. We have subsequently made nopurchases of interest rate derivative instruments.

**Fuel Price Market Risk**

Our Comdata transportation services business revenueand net income is exposed to variability based on changes in the price ofdiesel fuel and gasoline. 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 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 programand the effects of these instruments are modeled as part of our overall fuelrisk sensitivity 

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position. Our goal is toachieve a stable and predictable level of reported net income through a rangeof expected changes in fuel prices.

Diesel fuel prices have been rising generally, asreported by the Department of Energy which calculates that the average price ofhighway diesel fuel number 2 was $1.81 in 2004, $1.51 in 2003, and $1.32 in2002. These rising prices increased Comdata revenue by 5.5 in 2004 and by $3.2million in 2003 and were offset by realized losses on fuel derivative contractsof $2.7 million in 2004 and $0.8 million in 2003.

At December 31,2004, Comdata held fuel derivative instruments that will largely offset theoverall impact of diesel fuel price changes for 2005. These instruments matureon December 31, 2005 and are not accounted for as hedges. The hypotheticalimpact of changes in diesel fuel prices, including the impact of fuelderivative instruments is shown 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** | ** ** |
| ** **                               | ** ** | **(in millions of dollars)** | ** ** |
| $.30 Increase                            |       |                                        | $          | 5.4                |       |                    |       | $ | 6.7 |   |   |   | $ | (0.8 | ) |   |
| $.20 Increase                            |       |                                        | 3.6        |               |       |                    | 4.9        |   |   |   | (0.8 | ) |   |
| $.10 Increase                            |       |                                        | 1.8        |               |       |                    | 3.1        |   |   |   | (0.8 | ) |   |
| Base Scenario ($1.99/gallon)             |       |                                        | —     |               |       |                    | 1.3        |   |   |   | (0.8 | ) |   |
| $.10 Decrease                            |       |                                        | (1.8       | )                  |       |                    | (0.5       | ) |   |   | (0.8 | ) |   |
| $.20 Decrease                            |       |                                        | (3.6       | )                  |       |                    | (2.3       | ) |   |   | (0.8 | ) |   |
| $.30 Decrease                            |       |                                        | (5.4       | )                  |       |                    | (4.1       | ) |   |   | (0.8 | ) |   |
|                                          |            |                                             |            |                    |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

The contents of the table show the estimated annualimpact of an immediate and sustained change in diesel fuel prices from a baseof $1.99 per gallon at December 31, 2004. Computations in the table arebased on assumed levels of diesel fuel purchase transactions and amountscharged. Comdata does not otherwise hold instruments sensitive to fuel pricerisk except for fuel derivative instruments purchased as part of its riskmanagement program, which are held for investment purposes. The fuel derivativeinstruments 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, ourrevenue and pretax income are impacted $720,000. Due to changes in the averageprice of gasoline, our revenue was $2.3 million higher in 2004 than 2003. Wemay use gasoline derivative securities as part of our fuel price riskmanagement program, but no such securities were held during 2004.

**Other Market Risk**

Our exposure to foreign exchange risk is related toour HRS operations at Ceridian Canada and Ceridian Centrefile, and isconsidered not material to our consolidated financial condition or results ofoperations. These foreign operations principally serve their respectivedomestic markets with nearly all revenue and expenses denominated in localcurrency. Other intercompany charges between U.S. and non-U.S. based operationsare not material. Translation adjustments on investments in foreign operationsare reported in “accumulated other comprehensive income” in our accompanyingconsolidated statements of stockholders’ equity and are not hedged.

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**Item 8.**                        FinancialStatements and Supplementary Data

**1.   Index toConsolidated Financial Statements.**

Thefollowing financial statements and reports are filed as part of this report:
|                                                                                                                 | **Page** |
|-----------------------------------------------------------------------------------------------------------------|----------|
| Management’s  Report on Internal Control Over Financial Reporting                                          | 58       |
| Report of  Independent Registered Public Accounting Firm                                                        | 61       |
| Report of Independent Registered Public Accounting Firm                                                         | 65       |
| Consolidated Statements of Operations for the years ended  December 31, 2004, 2003 and 2002           | 66       |
| Consolidated Balance Sheets as of December 31, 2004 and 2003                                               | 67       |
| Consolidated Statements of Cash Flows for the years ended  December 31, 2004, 2003 and 2002           | 68       |
| Consolidated Statements of Stockholders’ Equity for the years ended  December 31, 2004, 2003 and 2002 | 69       |
| Notes to  Consolidated Financial Statements for the three years ended December 31,  2004                   | 70       |

 

**2.   Index toFinancial Statement Schedules.**

Thefollowing financial statement schedule and report is filed as part of thisreport and should be read in conjunction with the Consolidated FinancialStatements:
|                                                                                          | Page |
|------------------------------------------------------------------------------------------|------|
| Schedule II. Valuation and  Qualifying Accounts                                          | 120  |
| Report of Independent Registered Public Accounting Firm on Financial  Statement Schedule | 121  |

 

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**MANAGEMENT’S**REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control over financial reporting is defined inRule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of1934, as amended, as a process designed by, or under the supervision of, ourprincipal executive and principal financial officers and effected by our Boardof Directors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles, and includes those policies and proceduresthat:

·       Pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of our assets;

·       Provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America (“U.S. GAAP”), and that receipts andexpenditures are being made only in accordance with authorizations from ourmanagement and directors; and

·       Provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of our assets that could have a material effect on thefinancial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Ourmanagement assessed the effectiveness of our internal control over financialreporting as of December 31, 2004. This assessment identified deficiencies inour internal control over financial reporting, and management has determinedthat each of the following deficiencies individually constitutes a “materialweakness” (as defined by the Public Company Accounting Oversight Board or“PCAOB” in it’s Auditing Standard No. 2, “An Audit of Internal Control overFinancial Reporting Performed in Conjunction with an Audit of FinancialStatements”) in our internal control over financial reporting as of December31, 2004:

1.                *Inadequate company-level controls.  *Wedid not maintain effective company-level controls as defined in the *Internal Control—Integrated Framework* published by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Thesedeficiencies related to each of the five components of internal control asdefined by COSO (control environment, risk assessment, control activities,information and communication, and monitoring), specifically:

·        We did not maintainsufficient documentation supporting the application of our accounting policies,practices and procedures;

·        We did not maintainadequately trained personnel in accounting and other functions critical tofinancial reporting;

·        We did not maintainadequate mechanisms for anticipating and identifying financial reporting risksand for reacting to changes in our operating environment that could have amaterial effect on financial reporting;

·        We did not maintainpolicies and procedures designed to ensure that we accounted for softwarecapitalization, revenue recognition, and expense recognition in accordance withU.S. GAAP, and did not maintain effectively-designed preventive and detectivecontrols to ensure proper application of U.S. GAAP in the financial reportingprocess;

·        We did not adequatelycommunicate employees’ duties and control responsibilities; and

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·        Our periodic evaluationsof internal controls and monitoring of remediation activities were noteffective.

2.                *Inadequate financial statement preparation and reviewprocedures.  *We did not maintain adequate policies, proceduresand personnel to ensure that accurate, reliable interim and annual consolidatedfinancial statements were prepared and reviewed on a timely basis.Specifically, we identified the following deficiencies:

·        Failure to document andapprove journal entries at our corporate office and U.S. and U.K. payrolldivisions;

·        Inadequate policies andprocedures to identify errors in accounts payable and various accruals and toensure timely recognition of costs and expenses;

·        Failure to appropriatelysegregate and define certain accounting duties relating to the identification,calculation and recording of liabilities;

·        Inadequate cost andexpense classification processes and review controls to ensure compliance withU.S. GAAP;

·        Inadequate policies andprocedures for the identification, calculation and recording of acquisitionsand consolidation entries for international subsidiaries;

·        Ineffective reconciliationof accounts; and

·        Lack of sufficient financeand accounting personnel with appropriate U.S. GAAP expertise.

As aresult of this material weakness, we (i) failed to recognize costs and expenseson a timely basis and misclassified costs and expenses in our consolidatedstatements of operations; (ii) incorrectly calculated and recorded acquisitionand consolidation entries associated with our subsidiaries, principally in theUnited Kingdom and Canada, and (iii) improperly accounted for free rent,concessions and escalation clauses in leases.

3.                *Inadequate financial reporting processes andinformation systems in our United Kingdom subsidiary.  *Ourfinancial reporting processes and information systems at our subsidiary in theUnited Kingdom were not adequately designed or operating to effectively supportour financial reporting requirements. This material weakness is the result ofaggregate deficiencies in internal control activities, specifically:

·  Access and security controldeficiencies surrounding the use of certain information technologyapplications;

·  Insufficient data validationcontrols in end-user computing applications;

·  Insufficient managementoversight; and

·  Lack of adequately trainedfinance and accounting personnel.

Thesedeficiencies result in more than a remote likelihood that improper accountingfor transactions could occur, and not be detected on a timely basis, resultingin material misstatements in our consolidated financial information.

4.                *Inadequate controls associated with the accountingfor capitalized software costs and related amortization*.   Ourinternally developed software capitalization guidelines were not consistentwith U.S. GAAP; we lacked personnel with sufficient expertise in softwarecapitalization rules pursuant to U.S. GAAP; we did not adequately trainemployees, including financial analysts and project managers who performed theseaccounting functions; we failed to maintain sufficient documentation for thehistorical capitalization of certain software development costs and for thecommencement of amortization related to such costs; and we had insufficientpreventive and 

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detective controlsrelated to the capitalization of internally developed software. As a result ofthis material weakness, corrections of errors in accounting were required toreduce assets and stockholders’ equity in our consolidated balance sheets;increase costs and expenses and reduce net earnings in our consolidatedstatements of operations; and reclassify amounts between operating activities andinvesting activities in our consolidated statements of cash flows.

5.                *Inadequate controls over complex transactions andaccounting matters.  *We lacked adequately trained finance andaccounting personnel with appropriate U.S. GAAP accounting expertise.Accordingly, in certain circumstances, an effective secondary review oftechnical accounting matters could not be performed. As a result of thesedeficiencies, errors in accounting for certain complex transactions occurred inthe following areas:

·        *Inadequate revenue recognition procedures and controls.  *Wedid not have adequate policies and procedures in place related to revenuerecognition; we lacked personnel with adequate expertise in revenue recognitionrules under U.S. GAAP; and we failed to consistently include finance andaccounting personnel in the analysis of the impact revenue arrangements wouldhave on consolidated financial reporting. As a result, accounting errors wereidentified related to revenue recognition. These errors in accounting werecorrected by increasing deferred income and deferred costs and reducingstockholders’ equity in our consolidated balance sheets; and reducing revenue,cost of revenue and net earnings in our consolidated statements of operationsin 2003 and 2004.

·        *Statement ofFinancial Accounting Standards (FAS) 133, “Accounting for DerivativeInstruments and Hedging Activities.”  *Our interest rate andfuel price derivative instruments did not satisfy the requirements of FAS 133and, as such, did not qualify for hedge accounting treatment. The correction ofthis accounting error impacted revenue and (gain) loss on derivative instrumentsin our consolidated statements of operations for fiscal 2001 through 2004. Theunrealized gains and losses on these derivative instruments that wereoriginally accounted for in accumulated other comprehensive income withinstockholders’ equity in our consolidated balance sheets were restated andcorrectly reported in (gain) loss on derivative instruments in our consolidatedstatements of operations.

·        *Applicationof FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  *Ourprocesses were insufficient to ensure the timely identification of businessevents impacting the useful life of our long-lived assets. As a result, wefailed to timely identify the need to shorten the estimated useful life of atrademark asset resulting from a strategic marketing decision made in Januaryof 2004. This accounting error was corrected by increasing expenses andreducing net earnings in our consolidated statements of operations and reducingother intangible assets in our consolidated balance sheets.

As a result of theaforementioned material weaknesses in internal control over financialreporting, material misstatements of our current and previous consolidatedfinancial statements occurred and were identified. To correct these errors inaccounting, we restated our annual and interim consolidated financialstatements for fiscal 1999 through fiscal 2003 and the fiscal quarters of 2004.

In making our assessment,management used the criteria set forth by COSO in *InternalControl—Integrated Framework*. Because of the material weaknessesdescribed above, management concluded that, as of December 31, 2004, ourinternal control over financial reporting was not effective based on thosecriteria.

KPMG LLP, our independentregistered public accounting firm, has issued an audit report on our assessmentof our internal control over financial reporting. This audit report appears onthe next page of this Form 10-K.

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**REPORT OFINDEPENDEN**T 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 58), that Ceridian Corporation and subsidiaries (the “Company”)did not maintain effective internal control over financial reporting as ofDecember 31, 2004, because of the effect of material weaknesses identifiedin management’s assessment, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). CeridianCorporation’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal 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 accordance 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 reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could 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 weaknessis a control deficiency, or combination of control deficiencies, that resultsin more than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. The followingmaterial weaknesses have been identified and included in management’sassessment as of December 31, 2004:

1.                *Inadequate company-level controls.  *TheCompany did not maintain effective company-level controls as defined in theCOSO criteria. These deficiencies related to each of the five components ofinternal control as defined by COSO (control environment, risk assessment,control activities, information and communication, and monitoring),specifically:

·        TheCompany did not maintain sufficient documentation supporting the application ofaccounting policies, practices and procedures;

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·        TheCompany did not maintain adequately trained personnel in accounting and otherfunctions critical to financial reporting;

·        TheCompany did not maintain adequate mechanisms for anticipating and identifyingfinancial reporting risks and for reacting to changes in the Company’soperating environment that could have a material effect on financial reporting;

·        TheCompany did not maintain policies and procedures designed to ensure that itaccounted for software capitalization, revenue recognition, and expenserecognition in accordance with U.S. GAAP, and did not maintaineffectively-designed preventive and detective controls to ensure properapplication of U.S. GAAP in the financial reporting process;

·        TheCompany did not adequately communicate employees’ duties and controlresponsibilities; and

·        TheCompany’s periodic evaluations of internal controls and monitoring ofremediation activities were not effective.

2.*                Inadequate financial statementpreparation and review procedures.  *The Company did not maintainadequate policies, procedures and personnel to ensure that accurate, reliableinterim and annual consolidated financial statements were prepared and reviewedon a timely basis. Specifically, the following deficiencies were identified:

·        Failureto document and approve journal entries at the Company’s corporate office andU.S. and U.K. payroll divisions;

·        Inadequatepolicies and procedures to identify errors in accounts payable and variousaccruals and to ensure timely recognition of costs and expenses;

·        Failureto appropriately segregate and define certain accounting duties relating to theidentification, calculation and recording of liabilities;

·        Inadequatecost and expense classification processes and review controls to ensurecompliance with U.S. GAAP;

·        Inadequatepolicies and procedures for the identification, calculation and recording ofacquisitions and consolidation entries for international subsidiaries;

·        Ineffectivereconciliation of accounts; and

·        Lackof sufficient finance and accounting personnel with appropriate U.S. GAAPexpertise.

As a result of this material weakness, the Company (i)failed to recognize costs and expenses on a timely basis and misclassifiedcosts and expenses in the consolidated statements of operations; (ii)incorrectly calculated and recorded acquisition and consolidation entriesassociated with the Company’s subsidiaries, principally in the United Kingdomand Canada, and (iii) improperly accounted for free rent, concessions andescalation clauses in leases.

3.*                Inadequate financial reportingprocesses and information systems in the Company’s United Kingdom subsidiary.  *Thefinancial reporting processes and information systems at the Company’ssubsidiary in the United Kingdom were not adequately designed or operating toeffectively support financial reporting requirements. This material weakness isthe result of aggregate deficiencies in internal control activities,specifically:

·        Accessand security control deficiencies surrounding the use of certain informationtechnology applications;

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·        Insufficientdata validation controls in end-user computing applications;

·        Insufficientmanagement oversight; and

·        Lackof adequately trained finance and accounting personnel.

These deficiencies result in more than a remotelikelihood that improper accounting for transactions could occur, and not bedetected on a timely basis, resulting in material misstatements in theCompany’s consolidated financial information.

4.*               **Inadequate controls associated with the accountingfor capitalized software costs and related amortization*.   The Company did not haveinternally developed software capitalization guidelines consistent with U.S.GAAP; lacked personnel with sufficient expertise in software capitalizationrules pursuant to U.S. GAAP; did not adequately train employees, such asfinancial analysts and project managers, who performed these accountingfunctions; failed to document sufficient support for the historicalcapitalization of certain software development costs and for the commencementof amortization related to such costs; and preventive and detective controlsrelated to the capitalization of internally developed software wereinsufficient. As a result of thismaterial weakness, corrections of errors in accounting were required to reduceassets and stockholders’ equity in the Company’s consolidated balance sheets;increase costs and expenses and reduce net earnings in the Company’sconsolidated statements of operations; and reclassify amounts between operatingactivities and investing activities in the Company’s consolidated statements ofcash flows.

5.*                Inadequate controls over complextransactions and accounting matters.  *The Company lacked adequatelytrained finance and accounting resources with appropriate U.S. GAAP accountingexpertise. Accordingly, in certain circumstances, an effective secondary reviewof technical accounting matters could not be performed. As a result of thesedeficiencies, errors in accounting for certain complex transactions occurred inthe following areas:

·        *Inadequate revenue recognition procedures and controls.  *TheCompany did not have adequate policies and procedures in place related torevenue recognition; lacked personnel with adequate expertise in revenuerecognition rules under U.S. GAAP; and failed to consistently include financeand accounting personnel in the analysis of the impact revenue arrangementswould have on consolidated financial reporting. As a result, accounting errorswere identified related to revenue recognition. These errors in accounting werecorrected by increasing deferred income and deferred costs and reducingstockholders’ equity in the consolidated balance sheets; and reducing revenue,cost of revenue and net earnings in the consolidated statements of operationsin 2003 and 2004.

·        *Statement of Financial Accounting Standards (FAS) 133, “Accounting forDerivative Instruments and Hedging Activities.”  *The Company’sinterest rate and fuel price derivative instruments did not satisfy therequirements of FAS 133 and, as such, did not qualify for hedge accountingtreatment. The correction of this accounting error impacted revenue and (gain)loss on derivative instruments in the Company’s consolidated statements ofoperations for fiscal 2001 through 2004. The unrealized gains and losses onthese derivative instruments that were originally accounted for in accumulatedother comprehensive income within stockholders’ equity in the Company’sconsolidated balance sheets were restated and correctly reported in (gain) losson derivative instruments in the Company’s consolidated statements ofoperations.

·        *Application of FAS 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  *The Company’s processes were insufficientto ensure the timely identification of business events impacting the usefullife of long-lived assets. As a result, the Company failed to timely identify theneed to shorten the estimated useful life of a trademark asset resulting from astrategic 

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marketing decision made inJanuary of 2004. This accounting error was corrected by increasing expenses andreducing net earnings in the Company’s consolidated statements of operationsand reducing other intangible assets in the Company’s consolidated balancesheets.

As a result of the aforementioned material weaknessesin internal control over financial reporting, material misstatements of theCompany’s current and previous consolidated financial statements occurred andwere identified. To correct these errors in accounting, the Company restatedit’s annual and interim consolidated financial statements for fiscal 1999through fiscal 2003 and the fiscal quarters of 2004.

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, 2004 and 2003 and for each of the years in the three-yearperiod ended December 31, 2004. The aforementioned material weaknesses wereconsidered in determining the nature, timing, and extent of audit tests appliedin our audit of the December 31, 2004 consolidated financial statements,and this report does not affect our report dated April 20, 2005, whichexpressed an unqualified opinion on those consolidated financial statements.

In ouropinion, management’s assessment that Ceridian Corporation and subsidiaries didnot maintain effective internal control over financial reporting as ofDecember 31, 2004, is fairly stated, in all material respects, based onthe COSO criteria. Also, in our opinion, because of the effect of the materialweaknesses described above on the achievement of the objectives of the controlcriteria, Ceridian Corporation and subsidiaries have not maintained effectiveinternal control over financial reporting as of December 31, 2004, basedon the COSO criteria.
| /s/ KPMG LLP           |   |   |
|------------------------|--------|--------|
| Minneapolis, Minnesota |   |
| April 20,  2005        |   |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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, 2004and 2003, and the related consolidated statements of operations, cash flows andstockholders’ equity for each of the years in the three-year period ended December 31,2004. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements 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, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Ceridian Corporation andsubsidiaries as of December 31, 2004 and 2003, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles.

As discussed inNote B to the consolidated financial statements the Company has restated its consolidatedfinancial statements as of December 31, 2003 and for the years ended December31, 2003 and 2002.

As discussed inNote A to the consolidated financial statements, the Company adopted theprovisions of Statement of Financial Standards No. 142, “Goodwill and otherIntangible Assets,” on January 1, 2002.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Ceridian Corporation’sinternal control over financial reporting as of December 31, 2004, based oncriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), and our report dated April 20, 2005 expressed anunqualified opinion on management’s assessment of, and an adverse opinion onthe effective operation of, internal control over financial reporting.
| /s/ KPMG LLP           |
|------------------------|
| Minneapolis, Minnesota |
| April 20, 2005    |

 

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS**(Dollars in millions, except per share data)
| ** **                                  | ** ** | **Years Ended December 31,**                                                              | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **        2004        ** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                  | ** ** | ** **                                                                                               | ** ** | **   (restated)   ** | ** ** | **   (restated)   ** | ** ** |
| Revenue                                     |       |                                                                                                     | $          | 1,320.4 |   |   |   | $ | 1,213.9 |   |   |   | $ | 1,160.3 |   |   |
| Costs and Expenses                          |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue                             |       |                                                                                                     | 748.3      |   |   |   | 693.8 |   |   |   | 654.2 |   |   |
| Selling, general and administrative         |       |                                                                                                     | 475.5      |   |   |   | 365.1 |   |   |   | 353.8 |   |   |
| Research and development                    |       |                                                                                                     | 26.8       |   |   |   | 19.4 |   |   |   | 15.0 |   |   |
| (Gain) loss on derivative instruments       |       |                                                                                                     | 0.3        |   |   |   | (14.7 | ) |   |   | (73.3 | ) |   |
| Other expense (income)                      |       |                                                                                                     | 26.5       |   |   |   | (2.5 | ) |   |   | 33.1 |   |   |
| Interest income                             |       |                                                                                                     | (2.6       | ) |   |   | (2.0 | ) |   |   | (2.1 | ) |   |
| Interest expense                            |       |                                                                                                     | 4.4        |   |   |   | 4.6 |   |   |   | 6.3 |   |   |
| Total costs and expenses                    |       |                                                                                                     | 1,279.2    |   |   |   | 1,063.7 |   |   |   | 987.0 |   |   |
| Earnings before  income taxes               |       |                                                                                                     | 41.2       |   |   |   | 150.2 |   |   |   | 173.3 |   |   |
| Income tax provision                        |       |                                                                                                     | 4.3        |   |   |   | 51.4 |   |   |   | 61.8 |   |   |
| Net earnings                                |       |                                                                                                     | $          | 36.9 |   |   |   | $ | 98.8 |   |   |   | $ | 111.5 |   |   |
| Earnings per  share                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                       |       |                                                                                                     | $          | 0.25 |   |   |   | $ | 0.66 |   |   |   | $ | 0.75 |   |   |
| Diluted                                     |       |                                                                                                     | $          | 0.24 |   |   |   | $ | 0.66 |   |   |   | $ | 0.74 |   |   |
| Shares used in  calculations (in thousands) |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares (basic)             |       |                                                                                                     | 149,074    |   |   |   | 148,634 |   |   |   | 148,029 |   |   |
| Dilutive securities                         |       |                                                                                                     | 2,005      |   |   |   | 1,563 |   |   |   | 1,604 |   |   |
| Weighted average  shares (diluted)          |       |                                                                                                     | 151,079    |   |   |   | 150,197 |   |   |   | 149,633 |   |   |

 

See notes to consolidated financial statements.

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**CONSOLIDATEDBALANCE SHEETS**(Dollars in millions, except per share data)
| ** **                                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                                                                 | ** ** | ** **            | ** ** | **  (restated)  ** | ** ** |
| **ASSETS**                                                                                 |       |                  |       |   |   |   |   |
| Current assets                                                                             |       |                  |       |   |   |   |   |
| Cash and equivalents                                                                       |       | $                     | 220.7      |   |   | $ | 124.2 |   |   |
| Trade and other  receivables, net                                                          |       | 505.7                 |       |   | 467.3 |   |   |
| Current deferred income  taxes                                                             |       | 27.2                  |       |   | 28.5 |   |   |
| Other current assets                                                                       |       | 70.4                  |       |   | 56.0 |   |   |
| Total current assets                                                                       |       | 824.0                 |       |   | 676.0 |   |   |
| Property, plant  and equipment, net                                                        |       | 140.9                 |       |   | 148.0 |   |   |
| Goodwill                                                                                   |       | 931.8                 |       |   | 918.6 |   |   |
| Other intangible  assets, net                                                              |       | 43.6                  |       |   | 90.2 |   |   |
| Software and  development costs, net                                                       |       | 75.7                  |       |   | 86.2 |   |   |
| Prepaid pension  cost                                                                      |       | 13.1                  |       |   | 12.2 |   |   |
| Deferred income  taxes                                                                     |       | 26.7                  |       |   | 9.6 |   |   |
| Investments                                                                                |       | 16.4                  |       |   | 22.9 |   |   |
| Derivative  instruments                                                                    |       | 28.1                  |       |   | 55.7 |   |   |
| Other noncurrent  assets                                                                   |       | 10.6                  |       |   | 8.7 |   |   |
| Total assets before  customer funds                                                        |       | 2,110.9               |       |   | 2,028.1 |   |   |
| Customer funds                                                                             |       | 4,096.0               |       |   | 3,152.7 |   |   |
| Total assets                                                                               |       | $                     | 6,206.9    |   |   | $ | 5,180.8 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                              |       |                  |       |   |   |   |   |
| Current liabilities                                                                        |       |                  |       |   |   |   |   |
| Short-term debt and  current portion of long-term obligations                              |       | $                     | 14.9       |   |   | $ | 6.5 |   |   |
| Accounts payable                                                                           |       | 62.8                  |       |   | 39.1 |   |   |
| Drafts and settlements  payable                                                            |       | 153.4                 |       |   | 113.7 |   |   |
| Customer advances                                                                          |       | 31.1                  |       |   | 31.0 |   |   |
| Deferred income                                                                            |       | 87.4                  |       |   | 66.9 |   |   |
| Accrued taxes                                                                              |       | 28.7                  |       |   | 25.5 |   |   |
| Employee compensation and  benefits                                                        |       | 53.0                  |       |   | 55.3 |   |   |
| Other accrued expenses                                                                     |       | 47.7                  |       |   | 35.4 |   |   |
| Total current liabilities                                                                  |       | 479.0                 |       |   | 373.4 |   |   |
| Long-term  obligations, less current portion                                               |       | 85.8                  |       |   | 157.0 |   |   |
| Deferred income  taxes                                                                     |       | 32.5                  |       |   | 38.6 |   |   |
| Employee benefit  plans                                                                    |       | 208.4                 |       |   | 196.0 |   |   |
| Other noncurrent  liabilities                                                              |       | 38.3                  |       |   | 17.9 |   |   |
| Total liabilities before  customer funds obligations                                       |       | 844.0                 |       |   | 782.9 |   |   |
| Customer funds  obligations                                                                |       | 4,067.2               |       |   | 3,152.7 |   |   |
| Total liabilities                                                                          |       | 4,911.2               |       |   | 3,935.6 |   |   |
| Stockholders’ equity                                                                  |       |                  |       |   |   |   |   |
| Common stock, $.01 par,  authorized 500,000,000 shares, issued 151,073,244 and 150,028,289 |       | 1.5                   |       |   | 1.5 |   |   |
| Additional paid-in  capital                                                                |       | 936.6                 |       |   | 925.2 |   |   |
| Retained earnings                                                                          |       | 565.5                 |       |   | 528.6 |   |   |
| Treasury common stock at  cost, 1,650,117 and 5,848 shares                                 |       | (33.2                 | )          |   | (0.1 | ) |   |
| Accumulated other  comprehensive income                                                    |       | (174.7                | )          |   | (210.0 | ) |   |
| Total stockholders’  equity                                                           |       | 1,295.7               |       |   | 1,245.2 |   |   |
| Total liabilities and stockholders’ equity                                            |       | $                     | 6,206.9    |   |   | $ | 5,180.8 |   |   |

 

See notes to consolidated financial statements.

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**(Dollars in millions)
| ** **                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                           | ** ** | ** **                                  | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| **Cash Flows from Operating  Activities**                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Net earnings                                                                         |       | $                                           | 36.9       |   |   | $ | 98.8 |   |   |   | $ | 111.5 |   |   |
| Adjustments to reconcile  net earnings to net cash provided by operating activities: |       |                                        |       |   |   |   |   |   |   |   |   |
| Deferred income tax provision (benefit)                                              |       | (19.8                                       | )          |   | 34.2 |   |   |   | 24.7 |   |   |
| Depreciation and amortization                                                        |       | 124.7                                       |       |   | 79.3 |   |   |   | 75.8 |   |   |
| Provision for doubtful accounts                                                      |       | 9.7                                         |       |   | 11.2 |   |   |   | 17.0 |   |   |
| SourceWeb exit costs, net                                                            |       | 28.5                                        |       |   | — |   |   |   | — |   |   |
| Asset write-downs                                                                    |       | 3.6                                         |       |   | — |   |   |   | 7.3 |   |   |
| Unrealized (gain) loss on derivative instruments                                     |       | 28.0                                        |       |   | 15.7 |   |   |   | (47.1 | ) |   |
| (Gain) loss on marketable securities                                                 |       | (4.5                                        | )          |   | (3.4 | ) |   |   | 6.3 |   |   |
| Reduction of environmental accrual                                                   |       | —                                      |       |   | — |   |   |   | (4.1 | ) |   |
| Contribution to retirement plan trusts                                               |       | —                                      |       |   | (105.5 | ) |   |   | (3.3 | ) |   |
| Other                                                                                |       | 6.5                                         |       |   | 7.0 |   |   |   | (6.3 | ) |   |
| Decrease (increase) in trade and other receivables                                   |       | (42.4                                       | )          |   | (48.1 | ) |   |   | (43.2 | ) |   |
| Increase (decrease) in accounts payable                                              |       | 22.6                                        |       |   | 2.5 |   |   |   | 3.4 |   |   |
| Increase (decrease) in drafts and settlements payable                                |       | 39.7                                        |       |   | (7.1 | ) |   |   | 5.2 |   |   |
| Increase (decrease) in employee compensation and  benefits                           |       | (4.3                                        | )          |   | (6.0 | ) |   |   | (8.7 | ) |   |
| Increase (decrease) in accrued taxes                                                 |       | 7.0                                         |       |   | (24.9 | ) |   |   | 4.4 |   |   |
| Increase (decrease) in other current assets and  liabilities                         |       | 16.7                                        |       |   | 2.9 |   |   |   | (5.5 | ) |   |
| Net cash provided by (used for) operating activities                                 |       | 252.9                                       |       |   | 56.6 |   |   |   | 137.4 |   |   |
| **Cash Flows from Investing  Activities**                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Expended for property, plant and equipment                                           |       | (32.9                                       | )          |   | (30.5 | ) |   |   | (31.1 | ) |   |
| Expended for software and development costs                                          |       | (33.3                                       | )          |   | (27.0 | ) |   |   | (23.5 | ) |   |
| Proceeds from sales of businesses and assets                                         |       | 17.1                                        |       |   | 24.8 |   |   |   | 0.5 |   |   |
| Expended for acquisitions of investments and  businesses, less cash acquired         |       | (19.3                                       | )          |   | (1.7 | ) |   |   | (50.3 | ) |   |
| Net cash provided by (used for) investing activities                                 |       | (68.4                                       | )          |   | (34.4 | ) |   |   | (104.4 | ) |   |
| **Cash Flows from Financing  Activities**                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Revolving credit facilities and overdrafts, net                                      |       | (59.6                                       | )          |   | (49.6 | ) |   |   | (44.6 | ) |   |
| Repayment of other debt                                                              |       | (4.1                                        | )          |   | (1.4 | ) |   |   | — |   |   |
| Repurchase of common stock                                                           |       | (80.3                                       | )          |   | (28.8 | ) |   |   | (5.4 | ) |   |
| Proceeds from stock option exercises and stock sales                                 |       | 50.5                                        |       |   | 42.3 |   |   |   | 34.9 |   |   |
| Net cash provided by (used for) financing activities                                 |       | (93.5                                       | )          |   | (37.5 | ) |   |   | (15.1 | ) |   |
| **Effect of Exchange Rate Changes on Cash**                                          |       | 5.5                                         |       |   | 5.2 |   |   |   | 0.2 |   |   |
| Net Cash Flows Provided (Used)                                                       |       | 96.5                                        |       |   | (10.1 | ) |   |   | 18.1 |   |   |
| Cash and equivalents at beginning of year                                            |       | 124.2                                       |       |   | 134.3 |   |   |   | 116.2 |   |   |
| Cash and equivalents at end of year                                                  |       | $                                           | 220.7      |   |   | $ | 124.2 |   |   |   | $ | 134.3 |   |   |

 
| ** **                                     | ** ** | **Years Ended December 31,**              | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                     | ** ** | **    2004    ** | ** ** | **   2003   ** | ** ** | **   2002   ** | ** ** |
| **Interest  and Income Taxes Paid (Refunded)** |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Interest paid                                  |       |                                                     | $          | 4.5 |   |   |   | $ | 4.7 |   |   |   | $ | 7.0 |   |   |
| Income taxes paid                              |       |                                                     | 33.2       |   |   |   | $ | 47.4 |   |   |   | $ | 32.0 |   |   |
| Income taxes  refunded                         |       |                                                     | (17.1      | ) |   |   | $ | (1.1 | ) |   |   | $ | (1.1 | ) |   |
|                                                |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

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**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**(Dollars in millions)
| ** **                            | ** ** | **Amount** | ** ** | **Shares**     | ** ** |
|---------------------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **2004**   | ** ** | **2003**       | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                            | ** ** | ** ** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Common Shares Issued**              |       |       |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning balance                     |       | $          | 1.5        |           |       | $ | 1.5 |   |   |   | $ | 1.5 |   |   | 150,028,289 |   | 148,657,541 |   | 146,487,624 |   |
| Exercises of stock  options           |       | —     |       |           | —     |   |   |   | — |   |   | 849,273 |   | 1,040,523 |   | 2,008,932 |   |
| Restricted stock  awards, net         |       | —     |       |           | —     |   |   |   | — |   |   | 194,271 |   | 208,270 |   | 27,184 |   |
| Employee stock  purchase plans        |       | —     |       |           | —     |   |   |   | — |   |   | 1,411 |   | 121,955 |   | 133,801 |   |
| Ending balance—issued            |       | $          | 1.5        |           |       | $ | 1.5 |   |   |   | $ | 1.5 |   |   | 151,073,244 |   | 150,028,289 |   | 148,657,541 |   |
| **Treasury Stock—Common Shares** |       |       |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning balance                     |       | $          | (0.1       | )              |       | $ | (1.6 | ) |   |   | $ | — |   |   | (5,848 | ) | (117,001 | ) | (2,662 | ) |
| Repurchases                           |       | (80.3      | )          |           | (28.8      | ) |   |   | (5.4 | ) |   | (4,012,400 | ) | (1,844,100 | ) | (393,000 | ) |
| Exercises of stock  options           |       | 44.5       |       |           | 26.3       |   |   |   | 1.6 |   |   | 2,246,762 |   | 1,684,502 |   | 113,206 |   |
| Restricted stock  awards, net         |       | (1.5       | )          |           | —     |   |   |   | (0.1 | ) |   | (87,706 | ) | 2,943 |   | (1,790 | ) |
| Employee stock  purchase plans        |       | 4.2        |       |           | 4.0        |   |   |   | 2.3 |   |   | 209,075 |   | 267,808 |   | 167,245 |   |
| Ending  balance—treasury         |       | $          | (33.2      | )              |       | $ | (0.1 | ) |   |   | $ | (1.6 | ) |   | (1,650,117 | ) | (5,848 | ) | (117,001 | ) |
| **Common  Shares Outstanding**        |       |       |       |           |       |   |   |   |   |   |   | 149,423,127 |   | 150,022,441 |   | 148,540,540 |   |
| **Additional Paid-In Capital**        |       |       |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning balance                     |       | $          | 925.2      |           |       | $ | 906.3 |   |   |   | $ | 870.1 |   |   |   |   |   |   |   |   |
| Exercises of stock  options           |       | 2.5        |       |           | 10.7       |   |   |   | 28.8 |   |   |   |   |   |   |   |   |
| Tax benefit from  stock options       |       | 6.1        |       |           | 5.6        |   |   |   | 4.6 |   |   |   |   |   |   |   |   |
| Restricted stock  awards, net         |       | 3.5        |       |           | 1.3        |   |   |   | 0.6 |   |   |   |   |   |   |   |   |
| Employee stock  purchase plans        |       | (0.7       | )          |           | 1.3        |   |   |   | 2.2 |   |   |   |   |   |   |   |   |
| Ending balance                        |       | $          | 936.6      |           |       | $ | 925.2 |   |   |   | $ | 906.3 |   | * * | * * | * * | * * | * * | * * | * * |

 
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Comprehensive Income** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------------------|------------|
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                    | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| **Retained Earnings**                                                                     |       |       |       |       |       |       |       |       |       |       |       |                          |       |   |   |   |   |
| Beginning balance (Note  B)                                                               |       | $          | 528.6      |       |       | $          | 429.8      |       |       |       | $          | 324.0                         |       |   |   |   |   |   |   |   |
| Net earnings                                                                              |       | 36.9       |       |       | 98.8       |       |       |       | 111.5      |       | * *   | *$*                           | *36.9*     | * * | *$* | *98.8* | * * | *$* | *111.5* | * * |
| Arbitron spin-off  adjustment                                                             |       | —     |       |       | —     |       |       |       | (5.7       | )          |       |                          |       |   |   |   |   |
| Ending balance                                                                            |       | $          | 565.5      |       |       | $          | 528.6      |       |       |       | $          | 429.8                         |       |   |   |   |   |   |   |   |
| **Accumulated Other Comprehensive Income (Loss)**                                         |       |       |       |       |       |       |       |       |       |       |       |                          |       |   |   |   |   |
| Foreign currency translation                                                              |       |       |       |       |       |       |       |       |       |       |       |                          |       |   |   |   |   |
| Beginning balance                                                                         |       | $          | 21.2       |       |       | $          | (8.5       | )          |       |       | $          | (12.6                         | )          |   |   |   |   |   |   |   |
| Rate changes, net                                                                         |       | 22.9       |       |       | 29.7       |       |       |       | 4.1        |       | * *   | *22.9*                        | * *   | *29.7* | * * | *4.1* | * * |
| Ending balance                                                                            |       | 44.1       |       |       | 21.2       |       |       |       | (8.5       | )          |       |                          |       |   |   |   |   |
| Unrealized gain (loss) on customer funds                                                  |       |       |       |       |       |       |       |       |       |       |       |                          |       |   |   |   |   |
| Beginning balance                                                                         |       | $          | —     |       |       | $          | —     |       |       |       | $          | —                        |       |   |   |   |   |   |   |   |
| Change in unrealized gain  (loss), net of income taxes of $10.6, $0.0 and $0.0       |       | 18.9       |       |       | —     |       |       |       | —     |       | * *   | *18.9*                        | * *   | *—* | * * | *—* | * * |
| Less realized net (gain)  loss, net of income taxes of $(0.3), $0.0 and $0.0              |       | (0.4       | )          |       | —     |       |       |       | —     |       | * *   | *(0.4*                        | *)*        | *—* | * * | *—* | * * |
| Ending balance                                                                            |       | 18.5       |       |       | —     |       |       |       | —     |       |       |                          |       |   |   |   |   |
| Unrealized gain (loss) on marketable securities                                           |       |       |       |       |       |       |       |       |       |       |       |                          |       |   |   |   |   |
| Beginning balance                                                                         |       | $          | 3.9        |       |       | $          | 1.0        |       |       |       | $          | (0.3                          | )          |   |   |   |   |   |   |   |
| Change in unrealized gain  (loss), net of income taxes of $1.5, $3.2 and $0.3        |       | 2.4        |       |       | 4.9        |       |       |       | 0.7        |       | * *   | *2.4*                         | * *   | *4.9* | * * | *0.7* | * * |
| Less realized net (gain)  loss, net of income taxes of $(1.7), $(1.4) and $0.4            |       | (2.7       | )          |       | (2.0       | )          |       |       | 0.6        |       | * *   | *(2.7*                        | *)*        | *(2.0* | *)* | *0.6* | * * |
| Ending balance                                                                            |       | 3.6        |       |       | 3.9        |       |       |       | 1.0        |       |       |                          |       |   |   |   |   |
| Pension liability adjustment                                                              |       |       |       |       |       |       |       |       |       |       |       |                          |       |   |   |   |   |
| Beginning balance                                                                         |       | $          | (235.1     | )          |       | $          | (226.2     | )          |       |       | $          | (133.4                        | )          |   |   |   |   |   |   |   |
| Pension liability change,  net of income taxes of $2.7, $5.0 and $55.0 (Note I) |       | (5.8       | )          |       | (8.9       | )          |       |       | (92.8      | )          | * *   | *(5.8*                        | *)*        | *(8.9* | *)* | *(92.8* | *)* |
| Ending balance                                                                            |       | (240.9     | )          |       | (235.1     | )          |       |       | (226.2     | )          |       |                          |       |   |   |   |   |
| Total ending balance                                                                      |       | $          | (174.7     | )          |       | $          | (210.0     | )          |       |       | $          | (233.7                        | )          |   |   |   |   |   |   |   |
| Total  Stockholders’ Equity                                                          |       | $          | 1,295.7    |       |       | $          | 1,245.2    |       |       |       | $          | 1,102.3                       |       |   |   |   |   |   |   |   |
| ***Total  Comprehensive Income***                                                         | * *   | * *   | * *   |       |       |       |       |       |       |       | * *   | *$*                           | *72.2*     |   | *$* | *122.5* |   | *$* | *24.1* |   |

 

See notes to consolidated financial statements.

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Dollars in millions, except per share data)**

**A.   ACCOUNTINGPOLICIES**

**Basis of Consolidation**

As presented in these consolidated financialstatements, we are Ceridian Corporation, which includes subsidiaries andinvestments in which we have a majority interest. We provide human resourcesolutions to employers through our Human Resource Solutions (“HRS”) businesssegment operations primarily located in the United States, Canada and theUnited Kingdom. We also provide transaction processing and related servicesprimarily to the transportation and retail industries through our Comdatabusiness segment operations located primarily in the United States. Ourproducts and services and business segments are more fully described in Note E,“Segment Data.”

We include in our consolidated financial statementsgrantor trusts that hold funds provided by our HRS payroll and tax filingcustomers pending remittance to employees of those customers or tax authoritiesin the United States and Canada. The customer funds held in trust and customerdeposits related to our HRS benefits services and Comdata retail servicesbusinesses are separately identified as “customer funds” in our consolidatedbalance sheets. Further information on our accounting for these funds isprovided in the section “Revenue Recognition” later in this Note A and in NoteM, “Customer Funds.”

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 reportingperiod, we held no investments representing an equity interest between 20% and50%. Our other investments may include debt or equity securities that may ormay not be marketable securities. We discuss these other investments in thesection entitled “Cash and Investments, including Derivatives” later in thisNote A and in Note H, “Investing Activity.” We review 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 through one or more of thefollowing factors: (a) our representation on the investee’s board ofdirectors; (b) our participation in the investee’s policy makingdecisions; (c) material intercompany transactions with the investee; (d) interchangeof managerial personnel with the investee; or (e) technologicaldependency.

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

**RecentlyIssued Accounting Pronouncements**

In January 2003, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. (“FIN”) 46, “Consolidationof Variable Interest Entities,” which the FASB further amended during 2003. FIN46 is intended to provide guidance on whether a beneficiary of a variableinterest entity should include that entity in its consolidated financialstatements. FIN 46 became effective for our quarterly report for the periodended March 31, 2004. The FASB has issued five Staff Positions (“FSP”) toprovide further guidance on FIN 46 including FSP FIN 46(R)-5, “ImplicitVariable Interests under FASB Interpretation No. 46” issued on March 3,2004 and effective for periods beginning after that date. We currently believethat the trusts would be considered variable interest entities that willcontinue to be included in our consolidated financial statements.

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

On January 12, 2004, the FASB issued FSP 106-1, “Accountingand Disclosure Requirement Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003 (“Medicare Act”).”  The Medicare Act introduced a Medicareprescription drug benefit, as well as a federal subsidy to sponsors of retireehealth care benefit plans that provide a benefit that is at least actuarially equivalentto the Medicare benefit. FSP 106-1 allowed companies to recognize or deferrecognizing the effect of the prescription-drug provisions of the new MedicareAct, signed into law on December 8, 2003, on their accumulatedpostretirement benefit obligation in 2003 financial statements. We elected todefer the recognition of this effect. On May 19, 2004, the FASB issued FSP106-2, which addressed certain accounting and disclosure issues raised by theMedicare Act and became effective for the first interim or annual periodbeginning after June 15, 2004 or upon earlier adoption if elected. Weelected to adopt FSP 106-2 effective for the second quarter of 2004 anddescribe the effect of this adoption in the accompanying Note I, “RetirementPlans.”

In December 2004, the FASB issued a Statement ofFinancial Accounting Standards entitled “Share-Based Payment, anamendment of FASB Statements No. 123 and 95” (“FAS 123R”). The principaleffect of FAS 123R will be to require the inclusion in our earnings of a compensationexpense for stock option grants and employee stock plan purchases thatpreviously was only reported as a disclosure in a note to our consolidatedfinancial statements. FAS 123R will become effective for our quarterly reportfor the period ended March 31, 2006. We are presently studying FAS 123R andbelieve that the compensation expense that would be determined as a result ofadoption of its provisions would not differ materially from the amountspreviously presented in the notes to our consolidated financial statements.

In December 2004, theFASB issued Statement of Financial Accounting Standards No. 153 “Exchangesof Nonmonetary Assets” (“FAS 153”), which is effective for transactionsoccurring after June 15, 2005. We do not expect that adoption of FAS 153will have a material effect on our investing activities.

**Stock-Based Compensation**

We account for stock-basedcompensation under the intrinsic value method prescribed by AccountingPrinciples Board Opinion No. (“APB”) 25 “Accounting for Stock Issuedto Employees,” (“APB 25”) and related interpretations. Therefore, wegenerally do not record compensation expense with respect to grants toemployees or directors under our fixed stock option plans, since the exerciseprice is set at the market price on the date of grant, or for our employeestock purchase plan, which is noncompensatory. Compensation expense for ouroutstanding restricted stock awards, none of which is performance-based, isrecognized by charging the fair value of the award at the time of grant tooperations ratably over the vesting period. Grants of stock options toconsultants or independent contractors are accounted for under the fair valuemethod. We also report under the disclosure-only provisions of FAS 123, “Accountingfor Stock-Based Compensation” and FAS 148 “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No. 123”as presented in Note J, “Stock Plans.”

**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 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

financialstatements and our reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. Estimatesthat could significantly affect our results of operations or financialcondition involve accounting for software and development costs, goodwill andother intangible assets, pensions and postretirement benefits, economic hedgingof interest rates on payroll and tax filing fund investments, actions torestructure or discontinue operations, and the assessment of contingencies. Furtherdiscussion on these estimates can be found in related disclosures elsewhere inour Notes.

**Changes in Presentation**

We have reclassifiedcertain prior year amounts to conform to the current year’s presentation.

**Cashand Investments, including Derivatives**

We classify investments that are readily convertibleto cash within three months of purchase as cash equivalents in our consolidatedbalance sheet and report those amounts at amortized cost (which does not differmaterially from fair market value). We account for our investments inmarketable securities under FAS 115, “Accounting for Certain Investments inDebt and Equity Securities,” and investments other than marketable securitiesor derivative instruments under APB 18, “The Equity Method of Accounting forInvestments in Common Stock.” Our investments of customer funds in marketablesecurities were classified as held-to-maturity, carried at amortized cost untilMay 2004, when we reclassified these investments as “available for sale.” Customerfunds and other investments in marketable equity or debt securities areconsidered available-for-sale and reported in the balance sheet at fair value,with changes in fair value reported in accumulated other comprehensive incomeas further discussed in Note H, “Investing Activity.”

We account for derivativesin accordance with FAS 133 “Accounting for Derivative Instruments and HedgingActivities,” as amended and interpreted. FAS 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, includingwhether it has been designated and qualifies as part of a hedging relationshipas defined under FAS 133.  Derivativesthat do not meet the FAS 133 criteria for hedge accounting are designated aseconomic hedges and changes in the fair value associated with these instrumentsare included in the consolidated statement of operations as (gain) loss onderivative instruments.  In those caseswhere the derivative meets the FAS 133 hedge accounting criteria for a cashflow hedge, the change in fair value of the derivative that is effective inoffsetting changes in cash flows of the designated risk being hedged isreported, net of related taxes, as accumulated other comprehensive income instockholders’ equity until realized.  Thechange in fair value of the derivative that is associated with ineffectivenessin the hedging relationship is reported in current earnings. We enter intointerest rate and fuel price derivative instruments for the purpose ofeconomically hedging revenue risk and not for speculative activity. Oureconomic hedging activities may include the use of contracts such as swaps,collars, caps and floors, as economic hedges of variable income frominvestments of customer funds and corporate cash, in the case of interest ratederivatives, and, in the case of fuel price derivatives, from transportationrevenue based on a percentage of the dollar value of the transaction processed.We further discuss derivative instruments in Note H, “Investing Activity.”

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

**Property, Plant and Equipment**

Ourproperty, plant and equipment assets are carried at cost and depreciated forfinancial statement purposes using straight-line and accelerated methods atrates based on the estimated lives of the assets, which are generally asfollows:
| 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 was 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 other mattersindicate that the carrying value may not be recoverable. When the reviewindicates that the carrying value of the asset or group of assets representingthe lowest level of identifiable cash flows exceeds the sum of the expectedfuture cash flows (undiscounted and without interest charges), we recognize anasset write-down charge against operations. The amount of the impairment lossis the amount by which the carrying value exceeds the fair value of theimpaired asset or group of assets.

**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) at each December 31 were 6,455,760 for 2004, 9,051,000 for 2003and 9,847,000 for 2002.

**Goodwill and Other Intangibles**

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, Comdata—Transportation, and Comdata—Retail.After consideration of the factors prescribed in FAS 142 “Goodwill and OtherIntangible Assets” that might indicate a risk of impairment, we found noindication of goodwill impairment at December 31, 2004, 2003 and 2002.

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Ourother intangible assets represent amounts assigned to specifically identifiableintangible assets at the time of an acquisition. These costs are amortized on astraight-line basis over the following periods:
| Customer lists  and relationships |   | 5-15 years |   |
|-----------------------------------|--------|------------|--------|
| Trademarks                        |   | 30 years   |   |
| Technology                        |   | 7-8 years  |   |
| Non-compete  agreements           |   | 2-5 years  |   |

 

We regularly review theserecorded amounts and assess their recoverability along with our otherlong-lived asset groups. Our review considers factors such as whether theamortization of other intangible assets for each operating unit can berecovered through forecasted undiscounted cash flows over their remainingeconomic life. We discuss the results of current reviews in Note B,“Restatement of Financial Statements” and Note D, “Supplementary Data to theStatement of Operations.”

**Software and Development 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 and use for the function intended. Capitalized internal-use softwarecosts include only: (1) external direct costs of materials and servicesconsumed in developing or obtaining the software; (2) payroll and payroll-relatedcosts for employees who are directly associated with and who devote time to theproject; and (3) interest costs incurred, when material, while developingthe software. Capitalization of these costs ceases no later than the point atwhich the project is substantially complete and ready for its intended purpose.We do not include general and administrative costs and overhead costs incapitalizable costs. We charge research and development costs and othercomputer software maintenance costs related to software development tooperations as incurred.

We amortize software development costs using thestraight-line method over a range of three to seven years, but not exceedingthe expected life of the product.

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 thevalue of estimated undiscounted net cash flow benefit related to the assetgroup falls below the unamortized cost.

**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 for tax return purposes. We file a consolidated U.S.federal income tax return for our parent company and its eligible subsidiaries.We currently have undistributed earnings in our international subsidiaries ofapproximately $81. Currently, we are examining the impact of the American JobsCreation Act of 2004 in order to determine the tax impact of declaring adividend on a portion of such earnings. Based on our 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

currentanalysis, it is possible to remit between $50 and $81, with the respective taxliability ranging from $3 to $5. We will finalize our assessment after issuanceof further regulatory guidance.

**Revenue Recognition**

We recognize revenue fromsale of our products and services when the following criteria are met:  (1) persuasive evidence of anarrangement exists; (2) delivery has occurred or services have beenrendered; (3) the seller’s price to the buyer is fixed or determinable;and (4) collectibility is reasonably assured. Generally, we rely on asigned contract 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***

The majority of our HRS revenue is generated byrecurring monthly or quarterly fees from our payroll processing, tax filingservices, benefit administration services, work-life and employee assistanceservices, and human resource outsourcing products. This revenue is generated byservice fees, income from investment of customer funds in lieu of fees,software maintenance and subscription fees.

***Payroll Processingand Tax Filing Services.  ***Generally, service feesfor HRS payroll transaction 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 customer’s employees. Thesepayroll deposits are primarily invested through grantor trusts. We derive andrecognize investment income in lieu of fees as a component of revenue asearned.

Our payroll tax filing services consist primarily of: (1) collectingfunds for federal, state and local employment taxes from customers based onpayroll information provided by the customers; (2) remitting fundscollected to the appropriate taxing authorities; (3) filing applicablereturns; and (4) handling related regulatory correspondence and amendmentsfor customers. Revenue from these tax filing services is billed and recognizedas the services are provided, generally on a monthly basis. We hold ourcustomers’ tax filing deposits for the period between collection and remittanceof the funds to the applicable taxing authority. These tax filing deposits areinvested through a grantor trust. We derive and recognize this investmentincome in lieu of fees as a component of revenue as earned.

Payroll processing and tax filing services are soldseparately; accordingly, we have objective evidence of standalone value foreach service. Separate sales also establish the fair value of each of theservices sold in the event a customer contracts with us for multiple services.

***BenefitsAdministration Services.  ***We provide employee healthand welfare benefits administration and qualified administration services toour customers. Employee health and welfare benefits administration servicesinclude health insurance portability compliance services related primarily toCOBRA (Consolidated Omnibus Budget Reconciliation Act). Health and welfarebenefits administration services also encompass benefits provided to activeemployees, such as (1) annual health plan enrollment, (2) ongoingemployee enrollment and eligibility services, (3) tuition refund plans, (4) transportation

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

reimbursement under theTransportation Equity Act, and (5) Internal Revenue Code Section 125plans (Flexible Spending), which include fully administered andself-administered flexible spending accounts and premium-only plans.

We also provide retirement planning services thatinclude:  (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 include 401(k) planadministration, profit sharing administration, defined benefit planadministration, ESOP administration and Qualified Domestic Relations Orderadministration.

Revenue for COBRA services is earned and recognized asthe services are provided. Revenue associated with other health and welfarebenefits administration and retirement planning services is recognized monthlybased on the number of employees that receive or participate in the benefit.

Benefits administration services are sold separately; accordingly,we have objective evidence of standalone value for each service. Separate salesalso establish the fair value of each of the services sold in the event a customercontracts with us for multiple services.

***Work-Life andEmployee Assistance Services.  ***We provide work-lifeand employee assistance programs ***(“LifeWorks”)***to our clients. LifeWorks aredelivered through on-line access and telephonically, and through face-to-facemeetings provided by referral resources. Contracted fees for these services aregenerally billed monthly. Revenue is earned and recognized over the term of thecontract based on the number of customer employees served and the level ofservice.

***Human ResourceOutsourcing.  ***In 2003, we began marketingcomprehensive human resource outsourcing (“HRO”) solutions to our customers. HROservices can provide an entire suite of any of the HRS services outlined above,but to date typically involve: (1) conversion and implementation consultingservices; (2) processing and hosting services related to payroll, taxfiling services and benefit needs; and (3) administration of payroll orbenefits 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 qualifiedstated renewal rate in the contract provides evidence of the fair value for theundelivered repetitive processing services. In those situations where aqualified stated renewal rate is included in the arrangement, the use of theresidual method 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-repetitive conversionand implementation services. Where fair value cannot be established on theundelivered element, revenue (and the related costs of revenue) for thedelivered elements are deferred and recognized ratably over the repetitiveprocessing period.

***Non-RepetitiveBusiness***

Less than 5% of ourconsolidated revenue in 2004 was generated from the sale and installation ofsoftware and data conversion services in our HRS businesses (includingnon-repetitive HRO services discussed above). These services may also includetraining and other consulting.

76

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

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 two 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, make long distance phone calls and makedirect deposits of pay, settlements or trip advances to personal bank accounts.Revenue from funds transfer transactions is based on a per transaction fee thatis based on either a fixed amount or a percentage of the face value of thetransaction and is recognized when the transaction takes place.

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. The servicethat Comdata provides permits trucking companies to receive payment on shippinginvoices sooner. The non-refundable discount represents adequate compensationcharged for servicing the receivables over a 30-day period. If thecollection period extends beyond 30 days, a non-refundable additional fee ischarged for each month of servicing. After 90 days, an uncollected receivablecan be returned to the seller for its face value. Comdata recognizes revenuefrom the discounted fee in the month of the purchase and the additional feesfor servicing as we become entitled to collect the fee.

Comdata also providesfueling centers with:(1) PC-based, point of sale systems that automate thevarious transactions that occur at a fuel purchase desk; and (2) “pay atthe pump” systems which enable customers to transact card-based fuel purchasesat the pump. Revenue from the sale of PC-based point of sale equipment and payat the pump equipment is recognized at the time the equipment is received andaccepted by the customer. Recurring service revenues for these activities arerecognized as earned. Support and maintenance contracts are generally for 12month periods and are invoiced annually with the revenues recognized on astraight-line basis over the maintenance period. These products and servicesare all sold separately; accordingly, we have standalone value for each productand service. Separate sales also establish the fair value of each of theproducts and services sold in the event a customer contracts with us formultiple products and/or services.

***Retail Services***

Comdata sells stored valuecards and provides subsequent activation, reporting and transaction processingservices (“services”). Customers may also choose to purchase cards alone,without a continuing obligation for services from SVS. SVS recognizes revenuefor card sales without services upon shipment.

77

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

For card sales withservices, revenue on both the card sales and services are deferred and reportedon the consolidated balance sheets as deferred income. Costs of the cards soldis deferred and reported on the consolidated balance sheets as prepaid expense.Costs on the services are recognized as incurred. The deferred income andprepaid expense on the card sale are recognized in earnings over thetransaction processing period (up to approximately 30 months), which beginsupon activation of the card. The deferred income on the services where wecharge a fee for unlimited transactions processed on a card is recognized inearnings over the same transaction processing period which begins uponactivation of the card. The deferred income on the services where we charge afee each time a transaction is processed on a card is recognized in earningsover the same transaction processing period which begins each time atransaction is processed. 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 NetRevenue***

We include in revenueamounts that we bill for and remit to third-party vendors for associated productsand services as required on a gross basis as a principal rather than net as anagent when the following conditions are met: (1) we are the primaryobligor in the arrangement with the customer; (2) we have credit risk andinventory risk; (3) we have latitude in the establishment of pricing,subject to general economic restraints; and (4) we have full discretion invendor 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 equipment sold to customers. The principal Comdata costs ofrevenue that are recognized over the period of use include depreciation 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.

78

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

***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

·       Engineeringactivity required to advance the design of a product to the point that it meetsspecific functional 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 FAS 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 FAS 133 hedgeaccounting requirements is reported in accumulated other comprehensive income. Wediscuss our policy on derivative instruments earlier in this Note A under thecaption “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).

**Translationof 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 earnings statements at the weighted average exchange ratesfor each period. We report the effect of changes in the U.S. dollar carryingvalues of assets and liabilities of our international operations that are dueto changes in exchange rates between the U.S. dollar and their functionalcurrency as “foreign currency translation” in “accumulated other comprehensiveincome” in the accompanying consolidated statements of stockholders’ 

79

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

equity. Gainsand losses from translation of assets and liabilities denominated in other thanthe functional currency of the international operation are recorded in resultsof operations as “other expense (income).”

**Receivables Securitization**

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 FAS 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities”and the sold receivables and borrowings remain in our consolidated balancesheet. We further explain our policy and the operation of this facility in NoteK, “Financing.”

**B.   RESTATEMENT OF FINANCIAL STATEMENTS**

Wehave restated our consolidated financial statements for the years 2000 through2003 and for the first nine months of 2004 (the “Restatement”). The determination to restate these financialstatements was made after errors were discovered in March and April 2005. In addition, certain disclosures in other notes to ourconsolidated financial statements have been restated to reflect the Restatementadjustments. In the Restatement, we have:

·  recorded accelerated amortization of theCobraServ trademark

·  corrected the accounting for certain leases

·  corrected errors in the accounting forinternational acquisitions

·  corrected other accounting errors related tothe accrual of costs and expenses

·  reduced income tax reserves

·  corrected balance sheet amounts for customerfunds and employee benefits

The Restatement narrative belowincludes only the 2003 and 2002 audited amounts as well as the impact of priorperiod Restatement amounts on beginning retained earnings at January 1, 2002.The accompanying consolidated statement of operations table includes anunaudited column for the first nine months of 2004 to show the total impact ofthe Restatement on our 2004 quarterly periods.

The Restatement reduced our earnings before incometaxes for 2002 and 2003 by $4.0 consisting of $3.2 related to leases, $0.5 related to internationalacquisition accounting and $0.3 related to the accrual of costs and expenses.All of the 2002 and 2003 pre-tax statement of operations Restatement entrieswere classified as selling, general and administrative expense except for $0.3in 2003 related to leases that was charged to cost of revenue. The impact of theRestatement on the consolidated statements of operations for these periods isshown in an accompanying table. This consolidated statement of operations tablealso contains the unaudited amounts for the first nine months of 2004. Thequarterly impact of the Restatement for 2003 and 2004 is presented in Note O,“Supplementary Quarterly Data.”

80

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

The Restatement decreased beginning retained earningsfor the year ended December 31, 2002 presented on our consolidated statementsof stockholders’ equity from $327.4 as previously reported to $324.0 asrestated. This $3.4 decrease, net of tax of $1.4, consisted of $2.0 for leasesand $1.7 for international acquisition accounting, partially offset by a $0.3increase related to accruals of costs and expenses.

The primary impact of the above adjustments on theDecember 31, 2003 consolidated balance sheet was to intangible assets due tointernational acquisition adjustments, customer funds, and other noncurrentliabilities due to lease adjustments. The impact of the Restatement on ourconsolidated balance sheet at December 31, 2003 is shown in an accompanyingtable.

The Restatement had no impact on historical cashbalances or total cash flows from operating, investing or financing activitiesfor the years ended December 31, 2003 and 2002. The only impact on theconsolidated statements of cash flows was to reclass certain amounts withinoperating cash flows.

The following is a moredetailed description of the six classes of Restatement adjustments:

**CobraServ trademark amortization**

In March 2005, wediscovered that as a result of the determination to rename the CobraServproduct offering, the CobraServ trademark capitalized as part of a 1999acquisition of our benefits services division was no longer being used. It wasdetermined that the decision to abandon the trademark was made in January 2004 andto stop use of the CobraServ trademark in December 2004. As part of thisabandonment, we began phasing out use of this trademark over the course of2004, and the scheduled amortization expense for 2005 and future years of $40.9was accelerated and amortized to selling, general and administrative expense inequal amounts of $10.2 over the four quarters of 2004. This treatment wasapplied as a change in accounting estimate under Accounting Principles BoardOpinion No. 20, “Accounting Changes.” The impact on our consolidated balancesheets was a $10.2 reduction of other intangible assets in each of the fourquarters in 2004.

**Lease accounting**

In April 2005, we discoverederrors in our accounting for certain operating leases. Rent obligations werenot being expensed on a straight-line basis in accordance with the FinancialAccounting Standard’s Board Technical Bulletin 85-3, “Accounting for OperatingLeases with Scheduled Rent Increases.” The correction to a straight-line basisincreased costs and expenses by $3.2 during 2002 and 2003. This $3.2 wascharged to selling, general and administrative expense, except for $0.3 in 2003that was charged to cost of revenue. The pretax impact for periods prior to2002 was an expense of $2.8, which was recorded as a reduction of retainedearnings at January 1, 2002 of $2.0, net of tax.

**Internationalacquisition accounting**

As part of a March 2005review of international purchase accounting entries for acquisitions in theUnited Kingdom and Canada in 1995 and 1998, errors were discovered in the initialentries as well as the ongoing accounting treatment. The net impact of theseadjustments was an increase in selling, general and administrative expense of$0.5 during 2002 and 2003. The pretax impact for periods prior to 2002 was anexpense of $2.4, which was recorded as a reduction of retained earnings atJanuary 1, 2002 of $1.7, net of 

81

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

tax. Thecompany also made errors in the application of certain foreign currencytranslation impacts for the international operations which impacted the balancesheet accounts for goodwill, other intangible assets, capitalized software andaccumulated other comprehensive income—foreign currency translation.

**Accrual of costs and expenses**

As part of the ongoing review of our financialstatements, we discovered certain other errors related to the accuracy andtimeliness of the accrual of costs and expenses. These errors generally relatedto the timing of expense recognition and offset each other within annualreporting periods; however, the expense recognition timing between quarters hada larger impact as disclosed in Note O, “Supplementary Quarterly Data.” Theseadjustments increased selling, general and administrative expense for 2002 and2003 by $0.3. The pretax impact for periods prior to 2002 was a reduction ofexpenses of $0.4, which was recorded as an increase in retained earnings atJanuary 1, 2002 of $0.3, net of tax.

The adjustmentsconsisted of:

·  Casualty loss reserves

·  Accrual of commissions and incentives

·  Prepayment of expenses originally recorded asan investment

·  Payrolltaxes on third party contractors in the United Kingdom

**Income tax reserves**

It was determined that asa result of an error in the recording of a reduction in our income tax reserves,our liability was overstated by $0.9 as of December 31, 2003. Accordingly, atax benefit was recorded in the fourth quarter of 2003 as part of the Restatement.This adjustment is in addition to the tax impact of the corrections to pretaxearnings listed above.

**Balancesheet corrections for customer funds and employee benefits**

In reviewing ourcustomer funds assets and liabilities we discovered that an $11.4 correctionneeded to be made at December 31, 2003 related to amounts due from customersand taxing authorities. We also determined that a $2.0 employee benefitsaccrual should have been recorded as a current liability rather than long-termand reclassified it at December 31, 2003.

82

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Thefollowing table presents the effect of the Restatement on the consolidatedstatements of operations:
| ** **                              | ** ** | **First Nine** | ** ** | **For Years Ended** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Months**          | ** ** | **December 31,**         | ** ** |
| ** **                              | ** ** | **of 2004**    | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                              | ** ** | **(unaudited)**     | ** ** | ** **                    | ** ** | ** ** | ** ** |
| ***As  Previously Reported***           |       |                |       |                          |       |   |   |   |   |
| Revenue                                 |       |                | $          | 959.1                         |       |   | $ | 1,213.9 |   | $ | 1,160.3 |   |
| Costs and expenses                      |       |                | 888.3      |                          |       | 1,062.4 |   | 984.3 |   |
| Earnings before income  taxes           |       |                | 70.8       |                          |       | 151.5 |   | 176.0 |   |
| Income tax provision                    |       |                | 24.5       |                          |       | 52.8 |   | 62.8 |   |
| Earnings from continuing  operations    |       |                | 46.3       |                          |       | 98.7 |   | 113.2 |   |
| Discontinued operations                 |       |                | —     |                          |       | — |   | — |   |
| Net earnings                            |       |                | $          | 46.3                          |       |   | $ | 98.7 |   | $ | 113.2 |   |
| Basic earnings per share                |       |                |       |                          |       |   |   |   |   |
| Continuing operations                   |       |                | $          | 0.31                          |       |   | $ | 0.66 |   | $ | 0.76 |   |
| Net earnings                            |       |                | $          | 0.31                          |       |   | $ | 0.66 |   | $ | 0.76 |   |
| Diluted earnings per  share             |       |                |       |                          |       |   |   |   |   |
| Continuing operations                   |       |                | $          | 0.31                          |       |   | $ | 0.66 |   | $ | 0.76 |   |
| Net earnings                            |       |                | $          | 0.31                          |       |   | $ | 0.66 |   | $ | 0.76 |   |
| ***Restatement  Summary***              |       |                |       |                          |       |   |   |   |   |
| Trademark amortization                  |       |                | $          | 30.6                          |       |   | $ | — |   | $ | — |   |
| Lease accounting                        |       |                | 1.5        |                          |       | 2.1 |   | 1.1 |   |
| International acquisition  accounting   |       |                | (0.6       | )                             |       | (0.8 | ) | 1.3 |   |
| Accrual of costs and expenses           |       |                | (0.3       | )                             |       | — |   | 0.3 |   |
| Costs and expenses  increase            |       |                | 31.2       |                          |       | 1.3 |   | 2.7 |   |
| Total pretax earnings  decrease         |       |                | (31.2      | )                             |       | (1.3 | ) | (2.7 | ) |
| Tax effect of  restatement(1)           |       |                | (10.8      | )                             |       | (1.4 | ) | (1.0 | ) |
| Total net earnings increase  (decrease) |       |                | $          | (20.4                         | )          |   | $ | 0.1 |   | $ | (1.7 | ) |
| ***As  Restated***                      |       |                |       |                          |       |   |   |   |   |
| Revenue                                 |       |                | $          | 959.1                         |       |   | $ | 1,213.9 |   | $ | 1,160.3 |   |
| Costs and expenses                      |       |                | 919.5      |                          |       | 1,063.7 |   | 987.0 |   |
| Earnings before income  taxes           |       |                | 39.6       |                          |       | 150.2 |   | 173.3 |   |
| Income tax provision                    |       |                | 13.7       |                          |       | 51.4 |   | 61.8 |   |
| Earnings from continuing  operations    |       |                | 25.9       |                          |       | 98.8 |   | 111.5 |   |
| Discontinued operations                 |       |                | —     |                          |       | — |   | — |   |
| Net earnings                            |       |                | $          | 25.9                          |       |   | $ | 98.8 |   | $ | 111.5 |   |
| Basic earnings per share                |       |                |       |                          |       |   |   |   |   |
| Continuing operations                   |       |                | $          | 0.17                          |       |   | $ | 0.66 |   | $ | 0.75 |   |
| Net earnings                            |       |                | $          | 0.17                          |       |   | $ | 0.66 |   | $ | 0.75 |   |
| Diluted earnings per  share             |       |                |       |                          |       |   |   |   |   |
| Continuing operations                   |       |                | $          | 0.17                          |       |   | $ | 0.66 |   | $ | 0.74 |   |
| Net earnings                            |       |                | $          | 0.17                          |       |   | $ | 0.66 |   | $ | 0.74 |   |

----

(1)    2003 includes a $0.9 tax reserve adjustment in additionto the $0.5 tax effect of the pretax earnings decrease of $1.3.

Please refer to Note O for the impact of theRestatement on our 2004 and 2003 quarterly information.

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Thefollowing table presents the effect of the Restatement on the consolidatedbalance sheet:
| ** **                                                    | ** ** | **December 31, 2003** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **As**                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Previously**                  | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                                    | ** ** | **Reported**                    | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| ***Assets***                                                  |       |                            |       |   |   |   |   |   |   |
| Cash and  equivalents                                         |       | $                               | 124.2      |   |   | $ | — |   |   | $ | 124.2 |   |
| Trade and other  receivables, net                             |       | 467.3                           |       |   | — |   |   | 467.3 |   |
| Current portion  of deferred income taxes                     |       | 28.5                            |       |   | — |   |   | 28.5 |   |
| Other current  assets                                         |       | 56.0                            |       |   | — |   |   | 56.0 |   |
| Total current assets                                          |       | 676.0                           |       |   | — |   |   | 676.0 |   |
| Goodwill                                                      |       | 904.8                           |       |   | 13.8 |   |   | 918.6 |   |
| Other intangible  assets, net                                 |       | 101.1                           |       |   | (10.9 | ) |   | 90.2 |   |
| Software and  development costs, net                          |       | 85.8                            |       |   | 0.4 |   |   | 86.2 |   |
| Deferred income  taxes, less current portion                  |       | 6.0                             |       |   | 3.6 |   |   | 9.6 |   |
| Investments                                                   |       | 23.2                            |       |   | (0.3 | ) |   | 22.9 |   |
| Other noncurrent  assets                                      |       | 224.6                           |       |   | — |   |   | 224.6 |   |
| Total assets before customer funds                            |       | 2,021.5                         |       |   | 6.6 |   |   | 2,028.1 |   |
| Customer funds                                                |       | 3,141.3                         |       |   | 11.4 |   |   | 3,152.7 |   |
| Total assets                                                  |       | $                               | 5,162.8    |   |   | $ | 18.0 |   |   | $ | 5,180.8 |   |
| ***Liabilities  and Stockholders’ Equity***              |       |                            |       |   |   |   |   |   |   |
| Short-term debt  and current portion of long-term obligations |       | $                               | 6.5        |   |   | $ | — |   |   | $ | 6.5 |   |
| Accounts payable                                              |       | 39.1                            |       |   | — |   |   | 39.1 |   |
| Drafts and  settlements payable                               |       | 113.7                           |       |   | — |   |   | 113.7 |   |
| Customer advances                                             |       | 31.0                            |       |   | — |   |   | 31.0 |   |
| Deferred income                                               |       | 66.9                            |       |   | — |   |   | 66.9 |   |
| Accrued taxes                                                 |       | 26.4                            |       |   | (0.9 | ) |   | 25.5 |   |
| Employee  compensation and benefits                           |       | 53.9                            |       |   | 1.4 |   |   | 55.3 |   |
| Other accrued  expenses                                       |       | 35.2                            |       |   | 0.2 |   |   | 35.4 |   |
| Total current liabilities                                     |       | 372.7                           |       |   | 0.7 |   |   | 373.4 |   |
| Long-term  obligations, less current portion                  |       | 157.0                           |       |   | — |   |   | 157.0 |   |
| Deferred income  taxes                                        |       | 37.8                            |       |   | 0.8 |   |   | 38.6 |   |
| Employee benefit  plans                                       |       | 198.0                           |       |   | (2.0 | ) |   | 196.0 |   |
| Other noncurrent  liabilities                                 |       | 12.0                            |       |   | 5.9 |   |   | 17.9 |   |
| Total liabilities before customer funds obligations           |       | 777.5                           |       |   | 5.4 |   |   | 782.9 |   |
| Customer funds  obligations                                   |       | 3,141.3                         |       |   | 11.4 |   |   | 3,152.7 |   |
| Total liabilities                                             |       | 3,918.8                         |       |   | 16.8 |   |   | 3,935.6 |   |
| Common stock and additional paid-in capital                   |       | 926.5                           |       |   | 0.1 |   |   | 926.6 |   |
| Retained earnings                                             |       | 533.6                           |       |   | (5.0 | ) |   | 528.6 |   |
| Accumulated other  comprehensive income                       |       | (216.1                          | )          |   | 6.1 |   |   | (210.0 | ) |
| Total  stockholders’ equity                              |       | 1,244.0                         |       |   | 1.2 |   |   | 1,245.2 |   |
| Total liabilities  and stockholders’ equity              |       | $                               | 5,162.8    |   |   | $ | 18.0 |   |   | $ | 5,180.8 |   |

 

84

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

The following tablepresents the Restatement effects by reason and line item on the consolidatedbalance sheet:
| **Balance sheet account**                                | ** ** | ** **                   | ** ** | **December 31, 2003** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **Increase (decrease)** | ** ** |
| **Summary by Restatement Group by Balance Sheet  Account**         |       |                         |       |                            |       |
| **Lease accounting:**                                              |       |                         |       |                            |       |
| Other noncurrent  liabilities increase                             |       |                         | $          | 5.9                             |       |   |
| **International acquisition accounting:**                          |       |                         |       |                            |       |
| Goodwill                                                           |       |                         | 13.8       |                            |       |
| Other intangible assets,  net                                      |       |                         | (10.9      | )                               |       |
| Software and development  costs, net                               |       |                         | 0.4        |                            |       |
| Accumulated other  comprehensive income (currency translation)     |       |                         | 6.1        |                            |       |
| Net liability/equity  increase                                     |       |                         | $          | 2.8                             |       |   |
| **Accrual of costs and expenses:**                                 |       |                         |       |                            |       |
| Investments                                                        |       |                         | (0.3       | )                               |       |
| Employee compensation and  benefits (short-term liability)         |       |                         | (0.6       | )                               |       |
| Other accrued expenses                                             |       |                         | 0.2        |                            |       |
| Net liability decrease                                             |       |                         | $          | (0.1                            | )          |   |
| **Income tax impact of adjustments:**                              |       |                         |       |                            |       |
| Deferred income taxes  (long-term asset)                           |       |                         | 3.6        |                            |       |
| Accrued taxes (current  income taxes payable)                      |       |                         | (0.9       | )                               |       |
| Deferred income taxes  (long-term liability)                       |       |                         | 0.8        |                            |       |
| Net asset increase                                                 |       |                         | $          | 3.7                             |       |   |
| **Balance sheet reclassifications:**                               |       |                         |       |                            |       |
| Customer funds (asset)                                             |       |                         | 11.4       |                            |       |
| Customer funds  obligations                                        |       |                         | 11.4       |                            |       |
| Employee compensation and  benefits (short-term liability)         |       |                         | 2.0        |                            |       |
| Employee benefit plans  (long-term liability)                      |       |                         | (2.0       | )                               |       |
| Net balance sheet impact                                           |       |                         | $          | —                          |       |   |
| **Line item summary of above adjustments and  reclassifications:** |       |                         |       |                            |       |
| Assets                                                             |       |                         |       |                            |       |
| Goodwill                                                           |       |                         | 13.8       |                            |       |
| Other intangible assets,  net                                      |       |                         | (10.9      | )                               |       |
| Software and development  costs, net                               |       |                         | 0.4        |                            |       |
| Deferred income taxes  (long-term)                                 |       |                         | 3.6        |                            |       |
| Investments                                                        |       |                         | (0.3       | )                               |       |
| Customer funds                                                     |       |                         | 11.4       |                            |       |
| Net increase in assets                                             |       |                         | $          | 18.0                            |       |   |
| Liabilities                                                        |       |                         |       |                            |       |
| Accrued taxes                                                      |       |                         | (0.9       | )                               |       |
| Employee compensation and  benefits                                |       |                         | 1.4        |                            |       |
| Other accrued expenses                                             |       |                         | 0.2        |                            |       |
| Deferred income taxes  (long-term)                                 |       |                         | 0.8        |                            |       |
| Employee benefit plans  (long-term)                                |       |                         | (2.0       | )                               |       |
| Other noncurrent  liabilities                                      |       |                         | 5.9        |                            |       |
| Customer funds  obligations                                        |       |                         | 11.4       |                            |       |
| Net increase in  liabilities                                       |       |                         | $          | 16.8                            |       |   |
| Net increase in stockholders’ equity                          |       |                         | $          | 1.2                             |       |   |

 

85

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

**C.**   INCOME TAXES

At December 31, 2004,we had total net operating loss carryforwards of approximately $205.6. Amountsavailable to reduce future taxable income include $10.2 of U.S. federal netoperating loss carryfowards, $192.6 of U.S. state net operating loss carryforwards,and $2.8 of international net operating loss carryfowards. If unused, thesecarryforwards will expire between 2005 and 2024.

Ourincome tax returns remain subject to income tax audits in various jurisdictionsfor 1989 and subsequent years, as a result of tax sharing agreements related tothe disposition of certain operations. The IRS is currently examining us forthe 2001 and 2002 tax years. Also, as disclosed in an accompanying table, wewere able to favorably settle some tax issues with jurisdictions during each ofthe past three years. We have provided for probable additional taxes related toopen audits. During 2004, the net amount of audit related items reflected inour income tax provision is a tax benefit of $4.0. We consider our tax accrualsadequate to cover any U.S. and international tax deficiencies not recoverablethrough deductions in future years.
| **Components of Earnings and Taxes from** | ** ** | ** ** | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|
| **Continuing Operations**                                     | ** ** | ** ** | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                         | ** ** | ** ** | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** |
| *Earnings Before Income Taxes*                                     |       |       |       |                                        |       |   |   |   |   |   |   |
| U.S.                                                               |       | $          | 9.1        |                                        |       | $ | 121.6 |   |   |   | $ | 144.4 |   |   |
| International                                                      |       | 32.1       |       |                                        | 28.6       |   |   |   | 28.9 |   |   |
| Total                                                              |       | $          | 41.2       |                                        |       | $ | 150.2 |   |   |   | $ | 173.3 |   |   |
| *Income Tax Provision*                                             |       |       |       |                                        |       |   |   |   |   |   |   |
| Current                                                            |       |       |       |                                        |       |   |   |   |   |   |   |
| U.S.                                                               |       | $          | 25.9       |                                        |       | $ | 4.8 |   |   |   | $ | 21.6 |   |   |
| State and other                                                    |       | (10.8      | )          |                                        | (0.1       | ) |   |   | 3.0 |   |   |
| International                                                      |       | 9.0        |       |                                        | 12.5       |   |   |   | 12.5 |   |   |
|                                                               |       | 24.1       |       |                                        | 17.2       |   |   |   | 37.1 |   |   |
| Deferred                                                           |       |       |       |                                        |       |   |   |   |   |   |   |
| U.S.                                                               |       | (21.9      | )          |                                        | 35.7       |   |   |   | 27.6 |   |   |
| State and other                                                    |       | (1.9       | )          |                                        | 2.1        |   |   |   | 0.6 |   |   |
| International                                                      |       | 4.0        |       |                                        | (3.6       | ) |   |   | (3.5 | ) |   |
|                                                               |       | (19.8      | )          |                                        | 34.2       |   |   |   | 24.7 |   |   |
| Total                                                              |       | $          | 4.3        |                                        |       | $ | 51.4 |   |   |   | $ | 61.8 |   |   |

 

86

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

 
| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| **Effective  Rate Reconciliation**          | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                  | ** ** | ** **                                  | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| U.S. statutory  rate                        |       | 35                                          | %          |   | 35 | % |   |   | 35 | % |   |
| Income tax provision at U.S. statutory rate |       | $                                           | 14.4       |   |   | $ | 52.6 |   |   |   | $ | 60.6 |   |   |
| State income  taxes, net                    |       | 1.0                                         |       |   | 1.2 |   |   |   | 2.8 |   |   |
| Meals and  entertainment                    |       | 1.0                                         |       |   | 0.8 |   |   |   | 0.8 |   |   |
| Tax on  international earnings              |       | 12.3                                        |       |   | — |   |   |   | — |   |   |
| Tax settlements                             |       | (16.3                                       | )          |   | (3.9 | ) |   |   | (3.9 | ) |   |
| Valuation  allowance change                 |       | (7.0                                        | )          |   | — |   |   |   | — |   |   |
| Other                                       |       | (1.1                                        | )          |   | 0.7 |   |   |   | 1.5 |   |   |
| Income tax provision                        |       | $                                           | 4.3        |   |   | $ | 51.4 |   |   |   | $ | 61.8 |   |   |
|                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Tax Effect of  Items That Comprise a Significant Portion of the** | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| **Net Deferred  Tax Asset and Deferred Tax Liability**              | ** ** | ** ** | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                                          | ** ** | ** ** | ** ** | **(restated)**        | ** ** |
| *Deferred  Tax Asset*                                               |       |       |       |                  |       |   |   |
| Employment  related accruals                                        |       | $          | 64.1       |                  |       | $ | 64.0 |   |   |
| Restructuring and  other accruals                                   |       | 44.2       |       |                  | 28.6       |   |   |
| Net operating  loss carryforwards                                   |       | 18.7       |       |                  | 12.4       |   |   |
| Other                                                               |       | 14.5       |       |                  | 13.1       |   |   |
| Total gross deferred tax asset                                      |       | 141.5      |       |                  | 118.1      |   |   |
| Valuation allowance                                                 |       | (15.1      | )          |                  | (18.8      | ) |   |
| Total deferred tax asset                                            |       | 126.4      |       |                  | 99.3       |   |   |
| *Deferred Tax Liability*                                            |       |       |       |                  |       |   |   |
| Intangibles                                                         |       | (84.1      | )          |                  | (67.4      | ) |   |
| Other                                                               |       | (20.9      | )          |                  | (32.4      | ) |   |
| Total deferred tax liability                                        |       | (105.0     | )          |                  | (99.8      | ) |   |
| Net deferred tax asset (liability)                                  |       | $          | 21.4       |                  |       | $ | (0.5 | ) |   |
| **Net Deferred Tax by Geography**                                   |       |       |       |                  |       |   |   |
| United States                                                       |       | $          | 48.3       |                  |       | $ | 16.2 |   |   |
| International                                                       |       | (26.9      | )          |                  | (16.7      | ) |   |
| Total                                                               |       | $          | 21.4       |                  |       | $ | (0.5 | ) |   |

 

We have established avaluation allowance related to future state income tax benefits because it isconsidered to be more likely than not that these benefits will not be realized.At December 31, 2004, the valuation allowance relating to state taxoperating loss carryforwards was approximately $14.1 and the allowance relatedto international operating loss carryforwards was approximately $1.0. Wedecreased the valuation allowance for the state deferred income taxes relatedto the pension assets because it was more likely than not that we would realizeits benefit in the future. The associated tax benefit of approximately $7.0 wasrecognized in tax expense for the current year. We also increased the valuationallowance due to the current year net operating loss carryforwards.

87

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

**D.   SUPPLEMENTARY DATA TO STATEMENTS OF OPERATIONS**
| ** **                                     | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| **Other Expense  (Income)**                    | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| SourceWeb exit  costs, net of recoveries       |       | $                                           | 28.5       |   | $ | — |   | $ | — |   |
| Litigation and  contract settlement costs      |       | —                                      |       | 1.9 |   | 0.8 |   |
| Foreign currency  translation expense (income) |       | (0.8                                        | )          | (0.2 | ) | (0.6 | ) |
| Gain on sale of  assets                        |       | (0.6                                        | )          | (1.6 | ) | — |   |
| (Gain) loss on  marketable securities          |       | (4.5                                        | )          | (3.4 | ) | 6.3 |   |
| Accrued exit  costs, net of recoveries         |       | 0.3                                         |       | — |   | 13.5 |   |
| Factoring  receivables loss                    |       | —                                      |       | — |   | 9.8 |   |
| Asset write-downs                              |       | 3.6                                         |       | — |   | 7.3 |   |
| Reduction in  environmental accrual            |       | —                                      |       | — |   | (4.1 | ) |
| Other expense  (income)                        |       | —                                      |       | 0.8 |   | 0.1 |   |
| Total                                          |       | $                                           | 26.5       |   | $ | (2.5 | ) | $ | 33.1 |   |
|                                                |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

**Unusual Losses (Gains)**

***SourceWeb exit costs, net ofrecoveries***

On December 31, 2004,we sold certain customer relationships and other assets associated with ourSourceWeb 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 FAS 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 from TheUltimate Software Group, Inc. (“Ultimate”) and capitalized softwaredevelopment costs. In addition to this asset impairment, we also recorded a$19.4 pre-tax loss on disposal which comprised the fair value of the futureminimum royalty obligations to Ultimate of $19.2 and $0.2 of employee severancecosts.

SourceWeb was a payrollplatform within the small business division of our HRS business segment. Pursuantto the terms of the Asset Purchase Agreement, we agreed to provide certaintransitional and third party services to RSM for up to nine months from December 31,2004.

***Litigation and contract settlementcosts***

Duringthe third quarter of 2003, Comdata paid $1.9 to settle out of court with aformer vendor. In the fourth quarter of 2002, we also recorded $0.8 of other costsin HRS for a litigation settlement.

***(Gain)loss on marketable securities***

During 2004, we sold193,289 common shares of Ultimate for proceeds of $2.4 and a net gain of $1.6. Alsoin 2004, we sold 582,758 common shares of U.S.I. Holdings Corporation (“USIH”)for proceeds of $8.7 and a net gain of $2.9.

88

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

During September 2003, wesold 785,000 common shares of Ultimate for proceeds of $5.9 and a net gain of$3.0. In addition, we sold 137,158 common shares of USIH for proceeds of $1.8and a net gain of $0.4. We further describe these transactions in Note H, “InvestingActivity.”

During the fourth quarterof 2002, HRS recorded a $6.3 write-down of the carrying value of certainmarketable equity securities. The investment write-down related primarily toour December 2001 cost-based investment in preferred stock of USIH, whichwas converted to common stock as a result of an initial public offering in October 2002.

***Accrued exit costs, net of recoveries***
| ** **                         | ** ** | **Accrued Exit Costs** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **Severance**                    | ** ** | **Occupancy  Costs** | ** ** | **Contracts** | ** ** | **Total** | ** ** |
| ***2004***                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| SourceWeb                          |       |                             | $          | 0.2 |   |   |   | $ | — |   |   |   | $ | 19.2 |   |   | $ | 19.4 |   |
| Other                              |       |                             | 0.2        |   |   |   | 0.1 |   |   |   | — |   |   | 0.3 |   |
| Total accrued costs                |       |                             | 0.4        |   |   |   | 0.1 |   |   |   | 19.2 |   |   | 19.7 |   |
| Utilization:                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 2004 cash payments                 |       |                             | (0.1       | ) |   |   | — |   |   |   | — |   |   | (0.1 | ) |
| Balance at  December 31, 2004 |       |                             | $          | 0.3 |   |   |   | $ | 0.1 |   |   |   | $ | 19.2 |   |   | $ | 19.6 |   |
| ***2002***                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total accrued costs                |       |                             | $          | 8.2 |   |   |   | $ | 6.7 |   |   |   | $ | — |   |   | $ | 14.9 |   |
| Utilization:                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 2002 cash payments                 |       |                             | (6.3       | ) |   |   | (2.5 | ) |   |   | — |   |   | (8.8 | ) |
| 2002 recoveries                    |       |                             | (1.1       | ) |   |   | — |   |   |   | — |   |   | (1.1 | ) |
| 2003 cash payments                 |       |                             | (0.8       | ) |   |   | (2.8 | ) |   |   | — |   |   | (3.6 | ) |
| 2004 cash payments                 |       |                             | —     |   |   |   | (1.4 | ) |   |   | — |   |   | (1.4 | ) |
| Balance at December 31, 2004  |       |                             | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |

 

During the third quarterof 2004, we announced a shut-down of a Comdata facility that resulted inaccrued exit costs of $0.3 of which $0.2 was for severance and $0.1 was relatedto the lease of the facility.

During the first quarterof 2002, we announced two separate series of actions intended to consolidatecertain operations in each of our business segments and recorded accrued exitcosts of $9.0. A plan to consolidate certain HRS payroll and tax filingprocessing services, previously conducted in 25 district offices, into 4regional processing centers resulted in the accrual of $7.5 for exit costs. Ofthe $7.5 accrual, $5.3 related to severance costs for 317 employees all of whomwere terminated by December 31, 2002, and $2.2 represented other exitcosts, primarily related to lease terminations. Consolidation of certainComdata facilities resulted in accrued severance costs of $1.0 for 76employees, all of whom were terminated by December 31, 2003, and otherexit costs of $0.5, primarily related to lease terminations.

In the fourth quarter of2002, we reviewed the status of accrued exit costs and revised the estimatedamounts to reduce the severance cost provisions made in prior years by $1.4.The revisions made by HRS included $0.8 related to provisions recorded in thefirst quarter of 2002 and $0.3 recorded in the first quarter of 2000. Therevisions by Comdata amounted to $0.3 related to provisions recorded in thefirst quarter of 2002. We also incurred additional expense in HRS for severancecosts of $1.3, involving 

89

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

81 employees,and other exit costs of $2.9 and in Comdata for severance costs of $0.6,involving 41 employees, and other exit costs of $1.1. We paid all of theadditional HRS severance costs during the fourth quarter of 2002. The otherexit costs largely represented lease commitments, net of expected recoveries.

***Factoringreceivables loss***

During the third quarterof 2002, we examined purchases of receivables from a certain trucking companyby Comdata’s factoring business that had grown rapidly during 2002 and foundthat the debtors could not be verified. In the meantime, the parties that hadsold us the receivables declared bankruptcy. We recorded the full amount of theloss of $9.8, including $0.3 of investigative costs incurred. Due to theunusual and non-recurring nature of the loss, we have reported the loss asother expense (income). We also made certain modifications to our policies andprocedures related to the factoring business.

***Asset write-downs***

In January 2004, wecommitted to the internal development of a replacement for our HRS LifeWorkscustomer management system as a result of the failure of an external contractorto meet our requirements for such a project. We recorded an asset write-down of$2.3 in the first quarter of 2004 representing the carrying value of thecapitalized software related to the work performed by the external contractorthat was abandoned and determined to have no future value to us. In addition,during the fourth quarter of 2004, we recorded an asset write-down of $0.9 dueto an impairment of an internally developed software product in HRS.

HRS recorded a $4.9 assetwrite-down of internally developed software costs in the first quarter of 2002as a result of the February 2002 acceptance of the software technologyprovided under a March 2001 agreement with Ultimate further described inNote L, “Commitments and Contingencies.” An additional software assetwrite-down of $0.6 was recorded in the second quarter of 2002. Also in thefourth quarter of 2002, HRS recorded a $1.5 write-down of the carrying valuesof certain cost-based investments and wrote off the $0.3 carrying value of anabandoned software product.

***Reduction inenvironmental accrual***

During the first quarterof 2002, we conducted a periodic reassessment of our environmental obligation. Thisobligation relates to the 1989 sale by our predecessor (Control DataCorporation) of its disk drive operations, which involved remediableenvironmental sites. The sale agreement provided terms describing how remedialcosts related to remediable environmental sites would be shared between thebuyer and us as the seller. The terms of the agreement included periodic jointreviews of the obligation by the buyer and us. Our obligations covered onlythose sites identified prior to the fifth anniversary of the sale. At the timeof the sale, we established an accrual for our estimated costs that might occuras a result of this agreement. During the first 10 years following the sale,both parties incurred significant costs, which then began to decrease as thesesites entered a water extraction and monitoring stage. During the first quarterof 2002, we participated in a periodic review of the status of this obligationwith the environmental officer of the buyer. A site visit was made by ourenvironmental representative at that time, and it was determined that ourestimated liability was $4.1 less than previously determined. The excessaccrual was then credited back to earnings as a component of other expense(income). Our accrual for this environmental obligation was $4.0 as of December 31,2004.

90

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

**E.   SEGMENTDATA**

We operate in the information services industryprincipally in the U.S. and provide products and services primarily to thehuman resource, transportation and retail information markets. Our businessescollect, manage and analyze data and process transactions on behalf ofcustomers, report information resulting from such activities to customers, andprovide customers with related products, software applications and services. Ourtechnology-based products and services of these businesses are typicallyprovided through long-term customer relationships that result in a high levelof recurring revenue. Our HRS and Comdata business segments are distinguishedprimarily by reference to the markets served and the nature of the servicesprovided. Selected business segment information is provided in an accompanyingtable.

HRS offers a broad range of services and softwaredesigned to help employers more effectively manage their work forces andinformation that is integral to human resource processes. These activities areconducted primarily in the U.S. and, to a lesser extent, through subsidiarieslocated in Canada and the United Kingdom.

Comdata provides transaction processing and decisionsupport services to the transportation industry, including assistance inobtaining regulatory permits and other services, in its markets. Comdata sellsstored value cards and provides card-based services primarily to retailers (“RetailServices”) in the form of gift cards and certificates, credits for productreturns and retail promotions.

Further information about our business segments ispresented in the section of Note A, “Accounting Policies” entitled “RevenueRecognition.”

The “Other” reporting element includes the unallocatedamounts related to our corporate center operations. The assets of corporatecenter operations include cash and equivalents as well as deferred income taxand pension-related assets and liabilities.

We measure business segment results by reference toearnings before interest and taxes (“EBIT”). Expenses incurred by corporatecenter operations are charged or allocated to the business segments except forcertain unusual gains and losses, which are reported as “Other”.

Revenue from sales betweenbusiness segments is not material and is eliminated upon consolidation. Ouroperations are conducted primarily in the U.S. and revenue from sales betweenU.S. and non-U.S. entities is not material. Operations in Canada and the UnitedKingdom relate largely to the HRS segment. Geographic data for or at the end ofeach of the last three years, presented in an accompanying table, is determinedby reference to the location of operation.

91

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

 
| ** **                                         | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| **Geographic Segment Data**              | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| *U.S.  Operations*                                 |       |                                        |       |   |   |   |   |
| *HRS Revenue*                                      |       |                                        |       |   |   |   |   |
| Payroll and tax filing                             |       | $                                           | 452.0      |   | $ | 435.9 |   | $ | 417.1 |   |
| Benefits services                                  |       | 146.1                                       |       | 135.9 |   | 124.8 |   |
| LifeWorks                                          |       | 133.4                                       |       | 115.9 |   | 113.9 |   |
| *Total HRS U.S.*                                   |       | 731.5                                       |       | 687.7 |   | 655.8 |   |
| *Comdata Revenue*                                  |       |                                        |       |   |   |   |   |
| Transportation                                     |       | 257.1                                       |       | 242.0 |   | 250.1 |   |
| Retail services                                    |       | 98.9                                        |       | 77.7 |   | 62.9 |   |
| *Total Comdata*                                    |       | 356.0                                       |       | 319.7 |   | 313.0 |   |
| Total Revenue                                      |       | $                                           | 1,087.5    |   | $ | 1,007.4 |   | $ | 968.8 |   |
| Property, plant  and equipment at December 31 |       | 127.1                                       |       | 136.8 |   | 139.0 |   |
| *Non-U.S. Operations*                              |       |                                        |       |   |   |   |   |
| *United Kingdom Operations*                        |       |                                        |       |   |   |   |   |
| Revenue                                            |       | $                                           | 91.8       |   | $ | 79.3 |   | $ | 78.6 |   |
| Property, plant and equipment at December 31  |       | 5.8                                         |       | 3.5 |   | 4.0 |   |
| *Canadian Operations*                              |       |                                        |       |   |   |   |   |
| Revenue                                            |       | 141.1                                       |       | 127.2 |   | 112.9 |   |
| Property, plant and equipment at December 31  |       | 8.0                                         |       | 7.7 |   | 7.1 |   |
| *Total Non-U.S. Operations*                        |       |                                        |       |   |   |   |   |
| Revenue                                            |       | $                                           | 232.9      |   | $ | 206.5 |   | $ | 191.5 |   |
| Property, plant and equipment at December 31  |       | 13.8                                        |       | 11.2 |   | 11.1 |   |
| *Total Worldwide*                                  |       |                                        |       |   |   |   |   |
| Revenue                                            |       | $                                           | 1,320.4    |   | $ | 1,213.9 |   | $ | 1,160.3 |   |
| Property, plant and  equipment at December 31 |       | 140.9                                       |       | 148.0 |   | 150.1 |   |
|                                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

92

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

 
| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| **Business Segments**                  | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                  | ** ** | ** **                                  | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| *HRS*                                       |       |                                        |       |   |   |   |   |
| Revenue                                     |       | $                                           | 964.4      |   | $ | 894.2 |   | $ | 847.3 |   |
| EBIT                                        |       | $                                           | (72.6      | ) | $ | 48.5 |   | $ | 81.9 |   |
| Total assets  before customer funds         |       | $                                           | 1,332.8    |   | $ | 1,386.1 |   | $ | 1,345.4 |   |
| Customer funds                              |       | 4,079.6                                     |       | 3,143.5 |   | 2,440.9 |   |
| Total assets at  December 31           |       | $                                           | 5,412.4    |   | $ | 4,529.6 |   | $ | 3,786.3 |   |
| Goodwill                                    |       | $                                           | 814.8      |   | $ | 801.6 |   | $ | 780.1 |   |
| Depreciation and  amortization              |       | $                                           | 110.5      |   | $ | 65.2 |   | $ | 62.1 |   |
| Expended for  property, plant and equipment |       | $                                           | 25.6       |   | $ | 25.1 |   | $ | 25.2 |   |
| *Comdata*                                   |       |                                        |       |   |   |   |   |
| Revenue                                     |       | $                                           | 356.0      |   | $ | 319.7 |   | $ | 313.0 |   |
| EBIT                                        |       | $                                           | 115.6      |   | $ | 104.3 |   | $ | 91.5 |   |
| Total assets  before customer funds         |       | $                                           | 650.8      |   | $ | 586.1 |   | $ | 583.0 |   |
| Customer funds                              |       | 16.4                                        |       | 9.2 |   | 5.7 |   |
| Total assets at  December 31           |       | $                                           | 667.2      |   | $ | 595.3 |   | $ | 588.7 |   |
| Goodwill                                    |       | $                                           | 117.0      |   | $ | 117.0 |   | $ | 117.0 |   |
| Depreciation and  amortization              |       | $                                           | 13.3       |   | $ | 13.2 |   | $ | 12.8 |   |
| Expended for  property, plant and equipment |       | $                                           | 7.0        |   | $ | 4.6 |   | $ | 5.8 |   |
| *Other*                                     |       |                                        |       |   |   |   |   |
| EBIT                                        |       | $                                           | —     |   | $ | — |   | $ | 4.1 |   |
| Total assets at  December 31           |       | $                                           | 127.3      |   | $ | 55.9 |   | $ | 78.5 |   |
| Depreciation and  amortization              |       | $                                           | 0.9        |   | $ | 0.9 |   | $ | 0.9 |   |
| Expended for  property, plant and equipment |       | $                                           | 0.3        |   | $ | 0.8 |   | $ | 0.1 |   |
| *Total  Ceridian*                           |       |                                        |       |   |   |   |   |
| Revenue                                     |       | $                                           | 1,320.4    |   | $ | 1,213.9 |   | $ | 1,160.3 |   |
| EBIT                                        |       | $                                           | 43.0       |   | $ | 152.8 |   | $ | 177.5 |   |
| Interest income  (expense), net             |       | (1.8                                        | )          | (2.6 | ) | (4.2 | ) |
| Earnings before  income taxes               |       | $                                           | 41.2       |   | $ | 150.2 |   | $ | 173.3 |   |
| Total assets  before customer funds         |       | $                                           | 2,110.9    |   | $ | 2,028.1 |   | $ | 2,006.9 |   |
| Customer funds                              |       | 4,096.0                                     |       | 3,152.7 |   | 2,446.6 |   |
| Total assets at  December 31           |       | $                                           | 6,206.9    |   | $ | 5,180.8 |   | $ | 4,453.5 |   |
| Goodwill                                    |       | $                                           | 931.8      |   | $ | 918.6 |   | $ | 897.1 |   |
| Depreciation and  amortization              |       | $                                           | 124.7      |   | $ | 79.3 |   | $ | 75.8 |   |
| Expended for property,  plant and equipment |       | $                                           | 32.9       |   | $ | 30.5 |   | $ | 31.1 |   |
|                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

93

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

**F.   ACCOUNTS RECEIVABLE**
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Trade receivables  from customers                 |       | $                     | 508.0      |   | $ | 474.9 |   |
| Interest  receivable from invested customer funds |       | 17.5                  |       | 9.5 |   |
| Other                                             |       | 1.5                   |       | 2.2 |   |
| Total gross  receivables                          |       | 527.0                 |       | 486.6 |   |
| Less: long-term  portion of trade receivables     |       | (1.0                  | )          | (2.0 | ) |
| Less: reserves  and allowances                    |       | (20.3                 | )          | (17.3 | ) |
| Trade and other  receivables, net                 |       | $                     | 505.7      |   | $ | 467.3 |   |

 

A portion of the trade receivables serve as collateralunder the Comdata receivables securitization facility discussed in Note K, “Financing.”The aggregate amount serving as collateral under this facility amounted to$191.9 at December 31, 2004 and $187.0 at December 31, 2003. Thelong-term portion of trade receivables is included in other noncurrent assetson our consolidated balance sheets.

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

94

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

**G.   CAPITAL ASSETS**
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Capital Assets**                                                              | ** ** | ** **            | ** ** | **2004** | ** ** | **      2003      ** | ** ** |
| ** **                                                                           | ** ** | ** **            | ** ** | **(restated)** | ** ** |
| *Property, Plant and Equipment*                                                      | ** ** | ** **            | ** ** |   | ** ** | ** ** |   |
| Land                                                                                 |       | $                     | 10.2       |   |   | $ | 10.4 | ** ** |   |
| Machinery and  equipment (accumulated depreciation of $214.7 and $201.7)             |       | 288.6                 |       |   | 281.6 | ** ** |   |
| Buildings and  improvements (accumulated depreciation of $44.7 and $39.0)            |       | 101.5                 |       |   | 96.7 | ** ** |   |
| Total property,  plant and equipment                                                 |       | 400.3                 |       |   | 388.7 | ** ** |   |
| Accumulated  depreciation                                                            |       | (259.4                | )          |   | (240.7 | ) |   |
| Property, plant  and equipment, net                                                  |       | $                     | 140.9      |   |   | $ | 148.0 | ** ** |   |
| *Goodwill,  net of amortization*                                                     |       |                  |       |   |   | ** ** |   |
| At beginning of  year                                                                |       | $                     | 918.6      |   |   | $ | 897.1 | ** ** |   |
| Acquisitions in  the current period (Note H)                                         |       | 7.6                   |       |   | — | ** ** |   |
| Translation and  other adjustments                                                   |       | 5.6                   |       |   | 21.5 | ** ** |   |
| At end of year                                                                       |       | $                     | 931.8      |   |   | $ | 918.6 | ** ** |   |
| Tax-deductible  goodwill at end of year                                              |       | $                     | 270.1      |   |   | $ | 260.3 | ** ** |   |
| *Other  Intangible Assets*                                                           |       |                  |       |   |   | ** ** |   |
| Customer lists and  relationships (accumulated amortization of $34.0 and $26.7)      |       | $                     | 59.0       |   |   | $ | 49.4 | ** ** |   |
| Trademarks  (accumulated amortization of $77.9 and $31.6)                            |       | 78.5                  |       |   | 74.7 | ** ** |   |
| Technology  (accumulated amortization of $40.8 and $32.1)                            |       | 54.6                  |       |   | 52.2 | ** ** |   |
| Non-compete  agreements (accumulated amortization of $10.6 and $8.6)                 |       | 14.8                  |       |   | 12.9 | ** ** |   |
| Total other  intangible assets                                                       |       | 206.9                 |       |   | 189.2 | ** ** |   |
| Accumulated  amortization                                                            |       | (163.3                | )          |   | (99.0 | ) |   |
| Other intangible  assets, net                                                        |       | $                     | 43.6       |   |   | $ | 90.2 | ** ** |   |
| *Software  and Development Costs*                                                    |       |                  |       |   |   | ** ** |   |
| Purchased  software (accumulated amortization of $44.2 and $40.6)                    |       | $                     | 67.5       |   |   | $ | 77.2 | ** ** |   |
| Internally  development software costs (accumulated amortization of $48.5 and $36.5) |       | 100.9                 |       |   | 86.1 | ** ** |   |
| Total software  and development costs                                                |       | 168.4                 |       |   | 163.3 | ** ** |   |
| Accumulated  amortization                                                            |       | (92.7                 | )          |   | (77.1 | ) |   |
| Software and development  costs, net                                                 |       | $                     | 75.7       |   |   | $ | 86.2 | ** ** |   |
|                                                                                      |            |                       |            |  |  |  |  |  |  |  |  |

 
| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| **Depreciation and Amortization**     | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                      | ** ** | ** **                                  | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Depreciation of  property, plant and equipment  |       | $                                           | 42.3       |   |   | $ | 43.1 |   |   |   | $ | 43.3 |   |   |
| Amortization of  other intangible assets        |       | 56.9                                        |       |   | 15.1 |   |   |   | 16.8 |   |   |
| Amortization of  software and development costs |       | 25.5                                        |       |   | 21.1 |   |   |   | 15.7 |   |   |
| Total                                           |       | $                                           | 124.7      |   |   | $ | 79.3 |   |   |   | $ | 75.8 |   |   |
|                                                 |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

95

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

In March 2005, we discovered that the CobraServtrademark capitalized as part of our 1999 acquisition of our HRS benefitsservices business was no longer being used. This discovery caused us to restatethe amortization expense in our consolidated financial statements for the firstthree quarters of 2004 as discussed in Note B, “Restatement of Financial Statements.”

We estimate thatamortization of other intangible assets held at December 31, 2004 will be$13.7 for 2005, $11.3 for 2006, $9.4 for 2007, $4.5 for 2008, and $2.8 for2009.

**H.**   INVESTINGACTIVITY

**Derivative Instruments**

***Interest Rate Contracts***

During the three-year period ended December 31,2004, we maintained interest rate contracts for the purpose of mitigatinginterest rate risk on customer funds. The counterparties to these arrangementsare commercial banks with debt ratings of A or better. These arrangements,which do not require collateral, require the banks to pay us the amount bywhich a one-month LIBOR index of short-term interest rates falls below aspecified floor strike level. Alternatively, when this index exceeds aspecified cap strike level, we pay out to the banks the excess above the capstrike level. We believe that the risk of accounting loss throughnon-performance by the counterparties under any of these arrangements isnegligible.

At December 31, 2004 and 2003, we had interestrate contracts in effect with an aggregate notional amount of $800.0. Theactive contracts at the end of 2004 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 contractsdid not qualify for hedge accounting treatment so cash settlements and changesin fair value are included in results of operations as “(gain) loss onderivative instruments.” The fair market value of our interest rate contractswere $26.8 at December 31, 2004 and $55.7 at December 31, 2003.

On February 4, 2005,we disposed of our interest rate derivative instruments for cash proceeds of$21.0 which represented the fair market value of the contracts on the disposaldate. From December 31, 2004 to the disposal date, we received $3.5 incash for realized gains on these contracts. The $2.3 difference between the December 31,2004 carrying value of $26.8 and the $24.5 total cash received will be recordedas a loss on interest rate derivatives in the first quarter of 2005.

***Fuel Price Contracts***

The revenue and net earnings of Comdata’stransportation services business is exposed to variability based on changes inthe prices of diesel fuel. For a large 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/decrease inthe price of diesel fuel increases/decreases the total dollar amount of fuelpurchases and Comdata revenue, accordingly. We estimate that for each 10¢change in the average price of diesel fuel per year, Comdata revenue and pretaxprofit are impacted by $1.8, absent the effect of any fuel price contracts.

Our risk managementobjective of managing fuel price risk is to protect Comdata net income from theeffects of falling diesel fuel prices by entering into derivative contractsthat convert the floating price of 

96

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

fuelused in revenue calculations to a fixed price. During 2003 and 2004, Comdataentered into fuel price derivative contracts to swap the floating price of fuelfor a fixed price. These contracts had the effect of reducing the exposure toprice variability of diesel fuel noted above by approximately one half for thelast three quarters of each of these years. Since the floating fuel priceremained above the fixed price during the course of the hedges, we paid $0.8 tocounterparties over the term of the agreement and this realized loss wasreported in (gain) loss on derivative instruments in our consolidated statementof operations for the year ended December 31, 2003. These payments had theeffect of offsetting a portion of the revenue benefit received during the termof the derivative contracts from the higher-than-expected floating prices. At December 31,2004 Comdata held similar contracts that are intended to largely offset theoverall impact of diesel fuel price changes during 2005. Contracts held during2004 resulted in $2.2 in payments to counterparties as well as unrealized gainsof $0.8, resulting in a $1.4 net loss reported in (gain) loss on derivativeinstruments on our consolidated statement of operations. We continuouslymonitor fuel price volatility and the cost of derivative contracts and mayenter into additional fuel price derivative contracts solely for the purpose ofmanaging fuel price risk when market conditions are favorable to suchtransactions. The fair market value of our fuel price contracts was $1.3 at December 31,2004.

**Investments** and Acquisitions ofBusinesses

At December 31,2004 and 2003, we held the following publicly- or privately-held investmentsthat were accounted for under FAS 115, “Accounting for Certain Investments inDebt and Equity Securities” as “available for sale” for the publicly-heldsecurities and on a cost basis for the private holdings.

***At December 31,2004***
| **Investment**                          | ** ** | ** ** | ** ** | **% Owned** | ** ** | **Amount** | ** ** | **Holding** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------|------------|------------|------------|-------------|------------|
| U.S.I. Holdings  Corporation            |       | under 5    | %          |             | $          | 2.3        |       |        | Public     |   |
| The Ultimate Software  Group, Inc. |       | under 5    | %          |             | 7.7        |       |       | Public      |       |
| iSarla, Inc.                       |       | 19.9       | %          |             | 1.6        |       |       | Private     |       |
| SASH Management,  LLC                   |       | 19.9       | %          |             | 0.6        |       |       | Private     |       |
| ProfitPoint, Inc.                  |       | 17.5       | %          |             | 1.5        |       |       | Private     |       |
| Notes receivable  and other             |       |       |       |             | 2.7        |       |       | Private     |       |
| Total Investments                       |       |       |       |             | $          | 16.4       |       |        |       |   |

 

***At December 31,2003***
| **Investment**                          | ** ** | ** ** | ** ** | **% Owned** | ** ** | **Amount** | ** ** | **Holding** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------|------------|------------|------------|-------------|------------|
| U.S.I. Holdings  Corporation            |       | under 5    | %          |             | $          | 10.2       |       |        | Public     |   |
| The Ultimate  Software Group, Inc. |       | under 5    | %          |             | 6.9        |       |       | Public      |       |
| iSarla, Inc.  (restated)           |       | 19.9       | %          |             | 1.6        |       |       | Private     |       |
| SASH Management,  LLC                   |       | 19.9       | %          |             | 0.6        |       |       | Private     |       |
| Notes receivable  and other             |       |       |       |             | 3.6        |       |       | Private     |       |
| Total Investments                       |       |       |       |             | $          | 22.9       |       |        |       |   |

 

97

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

***Publicly held investments***

At December 31, 2003, we held 750,000 shares ofUltimate common stock and a warrant to purchase an additional 75,000 Ultimatecommon shares at a price of $4.00 per share. In March 2004, we sold 50,000shares of Ultimate for $0.7 and a net gain of $0.5. In June 2004, we sold106,600 shares of Ultimate for $1.3 and a net gain of $0.9. In August 2004,we sold 36,689 shares of Ultimate for $0.4 and a net gain of $0.2. Our holdingsof Ultimate as of December 31, 2004 included 556,711 shares and thewarrant. In addition, we held 782,069 common shares of USIH at December 31,2003 and 199,311 shares of USIH at December 31, 2004. In June 2004,we sold 360,758 shares of USIH for $5.7 and a net gain of $2.1. In September 2004,we sold 222,000 shares of USIH for $3.0 and a net gain of $0.8. Gains andlosses on sales of marketable securities are reported in other expense (income)in our consolidated statements of operations.

During March 2003, we paid to Ultimate $3.0 toacquire 750,000 unregistered shares of Ultimate common stock and a warrant topurchase an additional 75,000 unregistered Ultimate common shares at a price of$4.00 per share. At December 31, 2002, we also held 785,000 Ultimatecommon shares purchased on the open market in 2001, which we sold in September 2003for proceeds of $5.9 and a net gain of $3.0 reported in other expense (income).In addition, we held 919,227 common shares of USIH at December 31, 2002and 782,069 common shares at December 31, 2003. During September 2003,we sold 137,158 common shares of USIH for proceeds of $1.8 and a gain of $0.4,which we reported in other expense (income).

The Ultimate and USIHsecurities are treated as “available for sale” securities. The carrying valueof these securities has been adjusted at each balance sheet date to reflect themarket price reported by the stock exchange that lists those securities. Theamount of this change is reported as unrealized gain or loss from marketablesecurities in comprehensive income. At December 31, 2004, the netunrealized gain related to these securities amounted to $3.6, after reductionfor deferred income taxes of $2.2, and is reported in accumulated othercomprehensive income. This compares to a net unrealized gain of $3.9, afterreduction for deferred income taxes of $2.4, at December 31, 2003. Theunrealized gain for these securities during 2004 amounted to $3.9 ($2.4 net oftax), $8.1 ($4.9 net of tax) during 2003 and $1.0 ($0.7 net of tax) during 2002.The realized gain for these securities during 2004 amounted to $4.4 ($2.7 netof tax) and during 2003 amounted to $3.4 ($2.0 net of tax). For 2002, therealized loss for these securities was $1.0 ($0.6 net of tax).

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

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

During 2004, net investing cash outflows included$11.0 for the April acquisition of Recruiting Solutions International, Inc.(“RSI”), a provider of web-based recruiting products. The acquisition resultedin the recording of $10.1 of goodwill and intangible assets. RSI’s revenue forits most recent fiscal year was $5.5. We also paid $0.9 for a customer base forCOBRA services from a major insurance company near the end of the first quarterof 2004. In July 2004, we paid net cash of $0.7 to acquire ITS InformationTechnology Systems Ltd (“ITS”), a leading provider of HR software solutions inIreland. We also paid $1.5 for a minority interest in ProfitPoint, Inc., aloyalty and gift card business, in July 2004. During October 2004, wepaid $4.1 to acquire Datamark Technologies, Inc., a provider of storedvalue and customer loyalty programs. During December 2004, we paid $1.1for certain customer relationships from Stone Partners, Inc. These acquisitionswere all for the benefit of our HRS business segment except for DatamarkTechnologies, Inc. which was for the benefit of Comdata.

During July 2003, we settled in advance therevenue sharing arrangement associated with the 2002 acquisition of GLS BenefitServices LLC, a benefits administration outsourcing firm (“Great LakesStrategies”) by paying the sellers $1.4 of the $2.8 escrowed for this purposeat the time of acquisition. At the same time, we released to the sellers the $0.5of escrowed funds related to representations and warranties. These transactionsreduced other current assets by $0.5 and other noncurrent assets by $2.8 whileincreasing goodwill by $1.9 and cash and equivalents by $1.4. Also during 2003,we finalized the amount of purchase cost allocated to the acquired intangibleassets, which increased intangible assets and decreased goodwill by $2.2.

In March 2002, we acquired all of the outstandingstock of SYLINQ Corporation, a national employee benefits administrationoutsourcer specializing in automated enrollment and eligibility management (“SYLINQ”),for $15.6. As a result of the acquisition, we recorded net liabilities of $2.4,$11.6 of goodwill and $6.4 of other intangible assets. During the first quarterof 2003, we finalized the amount of purchase cost allocated to intangibleassets, which increased intangible assets and decreased goodwill by $0.8.

In May 2002, we paid$8.9 for certain assets and assumed liabilities of HR Comply, a provider ofonline human resource and payroll employment compliance services that isassociated with our LifeWorks business. The acquisition of HR Comply brought$1.0 of net liabilities, $7.9 of goodwill and $2.0 of other intangibles to thebalance sheet.

In December 2002, weacquired selected assets of Great Lakes Strategies, for $19.0. Under thepurchase agreement, we paid $15.7 to the sellers and placed $3.3 in escrow. Ofthe total escrow amount, $0.5 would apply to the representations and warrantiesprovisions of the purchase agreement. The $2.8 escrow deposit represented anestimate of an additional amount that could be paid to the sellers in February 2004under a revenue sharing arrangement that applied when revenue earned from theacquired business during 2003 rose above a stated amount. We recorded theescrowed funds as other noncurrent assets. The remaining $15.7 of recorded netassets included $8.8 of goodwill and $4.0 of other intangible assets, subjectto further evaluation of the intangibles acquired.

During 2002, we also paid$6.8 to acquire certain call center assets and cost-based investments.

99

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

**I.**   RETIREMENT PLANS

**Pension Benefits**

We provide retirementincome benefits to our employees through a combination of defined benefit anddefined contribution plans. Our principal pension plan is a contributory(salary reduction) defined benefit plan for U.S. employees that closed to newparticipants on January 2, 1995. Assets of this plan are held in anirrevocable trust, do not include any Ceridian securities and consistprincipally of equity securities, U.S. government securities, and other fixedincome obligations. Benefits under this plan are generally calculated on finalor career average earnings and years of participation in the plan. Mostparticipating employees are required to permit salary reduction contributionsto the plan on their behalf by the employer as a condition of activeparticipation. Retirees and other former employees are inactive participants inthis plan and constitute approximately 94% of the plan participants. This planis funded in accordance with funding requirements under the Employee RetirementIncome Security Act of 1974, based on determinations of an independentconsulting actuary. We also sponsor a nonqualified supplemental defined benefitplan, which is unfunded and provides benefits to selected U.S. employees inaddition to the principal pension plan. We expect to make contributionsamounting to $2.6 to the supplemental plan in 2005.

In the fourth quarter of2004, we changed our measurement date for our U.S. pension and postretirementplans from September 30 to December 31. We considered the December 31measurement date to be preferable since that date allows for the use of morecurrent information in determining the funded status and net periodic cost asof the end of our reporting year. We determined the effect of this change withthe assistance of our independent consulting actuary by recalculating the netperiodic benefit cost as of the December 31 date over the past ten years. Therecalculation involved reference to the change in interest rates (using the “Aa”bond rate published by Moody’s Investors Service as a guide) between September 30and December 31 and consideration of the discount rate used withappropriate adjustments to plan liabilities and service cost where needed. The December 31pension assets were used for the annual pension funding valuation. Therecalculation resulted in a reduction of net periodic pension cost of $4.9 ofwhich $0.9 was attributable to periods prior to 2004. The $4.9 was recorded asa reduction of net periodic pension cost in 2004 as shown in a table later inthis discussion. The $4.0 reduction in net periodic pension cost attributableto 2004 was significantly affected by an employer contribution of $75.0 in December 2003and by asset growth during the fourth quarter of 2004, which effect isheightened by the low level of active participants in the principal plan.

We provide a fundedpension plan for our employees in the United Kingdom (the “UK Plan”). The UKPlan contains both defined benefit and defined contribution elements. Theassets held by the UK Plan on behalf of its defined benefit participantsamounted to £15,900,000, or $30.6, at December 31, 2004 and consistedprimarily of equity securities (84%) and debt securities (10%). The weightedaverage long-term rate of return on these assets was 7.6%. The investmentpolicy for the UK Plan is to have sufficient monies at all times to meet itsobligations 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 ex-defined benefit 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

participantsof 10 years. We expect to make contributions to this plan amounting to£664,000, or $1.3, during 2005.

The accompanying tablesreflect the combined funded status and net periodic pension cost (credit) andblended supporting assumptions for the defined benefit elements of all threeplans.

We account for our definedbenefit pension plans using actuarial models required by present accounting rules underFAS 87, “Employers’ Accounting for Pensions.” This model uses an attributionapproach that generally spreads the effect of individual events over theservice lives of the employees in the plan. These events include planamendments and changes in actuarial assumptions such as the expected long-termrate of return on plan assets, discount rate related to the benefit obligation,rate of active participants’ compensation increases and mortality rates. Theprinciple underlying the required attribution approach is that employees renderservice over their service lives on a relatively smooth basis and, therefore,the income statement effects of pensions are earned in, and should follow, thesame pattern.

One of the principalcomponents of the net periodic pension calculation is the expected long-termrate of return on plan assets. The required use of expected long-term rate ofreturn on plan assets may result in recognized pension income that is greateror less than the actual returns of those plan assets in any given year. Overtime, however, the expected long-term returns are designed to approximate theactual long-term returns that contribute to the settlement of the liability. Differencesbetween actual and expected returns are recognized in the net periodic pensioncalculation over five years. We use long-term 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.

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,** | ** ** | **September 30,** | ** ** | ** **        | ** ** |
|------------------------|------------|-----------------------|------------|------------------------|------------|-------------------|------------|
| ** **             | ** ** | **2004**              | ** ** | **2003**               | ** ** | **Target %** | ** ** |
| Domestic Equity        |       | $                     | 269.2      |                   | 50.5       | %                 | $          | 222.2 |   | 53.2 | % | 50% +/–8 | % |
| Domestic Fixed  Income |       | 178.4                 |       | 33.5                   | %          | 130.1             |       | 31.2 | % | 35% +/-5 | % |
| International  Equity  |       | 85.4                  |       | 16.0                   | %          | 65.3              |       | 15.6 | % | 15% +/-4 | % |
| Total Invested  Assets |       | 533.0                 |       | 100.0                  | %          | 417.6             |       | 100.0 | % | 100 | % |
| Cash and Other  Assets |       | 5.5                   |       |                   |       | 17.1              |       |   |   |   |   |
| Total Assets           |       | $                     | 538.5      |                   |       |              | $          | 434.7 |   |   |   |   |   |

 

The investment policy forour principal pension plan specifies the objective is to earn the highestpossible total returns consistent with the preservation of capital andanticipated liquidity requirements while minimizing the volatility of returns. Targetasset allocation 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 

101

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

futurescontracts within limitations to achieve objectives under their assignedinvestment mandate. Investment of the principal pension plan assets insecurities of Ceridian Corporation is prohibited by the investment policy.

In November 2003,upon completion of a trading cost optimization study conducted by a planconsultant, the target ranges were changed to the amounts shown in the assetallocation table above. During December of 2003, we undertook rebalancingof plan assets to bring allocations within the new target ranges.

The discount rateassumptions used for pension plan accounting reflect the rates available onhigh-quality fixed-income debt instruments on December 31 of each year. Thatrate is used to determine the benefit obligation at that date and the interestportion of the net periodic pension cost or credit for the following year. Wedetermine the assumed rate of compensation increase based upon our long-termplans for such increases.

The accumulated benefitobligation of our principal pension plan exceeded the fair value of plan assetsby $157.9 at December 31, 2004 and $104.6 at December 31, 2003. Underpension accounting rules, this condition required that we reclassify theprepaid pension cost related to this plan to recognize this unfunded liabilityand record the remainder (net of deferred income taxes and a small intangibleasset amount) as a loss in accumulated other comprehensive income, whichreduces stockholders’ equity. During 2003, we made employer contributions tothe principal pension plan amounting to $103.7 including $75.0 in the fourthquarter of 2003. We made no contribution in 2004 and do not presently plan tomake additional contributions to the principal pension plan in 2005. Subsequentdevelopments in investment performance, interest rates or regulatory actionsmay require reconsideration of this position.

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. At December 31,2004 and 2003, our prepaid pension cost asset represented $12.8 and $11.9 heldin benefit protection trusts for certain nonqualified plan participants and anintangible pension asset of $0.3 and $0.3. We recognized expense of $15.2 in2004, $12.7 in 2003 and $13.4 in 2002 with respect to employer contributions toour defined contribution retirement plans.

**BenefitsExpected to be Paid in Future Years as of December 31, 2004**
| Years Ended December 31                   | ** ** |
|----------------------------------------------------------|------------|
| **    2005    ** | ** ** | **    2006    ** | ** ** | **    2007    ** | ** ** | **    2008    ** | ** ** | **    2009    ** | ** ** | **    2010-2014    ** | ** ** |
|                                                          | $          | 45.8 |   |   |   | $ | 46.2 |   |   |   | $ | 47.0 |   |   |   | $ | 48.7 |   |   |   | $ | 49.7 |   |   |   | $ | 260.4 |   |   |
|                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

102

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

 
| **Funded Status of Defined Benefit**     | ** ** | **Dec 31,** | ** ** | **Sep 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| **Retirement Plans at Measurement Date** | ** ** | ** **       | ** ** | **2004**         | ** ** | **2003** | ** ** |
| *Accumulated  Benefit Obligation*                            |       | $                | 727.0      |             | $          | 677.9 |   |
| *Change  in Projected Benefit Obligation During the Period*  | ** ** | ** **       | ** ** | ** **       | ** ** |
| At beginning of period                                       |       | $                | 697.4      |             | $          | 639.4 |   |
| Service cost                                                 |       | 3.6              |       | 3.8              |       |
| Interest cost                                                |       | 41.8             |       | 42.9             |       |
| Employee contributions to the UK Plan                        |       | 0.1              |       |             |       |
| Curtailment of the UK Plan                                   |       | —           |       | (1.8             | )          |
| Currency translation                                         |       | 6.2              |       | 2.1              |       |
| Actuarial (gain) loss                                        |       | 62.0             |       | 60.4             |       |
| Benefits paid                                                |       | (60.2            | )          | (49.5            | )          |
| At end of period                                             |       | $                | 750.8      |             | $          | 697.4 |   |
| *Change  in Fair Value of Plan Assets During the Period*     |       |             |       |             |       |
| At beginning of period                                       |       | $                | 457.8      |             | $          | 400.2 |   |
| Actual return on plan assets                                 |       | 88.6             |       | 73.4             |       |
| Currency translation                                         |       | 3.6              |       | 1.1              |       |
| Employee contributions to the UK Plan                        |       | —           |       | 0.1              |       |
| Employer contributions                                       |       | 79.3             |       | 32.5             |       |
| Benefits paid                                                |       | (60.2            | )          | (49.5            | )          |
| At end of period                                             |       | $                | 569.1      |             | $          | 457.8 |   |
| Funded status of plan                                        |       | $                | (181.7     | )                | $          | (239.6 | ) |
| Accrued contribution                                         |       | —           |       | 75.0             |       |
| Unrecognized net loss                                        |       | 393.1            |       | 380.7            |       |
| Total                                                        |       | $                | 211.4      |             | $          | 216.1 |   |
| *Balance  Sheet Presentation*                                |       |             |       |             |       |
| Prepaid and intangible pension asset                         |       | $                | 0.3        |             | $          | 0.3 |   |
| Accrued benefit liability                                    |       | (157.9           | )          | (144.7           | )          |
| Accumulated other comprehensive income, net of tax           |       | 240.9            |       | 235.1            |       |
| Deferred income tax                                          |       | 128.1            |       | 125.4            |       |
| Total                                                        |       | $                | 211.4      |             | $          | 216.1 |   |
|                                                              |            |                  |            |                  |            |  |  |  |  |

 
| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Assumptions Used in Calculations**        | ** ** | ** **                                  | ** ** | **    2004    ** | ** ** | **    2003    ** | ** ** | **    2002    ** | ** ** |
| Discount rate  used to determine net benefit cost (credit) |       |                                        | 5.99       | % |   |   | 6.70 | % |   |   | 7.42 | % |   |
| Rate of  compensation increase                             |       |                                        | 4.00       | % |   |   | 3.78 | % |   |   | 4.01 | % |   |
| Expected return  on plan assets                            |       |                                        | 8.70       | % |   |   | 8.70 | % |   |   | 9.43 | % |   |
| Discount rate used to  determine benefit obligations       |       |                                        | 5.53       | % |   |   | 5.99 | % |   |   | 6.70 | % |   |
|                                                            |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

103

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**
| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Net Periodic Pension Cost (Credit)** | ** ** | ** **                                  | ** ** | **    2004    ** | ** ** | **    2003    ** | ** ** | **    2002    ** | ** ** |
| Service cost                                               |       |                                        | $          | 3.6 |   |   |   | $ | 3.8 |   |   |   | $ | 3.0 |   |   |
| Interest cost                                              |       |                                        | 41.8       |   |   |   | 42.9 |   |   |   | 43.9 |   |   |
| Expected return  on plan assets                            |       |                                        | (46.6      | ) |   |   | (45.7 | ) |   |   | (54.9 | ) |   |
| Net amortization  and deferral                             |       |                                        | 15.4       |   |   |   | 9.0 |   |   |   | 6.1 |   |   |
| Total before effect of change in measurement date          |       |                                        | 14.2       |   |   |   | 10.0 |   |   |   | (1.9 | ) |   |
| 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          |       |                                        | $          | 9.3 |   |   |   | $ | 10.0 |   |   |   | $ | (1.9 | ) |   |
|                                                            |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Postretirement Benefits**

We provide health care and life insurance benefits foreligible retired employees, including individuals who retired from operations wesubsequently sold or discontinued. We sponsor several health care plans in theU.S. for both pre- and post-age 65 retirees. Our contributions to these plansdiffer 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. As discussed in Note A, “Accounting Policies—Recently Issued AccountingPronouncements,” we also implemented FSP 106-2 in 2004, which addressed theaccounting for the federal subsidy for the sponsors of single employer definedbenefit postretirement healthcare plans that commences in 2006. Theimplementation of FSP 106-2 reduced our accumulated postretirement benefitobligation by $4.8 and our net periodic postretirement benefit cost for 2004 by$0.5.

104

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

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  Health Care and Life Insurance Plans** | ** ** | ** ** | ** ** | **Dec 31,  2004** | ** ** | **Sep 30,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| *Change in Benefit Obligation*                                                                                    |       |       |       |                   |       |
| At beginning of period                                                                                            |       | $          | 61.3       |                   | $          | 54.2                   |       |
| Service cost                                                                                                      |       | 0.1        |       | 0.1                    |       |
| Interest cost                                                                                                     |       | 3.3        |       | 3.5                    |       |
| Participant contributions                                                                                         |       | 4.2        |       | 0.8                    |       |
| Actuarial loss (gain)                                                                                             |       | (2.1       | )          | 6.5                    |       |
| Benefits paid                                                                                                     |       | (9.4       | )          | (3.8                   | )          |
| At end of period                                                                                                  |       | $          | 57.4       |                   | $          | 61.3                   |       |
| *Change in Plan Assets*                                                                                           |       |       |       |                   |       |
| At beginning of period                                                                                            |       | $          | —     |                   | $          | —                 |       |
| Company contributions                                                                                             |       | 5.2        |       | 3.0                    |       |
| Participant contributions                                                                                         |       | 4.2        |       | 0.8                    |       |
| Benefits paid                                                                                                     |       | (9.4       | )          | (3.8                   | )          |
| At end of period                                                                                                  |       | $          | —     |                   | $          | —                 |       |
| *Funded Status of Plan*                                                                                           |       |       |       |                   |       |
| Benefit obligation, net                                                                                           |       | $          | 57.4       |                   | $          | 61.3                   |       |
| Unrecognized actuarial gain (loss)                                                                                |       | (10.3      | )          | (12.5                  | )          |
| At end of period                                                                                                  |       | $          | 47.1       |                   | $          | 48.8                   |       |
| Current portion                                                                                                   |       | $          | 5.6        |                   | $          | 6.0                    |       |
| Noncurrent  portion                                                                                               |       | 41.5       |       | 42.8                   |       |
| Total                                                                                                             |       | $          | 47.1       |                   | $          | 48.8                   |       |

 
| ** **                                                       | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Net Periodic Postretirement Benefit Cost** | ** ** | ** **                                  | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** | **   2002   ** | ** ** |
| Service cost                                                     |       |                                        | $          | 0.1 |   |   |   | $ | 0.1 |   |   |   | $ | 0.1 |   |   |
| Interest cost                                                    |       |                                        | 3.3        |   |   |   | 3.5 |   |   |   | 3.0 |   |   |
| Actuarial loss  (gain) amortization                              |       |                                        | 0.1        |   |   |   | 0.1 |   |   |   | (0.1 | ) |   |
| Net periodic  benefit cost                                       |       |                                        | $          | 3.5 |   |   |   | $ | 3.7 |   |   |   | $ | 3.0 |   |   |
|                                                                  |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The assumed health care cost trend rate used inmeasuring the benefit obligation is 10% in 2004 with rates declining at a rateof 1% per year to an ultimate rate of 5% in 2010. A one percent increase inthis rate would increase the benefit obligation at December 31, 2004 by$4.4 and the aggregate service and interest cost for the 2004 measurementperiod by $0.3. A one percent decrease in this rate would decrease the benefitobligation at December 31, 2004 by $4.1 and the aggregate service andinterest cost for the 2004 measurement period by $0.3. The weighted averagediscount rates used in determining the net periodic postretirement benefit costwere 6.00% for 2004, 6.75% for 2003 and 7.50% for 2002. The weighted averagediscount rates used in determining the benefit obligation at the measurementdates were 5.50% for 2004 and 6.00% for 2003.

105

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

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** | ** ** |
|------------|------------|--------------|------------|--------------|------------|
| 2005       |       |         | $          | 5.3          |       |   |   | $ | — |   |   |
| 2006       |       |         | 5.4        |         |       |   | 0.6 |   |   |
| 2007       |       |         | 5.6        |         |       |   | 0.6 |   |   |
| 2008       |       |         | 5.6        |         |       |   | 0.6 |   |   |
| 2009       |       |         | 5.6        |         |       |   | 0.6 |   |   |
| 2010-2014  |       |         | 25.7       |         |       |   | 2.7 |   |   |

 

**J.   STOCKPLANS**

During the three-year period ended December 31,2004, we maintained stock-based compensation plans for directors, officers,other employees, consultants and independent contractors.

Our Amended and Restated 2001 Director PerformanceIncentive Plan authorizes the issuance of up to 350,000 shares in connectionwith awards of stock options, non-performance restricted stock and deferredstock to our non-employee directors. An annual grant of a non-qualified stockoption to purchase 4,000 shares is made to each eligible non-employee directorwith such grants becoming fully exercisable six months after the date of grant.The exercise price of the options is the fair market value of the underlyingstock at the date of grant, and the options expire in ten years.

A one-time award of non-performance restricted sharesis made to each non-employee director when the director first joins the Boardwith restrictions on transfer that will ordinarily lapse annually over afive-year period. The number of shares awarded will have a fair market valueequal to two and one-half times the then-current annual retainer paid tonon-employee directors.

Additionally, at least one-half of the annual Boardretainer for each non-employee director is also provided in the form ofrestricted stock, deferred stock or a combination of the two. The restrictionson transfer of the retainer awards will lapse at the conclusion of the director’sservice.

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.

In connection with the approval by our stockholders ofthe 2004 LTSIP, the 2002 Employee Stock Incentive Plan (“2002 ESIP”), underwhich only non-statutory stock options were issued to employees who were notexecutive officers or directors of Ceridian, terminated on May 12, 2004,which eliminated 41,843 shares available for award. All outstanding awardsgranted under the 2002 ESIP remained in effect at the time of terminationpursuant to the terms of such awards. The number of options outstanding underthe 2002 ESIP amounted to 3,447,482 at May 12, 2004 and 3,114,789 at December 31,2004.

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. 

106

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Eligible participants inthe 2001 LTSIP include our employees and non-employee directors, consultantsand independent contractors.

Stock options awarded under the 2002 ESIP and 2001LTSIP generally vest annually either over a three-year period or on a specificdate if certain performance criteria were satisfied, have either a 5-year or10-year term and have an exercise price that may not be less than the fairmarket value of the underlying stock at the date of grant. No awards were madeunder the 2004 LTSIP in 2004.

The Compensation and Human Resources Committee of ourBoard has the discretion to determine the effect that a change of control ofCeridian will have upon awards made under these plans. In most cases, thevesting of stock options and restricted stock awards granted under these planswill accelerate upon a change of control of Ceridian.

We have reserved 725,495 common shares for issuanceunder “Save-As-You-Earn” stock-based compensation plans for our employees inthe United Kingdom (the “SAYE Plans”). At December 31, 2004, there were510,216 shares available for issuance under the SAYE Plans including 143,764options outstanding.

Our Amended and Restated Employee Stock Purchase Plan(“ESPP”) provides for the issuance of up to 1,600,000 shares of newly issued ortreasury common stock of Ceridian to eligible employees. The purchase price ofthe stock to ESPP participants is 85% of the lesser of the fair market value oneither the first day or the last day of the applicable three-month offeringperiod.

For holders of Ceridian common stock at November 9,2001, we distributed one right for each outstanding share entitling the holderto purchase from us one ten-thousandth of a share of an unissued class ofpreferred stock for $75 dollars. In the event of a certain effort to acquireCeridian, the holder would have the right to exercise the right for cash,property or securities of the issuer with a value of twice the exercise price. AtDecember 31, 2004, no such event had occurred.

As reported in Note A, “Accounting Policies,” weadopted the disclosure-only provisions of FAS 123 and FAS 148 and continue toaccount for stock-based compensation under APB 25. Therefore, since all optionexercise prices are at or above fair market value on the date of grant and theESPP is a non-compensatory plan, no expense is recorded with respect to ourstock option or employee stock purchase plans.

We provide the following disclosure, includingreferenced tables, with respect to the provisions of FAS 123. We employ theBlack-Scholes-Merton option pricing model for determining the fair value ofstock option grants and ESPP purchases as presented in an accompanying table. Weightedaverage exercise prices for stock option activity and options outstanding at December 31,2004, 2003 and 2002 are included in the Stock Plans table.

107

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Furtherinformation on outstanding and exercisable stock options by exercise pricerange as of the end of the current year is disclosed in an accompanying table. Weare required to report the pro forma effect on net earnings and earnings pershare that would have resulted if the fair value method of accounting forstock-based compensation issued in those years had been adopted. Thiscompensation cost is allocated to the related periods of service. The resultsof this calculation and the assumptions used appear in the accompanying proforma table.
| **Stock Plans**       | ** ** | ** **          | ** **          | **Option Price  Per Share** | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** | **Shares  Available** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|----------------------------|------------|---------------------|---------------------|---------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------------|------------|-----------------------------------------|------------|
| At December 31,  2001 |       | $                   | 3.71 – $31.66  |                                  | 20,392,653 |            | 11,173,363 |            | 7,260,283  |                  |       | $                                       | 15.88      |   |   |
| Authorized                 |       | —              |                | —                                |       | —          |       | 4,000,000       |       |                  |       |                                    |       |
| Granted                    |       | 13.97 –  22.25 |                | 4,978,925                             |       | —          |       | (4,978,925      | )          |                  | 18.11      |                                    |       |
| Became exercisable         |       | 11.88 –  28.94 |                | —                                |       | 4,419,513       |       | —          |       |                  |       |                                    |       |
| Exercised                  |       | 3.71 –  21.16  |                | (2,122,138                            | )          | (2,122,138      | )          | —          |       |                  | 14.34      |                                    |       |
| Canceled                   |       | 8.96 –  26.68  |                | (2,141,341                            | )          | (734,811        | )          | 2,141,341       |       |                  | 16.73      |                                    |       |
| ESPP purchases             |       | —              |                | —                                |       | —          |       | (297,830        | )          |                  |       |                                    |       |
| Restricted stock, net      |       | —              |                | —                                |       | —          |       | (25,665         | )          |                  |       |                                    |       |
| At December 31,  2002 |       | $                   | 4.80 – $31.66  |                                  | 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 – $31.66  |                                  | 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 –  $31.66 |                                  | 20,576,366 |            | 14,095,597 |            | 8,336,676  |                  |       | $                                       | 17.34      |   |   |

 

108

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Commonshares reserved for future issuance under all plans at December 31, 2004were 29,423,258.
| **Stock Option Information as of December 31, 2004** | ** ** | ** ** | **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** | ** ** |
| $  7.81  - $13.71                                                             |       | 2,469,756  |                         |                    | 1.12                         |                                                |   |   | $ | 13.62 |   |   | 2,463,090 |   |   | $ | 13.62 |   |   |
| $13.83 - $14.80                                                                         |       | 4,545,696  |                         |                    | 3.71                         |                                                |   |   | $ | 14.62 |   |   | 2,671,391 |   |   | $ | 14.67 |   |   |
| $14.81 - $15.78                                                                         |       | 2,014,011  |                         |                    | 2.29                         |                                                |   |   | $ | 15.37 |   |   | 1,998,533 |   |   | $ | 15.37 |   |   |
| $15.92 - $18.11                                                                         |       | 4,021,800  |                         |                    | 2.38                         |                                                |   |   | $ | 17.73 |   |   | 2,863,657 |   |   | $ | 17.63 |   |   |
| $18.19 - $20.29                                                                         |       | 1,503,997  |                         |                    | 3.03                         |                                                |   |   | $ | 18.89 |   |   | 1,236,919 |   |   | $ | 18.88 |   |   |
| $20.35 - $20.35                                                                         |       | 1,934,801  |                         |                    | 3.81                         |                                                |   |   | $ | 20.35 |   |   | 1,934,801 |   |   | $ | 20.35 |   |   |
| $20.42 - $20.56                                                                         |       | 2,880,443  |                         |                    | 4.11                         |                                                |   |   | $ | 20.56 |   |   | 64,858 |   |   | $ | 20.50 |   |   |
| $20.65 - $31.66                                                                         |       | 1,205,862  |                         |                    | 3.75                         |                                                |   |   | $ | 22.82 |   |   | 862,348 |   |   | $ | 23.16 |   |   |
|                                                                                    |       | 20,576,366 |                         |                    |                         |                                                |   |   |   |   |   | 14,095,597 |   |   |   |   |   |
|                                                                                         |            |            |                              |                         |                              |                                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|  

** **                                                                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Pro Forma Effect of Fair Value Accounting**                                                                 | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                  | ** ** | ** **                                  | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Net earnings as  reported                                                                                                                   |       | $                                           | 36.9       |   |   | $ | 98.8 |   |   |   | $ | 111.5 |   |   |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects                                         |       | 1.5                                         |       |   | $ | 0.8 |   |   |   | $ | 0.2 |   |   |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  method for all awards, net of related tax effects |       | (14.3                                       | )          |   | (15.6 | ) |   |   | (15.7 | ) |   |
| Pro forma net  earnings                                                                                                                     |       | $                                           | 24.1       |   |   | $ | 84.0 |   |   |   | $ | 96.0 |   |   |
| Basic earnings  per share as reported                                                                                                       |       | $                                           | 0.25       |   |   | $ | 0.66 |   |   |   | $ | 0.75 |   |   |
| Pro forma basic  earnings per share                                                                                                         |       | $                                           | 0.16       |   |   | $ | 0.57 |   |   |   | $ | 0.65 |   |   |
| Diluted earnings  per share as reported                                                                                                     |       | $                                           | 0.24       |   |   | $ | 0.66 |   |   |   | $ | 0.74 |   |   |
| Pro forma diluted  earnings per share                                                                                                       |       | $                                           | 0.16       |   |   | $ | 0.56 |   |   |   | $ | 0.64 |   |   |
| ***Weighted-Average  Assumptions***                                                                                                         |       |                                        |       |   |   |   |   |   |   |   |   |
| Expected lives in  years                                                                                                                    |       | 3.90                                        |       |   | 3.93 |   |   |   | 3.82 |   |   |
| Expected  volatility                                                                                                                        |       | 38.7                                        | %          |   | 43.3 | % |   |   | 37.5 | % |   |
| Expected dividend  rate                                                                                                                     |       | —                                      |       |   | — |   |   |   | — |   |   |
| Risk-free interest rate                                                                                                                     |       | 2.6                                         | %          |   | 2.3 | % |   |   | 4.5 | % |   |
|                                                                                                                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Weighted Average Fair Values  of Grants, Awards and Purchases** | ** ** | ** ** | ** ** | **2004**            | ** ** | **2003**   | ** ** | **2002**            | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------|------------|------------|------------|---------------------|------------|
| ** **                                                                                           | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Stock options                                                                                        |       | 3,291,708  |       |                | $          | 6.83       |       |                | 3,906,790  |   |   | $ | 5.41 |   |   | 4,978,925 |   |   | $ | 6.26 |   |   |
| ESPP                                                                                                 |       | 209,075    |       |                | $          | 4.33       |       |                | 308,879    |   |   | $ | 3.48 |   |   | 297,830 |   |   | $ | 2.14 |   |   |

 

109

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

**K.   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**   | ** ** | ** **            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Comdata  receivable securitization facility                  |       | $                     | 75.0       |   | $ | 140.0 |   |
| Ceridian  Centrefile overdraft facility                      |       | 9.0                   |       | 2.7 |   |
| Total revolving  credit facilities and overdrafts            |       | 84.0                  |       | 142.7 |   |
| Capital lease  obligations                                   |       | 16.7                  |       | 20.8 |   |
| Total debt and  capital lease obligations                    |       | 100.7                 |       | 163.5 |   |
| Less short-term debt and current portions of  long-term debt |       | 14.9                  |       | 6.5 |   |
| Long-term obligations,  less current portions                |       | $                     | 85.8       |   | $ | 157.0 |   |
|                                                              |            |                       |            |  |  |  |  |  |  |

 

***Revolving Credit Facility***

Under an agreement with a syndicate of commercialbanks dated January 31, 2001, we entered into a $350.0 domestic revolvingcredit facility, of which $50.0 may be used for letters of credit, that expiresin March 2006. This domestic revolving credit facility also permits us torequest that the bank syndicate use its best efforts to provide additionalcommitments so long as the total commitment does not exceed $500.0. The domesticrevolving credit facility is unsecured and its pricing for both loans andletters of credit is based on our senior unsecured debt ratings and LIBOR (ourinterest rate is 1% per annum over LIBOR). Under the terms of the domesticrevolving credit facility, our consolidated debt must not exceed ourstockholders’ equity, as defined in the agreement, as of the end of any fiscalquarter, and the ratio of earnings before interest and taxes to interestexpense on a rolling four quarter basis must be at least 2.75 to 1. Thedomestic revolving credit facility also contains covenants that, among otherthings, limit liens, subsidiary debt, contingent obligations, operating leases,minority equity investments and divestitures. In late 2004 and early 2005, weamended our domestic revolving credit facility to allow additional time todeliver our quarterly reports on Form 10-Q for the second and third quartersof 2004 and this Form 10-K to our lenders without the delayed deliveryconstituting a default under the domestic revolving credit facility. In March2005, we further amended the domestic revolving credit facility to apply theprovisions with respect to amortization and/or impairment of goodwill as are ineffect under GAAP on March 31, 2005 for the fourth quarter 2004 andperiods thereafter for the calculation of financial ratios and other financialrequirements set forth in such agreement.

Under the domesticrevolving credit facility, we used the $150.0 proceeds from the receivablessecuritization facility and additional payments of $45.0 during 2002 to reducethe advances outstanding to $40.0 at December 31, 2002. During 2003, wepaid off the $40.0 of advances outstanding since December 31, 2002 while$2.3 of letters of credit remain outstanding. At December 31, 2004, wehave unused borrowing capacity under the domestic revolving credit facility of$347.7, of which we have designated $75.0 as backup to the Comdata receivablessecuritization facility.

110

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

***Comdata Receivables Securitization Facility***

In June 2002, Comdata entered into a $150.0receivables securitization facility with a three-year term involving certain ofits trade receivables (the “Receivables”). The facility is subject to financialcovenants similar to those included in our $350.0 revolving credit facility andconsists 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 under thefirst step of the facility and the Receivables are no longer available tosatisfy claims of Comdata’s creditors, Comdata has agreed to act as theservicing agent for the Receivables acquired by CFC in exchange for a servicingfee 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 thesecuritization 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 2.27% at December 31,2004), 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 0.125% per annum on the average invested amountoutstanding during the preceding month and a monthly facility fee equal to0.25% 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.

During September 2003,we made a payment of $10.0 on this facility. During 2004, we made payments of$10.0 in June, $35.0 in September and $20.0 in December. The amountoutstanding under this facility was $75.0 at December 31, 2004, and $140.0at December 31, 2003. The aggregate amount of receivables serving ascollateral amounted to $191.9 at December 31, 2004 and $187.0 at December 31,2003. The invested amount outstanding is accounted for as long-term debt andthe receivables remain on our consolidated balance sheet, even though theReceivables are not available to satisfy claims of creditors of any of thecompanies other than CFC.

***Other Debt Financing***

In May 2004, Ceridian Centrefile replaced its £3.0 millionover draft facility with a £6.5 million overdraft facility available throughApril 2005. The amount outstanding under this overdraft facility amounted to£4.7 million ($9.0) at December 31, 2004 and £1.6 million ($2.7) at December 31,2003.

Ceridian Canada had available at December 31,2004 and 2003 a committed bank credit facility that provided up to $5.0 millionin Canadian currency for issuance of letters of credit and guarantees that isrenewed annually by the granting bank. The amounts of letters of creditoutstanding under this facility in 

111

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Canadiancurrency were $1.0 million (U.S. $0.7) at December 31, 2004 and $1.2 million(U.S. $0.8) at December 31, 2003.

***Equity Activities***

During 2004, werepurchased 4,012,400 shares of our common stock for $80.3 on the open marketat an average net price of $20.01 per share. We also repurchased 1,844,100shares of our common stock during 2003 for $28.8 on the open market at anaverage net price of $15.60. As of December 31, 2004, we may repurchase upto 6,350,500 additional shares of our common stock under an existing authorizationfrom our Board. We generally use our treasury stock to address our obligationsunder our stock compensation and employee stock purchase plans.

***Capital Lease Obligations***

During the second quarter of 2003, we entered into twoleasing agreements with different lessors intended to provide us with greaterflexibility to take advantage of future data storage technology at a lower cost.One arrangement involved the sale and leaseback of storage equipment acquiredby us. We received $6.3 as cash proceeds from the sale of the equipment, whichis reported 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 will be amortized ona straight line basis over the term of the lease.

The other leasingarrangement involved the replacement with new data storage equipment of datastorage equipment we owned or leased. Under this arrangement, we received $5.8as cash proceeds from the sale of owned equipment at its carrying value, whichis reported as an investing cash inflow. We accounted for the lease of newstorage equipment, which has a 5-year term commencing on June 1, 2003 andnegligible residual value, as a capital lease. We recorded the capital leaseasset in machinery and equipment at $13.4, net of a deferred gain, and thecapital lease obligation in long-term debt at $15.3 with no effect on cashflows. The lease allows us access to increased levels of data storage capacityat months 10 and 22 according to a contractual schedule that correlatesadditional capacity with the lease payment schedule.

**L.   COMMITMENTSAND CONTINGENCIES**

**Contracts**

In March 2001, we entered into an agreement withUltimate that provided us with a non-exclusive license to use Ultimate’ssoftware as part of a Web-enabled integrated payroll/HR/self-service offeringto our small business customers. Our initial payment to Ultimate amounted to$10.0, which provided us with a non-exclusive license to use its softwareproduct in our product offerings. This payment was partially refundable pendingsuccessful transfer of the technology. Amendments to the license agreementin August 2001 and February 2002 eliminated any refundable nature ofthe initial payment and deemed the technology transfer complete as of February 2002.In February 2002, we agreed to pay Ultimate an additional $0.5 if anupgraded release were to be delivered prior to August 31, 2002, which didoccur. The 

112

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

$10.5 was accounted for aspurchased software under SOP 98-1 and amortized on a straight-line basis over aseven-year period that began in March 2003 when our SourceWeb softwareproduct incorporating this Ultimate software was placed in service.

Pursuant to the February 2002 amendment, thelicense agreement also provided for a monthly royalty commencing in January 2003,which is based on the number of our customers’ employees paid by using thesoftware and subject to minimum and maximum amounts. Pursuant to the February 2002amendment, we made an advance payment of $6.0 to Ultimate at that timerepresenting the minimum royalty commitment for 2003. We were also obligated tofuture minimum monthly payments of $0.5 per month from January 2004 until January 1,2006, when the per-employee monthly charge will escalate at a rate of 5% perannum until the end of the noncancelable term in March 2008. We recordedthe $6.0 payment as prepaid expense and amortized this amount to cost ofrevenue on a straight line basis over the 12 months of 2003. Royalty costsunder this agreement were charged monthly to cost of revenue and paid accordingto the terms of the agreement.

On December 31, 2004, we sold certain customerrelationships and other assets associated with our SourceWeb payroll platformand ceased use of this contractual relationship. We remain obligated to makethe minimum monthly payments to Ultimate discussed above that totaled $20.7 at December 31,2004.

In connection with theacquisition of certain call center assets in December 2002, we enteredinto royalty and services arrangements that are noncancelable for the first 36months. Under these arrangements, we remain obligated to make a minimum paymentof $2.2 in 2005.

**Leasing**

We conduct a substantial portion 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 31,2004 appear in the following table:
| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| **Rental Expense** | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **              | ** ** | ** **                                  | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Rental expense          |       | $                                           | 54.2       |   |   | $ | 54.1 |   |   |   | $ | 50.6 |   |   |
| Sublease rental  income |       | (0.6                                        | )          |   | (0.4 | ) |   |   | (0.6 | ) |   |
| Net rental expense      |       | $                                           | 53.6       |   |   | $ | 53.7 |   |   |   | $ | 50.0 |   |   |
|                         |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

113

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Ourfuture minimum noncancelable lease payments on existing operating leases at December 31,2004, which have an initial term of more than one year, are presented in the followingtable:
| **Future Minimum Lease Payments** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| 2005                                             |       | $          | 52.7       |       |
| 2006                                             |       | 46.2       |       |
| 2007                                             |       | 41.2       |       |
| 2008                                             |       | 34.3       |       |
| 2009                                             |       | 28.3       |       |
| Thereafter                                       |       | 91.5       |       |
|                                                  |            |            |            |            |            |  |

 

**M.   CUSTOMERFUNDS**

In connection with our U.S. and Canadian payroll andtax filing services, we collect funds for payment of payroll and taxes;temporarily hold such funds in trust until payment is due; remit the funds tothe clients’ employees and appropriate taxing authority; file federal, stateand local tax returns; and handle related regulatory correspondence andamendments. In connection with our HRS benefits services operation, we receivefunds on behalf of our customers for remittances to employees, insuranceproviders and others. Comdata also holds non-interest bearing funds in a trust forits eCash customers.

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 and provincesof Canada, highly rated Canadian banks and corporations, asset-backed trustsand mortgages.

Effective May 1, 2004, we transferred ourinvestments of customer funds from the “held-to-maturity” category to the “available-for-sale”category to reflect our decision to change the holding period of underlyinginvestments, in order to provide additional flexibility in managing creditrisks for this portfolio. As a result, investments of customer funds arereported at fair value rather than amortized cost at all dates subsequent tothe change. The after tax impact of unrealized gains and losses resulting fromperiodic revaluation of these securities are reported as accumulated othercomprehensive income in stockholders’ equity.

At December 31, 2004, the fair value ofinvestments of customer funds exceeded the related amortized cost by $28.8. Thischange resulted in an after-tax unrealized gain of $18.5 in accumulated othercomprehensive income.

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 $75.6 in 2004, $62.2 in 2003 and $64.6 in 2002and does not include realized gains from our interest rate derivativeinstruments. We further discuss our accounting for this investment income inthe section entitled “Revenue Recognition” of Note A, “Accounting Policies.”

114

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Theaverage cost basis of invested customer funds amounted to $2,435.2 and $2,145.9,respectively, for the years ended December 31, 2004 and 2003. Thefollowing tables provide information on cost and market price for variousclassifications of customer fund investments and amounts by maturity date.
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | **Gross Unrealized** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------------------|------------|
| **Investments of Customer Funds at December 31, 2004** | ** ** | ** ** | ** ** | **Cost**   | ** ** | **Market***               | ** ** | **Gain** | ** ** | **   Loss   ** | ** ** |
| ***(Available-for-sale)***                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                | ** ** | ** ** | ** ** |
| Money market  securities and other cash equivalents                                       |       | $          | 2,619.4    |       | $          | 2,619.4                   |       | $ | — |   |   | $ | — |   |   |
| Held-to-maturity  investments:                                                            |       |       |       |       |       |                      |       |   |   |   |   |
| U.S. government  and agency securities                                                    |       | 750.4      |       | 758.7      |       | 8.8                       |       |   | (0.5 | ) |   |
| Canadian and  provincial government securities                                            |       | 323.0      |       | 337.0      |       | 14.0                      |       |   | — |   |   |
| Corporate debt  securities                                                                |       | 243.1      |       | 247.8      |       | 5.3                       |       |   | (0.6 | ) |   |
| Asset-backed  securities                                                                  |       | 77.7       |       | 78.8       |       | 1.4                       |       |   | (0.3 | ) |   |
| Mortgage-backed  and other securities                                                     |       | 40.0       |       | 40.7       |       | 0.8                       |       |   | (0.1 | ) |   |
| Total  held-to-maturity investments                                                       |       | 1,434.2    |       | 1,463.0    |       | 30.3                      |       |   | (1.5 | ) |   |
| Invested customer  funds                                                                  |       | 4,053.6    |       | 4,082.4    |       | $                         | 30.3       |   |   | $ | (1.5 | ) |   |
| Trust receivables                                                                         |       | 13.6       |       | 13.6       |       |                      |       |   |   |   |   |
| Total customer funds                                                                      |       | $          | 4,067.2    |       | $          | 4,096.0                   |       |   |   |   |   |   |   |
|                                                                                           |            |            |            |            |            |                           |            |  |  |  |  |  |  |  |  |  |  |

----

(*)   As reported in the consolidated balance sheet.
| **Investments of Customer Funds at December 31, 2003  (restated)** | ** ** | ** ** | ** ** | **Cost***  | ** ** | **Market** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ***(Held-to-maturity)***                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Money market  securities and other cash equivalents                                                   |       | $          | 2,202.0    |       | $          | 2,202.0    |       |
| Held-to-maturity  investments:                                                                        |       |       |       |       |       |
| U.S. government  and agency securities                                                                |       | 311.1      |       | 317.4      |       |
| Canadian and  provincial government securities                                                        |       | 201.0      |       | 208.1      |       |
| Corporate debt  securities                                                                            |       | 209.0      |       | 216.0      |       |
| Asset-backed  securities                                                                              |       | 159.5      |       | 163.0      |       |
| Mortgage-backed  and other securities                                                                 |       | 58.7       |       | 59.6       |       |
| Total  held-to-maturity investments                                                                   |       | 939.3      |       | 964.1      |       |
| Invested customer  fund                                                                               |       | 3,141.3    |       | 3,166.1    |       |
| Trust receivables                                                                                     |       | 11.4       |       | 11.4       |       |
| Total customer funds                                                                                  |       | $          | 3,152.7    |       | $          | 3,177.5    |       |

----

(*)   Asreported in the consolidated balance sheet.
| ** **                                                                       | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **Investments of Customer Funds by Maturity Date** | ** ** | ** **                      | ** ** | **Cost** | ** ** | **Market** | ** ** |
| Due in one year  or less                                                         |       | $                               | 2,686.6    |   | $ | 2,687.4 |   |
| Due in one to  three years                                                       |       | 319.3                           |       | 328.8 |   |
| Due in three to  five years                                                      |       | 443.6                           |       | 448.0 |   |
| Due after five  years                                                            |       | 604.1                           |       | 618.2 |   |
| Total                                                                            |       | $                               | 4,053.6    |   | $ | 4,082.4 |   |
|                                                                                  |            |                                 |            |  |  |  |  |  |  |

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

**N.   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. Insome proceedings, the claimant seeks damages as well as other relief, which, ifgranted, 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. 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.

**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. *Edmund Biancarelli v. Ceridian Corp., et al.*, filed August 16,2004; *Garco Investments v. Ceridian Corp.,et al.*, filed September 2, 2004; *Ellen Lear v. Ceridian Corp., et al.*, filed August 26,2004; *Bruce Valentine Mickan v. CeridianCorp., et al.*, filed September 24, 2004; *Richard Shaller v. Ceridian Corp., et al.*,filed August 6, 2004; and *Sharon Zaksv. Ceridian Corp., et al.*, filed August 25, 2004. Thecomplaints for these actions are virtually identical. In an order dated March 7,2005, the Court consolidated the cases into a captioned *In re: Ceridian Corporation Securities Litigation.*Theseconsolidated actions purport to be class actions filed on behalf of all personswho purchased or otherwise acquired common stock of the company between April 17,2003 through and including July 19, 2004, and allege claims against thecompany and certain of its officers under Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934. Plaintiffs challenge the accuracy ofcertain public disclosures made by Ceridian regarding its financialperformance, and in particular Ceridian’s accounting for revenue at its StoredValue Systems business unit and accounting for capitalization and expensing ofcertain costs in Ceridian’s U.S. Human Resource Solutions business.

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

**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. *JamesPark, Derivatively On Behalf of Ceridian Corporation v. Ronald L. Turner, etal.*, 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. Theconsolidated lawsuit 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

alleges that the CeridianBoard of Directors and certain executive officers breached fiduciary duties,through abuse of control, gross mismanagement, waste of corporate assets andunjust enrichment. These complaints rely on the same factual allegations as thepurported class action shareholder lawsuits as described above.

Ceridian is awaiting thefiling of an amended complaint. Ceridian intends to appropriately defend itselfin the consolidated action. We cannot estimate the possible loss or range ofloss 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 aninvestigation the Audit Committee of the Board of Directors was directing (the “AuditCommittee Investigation”). We kept the SEC advised on a regular basis of theAudit Committee Investigation. On December 10, 2004, we received a furtherformal confidential document request from the SEC. The second request hasbroadened the areas of inquiry to include, among other things, Ceridian’srestatement, revenue recognition, capitalization, expense recognition, how werespond to any internal ethics complaints, and Ceridian’s accounting policiesand procedures. The formal document requests state that the SEC investigationis a non-public, fact-finding inquiry, and that the investigation and documentrequests do not mean that the SEC has concluded that we have violated anysecurities laws. We are cooperating with the SEC and are in the process ofresponding to the SEC’s additional document request.

117

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

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

Asdescribed in Note B, “Restatement of Financial Statements”, we have madecorrections to our consolidated statements of operations related to trademarkamortization, leases, international acquisitions, and accrual of costs andexpenses and income tax reserves. The effect of the Restatement on ourquarterly results in 2004 and 2003 is presented in an accompanying table.
| ** **                                      | ** ** | **2004**    | ** ** | **2003**       | ** ** |
|-------------------------------------------------|------------|-------------|------------|----------------|------------|
| ** **                                      | ** ** | **4**th     | ** ** | **3**rd        | ** ** | **2**nd | ** ** | **1**st | ** ** | **4**th | ** ** | **3**rd | ** ** | **2**nd | ** ** | **1**st | ** ** |
| ** **                                      | ** ** | **Quarter** | ** ** | **Quarter**    | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                      | ** ** | ** **  | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Revenue                                         |       | $           | 361.3      |           | $          | 328.7 |   | $ | 316.5 |   | $ | 313.9 |   | $ | 324.3 |   | $ | 291.6 |   | $ | 291.1 |   | $ | 306.9 |   |
| Costs and Expenses                              |       |        |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue                                 |       | 200.7       |       | 192.4          |       | 178.0 |   | 177.2 |   | 180.1 |   | 169.8 |   | 173.8 |   | 170.1 |   |
| Selling, general and administrative        | ** ** | 119.9       | ** ** | 121.3          | ** ** | 117.1 | ** ** | 117.2 | ** ** | 96.7 | ** ** | 86.1 | ** ** | 85.6 | ** ** | 96.7 | ** ** |
| Research and development                   |       | 6.9         |       | 7.0            |       | 8.3 |   | 4.6 |   | 6.1 |   | 5.0 |   | 5.3 |   | 3.0 |   |
| (Gain) loss on derivative instruments           |       | 2.9         |       | (7.9           | )          | 19.0 |   | (13.7 | ) | 4.0 |   | 0.5 |   | (12.9 | ) | (6.3 | ) |
| Other expense (income)(1)                  |       | 29.0        |       | (0.8           | )          | (2.9 | ) | 1.2 |   | (1.2 | ) | (1.1 | ) | 0.2 |   | (0.4 | ) |
| Interest income                                 |       | (0.9        | )          | (0.7           | )          | (0.5 | ) | (0.5 | ) | (0.5 | ) | (0.5 | ) | (0.5 | ) | (0.5 | ) |
| Interest expense                                |       | 1.2         |       | 1.2            |       | 0.9 |   | 1.1 |   | 1.0 |   | 1.3 |   | 1.1 |   | 1.2 |   |
| Total costs and expenses                        |       | 359.7       |       | 312.5          |       | 319.9 |   | 287.1 |   | 286.2 |   | 261.1 |   | 252.6 |   | 263.8 |   |
| **Earnings (loss) before income taxes**         |       | 1.6         |       | 16.2           |       | (3.4 | ) | 26.8 |   | 38.1 |   | 30.5 |   | 38.5 |   | 43.1 |   |
| Income tax provision (benefit)                  |       | (9.4        | )          | 5.3            |       | (1.1 | ) | 9.5 |   | 11.8 |   | 11.1 |   | 13.5 |   | 15.0 |   |
| **Net earnings (loss)**                         |       | $           | 11.0       |           | $          | 10.9 |   | $ | (2.3 | ) | $ | 17.3 |   | $ | 26.3 |   | $ | 19.4 |   | $ | 25.0 |   | $ | 28.1 |   |
| **Earnings (loss) per share(2)**                | ** ** | ** **  | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                           |       | $           | 0.07       |           | $          | 0.07 |   | $ | (0.02 | ) | $ | 0.12 |   | $ | 0.18 |   | $ | 0.13 |   | $ | 0.17 |   | $ | 0.19 |   |
| Diluted                                         |       | $           | 0.07       |           | $          | 0.07 |   | $ | (0.02 | ) | $ | 0.11 |   | $ | 0.17 |   | $ | 0.13 |   | $ | 0.17 |   | $ | 0.19 |   |
| **Shares used in calculations  (in thousands)** | ** ** | ** **  | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average shares (basic)                 |       | 147,343     |       | 149,098        |       | 148,607 |   | 149,250 |   | 149,696 |   | 148,426 |   | 147,970 |   | 148,451 |   |
| Dilutive securities(3)                          |       | 1,237       |       | 1,544          |       | — |   | 2,422 |   | 2,916 |   | 2,156 |   | 866 |   | 275 |   |
| Weighted average  shares (diluted)              |       | 148,580     |       | 150,642        |       | 148,607 |   | 151,672 |   | 152,612 |   | 150,582 |   | 148,836 |   | 148,726 |   |

----

(1)    Includes in 2004, gain from sale of stock of $0.5 inthe first quarter, $3.0 in the second quarter, and $1.0 in the third quarter.Also in the fourth quarter of 2004 we incurred a $28.5 charge related to thesale of the SourceWeb Assets. In 2003, includes gain from sale of stock of $3.4in the third quarter and 2002 unusual losses of $9.8 for the first quarter,$0.6 for the second quarter, $9.8 for the third quarter and $13.4 for thefourth quarter as described in Note D, “Supplementary Data to Statements ofOperations.”

(2)    Forinformation on the calculation of earnings per share, see the section entitled“Earnings per Share” in Note A, “Accounting Policies.”

(3)    Secondquarter 2004 dilutive securities have been restated to zero vs. 3,036,000shares previously reported since the restated results are a net loss.

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the three years ended December 31, 2004) (Continued) (Dollars in millions, except per share data)**

Thefollowing table presents the effect of the Restatement on the quarterlyconsolidated statements of operation as previously reported:
| ** **                           | ** ** | **2004**          | ** ** | **2003**               | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                           | ** ** | **3rd**           | ** ** | **2nd**                | ** ** | **1st** | ** ** | **4th** | ** ** | **3rd** | ** ** | **2nd** | ** ** | **1st** | ** ** |
| ** **                           | ** ** | **Quarter**       | ** ** | **Quarter**            | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ***As Previously Reported***         |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Revenue                              |       | $ 328.7      |       | $ 316.5           |       | $ 313.9 |   | $ 324.3 |   | $ 291.6 |   | $ 291.1 |   | $ 306.9 |   |
| Costs and  expenses                  |       | 301.7             |       | 309.0                  |       | 277.6 |   | 284.0 |   | 261.0 |   | 252.6 |   | 264.8 |   |
| Earnings before  income taxes        |       | 27.0              |       | 7.5                    |       | 36.3 |   | 40.3 |   | 30.6 |   | 38.5 |   | 42.1 |   |
| Income tax  provision                |       | 9.1               |       | 2.6                    |       | 12.8 |   | 13.4 |   | 11.1 |   | 13.5 |   | 14.8 |   |
| Net earnings                         |       | $ 17.9       |       | $   4.9 |       | $ 23.5 |   | $ 26.9 |   | $   19.5 |   | $ 25.0 |   | $ 27.3 |   |
| Earnings per  share                  |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                |       | $ 0.12       |       | $ 0.03            |       | $ 0.16 |   | $ 0.18 |   | $   0.13 |   | $ 0.17 |   | $ 0.18 |   |
| Diluted                              |       | $ 0.12       |       | $ 0.03            |       | $ 0.16 |   | $ 0.18 |   | $   0.13 |   | $ 0.17 |   | $ 0.18 |   |
| ***Restatement  Summary***           |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Trademark amortization               |       | 10.2              |       | 10.2                   |       | 10.2 |   | — |   | — |   | — |   | — |   |
| Lease accounting                     |       | 0.5               |       | 0.6                    |       | 0.4 |   | 0.8 |   | 0.5 |   | 0.4 |   | 0.4 |   |
| International acquisition accounting |       | (0.2              | )          | (0.2                   | )          | (0.2 | ) | (0.2 | ) | (0.2 | ) | (0.2 | ) | (0.2 | ) |
| Accrual of costs and expenses        |       | 0.3               |       | 0.3                    |       | (0.9 | ) | 1.6 |   | (0.2 | ) | (0.2 | ) | (1.2 | ) |
| Costs and expenses increase          |       | 10.8              |       | 10.9                   |       | 9.5 |   | 2.2 |   | 0.1 |   | — |   | (1.0 | ) |
| Total pretax  earnings decrease      |       | (10.8             | )          | (10.9                  | )          | (9.5 | ) | (2.2 | ) | (0.1 | ) | — |   | 1.0 |   |
| Tax effect of  restatement(1)        |       | (3.8              | )          | (3.7                   | )          | (3.3 | ) | (1.6 | ) | — |   | — |   | 0.2 |   |
| Total net  earnings decrease         |       | $  (7.0 | )          | $  (7.2      | )          | $  (6.2 | ) | $  (0.6 | ) | $    (0.1 | ) | $     — |   | $   0.8 |   |
| Earnings per  share                  |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                |       | $ (0.05      | )          | $ (0.05           | )          | $ (0.04 | ) | $     — |   | $       — |   | $     — |   | $ 0.01 |   |
| Diluted                              |       | $ (0.05      | )          | $ (0.05           | )          | $ (0.05 | ) | $ (0.01 | ) | $       — |   | $     — |   | $ 0.01 |   |
| ***As  Restated***                   |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Revenue                              |       | $ 328.7      |       | $ 316.5           |       | $ 313.9 |   | $ 324.3 |   | $ 291.6 |   | $ 291.1 |   | $ 306.9 |   |
| Costs and  expenses                  |       | 312.5             |       | 319.9                  |       | 287.1 |   | 286.2 |   | 261.1 |   | 252.6 |   | 263.8 |   |
| Earnings (loss) before  income taxes |       | 16.2              |       | (3.4                   | )          | 26.8 |   | 38.1 |   | 30.5 |   | 38.5 |   | 43.1 |   |
| Income tax  provision (benefit)      |       | 5.3               |       | (1.1                   | )          | 9.5 |   | 11.8 |   | 11.1 |   | 13.5 |   | 15.0 |   |
| Net earnings  (loss)                 |       | $ 10.9       |       | $  (2.3      | )          | $ 17.3 |   | $ 26.3 |   | $   19.4 |   | $ 25.0 |   | $ 28.1 |   |
| Earnings (loss)  per share           |       |              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                |       | $ 0.07       |       | $ (0.02           | )          | $ 0.12 |   | $ 0.18 |   | $   0.13 |   | $ 0.17 |   | $ 0.19 |   |
| Diluted                              |       | $ 0.07       |       | $ (0.02           | )          | $ 0.11 |   | $ 0.17 |   | $   0.13 |   | $ 0.17 |   | $ 0.19 |   |

----

(1)          The fourth quarter of2003 includes a $0.9 tax reserve adjustment in addition to a $0.7 tax impact ofthe pretax earnings decrease.

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**SCHEDULE II**

**CERIDIAN CORPORATION AND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTS(Dollars in millions)**
| **Reserves and  Allowances**             | ** ** | ** ** | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------|------------|------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2004**   | ** ** | **2003**                                    | ** ** | **2002** | ** ** |
| Balance at  beginning of year            |       | $          | 17.3       |                                        | $          | 18.4 |   | $ | 16.2 |   |
| Additions charged  to costs and expenses |       | 9.7        |       | 11.2                                        |       | 17.0 |   |
| Deductions(1)                            |       | (6.7       | )          | (12.3                                       | )          | (14.8 | ) |
| Balance at end of year                   |       | $          | 20.3       |                                        | $          | 17.3 |   | $ | 18.4 |   |

----

(1)          Amounts determined notto be collectible, net of recoveries. Amount also includes the effect ofacquisitions and dispositions of businesses.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM ON FINANCIAL STATEMENT SCHEDULE**

**THEBOARD OF DIRECTORS AND STOCKHOLDERSCERIDIAN CORPORATION:**

Under date of April 20, 2005, we reported on theconsolidated balance sheets of Ceridian Corporation and subsidiaries as of December 31,2004 and 2003, and the related consolidated statements of operations, cashflows and stockholders’ equity for each of the years in the three-year periodended December 31, 2004, as contained in Ceridian’s 2004 Annual Report on Form 10-K.In connection with our audits of the aforementioned consolidated financialstatements, we also audited the related consolidated financial statementschedule as listed in the accompanying index (see Item 15.(a)2.). Thisfinancial statement schedule is the responsibility of Ceridian’s management. Ourresponsibility is to express an opinion on this financial statement schedulebased on our audits.

In our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationset forth therein.

As discussed in Note B to the consolidated financialstatements the Company has restated its consolidated financial statements as ofDecember 31, 2003 and for the years ended December 31, 2003 and 2002.

As discussed in Note A to the consolidated financialstatements, the Company adopted the provisions of Statement of FinancialStandards No. 142, “Goodwill and other Intangible Assets,” on January 1,2002.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of CeridianCorporation’s internal control over financial reporting as of December 31,2004, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report datedApril 20, 2005 expressed an unqualified opinion on management’s assessmentof, and an adverse opinion on the effective operation of, internal control overfinancial reporting.
|                   | /s/ KPMG LLP |
|------------------------|--------------|
| Minneapolis, Minnesota |         |
| April 20, 2005    |         |

 

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**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 31,2004. As a result of the material weaknesses identified in our Management’s Reporton Internal Control over Financial Reporting located in Part II, Item 8 ofthis report, we have concluded that as of December 31, 2004, ourdisclosure controls and procedures were ineffective to ensure that informationrequired to be disclosed in reports that we file or submit under the ExchangeAct are recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and Exchange Commission.However, to address the material weaknesses described in our Management’s Reporton Internal Control over Financial Reporting, we have significantly expandedour disclosure controls and procedures to include additional analysis and otherpost-closing procedures to ensure that our disclosure controls and procedureswere effective over the preparation of the financial statements included in thisreport. Accordingly, management believes 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 other changes to our internal control over financial reportingduring the quarter ended December 31, 2004 that have materially affected,or are likely to materially affect, our internal control over financialreporting.

**InternalControl Over Financial Reporting**

Management’s Report on InternalControl over Financial Reporting and the attestation 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.

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

In July 2004, we began performing periodicinternal accounting reviews of HRS. These reviews are performed at least onceper quarter and evaluate compliance with our policies and in accordance withaccounting principles generally accepted in the United States of America (“U.S.GAAP”) related to the capitalization and amortization of internally developedsoftware costs, and the month-end close and cost and expense accrual process. Thesereviews are performed by HRS personnel, as well as by our Internal AuditDepartment, and have been completed throughthe end of 2004.

In order toremediate the material weaknesses in internal control over financial reportingand ensure the integrity of our financial reporting processes, we implementedin 2004 or are in the process of implementing the following actions:

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

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Sarbanes-Oxley Actof 2002 and the rules issued thereunder (the “Section 404 Requirements”),including additional remediation as necessary;

·       additionaltraining for finance, accounting and certain other personnel at HRS 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, (iv) procedures for identifyingunusual events or transactions and obtaining appropriate accounting guidanceprior to recording such transactions, (v) the importance of a robustinternal control environment and (vi) the application of technicalaccounting pronouncements;

·       implementationof detailed, new internally developed software capitalization and amortizationpolicy and formal procedures that are consistent with U.S. GAAP;

·       implementationof detailed, new revenue recognition policies at HRS that are consistent withU.S. GAAP;

·       establishmentof new documentation requirements and monitoring procedures for HRS finance andaccounting employees to ensure, among other things, that (i) accountingconclusions involving the interpretation of complex accounting standards arethoroughly documented and identify the critical factors that support the basisfor such conclusions, and (ii) the factors upon which such employees relyare validated and adequately evidenced;

·       implementationof detective controls in the form of (i) random internal audits by ourInternal Audit Department of selected HRS software development projects forcompliance with our new capitalization policy, (ii) monthly testingprocesses at HRS to analyze whether costs and expenses have been accruedproperly, and (iii) quarterly monitoring procedures at HRS to analyzecosts and expenses incurred during such period and determine whether such costsand expenses were classified correctly on our consolidated statement of operations;

·       modificationof systems and procedures to (i) ensure that appropriate cut-off dates forthe monthly accounts payable cycle are strictly observed, thereby preventingimproper deferral of costs and expenses, (ii) ensure that purchases in anamount of over $1,000 be evidenced by a written purchase order form and thatappropriate purchase order reports are generated and analyzed monthly and (iii) establishappropriate deterrent controls, including clear and regular communication ofoperating policies and procedures by management to HRS employees emphasizingthat noncompliance with such policies and procedures will result in correctiveaction, which may include termination;

·       creationof a new position, Director of Financial Accounting and Compliance, andretention of such person to review and coordinate the implementation of newrevenue-related pronouncements and regulations under U.S. GAAP at Ceridian;

·       reviewof all new HRS contracts containing certain quantitative and qualitativecharacteristics in order****to determineappropriate accounting treatment under U.S. GAAP;

·       creationof a revenue recognition steering committee comprised of financial andaccounting personnel to discuss and review revenue recognition issues at HRSfor policy amendments and interpretations;

·       periodicreview of details supporting the consolidated statement of operations todetermine whether significant costs and expenses are being classifiedappropriately on a historical and recurring basis and to reclassify whereappropriate;

·       reconciliationof balance sheet accounts for HRS that were unreconciled for the third andfourth quarters of 2004. We have reviewed our account reconciliation process atHRS to ensure that, 

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among other things, suchaccounts are being reconciled on a timely basis, the reconciliation is 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

·       establishmentof a process to review long-lived assets on a quarterly basis.

In addition, in an effortto improve internal control over financial reporting, we continue to emphasizethe importance of establishing the appropriate environment in relation toaccounting, financial reporting and internal control over financial reportingand the importance of identifying areas of improvement and to create andimplement new policies and procedures where material weaknesses or significantdeficiencies exist. Furthermore, in an effort to improve internal control overfinancial reporting, we have hired additional accounting expertise, continuedour use of external resources, taken certain disciplinary actions andterminated certain individuals. In addition, a new chief financial officerjoined Ceridian in February 2005.

**Item 9B.**               Other Information.

None.

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**PART III**

**Item10.**                 Directorsand Executive Officers of the Registrant

We refer you to our ProxyStatement for our 2005 Annual Meeting of Stockholders, which will be filed withthe SEC within 120 days after the close of our fiscal year, and the heading “Electionof Directors (Item 1)” for information regarding our directors and nominees fordirector. This information is incorporated by reference into this item of thereport.

Information regarding ourexecutive officers is found in Item 1A of this report under the heading “ExecutiveOfficers of the Registrant.”

We refer to you to ourProxy Statement for our 2005 Annual Meeting of Stockholders, which will befiled with the SEC within 120 days after the close of our fiscal year, and theheading “Meetings of the Board of Directors and Committees of the Board” forinformation regarding our “audit committee financial expert” and our AuditCommittee. This information is incorporated by reference into this item of thereport.

We refer you to our ProxyStatement for our 2005 Annual Meeting of Stockholders, which will be filed withthe SEC within 120 days after the close of our fiscal year, and the heading “OtherMatters—Section 16(a) Beneficial Ownership Reporting Compliance” forinformation regarding compliance with Section 16(a) of the SecuritiesExchange Act of 1934. This information is incorporated by reference into thisitem of the report.

We have a code of conductfor all of our employees, including our principal executive, financial andaccounting officers, and each of the non-employee directors on our Board ofDirectors. The Ceridian Corporation Code of Conduct may be found on our website at *www.ceridian.com* in the “CorporateGovernance” section. We intend to satisfy the disclosure requirement under Item5.05 of Form 8-K regarding an amendment to, or waiver from, a provision ofthe Code of Conduct by our executive officers or directors by posting suchinformation on our website, at the address and location specified above.

**Item 11.**                 ExecutiveCompensation

We refer you to our ProxyStatement for our 2005 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.

**Item12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related Stock Matters

We refer you to our ProxyStatement for our 2005 Annual Meeting of Stockholders, which will be filed withthe SEC within 120 days after the close of our fiscal year, and the heading “ShareOwnership Information.” This information is incorporated by reference into thisitem of the report.

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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, 2004.
| ** **                                                      | ** ** | **(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**     | ** ** |       | 17,461,577 | (1)                                                                                                                                                  |       |                                                                                                        | $          | 17.15 |   |   |   | 8,336,676 | (2) |   |
| **Equity compensation plans not approved by  security holders** | ** ** |       | 3,114,789  |                                                                                                                                                 |       |                                                                                                        | $          | 18.45 |   |   |   | 510,216 | (3) |   |
| **Total**                                                       | ** ** |       | 20,576,366 |                                                                                                                                                 |       |                                                                                                        |       |   |   |   | 8,846,892 |   |   |
|                                                                 |            |            |            |                                                                                                                                                      |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

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(1)          TheCeridian Corporation Deferred Compensation Plan allows executive officers theopportunity to invest in various book accounts, including one that tracks theperformance of our common stock (referred to as “phantom stock”). Upondistribution, such participants will receive the amounts invested in phantomstock in the form of shares of Ceridian common stock from the CeridianCorporation Amended and Restated 2001 Long-Term Stock Incentive Plan. Column (a) doesnot include 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 31,2004. 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 31,2004. 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      | ** ** | 1,507,573  | ** ** | Stock options,  restricted stock,                                                                                                                                          |
|                                                                | ** ** |       | ** ** | performance units                                                                                                                                                          |
| Amended and Restated  2001 Director Performance Incentive Plan | ** ** | 212,812    | ** ** | Non-statutory  stock options,                                                                                                                                              |
|                                                           | ** ** |       | ** ** | restricted stock                                                                                                                                                           |
| 2004 Long-Term Stock  Incentive Plan                           | ** ** | 6,000,000  | ** ** | Stock options, stock  appreciation rights, restricted stock, restricted stock units, dividend  equivalents, performance awards, stock awards, and other stock-based awards |

 

Also, as of December 31,2004, 616,291 shares remained available under the Ceridian Corporation Amendedand Restated Employee Stock Purchase Plan, an “employee stock purchase plan”under Section 423 of the Internal Revenue Code of 1986, as amended.

(3)          The following equitycompensation plans have not been approved by our stockholders. These plans areavailable to employees in the United Kingdom, have been approved by InlandRevenue under a 

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“save-as-you-earn” plan design and have the followingnumber of shares that remain available for issuance as of December 31,2004:
| **Plan**                                   | ** ** | ** ** | ** ** | **Number of Shares** | ** ** |
|--------------------------------------------|------------|------------|------------|--------------------------------|------------|
| 2001  Savings-Related Share Option Plan    |       |       | 462,177    |                           |       |
| UK Compensation Share Option Plan          |       |       | 21,125     |                           |       |
| Amended  Savings-Related Share Option Plan |       |       | 26,914     |                           |       |

 

***Ceridian Corporation 2001Savings-Related Share Option Plan, Ceridian Corporation UK Compensation ShareOption Plan and Ceridian Corporation Amended Savings-Related Share Option Plan (referredto as the “SAYE Plans”).***The SAYE Plans have been adopted by our Board. The SAYE Plans havebeen approved by Inland Revenue in the United Kingdom under the “save-as-you-earn”plan design and are available to employees of Ceridian’s subsidiaries in theUnited Kingdom.

In 2001, our Board ofDirectors adopted the Ceridian Corporation 2001 Savings-Related Share OptionPlan (referred to as the “2001 SAYE”). Under the 2001 SAYE, employee-participants can commit to save a specified amountfrom after-tax pay for a fixed period (either three or five years). At the endof the period chosen, participants have the choice to receive the savingsamount and accumulated tax-free interest credits either in cash or to use theamount to purchase common stock from Ceridian at an exercise price equal to themarket price of the stock as of the beginning of the savings contract period,less a 15% discount. Under the 2001 SAYEPlan, an aggregate of 500,000 shares of Ceridian common stock has been reservedfor issuance. As of December 31, 2004, 95,725 shares of common stock areeligible to be purchased under the 2001 SAYE Plan.

In connection with thespin-off, Ceridian’s predecessor amended the Ceridian Corporation AmendedSavings-Related Share Option Plan (referred to as the “Rollover Plan”) andtransferred the Rollover Plan to Ceridian. As a result of the spin-off andtransfer of the Rollover Plan to Ceridian, the savings contracts held byemployee-participants lost their tax-favored status. To make employee-participantswhole for the income tax and national insurance liability resulting from thespin-off, employees were awarded additional savings contracts under theCeridian Corporation UK Compensation Share Option Plan (referred to as the “CompensationPlan”). Under the Rollover Plan and Compensation Plan, at the end of thecontract period chosen (three or five years), participants had the choice toreceive the savings amount and accumulated interest credits either in cash orto use the amount to purchase common stock from Ceridian at an exercise priceequal to the spin-adjusted market price of the stock as of the original date ofjoining the Rollover Plan, less a 20% discount. No new contributions arepermitted under the Rollover Plan and the Compensation Plan. As of December 31,2004, 26,914 and 21,125 shares of common stock are eligible to be purchasedfrom outstanding options under the Rollover Plan and Compensation Plan,respectively.

**Item13.**                 CertainRelationships and Related Transactions

We refer you to our ProxyStatement for our 2005 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.

**Item14.**                 PrincipalAccountant Fees and Services

We refer you to our ProxyStatement for our 2005 Annual Meeting of Stockholders, which will be filed withthe SEC within 120 days 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.

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**PART IV**

**Item 15.**                 Exhibits andFinancial 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**

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

**(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 (formerly known as New Ceridian Corporation)  (incorporated by reference to Exhibit 3.1 to Ceridian’s Registration  Statement on Form 10 (File No. 001-16149)).                                                                                                                                                                                                                                                                                                     |
| 3.02    |       | Amendment to Amended and  Restated Certificate of Incorporation of Ceridian Corporation (formerly known  as New Ceridian Corporation) (incorporated by reference to Exhibit 3.02  to Ceridian’s Annual Report on Form 10-K for the year ended  December 31, 2000 (File No. 001-16149)).                                                                                                                                                                                                                                                   |
| 3.03    |       | 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 Resignation,  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 (File No. 001-15168)). |
| 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)).                                                                                                                                                                                                                                    |

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| 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 (File No. 001-15168)). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)).                                                                           |
| 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 (File No. 001-15168)).                                                                                                                 |
| 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 (File No. 001-15168)).                                                                                    |
| 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 (File No. 001-15168)).                                                                                                       |
| 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 (File No. 001-15168)).                                                                                    |
| 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 (File No. 001-15168)).                                                                                                            |
| 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 (File  No. 001-15168)).                                                                                                                                        |
| 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 (File No. 001-15168)).                                                                                                                     |
| 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 (File No. 001-15168)).                                                                                        |

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| 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 (File No. 001-15168)).                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 (File No. 001-15168)).                          |
| 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 (File  No. 001-15168)).                                                                              |
| 10.19* |   | Ceridian Corporation  2004 Long-Term Stock Incentive Plan (incorporated by reference to  Exhibit 10.01 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended June 30, 2004 (File No. 001-15168)).                                                                                                |
| 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 10.05 to Ceridian’s Quarterly Report on Form 10-Q  for the quarterly period ended September 30, 2004 (File No. 001-15168)). |
| 10.21* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (under the Ceridian Corporation  2004 Long-Term Stock Incentive Plan) (incorporated by reference to Exhibit 10.06  to Ceridian’s Quarterly Report on Form 10-Q for the quarterly  period ended September 30, 2004 (File No. 001-15168)).           |
| 10.22* |   | 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 (File No. 001-15168)).                                                                                                            |
| 10.23* |   | 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 (File No. 001-15168)).                                                                                      |
| 10.24* |   | 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 (File No. 001-15168)).                 |
| 10.25* |   | 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 (File No. 001-15168)).                           |
| 10.26* |   | 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 (File No. 001-15168)).                                                                                  |
| 10.27* |   | 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 (File  No. 001-15168)).                                                                                 |
| 10.28* |   | 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 (File No. 001-15168)).            |

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| 10.29* |   | 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 (File No. 001-15168)).                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.30* |   | 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)).                                                                                                                      |
| 10.31* |   | 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)).                                                                                                                                              |
| 10.32* |   | 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)).                                                                                                                                             |
| 10.33* |   | 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)).                                                                                                                                              |
| 10.34* |   | 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)).  |
| 10.35* |   | 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)).            |
| 10.36* |   | 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)).                |
| 10.37* |   | 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 (File No. 001-15168)). |
| 10.38* |   | 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 (File No. 001-15168)).                                                                                                                                             |
| 10.39* |   | 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 (File No. 001-15168)).                                                                                                                                         |
| 10.40* |   | 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 (File No. 001-15168)).                                                                                                                           |
| 10.41* |   | 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 (File No. 001-15168)).                                                                                                                                                                 |

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| 10.42* |   | Ceridian Corporation UK  Compensation Share Option Plan (incorporated by reference to  Exhibit 10.39 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2002 (File No. 001-15168)).                                                                                                                                                                                                                                                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.43* |   | Ceridian Corporation  Amended Savings-Related Share Option Plan (incorporated by reference to  Exhibit 10.40 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2002 (File No. 001-15168)).                                                                                                                                                                                                                                                               |
| 10.44  |   | Credit Agreement dated  as of January 31, 2001 among Ceridian Corporation (formerly known as New  Ceridian Corporation), as the borrower, Bank of America, NA, as the  Administrative Agent and L/C issuer, Other Lenders thereto (exhibits and  schedules omitted) (incorporated by reference to Exhibit 10.28 to  Ceridian’s Annual Report on Form 10-K for the year ended  December 31, 2000 (File No. 001-16149)).                                                      |
| 10.45  |   | First Amendment to  Credit Agreement, dated as of April 19, 2002 among Ceridian Corporation,  as the borrower, the several financial institutions party to the Credit  Agreement, dated as of January 31, 2001, and Bank of America, NA, as the  Administrative Agent for itself and the other Lenders (incorporated by  reference to Exhibit 10.02 to Ceridian’s Quarterly Report on  Form 10-Q for the quarterly period ended March 31, 2002 (File  No. 001-15168)). |
| 10.46  |   | Second Amendment to  Credit Agreement dated as of August 4, 2004 among Ceridian Corporation,  the several financial institutions party to the Credit Agreement, dated as of  January 31, 2001, and Bank of America, NA (incorporated by reference to  Exhibit 10.06 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 2004 (File No. 001-15168)).                                                                              |
| 10.47  |   | Third Amendment to  Credit Agreement dated as of September 30, 2004 among Ceridian  Corporation, the several financial institutions party to the Credit  Agreement, dated as of January 31, 2001, and Bank of America, NA (incorporated  by reference to Exhibit 10.08 to Ceridian’s Quarterly Report on  Form 10-Q for the quarterly period ended September 30, 2004  (File No. 001-15168)).                                                                          |
| 10.48  |   | Fourth Amendment to  Credit Agreement dated as of November 9, 2004 among Ceridian  Corporation, the several financial institutions party to the Credit  Agreement, dated as of January 31, 2001, and Bank of America, NA  (incorporated by reference to Exhibit 10.14 to Ceridian’s Quarterly  Report on Form 10-Q for the quarterly period ended  September 30, 2004 (File No. 001-15168)).                                                                           |
| 10.49  |   | Fifth Amendment to  Credit Agreement dated as of December 31, 2004 among Ceridian  Corporation, the several financial institutions party to the Credit  Agreement, dated as of January 31, 2001, and Bank of America, NA.  (incorporated by reference to Exhibit 10.15 to Ceridian’s Quarterly  Report on Form 10-Q for the quarterly period ended  September 30, 2004 (File No. 001-15168)).                                                                          |
| 10.50  |   | Sixth Amendment to  Credit Agreement dated as of January 14, 2005 among Ceridian  Corporation, the several financial institutions party to the Credit  Agreement, dated as of January 31, 2001, and Bank of America, N.A.  (incorporated by reference to Exhibit 10.16 to Ceridian’s Quarterly  Report on Form 10-Q for the quarterly period ended  September 30, 2004 (File No. 001-15168)).                                                                          |
| 10.51  |   | Seventh Amendment to  Credit Agreement dated as of March 31, 2005 among Ceridian Corporation,  the several financial institutions party to the Credit Agreement, dated as of  January 31, 2001, and Bank of America, N.A.                                                                                                                                                                                                                                                                       |

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| 10.52 |   | Receivable Sales  Agreement, dated as of June 24, 2002, between Comdata Network, Inc.  and Comdata Funding Corporation (incorporated by reference to  Exhibit 10.01 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended June 30, 2002 (File No. 001-15168)).                                                                                                                                                                                              |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.53 |   | 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 (File No. 001-15168)).                                                                                                |
| 10.54 |   | 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 (File No. 001-15168)).                                                                                                                                                                                           |
| 10.55 |   | 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 (File No. 001-15168)).                                                                |
| 10.56 |   | 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 (File No. 001-15168)).                                                                |
| 10.57 |   | 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  (File No. 001-15168)).     |
| 10.58 |   | 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  (File No. 001-15168)). |
| 10.59 |   | 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  (File No. 001-15168)).   |
| 10.60 |   | 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  (File No. 001-15168)). |

133

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| 10.61  |   | 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 (File No. 001-15168)). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.62  |   | 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.                                                                                                                                                                                                   |
| 10.63* |   | Ceridian Corporation  Board of Directors Compensation Summary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 18.01  |   | Preferability letter  from KPMG LLP dated April 20, 2005 regarding change in accounting principle.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 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 required pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.02  |   | Certification of our  Chief Financial Officer required 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 its 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.

134

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**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 April 20,2005.
|            | **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 April 20, 2005.
| /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 and Accounting Officer)* |
| /s/ WILLIAM J. CADOGAN                                                      |   |                                                                                                 | /s/ NICHOLAS D. CHABRAJA  |   |
| William J. Cadogan, *Director*                                                   |   | Nicholas D. Chabraja, *Director*                                                                     |
| /s/ RONALD T. LEMAY                                                         |   |                                                                                                 | /s/ GEORGE R. LEWIS            |   |
| Ronald T. LeMay, *Director*                                                      |   | George R. Lewis, *Director*                                                                          |
| /s/ CAROLE J. UHRICH SHAPAZIAN                                                   |   |                                                                                                 | /s/ ALAN F. WHITE         |   |
| Carole J. Uhrich Shapazian, *Director*                                           |   | Alan F. White, *Director*                                                                            |

 

135

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**CERIDIAN CORPORATION**

**ANNUALREPORT ON FORM 10-K**

 

**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.01*                |       | Amended and Restated Certificate of  Incorporation of Ceridian Corporation (formerly known as New Ceridian  Corporation).                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.02*                |       | Amendment to Amended and Restated  Certificate of Incorporation of Ceridian Corporation (formerly known as New  Ceridian Corporation).                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.03*                |       | 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 Resignation, 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.                                                                                                                                       |
|   |   |                                                                                                                                                                                             |
| 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 Award Agreement (under the Ceridian Corporation 2004  Long-Term Stock Incentive Plan.                                                        |

 

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| 10.22* |   | 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 (File No. 001-15168)). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                 |
| 10.23* |   | Ceridian Corporation Amended and Restated  2001 Long-Term Stock Incentive Plan.                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                 |
| 10.24* |   | Form of Ceridian Corporation  Non-Statutory Stock Option Award Agreement (under the Amended and Restated  2001 Long-Term Stock Incentive Plan).                                                                                 |
|   |   |                                                                                                                                                                                                                                 |
| 10.25* |   | Form of Ceridian Corporation  Restricted Stock Award Agreement (under the Amended and Restated 2001  Long-Term Stock Incentive Plan).                                                                                           |
|   |   |                                                                                                                                                                                                                                 |
| 10.26* |   | Ceridian Corporation Amended and Restated  Employee Stock Purchase Plan.                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                 |
| 10.27* |   | Ceridian Corporation Amended and Restated  2001 Director Performance Incentive Plan.                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                 |
| 10.28* |   | Form of Ceridian Corporation  Non-Statutory Stock Option Award Agreement (under the Amended and Restated  2001 Director Performance Incentive Plan).                                                                            |
|   |   |                                                                                                                                                                                                                                 |
| 10.29* |   | Form of Ceridian Corporation  Restricted Stock Award Agreement (under the Amended and Restated 2001  Director Performance Incentive Plan).                                                                                      |
|   |   |                                                                                                                                                                                                                                 |
| 10.30* |   | Ceridian Corporation Benefit Equalization  Plan, as amended.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                 |
| 10.31* |   | Ceridian Corporation Benefit Equalization  Plan, First Declaration of Amendment.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                 |
| 10.32* |   | Ceridian Corporation Benefit Equalization  Plan, Second Declaration of Amendment.                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                 |
| 10.33* |   | Ceridian Corporation Benefit Equalization  Plan, Third Declaration of Amendment.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                 |
| 10.34* |   | Ceridian Corporation Employees’ Benefit  Protection Trust Agreement, dated as of December 1, 1994, between  Ceridian Corporation and First Trust National Association.                                                     |
|   |   |                                                                                                                                                                                                                                 |
| 10.35* |   | 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.                    |

 

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| 10.36* |   | 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.                                                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.37* |   | 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.                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.38* |   | Ceridian Corporation Deferred Compensation  Plan (2002 Revision).                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.39* |   | Split Dollar Agreement between Ronald L.  Turner and Ceridian Corporation.                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.40* |   | Form of Indemnification Agreement  between Ceridian Corporation and its Directors.                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.41* |   | Ceridian Corporation 2001 Savings-Related  Share Option Plan.                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.42* |   | Ceridian Corporation UK Compensation Share  Option Plan.                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.43* |   | Ceridian Corporation Amended  Savings-Related Share Option Plan.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.44* |   | Credit Agreement dated as of January 31,  2001 among Ceridian Corporation (formerly known as New Ceridian Corporation),  as the borrower, Bank of America, NA, as the Administrative Agent and L/C  issuer, Other Lenders thereto (exhibits and schedules omitted).                                          |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.45* |   | First Amendment to Credit Agreement, dated  as of April 19, 2002 among Ceridian Corporation, as the borrower, the  several financial institutions party to the Credit Agreement, dated as of January 31,  2001, and Bank of America, NA, as the Administrative Agent for itself and the  other Lenders. |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.46* |   | Second Amendment to Credit Agreement dated  as of August 4, 2004 among Ceridian Corporation, the several financial  institutions party to the Credit Agreement, dated as of January 31,  2001, and Bank of America, NA.                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.47* |   | Third Amendment to Credit Agreement dated  as of September 30, 2004 among Ceridian Corporation, the several  financial institutions party to the Credit Agreement, dated as of January 31,  2001, and Bank of America, NA.                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.48* |   | Fourth Amendment to Credit Agreement dated  as of November 9, 2004 among Ceridian Corporation, the several financial  institutions party to the Credit Agreement, dated as of January 31,  2001, and Bank of America, NA.                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.49* |   | Fifth Amendment to Credit Agreement dated  as of December 31, 2004 among Ceridian Corporation, the several  financial institutions party to the Credit Agreement, dated as of January 31,  2001, and Bank of America, NA.                                                                               |

 

----

 
| 10.50* |   | Sixth Amendment to Credit Agreement dated  as of January 14, 2005 among Ceridian Corporation, the several financial  institutions party to the Credit Agreement, dated as of January 31,  2001, and Bank of America, NA.                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.51  |   | Seventh Amendment to Credit Agreement dated  as of March 31, 2005 among Ceridian Corporation, the several financial  institutions party to the Credit Agreement, dated as of January 31,  2001, and Bank of America, N.A                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.52* |   | Receivable Sales Agreement, dated as of June 24,  2002, between Comdata Network, Inc. and Comdata Funding Corporation.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.53* |   | 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.                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.54* |   | Performance Undertaking, dated as of June 24,  2002, executed by Ceridian Corporation in favor of Comdata Funding  Corporation.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.55* |   | 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.                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.56* |   | 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.                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.57* |   | 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.     |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.58* |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.59* |   | 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.   |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.60* |   | 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.  |

 

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| 10.61* |   | 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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.62  |   | Amendment No. 8 to Receivables  Purchase Agreement and Amendment No. 5 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.        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.63  |   | Ceridian Corporation Board of Director  Compensation Summary.                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 18.01  |   | Preferability letter from KPMG LLP dated  April 20, 2005 regarding change in accounting principle.                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 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 required pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 32.02  |   | Certification of our Chief Financial  Officer required pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                      |

 

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* Incorporatedby Reference.

 

----