**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**FORM 10-K**

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**x**                   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended December 31, 2006**

**OR**

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

**Forthe Transition Period from                to                **

**CommissionFile Number 1-15168**

**CERIDIANCORPORATION**

(Exactname of Registrant as specified in its charter)

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

 

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

(Addressof principal executive offices)

**TelephoneNo.: (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 mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. x Yes o No

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

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 a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

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

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

The aggregate market value ofthe voting stock of Ceridian held by non-affiliates of Ceridian on June 30,2006 was $3,377,012,226 based on the closing sales price of Ceridian commonstock as reported on the New York Stock Exchange on June 30, 2006.

The number of shares ofCeridian common stock outstanding as of February 1, 2007 was 141,229,286.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portions of the ProxyStatement for the 2007 Annual Meeting of Stockholders:  Part III

 

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**CERIDIANCORPORATION**

**Annual Report on Form 10-K**

**For the fiscal yearended December 31, 2006**

**Table of Contents**

|               | ** ** |                                                                                                                              | ** ** | **Page** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I   |       |                                                                                                                         |       |     |
| Item 1.       |       | Business                                                                                                                     |       | 1        |   |
| Item 1A.      |       | Risk Factors                                                                                                                 |       | 16       |   |
| Item  1B.     |       | Unresolved  Staff Comments                                                                                                   |       | 26       |   |
| Item 2.       |       | Properties                                                                                                                   |       | 26       |   |
| Item 3.       |       | Legal Proceedings                                                                                                            |       | 27       |   |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                                          |       | 28       |   |
| PART II  |       |                                                                                                                         |       |     |   |
| Item 5.       |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 29       |   |
| Item 6.       |       | Selected Financial Data                                                                                                      |       | 31       |   |
| Item 7.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                  |       | 31       |   |
| Item 7A.      |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                  |       | 54       |   |
| Item 8.       |       | Financial Statements and Supplementary Data                                                                                  |       | 57       |   |
| Item 9.       |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                        |       | 103      |   |
| Item 9A.      |       | Controls and Procedures                                                                                                      |       | 103      |   |
| Item 9B.      |       | Other Information                                                                                                            |       | 104      |   |
| PART III |       |                                                                                                                         |       |     |   |
| Item 10.      |       | Directors, Executive Officers and Corporate Governance                                                                       |       | 105      |   |
| Item 11.      |       | Executive Compensation                                                                                                       |       | 105      |   |
| Item 12.      |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                         |       | 105      |   |
| Item 13.      |       | Certain Relationships and Related Transactions, and  Director Independence                                                   |       | 107      |   |
| Item 14.      |       | Principal Accounting Fees and Services                                                                                       |       | 107      |   |
| PART IV  |       |                                                                                                                         |       |     |   |
| Item 15.      |       | Exhibits, Financial Statement Schedules                                                                                      |       | 108      |   |

 

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**CERIDIANCORPORATION**

**PART I**

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

We own or have the rightsto various trademarks, trade names or service marks, including the following:Ceridian Corporation and logo® , Ceridian®, Comchek®, Comdata® andlogoSM ,Comdata®, andLifeWorks®. Thetrademarks American Express®,Discover®, MasterCard®, Visa®, Cirrus® andMaestro® referred to in this report are the registeredtrademarks of others.

**Item 1.**                        Business

**General**

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

Ceridian Corporation is an information servicescompany principally in the human resource (“HR”), transportation and retailmarkets. Our human resource solutions business (which we refer to in thisreport as “HRS” or “Human Resource Solutions”) enables customers to outsource abroad range of employment processes, such as payroll, tax filing, humanresource information systems, employee self-service, time and labor management,benefits administration, employee assistance and work-life programs, recruitmentand applicant screening, and post-employment health insurance portabilitycompliance. We have HRS operations primarily in the United States, Canada andthe United Kingdom. Our Comdata subsidiary (which we refer to in this report as“Comdata”) provides transaction processing, financial services and regulatorycompliance services primarily to the transportation and retail industries.Comdata’s products and services include payment processing and the issuance ofcredit, debit and stored value cards.

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

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

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

**FinancialInformation About Segments**

Our business has twosegments, HRS and Comdata. We refer you to Note 13, *“SegmentData”* to our consolidated financial statements for financialinformation about our business segments and geographic areas. This informationmay be found in Part II, Item 8 of this report.

**Human ResourceSolutions**

The operating units comprising HRS offer a broad rangeof managed human resource solutions built around a core capability of payrollprocessing and transactions associated with payroll. The broader solutions aredesigned to help companies maximize the value of their people by moreeffectively managing their work force 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. Ourinternational HRS operations are primarily conducted in Canada, throughCeridian Canada Ltd. (“Ceridian Canada”) and in the United Kingdom, throughCeridian UK Limited (“Ceridian U.K.”).

Late in 2005, we realigned our internal organizationstructure in the United States operations of HRS (“U.S. HRS”) into severaloperating units to improve the organization’s effectiveness and functionaloperating environment. The HRS organization’s structure is aligned to certainHR solution areas (payroll processing, tax filing, and other HR services;benefits administration services; and work-life and employee assistanceprograms).

HRS’s and U.S. HRS’s revenue for the years ended December 31,2006, 2005 and 2004 was as follows:

|                                                           | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                | ** ** | **(dollars in millions)**         | ** ** |
| HRS Revenue                                               |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. HRS                                                  |       | $                                           | 822.4      |   | 74.8 | % | $ | 799.8 |   | 76.2 | % | $ | 731.5 |   | 75.9 | % |
| Ceridian Canada                                           |       | 182.6                                       |       | 16.6 | % | 158.1 |   | 15.0 | % | 141.1 |   | 14.6 | % |
| Ceridian U.K.                                             |       | 94.8                                        |       | 8.6 | % | 92.2 |   | 8.8 | % | 91.8 |   | 9.5 | % |
| Total HRS                                                 |       | $                                           | 1,099.8    |   | 100.0 | % | $ | 1,050.1 |   | 100.0 | % | $ | 964.4 |   | 100.0 | % |
| U.S. HRS Revenue                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Payroll processing, tax filing and other HR services |       | $                                           | 527.1      |   |   |   | $ | 500.9 |   |   |   | $ | 452.0 |   |   |   |
| Benefits administration services                          |       | 154.0                                       |       |   |   | 151.1 |   |   |   | 146.1 |   |   |   |
| Work-life and employee assistance  programs               |       | 141.3                                       |       |   |   | 147.8 |   |   |   | 133.4 |   |   |   |
|                                                      |       | $                                           | 822.4      |   |   |   | $ | 799.8 |   |   |   | $ | 731.5 |   |   |   |

 

HRS revenue in 2006 includes approximately $132.0million of investment income earned in lieu of additional fees from customerfunds temporarily held in the United States and Canada pending remittance totaxing authorities, customer employees or other third parties. All customer fundstemporarily held by us are held primarily in trusts. Funds from U.S. customersare invested primarily in high quality collateralized short-term investments ormoney market mutual funds. We may also invest in U.S. Treasury and Agencysecurities, AAA rated asset-backed securities, and corporate securities ratedA3/A- or better. Funds from Canadian customers are invested primarily insecurities issued by the government and provinces of Canada, highly ratedCanadian banks and corporations, asset-backed trusts and mortgages. Thematurity 

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of theseinvestments is carefully managed to meet the related payment obligations. Dueto the significance of this investment income, our quarterly revenue andprofitability fluctuate as a result of changes in interest rates and in theamount of customer funds held.

***Market***

Themarket for human resource solutions covers a comprehensive range of informationmanagement, human resource administration and employee assistance products,services and software. These products, services and software 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 marketfor these solutions will continue to grow as organizations seek to reduce costs,improve productivity and add services for employees by outsourcingadministrative services and further automating internal processes. We alsobelieve the demand for human resource solutions will increase as organizationsseek assistance in maintaining their compliance with the increasing scope andcomplexity of laws and regulations governing businesses and increasinglycomplicated work-life issues 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 100 employees |       | Human resource management needs 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             |       | 100 to 5,000 employees   |       | Human resource  management needs tend to be more complex, and therefore require more  flexibility in products and services, greater integration among data  processing systems and a greater variety of products and services . Within  this group, the lower mid-market (100-300 employees) tend to have  simpler requirements and upper mid-market (300-5,000 employees) tend to have  more complex requirements.                 |
| Enterprise            |       | Over 5,000 employees     |       | Human resource management needs tend to be the most  complex, and therefore often require the most customization and flexibility in  products and services, the greatest integration among data processing systems  and the greatest variety of products and services; also has the greatest  reliance on their integral legacy systems which increases integration  complexity and challenges outsourcing and migration decisions. |

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*                    Thiscolumn of the table reflects the employer size of U.S. customers in 2006. InCanada and the United Kingdom, the employer segment sizes are typicallysmaller, although the characteristics of such segments are similar in nature.

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We believe, however, that with regard to any sizeemployer, a provider of a core transaction-based service, such as payrollprocessing or tax filing, is afforded opportunities to complement that coreservice with additional products and services that are natural adjuncts to thatservice, such as time and labor management, health insurance portabilitycompliance administration, flexible spending account administration, employeeself-service, benefits eligibility and enrollment, and employee assistance andwork-life services. We believe our ability to wrap value-added servicesaround a core service or product in an integrated manner will lead to revenuegrowth and our ability to achieve higher margins.

Further, we believe thatcustomers are increasingly seeking providers that can take responsibility forentire human resource management processes. These human resource outsourcing(referred to in this report as “HRO”)****relationshipstransfer responsibility for managing each core process from the employer to theprovider. Through HRO, we are able to provide our customers with acomprehensive suite of modular, fully managed HRS products and servicesdescribed above. By fully managing the products and services that we canotherwise provide on a standalone basis and presenting a single face to ourcustomers’ employees, we are able to transfer responsibility for managing eachcore HR process from the employer to the provider. Our HRO services to datetypically involve: (1) conversion and implementation consulting services; (2) processingand hosting services related to payroll, tax filing and benefits needs; and (3) administrationof HR, payroll and benefits functions.

***Products and Services***

Our human resourcemanagement solutions include:

·       payrollprocessing, tax filing and other HR services;

·       benefitsadministration services; and

·       work-life and employeeassistance programs.

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

*Payroll Processing.****  ***Ourpayroll processing for customers in the United States consists primarily ofpreparing and furnishing employee payroll checks, direct deposit advices andsupporting journals and summaries. For certain business customers, we mayhandle the transmission of customer payroll funds to the customer’s employees. 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 provides an integratedHR/payroll and benefits solution with outsourced payroll and tax filingservices to customers primarily in the corporate and enterprise customermarkets. It is primarily available in a hosted “application service provider”environment but also 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.

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Our HR/payroll web product is a web-enabled, fullyhosted integrated payroll and human resource administration solution, designedspecifically 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 web-based solution allows customers to complete payrolltransactions via the Internet. The Small Business HR/payroll product alsoprovides small businesses with access to services, such as new hire reporting,tax filing, direct deposit, optional benefits programs, unemployment filing andspecial reports services that were previously only available to largercompanies.

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

*Other HR Services.****  ***Wealso provide customers with a number of other HR solutions. Such servicesinclude time and attendance, administration of payroll and benefit functions,recruiting, employee/manager self service and human capital management services.These services are generally designed to automate, streamline and integratecertain traditional HR services to provide our customers with the ability tofocus less on administration and more on their core business.

***BenefitsAdministration Services.******  ***Weprovide employee health and welfare benefits 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 also provide qualified domestic relations order andmedical support order administration to our customers; and administration andbenefits billing services for benefits provided to retired and inactiveemployees of our customers, including retiree healthcare, disability, survivingdependent, family leave and severance benefits.

***Work-Life andEmployee Assistance Programs.******  ***Weprovide customers of all sizes and their employees with a single source forfully integrated work-life and employee assistance programs. Our customersinclude employers in both the private and public sectors (including certainagencies of the U.S. Government). Services are delivered through on-line accessand telephonically, and through face-to-face counseling provided by referralresources.

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 as assistancewith college selection, 

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eldercare assessment and facility review services, and health and wellness services.These services address employee effectiveness issues and seek to improveemployee retention and productivity, reduce absenteeism and increaserecruitment success. Consultants provide confidential assistance 24 hoursa day to customers’ employees to help them address issues ranging from everydaymatters to crisis situations. Supporting these consultants are research andsubject matter experts who provide specialized expertise or referrals in areassuch as parenting/child care, elder care, disabilities, addiction disorders,mental health, health and wellness, financial, legal, managerial/supervisoryand education/schooling issues. We have also entered into arrangements withsome service and product providers to provide additional services and expertiseto our customers.

***International Operations***

Ceridian Canada provides payroll processing services,HRIS solutions, tax filing services, work-life and employee assistance programsand recruitment services to its Canadian customers. Ceridian Canada handlespayroll as well as tax filing funds for our Canadian customers. These Canadianoperations collect payroll and payroll tax amounts from customers, remit taxamounts to applicable governmental authorities and make direct deposits ofpayroll amounts to employees’ bank accounts. As a result, revenue from ourpayroll processing services in Canada includes investment income received inlieu of additional fees from temporarily holding these amounts in trust.

Ceridian U.K. provides payroll processing services,HRIS solutions, work-life and employee assistance programs and recruitmentservices primarily in the United Kingdom. Ceridian U.K.’s services generally donot involve the handling or transmission of customer funds. In a very fewinstances, Ceridian U.K. holds customer funds for a short period of time innon-interest bearing segregated accounts prior to disbursement pursuant to thecustomer’s instructions.

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 Part I, Item 1A, “RiskFactors” of this report.

***Customers***

Our existing customer base covers a wide range ofindustries and markets. Our products and services are generally provided underwritten agreements, with contracts for repetitive services generally terminableupon 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***

Our HRS services are soldin the United States through our direct sales force operating throughout thecountry. We currently utilize, and seek to develop other, cooperative marketingrelationships with other companies offering products or services thatcomplement our businesses as well as informal and formal marketing allianceswith human resource consulting firms, other outsourcing firms and benefits 

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brokers.The most significant source of customer leads for these transaction-basedproducts and services are referrals from these marketing relationships andexisting customers, and other direct marketing efforts such as web marketing,telemarketing, direct mail and trade shows. Our international HRS operations,principally located in Canada and the United Kingdom, utilize their own directsales forces. Customer leads for the products and services of these businessesare generally obtained through referrals, trade shows, product demonstrationseminars, third party resellers and direct sales efforts. We are exploringadditional cooperative arrangements with other benefits brokers and humanresource services providers. We are also seeking to sell a greater variety ofour products and services to the 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 supportedby in-house systems, with the remainder supported by third party providers. Inthe United States, we believe that Automatic Data Processing, Inc. (“ADP”)is the largest third party provider of payroll processing in terms of revenue,with Paychex, Inc. and Ceridian comprising the other two large, nationalproviders in terms of revenue. Other third party payroll and tax filingproviders are generally regional and local competitors, although larger,national providers of benefits administration and 401(k) processingservices or financial institutions may expand further into outsourced payrollprocessing. In Canada, we believe that Ceridian Canada is the second largest outsourcedpayroll services provider in terms of revenue, facing competition from othernational providers, including ADP, and local providers. In the United Kingdom,we believe that Ceridian U.K. is the second largest outsourced payrollprocessing provider in terms of revenue, competing with several other nationalproviders, including a subsidiary of ADP and a division of NorthgateInformation Solutions, and local providers. Competition in both the payrollprocessing and HRIS areas also comes from a number of large, national softwarecompanies that provide both payroll processing software for in-house processingas well as 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 markets forthese products and services are evolving.

Currently, webelieve the principal competitive factors for us in the human resourcesolutions industry are:

·       repeatableand reliable transaction processing with timely and accurate access to data;

·       servicingour customers;

·       choiceof services;

·       performance;

·       price;

·       functionality;

·       easeand flexibility of use;

·       expertisein HR processes;

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·       integratedplatforms;

·       regulatorycompliance in the delivery of products and services; and

·       datasecurity and privacy.

We believe that theability to integrate transaction processing and broader human resourcemanagement solutions with a customer’s other acquired services and in-houseapplications are increasingly important competitive factors. While we believeour businesses will be able to compete effectively in the overall humanresource solutions market, our ability to compete effectively will depend inlarge measure on our ability to provide reliable and repeatable transactionprocessing. Without attention to our core capabilities, our opportunity todeliver further value to new and existing customers will be severelyrestricted.

***Regulation***

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

***Research and Development***

We intend to continue to invest resources in ourproprietary payroll processing systems and further develop a comprehensive andfully integrated suite of employee administrative services.

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

| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(dollars in millions)**         | ** ** |
| Research and  development |       | $                                           | 20.6       |   | $ | 21.5 |   | $ | 21.7 |   |
| Percent of revenue        |       | 1.9                                         | %          | 2.0 | % | 2.3 | % |
|                           |            |                                             |            |  |  |  |  |  |  |  |

 

**Comdata**

Comdataprovides payment solutions, transaction processing and related services to itscustomers in a variety of industries such as trucking, retail, governmentservices, aviation, construction, service businesses, restaurants andhospitality. Payment solutions range from credit and debit cards, gift andloyalty cards, fleet, fuel, payroll, purchasing and travel and entertainmentcards. As a full-service merchant processor, Comdata’s platforms support bothits proprietary and branded card networks, as well as card processing for allcard types. Comdata is headquartered in the United States, processingtransactions that originate in over 21 countries worldwide. Approximately 3% ofComdata’s revenue for each of 2006, 2005 and 2004 was derived from customers outsideof the United States. Comdata’s revenue from products and services for theyears ended December 31, 2006, 2005 and 2004 was as follows:

| ** **      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------|------------|---------------------------------------------|------------|
| ** **      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **      | ** ** | **(dollars in millions)**         | ** ** |
| Revenue         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Transportation  |       | $                                           | 311.5      |   | 66.9 | % | $ | 283.1 |   | 69.2 | % | $ | 257.1 |   | 72.2 | % |
| Retail services |       | 153.8                                       |       | 33.1 | % | 125.8 |   | 30.8 | % | 98.9 |   | 27.8 | % |
| Total           |       | $                                           | 465.3      |   | 100.0 | % | $ | 408.9 |   | 100.0 | % | $ | 356.0 |   | 100.0 | % |

 

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***Products and Services; Customers***

***Transportation Services.***   Comdataprovides transaction processing, financial services and regulatory complianceservices to customers within the transportation industry, primarily tocompanies in the trucking industry. Comdata sells such services through adirect sales force located at its headquarters in Brentwood, Tennessee. Suchservices are provided to trucking companies, truck stops, and long haul (e.g.,long distance carriers) and local fleet (e.g., local delivery companies, homemaintenance companies and local and state government agencies) drivers. Comdata’sservices primarily involve the use of the Comdata Card to facilitate truckdriver transactions and to provide transaction control and trip information fortrucking firms. Comdata also markets “co-branded” cards and transactionprocessing in association with MasterCard networks.

The Comdata Card product is a payment transactionservices card with credit and debit capabilities principally designed toprovide businesses with control over payments to and spending by theiremployees. The Comdata Card allows businesses to authenticate and authorizeindividual employee purchases and provide payroll to employees. A Comdatacustomer can review reports of transactions made by its employees over theInternet, as well as request the issuance of new employee cards. The ComdataCard offers businesses the capability of performing these services on a single,customizable employee card. The Comdata Card may be customized for each individualemployee within a business. Although the Comdata Card is primarily used byComdata’s trucking customers, Comdata believes that the Comdata Card hasapplication to businesses in a variety of industries. In 2006, more than 21,000customers used the Comdata Card.

Comdata alsoprovides assistance in obtaining regulatory permits, pilot car services, andother compliance services, such as fuel tax reporting and driver log auditing,and local fueling services to its trucking company customers.

***Fleet Services.***   Comdata’sfinancial services, most commonly initiated through the use of the ComdataCard, are designed to enable truck drivers to obtain funding for purchases andcash advances at truck stops and other locations en route to theirdestination. Drivers may use the Comdata Card to purchase fuel, lodging andother approved items, obtain cash advances from ATM machines or through the useof Comchek drafts (drafts that are drawn on Comdata and payable through abank), and make direct deposits of pay, settlements (for non-employee owner-operators)or trip advances to personal bank accounts. In 2006, Comdata processedapproximately 94.6 million funds transfer transactions involving approximately$23.4 billion for its trucking customers.

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

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

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In addition to the Comdata Card, Comdata providesComchek drafts. When a truck driver makes a request at a truck stop for aComchek transaction, Comdata verifies that the driver’s company has establishedsufficient credit. Upon presentation of valid identification, the truck stopobtains an authorization number from Comdata and prints a Comchek draft. Comdatafunds the underlying transaction when the truck stop (or other payee)negotiates the draft by depositing it in its bank account. Comdata bills thetrucking company for the amount of the draft plus a portion of the service fee,and collects from the truck stop the balance of the service fee. The truckingcompany remits payment to Comdata by wire transfer, electronic transfer orcheck, typically within seven days, although customers that do not meet Comdata’scredit criteria are required to prepay their accounts. Risks associated withfraudulent or unauthorized transactions are allocated between Comdata and itscustomers based upon which party may be at fault under a specific circumstanceand based upon which party is in the better position to control or eliminatethese types of transactions. Historically the number of fraudulent orunauthorized transactions attributable to this aspect of Comdata’s business hasbeen minimal compared to the aggregate dollar amount of funds Comdata hastransferred annually. Comdata is licensed by 41 states as a seller of checks ormoney transmitter and, pursuant to these licenses, undergoes annualexaminations by several states with respect to the integrity of its fundstransfer methods and procedures.

Comdata’s regulatory compliance division assists indetermining the permits needed for a designated trip, truck and load; purchasesthose permits on behalf of the customer; and delivers them to the carrier or atruck stop where they can be picked up by the driver. Comdata also providesother regulatory compliance services, such as processing and auditing of drivertrip logs, reporting of fuel taxes, annual licensing and motor vehicleregistration verification. Vehicle escort services for oversized loads are alsoprovided.

*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 accept Comdata’s payment instruments asa method of payment pursuant to a service center agreement with Comdata.

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

*Local Fueling.***  **Comdata is a provider of fuel management andpayment systems for local transportation truck fleets. Comdata provides localfleet operators with Comdata MasterCard corporate fleet cards that offer thefleet operators transaction control and trip-related information gatheringfeatures similar to those of the Comdata card.

*Financial Services.****  ***Comdata’sfinancial services business purchases accounts receivable due to truckingcompanies from manufacturers and shippers at a discount and with recourse backto the trucking company inthe event of non-payment. This allowstrucking companies to receive payment on shipping invoices sooner than they mayotherwise receive payment from shippers. While the majority of Comdata’sfinancial services portfolio relates to trucking company operations, Comdatamay, on occasion, enter into a factoring arrangement with a business outsidethe trucking industry.

Comdata provides services to more than 21,000 longhaul and local trucking fleets with more than 1,100,000 active fuel cards. Comdataalso provides services to more than 8,500 truck stops, travel centers andrepair facilities nationwide. Contracts for these services generally range fromone to three years in duration.

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Comdata is alsopursuing fixed based operators that service private airplanes and airplanefleets. Comdata expects to provide these aviation customers with controlledspending solutions offered through the Comdata Card. Comdata will provideflight managers with flexibility, efficiency, service and control overoperations. Benefits include consolidated billing for all trip-relatedexpenses, with line-item detail, as well as the management of expendituresincluding fuel purchases, repairs, travel and entertainment, and fuel discountadministration.

***Retail Services.*****  **Comdata’s retail services division, which iscomprised of Comdata’s payment services division and Comdata Stored ValueSolutions, Inc. (formerly known as Stored Value Systems, Inc.), awholly owned subsidiary of Comdata (referred to in this report as “Comdata SVS”),provides stored value cards and employer pay cards to customers principally inthe retail, restaurant and hospitality, and service industries. Comdata’spayment services division provides pay cards used by its customers to pay theiremployees. The Comdata Card with Comchek eCash is a card-based service allowingemployers to post or load payment of wages and other payments, such as expensereimbursements, to cards issued to employees and other recipients. Cardholders,in turn, may access these funds in a number of ways, including withdrawal ofcash from ATMs, point-of-sale purchases at stores or issuance of a Comchekdraft.

Comdata SVS provides, among other services, storedvalue card programs to major retailers that are used as gift cards, gift certificates,credits for returned product, loyalty promotions and retail promotions. ComdataSVS also provides ancillary support services including card inventorymanagement and assistance in designing and supervising the production ofplastic cards. Comdata SVS believes that its cards, transaction reliability,card maintenance/inventory programs and reporting capability provide benefitsto retailers and their customers, including ease of use and controls previouslydifficult to realize. In 2006, Comdata SVS expanded its product offeringthrough the acquisition of the remaining interest in SASH Management, L.L.C.d/b/a Gift Card Solutions and HQ Gift Cards, LLC, a provider of mall gift cardprogram management services, and now provides cash cards and/or payrolldistribution services to more than 650 customers. The contracts with thesecustomers are generally three years in duration.

Comdata’s retail services division also provides acard-based funds distribution service for use by employers and others for, amongother things, expense reimbursements, payroll delivery and termination pay. Comdatamarkets this card-based funds distribution service to a variety of employers,such as temporary staffing companies, professional employment organizations,custodial companies, the restaurant and hospitality industries, and retailers,including the customers of Comdata SVS.

Through Comdata SVS, Comdata sells its private labelcash cards, electronic payroll cards and ancillary services throughout theUnited States and Canada through a direct sales force located in Louisville,Kentucky. Comdata SVS sales efforts are also being conducted to retailers andother merchants with locations in approximately 20 other countries worldwide. AllComdata SVS transaction processing is conducted in Louisville, Kentuckyregardless of the location in the world where the sale occurs or the card isused.

Comdata offers transactionprocessing services to merchants for a variety of card-based products, such astraditional bank credit and debit cards carrying the Visa or MasterCard logos. Suchtransaction processing services include transaction authorization, settlementand reporting. Comdata’s transaction processing clients are acquired throughboth direct sales and, indirectly, through third parties, such as banks andother financial institutions and independent sales organizations.

***Suppliers***

Comdata’s current businessrelies upon relationships with third-party suppliers, such as MasterCard, toeffect and support transactions, including access to the Cirrus ATM network andthe Maestro point-of-sale debit network. The ability of Comdata to continue toprovide some of its services in the manner in which it currently delivers themmay be affected by actions taken by third-party suppliers, including 

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MasterCardor other similar card associations. Comdata has applied to form a Utahindustrial bank that would likely become a direct participant in the MasterCardcredit and debit networks. This application is subject to FDIC approval, whichis currently pending.

***Competition***

The principal competitive factors relevant totransaction processing are marketing efforts, pricing, reliability of computerand communications 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 services, including First Data Corporation, T-ChekSystems, Inc., Fleet One, L.L.C., FleetCor and Wright Express Corp. Inaddition, truck stops often negotiate directly with trucking companies for adirect billing relationship. Some of Comdata’s competitors, such asTransportation Clearing House, LLC, an affiliate of Flying J, Inc., areunder common ownership with entities that operate or franchise nationwide truckstop chains. In addition, Comdata competes with truck stops and other servicecenters that offer similar products and services.

While the majority of regulatory services continue tobe performed by customers in-house, at least one other nationwide company,Xero-Fax, Inc., and several regional companies, including The PermitCompany, provide permit services similar to those provided by Comdata. Competitionin this market is influenced by price, the expertise of personnel and the easewith which permits may be ordered and received. In addition, Comdata believesthat technological advances will impact the way regulatory services aredelivered and may give rise to new competitors or change the way this serviceis offered.

Comdata believesthat it is the leading provider of transaction processing, financial servicesand regulatory compliance services to the long haul fleets and one of theleading providers to local fleets in the trucking segment of the transportationindustry. Comdata believes that 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

·       positivereputation in the transportation industry.

Comdata’s retail services division (which principallyincludes Comdata SVS) competes with a number of national companies in providingprivate label cards, including First Data Corporation, Chase PaymentechSolutions LLC, and Chockstone, Inc. Comdata believes that it is one of theleading providers of private label cards to large retailers in the UnitedStates. Comdata’s retail services division competes on the bases of breadth ofservices offered, systems, technology and price. Comdata believes that one ofthe competitive weaknesses of its retail services division is that most of itscompetitors have established relationships with many of the potential customersof Comdata’s retail services division to provide additional and unrelatedproducts and services to these customers, such as credit card processing andcheck authorization services. By providing these other services which Comdata’sretail services division does not provide, these competitors have an advantageof being able to bundle their products and services together and present themto existing customers with whom they have established relationships. Comdata 

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believes a competitiveweakness of the retail services division is that its competitors have greaterfinancial, sales and marketing resources and better brand name recognition thanComdata’s retail services division.

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

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

·       breadthof solutions offered; and

·       experience in transactionprocessing and related services providing for high quality control and reducedtime 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 Comdata 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.

***Regulation***

Many states require persons engaged in the business ofselling or issuing payment instruments, such as the Comchek draft, or in thebusiness of transmitting funds to obtain a license from the appropriate stateagency. In some states, Comdata is required to post bonds or other collateralto secure its obligations. Comdata believes that it is currently in compliancein all material respects with the regulatory requirements applicable to itsbusiness. The failure to comply with the requirements of any particular statecould significantly adversely affect Comdata’s business in that state.

***Researchand Development***

Comdata’s research and development activitiesprincipally include applications development for existing products andservices, and the new product development for private commerce solutions. Comdataanticipates a continuing need to develop applications to enhance its productsand services 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.

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

| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | ** 2006 **                        | ** ** | ** 2005 ** | ** ** | ** 2004 ** | ** ** |
| ** **                | ** ** | **(dollars in millions)**         | ** ** |
| Research and  development |       |                                        | $          | 7.5 |   |   |   | $ | 6.6 |   |   |   | $ | 4.4 |   |   |
| Percent of revenue        |       |                                        | 1.6        | % |   |   | 1.6 | % |   |   | 1.2 | % |   |

 

**Other Investmentsand Divestitures**

In addition to theArbitron spin-off, we refer you to Note 2, *“Investing Activity,”*and Note 9, *“Supplementary Data to Statements of Operations,”*to our consolidated financial statements for further information on ourinvesting and divesting activities. This information may be found in Part II,Item 8 of this report.

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**Intellectual Property**

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

We have entered intoconfidentiality agreements with most of our key 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.

**Seasonality**

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

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

**Employees**

As of January 31,2007, we employed approximately 9,579 people on a full- or part-time basis,including 7,356 full-time and 470 part-time employees of HRS, 1,535 full-timeand 121 part-time employees of Comdata, and 95 full-time and two part-timecorporate employees. None of our employees are covered by a collectivebargaining agreement.

**Backlog**

Although our businesses are typically characterized bylong-term customer relationships that result in a high level of recurringrevenue, a substantial portion of our customer contracts used by our businessescan be terminated by our customers upon relatively short notice periods,including contracts that have been extended beyond their original terms. Inaddition, orders for products and services can be terminated by our customers,and no order for one of our products or services is considered firm until thecontract is executed. The timing of the delivery of our products and servicesis largely dependent upon the customer. As such, we do not have backloginformation that can be provided for our businesses.

In our HRSbusiness, we do, however, track the estimated dollar value of a year’s worth ofproduct or service orders from our customers that have not yet been billed orinstalled. Although not a reported number, this metric is used by management asa planning tool relating to resources needed to install products and services,and a means of assessing our performance against installation timingexpectations of us and our customers.

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**Executive Officersof Registrant**

Our executive officers as of February 1, 2007are:

| Name (Age)                | ** ** | ** **                                                | ** ** | **Current Position** |
|---------------------------|------------|-----------------------------------------------------------|------------|----------------------|
| Kathryn V. Marinello (50) |       | President and Chief  Executive Officer                    |
| Perry H. Cliburn (48)     |       | Executive Vice  President, Chief Technology Officer       |
| Gary A. Krow (51)         |       | Executive Vice  President and President of Comdata        |
| Gary M. Nelson (55)       |       | Executive Vice  President, Chief Administrative Officer,  |
|                      |       | General Counsel and  Corporate Secretary                  |
| Douglas C. Neve (51)      |       | Executive Vice  President and Chief Financial Officer     |
| Michael F. Shea (41)      |       | Executive Vice  President, Quality and Service Operations |
| Kairus K. Tarapore (45)   |       | Executive Vice  President, Human Resources                |
| Randy W. Strobel (39)     |       | Vice President and  Corporate Controller                  |

 

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

Except as specifically noted, our executive officershave held the following positions with Ceridian, Ceridian’s predecessor andcertain other entities for the past five years:

Kathryn V. Marinello has served as President and ChiefExecutive Officer since October 2006. Ms. Marinello was President andChief Executive Officer of a number of divisions of General Electric Company, adiversified financial services, technology and manufacturing company, since1997, including: President and CEO of GE Fleet Services from October 2002until October 2006; and President and CEO of GE Insurance Solutions from August 1999to October 2002.

Perry H. Cliburn has served as Executive VicePresident, Chief Technology Officer since December 2006. Mr. Cliburnwas Senior Vice President and Chief Information Officer of Hewitt Associates, Inc.,a human resource outsourcing and consulting company, from April 1999 to July 2006.

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

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

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

Michael F. Shea has served as Executive Vice President,Quality and Service Operations since January 2007. Mr. Shea served invarious positions within the Commercial Finance Fleet Services division ofGeneral Electric Company prior to January 2007, including:  Senior Vice President, Operations from June 2003until January 2007; and Six Sigma Master Black Belt from July 2001until June 2003.

Kairus K. Tarapore has served as Executive VicePresident, Human Resources since December 2006. Mr. Tarapore servedin various positions with divisions of General Electric Company prior to December 2006,including:  Senior Vice President, GlobalQuality, GE Fleet Services, from November 2004 until December 2006;Vice President, HR, GE Auto Financial Services and 

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Vice President,Organization & Staffing for GE Fleet Services, from July 2002until October 2004; and HR Integration Leader, GE Fleet Services, Canada,from September 2001 until July 2002.

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

**Available Information**

Our Internet website is *http://www.ceridian.com.*You may access, free of charge, through the “Investor Relations” portion of ourwebsite, our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to such reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended, as soon as reasonably practicable after weelectronically file such material with, or furnish 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, code ofconduct and other corporate governance matters. These documents are located inthe “Corporate Governance” section of our website. Copies of our corporategovernance policies and guidelines, charters for each of our committees of theBoard of Directors, code of conduct and other corporate governance documentscontained in the Corporate Governance section of our website are available in printwithout charge to any stockholder by writing Ceridian Corporation, Attention:Corporate Secretary, 3311 East Old Shakopee Road, Minneapolis, Minnesota 55425-1640.Our Internet website and the information contained on or connected to thewebsite are not intended to be incorporated by reference into this report.

**Item 1A.**                RiskFactors

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

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

We cannot ensure that wewill be successful in developing and implementing our strategic plans for ourbusinesses or that the operational plans that have been or need to be developedto implement the strategic plans will produce the revenue, margins, earnings orsynergies that we need to be successful. In addition, these strategic plans andoperational plans need to continue to be assessed and reassessed to meet thechallenges and needs of our businesses in order for us to remain competitive.Further, the execution of the strategic plans will, to some extent, bedependent on external factors that we cannot control.

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***Economic andgovernmental factors may adversely affect our business and operating results.***

Economicconditions, trade, monetary and fiscal policies, and governmental regulationsmay substantially change, with corresponding impacts on the industries that weserve. Changing overall economic conditions could affect:

·       interestrates, with a corresponding impact on investment income from invested customerfunds which are held pending remittance to taxing authorities, customeremployees and other third parties;

·       decreasedemployment levels, as well as slowed economic conditions, could negativelyaffect wage and bonus payments, orders and the timing of product installations,and negatively impact the operating results of our HRS business;

·       fuelprices, with falling fuel prices negatively impacting Comdata’s revenue whilerising fuel prices increase the working capital requirements and subjectComdata to greater credit or bad debt risks with respect to its customers thatpurchase fuel using a Comdata payment method; and

·       levelof activity in the transportation and retail industries impacting Comdata’srevenue.

Changes in or the elimination of governmentalregulations may adversely affect our revenue and earnings and the way in whichwe conduct our business. Changes in governmental regulations are difficult topredict and could be significant. For example, the timing and amount ofremittances associated with the investment of customer funds, a reduction inthe period of time we are allowed to hold remittances as well as the amount ofsuch remittances, may decrease our revenue and earnings. As another example,the extent and type of benefits that employers are required to or may choose toprovide employees and/or the amount and type of federal or state taxes employersand employees are required to pay will affect the revenue and earningsassociated with the products or services that we may sell. A third example,Comdata is currently licensed on the state level by the banking or financialinstitutions departments of numerous states. Continued licensing by thesestates is subject to ongoing satisfaction of compliance requirements regardingsafety and soundness, including, for example, posting of surety bonds toguarantee payment of funds in transit. Changes in this regulatory environment,including the implementation of new or varying measures by the government, maysignificantly affect or change the manner in which we currently conduct some ofthe aspects of our business.

If we are unable torespond to changing economic factors and timely and appropriately comply withexisting or changed government regulations, there may be an adverse affect onour financial results and we may be subject to sanctions and the payment offines and penalties.

***Our future revenue and revenue growth will depend onour ability to retain our existing customers, sell additional products andservices to our existing customers, introduce new or enhanced products andservices and attract and retain new customers.***

Customer retention is an important factor in theamount and predictability of revenue in each of our businesses. Our ability toretain our customers depends on a number of factors, including:

·       customersatisfaction;

·       newproduct and service offerings;

·       customerservice levels;

·       price;

·       customerviability; and

·       competition.

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We expect that a portionof our anticipated future revenue growth in each of our business segments willbe derived from:

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

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

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

·       theselling of products and services to new customers; and

·       acquisitionsof complementary businesses.

Our ability to retainexisting customers, attract new customers and grow revenue will depend on avariety of factors, including:

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

·       effectivesales and marketing efforts;

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

·       thelevel of market acceptance of new products and services;

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

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

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

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

There can be no assurancethat we will achieve our revenue objectives from our up-selling efforts andselling of new products and services. The inability to up-sell our products andservices, retain existing customers, attract new customers or successfullydevelop and implement new and enhanced products and services could adverselyaffect our businesses.

***Our ability toimprove operating margins will depend on the degree to which and the speed withwhich we are able to make investments in our business to improve our businessperformance, make investments to improve the performance of our technology, andreduce operating costs.***

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

·       improvingour customer service model;

·       improvingcustomer retention;

·       continuingproduct enhancements;

·       improvingour return on information technology (“IT”) investments;

·       investingin and improving our return on process improvements;

·       consolidatingand improving efficiencies at our processing centers;

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

·       integratingacquisitions.

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The profitability of certain elements of our businesscan also vary from year to year due to either external or internal factors. Wemay not be able to improve the performance of the elements of the business thatlose money or are less profitable than others. Further, each business andoperating function requires substantial ongoing investment in maintaining andimproving infrastructure and product solutions. We may not have sufficientfinancial resources to fund all of the desired or necessary investments.

We have ongoing and continued initiatives to invest inand improve the performance of IT systems and technology based products andservices. These initiatives include:

·       standardizingthe IT development process;

·       enhancingdata processing systems and/or software that process customer data;

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

·       providingscalability; and

·       upgradingour financial systems.

We cannot assure you that our efforts will besuccessful and that the amount we invest in this process will improve theperformance of our technology or improve our ability to compete in the marketswe serve. Problems or delays with the installation or initial operation of newor enhanced systems could disrupt or increase costs in connection with ourdelivery of services and with our operations planning, financial reporting andmanagement. If these initiatives are unsuccessful or less successful thanplanned, or the level of investment needs to be increased, our business and operatingresults could be adversely affected.

We have ongoing and continued initiatives to reduceour overall cost structure compared to our revenues, or otherwise improveproductivity. These initiatives include:

·       installingnew products and services for customers;

·       rationalizingour staff and locations;

·       consolidatingvarious functions, including administrative functions, eliminating duplicateoperations and consolidating facilities; and

·       outsourcingor off-shoring various operating and administrative functions, to the extent wedeem appropriate.

We may face delays ordifficulties in implementing product, process and system improvements whichcould adversely affect the timing or effectiveness of cost reduction and marginimprovement efforts in our business and our ability to successfully compete inthe markets we serve.

***Any breach of our IT security or loss of customer datacould adversely affect our businesses.***

Any security breach in ourbusiness processes and/or systems has the potential to impact our customerinformation and our financial reporting capabilities which could result in thepotential loss of business and our ability to accurately report financialresults. In addition, any issues of data privacy as it relates to unauthorizedaccess to or loss of customer and/or employee information could result in thepotential loss of business, damage to our market reputation, litigation andregulatory investigation and penalties. We cannot assure you that our continuedinvestment in the security of our IT systems, continued efforts to improve thecontrols within our IT systems, business processes improvements, and theenhancements to our culture of information security will prevent attempts tobreach our security or unauthorized access to confidential information. If oursecurity is breached or confidential information accessed, our business andoperating results could be adversely affected.

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***In the event of a catastrophic occurrence, our abilityto protect client data and maintain operations may be impaired.***

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

***The failure of our HRS business to comply withapplicable laws could result in substantial taxes, penalties and liabilitiesthat could adversely affect our business.***

Our HRS customers remit employer and employee taxfunds to our HRS businesses. Our HRS businesses process the data received fromits customers and remit the funds along with a tax return to the appropriatetaxing authorities when due. Under various service agreements with itscustomers, our HRS businesses assume financial responsibility for the paymentof the taxes, penalties and liabilities assessed against its customers arisingout of the failure of our HRS businesses to fulfill its obligations under itsagreements with these customers, unless these taxes, penalties or liabilitiesare attributable to the customer’s failure to comply with the terms of theagreement the customer has with our HRS businesses. These taxes, penalties andliabilities could, in some cases, be substantial and could adversely affect itsbusiness and operating results. Additionally, the failure of our HRS businessesto fulfill its obligations under its customer agreements could adversely affectour reputation, its relationship with our customers and its ability to gain newcustomers. Mistakes may occur in connection with this service. Our HRSbusinesses and its customers may be subject to penalties imposed by taxauthorities for late filings or underpayment of taxes.

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

As a result of work-lifeand assistance programs currently provided to the Federal Government, we arerequired to comply with all applicable Federal contracting regulations.Non-compliance with required reporting and performance activities subjects usto penalties and legal liabilities imposed by regulatory authorities.

***Litigation and governmental inquiries, investigationsand proceedings may adversely affect our financial results.***

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

From time to time, we have had inquiries fromregulatory bodies relating to the operation of our business. It has been ourpractice to cooperate with such inquiries. Such inquiries may result in variousaudits, reviews and investigations. For example, on January 22, 2004, wefiled 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 

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order of investigation. InFebruary 2004, we provided documents responsive to the SEC. In July 2004,we advised the SEC of the investigation being directed by the Audit Committeeof our Board of Directors. We kept the SEC advised on a regular basis of theAudit Committee’s investigation. On December 10, 2004, we received afurther formal confidential document request from the SEC. The second requesthas broadened the areas of inquiry to include, among other things, our restatements,revenue recognition, capitalization, expense recognition, how we respond to anyinternal ethics complaints, and our accounting policies and procedures. Theformal document requests state that the SEC investigation is a non-public,fact-finding inquiry, and that the investigation and document requests do notmean that the SEC has concluded that we have violated any securities laws. Asis common in SEC investigations, on June 15, 2005, we received a subpoenafrom the SEC seeking certain additional documents that relate to some of theareas of inquiry identified above. The subpoena is consistent withinvestigations of this type and was anticipated. On January 8, 2007, wereceived a second subpoena seeking additional documents relating to the areasof inquiry identified above. We continue to fully cooperate with the SEC.

An adverse outcome of this SEC investigation or otherinquiries from regulatory bodies could have a material adverse effect on us andresult in:

·       theinstitution of administrative or civil proceedings;

·       sanctionsand the payment of fines and penalties;

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

·       changesin personnel;

·       shareholderlawsuits; and

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

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

Since August 6, 2004, six shareholder lawsuitshave been filed against Ceridian Corporation and certain of our formerexecutive officers in United States District Court, District of Minnesota. Thoselawsuits have been consolidated into a single case captioned *In re Ceridian Corporation Securities**Litigation*, Case No. 04-cv-03704PJS-RLE. This consolidated action purports to be a class action filed on behalfof all persons who purchased or otherwise acquired our common stock between April 17,2003 through and including March 17, 2005, and allege claims against CeridianCorporation and certain of our former executive officers under Sections 10(b) and20(a) of the Securities Exchange Act of 1934. Plaintiffs challenge theaccuracy of certain public disclosures made by us regarding our financialperformance, and in particular our accounting for revenue and expenses,accounting for capitalization, accounting for derivatives, accounting forlong-term leases, and accounting for trademarks. Plaintiffs allege, in essence,that our series of restatements constituted a violation of Section 10(b) and20(a) of the Securities Exchange Act of 1934. On May 25, 2006, theUnited States District Court, District of Minnesota granted our motion todismiss the consolidated class action complaint and gave leave to theplaintiffs to file an amended complaint. An amended complaint was filed on July 14,2006. We have made a motion to dismiss the amended consolidated class action.

Since August 13,2004, two shareholders have filed derivative suits on behalf of Ceridian Corporationagainst Ceridian Corporation, as nominal defendant, certain current and formerdirectors and certain of our former 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 ofCeridian Corporation v. Ronald L. Turner, et al.*, both served August 19,2004. These complaints have been consolidated into a single lawsuit. Theconsolidated lawsuit alleges that the our Board of Directors as of August 2004 andcertain of our former executive officers breached fiduciary 

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duties,through abuse of control, gross mismanagement, waste of corporate assets andunjust enrichment. The consolidated lawsuit, which is currently stayed, relieson the same factual allegations as the purported class action shareholderlawsuit described above.

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

One of our growth strategies for each of our businesssegments is to make acquisitions of and investments in complementarybusinesses, products and technologies that will enable us to add products andservices for our core customer base and for adjacent markets, and to expandeach of our businesses geographically. Our ability to make these acquisitionsand investments will depend on a number of factors, including:

·       theavailability of suitable acquisition candidates and investments at acceptablecosts;

·       completefinancial information to make informed investment decisions;

·       ourability to compete effectively for these acquisition candidates andinvestments;

·       theavailability of capital to complete these acquisitions and investments; and

·       theproper allocation of resources to value, negotiate, acquire and integrate theacquisition or investment into our business segments.

A number of these factors are outside our control. Inaddition, implementation of this strategy entails a number of other risks,including:

·       inaccurateassessment of undisclosed liabilities;

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

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

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

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

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

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

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

***Our success is dependent on the retention andacquisition of talented people and the skills and abilities of our managementteam and key personnel.***

We must continue to attract, hire, train, develop andretain talented people to fill the key roles within the organization. We mustprovide challenging roles, with accountability and commensurate rewards, toattract and retain the appropriate individuals to the organization. If we areunable to attract and retain 

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talented employees whowork effectively as members of teams, it could impact our ability to deliverthe expected results from our operations.

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

***Our ability to remain competitive depends on our speedto market with new or enhanced technology.***

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

***The markets we serve are highly competitive and mayattract new competitors or cause current competitors to focus more on thesemarkets, which could adversely affect our business.***

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

***Our U.S. HRS business is subject to the risksassociated with contracting with the government.***

Our U.S. HRS business provides certain services tovarious government agencies or parties, and therefore is exposed to risksassociated with government contracting which could have a material adverseeffect on our business.

Although we generally seek multi-year contracts fromthe government, funds are generally appropriated on a fiscal year basis eventhough the contract may continue for several years. Consequently, governmentcontracts are often only partially funded initially and additional funds arecommitted only with further appropriations. The termination of funding for aparticular government contract would result in a loss of anticipated futurerevenues attributable to that program which could have a negative impact on ouroperations.

Generally, government contracts contain provisionspermitting the government to terminate the contract at its convenience, inwhole or in part, without prior notice, and to provide for payment ofcompensation only for work done and commitments made at the time oftermination. We cannot guarantee that any of our government contracts will notbe terminated under these circumstances.

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As a result of contracting with the government, we maybe subject to audits, cost reviews and investigations by contracting oversightagencies. During the course of an audit, the oversight agency may disallowcosts. Such cost disallowances may result in adjustments to previously reportedrevenues. In addition, our failure to comply with the terms of one or more ofour government contracts, other government agreements, or governmentregulations and statutes could result in our being suspended or barred from futuregovernment projects for a significant period of time and possible civil orcriminal fines and penalties and the risk of public scrutiny of our performancewhich could have a material adverse effect on our business.

We generally obtain government contracts through acompetitive bidding process. We cannot provide assurance that we will wincompetitively awarded contracts and that such contracts will be profitable. Inaddition, if we failed to obtain a renewal or follow-on contract as to aparticular government contract, there could be an adverse effect on ourbusiness. For example, we currently provide customized work-life and employeeassistance services to U.S. Armed Services personnel under a contract with theU.S. Department of Defense. We have received a series of short-term contractextensions since this contract expired in early 2006. We expect to continueoperating under short-term extensions until the new contract is awarded. Theterm of the current contract, as extended, is through February 28, 2007. OnMay 11, 2006, the U.S. Department of Defense issued a request for proposalto enter into a long-term contract. We timely responded to the request forproposal.

Furthermore, governmentcontracts may be subject to protest or challenge by unsuccessful bidders or totermination, reduction or modification in the event of changes in governmentrequirements, reductions in federal spending or other factors. For example, in September 2006we were awarded a contract to provide employee assistance program services toFederal Occupational Health, a division of the U.S. Department of Health andHuman Services, Program Support Center. The contract was suspended in October whena protest to the contract award was filed by an unsuccessful bidder. In January 2007,we were notified by the government that the original contract value was reducedbecause one major government agency is no longer part of the contract. In February 2007,at the request of the government, we submitted a revised business proposal, andare awaiting a response on a revised contract award.

***We are subject to risks related to our internationaloperations, which may adversely affect our operating results.***

Approximately 25.2%of HRS revenue in 2006 was obtained from our international operations. OurCeridian Canada operations provide certain HRS services for our Canadiancustomers, and our Ceridian U.K. subsidiary primarily provides certain HRSservices in the United Kingdom. We are beginning to expand our internationalHRS business into other countries by engaging a partner within a country toprovide us with payroll administration and processing services for thatcountry. Comdata also has operations in Canada, and is expanding both itstransportation and retail businesses internationally. Approximately 3% ofComdata’s revenue in 2006 was derived from customers outside of the UnitedStates. In addition to the risks otherwise described herein, internationaloperations are subject to further additional risks that could adversely affectthose operations or our business as a whole, including:

·       costsof customizing products and services for foreign customers;

·       difficultiesin managing and staffing international operations;

·       difficultieswith or inability to engage global partners;

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

·       longersales and payment cycles;

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

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

·       exposureto local economic and political conditions; and

·       unfavorablecurrency exchange rates.

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

***Our $250 million revolving credit facility and $150million Comdata receivables securitization facility may restrict our operatingflexibility.***

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

·       sellassets;

·       incurmore indebtedness;

·       grantor incur liens on our assets;

·       makeinvestments or acquisitions;

·       enterinto leases or assume contingent obligations;

·       engagein mergers or consolidations; and

·       engagein transactions with our affiliates.

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

***Ourbusiness and results of operations are dependent on several vendors andsuppliers, the loss of whom could adversely affect our consolidated results ofoperations.***

Our business is dependenton several vendors and suppliers, the loss of whom could adversely affect ourconsolidated results of operations. In particular, Comdata’s current businessrelies upon its relationships with third party suppliers, such as MasterCard,to effect and support transactions, including access to the Cirrus ATM networkand the Maestro point-of-sale debit network. The ability of Comdata to continueto provide some of its services in the manner in which it currently deliversthem may be affected by actions taken by third party suppliers, includingMasterCard or other similar card associations. Comdata’s application to form aUtah industrial bank that would likely become a direct participant in theMasterCard credit and debit networks is subject to FDIC approval, which iscurrently pending and may not be approved. Any adverse change in Comdata’srelationship with these vendors or Comdata’s inability to 

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timelyand effectively establish an industrial bank or find other timely and effectivealternatives to these vendor relationships could likely adversely affectComdata’s business and results of operations and could adversely affect ourconsolidated results of operations as well.

***There may be a contested electionfor directors at our 2007 annual meeting of stockholders, which may bedisruptive and impose costs and expenses.***

On January 23, 2007,Pershing Square Capital Management, L.P., a Ceridian stockholder, submitted anotice to us proposing to nominate eight individuals to stand for election toour board of directors at our 2007 annual meeting of stockholders, inopposition to the nominees to be proposed by our board.  Contested elections for directors can betime-consuming and expensive, and can divert company resources and managementattention.  In addition, contestedelections can create uncertainty among employees and other companyconstituencies.  We cannot predict theoutcome or impact on us of such a contested election.

**Item 1B.**               UnresolvedStaff Comments.

None.

**Item2.**                        Properties

Our principal executiveoffices are located at 3311 East Old Shakopee Road, Minneapolis, Minnesota55425. As of February 1, 2007, the principal computer and officefacilities used in our businesses were located in the metropolitan areas ofMinneapolis, Minnesota; Atlanta, Georgia; Los Angeles, California; Chicago,Illinois; St. Louis, Missouri; Louisville, Kentucky; Raleigh, NorthCarolina; Nashville, Tennessee; Dallas, Texas; El Paso, Texas;St. Petersburg, Florida; Philadelphia, Pennsylvania; in London, Manchesterand Rickmansworth, England; in Winnipeg, Manitoba, St. Laurent, Quebec andMarkham, Ontario, Canada; and in Ebene, Mauritius.

The following tablesummarizes the usage and location of our facilities as of February 1,2007:

**Facilities(in thousands of square feet)**

| ** **                                | ** ** | **U.S.**   | ** ** | **Non-U.S.** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|------------|------------|--------------|------------|-----------|------------|
| **Type of Property Interest**             |       |       |       |         |       |      |       |   |   |
| Owned                                     |       | 388        |       |         | —     |      |       | 388 |   |
| Leased                                    |       | 1,729      |       |         | 490        |      |       | 2,219 |   |
| Total                                     |       | 2,117      |       |         | 490        |      |       | 2,607 |   |
| **Property Interest by Segment**          | ** ** | ** ** | ** ** |         |       |      | ** ** | ** ** | ** ** |
| HRS                                       |       | 1,648      |       |         | 480        |      |       | 2,128 |   |
| Comdata                                   |       | 399        |       |         | 10         |      |       | 409 |   |
| Corporate                                 |       | 70         |       |         | —     |      |       | 70 |   |
| Total                                     |       | 2,117      |       |         | 490        |      |       | 2,607 |   |
| **Utilization of Property**               | ** ** | ** ** | ** ** |         |       |      | ** ** | ** ** | ** ** |
| Office, Computer  Center & Other |       | 2,081      |       |         | 490        |      |       | 2,571 |   |
| Leased or Subleased to  Others            |       | 36         |       |         | —     |      |       | 36 |   |
| Total                                     |       | 2,117      |       |         | 490        |      |       | 2,607 |   |

 

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

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

**Item3.**                        LegalProceedings

We are subject to claims and a number of judicial andadministrative proceedings considered normal in the course of our current andpast operations, including employment-related disputes, contract disputes,intellectual property disputes, government audits and proceedings, customerdisputes, and tort claims. In some proceedings, the claimant seeks damages aswell as other relief, which, if granted, would require substantial expenditureson 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 or established 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 Action**

Since August 6, 2004, six shareholder lawsuitshave been filed against Ceridian Corporation and certain of our formerexecutive officers in United States District Court, District of Minnesota. Thoselawsuits have been consolidated into a single case captioned *In re Ceridian Corporation Securities**Litigation*, Case No. 04-cv-03704PJS-RLE.  This consolidated actionpurports to be a class action filed on behalf of all persons who purchased orotherwise acquired our common stock between April 17, 2003 through andincluding March 17, 2005, and allege claims against Ceridian Corporation andcertain of our former executive officers under Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934. Plaintiffs challenge the accuracy ofcertain public disclosures made by us regarding our financial performance, andin particular our accounting for revenue and expenses, accounting forcapitalization, accounting for derivatives, accounting for long-term leases,and accounting for trademarks. Plaintiffs allege, in essence, that our seriesof restatements constituted a violation of Section 10(b) and 20(a) ofthe Securities Exchange Act of 1934. On May 25, 2006, the United StatesDistrict Court, District of Minnesota granted our motion to dismiss theconsolidated class action complaint and gave leave to the plaintiffs to file anamended complaint. An amended complaint was filed on July 14, 2006. Wehave made a motion to dismiss the amended consolidated class action.

We believe these claimsare without merit and we intend to vigorously defend our position in thisaction. We cannot estimate the possible loss or range of loss from this matter.

**Derivative Action**

Since August 13, 2004, two shareholders havefiled derivative suits on behalf of Ceridian Corporation against CeridianCorporation, as nominal defendant, certain current and former directors andcertain of our former executive officers in United States District Court,District of Minnesota. *James Park, DerivativelyOn Behalf of Ceridian Corporation v. Ronald L. Turner, et al.*,and *Anthony Santiamo, Derivatively On Behalf ofCeridian Corporation v. Ronald L. Turner, et al.*, both served August 19,2004. These complaints have been consolidated into a single lawsuit. Theconsolidated lawsuit alleges that our 

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Board of Directors as ofAugust 2004 and certain of our former executive officers breached fiduciaryduties, through abuse of control, gross mismanagement, waste of corporateassets and unjust enrichment. The consolidated lawsuit, which is currentlystayed, relies on the same factual allegations as the purported class actionshareholder lawsuit described above.

We intend to appropriatelydefend our position in this action. We cannot estimate the possible loss orrange of loss from this matter.

**SEC Investigation**

On January 22, 2004,we filed a Current Report on Form 8-K, under Item 5, stating that weannounced that we are responding to a document request from the Securities andExchange Commission, and that we have been advised that the SEC has issued aformal order of investigation. In February 2004, we provided documentsresponsive to the SEC. In July 2004, we advised the SEC of theinvestigation being directed by the Audit Committee of our Board of Directors. Wekept the SEC advised on a regular basis of the Audit Committee’s investigation.On December 10, 2004, we received a further formal confidential document requestfrom the SEC. The second request has broadened the areas of inquiry to include,among other things, our restatements, revenue recognition, capitalization,expense recognition, how we respond to any internal ethics complaints, and our accountingpolicies and procedures. The formal document requests state that the SECinvestigation is a non-public, fact-finding inquiry, and that the investigationand document requests do not mean that the SEC has concluded that we haveviolated any securities laws. As is common in SEC investigations, on June 15,2005, we received a subpoena from the SEC seeking certain additional documentsthat relate to some of the areas of inquiry identified above. The subpoena isconsistent with investigations of this type and was anticipated. On January 8,2007, we received a second subpoena seeking additional documents relating tothe areas of inquiry identified above. We continue to fully cooperate with theSEC.

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

No matters were submittedto a vote of our stockholders during the fourth quarter of 2006.

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**PART II**

**Item 5.**                        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 February 1, 2007 was 10,941. We have not declared or paidany cash dividends on our common stock since our inception and our Board of Directorspresently intends to retain all earnings for use in the business for theforeseeable future. The transfer agent and registrar for our common stock isthe 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, 2006 and 2005.

| **2006** | ** ** | ** ** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
|----------|------------|------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| High     |       | $          | 26.00      |   | $          | 25.75  |       | $      | 24.54      |   | $          | 28.99 |   |
| Low      |       | 23.51      |       | 23.04  |       | 21.76  |       | 22.18  |       |
|          |            |            |            |        |            |        |            |        |            |        |            |  |  |  |  |

 

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

 

The table belowsets forth the information with respect to purchases made by or on behalf ofCeridian of our common stock during the three months ended December 31,2006.

| Period                  | ** ** | ** ** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced  Plans or Programs (1)** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Plans or Programs(1)** | ** ** |
|-------------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Month #1                |       |       | 200,000    |                                                 |       |                                             | $          | 23.15                                                                                                                                         |       |                                                                                                                                       |       | 200,000 |   |   |   | 4,009,250 |   |   |
| (October 1, 2006-  |       |       |       |                                                 |       |                                             |       |                                                                                                                                          |       |                                                                                                                                       |       |   |   |   |   |   |   |
| October 31, 2006)  |       |       |       |                                                 |       |                                             |       |                                                                                                                                          |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Month #2                |       |       | 1,341,700  |                                                 |       |                                             | $          | 24.63                                                                                                                                         |       |                                                                                                                                       |       | 1,341,700 |   |   |   | 2,667,550 |   |   |
| (November 1, 2006- |       |       |       |                                                 |       |                                             |       |                                                                                                                                          |       |                                                                                                                                       |       |   |   |   |   |   |   |
| November 30, 2006) |       |       |       |                                                 |       |                                             |       |                                                                                                                                          |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Month #3                |       |       | 105,941    | (2)                                                  |       |                                             | $          | 24.54                                                                                                                                         |       |                                                                                                                                       |       | 100,000 |   |   |   | 2,567,550 |   |   |
| (December 1, 2006- |       |       |       |                                                 |       |                                             |       |                                                                                                                                          |       |                                                                                                                                       |       |   |   |   |   |   |   |
| December 31, 2006) |       |       |       |                                                 |       |                                             |       |                                                                                                                                          |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Total:                  |       |       | 1,647,641  |                                                 |       |                                             | $          | 24.44                                                                                                                                         |       |                                                                                                                                       |       | 1,641,700 |   |   |   | 2,567,550 |   |   |

 

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(1)          On July 27, 2005,our Board of Directors authorized Ceridian to repurchase up to 20,000,000additional shares of our common stock. We disclosed this increase in therepurchase program in a press release on July 28, 2005. The repurchaseprogram is being effected from time to time, depending on market conditions andother factors, through open market purchases and privately negotiatedtransactions. The total remaining authorization under the repurchase programwas 2,567,550 shares as of December 31, 2006. The repurchase program hasno set expiration or termination date.

(2)          5,941 shares werereturned from the Ceridian Corporation Deferred Compensation Plan.

We refer you to Part III, Item 12 of this report for informationabout our securities that may be issued under our equity compensation plans.

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The graph below comparesthe cumulative total return from December 31, 2001 to December 31,2006 for our common stock, the S&P 500 Index and our peer group index ofdata services companies aligned to our HRS and Comdata business segments. Thepeer group index of data services companies, weighted for marketcapitalization, consists of Automatic Data Processing, Inc.; Bisys Group, Inc.;Computer Sciences Corporation; Concord EFS, Inc. (prior to February 26,2004, when it was acquired by First Data Corporation); DST Systems, Inc.;Equifax, Inc.; First Data Corporation; Fiserv, Inc.; and Paychex, Inc.The graph assumes the investment of $100 in each of our common stock, theS&P 500 Index and our peer group index on December 31, 2001, and thereinvestment of all dividends as and when distributed.

**COMPARISON OFCUMULATIVE TOTAL RETURN(CERIDIAN, THE S&P 500 INDEX AND THE PEER GROUP INDEX)**

| ** **            | ** ** | **Years Ending** | ** ** |
|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2001**              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Ceridian  Corporation |       | $                     | 100.00     |   | $ | 76.91 |   | $ | 111.68 |   | $ | 97.49 |   | $ | 132.53 |   | $ | 149.23 |   |
| S&P 500 Index     |       | 100.00                |       | 77.90 |   | 100.25 |   | 111.15 |   | 116.61 |   | 135.03 |   |
| Peer Group Index      |       | 100.00                |       | 73.25 |   | 82.73 |   | 89.45 |   | 93.73 |   | 101.16 |   |
|                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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**Item 6.**                        SelectedFinancial Data

The selected consolidated historical financialinformation set forth below should be read along with Part II, Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour audited consolidated financial statements included in Part II, Item 8,“Financial Statements and Supplementary Data” of this report.

(Dollars in millions, except per share data)

| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Revenue**                                     |       | $                                           | 1,565.1    |   | $ | 1,459.0 |   | $ | 1,320.4 |   | $ | 1,213.9 |   | $ | 1,160.3 |   |
| **Net earnings**                                |       | $                                           | 173.6      |   | $ | 127.9 |   | $ | 36.9 |   | $ | 98.8 |   | $ | 111.5 |   |
| **Earnings Per Common Share**                   |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | $                                           | 1.22       |   | $ | 0.87 |   | $ | 0.25 |   | $ | 0.66 |   | $ | 0.75 |   |
| Diluted                                         |       | $                                           | 1.20       |   | $ | 0.86 |   | $ | 0.24 |   | $ | 0.66 |   | $ | 0.74 |   |
| **Shares  used in calculations (in thousands)** |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | 141,882                                     |       | 146,935 |   | 149,074 |   | 148,634 |   | 148,029 |   |
| Diluted                                         |       | 144,531                                     |       | 148,633 |   | 151,079 |   | 150,197 |   | 149,633 |   |
| **Balance Sheet Data at end of year**           |       |                                        |       |   |   |   |   |   |   |   |   |
| Working capital                                 |       | $                                           | 386.7      |   | $ | 401.3 |   | $ | 345.0 |   | $ | 302.6 |   | $ | 246.6 |   |
| Total assets before customer funds              |       | 2,341.0                                     |       | 2,312.2 |   | 2,129.6 |   | 2,053.4 |   | 2,025.7 |   |
| Customer funds                                  |       | 4,593.4                                     |       | 4,341.2 |   | 4,096.0 |   | 3,152.7 |   | 2,446.6 |   |
| Total assets                                    |       | 6,934.4                                     |       | 6,653.4 |   | 6,225.6 |   | 5,206.1 |   | 4,472.3 |   |
| Total debt and capital lease obligations        |       | 100.5                                       |       | 106.5 |   | 100.7 |   | 163.5 |   | 193.5 |   |
| Stockholders’ equity                       |       | $                                           | 1,371.2    |   | $ | 1,291.8 |   | $ | 1,295.7 |   | $ | 1,245.2 |   | $ | 1,102.3 |   |
| **Number of Employees at end of year**          | ** ** | 9,538                                       |       | 9,633 |   | 9,517 |   | 9,349 |   | 9,412 | ** ** |

 

We have reclassifiedcertain prior year amounts to conform to the current year’s presentation. Thesereclassifications had no effect on the previously reported consolidated netearnings or stockholders’ equity.

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

The following discussionshould be read in conjunction with Item 1A. “Risk Factors” and 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 report. Any reference to a “Note” inthis discussion relates to the accompanying notes to the consolidated financialstatements unless otherwise indicated. All dollars in the following discussionare in millions except per share amounts.

**Overview**

Our human resource solutions (“HRS”) business segmentenables customers to outsource a broad range of employment processes, such aspayroll, tax filing, human resource information systems, employee self-service,time and labor management, benefits administration, employee assistance andwork-life programs, recruitment and applicant screening, and post-employmenthealth insurance portability compliance. We have HRS operations primarily inthe United States, Canada and the United Kingdom. Our Comdata subsidiary (whichwe refer to in this report as “Comdata”) provides transaction processing,financial services and regulatory compliance services primarily to thetransportation and retail industries. Comdata’s products and services includepayment processing and the issuance of credit, debit and stored 

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value cards. Comdata’soperations are located primarily in the United States. Our businesses are morefully described in Part I, Item 1, “Business” and in Note 13, “SegmentData.”

A number of eventsor transactions occurred during the period covered by this discussion that hada significant effect on the year-to-year comparisons of our financial conditionand performance, including:

·       *Adoption of SFAS 123R.  *The comparison of cost ofrevenue, selling, general and administrative (“SG&A”), and research anddevelopment expense for 2006 to 2005 was significantly affected by adoption ofStatement of Financial Accounting Standards (“SFAS”) 123R, “Share-BasedPayment.” The principal effect of SFAS 123R was to require the inclusion in ourearnings of compensation expense for employee services obtained throughstock-based payment transactions that previously were only reported as adisclosure in a note to our consolidated financial statements. Total costs andexpenses for stock-based compensation in 2006 equaled $21.0 compared to $2.5and $2.4 in 2005 and 2004, respectively. The adoption of this pronouncement isdiscussed further in Note 8, “Stock-Based Compensation Plans.”

·       *Income tax matters.  *In 2006, the expiration of thestatute of limitations on an international tax contingency and a Canadian taxrate reduction resulted in a reduction in our income tax expense of $8.6 and$2.8, respectively. During 2005, we reduced our income tax provision by $24.5due primarily to the settlement of specific tax matters and the expiration ofthe statute of limitations in various jurisdictions. In addition, in 2005 werepatriated $130.3 of accumulated earnings from Ceridian Canada under theAmerican Jobs Creation Act of 2004, resulting in an additional tax expense of$5.2. During 2004, we reduced our tax by $16.3 related to tax settlementsand $7.0 related to a valuation allowance realization partially offset byincreased tax expense of $12.3 for a proposed tax adjustment on internationalearnings.

·       *Phase-out of CobraServ trademark.  *The comparison ofSG&A expense for 2005 to 2004 was affected by the abandonment of theCobraServ trademark. The CobraServ trademark was capitalized as part of our1999 acquisition of our benefits administration services business. In 2004, theCobraServ trademark was phased out of operation. As part of this abandonment,we accelerated the amortization of the remaining net book value of $42.6 in2004. This amortization is reported in SG&A expense in the HRS operationsfor the year ended December 31, 2004.

·       *Sale of ourSourceWeb payroll platform and the reorganization within our U.S. HRS payrollprocessing and tax filing operations.  *The sale on December 31,2004 of certain customer relationships and other assets associated with ourSourceWeb payroll platform (“SourceWeb Assets”) resulted in a 2004 charge toearnings of $28.5. The elimination of the direct costs associated with this productoffering and the benefits of the reorganization within our U.S. HRS payrollprocessing and tax filing operations significantly improved the comparison ofcosts and expenses for 2005 to 2004.

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**Results of Operations2006 Compared to 2005**

**Statementsof Operations**

| ** **                                  | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **2006**   | ** ** | **2005**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                                     |       | $          | 1,565.1    |                     | $          | 1,459.0                    |       | 106.1 |   | 7.3 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                             |       | 843.0      |       | 785.2                    |       | 57.8                       |       | 7.4 |   | 54.9 |   | 54.8 |   |
| SG&A expense                            |       | 450.0      |       | 458.1                    |       | (8.1                       | )          | (1.7 | ) | 28.7 |   | 31.4 |   |
| Research and  development (R&D) expense |       | 28.1       |       | 28.1                     |       | 0.0                        |       | (0.2 | ) | 1.8 |   | 1.9 |   |
| Loss on  derivative instruments             |       | 2.7        |       | 11.6                     |       | (8.9                       | )          | (76.4 | ) | 0.2 |   | 0.8 |   |
| Other (income)  expense, net                |       | (10.5      | )          | 4.5                      |       | (15.0                      | )          | (330.6 | ) | (0.7 | ) | 0.3 |   |
| Interest income                             |       | (13.5      | )          | (7.8                     | )          | (5.7                       | )          | 71.8 |   | (0.9 | ) | (0.5 | ) |
| Interest expense                            |       | 6.0        |       | 5.5                      |       | 0.5                        |       | 7.3 |   | 0.4 |   | 0.4 |   |
| Total costs and  expenses                   |       | 1,305.8    |       | 1,285.2                  |       | 20.6                       |       | 1.6 |   | 83.4 |   | 88.1 |   |
| Earnings before  income taxes               |       | 259.3      |       | 173.8                    |       | 85.5                       |       | 49.2 |   | 16.6 |   | 11.9 |   |
| Income tax  provision                       |       | 85.7       |       | 45.9                     |       | 39.8                       |       | 86.8 |   | 5.5 |   | 3.1 |   |
| Net earnings                                |       | $          | 173.6      |                     | $          | 127.9                      |       | 45.7 |   | 35.7 |   | 11.1 |   | 8.8 |   |
| Diluted earnings per  common share          |       | $          | 1.20       |                     | $          | 0.86                       |       | 0.34 |   | 39.5 |   | NM |   | NM |   |

 

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*NM represents comparisonsthat are not meaningful to this analysis.

***Consolidated Results—Overview***

Consolidated revenue increased $106.1, or 7.3%, to$1,565.1 in 2006 from $1,459.0 in 2005. The HRS business segment revenueincreased $49.7 in 2006 primarily due to higher interest income on investedcustomer funds resulting from higher interest rates and increased customerfloat balances, higher customer employment levels, the strengthening of theCanadian dollar against the U.S. dollar, and increased customer demandpartially offset by incremental revenue deferrals. Our Comdata business segmentrevenue increased $56.4****in 2006 due tohigher customer demand, the benefit of higher fuel prices and the impact ofprice increases. Results for our HRS and Comdata segments are discussed belowunder “Business Segment Results.”

Cost of revenue as a percent of revenue increasedslightly to 54.9% in 2006 from 54.8% in 2005. This included increased costs inthe HRS segment related to our government contracts and an increase instock-based compensation expense, offset by increased interest income oninvested customer funds without significant incremental costs and reduced coststhrough reorganization efforts principally in our HRS segment.

SG&A expense decreased $8.1, or 1.7%, to $450.0 in2006 from $458.1 in 2005. This decrease was primarily due to cost savingsresulting through reorganization efforts in our HRS segment, reductions inmedical and postretirement expenses and lowered pension expense primarily dueto the pension remeasurement in 2006. These expense reductions were partiallyoffset by increased stock-based compensation expense and general expenseincreases.

R&D expense remained flat to last year at $28.1. Externalconsulting costs were lower offset by increases in internal cost and increasedstock-based compensation.

In 2006, the loss on derivative instruments amountedto $2.7****in 2006 compared to a loss of $11.6 in2005. The decreased loss included the impact of a $2.3 loss from the sale ofour interest rate derivative instruments in February 2005 while theremaining reduction of $6.6 million resulted from****agreater increase in diesel fuel futures prices in 2005 compared to 2006.

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Other (income) expense, net for 2006 primarily relatesto gain on the sale of marketable securities, sale of other assets, and gainfrom the settlement of a lawsuit. Other (income) expense, net in 2005 resultedfrom asset impairments, partially offset by gain on sale of marketablesecurities and other assets.

Interest income in 2006 increased $5.7 to $13.5compared to $7.8 in 2005. The increase was driven by a higher average level ofcash and equivalents and higher interest rates. Interest expense increased $0.5in 2006 compared to 2005 primarily driven by higher average interest rates.

Income taxes increased$39.8 to $85.7 in 2006 compared to $45.9 in 2005. Our effective tax rate for2006 was 33.0% compared to 26.4% for 2005. The effective tax rate for 2006 wasfavorably impacted by the expiration of the statute of limitations on aninternational tax contingency and a Canadian tax rate reduction. The statuteexpiration resulted in an $8.6 decrease in income tax expense. The Canadian taxrate change impacted our deferred income tax balance and reduced income taxexpense by $2.8. The effective rate and income tax expense for 2005 werefavorably impacted by a settlement of a tax matter that reduced income taxexpense by $13.0, the settlement of an audit of a former affiliate thatresolved our potential obligation which reduced our tax expense by $5.9, theexpiration of the statute of limitations in various jurisdictions and otheradjustments to our contingent tax liabilities that reduced income tax expenseby $5.6. In addition, in 2005 we repatriated foreign earnings from CeridianCanada under the American Jobs Creation Act of 2004 resulting in additional taxexpense of $5.2.

***Business Segment Results***

Our business is classifiedinto two reportable segments; HRS and Comdata. We measure business segmentresults by reference to earnings before interest and taxes (“EBIT”) becauseinterest income and interest expense are not allocated to our segments. Revenuebetween business segments is not material and is eliminated upon consolidation.Expenses incurred by corporate center operations are directly charged orotherwise allocated to the business segments. Corporate center costs include medical, workers compensation,casualty and property insurance, retirement plan expenses, treasury services,tax services, audit services, accounting services, general management servicesand other corporate overhead such as occupancy and aircraft costs. Certain ofthese costs are charged to the business segment based on usage or direct costsand the remainder is allocated on a consistent basis based on a percentage ofrevenue.

***HRS***

| ** **                      | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|---------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **2006**   | ** ** | **2005**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                         |       | $          | 1,099.8    |                     | $          | 1,050.1                    |       | 49.7 |   | 4.7 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                 |       | 620.6      |       | 601.4                    |       | 19.2                       |       | 3.2 |   | 56.4 |   | 56.7 |   |
| SG&A expense                |       | 370.0      |       | 382.3                    |       | (12.3                      | )          | (3.2 | ) | 33.7 |   | 36.4 |   |
| R&D expense                 |       | 20.6       |       | 21.5                     |       | (0.9                       | )          | (4.2 | ) | 1.9 |   | 2.0 |   |
| Loss on  derivative instruments |       | —     |       | 2.3                      |       | (2.3                       | )          | (100.0 | ) | — |   | 0.2 |   |
| Other (income)  expense, net    |       | (9.6       | )          | 4.5                      |       | (14.1                      | )          | (313.3 | ) | (0.9 | ) | 0.4 |   |
| EBIT                            |       | $          | 98.2       |                     | $          | 44.6                       |       | 53.6 |   | 119.9 |   | 8.9 |   | 4.3 |   |

 

HRS revenue increased $49.7, or 4.7%, to $1,099.8 in2006 compared to $1,050.1 in 2005. Revenue from U.S. operations increased$22.6, or 2.8%, from $799.8 to $822.4, revenue from Ceridian Canada operationsincreased $24.5, or 15.5%, from $158.1 to $182.6, and revenue from CeridianU.K. operations increased $2.6, or 2.8%, from $92.2 to $94.8.

The increase in revenue from U.S. operations in 2006included a $26.2 increase in payroll processing, tax filing and other humanresource services (“Payroll and Tax Services”) and a $2.9 increase frombenefits 

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administration services (“BenefitServices”), partially offset by a $6.5 decrease in work-life and employeeassistance programs (“LifeWorks”). The increase in Payroll and Tax ServicesU.S. operations revenue in 2006 was mainly driven by increases in interestincome earned on invested customer funds of $20.2, of which $17.0 was from ahigher average yield and $3.2 was from a higher average invested balance. Theincrease in Benefit Services U.S. operations revenue of $2.9****was primarily driven by increased customer employeeparticipation and higher interest rates on invested customer funds. LifeWorksU.S. operations revenue decrease of $6.5 was primarily from a reduction inbusiness volume and lower pricing due to the competitive environment.

The Ceridian Canada revenue increase of $24.5 included$11.3 due to the strengthening of the Canadian dollar against the U.S. dollar,$6.3 from additional interest income primarily resulting from a higher averageinvested balance, with the remainder of the increase attributed to growth inthe payroll base and price increases. The Ceridian U.K. revenue increase of$2.6 was due to the strengthening of the British Pound Sterling against theU.S. dollar and increased volume.

HRS cost of revenue as a percent of revenue decreasedto 56.4% in 2006 from 56.7% in 2005 mainly due to increased interest income oninvested customer funds without significant incremental costs and reduced coststhrough reorganization efforts principally in our Payroll and Tax Servicesbusiness, offset by an increase in expenses related to our government LifeWorksbusiness and an increase in stock-based compensation expense of $2.6.

SG&A expense for HRS decreased $12.3, or 3.2%, to$370.0 in 2006 compared to $382.3 in 2005 resulting from a decrease of $11.2 inselling expense and of $1.1 in general and administrative expense. The decreasein selling expense of $11.2 was primarily the result of the Payroll and TaxServices reorganization and reduced headcount of approximately $16.0, partiallyoffset by $1.8 from additional stock-based compensation expense, $1.3 due tothe strengthening of the Canadian dollar against the U.S. dollar and generalexpense increases. The decrease in general and administrative expense of $1.1was primarily due to a $5.7 reduction in medical and postretirement expenses, a$4.8 reduction related to the pension remeasurement in the second quarter of2006, a $4.7 reduction in severance charges and reduced external Sarbanes-Oxleycompliance expenses of $3.4, partially offset by $8.5 of additional stock-basedcompensation expense, $2.9 due to the strengthening of the Canadian dollar andBritish Pound Sterling against the U.S. dollar, $0.9 related to legal accrualsand the remaining due to compensation and benefit increases.

R&D expense for HRS decreased $0.9, or 4.2%, to$20.6 in 2006 compared to $21.5 in 2005. This decrease was a result of a largeconsulting project in 2005 that was not duplicated in 2006 partially offset byadditional stock-based compensation expense of $0.5 in 2006.

We maintained interest rate derivatives for thepurpose of mitigating interest rate risk on customer funds until February 2005.In the first quarter of 2005, we recorded a loss of $2.3 associated with thedisposition of these derivative instruments. We held no interest ratederivatives in 2006.

Other (income) expense, net for 2006 primarily relatesto a $5.8 gain on the sale of a major portion of the RPS business and a gain onsale of marketable securities and other assets of $3.4. Other (income) expense,net in 2005 resulted from asset impairments of $9.1, partially offset by a $4.3gain of sale of marketable securities and other assets.

HRS EBIT increased $53.6, or 119.9%, to $98.2 or 8.9%of revenue in 2006 compared to $44.6 or 4.3% of revenue in 2005. The increasewas primarily due to an improvement in operating performance in the U.S. HRSbusiness driven by increased revenue, higher other income and a reduction inSG&A expenses.

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***Comdata***

| ** **                      | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|---------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **2006**   | ** ** | **2005**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                         |       | $          | 465.3      |                     | $          | 408.9                      |       | 56.4 |   | 13.8 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                 |       | 222.4      |       | 190.3                    |       | 32.1                       |       | 16.9 |   | 47.8 |   | 46.6 |   |
| SG&A expense                |       | 80.0       |       | 75.8                     |       | 4.2                        |       | 5.6 |   | 17.2 |   | 18.5 |   |
| R&D expense                 |       | 7.5        |       | 6.6                      |       | 0.9                        |       | 14.1 |   | 1.6 |   | 1.6 |   |
| Loss on  derivative instruments |       | 2.7        |       | 9.3                      |       | (6.6                       | )          | (70.6 | ) | 0.6 |   | 2.3 |   |
| Other income, net               |       | (0.9       | )          | —                   |       | (0.9                       | )          | NM |   | (0.2 | ) | — |   |
| EBIT                            |       | $          | 153.6      |                     | $          | 126.9                      |       | 26.7 |   | 21.1 |   | 33.0 |   | 31.0 |   |

 

Comdata revenue increased $56.4, or 13.8%, to $465.3****in 2006 from $408.9 in 2005. The increase in revenue in2006 was primarily due to increased customer demand and price increasesgenerating $50.0 and fuel price increases generating $6.4. For a portion of itstransportation customers, Comdata earns fee revenue for card transactions basedon a percentage of the total cost of each fuel purchase. An increase ordecrease in the price of fuel increases or decreases the total dollar amount offuel purchases and corresponding Comdata revenue. Revenue from transportation increased$28.4, or 10.0%, to $311.5 in 2006 from $283.1 in 2005. Revenue from retailservices increased $28.0, or 22.3%, to $153.8 in 2006 from $125.8 in 2005.

The increase in revenue from transportation of $28.4 in2006 related primarily to revenue from the long haul business, which increased$14.9, including a $5.0****increaseresulting from higher fuel prices. The remaining long haul revenue increase of$9.9****primarily resulted from an increase intransaction volume in 2006 over 2005, reflecting in part the continued growingacceptance of the Comdata Card. Local fleet revenue increased $8.6 due to $7.2from new customers and greater utilization by major local fleet customers ofComdata’s products and services, including the Comdata Card and a $1.4 increaseresulting from higher fuel prices. The remaining increase in transportation revenueof $4.9 is primarily from regulatory compliance services which increased $5.2due largely to price increases and improved delivery of services.

Revenue from retail services increased $28.0 in 2006primarily due to higher levels of retail cards in use, greater transactionvolume and the acquisition of HQ Giftcards, LLC (“HQ Giftcards”), a provider ofmall gift card program management services, in the fourth quarter of 2006. Revenuefrom retail services is generally deferred and recognized largely over asix-month period following the activation of a card, which typically takesplace about seven months after the shipment of the card to the retailer. Cardsdelivered increased 15.6% while transactions processed increased approximately16.5% in 2006 over 2005.

Comdata cost of revenue as a percent of revenue for2006 increased to 47.8% compared to 46.6% in 2005. Cost of revenue includedhigher payroll expenses to support the retail services business and $1.2 forstock-based compensation expense. Cost of revenue as a percent of revenue wasreduced by the benefit from higher fuel prices without significant incrementalcost.

SG&A expense increased $4.2, or 5.6%, to $80.0 in2006 compared to $75.8 in 2005. The increase is due to higher legal fees andlitigation accruals of $7.8, a $4.1 increase in selling expense due to growthin revenue and stock-based compensation expense of $3.7, partially offset by areduction in bad debt expense of $6.1 due to higher charges in 2005, a $1.9reduction in medical and postretirement expenses, a $1.6 reduction related tothe pension remeasurement in the second quarter of 2006, reduced internalfinancial controls compliance expenses of $1.1 and a reduction in severancecharges of $0.8.

R&D expense increased $0.9, or 14.1%, to $7.5 in2006 compared to $6.6 in 2005 primarily due to staffing additions to developnew service offerings.

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The net loss on the diesel fuelprice derivative instruments in 2006 was $2.7 compared to $9.3 in 2005. Thisprimarily resulted from****a greaterincrease in diesel fuel futures prices in 2005 compared to 2006. Our dieselfuel price risk management objective is to protect Comdata earnings from theeffects of falling diesel fuel prices by entering into derivative instrumentsthat convert the floating price of diesel fuel used in revenue calculations toa fixed price. During late 2005 and early 2006, we acquired diesel fuel pricederivative instruments covering approximately 80% of our anticipated 2006diesel fuel price related earnings exposure with an average strike price of$2.55 per gallon. During 2005, we covered approximately 100% of our diesel fuelprice risk for the full year with a combination of instruments with an averagestrike price of $1.92 per gallon.

Other income, net primarily reflects a $1.0 gain fromthe settlement of a lawsuit.

Comdata EBIT increased$26.7, or 21.1%, to $153.6 or 33.0% of revenue in 2006 compared to $126.9 or31.0% of revenue in 2005 primarily due to a continued increase in customerdemand, the benefit of higher fuel prices, and the reduced loss on diesel fuelprice derivative instruments partially offset by increased legal fees andlitigation accruals.

**2005 Compared to2004**

**Statementsof Operations**

| ** **                         | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **2005**   | ** ** | **2004**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                            |       | $          | 1,459.0    |                     | $          | 1,320.4                    |       | 138.6 |   | 10.5 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                    |       | 785.2      |       | 741.4                    |       | 43.8                       |       | 5.9 |   | 53.8 |   | 56.2 |   |
| SG&A expense                   |       | 458.1      |       | 483.1                    |       | (25.0                      | )          | (5.2 | ) | 31.4 |   | 36.6 |   |
| R&D expense                    |       | 28.1       |       | 26.1                     |       | 2.0                        |       | 7.6 |   | 1.9 |   | 2.0 |   |
| Loss on  derivative instruments    |       | 11.6       |       | 0.3                      |       | 11.3                       |       | NM |   | 0.8 |   | 0.0 |   |
| Other expense,  net                |       | 4.5        |       | 26.5                     |       | (22.0                      | )          | 82.9 |   | 0.3 |   | 2.0 |   |
| Interest income                    |       | (7.8       | )          | (2.6                     | )          | (5.2                       | )          | NM |   | (0.5 | ) | (0.2 | ) |
| Interest expense                   |       | 5.5        |       | 4.4                      |       | 1.1                        |       | 27.2 |   | 0.4 |   | 0.3 |   |
| Total costs and  expenses          |       | 1,285.2    |       | 1,279.2                  |       | 6.0                        |       | 0.5 |   | 88.1 |   | 96.9 |   |
| Earnings before  income taxes      |       | 173.8      |       | 41.2                     |       | 132.6                      |       | 321.9 |   | 11.9 |   | 3.1 |   |
| Income tax  provision              |       | 45.9       |       | 4.3                      |       | 41.6                       |       | NM |   | 3.1 |   | 0.3 |   |
| Net earnings                       |       | $          | 127.9      |                     | $          | 36.9                       |       | 91.0 |   | 246.7 |   | 8.8 |   | 2.8 |   |
| Diluted earnings per  common share |       | $          | 0.86       |                     | $          | 0.24                       |       | 0.62 |   | 258.3 |   | NM |   | NM |   |

 

***Consolidated Results—Overview***

Total revenue increased $138.6 or 10.5% to $1,459.0 in2005 compared to $1,320.4 in 2004. HRS business segment revenue increased $85.7from 2004 to 2005 while the Comdata business segment revenue increased $52.9from 2004 to 2005. HRS revenue benefited $19.3 from higher yields on investedcustomer funds, $10.6 from higher invested balances, $20.2 from increasedrevenue from LifeWorks and $10.1 from the effect of foreign currencytranslation. Comdata’s revenue benefited $25.3 from increased revenue fromretail services and $12.9 due to increased transaction fees for transportationservices due to higher fuel prices. In addition, both segments benefited fromthe addition of new customers, selling additional services to existingcustomers and price increases.

Cost of revenue as a percent of revenue improved from56.2% in 2004 to 53.8% in 2005. The improvement was primarily due to increasedsales of higher margin products and services and improved efficienciesresulting from reorganization efforts principally in our Payroll & TaxServices business.

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SG&A expense decreased $25.0, or 5.2% to $458.1 in2005 from $483.1 in 2004. This was primarily due to the $42.6 charge in 2004for accelerated amortization of the CobraServ trademark.

Loss on derivative instruments increased $11.3 mainlydue to our diesel fuel price derivatives. During 2005, we made payments of $8.2to counterparties for our diesel fuel price derivatives and recorded a $1.1unrealized loss on such derivatives. We sold our interest rate derivatives in February 2005and recorded a $2.3 loss. Other expense decreased $22.0 in 2005 mainly due tothe charge to earnings in 2004 as a result of the sale of our SourceWeb Assetsin 2004.

Interest income increased $5.2 to $7.8 in 2005 due toboth a higher average level of cash and equivalents and higher interest rates.Our average outstanding borrowings under our U.S. credit facilities decreasedfrom $125.2 for 2004 to $61.2 for 2005. Our average effective interest rate onthese facilities increased from 1.97% for 2004 to 4.15% for 2005. Interestexpense increased $1.1 in 2005 from $4.4 in 2004 due to rising interest rates.

Income taxes increased$41.6 from 2004 to 2005 primarily due to increased earnings and additionaltaxes of $5.2 related to the repatriation of funds from Ceridian Canada. In2005, we favorably settled a tax matter that resulted in a $13.0 reduction intax expense. In addition, a former affiliate settled an audit that resolved ourpotential obligations which reduced our tax expense by $5.9. Finally, theexpiration of the statute of limitations and other adjustments to ourcontingent tax liabilities resulted in a $5.6 reduction in our tax expense. Theincome tax expense for 2004 was lower primarily due to lower earnings. We alsoprovided additional tax expense in 2004 of $12.3 for a proposed tax adjustmenton international earnings. We reduced tax expense in 2004 by $16.3 related totax settlements and $7.0 related to a valuation allowance realization. Thereported effective tax rate was 26.4% for 2005 and 10.4% for 2004.

***Business Segment Results***

Our business is classifiedinto two reportable segments; HRS and Comdata. We measure business segmentresults by reference to EBIT because interest income and interest expense arenot allocated to our segments. Revenue between business segments is notmaterial and is eliminated upon consolidation. Expenses incurred by corporatecenter operations are directly charged or otherwise allocated to the businesssegments. Corporate center costsinclude medical, workers compensation, casualty and property insurance,retirement plan expenses, treasury services, tax services, audit services,accounting services, general management services and other corporate overheadsuch as occupancy and aircraft costs. Certain of these costs are charged to thebusiness segment based on usage or direct costs and the remainder is allocatedon a consistent basis based on a percentage of revenue.

***HRS***

| ** **                             | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **2005**   | ** ** | **2004**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                                |       | $          | 1,050.1    |                     | $          | 964.4                      |       | 85.7 |   | 8.9 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                        |       | 594.9      |       | 572.4                    |       | 22.5                       |       | 3.9 |   | 56.7 |   | 59.3 |   |
| SG&A expense                       |       | 382.3      |       | 418.3                    |       | (36.0                      | )          | (8.7 | ) | 36.4 |   | 43.3 |   |
| R&D expense                        |       | 21.5       |       | 21.7                     |       | (0.2                       | )          | (0.9 | ) | 2.0 |   | 2.3 |   |
| Loss (gain) on  derivative instruments |       | 2.3        |       | (1.1                     | )          | 3.4                        |       | NM |   | 0.2 |   | (0.1 | ) |
| Other expense,  net                    |       | 4.5        |       | 25.7                     |       | (21.2                      | )          | (82.4 | ) | 0.4 |   | 2.7 |   |
| EBIT                                   |       | $          | 44.6       |                     | $          | (72.6                      | )          | 117.2 |   | 161.4 |   | 4.3 |   | (7.5 | ) |

 

HRS revenue increased $85.7 or 8.9% in 2005. Revenuefrom U.S. operations increased $68.3, revenue from Ceridian Canada operationsincreased $17.0 and revenue from Ceridian U.K. operations increased $0.4.

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The increase in revenue from U.S. operations in 2005included an increase in Payroll and Tax Services of $48.9, Benefit Servicescontributing $5.0, and LifeWorks contributing $14.4. The increase in Payrolland Tax Services revenue was mainly driven by a $25.3 increase in interestincome earned on invested customer funds due to both a higher average investedbalance and a higher average yield. The remainder of the increase in Payrolland Tax Services revenue was primarily driven by the addition of new customers.The increase in Benefit Services revenue was mainly driven by increasedinterest income of $2.3 and the addition of new customers. LifeWorks revenueincreased $20.2 due to increased revenue from work-life services.

The Ceridian Canada revenue increased $17.0 with $10.2of the increase due to the strengthening of the Canadian dollar against theU.S. dollar and $2.3 due to increased interest income. Ceridian U.K. revenueincreased $0.4. Currency rate changes had little effect on Ceridian U.K.revenue.

HRS cost of revenue as a percent of revenue improvedfrom 59.3% in 2004 to 56.7% in 2005. The improvement was mainly driven by adecrease of 6.9 percentage points in cost of revenue as a percent of revenue inPayroll and Tax Services as a result of reorganization efforts that reducedcost and by increased interest income on invested customer funds withoutsignificant incremental costs. The improvement in the cost of revenue as apercent of revenue in Payroll and Tax Services was partially offset byincreases in cost of revenue as a percent of revenue mainly due to compensationand benefit increases.

SG&A expense for HRS decreased $36.0 from 2004 to2005 primarily due to the $42.6 expense in 2004 for amortization of theCobraServ trademark, a decrease of $21.4 related to selling expense, partiallyoffset by an increase of $28.0 related to other general and administrativeexpense. The decrease in selling expense is primarily attributed to costsavings resulting from our Payroll and Tax Services reorganization inconnection with the disposition of our SourceWeb Assets. The increase ingeneral and administrative expense of $28.0 was primarily due to increasedcosts of technology support, compensation, benefits and severance costs.

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

In the first quarter of 2005, we disposed of ourinterest rate derivative instruments, receiving proceeds of $21.0 and $3.5 forsettlements. We recorded a loss of $2.3 on interest rate derivative instrumentsrepresenting the difference between the carrying value of $26.8 and the $24.5of total cash received.

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

HRS EBIT increased from aloss of $72.6 in 2004 to earnings of $44.6 in 2005. This improvement was mainlydriven by an improvement in EBIT from the U.S. HRS business resulting fromincreased revenue as well as reduced SG&A and other expense.

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***Comdata***

| ** **                      | ** ** | **Amount** | ** ** | **Increase  (Decrease)** | ** ** | **% of Revenue** | ** ** |
|---------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **2005**   | ** ** | **2004**                 | ** ** | **$**                      | ** ** | **%** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                         |       | $          | 408.9      |                     | $          | 356.0                      |       | 52.9 |   | 14.8 |   | 100.0 |   | 100.0 |   |
| Cost of revenue                 |       | 190.3      |       | 169.0                    |       | 21.3                       |       | 11.0 |   | 46.6 |   | 47.5 |   |
| SG&A expense                |       | 75.8       |       | 64.8                     |       | 11.0                       |       | 17.0 |   | 18.5 |   | 18.2 |   |
| R&D expense                 |       | 6.6        |       | 4.4                      |       | 2.2                        |       | 42.3 |   | 1.6 |   | 1.2 |   |
| Loss on  derivative instruments |       | 9.3        |       | 1.4                      |       | 7.9                        |       | 78.5 |   | 2.3 |   | 0.4 |   |
| Other expense                   |       | —     |       | 0.8                      |       | (0.8                       | )          | (58.1 | ) | — |   | 0.2 |   |
| EBIT                            |       | $          | 126.9      |                     | $          | 115.6                      |       | 11.3 |   | 9.7 |   | 31.0 |   | 32.5 |   |

 

Comdata revenue increased $52.9 or 14.8% from 2004 to2005 as revenue from transportation contributed $26.0 and revenue from retailservices contributed $26.9. The $26.0 increase in transportation revenuerelated primarily to revenue from the long haul business, which increased $17.4including a $10.4 increase resulting from higher fuel prices. A 4.4% increase intransaction volume in 2005 over 2004, including the impact of the growingacceptance of the Comdata Card, provided the remaining $7.0 increase in longhaul revenue. Local fleet revenue grew $3.9, primarily due to $2.5 from higherfuel prices. Also, major local fleet customers increased their utilization ofComdata’s products and services, including the Comdata Card. Comdata earns feerevenue for a portion of the card transactions based on a percentage of thetotal cost of each fuel purchase. An increase or decrease in the price of fuelincreases or decreases the total dollar amount of fuel purchases andcorresponding Comdata revenue. The remaining increase in transportation revenuein 2005 compared to 2004 of $4.7 included increases from sales of products andservices to truck stops, due largely to increased outsourcing of maintenanceservices, and from regulatory compliance services, due largely to priceincreases related to improved delivery of services.

In 2005, revenue from retail services increasedprimarily due to higher levels of retail cards in use, greater transactionvolume and the addition of new customers. Revenue from retail services isgenerally deferred and recognized largely over a six-month period following theactivation of a card, which typically takes place about seven months after theshipment of the card to the retailer. Cards delivered increased byapproximately 50% and transactions processed increased by approximately 22% in2005.

Comdata cost of revenue as a percent of revenueimproved from 47.5% in 2004 to 46.6% in 2005. The improvement was primarily dueto higher margins on fuel transactions resulting from higher fuel prices.

SG&A expense increased $11.0, or 17.0% in 2005compared to 2004. Selling expense increased $1.3 as a result of increases instaffing, compensation and advertising, largely related to retail services andregulatory compliance. General and administrative expense increased $9.7 in2005 over 2004 due primarily to increased costs of compensation and benefits,increased costs for contracted services, an increase of $1.7 in amortization ofidentifiable intangible assets from recent acquisitions and a $1.1 increase inbad debt expense.

R&D expense increased $2.2 to $6.6 in 2005primarily due to a higher level of application development for existingproducts and services and product development around the Comdata Card.

The loss on derivative instruments related to thediesel fuel price contracts increased $7.9 to $9.3 in 2005 from $1.4 in 2004.Our diesel fuel price risk management objective is to protect Comdata earningsfrom the effects of falling diesel fuel prices by entering into derivativeinstruments that convert the floating price of fuel used in revenuecalculations to a fixed price. During 2004, we entered into a diesel fuel pricederivative instrument covering approximately 66% of our total risk for theperiod July 1, 2004 through December 31, 2004 with a strike price of$1.51 per gallon. For 2005, we covered approximately 100% of our diesel fuelprice risk for the full year with diesel fuel price derivative instruments withsimilar terms 

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and an average strikeprice of $1.92 per gallon. During 2005, there were payments of $8.2 tocounterparties as well as an unrealized loss of $1.1, resulting in a $9.3 netloss reported in (gain) loss on derivative instruments on our consolidatedstatement of operations. During 2004, there were payments of $2.2 tocounterparties as well as an unrealized gain of $0.8 resulting in a $1.4 netloss reported in (gain) loss on derivative instruments on our consolidatedstatement of operations. We continuously monitor fuel price volatility and thecost of derivative instruments.

Other expense decreased $0.8 in 2005 as compared with2004 due primarily to nonrecurring facility shut-down costs in 2004.

Comdata EBIT increased$11.3, or 9.7% from $115.6 in 2004 to $126.9 in 2005, primarily due toincreased revenues. EBIT as a percent of revenue decreased slightly from 32.5%to 31.0% due primarily to the $7.9 increased loss on derivative instruments in 2005.

**Balance Sheets at December 31,2006 and 2005**

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 have advancedto us to pay their employees, remit to taxing authorities, or pay for benefitsservices to other third parties. Customer funds obligations represent ourliability to pay the amounts due to these third parties on behalf of ourcustomers. Customer funds assets are held substantially in trust accounts andare invested in high-quality short-term investments or highly-rated fixedincome securities and are not utilized in our operations except for earningsfrom those investments that are included in our revenue. Additional informationon customer funds assets and liabilities can be found in Note 3, “CustomerFunds.”

Total assets before customer funds increased $28.8during 2006 as current assets increased $61.3 and noncurrent assets decreased$32.5. Our current assets increase was due primarily to increases of $103.6 intrade and other receivables, net and $32.0 in other current asets, partiallyoffset by decreases of $68.2 in cash and equivalents. The increase in trade andother receivables, net was due mainly from increased volume in the number oftransactions processed by Comdata resulting in an increase of $111.9 in tradeand other receivables, net. Other current assets increased primiarily due to anincrease of $27.5 in deferred expenses associated with an increase in deferredrevenue. We discuss changes in cash and equivalents in a following section ofthis discussion entitled “Cash Flows.” Our noncurrent assets decreased $32.5primarily due to a $38.6 decrease in deferred income taxes driven by the taximpact of the $75.0 pension contribution.

Current liabilitiesincreased $75.9 during 2006 as deferred revenue increased $54.8 and Comdata’sdrafts and settlements payable increased $36.5. Noncurrent liabilitiesdecreased $128.4 due primarily to a $75.0 million contribution to the U.S. defined benefit pension planduring the second quarter 2006 and a corresponding reduction in the pensionliability adjustment within accumulated other comprehensive income of $50.0million. Stockholders’ equity increased $79.4 primarily due to netearnings of $173.6 and exercise of stock options of $197.7 partially offset bystock repurchases of $316.8.

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**Cash Flows**

**ConsolidatedStatements of Cash Flows Highlights**

| ** **                                       | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating  activities                            |       | $                                           | 161.7      |   | $ | 299.3 |   | $ | 240.8 |   |
| Investing  activities                            |       | (74.1                                       | )          | (43.1 | ) | (68.0 | ) |
| Financing  activities                            |       | (157.2                                      | )          | (129.8 | ) | (93.5 | ) |
| Effect of  exchange rate on cash and equivalents |       | 1.4                                         |       | 2.2 |   | 5.5 |   |
| Net cash flows  provided (used)                  |       | $                                           | (68.2      | ) | $ | 128.6 |   | $ | 84.8 |   |
| Cash and equivalents at  end of year             |       | $                                           | 294.7      |   | $ | 362.9 |   | $ | 234.3 |   |

 

***Cash Balances and Operating Activities***

During 2006, our cash and equivalents decreased $68.2to $294.7 including net cash inflows of $161.7 from operating activities, netcash outflows of $74.1 from investing activities, net cash outflows fromfinancing activities of $157.2, and an increase in cash balances of $1.4 due tothe effect of exchange rate changes. The decrease in cash and equivalents wasdriven by $316.8 used to repurchase our common stock, a $75.0 contribution tothe U.S. defined benefit pension plan, $53.0 in expenditures for property,plant and equipment and software development costs and $41.1 for acquisitionsof investments and businesses, partially offset by $173.6 in net earnings,$150.8 in proceeds from stock option exercises and stock sales and $20.0 ofproceeds from the sales of businesses and assets. During 2005, our cash andequivalents increased $128.6 to $326.9 as we used operating cash flows and cashbalances to fund investing activities and repurchase our stock. In 2004, ourcash and equivalents increased $84.8 to $234.3 as we used operating cash flowsand cash balances to fund investing activities, repay debt and repurchase ourstock.

Cash flows from operatingactivities in 2006 provided cash of $161.7 compared to cash provided of $299.3for 2005. The decrease of $137.6 in operating cash flows in 2006 compared to2005 largely reflected the $75.0 contribution to the U.S. defined benefitpension plan and an increase in working capital requirements of $113.6primarily due to higher fuel prices and extended payment terms for new keycustomers at Comdata, partially offset by higher earnings in 2006 compared to2005 and an increase in deferred revenue. Our operating cash flows increased$58.5 from 2004 to 2005 due primarily to an increase in net earnings of $91.0offset by decreased depreciation and amortization and increased trade and otherreceivables.

***InvestingActivities***

| ** **                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Capital expenditures                          |       | $        | (53.0      | )        | $          | (64.2    | )          | $ | (65.8 | ) |
| Acquisitions of  investments and businesses   |       | (41.1    | )          | (10.4    | )          | (19.3    | )          |
| Proceeds from  sales of businesses and assets |       | 20.0     |       | 31.5     |       | 17.1     |       |
| Net cash outflows                             |       | $        | (74.1      | )        | $          | (43.1    | )          | $ | (68.0 | ) |

 

During 2006, our capital expenditures included $30.3for property and equipment and $22.7 for software and development costs. Ourexpenditures for acquisitions of investments and businesses (net of cashacquired) were $41.1 for two acquisitions in the fourth quarter of 2006. Cashinflows from sales of businesses and assets amounted to $20.0 primarily from$11.1 related to the sale of the major portion of our Retirement Plan Servicesrecordkeeping and administration business in Benefits Services in the thirdquarter of 2006 as well as the sale of marketable securities.

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During 2005, our capital expenditures included $31.4for property and equipment and $32.8 for software and development costs. Ourexpenditures for acquisitions of investments and businesses (net of cashacquired) included the purchase of Tranvia, Inc., a provider of merchantcard processing services, by Comdata for $8.2 and $1.8 in contingent paymentsmade for previous acquisitions. Cash inflows from sales of businesses andassets amounted to $31.5 including $21.0 from the disposition of our HRSinterest rate derivative instruments, $7.8 from the sale of land and $2.7 fromthe sale of marketable securities.

During 2004, our capitalexpenditures included $32.9 for property and equipment and $32.9 for softwareand development costs. Our expenditures for acquisitions of investments andbusinesses (net of cash acquired) amounted to $19.3 resulting primarily fromthe HRS acquisition of Recruiting Solutions, Inc., a provider of web-basedrecruiting products, for $11.0, and the Comdata acquisition of DatamarkTechnologies, Inc., a provider of stored value and customer loyaltyprograms, for $4.1. Our proceeds from sales of businesses and assets amountedto $17.1 and consisted largely of $11.1 from the sale of marketable securitiesand $4.0 from the sale of our SourceWeb Assets.

***FinancingActivities***

| ** **                                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revolving credit  facilities and overdrafts, net                 |       | $        | (2.6       | )        | $          | 11.5     |       | $ | (59.6 | ) |
| Repayment of  other debt                                         |       | (4.9     | )          | (5.9     | )          | (4.1     | )          |
| Payment of The  Ultimate Software Group, Inc. royalty obligation |       | (5.8     | )          | (5.3     | )          | —   |       |
| Repurchase of  common stock                                      |       | (316.8   | )          | (222.3   | )          | (80.3    | )          |
| Tax benefits from  stock based compensation                      |       | 22.1     |       | —   |       | —   |       |
| Proceeds from  stock option exercises and stock sales            |       | 150.8    |       | 92.2     |       | 50.5     |       |
| Net cash outflows                                                |       | $        | (157.2     | )        | $          | (129.8   | )          | $ | (93.5 | ) |

 

Net cash outflows fromfinancing activities amounted to $157.2 in 2006. Included in revolving creditfacilities and overdrafts, net of $2.6, we made payments of $29.6 on our $250.0revolving credit facility offset by borrowings of $27.0 on our Comdatareceivables securitization facility to fund the acquisition of HQ Giftcards. Wemade principal payments of $4.9 and $5.8 on capital leases and a guaranteedminimum royalty obligation with The Ultimate Software Group, Inc. (“Ultimate”),respectively, during 2006. We repurchased 13,046,500 shares of our common stockfor $316.7 on the open market at an average net price of $24.27 per share. Thebenefit of tax deductions in excess of recognized compensation expense relatedto stock-based compensation is classified as a financing cash flow and,accordingly, $22.1 was reclassified from operating activities in accordancewith the requirements of SFAS 123R. Proceeds from exercises of stock optionsand sales of stock to employees amounted to $150.8.

Our financing activitiesin 2005 resulted in cash outflows of $129.8. In connection with therepatriation of funds from Ceridian Canada to the United States, CeridianCanada borrowed $40.6 under the Ceridian subfacility of our 2005 revolvingcredit facility. We reduced the amount outstanding on our Comdata receivablessecuritization facility by $20.0 and the Ceridian U.K. overdraft facilityby $9.0 of which $8.3 was attributable to debt reduction and $0.7 was due tothe foreign currency translation effect. In connection with the sale of ourSourceWeb Assets in 2004, we accrued a liability of $19.2 representing the fairvalue of an associated guaranteed future minimum royalty obligation toUltimate. We made principal payments of $5.3 related to the Ultimate royaltyobligation during 2005. During 2005, we repurchased 10,736,450 shares of ourcommon stock on the open market or from private parties at an average net priceof $20.71 per share, resulting in financing cash outflows of $222.3 for settledtrades. Proceeds from exercises of stock options and employee stock planpurchases amounted to $92.2 during 2005.

Our financing activitiesfor 2004 resulted in net cash outflows of $93.5. We repaid $65.0 of our Comdatareceivable securitization facility. We repurchased 4,012,400 shares of ourcommon stock for $80.3 on the open market at an average net price of $20.01 pershare, resulting in financing cash outflows 

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of $80.3for settled trades. We also received proceeds of $50.5 for exercises of stockoptions and employee stock plan purchases.

For further information onfinancing cash flows, see Note 6, “Financing” and the following section of thisdiscussion entitled “Liquidity and Capital Resources.”

**Liquidity and Capital Resources**

We expect to meet ourliquidity needs from existing cash balances, cash flows from operations andborrowings under our credit facilities. We expect to use our cash flows forcapital expenditures, investments in software and development costs, potentialacquisitions of complementary businesses to our existing operations, repaymentof debt, stock repurchases and potential pension plan contributions. Cashbalances and cash flows are discussed under the section of this discussionentitled “Cash Flows.” Cash flows from operations are primarily influenced bythe same factors that influence revenue as discussed in a preceding section ofthis discussion entitled “Results of Operations” and in several of the risksidentified in Part I, Item 1A, “Risk Factors” of this report.

***Revolving CreditFacility***

On November 18, 2005,we entered into a five-year, $250.0 revolving credit agreement (“2005 CeridianRevolving Credit Facility”) and terminated the existing revolving creditagreement dated January 31, 2001. The 2005 Ceridian Revolving CreditFacility provides for up to $250.0 (subject to possible increase, at ourrequest as authorized by our Board of Directors, up to $400.0) for acombination of advances and letters of credit until November 18, 2010.This facility includes a sublimit for $25.0 for swingline loans, a $100.0 U.S.dollar equivalent sublimit for loans made in Canadian dollars to CeridianCanada (“Canadian subfacility”), and a $50.0 U.S. dollar equivalent sublimitfor multicurrency borrowings in certain currencies. The Canadian subfacility isto be used to meet the ongoing working capital, capital expenditures andgeneral corporate needs of Ceridian Canada. The interest rate on the Canadiansubfacility is the Eurocurrency Rate plus 57.5 basis points (4.86% atDecember 31, 2006). Advances under the 2005 Ceridian Revolving CreditFacility are unsecured. The terms of the 2005 Ceridian Revolving CreditFacility require that our consolidated debt must not exceed 50% of ourconsolidated net worth, as defined in the agreement, as of the end of anyfiscal quarter 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. The2005 Ceridian Revolving Credit Facility also contains covenants that, amongother things, limit liens, subsidiary debt, contingent obligations, operatingleases, minority equity investments and divestitures. There is no requirementunder the terms of the 2005 Ceridian Revolving Credit Facility to make anyprincipal payments until the agreement expires on November 18, 2010.

In connection with therepatriation of funds from Ceridian Canada to Ceridian Corporation inDecember 2005, Ceridian Canada’s net borrowing under the Canadiansubfacility as of December 31, 2006 was $11.6. We have classified theentire $11.6 in current based on management’s intent to repay this amountduring 2007. The carrying amount approximates fair value. As ofDecember 31, 2006, we utilized $3.2 of the 2005 Ceridian Revolving CreditFacility for letters of credit leaving an unused borrowing capacity of $235.2,of which we have designated $82.0 as backup to the Comdata receivablessecuritization facility.

***Comdata ReceivablesSecuritization Facility***

In June 2002, Comdata entered into a $150.0receivables securitization facility with a three-year term involving certain ofits trade receivables (the “Receivables”). In June 2006, this facility wasamended to extend the facility termination date to June 14, 2009 and theliquidity termination date to June 14, 2007. The facility is subject tofinancial covenants similar to those included in the 2005 Ceridian RevolvingCredit Facility and consists of two steps.

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In the first step, ComdataFunding Corporation (“CFC”), a bankruptcy-remote special purpose subsidiary ofComdata, buys and accepts capital contributions of the Receivables intransactions intended to constitute true sales or other outright conveyances.

In the second step, CFCsells undivided interests in those Receivables to a third-party multi-sellercommercial paper conduit (the “Conduit”) or its liquidity banks (together withthe Conduit, “Purchasers”) in transactions reported as secured loans.

Although title to theReceivables passes to CFC under the first step of the facility and theReceivables are no longer available to satisfy claims of Comdata’s creditors,Comdata has agreed to act as the servicing agent for the Receivables acquiredby CFC in exchange for a servicing fee of 1% per annum on the averageoutstanding balance of the Receivables. Ceridian Corporation has guaranteedComdata’s performance as both originator of and servicing agent for theReceivables.

CFC may increase ordecrease its use of the securitization facility up to four times a monthprovided sufficient qualified Receivables exist to support the Purchasers’investment under the second step. CFC is obligated to pay interest on theinvested amount outstanding either at the Conduit’s pooled A-1/P-1commercial paper rate (which was 5.35% at December 31, 2006), or, in theevent the Conduit is unable to issue commercial paper, at CFC’s choice of theprime rate or LIBOR plus 1.5% per annum. In addition, CFC must pay a monthlyprogram fee of 0.20% per annum on the average invested amount outstandingduring the preceding month and a monthly facility fee equal to 0.20% per annumon 102% of the average facility size (whether used or unused) during thepreceding month. Both of these fees are included in interest expense.

The amount outstandingunder this facility at December 31, 2006 and 2005 is $82.0 and $55.0,respectively. The carrying amount approximates fair value. The aggregate amountof receivables serving as collateral amounted to $307.1 and $230.2 at December 31,2006 and 2005, respectively. The amount outstanding is accounted for aslong-term debt and the Receivables remain on our consolidated balance sheet,even though the Receivables are not available to satisfy claims of creditors ofany of the companies other than CFC.

***Other DebtFinancing***

At December 31, 2006and 2005, Ceridian U.K. maintained two overdraft facilities totaling £7.5 million.There were no amounts outstanding as of December 31, 2006 and December 31,2005. The £6.5 million overdraft facility expires in February 2007. The£1.0 million overdraft facility expires in September 2007. Our prior practicehas been to renew these facilities on an annual basis.

In addition to theCanadian subfacility, Ceridian Canada had available at December 31, 2006and 2005 a committed bank credit facility that provided up to CDN $5.0 millionfor issuance of letters of credit and it is renewed annually at the option ofthe bank. The amounts of letters of credit outstanding under this facility wereCDN $3.9 million ($3.3) and CDN $4.1 million ($3.5) at December 31, 2006and December 31, 2005.

***Capital LeaseObligations***

Our capital leaseobligations are $6.9 at December 31, 2006 . The remaining payments include$5.0 in 2007 and $1.9 in 2008.

***Equity Activities***

On July 27, 2005, ourBoard of Directors authorized us to repurchase up to 20,000,000 additionalshares of our common stock. The repurchase program is being effected from timeto time, depending on market conditions and other factors, through open marketpurchases and privately negotiated transactions. 

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During2006, we repurchased 13,046,500 shares of our common stock for $316.7 on theopen market at an average net price of $24.27 per share. We also repurchased10,736,450 shares of our common stock during 2005 for $222.3 on the open marketat an average net price of $20.71. The total remaining authorization under therepurchase program was 2,567,550 shares as of December 31, 2006. Therepurchase program has no set expiration or termination date. We generally useour treasury stock to address our obligations under our stock compensationplans.

***ContractualObligations***

The table below describesthe future cash payments for which we are obligated under our financingagreements, capital and operating lease agreements, guaranteed purchaseobligations and retirement plans as of December 31, 2006, whether or notthey appear on our consolidated balance sheet.

**ContractualObligations at December 31, 2006**

| ** **                          | ** ** | **Payments due by period** | ** ** | ** **     | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **Less than  one year**         | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 years** | ** ** | **Total** | ** ** |
| Long-term debt                      |       |                                      | $          | 11.6           |       |   | $ | 82.0 |   | $ | — |   |   | $ | — |   |   | $ | 93.6 |   |
| Capital leases                      |       |                                      | 5.0        |           |       | 1.9 |   | — |   |   | — |   |   | 6.9 |   |
| Operating leases                    |       |                                      | 43.1       |           |       | 70.6 |   | 43.7 |   |   | 59.6 |   |   | 217.0 |   |
| Interest payable  on long-term debt |       |                                      | 0.4        |           |       | — |   | — |   |   | — |   |   | 0.4 |   |
| Purchase  obligations               |       |                                      | 10.5       |           |       | 5.4 |   | 1.8 |   |   | 0.3 |   |   | 18.0 |   |
| Postretirement  plan obligations    |       |                                      | 3.6        |           |       | 7.4 |   | 7.8 |   |   | 36.0 |   |   | 54.8 |   |
| Retirement plan  obligations        |       |                                      | 7.0        |           |       | 4.4 |   | 4.0 |   |   | 31.4 |   |   | 46.8 |   |
| Total                               |       |                                      | $          | 81.2           |       |   | $ | 171.7 |   | $ | 57.3 |   |   | $ | 127.3 |   |   | $ | 437.5 |   |

 

Our long-term debt andcapital lease obligations are described in the “Cash Flows” section of thisdiscussion and in Note 6, “Financing.” The long-term debt payments includeamounts due under the 2005 Ceridian Revolving Credit Facility and the Comdatareceivables securitization facility. Since we have the capability under our2005 Ceridian Revolving Credit Facility and the intention of continuing our useof short-term borrowings under our Comdata receivables securitization facility,its outstanding balance of $82.0 is reported in noncurrent liabilities on ourconsolidated balance sheet. The $82.0 reflects the total amount due under theComdata receivables securitization facility according to the contractual 2009maturity date. All of the $11.6 outstanding under our 2005 Ceridian RevolvingCredit Facility is classified as a current liability on our consolidatedbalance sheet as it is our intention to repay this amount in 2007.

The capital lease paymentsrepresent scheduled payments under the terms of the lease agreements andinclude implicit interest. We conduct substantially all of our operations inleased facilities. Most of these leases contain renewal options and requirepayments for taxes, insurance and maintenance. We also lease equipment for usein our businesses.

Purchase obligationsinclude minimum royalty payments to Ultimate and guaranteed purchasecommitments with several vendors.

Payments of retirementplan obligations include employer commitments to fund our defined benefit andpostretirement plans and do not include estimated future benefit payments toparticipants expected to be made from liquidation of the assets in our definedbenefit plan trusts. At December 31, 2006, our defined benefit pensionplans had a projected benefit obligation that exceeded the fair value of theplans’ assets by $46.8 and our postretirement benefit plan had an accumulatedbenefit obligation that exceeded the fair value of the plans’ assets by $54.8. Weexpect to satisfy these remaining obligations through investment income fromand appreciation in the fair value of plan assets held in trust as well as byfuture employer contributions.

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Our planned expendituresfor capital assets in 2007 are expected to be between $60.0 and $70.0 with anestimated allocation of 74% to HRS and 26% to Comdata. The amount of ourobligation to vendors for these expenditures at December 31, 2006 was notmaterial and no such amount is included in the table above.

**Critical Accounting Policies and Estimates**

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires us to make judgments, estimates, andassumptions regarding uncertainties that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof our financial statements and our reported amounts of revenues and expensesduring the reported periods. Additionally, management’s judgment is required inselecting among available alternative accounting standards that allow differentaccounting treatment for similar transactions. Areas that require significantjudgments, estimates and assumptions include revenue recognition, theassignment of fair values upon acquisition of goodwill and other intangibleassets and testing for impairment; the capitalization, amortization andimpairment testing of software and development costs; the determination of ourliability for pensions and other postretirement benefits; the determination offair value and estimated expected life related to stock options granted; thedetermination of the allowance for doubtful accounts and reserve for salesadjustment; and the resolution of tax matters. We use historical experience,qualified independent consultants and all available information to make thesejudgments and estimates, and actual results will inevitably differ from thoseestimates and assumptions that are used to prepare our financial statements atany given time. Despite these inherent limitations, we believe that ourManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and consolidated financial statements and related notes provide ameaningful and fair perspective of our company. Further discussion of therisks, judgments and uncertainties associated with our business can be found inPart I, Item 1A, “Risk Factors” and Part II, Item 7A, “Quantitativeand Qualitative Disclosures About Market Risks” of this report.

***Revenue Recognition***

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

***HRS***

***Repetitive Business***

Themajority of our HRS revenue is generated by recurring monthly or quarterly feesfrom our Payroll and Tax Services business, Benefit Services business andLifeWorks business. This revenue is generated by service fees, income frominvestment of customer funds in lieu of additional fees, software maintenanceand subscription fees.

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

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Our tax filing servicesconsist primarily of: (1) collecting funds for federal, state and localemployment taxes from customers based on payroll information provided by thecustomers; (2) remitting funds collected to the appropriate taxingauthorities; (3) filing applicable returns; and (4) handling relatedregulatory correspondence and amendments for customers. Revenue from these taxfiling services is billed and recognized as the services are provided,generally on a monthly basis. We hold our customers’ tax filing deposits forthe period between collection and remittance of the funds to the applicabletaxing authority. These tax filing deposits are invested through a grantortrust. We derive and recognize this investment income in lieu of additionalfees as a component of revenue as earned.

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

***Benefit Services.******  ***We provide employeehealth and welfare benefits administration services to our customers. Employeehealth and welfare benefits administration services include health insuranceportability compliance services related primarily to COBRA (ConsolidatedOmnibus Budget Reconciliation Act). Health and welfare benefits administrationservices also encompass benefits provided to active employees, such as (1) annualhealth plan enrollment, (2) ongoing employee enrollment and eligibilityservices, (3) tuition refund plans, (4) transportation reimbursementunder the Transportation 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 retirementplanning services that include: (1) administration services for benefitsprovided to retired and inactive employees, which include retiree healthcare,disability, surviving dependent, family leave and severance benefits; and (2) definedbenefit plan administration, ESOP administration and Qualified DomesticRelations Order administration.

Revenue for COBRA servicesis generally earned and recognized as the services are provided. Revenueassociated with other health and welfare benefits administration and retirementplanning services is generally recognized monthly based on the number ofemployees that receive or participate in the benefit.

Benefit Services are soldseparately; accordingly, we have objective evidence of standalone value formost services. Separate sales also establish the fair value of many of theservices sold in the event a customer contracts with us for multiple services.Where fair value cannot be established on the undelivered element, revenue (andthe related direct costs of revenue) for the delivered elements are deferredand recognized ratably over the remaining repetitive processing periodcommencing when all elements are delivered.

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

***Non-RepetitiveBusiness***

We generate revenue fromdelivery of professional services (i.e. data conversion, implementation andtraining) and shipment of materials.

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Revenue from professionalservices is non-refundable and is determined either on a time and materialsbasis or firm fixed fee. If these services or materials are sold on a standalonebasis revenue is recognized as the professional services or materials aredelivered. When professional services or materials are sold as part of amultiple element arrangement, we allocate revenue first to the fair value ofthe undelivered element(s) and allocate the residual revenue to thedelivered element(s) which revenue is typically recognized over the one tofour month implementation and conversion period. In the absence of fair valuefor an undelivered element(s), the arrangement is accounted for as a singleunit of accounting, resulting in a deferral of revenue recognition for thedelivered elements until all undelivered elements have been fulfilled, at whichtime previously deferred revenue is recognized ratably over the remainingcontract term of the arrangement.

***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 theirdestinations. Drivers may use Comdata’s proprietary Comdata Card to purchasefuel, lodging and other approved items, obtain cash advances from automatedteller machines or through the use of Comchek drafts and make direct depositsof pay, settlements or trip advances to personal bank accounts. Revenue fromfunds transfer transactions is based on a per transaction fee that is based oneither a fixed amount or a percentage of the face value of the transaction andis recognized when the transaction is processed.

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

Comdata also providesfueling centers with: (1) PC-based, point of sale systems that automatethe various transactions that occur at a fuel purchase desk; and (2) ”payat the pump” systems which enable customers to transact card-based fuelpurchases at the pump. Revenue from the sale of PC-based point of saleequipment and pay at the pump equipment is recognized based on shipping andinstallation terms. Recurring service revenues for these activities arerecognized as earned. Support and maintenance contracts are generally for 12-monthperiods 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. Sales of equipment under these arrangementsdo not include a right of return.

***Retail Services***

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

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

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

***Gross Versus Net Revenue***

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

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

We assess the collectibility of our accountsreceivable based primarily on the creditworthiness of the customer asdetermined by credit checks and analysis, as well as the customer’s paymenthistory. The amount established for the allowance for doubtful accounts isdependent on various matters including changes in the customer’s financial conditionand general economic factors such as the price of diesel fuel.

We assess the reserve forsales adjustment based on an analysis of historical trends. The amountestablished for the reserve for sales adjustment is dependent on variousmatters including customer negotiations and the notification of disputes by thecustomer.

***Assignment of fair values upon acquisition of goodwilland other intangible assets and testing for impairment***

In the event of a business combination where we arethe acquiring party, we are required to assign fair values to all identifiableassets and liabilities acquired, including intangible assets such as customerlists, trademarks, technology and covenants not to compete. We are alsorequired to determine the useful life for amortizable assets acquired. Thesedeterminations require significant judgments, estimates and assumptions and,when material amounts are involved, we generally utilize the assistance ofindependent valuation consultants. The remainder of the purchase cost of theacquired business not assigned to identifiable assets or liabilities is thenrecorded as goodwill. Although goodwill is no longer subject to amortization,we reassess the carrying value of goodwill annually, or more frequently whencertain developments occur, for impairment of that value.

A number of significant assumptions and estimates areinvolved in determining the current fair value of the reporting unit includingoperating cash flows, markets and market share, sales volumes and prices 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 of 

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impairment involvescomparing the current fair value of the reporting units to the recorded value(including goodwill).

If the recorded value (including goodwill) of areporting unit exceeds its current fair value, then to the extent that therecorded value of goodwill of the reporting unit exceeds the implied fair valueof the reporting unit’s goodwill, an impairment loss is recognized. The impliedfair value of goodwill is determined in the same manner as the amount ofgoodwill recognized in a business combination is determined. That is, the fairvalue of a reporting unit is allocated to all of the assets and liabilities ofthat reporting unit including any unrecognized intangible assets and the excessis the implied fair value of goodwill.

We also testlong-lived assets, including other intangible 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; and

·       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 ofsoftware and development costs***

Our software and development efforts are substantiallyfor internal use and, as indicated in Note 1, “Accounting Policies—Software andDevelopment Costs,” we rely on AICPA Statement of Position 98-1 (“SOP 98-1”)for accounting guidance. Therefore, for our modification or developmentefforts, we need to identify by nature and by stage of development those costswhich are to be capitalized rather than charged to operations as incurred. Wealso need to identify the point at which the modified or developed software isready for use, capitalization of cost will cease and amortization of that costwill begin. Costs incurred subsequent to the ready for use date will generallybe charged to operations and only capitalized if justified as a materialimprovement 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, 2006 was $61.1. The elements of software and developmentcosts were purchased software of $18.7 and internally developed software of$42.4. These amounts represent the costs we have invested in these assets,reduced by amortization expense charged against our earnings as the softwarewas used in our operations and by any write-downs as a result of ourrecoverability analysis. Our recoverability analysis considers projected futurecash flows from the utilization of the underlying software in the respectivecomponents of the business. Our projections of future cash flows are affectedby such factors as technological change, competitive offerings, marketplaceexpectations and project development. Changes in any of these factors mayresult in future write-downs of 

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thecarrying value of these or other assets. The amount of the write-down, if any,is largely dependent on our estimates of future cash flows and the selection ofan appropriate discount rate. As a result of our assessments during the pastthree years, we recorded asset write-downs of $0.3 in 2006, $7.8 in 2005 and$3.2 in 2004, for abandoned software projects.

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

We present informationabout our pension and postretirement benefit plans in Note 7, “RetirementPlans.”  The determination of theliabilities and expenses for pensions and other postretirement benefits areaccomplished with the assistance of independent actuaries using actuarialmethodologies and incorporating significant assumptions, including the rate usedto discount the future estimated liability, the long-term rate of return onplan assets, and several assumptions relating to the employee workforce (salaryincreases, medical costs, retirement age and mortality). The rate used todiscount future estimated liabilities is determined considering threeindependently prepared yield curves, taking into consideration the timing ofthe estimated defined benefit payments. The impact on the liabilities of achange in the discount rate of 1⁄4 of 1% would be approximately $16.8 andapproximately $0.4 to pre-tax earnings in the following year. The long-termrate of return is estimated by considering historical returns and expectedreturns on current and projected asset allocations and is generally applied toa five-year average market value of assets. A change in the assumption for thelong-term rate of return on plan assets of 1⁄4 of 1% would impact pre-taxearnings by approximately $1.5.

***Determination of fair value and estimated expectedlife related to stock options granted***

Effective January 1, 2006, we adopted theprovisions of, and account for stock-based compensation in accordance with,SFAS 123R. Under the fair value recognition provisions of SFAS 123R, we measurestock-based compensation cost at the grant date based on the fair value of theaward and recognize the compensation expense over the requisite service period,which is usually the vesting period. We elected the modified-prospective methodof adopting SFAS 123R under which prior periods are not retroactively restated.The valuation provisions of SFAS 123R apply to awards granted after theeffective date. Estimated stock-based compensation expense for awards grantedprior to the effective date but that remain unvested on the effective date willbe recognized over the remaining service period using the compensation costestimated for the SFAS 123 pro forma disclosures.

The adoption of SFAS 123R had a material impact on ourconsolidated results of operations and the statement of cash flows. However, webelieve that stock-based compensation aligns the interests of managers andnon-employee directors with the interests of shareholders. We do not currentlyexpect to significantly change our various stock-based compensation programs.See Note 8, “Stock-Based Compensation Plans”of this report for furtherinformation regarding our stock-based compensation plans.

We use the Black-Scholes standard option pricing model(“Black-Scholes model”) to determine the fair value of stock options. Thedetermination of the fair value of the awards on the date of grant using theBlack-Scholes model is affected by our stock price as well as assumptions ofother variables, including projected employee stock option exercise behaviors,the risk-free interest rate and expected volatility of our stock price infuture periods.

We analyze historical employee exercise andtermination data to estimate the expected life assumption. We believe thathistorical data currently represents the best estimate of the expected life ofa new employee option. We also stratify our employee population based upondistinctive exercise behavior patterns. The risk-free interest rate we use isbased on the implied yield currently available on U.S. Treasury zero couponissues. The estimated volatility of our common stock is based on historicaldaily volatility levels of our common shares. We believe that historical datacurrently represents the best estimate of the volatility. Because we do notanticipate paying any cash dividends in the foreseeable future, 

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we use an expecteddividend yield of zero. The amount of stock-based compensation expense werecognize during a period is based on the portion of the awards that areultimately expected to vest. We estimate option forfeitures at the time ofgrant and revise those estimates in subsequent periods if actual forfeituresdiffer from those estimates. We analyze historical data to estimate pre-vestingforfeitures and record stock-based compensation expense for those awardsexpected to vest.

If factors change and we employ different assumptionsfor estimating stock-based compensation expense in future periods or if weadopt a different valuation model, the future periods may differ significantlyfrom what we have recorded in the current period and could materially affectour net earnings and net earnings per share.

The Black-Scholes modelwas developed for use in estimating the fair value of traded options that haveno vesting restrictions and are fully transferable, characteristics not presentin our option grants. Existing valuation models, including the Black-Scholesand lattice binomial models, may not provide reliable measures of the fairvalues of our stock-based compensation. Consequently, there is a risk that ourestimates of the fair values of our stock-based compensation awards on thegrant dates may bear little resemblance to the actual values realized upon theexercise or forfeiture of those stock-based awards in the future. Some employeestock options may expire worthless, or only realize minimal intrinsic value, ascompared to the fair values originally estimated on the grant date andrecognized in our financial statements. Alternatively, some employee stockoptions may realize significantly more value than the fair values originallyestimated on the grant date and recognized in our financial statements.Currently, there is no market-based mechanism or other practical application toverify the reliability and accuracy of the estimates stemming from thesevaluation models, nor is there a means to compare and adjust the estimates toactual values.

***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.

***Recently issued accounting pronouncements***

In February 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS 155, “Accounting for Certain HybridInstruments—an amendment of FASB Statement 133 and 140.”  The new standard no longer requires financialinstruments that have embedded derivatives to be bifurcated and accounted forseparately. The new standard is effective for all financial instrumentsacquired or issued for years beginning after September 15, 2006 and is notexpected to have a material effect on the results of our operations orfinancial position.

In March 2006, the FASB issued SFAS 156, “Accountingfor Servicing of Financial Assets” that amends SFAS 140 regarding thecircumstances under which a servicing asset or servicing liability must berecognized, the initial and subsequent measurement of recognized servicingassets and liabilities, and information required to be disclosed relating toservicing assets and liabilities. Further, the new standard allowsmark-to-market accounting for servicing rights resulting in reporting that issimilar to fair-value hedge accounting, but without the effort and system costsneeded to identify effective hedging instruments and document hedgingrelationships. The new standard is effective for years beginning after September 15,2006 and is not expected to have a material effect on the results of ouroperations or financial position.

In July 2006, the FASB issued FinancialAccounting Standards Board Interpretation (“FIN”) 48, “Accounting for Uncertaintyin Income Tax Positions.”  FIN 48clarifies the application of SFAS 109, 

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“Accounting for IncomeTaxes” by establishing a threshold condition that a tax position must meet forany part of the benefit of that position to be recognized in the financial statements.In addition to recognition, FIN 48 provides guidance concerning measurement,derecognition, classification, and disclosure of tax positions. The newstandard is effective for years beginning after December 15, 2006 and isnot expected to have a material effect on the results of our operations orfinancial position.

In September 2006,the FASB issued SFAS 157, “Fair Value Measurements.”  SFAS 157 clarifies the principle thatfair value should be based on the assumptions market participants would usewhen pricing an asset or liability, and establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions. Under thestandard, fair value measurements would be separately disclosed by level withinthe fair value hierarchy. SFAS 157 is effective for fiscal years beginningafter November 15, 2007. We are currently evaluating the impact of thisnew standard.

**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk

**Interest RateMarket Risk**

Ourprimary market risk exposure is interest rate risk. We invest funds heldtemporarily for our clients in interest bearing instruments, earning interestincome in lieu of additional service fees. Interest income from client funds isrecorded as revenue net of any interest credits due clients, and changes ininterest rates impact interest revenue accordingly. In addition, we holdshort-term investments for our own account for liquidity purposes and issuedebt instruments, with related interest income and interest expense recorded assuch in the statement of operations. At December 31, 2006, we held nointerest rate derivative instruments. All interest rate sensitive instrumentsare held in portfolios for investment purposes, and no such instruments areheld in trading portfolios. Our interest rate risk exposures are summarized inthe table below.

| ** **                       | ** ** | **Invested  Customer  Funds**       | ** ** | **Ceridian  Short-term  Investments** | ** ** | **Variable  Rate Debt  Instruments** | ** ** | **Net  Position** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|
| ** **                       | ** ** | **(dollars in millions)** | ** ** |
| ***Average  balances***          |       |                                |       |                                  |       |                                      |       |              |       |   |   |   |   |
| 2006                             |       | $                                   | 2,998.1    |                                  |       | $                                         | 296.3      |              |       |   | $ | (89.8 | ) |   | $ | 3,204.6 |   |
| 2005                             |       | $                                   | 2,769.6    |                                  |       | $                                         | 256.5      |              |       |   | $ | (61.2 | ) |   | $ | 2,964.9 |   |
| 2004                             |       | $                                   | 2,435.2    |                                  |       | $                                         | 144.3      |              |       |   | $ | (125.2 | ) |   | $ | 2,454.3 |   |
| ***Average  interest rate***     |       |                                |       |                                  |       |                                      |       |              |       |   | ** ** | ** ** | ** ** |
| 2006                             |       | 4.40                                | %          |                                  | 4.56       | %                                         |       |              | 5.46       | % |   | 4.39 | % |
| 2005                             |       | 3.81                                | %          |                                  | 3.05       | %                                         |       |              | 4.15       | % |   | 3.74 | % |
| 2004                             |       | 3.10                                | %          |                                  | 1.80       | %                                         |       |              | 1.97       | % |   | 3.09 | % |
| ***Interest  income (expense)*** |       |                                |       |                                  |       |                                      |       |              |       |   | ** ** | ** ** | ** ** |
| 2006                             |       | $                                   | 130.2      |                                  |       | $                                         | 13.5       |              |       |   | $ | (4.9 | ) |   | $ | 140.6 |   |
| 2005                             |       | $                                   | 105.5      |                                  |       | $                                         | 7.8        |              |       |   | $ | (2.5 | ) |   | $ | 110.8 |   |
| 2004                             |       | $                                   | 75.6       |                                  |       | $                                         | 2.6        |              |       |   | $ | (2.5 | ) |   | $ | 75.7 |   |

 

At December 31, 2006, our invested customer fundswere $4,584.3, short-term investments were $230.5 and variable rate debtinstruments were $93.5. In 2006, our interest revenue increased $26.5 comparedto 2005, with $17.5 due to higher interest rates and $9.0 due to higherinvestment balances. The increase in interest revenue from invested customerfunds in 2005 over 2004 of $29.9 consisted of $19.3 related to higher interestrates and $10.6 due to higher average invested balances.

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Theimpact of our interest rate derivative program was as follows:

| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | ** 2006 **                        | ** ** | ** 2005 ** | ** ** | ** 2004 ** | ** ** |
| ** **               | ** ** | **(dollars in millions)**         | ** ** |
| Realized losses  (gains) |       |                                        | —     |   |   |   | $ | 2.3 |   |   | $ | (30.0 | ) |
| Unrealized losses        |       |                                        | —     |   |   |   | — |   |   | 28.9 |   |
| Net losses  (gains)      |       |                                        | —     |   |   |   | $ | 2.3 |   |   | $ | (1.1 | ) |

 

We further discuss interest rate derivative contractsin Note 1, “Accounting Policies—Cash and Investments, including Derivatives”and Note 2, “Investing Activity” to our consolidated financial statementscontained in Part II, Item 8, “Financial Statements and Supplementary Data”of this report.

We manage our interest rate risk by modeling theimpact of changes in interest rates on interest income and interest expense,referred to below as “Net Interest Income.” Interest rate derivative instruments may be purchased as part of ourrisk management program and such instruments are modeled as part of our overallinterest rate sensitivity position. Our goal is to achieve a stable andpredictable level of reported Net Interest Income over a range of expectedchanges in interest rates.

Thetable below illustrates the impact of changes in interest rates on our NetInterest Income.

| ** **                                   | ** ** | **Hypothetical Change in** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|
| **Change in Interest Rates**  | ** ** | ** **                           | ** ** | **Net Interest Income** | ** ** |
| **Expressed in Basis Points** | ** ** | ** **                           | ** ** | **from Base Scenario** | ** ** |
| ** **                                   | ** ** | **(dollars in millions)**  | ** ** |
| 300 Increase                                 |       |                                 | $          | 43.2 |   |   |
| 200 Increase                                 |       |                                 | 28.8       |   |   |
| 100 Increase                                 |       |                                 | 14.4       |   |   |
| 50 Increase                                  |       |                                 | 7.2        |   |   |
| 25 Increase                                  |       |                                 | 3.6        |   |   |
| Base Scenario  (5.25%)                       |       |                                 |       |   |   |
| 25 Decrease                                  |       |                                 | (3.6       | ) |   |
| 50 Decrease                                  |       |                                 | (7.2       | ) |   |
| 100 Decrease                                 |       |                                 | (15.1      | ) |   |
| 200 Decrease                                 |       |                                 | (30.0      | ) |   |
| 300 Decrease                                 |       |                                 | $          | (46.5 | ) |   |
|                                              |            |                                      |            |  |  |  |  |  |  |  |

 

The contents of the table show the estimated impact onannual Net Interest Income of an immediate and sustained change in interestrates from a base of 5.25% Federal Funds rate as of December 31, 2006. Computationsin the table are based on assumed levels of customer funds, short-termliquidity investments, debt instruments outstanding, interest rate derivativeinstruments, and U.S. and Canadian interest rates. We held no interest ratederivative instruments at December 31, 2006. Prepayment risk exists in theform of callable securities we own, and we expect these securities would becalled in the -100 bp, -200 bp, and -300 bp ratescenarios. We expect that callable securities will not be called in all risingrate scenarios and in the -25 bp and -50 bp scenarios. The amountof prepayment risk of other securities in the portfolio is negligible, andtherefore excluded from the table’s contents.

The principal change inour interest rate risk position was the sale of all of our interest ratederivative instruments on February 4, 2005. After a review of interestrate market factors and trends, our management decided that the best method tomaximize the realizable value of the interest rate derivative instruments wasto liquidate them at that time. We disposed of our interest rate derivativeinstruments for cash proceeds of $21.0 which represented the fair market valueof the contracts on the disposal date. From 

55

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December 31,2004 to the disposal date, we received $3.5 in cash for settlements on thesederivative instruments. The $2.3 difference between the December 31, 2004carrying value of $26.8 and the $24.5 total cash received was recorded as aloss on interest rate derivative instruments in the first quarter of 2005. Interestrate risks associated with these instruments included mark-to-market valuationsand interest receipts, all of which were reported as “loss on derivativeinstruments” in our consolidated statements of operations. We have subsequentlymade no purchases of interest rate derivative instruments.

**Fuel Price MarketRisk**

Our Comdata transportation services business revenueand net earnings is exposed to variability based on changes in the price ofdiesel fuel and gasoline. For a portion of its transportation customers,Comdata earns fee revenue for card transactions based on a percentage of thetotal amount of each fuel purchase. An increase or decrease in the price offuel increases or decreases the total dollar amount of fuel purchases andComdata revenue, accordingly.

We manage our fuel price risk by modeling the impactof changes in fuel prices on transaction fee revenue and net income. Fuel pricederivative 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 position. Our goal is to achieve a stable and predictablelevel of reported net earnings through a range of expected changes in fuelprices.

As reported by the U.S. Department of Energy, theaverage price per gallon of highway diesel fuel number 2 was $2.70 in 2006,$2.40 in 2005, $1.81 in 2004 and $1.51 in 2003. These rising diesel fuel pricesincreased Comdata revenue approximately $5.7 in 2006, $10.4 in 2005 and $5.5 in2004, which were offset by realized losses on diesel fuel price derivativecontracts of $2.9 in 2006, $8.2 in 2005 and $2.2 in 2004.

As of December 31, 2006, Comdata held no fuelprice derivative instruments for diesel fuel or gasoline. In February of2007, we entered into diesel fuel price derivative instruments that have theeffect of hedging approximately 30% of our anticipated fuel exposure for 2007with an average strike price of $2.65 per gallon. We estimate that for dieselfuel number 2, a 10 cent change in the annual average price impacts Comdata revenueand pretax income by $2.0.

Similar to diesel fuel price risk, our Comdatatransportation services business revenue and net income are subject tovariability based on changes in gasoline prices. We estimate that for each 10cent change in the annual average price of gasoline, Comdata’s revenue andpretax income are impacted $0.5. Due to increases in the average price ofgasoline during 2006 and 2005, Comdata’s revenue was $0.7 higher in 2006 and$2.5 higher in 2005 from what it would have been had gasoline prices remainedstable during those years. We may use gasoline derivative instruments as partof our fuel price risk management program, but no such instruments were heldduring 2006.

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**Item 8.**                        FinancialStatements and Supplementary Data

**1.**                 Indexto Consolidated Financial Statements.

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

|                                                                                                                                           | ** ** | Page   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|------------|
| Management’s Report on Internal Control Over Financial  Reporting                                                                    |       |   | 58         |   |   |
| Report of Independent Registered Public Accounting  Firm                                                                                  |       |   | 59         |   |   |
| Report of Independent Registered Public Accounting  Firm                                                                                  |       |   | 60         |   |   |
| Consolidated Statements of Operations for the years  ended December 31, 2006, 2005 and 2004                                          |       |   | 61         |   |   |
| Consolidated Balance Sheets as of December 31,  2006 and 2005                                                                        |       |   | 62         |   |   |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Income for the years ended December 31, 2006, 2005 and  2004 |       |   | 63         |   |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005 and 2004                                     |       |   | 64         |   |   |
| Notes  to Consolidated Financial Statements for the three years ended  December 31, 2006                                             |       |   | 65         |   |   |

 

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**MANAGEMENT’S REPORTON INTERNAL CONTROL OVER FINANCIAL REPORTING**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and15d-15(f) promulgated under the Securities Exchange Act of 1934, asamended, as a process designed by, or under the supervision of, our principalexecutive and principal financial officers and effected by our Board ofDirectors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in conformity with generallyaccepted accounting principles in the United States of America (“U.S. GAAP”),and includes those policies and procedures that:

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

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

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

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.

Our management assessed the effectiveness of internalcontrol over financial reporting as of December 31, 2006 using thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in *Internal Control—IntegratedFramework*. Based on this assessment and those criteria, we concludedthat, as of December 31, 2006, Ceridian Corporation and its subsidiariesmaintained effective internal control over financial reporting.

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 report.

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**REPORT OFINDEPENDENT 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 54), that Ceridian Corporation and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon 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. A company’sinternal 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.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2006 is fairly stated, in all material respects, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2006, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheets of the Company as of December 31, 2006 and 2005, and therelated consolidated statements of income, stockholders’ equity andcomprehensive income, and cash flows for each of the years in the three-yearperiod ended December 31, 2006, and our report dated February 28,2007 expressed an unqualified opinion on those consolidated financialstatements.

/s/ KPMGLLP

Minneapolis,MinnesotaFebruary 28, 2007

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofCeridian Corporation:

We have audited the accompanying consolidated balancesheets of Ceridian Corporation and subsidiaries (the “Company”) as of December 31,2006 and 2005, and the related consolidated statements of operations, cashflows and stockholders’ equity and comprehensive income for each of the yearsin the three-year period ended December 31, 2006. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

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

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Ceridian Corporation and subsidiaries as of December 31, 2006and 2005, and the results of their operations and their cash flows for each ofthe years in the three-year period ended December 31, 2006, in conformitywith U.S. generally accepted accounting principles.

As disclosed in Notes 1, 7 and 8 to the consolidatedfinancial statements, the Company adopted the provisions of Statement of FinancialAccounting Standards No. 123R, *Share Based Payment*,on January 1, 2006 and Statement of Financial Accounting Standards No. 158,*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans*,**on December 31,2006.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Ceridian Corporation and subsidiaries’ internal control overfinancial reporting as of December 31, 2006, based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated February 28, 2007 expressed an unqualifiedopinion on management’s assessment of, and effective operations of, internalcontrol over financial reporting.

/s/ KPMG LLP

Minneapolis, MinnesotaFebruary 28, 2007

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

| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                                     |       | $                                           | 1,565.1    |   | $ | 1,459.0 |   | $ | 1,320.4 |   |
| Costs and  Expenses                         |       |                                        |       |   |   |   |   |
| Cost of revenue                             |       | 843.0                                       |       | 785.2 |   | 741.4 |   |
| Selling, general and administrative         |       | 450.0                                       |       | 458.1 |   | 483.1 |   |
| Research and development                    |       | 28.1                                        |       | 28.1 |   | 26.1 |   |
| Loss on derivative instruments              |       | 2.7                                         |       | 11.6 |   | 0.3 |   |
| Other (income) expense, net                 |       | (10.5                                       | )          | 4.5 |   | 26.5 |   |
| Interest income                             |       | (13.5                                       | )          | (7.8 | ) | (2.6 | ) |
| Interest expense                            |       | 6.0                                         |       | 5.5 |   | 4.4 |   |
| Total costs and expenses                    |       | 1,305.8                                     |       | 1,285.2 |   | 1,279.2 |   |
| Earnings before  income taxes               |       | 259.3                                       |       | 173.8 |   | 41.2 |   |
| Income tax provision                        |       | 85.7                                        |       | 45.9 |   | 4.3 |   |
| Net earnings                                |       | $                                           | 173.6      |   | $ | 127.9 |   | $ | 36.9 |   |
| Earnings per  share                         |       |                                        |       |   |   |   |   |
| Basic                                       |       | $                                           | 1.22       |   | $ | 0.87 |   | $ | 0.25 |   |
| Diluted                                     |       | $                                           | 1.20       |   | $ | 0.86 |   | $ | 0.24 |   |
| Shares used in  calculations (in thousands) |       |                                        |       |   |   |   |   |
| Weighted average shares (basic)             |       | 141,882                                     |       | 146,935 |   | 149,074 |   |
| Dilutive securities                         |       | 2,649                                       |       | 1,698 |   | 2,005 |   |
| Weighted average  shares (diluted)          |       | 144,531                                     |       | 148,633 |   | 151,079 |   |

 

See notes to consolidated financial statements.

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

| ** **                                                                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                  |       |                  |       |   |   |
| Current assets                                                                              |       |                  |       |   |   |
| Cash and equivalents                                                                        |       | $                     | 294.7      |   | $ | 362.9 |   |
| Trade and other receivables, net                                                            |       | 682.2                 |       | 578.6 |   |
| Current deferred income taxes                                                               |       | 10.4                  |       | 16.5 |   |
| Other current assets                                                                        |       | 120.9                 |       | 88.9 |   |
| Total current assets                                                                        |       | 1,108.2               |       | 1,046.9 |   |
| Property, plant and equipment, net                                                          |       | 110.3                 |       | 121.5 |   |
| Goodwill                                                                                    |       | 952.6                 |       | 936.5 |   |
| Other intangible assets, net                                                                |       | 44.9                  |       | 35.6 |   |
| Software and development costs, net                                                         |       | 61.1                  |       | 71.8 |   |
| Deferred income taxes                                                                       |       | 19.4                  |       | 58.0 |   |
| Investments                                                                                 |       | 10.9                  |       | 12.9 |   |
| Derivative instruments                                                                      |       | —                |       | 0.5 |   |
| Other noncurrent assets                                                                     |       | 33.6                  |       | 28.5 |   |
| Total assets before customer funds                                                          |       | 2,341.0               |       | 2,312.2 |   |
| Customer funds                                                                              |       | 4,593.4               |       | 4,341.2 |   |
| Total assets                                                                                |       | $                     | 6,934.4    |   | $ | 6,653.4 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                              |       |                  |       |   |   |
| Current liabilities                                                                         |       |                  |       |   |   |
| Short-term debt and current portion of long-term  obligations                               |       | $                     | 16.6       |   | $ | 25.5 |   |
| Accounts payable                                                                            |       | 93.6                  |       | 95.0 |   |
| Drafts and settlements payable                                                              |       | 269.2                 |       | 232.7 |   |
| Customer advances                                                                           |       | 33.1                  |       | 39.3 |   |
| Deferred revenue                                                                            |       | 162.6                 |       | 107.8 |   |
| Accrued taxes                                                                               |       | 8.9                   |       | 22.8 |   |
| Employee compensation and benefits                                                          |       | 72.8                  |       | 67.8 |   |
| Other accrued expenses                                                                      |       | 64.7                  |       | 54.7 |   |
| Total current liabilities                                                                   |       | 721.5                 |       | 645.6 |   |
| Long-term obligations, less current portion                                                 |       | 83.9                  |       | 81.0 |   |
| Deferred income taxes                                                                       |       | 27.7                  |       | 31.2 |   |
| Employee benefit plans                                                                      |       | 103.3                 |       | 224.1 |   |
| Other noncurrent liabilities                                                                |       | 29.9                  |       | 36.8 |   |
| Total liabilities before customer funds obligations                                         |       | 966.3                 |       | 1,018.7 |   |
| Customer funds obligations                                                                  |       | 4,596.9               |       | 4,342.9 |   |
| Total liabilities                                                                           |       | 5,563.2               |       | 5,361.6 |   |
| Stockholders’ equity                                                                   |       |                  |       |   |   |
| Common stock, $.01 par, authorized 500,000,000  shares,  issued 151,567,406 and 151,567,406 |       | 1.5                   |       | 1.5 |   |
| Additional paid-in capital                                                                  |       | 924.0                 |       | 931.0 |   |
| Retained earnings                                                                           |       | 867.0                 |       | 693.4 |   |
| Treasury common stock at cost, 11,081,941 and  6,848,402 shares                             |       | (260.8                | )          | (144.1 | ) |
| Accumulated other comprehensive income                                                      |       | (160.5                | )          | (190.0 | ) |
| Total stockholders’ equity                                                             |       | 1,371.2               |       | 1,291.8 |   |
| Total liabilities  and stockholders’ equity                                            |       | $                     | 6,934.4    |   | $ | 6,653.4 |   |

 

See notes to consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVEINCOME (Dollars in millions)**

| ** **                            | ** ** | **Amount** | ** ** | **Shares** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Common Shares Issued**              |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                     |       | $          | 1.5        |       | $          | 1.5 |   | $ | 1.5 |   | 151,567,406 |   | 151,073,244 |   | 150,028,289 |   |
| Exercises of stock  options           |       | —     |       | —     |       | — |   | — |   | 299,736 |   | 849,273 |   |
| Restricted stock awards,  net         |       | —     |       | —     |       | — |   | — |   | 194,426 |   | 194,271 |   |
| Employee stock purchase  plans        |       | —     |       | —     |       | — |   | — |   | — |   | 1,411 |   |
| Ending balance—issued            |       | $          | 1.5        |       | $          | 1.5 |   | $ | 1.5 |   | 151,567,406 |   | 151,567,406 |   | 151,073,244 |   |
| **Treasury Stock—Common Shares** |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                     |       | $          | (144.1     | )          | $          | (33.2 | ) | $ | (0.1 | ) | (6,848,402 | ) | (1,650,117 | ) | (5,848 | ) |
| Repurchases                           |       | (316.8     | )          | (222.3     | )          | (80.3 | ) | (13,052,441 | ) | (10,736,450 | ) | (4,012,400 | ) |
| Exercises of stock options            |       | 197.7      |       | 108.3      |       | 44.5 |   | 8,724,312 |   | 5,389,255 |   | 2,246,762 |   |
| Restricted stock awards,  net         |       | 2.4        |       | (1.8       | )          | (1.5 | ) | 93,495 |   | (94,467 | ) | (87,706 | ) |
| Employee stock purchase  plans        |       | 0.0        |       | 4.9        |       | 4.2 |   | 1,095 |   | 243,377 |   | 209,075 |   |
| Ending balance—treasury          |       | $          | (260.8     | )          | $          | (144.1 | ) | $ | (33.2 | ) | (11,081,941 | ) | (6,848,402 | ) | (1,650,117 | ) |
| **Common Shares Outstanding**         |       |       |       |       |       |   |   | 140,485,465 |   | 144,719,004 |   | 149,423,127 |   |
| **Additional Paid-In Capital**        |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Beginning balance                     |       | $          | 931.0      |       | $          | 936.6 |   | $ | 925.2 |   |   |   |   |   |   |   |
| Exercises of stock  options           |       | (28.0      | )          | (20.0      | )          | 2.5 |   |   |   |   |   |   |   |
| Tax benefit from stock  options       |       | 22.1       |       | 11.7       |       | 6.1 |   |   |   |   |   |   |   |
| Restricted stock awards,  net         |       | (1.2       | )          | 3.7        |       | 3.5 |   |   |   |   |   |   |   |
| Employee stock purchase  plans        |       | 0.1        |       | (1.0       | )          | (0.7 | ) |   |   |   |   |   |   |
| Ending balance                        |       | $          | 924.0      |       | $          | 931.0 |   | $ | 936.6 | * * | * * | * * | * * | * * | * * | * * |

 

| ** **                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Comprehensive  Income** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|---------------------------|------------|
| ** **                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2006**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Retained  Earnings**                                                                                  |       |       |       |       |       |       |       |                      |       |   |   |   |   |
| Beginning balance                                                                                       |       | $          | 693.4      |       | $          | 565.5      |       | $                         | 528.6      |   |   |   |   |   |   |   |
| Net earnings                                                                                            |       | 173.6      |       | 127.9      |       | 36.9       |       | $                         | 173.6      |   | $ | 127.9 |   | $ | 36.9 |   |
| Ending balance                                                                                          |       | $          | 867.0      |       | $          | 693.4      |       | $                         | 565.5      |   |   |   |   |   |   |   |
| **Accumulated  Other Comprehensive Income (Loss)**                                                      |       |       |       |       |       |       |       |                      |       |   |   |   |   |
| Foreign currency  translation                                                                           |       |       |       |       |       |       |       |                      |       |   |   |   |   |
| Beginning balance                                                                                       |       | $          | 48.9       |       | $          | 44.1       |       | $                         | 21.2       |   |   |   |   |   |   |   |
| Rate changes, net                                                                                       |       | 3.6        |       | 4.8        |       | 22.9       |       | 3.6                       |       | 4.8 |   | 22.9 |   |
| Ending balance                                                                                          |       | $          | 52.5       |       | $          | 48.9       |       | $                         | 44.1       |   |   |   |   |   |   |   |
| Unrealized (loss)  gain on customer funds                                                               |       |       |       |       |       |       |       |                      |       |   |   |   |   |
| Beginning balance                                                                                       |       | $          | (0.9       | )          | $          | 18.5       |       | $                         | —     |   |   |   |   |   |   |   |
| Change in unrealized gain  (loss), net of income taxes of $(0.9), $(10.5) and $10.6                |       | (1.1       | )          | (18.3      | )          | 18.9       |       | (1.1                      | )          | (18.3 | ) | 18.9 |   |
| Less realized net (gain),  net of income taxes of $0.0, $(0.6) and $(0.3)                          |       | 0.1        |       | (1.1       | )          | (0.4       | )          | 0.1                       |       | (1.1 | ) | (0.4 | ) |
| Ending balance                                                                                          |       | $          | (1.9       | )          | $          | (0.9       | )          | $                         | 18.5       |   |   |   |   |   |   |   |
| Unrealized gain on  marketable securities                                                               |       |       |       |       |       |       |       |                      |       |   |   |   |   |
| Beginning balance                                                                                       |       | $          | 3.2        |       | $          | 3.6        |       | $                         | 3.9        |   |   |   |   |   |   |   |
| Change in unrealized gain,  net of income taxes of $0.6, $1.3 and $1.5                        |       | 1.5        |       | 2.3        |       | 2.4        |       | 1.5                       |       | 2.3 |   | 2.4 |   |
| Less realized net (gain),  net of income taxes of $(0.9), $(1.6) and $(1.7)                        |       | (1.4       | )          | (2.7       | )          | (2.7       | )          | (1.4                      | )          | (2.7 | ) | (2.7 | ) |
| Ending balance                                                                                          |       | $          | 3.3        |       | $          | 3.2        |       | $                         | 3.6        |   |   |   |   |   |   |   |
| Pension liability  adjustment                                                                           |       |       |       |       |       |       |       |                      |       |   |   |   |   |
| Beginning balance                                                                                       |       | $          | (241.2     | )          | $          | (240.9     | )          | $                         | (235.1     | ) |   |   |   |   |   |   |
| Pension liability change,  net of income taxes of $119.8, $0.4 and $2.7 (Note 7)                   |       | 223.4      |       | (0.3       | )          | (5.8       | )          | 223.4                     |       | (0.3 | ) | (5.8 | ) |
| Pension and other  postretirement adjustment for adoption of SFAS 158, net of income taxes of  ($104.0) |       | (196.6     | )          | —     |       | —     |       |                      |       |   |   |   |   |
| Ending balance                                                                                          |       | $          | (214.4     | )          | $          | (241.2     | )          | $                         | (240.9     | ) |   |   |   |   |   |   |
| Total ending balance                                                                                    |       | $          | (160.5     | )          | $          | (190.0     | )          | $                         | (174.7     | ) |   |   |   |   |   |   |
| Total Stockholders’  Equity                                                                        |       | $          | 1,371.2    |       | $          | 1,291.8    |       | $                         | 1,295.7    |   |   |   |   |   |   |   |
| ***Total Comprehensive Income***                                                                        | * *   | * *   |       |       |       |       |       | $                         | 399.7      |   | $ | 112.6 |   | $ | 72.2 |   |

 

See notes to consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**(Dollars in millions)

| ** **                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flows from Operating Activities**                                             |       |                                        |       |   |   |   |   |
| Net earnings                                                                         |       | $                                           | 173.6      |   | $ | 127.9 |   | $ | 36.9 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                        |       |   |   |   |   |
| Deferred income  tax provision (benefit)                                             |       | 25.3                                        |       | (11.4 | ) | (19.8 | ) |
| Depreciation and  amortization                                                       |       | 86.9                                        |       | 85.3 |   | 124.7 |   |
| Provision for  doubtful accounts                                                     |       | 5.3                                         |       | 11.2 |   | 9.7 |   |
| Net periodic  pension costs                                                          |       | 6.7                                         |       | 11.6 |   | 6.0 |   |
| Unrealized (gain)  loss on derivative instruments                                    |       | (0.2                                        | )          | 1.1 |   | 28.1 |   |
| Gain on sale of  marketable securities and other assets                              |       | (9.3                                        | )          | (4.3 | ) | (4.5 | ) |
| Stock-based  compensation                                                            |       | 21.0                                        |       | 2.5 |   | 2.4 |   |
| Tax benefits from  stock-based compensation                                          |       | (22.1                                       | )          | — |   | — |   |
| Asset abandonments                                                                   |       | 0.3                                         |       | 9.1 |   | 3.6 |   |
| SourceWeb exit  costs                                                                |       | —                                      |       | — |   | 28.5 |   |
| Other.                                                                               |       | 1.8                                         |       | 5.3 |   | (2.3 | ) |
| Changes in operating assets and liabilities:                                         |       |                                        |       |   |   |   |   |
| Trade and other  receivables                                                         |       | (113.3                                      | )          | (85.6 | ) | (42.4 | ) |
| Accounts payable.                                                                    |       | (2.6                                        | )          | 20.3 |   | 10.8 |   |
| Drafts and settlements  payable                                                      |       | 36.5                                        |       | 79.3 |   | 39.7 |   |
| Deferred revenue                                                                     |       | 54.3                                        |       | 19.4 |   | 22.4 |   |
| Employee  compensation and benefits                                                  |       | (4.1                                        | )          | 10.1 |   | 0.9 |   |
| Accrued taxes                                                                        |       | 3.6                                         |       | 13.2 |   | 7.0 |   |
| Contribution to  retirement plan trust                                               |       | (75.0                                       | )          | — |   | — |   |
| Other current  assets and liabilities                                                |       | (27.0                                       | )          | 4.3 |   | (10.9 | ) |
| Net cash provided by  operating activities                                           |       | 161.7                                       |       | 299.3 |   | 240.8 |   |
| **Cash Flows from Investing Activities**                                             | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expended for property,  plant and equipment.                                         |       | (30.3                                       | )          | (31.4 | ) | (32.9 | ) |
| Expended for software and  development costs                                         |       | (22.7                                       | )          | (32.8 | ) | (32.9 | ) |
| Proceeds from sales of  businesses and assets.                                       |       | 20.0                                        |       | 31.5 |   | 17.1 |   |
| Expended for  acquisitions of investments and businesses, less cash acquired         |       | (41.1                                       | )          | (10.4 | ) | (19.3 | ) |
| Net cash used for  investing activities                                              |       | (74.1                                       | )          | (43.1 | ) | (68.0 | ) |
| **Cash Flows from Financing  Activities**                                            |       |                                        |       |   |   |   |   |
| Revolving credit  facilities and overdrafts, net                                     |       | (7.5                                        | )          | 11.5 |   | (59.6 | ) |
| Repayment of other debt  and long-term obligations                                   |       | (5.8                                        | )          | (11.2 | ) | (4.1 | ) |
| Repurchase of common  stock.                                                         |       | (316.8                                      | )          | (222.3 | ) | (80.3 | ) |
| Tax benefits from  stock-based compensation                                          |       | 22.1                                        |       | — |   | — |   |
| Proceeds from stock  option exercises and stock sales                                |       | 150.8                                       |       | 92.2 |   | 50.5 |   |
| Net cash used for  financing activities                                              |       | (157.2                                      | )          | (129.8 | ) | (93.5 | ) |
| **Effect of Exchange Rate Changes  on Cash**                                         |       | 1.4                                         |       | 2.2 |   | 5.5 |   |
| Net Cash Flows (Used)  Provided                                                      |       | (68.2                                       | )          | 128.6 |   | 84.8 |   |
| Cash and equivalents at  beginning of period                                         |       | 362.9                                       |       | 234.3 |   | 149.5 |   |
| Cash and equivalents at end of period                                                |       | $                                           | 294.7      |   | $ | 362.9 |   | $ | 234.3 |   |

 

| ** **                                     | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | ** 2006 **                        | ** ** | ** 2005 ** | ** ** | ** 2004 ** | ** ** |
| **Interest and Income Taxes Paid  (Refunded)** |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest paid                                  |       |                                        | $          | 6.2 |   |   |   | $ | 6.3 |   |   | $ | 4.5 |   |
| Income taxes paid                              |       |                                        | $          | 52.4 |   |   |   | $ | 56.9 |   |   | $ | 33.2 |   |
| Income taxes refunded                          |       |                                        | $          | (0.4 | ) |   |   | $ | (7.0 | ) |   | $ | (17.1 | ) |

 

See notes to consolidated financial statements.

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS(For the three years ended December 31, 2006)(Dollars in millions, except per share data)**

**INDEX TO NOTES**

|     | ** ** | **Note**                                        | ** ** | **Page** | ** ** |
|-----|------------|-------------------------------------------------|------------|----------|------------|
| 1.  |       | Accounting  Policies                            |       |     | 65         |   |   |
| 2.  |       | Investing Activity                              |       |     | 75         |   |   |
| 3.  |       | Customer Funds                                  |       |     | 78         |   |   |
| 4.  |       | Trade  and Other Receivables, Net               |       |     | 79         |   |   |
| 5.  |       | Capital Assets                                  |       |     | 80         |   |   |
| 6.  |       | Financing                                       |       |     | 81         |   |   |
| 7.  |       | Retirement Plans                                |       |     | 83         |   |   |
| 8.  |       | Stock-Based  Compensation Plans                 |       |     | 89         |   |   |
| 9.  |       | Supplementary  Data to Statements of Operations |       |     | 94         |   |   |
| 10. |       | Income Taxes                                    |       |     | 95         |   |   |
| 11. |       | Commitments  and Contingencies                  |       |     | 97         |   |   |
| 12. |       | Legal Matters                                   |       |     | 97         |   |   |
| 13. |       | Segment Data                                    |       |     | 99         |   |   |
| 14. |       | Supplementary  Quarterly Data (Unaudited)       |       |     | 102        |   |   |

 

**1.**   ACCOUNTING POLICIES

**General Nature ofOur Business**

Ceridian Corporation is aninformation services company principally in the human resource (“HR”),transportation and retail markets. Our human resource solutions business (whichwe refer to in this report as “HRS” or “Human Resource Solutions”) enablescustomers to outsource a broad range of employment processes, such as payroll,tax filing, human resource information systems, employee self-service, time andlabor management, benefits administration, employee assistance and work-lifeprograms, recruitment and applicant screening, and post-employment healthinsurance portability compliance. We have HRS operations primarily in theUnited States, Canada and the United Kingdom. Our Comdata subsidiary (which werefer to in this report as “Comdata”) provides transaction processing,financial services and regulatory compliance services primarily to thetransportation and retail industries. Comdata’s products and services includepayment processing and the issuance of credit, debit and stored value cards. Ourproducts and services and business segments are more fully described in Note13, “Segment Data.”

**Basis ofConsolidation**

We include in our consolidated financial statementsthe subsidiaries and investments in which we have a majority interest. We alsoinclude in our consolidated financial statements the grantor trusts that holdfunds provided by our HRS payroll and tax filing customers pending remittanceto employees of those customers or tax authorities in the United States andCanada. The customer funds held in trust and customer deposits related to ourHRS benefits services and Comdata retail services businesses are separatelyidentified as “customer funds” in our consolidated balance sheets. Throughcustomer agreements, we are entitled to receive the interest income on thesecustomer funds. Further information on our accounting for these funds isprovided in the section “Revenue Recognition” later in this Note 1 and in Note3, “Customer Funds.”

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When we acquire between a 20% to 50% equity interestin another entity, we generally account for that investment under the equitymethod and record our share of its earnings or losses. During the reportingperiods included in this report, we held no investments representing an equityinterest between 20% and 50%. Our other investments may include debt or equitysecurities that may or may not be marketable securities. We discuss these otherinvestments in the section entitled “Cash and Investments, includingDerivatives” later in this Note 1 and in Note 2, “Investing Activity.” We reviewour less-than-20%-owned investments to determine whether we exercise adegree of significant influence over their management that would require theapplication of the equity method.

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

**Recently IssuedAccounting Pronouncements**

In February 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)155, “Accounting for Certain Hybrid Instruments—an amendment of FASB Statement133 and 140.” The new standard no longer requires financial instruments thathave embedded derivatives to be bifurcated and accounted for separately. Thenew standard is effective for all financial instruments acquired or issued foryears beginning after September 15, 2006 and is not expected to have amaterial effect on the results of our operations or financial position.

In March 2006, the FASB issued SFAS 156, “Accountingfor Servicing of Financial Assets” that amends SFAS 140 regarding thecircumstances under which a servicing asset or servicing liability must berecognized, the initial and subsequent measurement of recognized servicingassets and liabilities, and information required to be disclosed relating toservicing assets and liabilities. Further, the new standard allowsmark-to-market accounting for servicing rights resulting in reporting that issimilar to fair-value hedge accounting, but without the effort and system costsneeded to identify effective hedging instruments and document hedgingrelationships. The new standard is effective for years beginning after September 15,2006 and is not expected to have a material effect on the results of ouroperations or financial position.

In July 2006, the FASB issued FinancialAccounting Standards Board Interpretation (“FIN”) 48, “Accounting forUncertainty in Income Tax Positions.” FIN 48 clarifies the application of SFAS109, “Accounting for Income Taxes” by establishing a threshold condition that atax position must meet for any part of the benefit of that position to berecognized in the financial statements. In addition to recognition, FIN 48provides guidance concerning measurement, derecognition, classification, anddisclosure of tax positions. The new standard is effective for years beginningafter December 15, 2006 and is not expected to have a material effect onthe results of our operations or financial position.

In September 2006,the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing an asset or liability, andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. Under the standard, fair value measurements would beseparately disclosed by level within the fair value hierarchy. SFAS 157 iseffective for fiscal years beginning after November 15, 2007. We arecurrently evaluating the impact of this new standard.

**Use of Estimates**

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of our financial statements andour reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates. Estimates that could significantlyaffect our results of operations or financial condition involve the assignmentof fair values upon acquisition of goodwill and 

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otherintangible assets and testing for impairment, the capitalization, amortizationand impairment testing of software and development costs, the determination ofour liability for pensions and postretirement benefits, costs associated withrestructuring operations, the determination of fair value and estimatedexpected life related to stock options granted, and the resolution of taxmatters and contingencies. Further discussion on these estimates can be foundin related disclosures elsewhere in our Notes.

**Changes inPresentation**

We have reclassifiedcertain prior year amounts to conform to the current year’s presentation. Inthe years ended December 31, 2005 and 2004, we reduced cost of revenue andincreased selling, general and administration (“SG&A”) expenses by $6.5 and$3.8, respectively, to properly classify expenses to reflect the activitiesperformed. For the periods ended December 31, 2005, 2004, 2003 we increasedcash and equivalents and accounts payable by $27.3, $13.6, and $25.3,respectively, to properly reflect book overdrafts with certain financialinstitutions. This reclassification increased cash provided by operatingactivities by $13.7 for the year ended December 31, 2005, and decreasedthe cash provided by operating activities by $11.7 for the period ended December 31,2004. Also, for the period ended December 31, 2005, we reduced trade andother receivables, net, and deferred revenue by $6.1. These reclassificationshad no effect on the previously reported consolidated net earnings orstockholders’ equity.

**Cash andInvestments, including Derivatives**

We classify investments that are readily convertibleto cash within three months of purchase as cash equivalents in our consolidatedbalance sheets and report those amounts at amortized cost (which approximatesfair value). We account for our investments in marketable securities under SFAS115, “Accounting for Certain Investments in Debt and Equity Securities,” andinvestments other than marketable securities or derivative instruments under AccountingPrinciples Board (“APB”) Opinion 18, “The Equity Method of Accounting forInvestments in Common Stock.” Our investments of customer funds in marketablesecurities were classified as held-to-maturity, and carried at amortized costuntil May 2004, when we reclassified these investments as “available forsale.” Customer funds and other investments in marketable equity or debtsecurities are classified as available-for-sale and reported in the balancesheet at fair value, with changes in fair value reported in accumulated othercomprehensive income as further discussed in Note 2, “Investing Activity.”

We account for derivativesin accordance with SFAS 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended and interpreted. SFAS 133 requires that all derivativesbe measured at fair value on the balance sheet. The treatment of changes in thefair value of a derivative depends on the character of the transaction,including whether it has been designated and qualifies as part of a hedgingrelationship as defined under SFAS 133. Derivatives that do not meet the SFAS133 criteria for hedge accounting are designated as economic hedges and changesin the fair value associated with these instruments are included in theconsolidated statement of operations as loss on derivative instruments. Inthose cases where the derivative meets the SFAS 133 hedge accounting criteriafor a cash flow hedge, the change in fair value of the derivative that iseffective in offsetting changes in cash flows of the designated risk beinghedged is reported, net of related taxes, as accumulated other comprehensiveincome in stockholders’ equity until realized. The change in fair value of thederivative that is associated with ineffectiveness in the hedging relationshipis reported in current earnings. We enter into interest rate and fuel pricederivative instruments for the purpose of economically hedging revenue risk andnot for speculative activity. Our economic hedging activities may include theuse of contracts such as swaps, collars, caps and floors, as economic hedges ofvariable income from investments of customer funds and corporate cash, in thecase of interest rate derivatives, and, in the case of fuel price derivatives,from transportation revenue based on a percentage of the dollar value of thetransaction processed. We further discuss derivative instruments in Note 2, “InvestingActivity.”

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**Concentrations**

Cash deposits of clientand corporate funds are maintained primarily in large credit-worthy financialinstitutions in the countries in which we operate. These deposits may exceedthe amount of any deposit insurance that may be available through governmentagencies. All deliverable securities are held in custody with largecredit-worthy financial institutions which bear the risk of custodial loss. Non-deliverablesecurities, primarily money market securities, are restricted to large,credit-worthy broker-dealers and financial institutions.

**Trade and OtherReceivables, Net**

Trade and otherreceivables balances are shown on the consolidated balance sheets net of theallowance for doubtful accounts of $13.7 and $13.9 as of December 31, 2006and 2005, respectively. Amounts recorded on the consolidated balance sheetsapproximate fair value.

**Property, Plant andEquipment**

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

| Buildings                |   | 40 years   |   |
|--------------------------|--------|------------|--------|
| Building  improvements   |   | 5-10 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(income) expense, net when realized. Capitalized interest included in property,plant and equipment costs were not material.

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

**Goodwill and OtherIntangibles**

Goodwill, which represents the excess purchase priceover the fair value of net assets of businesses acquired, is assigned tooperating units based on the benefits derived from the acquisition. Goodwill isnot amortized against earnings but instead goodwill balances are subject toimpairment review on at least an annual basis. We perform the assessment of ourgoodwill balances in the fourth quarter of each year. After consideration ofthe factors prescribed in SFAS 142, “Goodwill and Other Intangible Assets,” thatmight indicate a risk of impairment, we found no indication of goodwillimpairment at December 31, 2006, 2005 and 2004.

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

| Customer lists  and relationships |   | 3-15 years |   |
|-----------------------------------|--------|------------|--------|
| Technology                        |   | 3-7 years  |   |
| Non-compete agreements            |   | 2-7 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 9, “SupplementaryData to the Statement of Operations.”

**Software andDevelopment Costs**

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

We generally amortize software development costs usingthe straight-line method over a range of three to seven years, but notexceeding the expected life of the software.

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

**ReceivablesSecuritization**

We maintain a creditfacility under which we sell Comdata receivables to third parties through aconsolidated subsidiary of Comdata. The subsidiary is consolidated sinceComdata owns 100% of the equity, the subsidiary’s activities are virtually allon Comdata’s behalf, and the substantive risks and rewards of the assets restdirectly with Comdata. Additionally, the subsidiary has a unilateral right toreclaim all of the transferred assets. Therefore, we account for theoutstanding advances as secured borrowings under SFAS 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities”and the sold receivables and borrowings remain in our consolidated balancesheets. We further explain our policy and the operation of this facility inNote 6, “Financing.”

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***RevenueRecognition***

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

***HRS***

***Repetitive Business***

The majority of our HRS revenue is generated byrecurring monthly or quarterly fees from our payroll processing, tax filing andother human resource services business (“Payroll and Tax Services”), benefitsadministration services business (“Benefits Services”) and work-life andemployee assistance programs business (“LifeWorks”). This revenue is generatedby service fees, income from investment of customer funds in lieu of additionalfees, software maintenance and subscription fees.

***Payroll and TaxServices.******  ***Generally, service fees for HRSpayroll processing are contracted on a per transaction basis and recognized asrevenue when transaction services are provided and the amount is billable. Wealso recognize payroll revenue from customer funds held temporarily pendingremittance to the customers’ employees. These payroll deposits are primarilyinvested through grantor trusts. We derive and recognize investment income inlieu of additional fees as a component of revenue as earned.

Our 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 additional fees as a component of revenue as earned.

Payroll processing and tax filing services are soldseparately; accordingly, we have objective evidence of standalone value formost services. Separate sales also establish the fair value of many of theservices sold in the event a customer contracts with us for multiple services.Where fair value cannot be established on the undelivered element, revenue (andthe related direct costs of revenue) for the delivered elements are deferredand recognized ratably over the remaining repetitive processing periodcommencing upon completion of implementation consulting services.

***Benefit Services.******  ***We provide employeehealth and welfare benefits administration services to our customers. Employeehealth and welfare benefits administration services include health insuranceportability compliance services related primarily to COBRA (ConsolidatedOmnibus Budget Reconciliation Act). Health and welfare benefits administrationservices also encompass benefits provided to active employees, such as (1) annualhealth plan enrollment, (2) ongoing employee enrollment and eligibilityservices, (3) tuition refund plans, (4) transportation reimbursementunder the Transportation 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) administration services for benefits provided to retired andinactive employees, which include retiree healthcare, disability, survivingdependent, family leave and severance benefits; and (2) defined benefitplan administration, ESOP administration and Qualified Domestic Relations Orderadministration.

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Revenue for COBRA servicesis generally earned and recognized as the services are provided. Revenueassociated with other health and welfare benefits administration and retirementplanning services is generally recognized monthly based on the number ofemployees that receive or participate in the benefit.

Benefit Services are soldseparately; accordingly, we have objective evidence of standalone value formost services. Separate sales also establish the fair value of many of theservices sold in the event a customer contracts with us for multiple services.Where fair value cannot be established on the undelivered element, revenue (andthe related direct costs of revenue) for the delivered elements are deferredand recognized ratably over the remaining repetitive processing periodcommencing upon completion of implementation consulting services.

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

***Non-RepetitiveBusiness***

We generate revenue fromdelivery of professional services (i.e. data conversion, implementation andtraining) and shipment of materials.

Revenue from professionalservices is non-refundable and is determined either on a time and materialsbasis or firm fixed fee. If these services or materials are sold on a standalonebasis revenue is recognized as the professional services or materials aredelivered. When professional services or materials are sold as part of amultiple element arrangement, we allocate revenue first to the fair value ofthe undelivered element(s) and allocate the residual revenue to thedelivered element(s) which revenue is typically recognized over the one tofour month implementation and conversion period. In the absence of fair valuefor an undelivered element(s), the arrangement is accounted for as a singleunit of accounting, resulting in a deferral of revenue recognition for thedelivered elements until all undelivered elements have been fulfilled, at whichtime previously deferred revenue is recognized ratably over the remainingcontract term of the arrangement.

***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 theirdestinations. Drivers may use Comdata’s proprietary Comdata Card to purchasefuel, lodging and other approved items, obtain cash advances from automatedteller machines or through the use of Comchek drafts and make direct depositsof pay, settlements or trip advances to personal bank accounts. Revenue fromfunds transfer transactions is based on a per transaction fee that is based oneither a fixed amount or a percentage of the face value of the transaction andis recognized when the transaction is processed.

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

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Comdata also providesfueling centers with: (1) PC-based, point of sale systems that automatethe various transactions that occur at a fuel purchase desk; and (2) ”payat the pump” systems which enable customers to transact card-based fuelpurchases at the pump. Revenue from the sale of PC-based point of saleequipment and pay at the pump equipment is recognized based on shipping andinstallation terms. 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. Sales of equipment under these arrangementsdo not include a right of return.

***Retail Services***

Comdata sells stored value cards and providessubsequent activation, reporting and transaction processing services (“services”)through its wholly owned subsidiary, Comdata Stored Value Solutions, Inc.(referred to in this report as “Comdata SVS”). Customers may also choose topurchase cards alone, without a continuing obligation for services from ComdataSVS. Comdata SVS recognizes revenue for card sales without services uponshipment.

For card sales with future processing services, revenueon both the card sales and services are deferred and reported on theconsolidated balance sheets as deferred income. Costs of the cards sold aredeferred and reported on the consolidated balance sheets in other currentassets. Costs associated with the services are recognized as incurred. Thedeferred income and deferred cost on the card sale are both recognized inearnings over the estimated life of the card, which includes the transactionprocessing period. The recognition period is 30 months, beginning uponactivation of the card. The deferred income on the services where we charge afee upon card activation for unlimited transactions is recognized in earningsover the same 30 month period, beginning when the fee is assessed. The deferredincome on the services where we charge a fee each time a transaction isprocessed is recognized in earnings over the same 30 month period,beginning when the fee is assessed. Our history of providing services to ourcustomers indicates that (1) we can expect activation of a card withinapproximately seven months following card shipment, and (2) during the sixmonths following the activation of a card, approximately 90% of the serviceshave been performed.

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

***Gross Versus Net Revenue***

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

**Costs and Expenses**

***Cost of Revenue***

We assign to cost of revenue those costs that directlybenefit the delivery of our revenue-producing products and services. Most ofthese costs are recognized as incurred, that is, as we become obligated to payfor them. Some costs of revenue are recognized in the period that a product issold and delivered. Other costs of revenue are recognized over the period ofuse or in proportion to the related revenue.

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For HRS, a substantial portion of the costs includedin cost of revenue are recognized as incurred and the remaining costs arerecognized over the period of use. The costs recognized as incurred consistprimarily of customer service staff costs, customer technical support costs,consulting and purchased services, delivery services and royalties. The costsof revenue recognized over the period of use are depreciation and amortizationof tangible and software assets, rentals of facilities and equipment, anddirect and incremental costs associated with deferred implementation servicerevenue.

For Comdata, the principaltypes of costs included in cost of revenue that are recognized as incurredinclude customer service staff costs, banking fees and telecommunications costs.The principal Comdata cost of revenue that is recognized when the product isdelivered is the cost of equipment sold to customers. The principal Comdatacosts of revenue that are recognized over the period of use includedepreciation and amortization of tangible and software assets, and rentals offacilities and equipment. The purchase cost of retail card stock is deferredand recognized in proportion to and over the same period as the relatedrevenue.

***Selling, General and Administrative Expense***

We include in selling expense costs related tomaintaining a direct marketing infrastructure and sales force and other directmarketing efforts such as advertising, telemarketing, direct mail and tradeshows.

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 pension costs.

***Research and Development 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:

·       conceptual formulation anddesign of possible product or process alternatives;

·       testing in search for orevaluation of product or process alternatives;

·       modification of theformulation or design of a product or process; and

·       engineeringactivity required to advance the design of a product to the point that it meetsspecific functional and economic requirements and is ready for production.

***Loss on Derivative Instruments***

We include in loss onderivative instruments the change in the fair value of derivative instrumentsdesignated as economic hedges, which are derivatives that do not meet the SFAS133 criteria for hedge accounting treatment. We do not enter into derivativeinstruments for speculative purposes. The effective portion of changes in thefair value of derivative contracts that meets the SFAS 133 hedge accountingrequirements is reported in accumulated other comprehensive income. As of December 31,2006, we did not have any derivative contracts that meet the SFAS 133 hedgeaccounting requirements. We discuss our policy on derivative instrumentsearlier in this Note 1 under the caption “Cash and Investments, includingDerivatives.”

***Other (Income) Expense, net***

We include in other(income) expense, net the results of transactions that are not appropriatelyclassified in another category and that generally are not recurring. Thosetransactions might relate to 

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litigationand contract settlements, currency exchange, asset sales, exit activities, andimpairment of asset values (asset write-downs).

**Leases**

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

**Stock-BasedCompensation**

In December 2004, FASB issued SFAS 123R, “Share-BasedPayment.” SFAS 123R is a revision of SFAS 123, “Accounting for Stock-BasedCompensation,” and supersedes APB Opinion No. 25, “Accounting for StockIssued to Employees,” and amends SFAS 95, “Statement of Cash Flows,” and itsrelated implementation guidance. On January 1, 2006, we adopted theprovisions of SFAS 123R using the modified prospective method, under whichprior periods are not retroactively restated. The valuation provisions of SFAS123R apply to awards granted after the effective date. Estimated stock-basedcompensation expense for awards granted prior to the effective date but thatremain unvested on the effective date will be recognized over the remainingservice period using the compensation cost estimated for the SFAS 123 pro formadisclosures. SFAS 123R focuses primarily on accounting for transactions inwhich an entity obtains employee services through stock-based paymenttransactions. SFAS 123R requires a public entity to measure the cost ofemployee services received in exchange for the award of equity instrumentsbased on the fair value of the award at the date of grant. The cost is to berecognized over the period during which an employee is required to provideservices in exchange for the award. SFAS 123R also requires the benefits of taxdeductions in excess of recognized compensation expense be reported as afinancing cash flow, rather than as an operating cash flow as prescribed underthe prior accounting rules. This requirement reduces net operating cash flowsand increases net financing cash flows in periods after adoption. Total cashflow remains unchanged from what would have been reported under prioraccounting rules.

Prior to the adoption of SFAS 123R, we followed theintrinsic value method in accordance with APB 25 to account for our equitygrants. Accordingly, no compensation expense was recognized for stock purchaserights granted in connection with the issuance of stock options under ouremployee stock option plans or employee stock purchase plans; however,compensation expense was recognized in connection with the issuance ofrestricted stock. The adoption of SFAS 123R primarily resulted in a change inour method of recognizing the fair value of stock-based compensation andestimating forfeitures for all unvested awards.

We use the Black-Scholes standard option pricing model(“Black-Scholes model”) to determine the fair value of stock options. Thedetermination of the fair value of the options on the date of grant using theBlack-Scholes model is affected by our stock price as well as assumptions ofother variables, including projected employee stock option exercise behaviors,the risk-free interest rate and expected volatility of our stock price infuture periods.

We analyze historicalemployee exercise and termination data to estimate the expected life assumption.We believe that historical data currently represents the best estimate of theexpected life of a new employee option. We also stratify our employeepopulation based upon distinctive exercise behavior patterns. The risk-freeinterest rate we use is based on the implied yield currently available on U.S.Treasury zero coupon issues. The estimated volatility of our common stock isbased on historical daily volatility levels of our common shares. We believethat historical data currently represents the best estimate of the volatility.Because we do not anticipate paying any cash dividends in the foreseeablefuture, we use an expected dividend yield of zero. The amount of stock-basedcompensation expense we recognize 

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during aperiod is based on the portion of the awards that are ultimately expected tovest. We estimate option forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ from thoseestimates. We analyze historical data to estimate pre-vesting forfeitures andrecord stock-based compensation expense for those awards expected to vest.

Additional informationrelated to our stock option plans is detailed in Note 8, “Stock-BasedCompensation Plans.”

**Income Taxes**

We base our provision forincome taxes on income recognized for financial statement purposes, whichincludes the effects of temporary differences between financial statementincome and income recognized for tax return purposes. We record a valuationallowance to reduce our deferred tax assets when it is more likely than not thedeferred tax asset will not be realized.

**Earnings Per Share**

Basic earnings per sharerepresents earnings divided by the weighted average number of our common sharesoutstanding for the reporting period. Diluted earnings per share representsearnings divided by the sum of the weighted average number of our common sharesoutstanding plus shares derived from other potentially dilutive securities. Ourother potentially dilutive securities include “in the money” fixed stockoptions outstanding. The number of shares added for stock options is determinedby the treasury stock method, which assumes exercise of these options and theuse of any proceeds, the amount of compensation cost attributed to futureservices and not yet recognized, and related tax benefits to repurchase aportion of these shares at the average market price for the period. The optionshares excluded from the calculation of our other potentially dilutivesecurities (because the exercise price exceeded the average market price forthe year) were 1,601,221, 5,665,289 and 6,455,760 at December 31, 2006,2005 and 2004, respectively.

**Translation of Foreign Currencies**

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

**2.**   INVESTING ACTIVITY

**Derivative Instruments**

***Interest RateContracts***

We have in the pastmaintained interest rate derivative instruments for the purpose of mitigatinginterest rate risk on investments of client funds; however, at December 312006 and at December 31, 2005, we held no such instruments. On February 4,2005, we disposed of 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 settlements on these derivative instruments. The $2.3 differencebetween the December 31, 2004 carrying value of $26.8 and the $24.5 totalcash received was recorded as a loss on interest rate derivative instruments inthe first quarter of 2005. No interest rate derivative instruments have beenentered into since that time.

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***Fuel Price Contracts***

The revenue and net income of Comdata’s transportationbusiness is exposed to variability based on changes in fuel (both diesel fueland gasoline) prices. For a portion of its transportation customers, Comdataearns fee revenue for card transactions based on a percentage of the totalamount of each fuel purchase. An increase or decrease in the price of fuel increasesor decreases the total dollar amount of fuel purchases and Comdata revenue. Accordingly,we estimate that for each 10¢ change in the average price per gallon of dieselfuel per year, Comdata revenue and pre-tax earnings are impacted by $2.0,absent the effect of any diesel fuel price derivative contracts. In addition,we estimate that for each 10¢ change in the average price per gallon ofgasoline per year, Comdata revenue and pre-tax earnings are impacted by $0.5,absent the effect of any gasoline price derivative contracts.

Ourfuel price risk management objective is to protect Comdata earnings from theeffects of falling fuel prices by entering into derivative contracts thatconvert the floating price of fuel used in revenue calculations to a fixedprice. For 2006 and 2005, we covered our diesel fuel price risk for the fullyear with diesel fuel price derivative instruments. In 2004, we partiallycovered our diesel fuel price risk for the full year with diesel fuel pricederivative instruments. The activity related to diesel fuel price derivativeinstruments for the each of the three years ended December 31 was asfollows:

| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | ** 2006 **                        | ** ** | ** 2005 ** | ** ** | **2004** | ** ** |
| Payments to counterparties      |       | $                                           | 2.9        |   |   | $ | 8.2 |   |   | $ | 2.2 |   |
| Unrealized (gain) loss          |       | (0.2                                        | )          |   | 1.1 |   |   | (0.8 | ) |
| Loss  on derivative instruments |       | $                                           | 2.7        |   |   | $ | 9.3 |   |   | $ | 1.4 |   |

 

Our diesel fuel pricederivative instruments are carried at fair market value and were reported as aliability of $0.1 at December 31, 2006, and an asset of $0.5 and a liabilityof $0.8 recorded in other noncurrent liabilities at December 31, 2005.

**Investments andAcquisitions of Businesses**

At December 31,2006 and 2005, we held the following publicly-held investments that wereaccounted for under SFAS 115, “Accounting for Certain Investments in Debt andEquity Securities” as “available for sale,” and privately-held investments thatwere accounted for on a cost basis:

| ** **                              | ** ** | ** ** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Investment**                          | ** ** | ** ** | ** ** | **Holding**                     | ** ** | **Amount**                      | ** ** | **% Owned** | ** ** | **Amount** | ** ** | **% Owned** | ** ** |
| The Ultimate Software  Group, Inc. |       |       | Public     |                            |       |                            | $          | 5.1 |   |   | under 5% |   |   | $ | 6.5 |   |   | under 5% |   |
| Priority Transportation.                |       |       | Private    |                            |       |                            | 2.5        |   |   | under 5% |   |   | 2.5 |   |   | under 5% |   |
| iSarla, Inc.                       |       |       | Private    |                            |       |                            | 1.6        |   |   | 15.6% |   |   | 1.6 |   |   | 19.9% |   |
| ProfitPoint, Inc.                  |       |       | Private    |                            |       |                            | 1.5        |   |   | 17.5% |   |   | 1.5 |   |   | 17.5% |   |
| SASH Management, LLC                    |       |       | Private    |                            |       |                            | —     | (1) |   | — |   |   | 0.6 |   |   | 19.9% |   |
| Revelation  Technologies, Inc.     |       |       | Private    |                            |       |                            | —     |   |   | 7.4% |   |   | — |   |   | 7.4% |   |
| Reach Financial, LLC.                   |       |       | Private    |                            |       |                            | —     |   |   | 15.0% |   |   | — |   |   | 15.0% |   |
| Other                                   |       |       | Private    |                            |       |                            | 0.2        |   |   |   |   |   | 0.2 |   |   |   |   |
| Total Investments                       |       |       |       |                            |       |                            | $          | 10.9 |   |   |   |   |   | $ | 12.9 |   |   |   |   |
|                                         |            |            |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)    Acquired remaining 80.1% equity interest in SASH Management, LLCduring 2006.

***Publicly held investments***

At December 31, 2006,we held 220,922 shares of The Ultimate Software Group, Inc. (“Ultimate”)common stock. During 2006, we sold 120,000 shares of Ultimate common stock forproceeds of $2.7 and a net gain of $2.3. During 2005, we sold 290,789 shares ofUltimate common stock for proceeds of $4.8 and a 

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net gainof $3.6. During December 2005, we paid $0.3 to exercise 75,000 warrants ofUltimate common stock. Also during December 2005, we sold all theremaining 199,311 shares of U.S.I Holdings Corporation (“USIH”) common stockfor proceeds of $2.7 and a net gain of $0.7. Gains and losses on sales ofmarketable securities are reported in other (income) expense, net in ourconsolidated statements of operations.

At December 31, 2004,we held 556,711 shares of Ultimate common stock and a warrant to purchase anadditional 75,000 Ultimate common shares at a price of $4.00 per share. In2004, we sold 193,289 shares of Ultimate common stock for $2.4 and a net gainof $1.6. In addition, we held 199,311 shares of common stock of USIH at December 31,2004. In 2004, we sold 582,758 shares of common stock of USIH for $8.7 and anet gain of $2.9.

The Ultimate securitiesare treated as “available for sale” securities. The carrying value of thesesecurities has been adjusted at each balance sheet date to reflect the marketprice reported by the stock exchange that lists those securities. The amount ofthis change is reported as unrealized gain or loss from marketable securitiesin accumulated other comprehensive income. The cost and fair values ofsecurities available for sale at December 31, 2006 and 2005 were asfollows:

| ** **                     | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Fair Value** | ** ** |
|--------------------------------|------------|----------|------------|------------------------------|------------|---------------------|------------|
| **At December 31, 2006**  |       |     |       |                         |       |                |       |   |   |   |   |
| Ultimate                       |       | $        | 0.9        |                         |       | $                   | 4.2        |   |   |   | $ | 5.1 |   |   |
| **At  December 31, 2005** |       |     |       |                         |       |                |       |   |   |   |   |
| Ultimate                       |       | $        | 1.4        |                         |       | $                   | 5.1        |   |   |   | $ | 6.5 |   |   |

 

***Acquisitions anddivestures of businesses***

In 2006, we acquired twobusinesses, one in our HRS segment and one in our Comdata segment, for a totalpurchase price of $33.2, net of cash received. Combined, the acquisitions haveadditional purchase price obligations of up to $7.0 depending on theperformance of the businesses. We preliminarily allocated costs to goodwill of$16.1, intangible assets of $19.2, and net liabilities of $2.1 in relation tothese acquisitions. In addition, we acquired the remaining 80.1% equityinterest in SASH Management, LLC (“SASH”), a mid-market provider of giftcertificates and gift cards, for $5.8 and preliminarily allocated costs togoodwill of $2.9, other intangible assets of $3.2, net assets of $0.3 andeliminated a pre-existing minority interest in SASH of $0.6.

In 2005, we acquired abusiness in our Comdata segment for $8.2 and recorded goodwill of $5.1, otherintangible assets of $3.4 and net liabilities of $0.3. During 2005, we alsopaid out $1.8 in payments related to agreements on prior acquisitions.

Pro forma financialinformation relating to these acquisitions has not been presented because theimpact was not material. The results of operations for the acquired businesseshave been included in our consolidated reports of operations since the date ofrespective acquisition.

We divested a portion of abusiness, including $4.9 of allocated goodwill, in 2006 for a sales price of$11.1 and a subsequent payment to us to be determined one year after theclosing date based on a percentage of revenue received by the buyer. Werecognized a gain on the sale of the business of $5.8. Assuming retention ofall transferred customers by the buyer, the subsequent payment to us would beapproximately $4.9. We are not required to classify the results of operationsof the divested business as a discontinued operation as it did not meet thecriteria to qualify as a discontinued operation.

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**3.**   CUSTOMER FUNDS

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 trustfor its 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 andprovinces of Canada, highly rated Canadian banks and corporations, asset-backedtrusts and mortgages.

Investment income from invested customer fundsconstitutes a component of our compensation for providing services underagreements with our customers. Investment income from invested customer fundsincluded in revenue amounted to $132.0, $105.5 and $75.6 for the years ended December 31,2006, 2005 and 2004, respectively. Investment income includes realized gainsand losses from sales of customer funds investments. We further discuss ouraccounting for this investment income in the section entitled “RevenueRecognition” of Note 1, “Accounting Policies.”

Theamortized cost and fair values of investments of customer funds available forsale at December 31, 2006 and 2005 were as follows:

| ** **                                                                                | ** ** | **Amortized** | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------|------------|---------------------------|------------|------------|------------|
| **Investments of Customer Funds at December 31, 2006** | ** ** | ** **    | ** ** | **Cost**                  | ** ** | **Gain**   | ** ** | **Loss** | ** ** | **Fair Value** | ** ** |
| Money market  securities and other cash equivalents                                       |       |          | $          | 2,929.0                   |       |       | $          | — |   | $ | — |   |   | $ | 2,929.0 |   |   |
| Available for sale  investments:                                                          |       |          |       |                      |       |       |       |   |   |   |   |   |   |
| U.S. government  and agency securities                                                    |       |          | 937.7      |                      |       | 0.6        |       | (12.4 | ) |   | 925.9 |   |   |
| Canadian and  provincial government securities                                            |       |          | 374.4      |                      |       | 8.8        |       | (0.2 | ) |   | 383.0 |   |   |
| Corporate debt  securities                                                                |       |          | 258.0      |                      |       | 1.2        |       | (1.6 | ) |   | 257.6 |   |   |
| Asset-backed  securities                                                                  |       |          | 62.9       |                      |       | 0.2        |       | (0.1 | ) |   | 63.0 |   |   |
| Mortgage-backed  and other securities                                                     |       |          | 29.5       |                      |       | 0.1        |       | (0.1 | ) |   | 29.5 |   |   |
| Total available  for sale investments                                                     |       |          | 1,662.5    |                      |       | 10.9       |       | (14.4 | ) |   | 1,659.0 |   |   |
| Invested customer  funds                                                                  |       |          | 4,591.5    |                      |       | $          | 10.9       |   | $ | (14.4 | ) |   | 4,588.0 |   |   |
| Trust receivables                                                                         |       |          | 5.4        |                      |       |       |       |   |   |   | 5.4 |   |   |
| Total customer  funds                                                                     |       |          | $          | 4,596.9                   |       |       |       |   |   |   |   | $ | 4,593.4 |   |   |
|                                                                                           |            |               |            |                           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

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Thefollowing represents the gross unrealized losses and the related fair value ofthe investments of customer funds available for sale, aggregated by investmentcategory and length of time that individual securities have been in acontinuous unrealized loss position at December 31, 2006.

| ** **                                     | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**              | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **Unrealized  Losses**                 | ** ** | **Fair  Value**                      | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| U.S. government and  agency securities         |       |                                   | $          | (0.2                                 | )          |                   | $          | 64.2 |   |   | $ | (12.2 | ) |   | $ | 752.3 |   |   | $ | (12.4 | ) |   | $ | 816.5 |   |
| Canadian and provincial  government securities |       |                                   | (0.2       | )                                    |       | 20.8                   |       |   | — |   |   | 11.3 |   |   | (0.2 | ) |   | 32.1 |   |
| Corporate debt  securities                     |       |                                   | (0.1       | )                                    |       | 34.6                   |       |   | (1.5 | ) |   | 92.2 |   |   | (1.6 | ) |   | 126.8 |   |
| Asset-backed securities                        |       |                                   | —     |                                 |       | 12.9                   |       |   | (0.1 | ) |   | 1.4 |   |   | (0.1 | ) |   | 14.3 |   |
| Mortgage-backed and  other securities          |       |                                   | —     |                                 |       | 0.6                    |       |   | (0.1 | ) |   | 13.4 |   |   | (0.1 | ) |   | 14.0 |   |
| Total available for sale investments           |       |                                   | $          | (0.5                                 | )          |                   | $          | 133.1 |   |   | $ | (13.9 | ) |   | $ | 870.6 |   |   | $ | (14.4 | ) |   | $ | 1,003.7 |   |

 

Management does not believe any individual unrealizedlosses as of December 31, 2006 represents an other-than-temporaryimpairment. The unrealized losses are primarily attributable to changes ininterest rates and not credit deterioration. We currently have both the intentand ability to hold the securities for the time necessary to recover theamortized cost.

Theamortized cost and fair value of investment securities available for sale at December 31,2006, by contractual maturity are shown below. Expected maturities will differfrom contractual maturities because borrowers may have the right to call orprepay obligations with or without call or prepayment penalties.

| ** **                                                                       | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **Investments of Customer Funds by Maturity Date** | ** ** | ** **                      | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Due in one year or less                                                          |       | $                               | 3,164.0    |   |   | $ | 3,163.6 |   |   |
| Due in one to three  years                                                       |       | 573.7                           |       |   | 567.3 |   |   |
| Due in three to five  years                                                      |       | 471.5                           |       |   | 467.2 |   |   |
| Due after five years                                                             |       | 382.3                           |       |   | 389.9 |   |   |
| Total                                                                            |       | $                               | 4,591.5    |   |   | $ | 4,588.0 |   |   |
|                                                                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

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

| ** **   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
| Proceeds     |       | $        | 1.7        |     | $          | 130.6    |       | $ | 104.3 |   |
| Gross gains  |       | $        | —     |     | $          | 1.7      |       | $ | 3.2 |   |
| Gross losses |       | $        | 0.1        |     | $          | —   |       | $ | (3.1 | ) |

 

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

| ** **                                                                   | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Trade receivables from customers                                             |       | $                     | 687.2      |   | $ | 579.4 |   |
| Interest receivable from invested customer funds                             |       | 21.4                  |       | 20.7 |   |
| Other                                                                        |       | 6.3                   |       | 7.8 |   |
| Total gross receivables                                                      |       | 714.9                 |       | 607.9 |   |
| Less: reserve for sales adjustments                                          |       | (9.0                  | )          | (8.2 | ) |
| Less: long-term portion of trade receivables                                 |       | (0.3                  | )          | (0.4 | ) |
| Less: long-term portion of interest receivable from  invested customer funds |       | (9.7                  | )          | (6.8 | ) |
| Less: allowance for doubtful accounts                                        |       | (13.7                 | )          | (13.9 | ) |
| Trade and other receivables, net                                             |       | $                     | 682.2      |   | $ | 578.6 |   |

 

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A portion of the trade receivables serve as collateralunder the Comdata receivables securitization facility discussed in Note 6, “Financing.”The aggregate amount serving as collateral under this facility amounted to$307.1 and $230.2 at December 31, 2006 and 2005, respectively. Thelong-term portion of trade receivables is included in other noncurrent assetson our consolidated balance sheets. The carrying value of total grossreceivables approximates fair value.

Theinterest earnings on invested customer funds are included in revenue asdiscussed in Note 3, “Customer Funds.”

| ** **                                         | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| **Allowance for Doubtful Accounts** | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance at  beginning of year                      |       | $                                           | 13.9       |   | $ | 13.3 |   | $ | 15.4 |   |
| Provision for  doubtful accounts                   |       | 5.3                                         |       | 11.2 |   | 9.7 |   |
| Charge-offs, net  of recoveries                    |       | (5.5                                        | )          | (10.6 | ) | (11.8 | ) |
| Balance at end of year                             |       | $                                           | 13.7       |   | $ | 13.9 |   | $ | 13.3 |   |
|                                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

**5.**   CAPITAL ASSETS

| ** **                                                                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Capital Assets**                                                                   | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Property, Plant and Equipment*                                                           | * *   | * *              | * *   | * * | * * |
| Land                                                                                      |       | $                     | 2.9        |   | $ | 3.0 |   |
| Machinery and  equipment (accumulated depreciation of $198.1 and $200.8)                  |       | 253.7                 |       | 264.8 |   |
| Buildings and  improvements (accumulated depreciation of $45.3 and $44.3)                 |       | 97.1                  |       | 98.8 |   |
| Total property,  plant and equipment                                                      |       | 353.7                 |       | 366.6 |   |
| Accumulated  depreciation                                                                 |       | (243.4                | )          | (245.1 | ) |
| Property, plant  and equipment, net                                                       |       | $                     | 110.3      |   | $ | 121.5 |   |
| *Goodwill,  net of amortization*                                                          | * *   | * *              | * *   | * * | * * |
| At beginning of  year                                                                     |       | $                     | 936.5      |   | $ | 931.8 |   |
| Acquisitions in  the current period (Note 2)                                              |       | 19.0                  |       | 5.1 |   |
| Translation and  other adjustments                                                        |       | (2.9                  | )          | (0.4 | ) |
| At end of year                                                                            |       | $                     | 952.6      |   | $ | 936.5 |   |
| Tax-deductible  goodwill at end of year                                                   |       | $                     | 258.1      |   | $ | 274.1 |   |
| *Other  Intangible Assets*                                                                | * *   | * *              | * *   | * * | * * |
| Customer lists  and relationships (accumulated amortization of $41.6 and $34.1)           |       | $                     | 72.6       |   | $ | 56.1 |   |
| Trademarks  (accumulated amortization of $1.0 and $0.7)                                   |       | 1.3                   |       | 0.9 |   |
| Technology  (accumulated amortization of $50.1 and $51.3)                                 |       | 60.4                  |       | 62.3 |   |
| Non-compete  agreements (accumulated amortization of $9.7 and $7.9)                       |       | 13.0                  |       | 10.3 |   |
| Total other  intangible assets                                                            |       | 147.3                 |       | 129.6 |   |
| Accumulated  amortization                                                                 |       | (102.4                | )          | (94.0 | ) |
| Other intangible  assets, net                                                             |       | $                     | 44.9       |   | $ | 35.6 |   |
| *Software  and Development Costs*                                                         | * *   | * *              | * *   | * * | * * |
| Purchased software  (accumulated amortization of $57.4 and $47.2)                         |       | $                     | 76.1       |   | $ | 69.3 |   |
| Internally  development software costs (accumulated amortization of $75.6 and $60.1) |       | 118.0                 |       | 109.8 |   |
| Total software  and development costs                                                     |       | 194.1                 |       | 179.1 |   |
| Accumulated  amortization                                                                 |       | (133.0                | )          | (107.3 | ) |
| Software and development  costs, net                                                      |       | $                     | 61.1       |   | $ | 71.8 |   |
|                                                                                           |            |                       |            |  |  |  |  |  |  |

 

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| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| **Depreciation and Amortization**     | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Depreciation of  property, plant and equipment  |       | $                                           | 41.1       |   | $ | 41.4 |   | $ | 42.3 |   |
| Amortization of  other intangible assets        |       | 13.8                                        |       | 15.2 |   | 56.9 |   |
| Amortization of  software and development costs |       | 32.0                                        |       | 28.7 |   | 25.5 |   |
| Total                                           |       | $                                           | 86.9       |   | $ | 85.3 |   | $ | 124.7 |   |
|                                                 |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

The weighted averageremaining useful life of the other intangible assets is two years (three yearsfor customer lists and relationships, less than one year for trademarks, twoyears for technology and one year for non-compete agreements). We estimate thatamortization of other intangible assets held at December 31, 2006 will be$14.2 for 2007, $10.4 for 2008, $8.8 for 2009, $5.2 for 2010, and $3.7 for2011.

**6.**   FINANCING

**Debt and CapitalLease 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**                                 | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Ceridian  revolving credit facility                                                        |       | $                     | 11.6       |   | $ | 40.6 |   |
| Comdata  receivable securitization facility                                                |       | 82.0                  |       | 55.0 |   |
| Ceridian U.K.  overdraft facility                                                          |       | —                |       | — |   |
| Total revolving  credit facilities and overdrafts                                          |       | 93.6                  |       | 95.6 |   |
| Capital lease  obligations                                                                 |       | 6.9                   |       | 10.9 |   |
| Total debt and  capital lease obligations                                                  |       | 100.5                 |       | 106.5 |   |
| Less short-term debt and current portions of  long-term debt and capital lease obligations |       | 16.6                  |       | 25.5 |   |
| Long-term obligations,  less current portions                                              |       | $                     | 83.9       |   | $ | 81.0 |   |
|                                                                                            |            |                       |            |  |  |  |  |  |  |

 

***Revolving Credit Facility***

On November 18, 2005, we entered into afive-year, $250.0 revolving credit agreement (“2005 Ceridian Revolving CreditFacility”) and terminated the existing revolving credit agreement dated January 31,2001. The 2005 Ceridian Revolving Credit Facility provides for up to $250.0(subject to possible increase, at our request as authorized by our Board ofDirectors, up to $400.0) for a combination of advances and letters of credituntil November 18, 2010. This facility includes a sublimit for $25.0 forswingline loans, a $100.0 U.S. dollar equivalent sublimit for loans made inCanadian dollars to Ceridian Canada (“Canadian subfacility”), and a $50.0 U.S.dollar equivalent sublimit for multicurrency borrowings in certain currencies. TheCanadian subfacility is to be used to meet the ongoing working capital, capitalexpenditures and general corporate needs of Ceridian Canada. The interest rateon the Canadian subfacility is the Eurocurrency Rate plus 57.5 basis points(4.86% at December 31, 2006). Advances under the 2005 Ceridian RevolvingCredit Facility are unsecured. The terms of the 2005 Ceridian Revolving CreditFacility require that our consolidated debt must not exceed 50% of ourconsolidated net worth, as defined in the agreement, as of the end of anyfiscal quarter 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. The2005 Ceridian Revolving Credit Facility also contains covenants that, amongother things, limit liens, subsidiary debt, contingent obligations, operatingleases, minority equity investments and divestitures. There is no requirementunder the terms of the 2005 Ceridian Revolving Credit Facility to make anyprincipal payments until the agreement expires on November 18, 2010.

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In connection with therepatriation of funds from Ceridian Canada to Ceridian Corporation in December 2005,Ceridian Canada’s net borrowing under the Canadian subfacility as of December 31,2006 was $11.6. We have classified the entire $11.6 in current based onmanagement’s intent to repay this amount during 2007. The carrying amountapproximates fair value. As of December 31, 2006, we utilized $3.2 of the2005 Ceridian Revolving Credit Facility for letters of credit leaving an unusedborrowing capacity of $235.2, of which we have designated $82.0 as backup tothe Comdata receivables securitization facility.

***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”). In June 2006, this facility wasamended to extend the facility termination date to June 14, 2009 and theliquidity termination date to June 14, 2007. The facility is subject tofinancial covenants similar to those included in the 2005 Ceridian RevolvingCredit Facility and consists of two steps.

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

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

Although title to the Receivables passes to CFC underthe first step of the facility and the Receivables are no longer available tosatisfy claims of Comdata’s creditors, Comdata has agreed to act as 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 5.35% at December 31,2006), or, in the event the Conduit is unable to issue commercial paper, at CFC’schoice of the prime rate or LIBOR plus 1.5% per annum. In addition, CFC mustpay a monthly program fee of 0.20% per annum on the average invested amountoutstanding during the preceding month and a monthly facility fee equal to0.20% per annum on 102% of the average facility size (whether used or unused)during the preceding month. Both of these fees are included in interestexpense.

The amount outstandingunder this facility at December 31, 2006 and 2005 is $82.0 and $55.0,respectively. The carrying amount approximates fair value. The aggregate amountof receivables serving as collateral amounted to $307.1 and $230.2 at December 31,2006 and 2005, respectively. The amount outstanding is accounted for aslong-term debt and the Receivables remain on our consolidated balance sheet,even though the Receivables are not available to satisfy claims of creditors ofany of the companies other than CFC.

***Other Debt Financing***

At December 31, 2006 and 2005, Ceridian U.K.maintained two overdraft facilities totaling £7.5 million. There were noamounts outstanding as of December 31, 2006 and December 31, 2005. The£6.5 million overdraft facility expires in February 2007. The £1.0 millionoverdraft facility expires in September 2007. Our prior practice has been torenew these facilities on an annual basis.

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In addition to theCanadian subfacility, Ceridian Canada had available at December 31, 2006and 2005 a committed bank credit facility that provided up to CDN $5.0 millionfor issuance of letters of credit and it is renewed annually at the option ofthe bank. The amounts of letters of credit outstanding under this facility wereCDN $3.9 million ($3.3) and CDN $4.1 million ($3.5) at December 31, 2006and December 31, 2005.

***Capital Lease Obligations***

Our capital leaseobligations are $6.9 at December 31, 2006 . The remaining payments include$5.0 in 2007 and $1.9 in 2008.

***Equity Activities***

On July 27, 2005, ourBoard of Directors authorized us to repurchase up to 20,000,000 additionalshares of our common stock. The repurchase program is being effected from timeto time, depending on market conditions and other factors, through open marketpurchases and privately negotiated transactions. During 2006, we repurchased13,046,500 shares of our common stock for $316.7 on the open market at anaverage net price of $24.27 per share. We also repurchased 10,736,450 shares ofour common stock during 2005 for $222.3 on the open market at an average netprice of $20.71. The total remaining authorization under the repurchase programwas 2,567,550 shares as of December 31, 2006. The repurchase program hasno set expiration or termination date. We generally use our treasury stock toaddress our obligations under our stock compensation plans.

**7.**   RETIREMENT PLANS

We maintain defined benefit pension plans coveringcertain of our current and former U.S. and U.K. employees, as well as otherpostretirement benefit plans for U.S. retired employees that include heath careand life insurance benefits.

Wehave adopted SFAS 158, “Employer’s Accounting for Defined Benefit Pension andOther Postretirement Plans” at December 31, 2006. This statement requiresemployers to recognize the overfunded or underfunded status of each definedbenefit pension and other postretirement plan as an asset or liability in itsstatement of financial position, recognize changes in that funded status in theyear in which the changes occur through comprehensive income and measure aplan’s assets and its obligations that determine its funded status as of theend of the employer’s fiscal year. Below is the incremental effect of applyingSFAS 158 on individual line items in the consolidated balance sheet.

| ** **                              | ** ** | **Twelve Months Ended December 31, 2006** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Before Application  of Statement 158**            | ** ** | **Adjustments** | ** ** | **After Application  of Statement 158** | ** ** |
| Prepaid Pension  Asset                  |       |                                                               | $          | 284.5 |   |   |   | $ | (284.5 | ) |   |   | $ | — |   |   |
| Pension  Liabilities                    |       |                                                               | (38.3      | ) |   |   | (8.5 | ) |   |   | (46.8 | ) |   |
| Other  Postretirement Liabilities       |       |                                                               | (47.2      | ) |   |   | (7.6 | ) |   |   | (54.8 | ) |   |
| Deferred Income  Taxes                  |       |                                                               | 8.8        |   |   |   | 103.9 |   |   |   | 112.8 |   |   |
| Accumulated other  comprehensive income |       |                                                               | $          | 17.8 |   |   |   | $ | 196.6 |   |   |   | $ | 214.4 |   |   |

 

The amount in accumulatedother comprehensive income that is expected to be recognized as a component ofnet periodic benefit cost during 2007 is a net loss of $18.0, comprised of$17.8 in the pension plans and $0.2 in the other postretirement benefit plans.

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**Pension Benefits**

We provide retirement income benefits to our employeesthrough a combination of defined benefit and defined contribution plans. Ourlargest defined benefit pension plan (the “U.S. defined benefit plan”) is acontributory (salary reduction) defined benefit plan for certain current andformer U.S. employees that closed to new participants on January 2, 1995. Assetsof this plan are held in an irrevocable trust, do not include any Ceridiansecurities and consist principally of equity securities, U.S. governmentsecurities and other fixed income obligations. Benefits under this plan aregenerally calculated on final or career average earnings and years ofparticipation in the plan. Most participating employees are required to permitsalary reduction contributions to the plan on their behalf by the employer as acondition of active participation. Retirees and other former employees areinactive participants in this plan and constitute approximately 95% of the planparticipants. This plan is funded in accordance with funding requirements underthe Employee Retirement Income Security Act of 1974, based on determinations ofan independent consulting actuary. We also sponsor a nonqualified supplementaldefined benefit plan (the “nonqualified defined benefit plan”), which isunfunded and provides benefits to selected U.S. employees in addition to theU.S. defined benefit plan. We expect to make contributions to the nonqualifieddefined benefit plan amounting to $7.0 during 2007.

The investment policy for our U.S. defined benefitplan specifies the objective is to earn the highest possible total returnsconsistent with the preservation of capital and anticipated liquidityrequirements while minimizing the volatility of returns. Target asset allocationranges specified in the policy are designed to achieve policy objectives andare based upon actuarial and capital market studies performed by experiencedoutside consultants. On a regular basis we rebalance assets to maintain assetallocations within policy ranges. Within asset categories we use a range ofpassive and active investment management styles to achieve our U.S. definedbenefit plan’s investment objectives and hire outside managers to manage allassets. The U.S. defined benefit plan currently has no allocation to realestate, derivative instruments, or other alternative investment strategies;however a small amount of real estate and venture capital investments fromprior investments is shown in “Cash and Other Assets.” Certain asset managersmay use futures contracts within limitations to achieve objectives under theirassigned investment mandate. Investment of the U.S. defined benefit plan assetsin securities of ours is prohibited by the investment policy.

On May 31, 2006, we made an employer contributionof $75.0 to our U.S. defined benefit plan from our existing cash balance,resulting in a remeasurement of the plan assets, liabilities and projectedpension expenses under SFAS 87, “Employers’ Accounting for Pensions,” as ofthat date. The discount rate used to value the assets and liabilities increasedfrom 5.5% to 6.25%. The effect of this remeasurement resulted in a reduction ofour net periodic pension cost for this plan by $6.4 in 2006, or $0.04 perdiluted share. In addition, accumulated other comprehensive loss was reduced by$50.0 as a result of the cash contribution. We made no contribution in 2005 and2004 to the U.S. defined benefit plan.

In the fourth quarter of 2004, we changed ourmeasurement date for our U.S. defined benefit plan and nonqualified benefit planfrom September 30 to December 31. We determined the effect of thischange with the assistance of our independent consulting actuary, whichresulted in a reduction of net periodic pension cost of $4.9 as shown in atable later in this discussion.

We provide a pension plan for our employees in theUnited Kingdom (the “U.K. Plan”). The U.K. Plan contains both defined benefitand defined contribution elements. The assets held by the U.K. Plan on behalfof its defined benefit participants amounted to £22.8 million ($44.6), at December 31,2006 and consisted primarily of equity securities (85%) and debt securities(15%). We expect to make contributions to this plan amounting to £1.2 million($2.4) during 2007. The investment policy for the U.K. Plan is to havesufficient monies at all times to meet its obligations as and when they occurin the future. Effective in 

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October 2003, theU.K. Plan was amended to freeze the defined benefit element and enhance thedefined contribution element of the plan.

We account for our defined benefit plans (the U.S.defined benefit plan, nonqualified defined benefit plan and U.K. plancollectively referred to as our “defined benefit plans”) using actuarial modelsrequired by present accounting rules under SFAS 87, “Employers’ Accountingfor Pensions.” This model uses an attribution approach that generally spreadsthe effect of individual events over the service lives of the employees in suchplans. These events include plan amendments and changes in actuarialassumptions such as the expected long-term rate of return on plan assets,discount rate related to the benefit obligation, rate of active participants’compensation increases and mortality rates. The principle underlying therequired attribution approach is that employees render service over theirservice lives on a relatively smooth basis and, therefore, the income statementeffects of pensions are earned in, and should follow, the same pattern.

One of the principal components of the net periodicpension calculation is the expected long-term rate of return on plan assets. Therequired use of expected long-term rate of return on plan assets may result inrecognized pension income that is greater or less than the actual returns ofthose plan assets in any given year. Over time, however, the expected long-termreturns are designed to approximate the actual long-term returns thatcontribute to the settlement of the liability. Differences between actual andexpected returns are recognized in the net periodic pension calculation overfive years. We use long-term historical actual return information, the mix ofinvestments that comprise plan assets, and future estimates of long-terminvestment returns by reference to external sources to develop our expectedreturn on plan assets.

The discount rate assumption used for pension planaccounting is used to determine the benefit obligation and the interest portionof the net periodic pension cost (credit) for the following year. Beginning in2005, we added additional sources that we analyzed to determine the discountrate used for determining the present value of future pension obligations. Weemployed a process that analyzed three independently prepared yield curves,taking into consideration the timing of the estimated defined benefit paymentsin arriving at a discount rate. A 25 basis point decrease in the discount ratewould result in a $0.4 annual increase in pension expense. We determinethe assumed rate of compensation increase based upon our long-term plans forsuch increases.

In thetable below we present the allocation of assets held for the U.S. definedbenefit plan, which is by far the largest of our defined benefit plans, as ofthe measurement date.

| ** **             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | ** **        | ** ** |
|------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------|------------|
| ** **             | ** ** | **2006**              | ** ** | **2005**              | ** ** | **Target %** | ** ** |
| Domestic Equity        |       | $                     | 301.7      |                  | 49.5       | %                 | $          | 263.4 |   | 51.5 | % | 50% +/-8 | % |
| Domestic Fixed  Income |       | 206.8                 |       | 33.9                  | %          | 169.4             |       | 33.1 | % | 35% +/-5 | % |
| International  Equity  |       | 101.0                 |       | 16.6                  | %          | 78.4              |       | 15.4 | % | 15% +/-4 | % |
| Total Invested Assets  |       | 609.5                 |       | 100.0                 | %          | 511.2             |       | 100.0 | % | 100 | % |
| Cash and Other  Assets |       | 5.9                   |       |                  |       | 5.2               |       |   |   |   |   |
| Total Assets           |       | $                     | 615.4      |                  |       |              | $          | 516.4 |   |   |   |   |   |

 

The funded status of our defined benefit plans representsthe difference between the projected benefit obligation and the plans’ assetsat fair value. The projected benefit obligation of our defined benefit plans exceededthe fair value of plan assets by $46.8 and $193.8 at December 31, 2006 and2005, respectively. Under SFAS 158, we are required to record that unfundedstatus as a liability in our statement of financial position and recognize thechange in that funded status in comprehensive income (net of deferred incometaxes) for 2006 prospectively.

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In 2005, the amount included in other comprehensiveincome arising from the change in the additional minimum pension liability ispresented in the accompanying consolidated statements of stockholders’ equityand comprehensive income. At December 31, 2005 our prepaid pension costasset represented $8.9 held in benefit protection trusts for certainnonqualified plan participants and an intangible pension asset of $0.2.

The projected futurepension defined benefit plan payments for our defined benefit plans in each ofthe next five years and the five-year period following are included in thetable below.

**BenefitsExpected to be Paid in Future Years as of December 31, 2006**

| **Years Ended December 31** | ** ** |
|--------------------------------------------|------------|
| **2007**                                   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012-2016** | ** ** |
| $50.7                                      |       | $ | 46.6 |   | $ | 47.2 |   | $ | 47.7 |   | $ | 48.1 |   |   | $ | 257.0 |   |   |
|                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theaccompanying tables reflect the combined funded status and net periodic pensioncost (credit) and blended supporting assumptions for the defined benefitelements of our defined benefit plans.

| **Funded Status of Defined Benefit**        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| **Retirement Plans at Measurement Date**    | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Change in Projected Benefit  Obligation During the Period*     | * *   | * *              | * *   | * * | * * |
| Projected benefit obligation at beginning of period             |       | $                     | 744.1      |   | $ | 750.8 |   |
| Service cost                                                    |       | 3.3                   |       | 4.1 |   |
| Interest cost                                                   |       | 41.5                  |       | 40.9 |   |
| Currency translation                                            |       | 6.9                   |       | (5.4 | ) |
| Actuarial (gain) loss                                           |       | (33.0                 | )          | 13.5 |   |
| Benefits paid and plan expenses                                 |       | (56.0                 | )          | (59.8 | ) |
| Projected benefit obligation at end of period                   |       | $                     | 706.8      |   | $ | 744.1 |   |
| *Change  in Fair Value of Plan Assets During the Period*        | * *   | * *              | * *   | * * | * * |
| Plan assets at fair value at beginning of period                |       | $                     | 550.3      |   | $ | 569.1 |   |
| Actual return on plan assets                                    |       | 81.2                  |       | 37.2 |   |
| Currency translation                                            |       | 4.9                   |       | (3.5 | ) |
| Employer contributions                                          |       | 79.6                  |       | 7.3 |   |
| Benefits paid and plan expenses                                 |       | (56.0                 | )          | (59.8 | ) |
| Plan assets at fair value at end of period                      |       | $                     | 660.0      |   | $ | 550.3 |   |
| Funded status of plan                                           |       | $                     | (46.8      | ) | $ | (193.8 | ) |
| *Amounts  recognized in Statement of Financial Position*        | * *   | * *              | * *   | * * | * * |
| Prepaid and intangible pension asset                            |       | $                     | —     |   | $ | 1.5 |   |
| Current Liability                                               |       | (7.0                  | )          | — |   |
| Noncurrent liability                                            |       | (39.8                 | )          | (168.8 | ) |
| Deferred income tax                                             |       | 110.0                 |       | 128.6 |   |
| *Amounts  recognized in Accumulated Other Comprehensive Income* |       |                  |       |   |   |
| Accumulated other  comprehensive income, net of tax             |       | $                     | 209.6      |   | $ | 241.2 |   |
|                                                                 |            |                       |            |  |  |  |  |  |  |

 

| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Assumptions Used in Calculations**        | ** ** | ** **                                  | ** ** | **  2006  ** | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| Discount rate  used to determine net benefit cost (credit) |       |                                        | 5.76       | % |   |   | 5.53 | % |   |   | 5.99 | % |   |
| Rate of  compensation increase                             |       |                                        | 4.02       | % |   |   | 4.00 | % |   |   | 4.00 | % |   |
| Expected return  on plan assets                            |       |                                        | 8.47       | % |   |   | 8.69 | % |   |   | 8.70 | % |   |
| Discount rate used to  determine benefit obligations       |       |                                        | 5.54       | % |   |   | 5.53 | % |   |   | 5.53 | % |   |
|                                                            |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Net Periodic Pension Cost (Credit)** | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                               |       | $                                           | 3.3        |   | $ | 4.1 |   | $ | 3.6 |   |
| Interest cost                                              |       | 41.5                                        |       | 40.9 |   | 41.8 |   |
| Expected return  on plan assets                            |       | (50.8                                       | )          | (46.7 | ) | (46.6 | ) |
| Net amortization  and deferral                             |       | 15.5                                        |       | 16.2 |   | 15.4 |   |
| Total before effect of change in measurement date          |       | 9.5                                         |       | 14.5 |   | 14.2 |   |
| 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          |       | $                                           | 9.5        |   | $ | 14.5 |   | $ | 9.3 |   |
|                                                            |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

The accumulated benefitobligation of our defined benefit plans was $690.3 and $719.1 at December 31,2006 and 2005, respectively.

**PostretirementBenefits**

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

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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 fund these costs as they become due.

| **Funded Status of Postretirement**                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
| **Health Care and Life Insurance Plans** | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Change in Benefit Obligation*                                    | * *   | * *              | * *   | * * | * * |
| At beginning of period                                            |       | $                     | 55.5       |   | $ | 57.4 |   |
| Service cost                                                      |       | 0.1                   |       | 0.1 |   |
| Interest cost                                                     |       | 2.9                   |       | 3.0 |   |
| Participant contributions                                         |       | 2.7                   |       | 3.2 |   |
| Actuarial gain                                                    |       | (0.3                  | )          | (2.0 | ) |
| Benefits paid                                                     |       | (6.1                  | )          | (6.2 | ) |
| At end of period                                                  |       | $                     | 54.8       |   | $ | 55.5 |   |
| *Change  in Plan Assets*                                          | * *   | * *              | * *   | * * | * * |
| At beginning of period                                            |       | $                     | —     |   | $ | — |   |
| Company contributions                                             |       | 3.4                   |       | 3.0 |   |
| Participant contributions                                         |       | 2.7                   |       | 3.2 |   |
| Benefits paid                                                     |       | (6.1                  | )          | (6.2 | ) |
| At end of period                                                  |       | $                     | —     |   | $ | — |   |
| Funded Status                                                     |       | $                     | (54.8      | ) | $ | (55.5 | ) |
| *Amounts  recognized in Statement of Financial Position*          | * *   | * *              | * *   | * * | * * |
| Current liabilities                                               |       | $                     | (3.6       | ) | $ | — |   |
| Noncurrent liabilities                                            |       | (51.2                 | )          | (47.2 | ) |
| Deferred income tax                                               |       | 2.8                   |       | — |   |
| *Amounts  recognized in Accumulated Other Comprehensive Income*   |       |                  |       |   |   |
| Accumulated Other  Comprehensive Income                           |       | $                     | 4.8        |   | $ | — |   |
|                                                                   |            |                       |            |  |  |  |  |  |  |

 

| ** **                                                       | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Net Periodic Postretirement Benefit Cost** | ** ** | ** **                                  | ** ** | ** 2006 ** | ** ** | ** 2005 ** | ** ** | ** 2004 ** | ** ** |
| Service cost                                                     |       |                                        | $          | 0.1 |   |   |   | $ | 0.1 |   |   |   | $ | 0.1 |   |   |
| Interest cost                                                    |       |                                        | 2.9        |   |   |   | 3.0 |   |   |   | 3.3 |   |   |
| Actuarial loss  amortization                                     |       |                                        | 0.3        |   |   |   | 0.5 |   |   |   | 0.3 |   |   |
| Net periodic  benefit cost                                       |       |                                        | $          | 3.3 |   |   |   | $ | 3.6 |   |   |   | $ | 3.7 |   |   |
|                                                                  |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The assumed health care cost trend rate represents therate at which health care costs are assumed to increase. The assumed healthcare cost trend rate used in measuring the benefit obligation in 2006 is 9.0%for pre-age 65 retirees and 11.0% for post-age 65 retirees. These rates areassumed to decrease gradually to the ultimate health care cost trend rate of5.0% in 2016 for both groups. A one percent increase in this rate wouldincrease the benefit obligation at December 31, 2006 by $3.9 and theaggregate service and interest cost for 2006 by $0.2. A one percent decrease inthis rate would decrease the benefit obligation at December 31, 2006 by$3.7 and the aggregate service and interest cost for the 2006 measurementperiod by $0.2. The weighted average discount rates used in determining the netperiodic postretirement benefit cost were 5.50%, 5.50% and 6.00% for 2006, 2005and 2004, respectively. The weighted average discount rates used in determiningthe benefit obligation at the measurement dates were 5.75% for 2006 and 5.50%in 2005. We used the same discount rate for measuring our postretirementbenefit plan obligations as for measuring our obligations under our definedbenefit plans. Due to the small size of the participant base, the similarity incharacteristics of expected payment obligations to the defined benefit plans’participant 

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base, and due to verylittle variability in interest rates over different time periods, using adifferent discount rate for the postretirement benefits plan would not resultin a materially different amount of total benefit obligation.

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

| ** ** | ** ** | **Payments** | ** ** | **Receipts** | ** ** |
|------------|------------|--------------|------------|--------------|------------|
| 2007       |       |         | $          | 4.0          |       |   |   | $ | 0.5 |   |   |
| 2008       |       |         | 4.1        |         |       |   | 0.5 |   |   |
| 2009       |       |         | 4.3        |         |       |   | 0.5 |   |   |
| 2010       |       |         | 4.4        |         |       |   | 0.5 |   |   |
| 2011       |       |         | 4.5        |         |       |   | 0.6 |   |   |
| 2012-2016  |       |         | 22.3       |         |       |   | 2.7 |   |   |

 

**DefinedContribution Benefits**

We sponsor definedcontribution plans that provide retirement benefits to substantially all of ouremployees. Company contributions are based upon the contractual obligations ofeach respective plan. We recognized expense of $17.3, $15.6 and $15.2 for theyears ended December 31, 2006, 2005 and 2004, respectively, with regard toemployer contributions to these plans.

**8.**   STOCK-BASED COMPENSATION PLANS

In December 2004, FASB issued SFAS 123R, “Share-BasedPayment.” SFAS 123R is a revision of SFAS 123, “Accounting for Stock-BasedCompensation,” and supersedes APB Opinion No. 25, “Accounting for StockIssued to Employees,” and amends SFAS 95, “Statement of Cash Flows,” and itsrelated implementation guidance. On January 1, 2006, we adopted theprovisions of SFAS 123R using the modified prospective method, under whichprior periods are not retroactively restated. The valuation provisions of SFAS123R apply to awards granted after the effective date. Estimated stock-basedcompensation expense for awards granted prior to the effective date but thatremain unvested on the effective date will be recognized over the remainingservice period using the compensation cost estimated for the SFAS 123 pro formadisclosures. SFAS 123R focuses primarily on accounting for transactions inwhich an entity obtains employee services through stock-based payment transactions.SFAS 123R requires a public entity to measure the cost of employee servicesreceived in exchange for the award of equity instruments based on the fairvalue of the award at the date of grant. The cost is to be recognized over theperiod during which an employee is required to provide services in exchange forthe award. SFAS 123R also requires the benefits of tax deductions in excess ofrecognized compensation expense be reported as a financing cash flow, ratherthan as an operating cash flow as prescribed under the prior accounting rules. Thisrequirement reduces net operating cash flows and increases net financing cashflows in periods after adoption. Total cash flow remains unchanged from whatwould have been reported under prior accounting rules. Upon adoption of SFAS123R, we recognized a one-time gain in the first quarter of 2006 of $0.4 basedon SFAS 123R’s requirement to apply an estimated forfeiture rate to unvestedawards. Previously, we recorded forfeitures as incurred. There was no impact onpreviously reported interim periods upon the adoption of SFAS 123R.

Priorto the adoption of SFAS 123R, we followed the intrinsic value method inaccordance with APB 25 to account for our equity grants. Accordingly, nocompensation expense was recognized for stock purchase rights granted inconnection with the issuance of stock options under our employee stock optionplans or employee stock purchase plans; however, compensation expense wasrecognized in connection with the issuance of restricted stock. The adoption ofSFAS 123R primarily resulted in a change in our method of recognizing the fairvalue of stock-based compensation and estimating forfeitures for all 

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unvested awards. The following table shows the effectof adopting SFAS 123R on selected reported items (referred to in the table as “AsReported”) and what those items would have been under previous guidance underAPB 25:

| ** **                            | ** ** | **Year Ended December 31, 2006** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **                            | ** ** | **As  Reported**                                     | ** ** | **Pro Forma  Under  APB No. 25** | ** ** | **Difference** | ** ** |
| Earnings before  income taxes         |       |                                                 | $          | 259.3 |   |   |   | $ | 274.4 |   |   |   | $ | (15.1 | ) |   |
| Net earnings                          |       |                                                 | $          | 173.6 |   |   |   | $ | 183.7 |   |   |   | $ | (10.1 | ) |   |
| Cash flows from  operating activities |       |                                                 | $          | 161.7 |   |   |   | $ | 183.8 |   |   |   | $ | (22.1 | ) |   |
| Cash flows from  financing activities |       |                                                 | $          | (157.2 | ) |   |   | $ | (179.3 | ) |   |   | $ | 22.1 |   |   |
| Earnings per share:                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                 |       |                                                 | $          | 1.22 |   |   |   | $ | 1.29 |   |   |   | $ | (0.07 | ) |   |
| Diluted                               |       |                                                 | $          | 1.20 |   |   |   | $ | 1.27 |   |   |   | $ | (0.07 | ) |   |

 

Results of operations for the year ended December 31,2005 and prior periods have not been restated to reflect recognition ofstock-based compensation expense. 

Ifcompensation expense for employee stock-based compensation had been determinedbased on the fair value at the grant dates consistent with the methods providedin SFAS No. 123, net income and earnings per share for the year ended December 31,2005 and 2004 would have been as follows:

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

 

We maintained stock-based compensation plans fornon-employee directors, officers, employees, consultants and independentcontractors.

The Ceridian Corporation 2004 Long-Term StockIncentive Plan, as amended (“2004 LTSIP”), authorizes the issuance of up to6,000,000 common shares in connection with awards of stock options, stockappreciation rights, restricted stock, restricted stock units, dividendequivalents, performance awards, stock awards and other stock-based awards. Eligibleparticipants in the 2004 LTSIP include our employees, officers, consultants,advisors and non-employee directors. Awards may be granted under the 2004 LTSIPuntil May 11, 2014. As of December 31, 2006, 2,081,676 shares wereavailable for future grants under the 2004 LTSIP.

The Ceridian Corporation Amended and Restated 2001Long-Term Stock Incentive Plan (“2001 LTSIP”) authorizes the issuance of up to27,000,000 common shares in connection with similar awards. Eligibleparticipants in the 2001 LTSIP include our employees and non-employeedirectors, consultants and independent contractors. Awards may be granted underthe 2001 LTSIP until November 27, 2010. As of December 31, 2006,1,483,557 shares were available for future grants under the 2001 LTSIP.

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We have also granted non-qualifiedstock options to employees who were not executive officers or directorspursuant to the Ceridian Corporation 2002 Employee Stock Incentive Plan (“2002ESIP”). The 2002 ESIP was terminated on May 12, 2004 in connection withthe approval by our shareholders of the 2004 LTSIP. All outstanding awardsunder the 2002 ESIP remained in effect at the time of termination of this plan.

Stock options, restrictedstock awards and restricted stock units awarded under the 2004 LTSIP, 2001LTSIP and 2002 ESIP generally vest either annually on a pro rata basis over athree-year period or on a specific date if certain performance criteria aresatisfied. Stock options generally have either a 5-year or 10-year term andhave an exercise price that is not less than the fair market value of theunderlying stock on the date of grant. Prior to February 17, 2006, moststock option award agreements under these plans include a “retirement” featurethat accelerates future vesting (service) dates to the “retirement date” forrecipients who terminate employment and who are age 55 or older and have 10years of qualified employment service. Subsequent to February 17, 2006,stock option and restricted stock unit award agreements under the 2004 LTSIPcontain a “retirement” feature that permits the continued vesting of suchawards following a recipients’ retirement for recipients who terminateemployment and who are age 55 or older and have 10 years of qualifiedemployment service. Restricted stock awards do not include such a “retirement”feature.

For stock option awardsgranted prior to January 1, 2006, compensation expense is generallyrecognized evenly over the requisite service period of each individual vestingincrement. As a result, in 2006 we recognized approximately $1.3 ofcompensation expense attributed to retirement eligible employees who receivedgrants prior to January 1, 2006. For restricted stock awards granted priorto January 1, 2006, compensation expense is generally recognized evenlyover the requisite service period, which is usually the entire vesting periodof each grant. Subsequent to January 1, 2006, compensation expense for allawards is recognized evenly over the requisite service period, which is usuallythe entire vesting period of each grant. The fair value of stock options andrestricted stock units received by retirement eligible employees is expensedwhen granted.

The Ceridian CorporationAmended and Restated 2001 Director Performance Incentive Plan (“2001 DPIP”),which expired in May 2005, authorized the issuance of common shares inconnection with awards of stock options, restricted stock and deferredrestricted stock units to our non-employee directors. All outstanding awardsunder the 2001 DPIP remained in effect at the time of expiration of this plan. Sincethe expiration of the 2001 DPIP, equity awards are made to non-employeedirectors under the 2004 LTSIP.

Prior to January 1,2006, an annual grant of a non-qualified stock option to purchase 4,000 shareswas made to each eligible non-employee director at the time of election orre-election to the Board at our annual stockholders’ meeting, with such grantsbecoming fully exercisable six months after the date of grant. The exerciseprice of the options was the fair market value of the underlying stock at thedate of grant, and the options expire in ten years. Effective January 1,2006, the amount of shares underlying this annual grant of non-qualified stockoptions to non-employee directors was increased to 8,000 shares. Such grantsvest annually on a pro rata basis over a three year period after the date ofgrant. The exercise price of the options will be the fair market value of theunderlying stock at the date of grant, and the options will expire in five years.

Additionally, at least 50%of the annual Board retainer for each non-employee director is provided in theform of restricted stock, deferred restricted stock units or a combination ofthe two. Non-employee directors may elect to receive up to 100% of their annualBoard retainer and up to 100% of any Board committee chair fees in the form ofrestricted stock, deferred restricted stock units or a combination of the two. Suchrestricted stock and deferred restricted stock units are subject to forfeitureon a pro rata basis if a director’s service on the Board terminates before December 31in the year of grant other than following a change of control, and therestrictions on transfer of such awards lapse at the conclusion of the director’sservice.

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

We have reserved 500,000 common shares for issuanceunder the 2001 Savings-Related Share Option Plan (“2001 SAYE”) for ouremployees in the United Kingdom. At December 31, 2006, 51,015 shares ofcommon stock remain eligible to be purchased under the 2001 SAYE. No futureparticipation will be permitted in this plan.

We generally use our treasury stock to address ourobligations under our stock compensation plans.

The Ceridian Corporation Amended and Restated EmployeeStock Purchase Plan (“ESPP”) was terminated on December 15, 2005. The ESPPprovided for the issuance of up to 1,600,000 newly issued or treasury commonshares to our eligible U.S. employees. The purchase price of the common shareswas 85% of the lesser of the fair market value on either the first day or thelast day of the applicable three-month offering period. 419,359 common sharesremained available under the ESPP at the time of termination.

Asummary of information with respect to stock-based compensation is as follows:

| ** **                                                                       | ** ** | **For Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                       | ** ** | **  2006  **                    | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| Stock-based compensation  costs included in:                                     |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue                                                                  |       |                                                | $          | 4.1 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Selling, general and administrative                                              |       |                                                | 16.5       |   |   |   | 2.5 |   |   |   | 2.4 |   |   |
| Research and development                                                         |       |                                                | 0.4        |   |   |   | — |   |   |   | — |   |   |
| Total stock-based  compensation costs                                            |       |                                                | 21.0       |   |   |   | 2.5 |   |   |   | 2.4 |   |   |
| Amounts  capitalized                                                             | ** ** | ** **                                          | **—** |   |   |   | — |   | ** ** | ** ** | **—** |   |   |
| Amounts charged  against income, before income tax benefit                       |       |                                                | 21.0       |   |   |   | 2.5 |   |   |   | 2.4 |   |   |
| Income tax  benefit related to stock-based compensation included in net earnings |       |                                                | 7.2        |   |   |   | 1.0 |   |   |   | 0.9 |   |   |
| Net compensation expense  included in net earnings                               |       |                                                | $          | 13.8 |   |   |   | $ | 1.5 |   |   |   | $ | 1.5 |   |   |

 

Stockoption activity in the year ended December 31, 2006 was as follows:

| ** **                                     | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------|------------|------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------|------------|
| Options  outstanding at January 1, 2006   |       | 16,572,506 |       |                                   | $          | 17.92                                                                    |       |                            |       |   |   |   |   |   |   |   |
| Granted                                        |       | 2,109,949  |       |                                   | $          | 25.34                                                                    |       |                            |       |   |   |   |   |   |   |   |
| Exercised                                      |       | (8,724,312 | )          |                                   | $          | 17.29                                                                    |       |                            |       |   |   |   |   |   |   |   |
| Forfeited or  expired                          |       | (582,119   | )          |                                   | $          | 20.41                                                                    |       |                            |       |   |   |   |   |   |   |   |
| Options outstanding  at December 31, 2006 |       | 9,376,024  |       |                                   | $          | 20.03                                                                    |       |                            |       | 2.70 |   |   |   | $ | 74.6 |   |   |
| Options exercisable at  December 31, 2006 |       | 5,177,751  |       |                                   | $          | 18.43                                                                    |       |                            |       | 1.99 |   |   |   | $ | 49.4 |   |   |

 

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Otherinformation pertaining to options was as follows: 

| ** **                                                                 | ** ** | **For Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **  2006  **                    | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| Total intrinsic  value of stock options exercised                          |       | $                                                   | 66.3       |   |   | $ | 35.5 |   |   |   | $ | 19.4 |   |   |
| Weighted average  grant date fair value per share of stock options granted |       | $                                                   | 8.45       |   |   | $ | 6.01 |   |   |   | $ | 6.83 |   |   |
| Cash received  from the exercise of stock options                          |       | $                                                   | 150.8      |   |   | $ | 88.3 |   |   |   | $ | 47.0 |   |   |
| Tax  benefit related to the exercise of stock options                      |       | $                                                   | 22.1       |   |   | $ | 11.7 |   |   |   | $ | 6.1 |   |   |

 

At December 31, 2006, there was $12.1 of totalstock option compensation expense related to nonvested awards not yetrecognized, which is expected to be recognized over a weighted average periodof 0.92 years.

Thefair value of these stock options was estimated at the date of grant using theBlack-Scholes option pricing model with the following weighted-averageassumptions:

| ** **              | ** ** | **For Year Ended December 31,** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|
| ** **              | ** ** | **  2006  **                    | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| Expected life in  years |       |                                                | 4.23       |   |   |   | 3.90 |   |   |   | 3.90 |   |   |
| Expected  volatility    |       |                                                | 32.8       | % |   |   | 35.4 | % |   |   | 38.7 | % |   |
| Expected dividend  rate |       |                                                | —     |   |   |   | — |   |   |   | — |   |   |
| Risk-free interest rate |       |                                                | 4.4        | % |   |   | 4.1 | % |   |   | 2.6 | % |   |

 

For the year ended December 31, 2006, we used aprojected expected life for each award granted based on historical experienceof our employees’ exercise behavior. We stratify our employee population basedupon distinctive exercise behavior patterns. Expected volatility is based onhistorical daily volatility levels of our common shares. The risk-free interestrate is based on the implied yield currently available on U.S. Treasury zerocoupon issues.

Restrictedstock unit activity in the year ended December 31, 2006 was as follows:

| ** **                                          | ** ** | **Number of  Restricted  Stock Units** | ** ** | **Weighted  Average  Remaining  Contractual  Term   (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------|------------|
| Units outstanding  at January 1, 2006          |       |                                             | 3,747      |                                                                       |       |                            |       |   |   |   |   |   |   |
| Granted                                             |       |                                             | 391,570    |                                                                       |       |                            |       |   |   |   |   |   |   |
| Converted                                           |       |                                             | (716       | )                                                                          |       |                            |       |   |   |   |   |   |   |
| Forfeited                                           |       |                                             | (26,110    | )                                                                          |       |                            |       |   |   |   |   |   |   |
| Units outstanding  at December 31, 2006        |       |                                             | 368,491    |                                                                       |       |                            | 1.20       |   |   |   | $ | 10.3 |   |   |
| Undelivered vested units  at December 31, 2006 |       |                                             | 3,171      |                                                                       |       |                            |       |   |   |   |   |   |   |
|                                                     |            |                                                  |            |                                                                            |            |                                 |            |  |  |  |  |  |  |  |

 

The intrinsic value of the converted restricted stockunits during the twelve months ended December 31, 2006 was less than $0.1.There were no****restricted stock units convertedduring the twelve months ended December 31, 2005 and 2004. As of December 31,2006, there was $5.3 of total restricted stock unit compensation expenserelated to nonvested awards not yet recognized, which is expected to berecognized over a weighted average period of 2.19 years.

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Restrictedstock award activity in the twelve months ended December 31, 2006 was asfollows:

| ** **                                      | ** ** | **Number of Restricted  Shares** | ** ** | **Weighted Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------|------------|
| Nonvested balance  as of January 1, 2006        |       |                                       | 308,416    |                                                   |       |   | $ |  18.46 |   |   |
| Granted                                         |       |                                       | 196,519    |                                                   |       |   | $ | 23.84 |   |   |
| Vested                                          |       |                                       | (144,051   | )                                                      |       |   | $ | 18.04 |   |   |
| Forfeited                                       |       |                                       | (61,620    | )                                                      |       |   | $ | 18.96 |   |   |
| Nonvested balance as of  December 31, 2006 |       |                                       | 299,264    |                                                   |       |   | $ | 22.09 |   |   |

 

The fair value ofrestricted stock vested during the twelve months ended December 31, 2006,2005 and 2004 was $2.6, $2.2 and $1.2, respectively. As of December 31,2006, there was $4.9 of total restricted stock award compensation expenserelated to nonvested awards not yet recognized, which is expected to berecognized over a weighted average period of 1.96 years.

**9.**   SUPPLEMENTARY DATA TO STATEMENTS OF OPERATIONS

| ** **                                     | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| **Other (Income) Expense, net** | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Asset write-downs                              |       | $                                           | 0.3        |   | $ | 9.1 |   | $ | 3.6 |   |
| Foreign currency  translation (income) expense |       | (0.9                                        | )          | 0.2 |   | (0.8 | ) |
| Gain on sale of  assets                        |       | (6.9                                        | )          | (0.5 | ) | (0.6 | ) |
| Gain on sale of  marketable securities         |       | (2.3                                        | )          | (4.3 | ) | (4.5 | ) |
| SourceWeb exit  costs, net of recoveries       |       | —                                      |       | — |   | 28.5 |   |
| Other (income)  expense                        |       | (0.7                                        | )          | — |   | 0.3 |   |
| Total                                          |       | $                                           | (10.5      | ) | $ | 4.5 |   | $ | 26.5 |   |
|                                                |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

**Asset write-downs**

During 2006, we had assetwrite-downs of $0.3 for software, all of which was due to abandonment of thesoftware project. During 2005, we had asset write-downs of $9.1, of which $7.8was due to abandonment of software projects. During 2004, we had assetwrite-downs of $3.6, of which $3.2 was due to abandonment of software projects.

**Gain on sale ofassets and marketable securities**

During 2006, the gain onasset sale primarily relates to a $5.8 gain on the sale of a major portion ofthe RPS business and $1.1 related to the sale of other assets. The gain onmarketable securities in 2006 is due to sales of Ultimate stock. The gain ofsale of marketable securities in 2005 is the result of Ultimate and USIH stocksales of $3.6 and $0.7 respectively. 

**SourceWeb exitcosts, net of recoveries**

SourceWeb was a payrollplatform within the Payroll and Tax Services business of our HRS segment. On December 31,2004, we sold certain customer relationships and other assets associated withour SourceWeb payroll platform (the “SourceWeb Assets”) to the buyer for $4.0pursuant to the terms and conditions of an Asset Purchase Agreement. Inaccordance with the provisions of SFAS 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” we recorded a $9.1 pre-tax impairment chargeon assets associated with this platform representing the excess of net bookvalue of the SourceWeb Assets over sale proceeds. The impaired assets primarilyconsisted of a purchased software license from Ultimate and capitalizedsoftware development costs. In addition to this asset impairment, we alsorecorded a $19.4 

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pre-taxloss on disposal which comprised the fair value of the future minimum royaltyobligations to Ultimate of $19.2 and $0.2 of employee severance costs. 

**10.**   INCOME TAXES

In 2006, the expiration of the statute of limitationson an international tax contingency and a Canadian tax rate reduction resultedin a reduction in our income tax expense of $8.6 and $2.8, respectively. Weconsider our tax accruals adequate to cover any U.S. and international taxdeficiencies not recoverable through deductions in future years.

During 2005, we favorably settled a significant taxissue that resulted in a $13.0 reduction in tax expense. We also repatriated$130.3 of earnings from Ceridian Canada pursuant to the American Jobs CreationAct of 2004 resulting in an additional tax expense of $5.2. In addition, aformer affiliate settled an audit that resolved our potential obligations froma previous spin-off transaction reducing our tax expense by $5.9. Finally, theexpiration of the statue of limitations and other adjustments to our taxcontingency liabilities resulted in a $6.2 reduction in our tax expense. 

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

| ** **                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Components of Earnings and Taxes from Operations** | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Earnings Before Income Taxes*                                                     | * *   | * *                                    | * *   | * * | * * | * * | * * |
| U.S.                                                                               |       | $                                           | 215.4      |   | $ | 141.2 |   | $ | 9.1 |   |
| International                                                                      |       | 43.9                                        |       | 32.6 |   | 32.1 |   |
| Total                                                                              |       | $                                           | 259.3      |   | $ | 173.8 |   | $ | 41.2 |   |
| *Income  Tax Provision*                                                            | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Current                                                                            |       |                                        |       |   |   |   |   |
| U.S.                                                                               |       | $                                           | 38.8       |   | $ | 39.4 |   | $ | 25.9 |   |
| State and local                                                                    |       | 5.6                                         |       | 2.4 |   | (10.8 | ) |
| International                                                                      |       | 16.0                                        |       | 15.5 |   | 9.0 |   |
|                                                                               |       | 60.4                                        |       | 57.3 |   | 24.1 |   |
| Deferred                                                                           |       |                                        |       |   |   |   |   |
| U.S.                                                                               |       | 28.9                                        |       | (10.9 | ) | (21.9 | ) |
| State and local                                                                    |       | (0.1                                        | )          | (0.9 | ) | (1.9 | ) |
| International                                                                      |       | (3.5                                        | )          | 0.4 |   | 4.0 |   |
|                                                                               |       | 25.3                                        |       | (11.4 | ) | (19.8 | ) |
| Total                                                                              |       | $                                           | 85.7       |   | $ | 45.9 |   | $ | 4.3 |   |
|                                                                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Effective Rate Reconciliation**                         | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| U.S. statutory  rate                                                |       | 35                                          | %          | 35 | % | 35 | % |
| Income tax  provision at U.S. statutory rate                        |       | $                                           | 90.8       |   | $ | 60.8 |   | $ | 14.4 |   |
| Tax on  international earnings                                      |       | 0.0                                         |       | (13.0 | ) | 12.3 |   |
| Tax settlements                                                     |       | (2.0                                        | )          | (6.2 | ) | (16.3 | ) |
| Tax on  international statute expiration                            |       | (8.6                                        | )          | — |   | — |   |
| Tax sharing  agreement settlements                                  |       | 0.0                                         |       | (5.9 | ) | — |   |
| Valuation  allowance change                                         |       | (0.6                                        | )          | 0.6 |   | (7.0 | ) |
| Meals and  entertainment                                            |       | 0.9                                         |       | 1.0 |   | 1.0 |   |
| State income  taxes, net of federal benefit and valuation allowance |       | 5.1                                         |       | 3.5 |   | 1.0 |   |
| Foreign earnings  repatriation                                      |       | 0.0                                         |       | 5.2 |   | — |   |
| Other                                                               |       | 0.1                                         |       | (0.1 | ) | (1.1 | ) |
| Income tax  provision                                               |       | $                                           | 85.7       |   | $ | 45.9 |   | $ | 4.3 |   |
|                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

| **Tax Effect of Items That Comprise a Significant Portion of the** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Net Deferred Tax Asset and Deferred Tax Liability**                             | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Deferred  Tax Asset*                                                                                                | * *   | * *              | * *   | * * | * * |
| Employment  related accruals                                                                                         |       | $                     | 53.6       |   | $ | 93.1 |   |
| Accrued  liabilities                                                                                                 |       | 18.6                  |       | 16.6 |   |
| Net operating  loss carryforwards                                                                                    |       | 26.9                  |       | 23.9 |   |
| Total gross deferred tax asset                                                                                       |       | 99.1                  |       | 133.6 |   |
| Valuation allowance                                                                                                  |       | (22.7                 | )          | (19.4 | ) |
| Total deferred tax asset                                                                                             |       | 76.4                  |       | 114.2 |   |
| *Deferred Tax Liability*                                                                                             | * *   | * *              | * *   | * * | * * |
| Intangibles                                                                                                          |       | (47.0                 | )          | (51.9 | ) |
| Other                                                                                                                |       | (27.3                 | )          | (19.0 | ) |
| Total deferred tax liability                                                                                         |       | (74.3                 | )          | (70.9 | ) |
| Net deferred tax asset                                                                                               |       | $                     | 2.1        |   | $ | 43.3 |   |
|                                                                                                                      |            |                       |            |  |  |  |  |  |  |

 

| **Net Deferred  Tax by Geography** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| United States                      |       | $          | 23.5       |       | $          | 68.1       |       |
| International                      |       | (21.4      | )          | (24.8      | )          |
| Total                              |       | $          | 2.1        |       | $          | 43.3       |       |

 

At December 31, 2006, we had total net operatingloss carryforwards of approximately $306.4. Amounts available to reduce futuretaxable income include $7.7 of U.S. federal net operating loss carryforwards,$290.5 of U.S. state net operating loss carryforwards, and $8.1 ofinternational net operating loss carryforwards. If unused, these carryforwardswill expire between 2007 and 2026.

We have recorded valuation allowances related to certainstate and international net operating losses because it is considered morelikely than not that these benefits will not be realized. At December 31,2006, the valuation allowance relating to state tax operating losscarryforwards was approximately $21.7 and the allowance related tointernational operating loss carryforwards was approximately $1.0. We believethat the remainder of our deferred tax asset is realizable.

We consider earnings frominternational subsidiaries to be indefinitely reinvested and accordingly, we donot provide U.S. income taxes or withholding taxes on these earnings. Uponrepatriation of those earnings, in the form of dividends or otherwise, we wouldbe subject to both U.S. income taxes and foreign 

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withholdingtaxes payable offset by applicable foreign tax credits. At December 31,2006, the unrecognized deferred U.S. income tax liability is approximately$13.6.

**11.**          COMMITMENTS AND CONTINGENCIES

**Guarantees andIndemnifications**

As a result of the sale of the SourceWeb Assets in2004, we recorded a pre-tax charge and accrued a liability of $19.2representing the fair value of an associated guaranteed future minimum royaltyobligation to Ultimate. As of December 31, 2006 the remaining liabilitywas $8.1. Future payments of principal and interest under this obligation willamount to $6.6 in 2007 and $1.7 in 2008.

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

**Leasing**

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

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

Ourrental expense and sublease income for each of the three years endedDecember 31, 2006 appear in the following table:

| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| **Rental Expense** | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Rental expense          |       | $                                           | 51.4       |   | $ | 53.0 |   | $ | 54.2 |   |
| Sublease rental  income |       | (0.2                                        | )          | (0.2 | ) | (0.6 | ) |
| Net rental expense      |       | $                                           | 51.2       |   | $ | 52.8 |   | $ | 53.6 |   |
|                         |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Ourfuture minimum noncancelable lease payments on existing operating leases atDecember 31, 2006, which have an initial term of more than one year, arepresented in the following table:

| **Future Minimum Lease Payments** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                             |       | $          | 43.1       |       |
| 2008                                             |       | 38.7       |       |
| 2009                                             |       | 31.9       |       |
| 2010                                             |       | 25.3       |       |
| 2011                                             |       | 18.4       |       |
| Thereafter                                       |       | $          | 59.6       |       |

 

**12.**          LEGAL MATTERS

We are subject to claims and a number of judicial andadministrative proceedings considered normal in the course of our current andpast operations, including employment-related disputes, contract disputes,intellectual property disputes, government audits and proceedings, customer disputes,and tort claims. In some proceedings, the claimant seeks damages as well asother relief, which, if granted, would require substantial expenditures on ourpart.

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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 or established 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 Action**

Since August 6, 2004, six shareholder lawsuitshave been filed against Ceridian Corporation and certain of our formerexecutive officers in United States District Court, District of Minnesota. Thoselawsuits have been consolidated into a single case captioned *In re Ceridian Corporation Securities**Litigation*, Case No. 04-cv-03704PJS-RLE. This consolidated action purports to be a class action filed on behalfof all persons who purchased or otherwise acquired our common stock between April 17,2003 through and including March 17, 2005, and allege claims against CeridianCorporation and certain of our former executive officers under Sections 10(b) and20(a) of the Securities Exchange Act of 1934. Plaintiffs challenge theaccuracy of certain public disclosures made by us regarding our financialperformance, and in particular our accounting for revenue and expenses,accounting for capitalization, accounting for derivatives, accounting forlong-term leases, and accounting for trademarks. Plaintiffs allege, in essence,that our series of restatements constituted a violation of Section 10(b) and20(a) of the Securities Exchange Act of 1934. On May 25, 2006, theUnited States District Court, District of Minnesota granted our motion todismiss the consolidated class action complaint and gave leave to theplaintiffs to file an amended complaint. An amended complaint was filed on July 14,2006. We have made a motion to dismiss the amended consolidated class action.

We believe these claimsare without merit and we intend to vigorously defend our position in thisaction. We cannot estimate the possible loss or range of loss from this matter.

**Derivative Action**

Since August 13, 2004, two shareholders havefiled derivative suits on behalf of Ceridian Corporation against CeridianCorporation, as nominal defendant, certain current and former directors andcertain of our former executive officers in United States District Court,District of Minnesota. *James Park, DerivativelyOn Behalf of Ceridian Corporation v. Ronald L. Turner, et al.*,and *Anthony Santiamo, Derivatively On Behalf ofCeridian Corporation v. Ronald L. Turner, et al.*, both served August 19,2004. These complaints have been consolidated into a single lawsuit. Theconsolidated lawsuit alleges that our Board of Directors as of August 2004 andcertain of our former executive officers breached fiduciary duties, throughabuse of control, gross mismanagement, waste of corporate assets and unjustenrichment. The consolidated lawsuit, which is currently stayed, relies on thesame factual allegations as the purported class action shareholder lawsuitdescribed above.

We intend to appropriatelydefend our position in this action. We cannot estimate the possible loss orrange of loss from this matter.

**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, 

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and thatwe have been advised that the SEC has issued a formal order of investigation. InFebruary 2004, we provided documents responsive to the SEC. In July 2004,we advised the SEC of the investigation being directed by the Audit Committeeof our Board of Directors. We kept the SEC advised on a regular basis of theAudit Committee’s investigation. On December 10, 2004, we received afurther formal confidential document request from the SEC. The second requesthas broadened the areas of inquiry to include, among other things, our restatements,revenue recognition, capitalization, expense recognition, how we respond to anyinternal ethics complaints, and our accounting policies and procedures. Theformal document requests state that the SEC investigation is a non-public,fact-finding inquiry, and that the investigation and document requests do notmean that the SEC has concluded that we have violated any securities laws. Asis common in SEC investigations, on June 15, 2005, we received a subpoenafrom the SEC seeking certain additional documents that relate to some of theareas of inquiry identified above. The subpoena is consistent withinvestigations of this type and was anticipated. On January 8, 2007, wereceived a second subpoena seeking additional documents relating to the areasof inquiry identified above. We continue to fully cooperate with the SEC.

**Other Matters**

On September 1, 2006,Ronald A. Katz Technology Licensing, L.P. (“Katz”) filed a lawsuit against CeridianCorporation and Comdata. The lawsuit alleges we infringed on certain of theirpatents. Katz seeks unspecified damages, trebling of the damages based on allegedwillful infringement, attorney’s fees and injunctive relief. We have evaluatedthe claims made by Katz, plan to initiate settlement discussions and we believewe have appropriately reserved for this lawsuit.

**13.**          SEGMENT  DATA

We operate in the information services industryprincipally in the U.S., Canada and United Kingdom, and provide products andservices primarily to the human resource, transportation and retail servicesmarkets. Our businesses collect, manage and analyze data and processtransactions on behalf of customers, report information resulting from suchactivities to customers, and provide customers with related products, softwareapplications and services. Our technology-based products and services of thesebusinesses are typically provided through long-term customer relationships thatresult in a high level of recurring revenue. Our HRS and Comdata businesssegments are distinguished primarily by reference to the markets served and thenature of the services provided. Selected business segment information isprovided in an accompanying table.

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 alsosells stored value cards and provides card-based services primarily toretailers (“Retail Services”) in the form of gift cards, credits for productreturns and retail promotions.

Further information about our business segments ispresented in the section of Note 1, “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. Expenses incurred by corporatecenter operations are charged or allocated to the business segments.

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Wemeasure business segment results by reference to earnings before interest andtaxes (“EBIT”) because interest income and interest expense are not allocatedto our segments. Revenue from sales between business segments is not materialand is eliminated upon consolidation. 

| **Business Segments**                   | ** ** | ** ** | ** ** | **HRS** | ** ** | **Comdata** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|------------|------------|---------|------------|-------------|------------|-----------|------------|-----------|------------|
| Year Ended December 31, 2006            |       |       |       |    |       |        |       |      |       |      |       |
| Revenue                                      |       | $          | 1,099.8    |    |       | $           | 465.3      |      |       | $         | —     |   | $ | 1,565.1 |   |
| EBIT                                         |       | 98.2       |       |    | 153.6      |        |       | —    |       | 251.8     |       |
| Total assets before  customer funds          |       | 1,240.4    |       |    | 932.2      |        |       | 168.4     |       | 2,341.0   |       |
| Customer funds                               |       | 4,570.9    |       |    | 22.5       |        |       | —    |       | 4,593.4   |       |
| Total assets at  December 31            |       | 5,811.3    |       |    | 954.7      |        |       | 168.4     |       | 6,934.4   |       |
| Depreciation and  amortization               |       | 68.1       |       |    | 17.8       |        |       | 1.0       |       | 86.9      |       |
| Expended for property,  plant and equipment  |       | 21.3       |       |    | 8.8        |        |       | 0.2       |       | 30.3      |       |
| Expended for software  and development costs |       | $          | 15.8       |    |       | $           | 6.0        |      |       | $         | 0.9        |   | $ | 22.7 |   |
| Year Ended December 31, 2005            |       |       |       |    |       |        |       |      |       |      |       |
| Revenue                                      |       | $          | 1,050.1    |    |       | $           | 408.9      |      |       | $         | —     |   | $ | 1,459.0 |   |
| EBIT                                         |       | 44.6       |       |    | 126.9      |        |       | —    |       | 171.5     |       |
| Total assets before  customer funds          |       | 1,253.9    |       |    | 795.9      |        |       | 262.4     |       | 2,312.2   |       |
| Customer funds                               |       | 4,322.2    |       |    | 19.0       |        |       | —    |       | 4,341.2   |       |
| Total assets at  December 31            |       | 5,576.1    |       |    | 814.9      |        |       | 262.4     |       | 6,653.4   |       |
| Depreciation and  amortization               |       | 68.6       |       |    | 15.8       |        |       | 0.9       |       | 85.3      |       |
| Expended for property,  plant and equipment  |       | 23.5       |       |    | 7.3        |        |       | 0.6       |       | 31.4      |       |
| Expended for software  and development costs |       | $          | 27.9       |    |       | $           | 4.9        |      |       | $         | 0.0        |   | $ | 32.8 |   |
| Year Ended December 31, 2004            |       |       |       |    |       |        |       |      |       |      |       |
| Revenue                                      |       | $          | 964.4      |    |       | $           | 356.0      |      |       | $         | —     |   | $ | 1,320.4 |   |
| EBIT                                         |       | (72.6      | )          |    | 115.6      |        |       | —    |       | 43.0      |       |
| Total assets before  customer funds          |       | 1,343.6    |       |    | 658.7      |        |       | 127.3     |       | 2,129.6   |       |
| Customer funds                               |       | 4,079.6    |       |    | 16.4       |        |       | —    |       | 4,096.0   |       |
| Total assets at  December 31            |       | 5,423.2    |       |    | 675.1      |        |       | 127.3     |       | 6,225.6   |       |
| Depreciation and  amortization               |       | 110.5      |       |    | 13.3       |        |       | 0.9       |       | 124.7     |       |
| Expended for property,  plant and equipment  |       | 25.6       |       |    | 7.0        |        |       | 0.3       |       | 32.9      |       |
| Expended for software and development costs  |       | $          | 30.5       |    |       | $           | 2.4        |      |       | $         | —     |   | $ | 32.9 |   |

 

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| **Goodwill, net of amortization** | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| *HRS*                                            | * *   | * *              | * *   | * * | * * |
| At beginning of year                             |       | $                     | 814.5      |   | $ | 814.8 |   |
| Acquisitions in the current period (Note 2)      |       | 5.4                   |       | — |   |
| Translation and other adjustments                |       | (2.8                  | )          | (0.3 | ) |
| At end of year                                   |       | $                     | 817.1      |   | $ | 814.5 |   |
| Tax-deductible goodwill at end of year           |       | $                     | 222.2      |   | $ | 251.8 |   |
| *Comdata*                                        | * *   | * *              | * *   | * * | * * |
| At beginning of year                             |       | $                     | 122.0      |   | $ | 117.0 |   |
| Acquisitions in the current period (Note 2)      |       | 13.6                  |       | 5.1 |   |
| Translation and other adjustments                |       | (0.1                  | )          | (0.1 | ) |
| At end of year                                   |       | $                     | 135.5      |   | $ | 122.0 |   |
| Tax-deductible goodwill at end of year           |       | $                     | 35.9       |   | $ | 22.4 |   |
| *Total goodwill*                                 | * *   | * *              | * *   | * * | * * |
| At beginning of year                             |       | $                     | 936.5      |   | $ | 931.8 |   |
| Acquisitions in the current period (Note 2)      |       | 19.0                  |       | 5.1 |   |
| Translation and other adjustments                |       | (2.9                  | )          | (0.4 | ) |
| At end of year                                   |       | $                     | 952.6      |   | $ | 936.5 |   |
| Tax-deductible goodwill at end of year           |       | $                     | 258.1      |   | $ | 274.1 |   |
|                                                  |            |                       |            |  |  |  |  |  |  |

 

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| ** **                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Reconciliation of EBIT to Earnings before Income Taxes** | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| EBIT                                                                                          |       |                                        |       |   |   |   |   |
| HRS                                                                                           |       | $                                           | 98.2       |   | $ | 44.6 |   | $ | (72.6 | ) |
| Comdata                                                                                       |       | 153.6                                       |       | 126.9 |   | 115.6 |   |
| Total EBIT                                                                                    |       | $                                           | 251.8      |   | $ | 171.5 |   | $ | 43.0 |   |
| Interest income (expense), net (not allocated to  business segments)                          |       | 7.5                                         |       | 2.3 |   | (1.8 | ) |
| Earnings before  income taxes                                                                 |       | $                                           | 259.3      |   | $ | 173.8 |   | $ | 41.2 |   |
|                                                                                               |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Revenueby product and services are as follows:

| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| *HRS  Revenue*           | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Payroll and Tax Services |       | $                                           | 790.4      |   | $ | 739.8 |   | $ | 674.0 |   |
| Benefit Services         |       | 154.0                                       |       | 151.1 |   | 146.1 |   |
| Lifeworks                |       | 155.4                                       |       | 159.2 |   | 144.3 |   |
| Total HRS revenue        |       | $                                           | 1,099.8    |   | $ | 1,050.1 |   | $ | 964.4 |   |
| *Comdata Revenue*        | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Transportation           |       | $                                           | 311.5      |   | $ | 283.1 |   | $ | 257.1 |   |
| Retail services          |       | 153.8                                       |       | 125.8 |   | 98.9 |   |
| Total Comdata revenue    |       | $                                           | 465.3      |   | $ | 408.9 |   | $ | 356.0 |   |
| Total Revenue            |       | $                                           | 1,565.1    |   | $ | 1,459.0 |   | $ | 1,320.4 |   |

 

Our operations are conducted primarily in the U.S. andrevenue from sales between U.S. and non-U.S. entities is not material. Operationsin Canada and the United Kingdom relate almost entirely to the HRS segment. Geographicdata for or at the end of each of the last three years, presented below, isdetermined by reference to the location of operation. No single customeraccounted for 10% or more of our consolidated revenue for any of the periodspresented.

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

| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Revenue*                            | * *   | * *                                    | * *   | * * | * * | * * | * * |
| U.S.                                 |       | $                                           | 1,287.7    |   | $ | 1,208.7 |   | $ | 1,087.5 |   |
| Canada                               |       | 182.6                                       |       | 158.1 |   | 141.1 |   |
| United Kingdom                       |       | 94.8                                        |       | 92.2 |   | 91.8 |   |
| Total revenue                        |       | $                                           | 1,565.1    |   | $ | 1,459.0 |   | $ | 1,320.4 |   |
| *Property,  plant and equipment*     | * *   | * *                                    | * *   | * * | * * | * * | * * |
| U.S.                                 |       | $                                           | 93.3       |   | $ | 106.6 |   | $ | 127.1 |   |
| Canada                               |       | 10.3                                        |       | 8.4 |   | 8.0 |   |
| United Kingdom                       |       | 6.7                                         |       | 6.5 |   | 5.8 |   |
| Total property,  plant and equipment |       | $                                           | 110.3      |   | $ | 121.5 |   | $ | 140.9 |   |

 

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

| ** **                                          | ** ** | **2006**            | ** ** | **2005**           | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                          | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** |
| Revenue                                             |       | $                   | 404.0      |               | $          | 386.5 |   | $ | 388.9 |   | $ | 385.7 |   | $ | 379.5 |   | $ | 364.1 |   | $ | 358.0 |   | $ | 357.4 |   |
| Costs and Expenses (1)                              |       |                |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue                                     |       | 214.3               |       | 212.9              |       | 210.8 |   | 205.0 |   | 198.9 |   | 197.2 |   | 197.8 |   | 191.3 |   |
| Selling, general  and administrative                |       | 107.7               |       | 113.7              |       | 110.9 |   | 117.7 |   | 117.2 |   | 114.1 |   | 111.1 |   | 115.8 |   |
| Research and  development                           |       | 6.1                 |       | 7.5                |       | 6.7 |   | 7.8 |   | 8.5 |   | 6.1 |   | 7.1 |   | 6.4 |   |
| Loss (gain) on  derivative instruments              |       | 0.3                 |       | (0.7               | )          | 2.2 |   | 0.9 |   | (0.9 | ) | 3.1 |   | (0.1 | ) | 9.5 |   |
| Other (income)  expense,  net                       |       | (0.8                | )          | (5.6               | )          | (2.5 | ) | (1.6 | ) | 1.6 |   | 4.6 |   | (0.7 | ) | (1.0 | ) |
| Interest income                                     |       | (3.0                | )          | (2.4               | )          | (4.0 | ) | (4.1 | ) | (2.4 | ) | (2.0 | ) | (2.0 | ) | (1.4 | ) |
| Interest expense                                    |       | 1.5                 |       | 1.5                |       | 1.7 |   | 1.3 |   | 1.6 |   | 1.0 |   | 1.3 |   | 1.6 |   |
| Total costs and  expenses                           |       | 326.1               |       | 326.9              |       | 325.8 |   | 327.0 |   | 324.5 |   | 324.0 |   | 314.5 |   | 322.2 |   |
| **Earnings  before income taxes**                   |       | 77.9                |       | 59.6               |       | 63.1 |   | 58.7 |   | 55.0 |   | 40.1 |   | 43.5 |   | 35.2 |   |
| Income tax  provision                               |       | 28.3                |       | 14.0               |       | 20.9 |   | 22.5 |   | 8.3 |   | 14.4 |   | 10.0 |   | 13.2 |   |
| **Net  earnings**                                   |       | $                   | 49.6       |               | $          | 45.6 |   | $ | 42.2 |   | $ | 36.2 |   | $ | 46.7 |   | $ | 25.7 |   | $ | 33.5 |   | $ | 22.0 |   |
| **Earnings  per share (2)**                         | ** ** | ** **          | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                               |       | $                   | 0.35       |               | $          | 0.33 |   | $ | 0.29 |   | $ | 0.25 |   | $ | 0.32 |   | $ | 0.17 |   | $ | 0.23 |   | $ | 0.15 |   |
| Diluted                                             |       | $                   | 0.35       |               | $          | 0.32 |   | $ | 0.29 |   | $ | 0.24 |   | $ | 0.32 |   | $ | 0.17 |   | $ | 0.22 |   | $ | 0.15 |   |
| **Shares used in calculations (in thousands)** | ** ** | ** **          | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  shares (basic)                    |       | 138,962             |       | 138,905            |       | 144,269 |   | 145,490 |   | 144,737 |   | 145,543 |   | 147,826 |   | 149,637 |   |
| Dilutive securities                                 |       | 2,100               |       | 2,355              |       | 2,809 |   | 3,343 |   | 2,507 |   | 1,929 |   | 1,182 |   | 1,025 |   |
| Weighted average  shares (diluted)                  |       | 140,963             |       | 141,260            |       | 147,078 |   | 148,834 |   | 147,244 |   | 147,472 |   | 149,008 |   | 150,662 |   |

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(1)          Certain out-of-periodadjustments were identified during each quarter of 2005 and 2006 that relate toprior periods. Upon identification of these out-of-period adjustments, weanalyzed their effect and concluded that in the aggregate, they were notsignificant enough to warrant a restatement of Ceridian’s quarterly results.

(2)          For information on thecalculation of earnings per share, see the section entitled “Earnings per Share”in Note 1, “Accounting Policies.”

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

None.

**Item 9A.**                Controls andProcedures

**Disclosure Controlsand Procedures**

As of December 31, 2006, we carried out anevaluation, under the supervision and with the participation of our management,including our President and Chief Executive Officer (principal executiveofficer) and our Executive Vice President and Chief Financial Officer(principal financial officer), of the effectiveness of the design and operationof our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended (“Exchange Act”)). Based onthis evaluation we have concluded that as of December 31, 2006, ourdisclosure controls and procedures were effective.

Other than such actionsnoted below under the heading “Remediation Steps to Address Material Weaknessin Internal Control Over Financial Reporting,” there have been no changes toour internal control over financial reporting during the quarter ended December 31,2006 that have materially affected, or are likely to materially affect, ourinternal control over financial reporting.

**Internal ControlOver Financial Reporting**

Management’s Report onInternal Control Over Financial Reporting and the audit report of KPMG LLP,our independent registered public accounting firm, on management’s assessmentof internal 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.

**Remediation ofMaterial Weakness Previously Reported**

Our managementassessed the effectiveness of our internal control over financial reporting asof December 31, 2005. The assessment was provided in our “Management’sReport on Internal Control Over Financial Reporting” as set forth in Part II,Item 8 “Financial Statements and Supplementary Data” in our Annual Report Form 10-K,for the year ended December 31, 2005 (“2005 Form 10-K”). Theassessment identified the following “material weakness” (as defined by thePublic Company Accounting Oversight Board or “PCAOB” in its Auditing Standard No. 2,“An Audit of Internal Control over Financial Reporting Performed in Conjunctionwith an Audit of Financial Statements”) in our internal control over financialreporting as of December 31, 2005:

We did not have personnel with sufficient technicalknowledge to analyze complex multiple element revenue arrangements to ensurethat such transactions were accounted for in conformity with accountingprinciples generally accepted in the United States of America. Specifically, wedid not effectively identify and analyze the terms of certain complex multipleelement revenue arrangements to ensure timely and accurate financial reporting.As a result, accounting errors were identified related to revenue recognition,resulting in an understatement of deferred revenue and deferred costs and anoverstatement in revenue, cost of revenue, and net earnings in our preliminary2005 consolidated financial statements. These errors were corrected in ourconsolidated financial statements prior to issuance. Management has concludedthat this deficiency resulted in more than a remote likelihood that a materialmisstatement of our consolidated financial statements would not have beenprevented or detected.

In making our assessment,management used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in *InternalControl—Integrated Framework.*Becauseof the material weakness described above, our management concluded that as of December 31,2005, our 

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internal control over financial reporting was noteffective based on those criteria. Our management concluded that as of December 31,2006, the changes described below in “Remediation Steps to Address MaterialWeakness in Internal Control Over Financial Reporting” have successfullyremediated the aforementioned material weakness.

**Remediation Steps to Address Material Weakness inInternal Control Over Financial Reporting**

Thefollowing actions were implemented throughout 2006 and completed during thequarter ended December 31, 2006, to remediate the material weakness ininternal control over financial reporting set forth in our 2005 Form 10-Kand to ensure the integrity of our financial reporting processes:

·       increasedthe frequency and depth of our Revenue Recognition Steering Committee meetingsand improved the resulting documentation;

·       providedadditional training for finance, accounting and certain other personnel relatedto revenue recognition for complex multiple element revenue arrangements;

·       increasedthe scope of review of complex multiple element revenue arrangements;

·       designedand implemented internal controls to assist in the proper identification andanalysis of complex multiple element revenue arrangements; and

·       addedadditional qualified personnel.

As previously indicated,we have remediated the material weakness identified in connection with ourassessment of our internal control over financial reporting as of December 31,2005. “Significant deficiencies” and “control deficiencies” (as defined by thePCAOB in its Auditing Standard No. 2) remain in our internal control overfinancial reporting as of December 31, 2006. We will continue to improveour control environment and remediate existing significant and controldeficiencies.

**Item9B.**               OtherInformation.

None.

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**PART III**

**Item10.**                 Directors,Executive Officers and Corporate Governance

We refer you to our ProxyStatement for our 2007 Annual Meeting of Stockholders, which will be filed withthe SEC within 120 days after the close of our fiscal year (which is referredto in this Report as our “Proxy Statement”), and the heading “Election ofDirectors (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 Part I, Item 1 of this report under theheading “Executive Officers of Registrant.”

We refer you to our ProxyStatement and the heading “Other Matters—Section 16(a) BeneficialOwnership Reporting Compliance” for information regarding compliance withSection 16(a) of the Securities Exchange Act of 1934. Thisinformation is incorporated by reference into this item of the report.

We have a code of conduct for all of our employees,including our principal executive, financial and accounting officers and ourcontroller, and each of the non-employee directors on our Board of Directors.The Ceridian Corporation Code of Conduct may be found on our web site at *www.ceridian.com* in the “Corporate Governance” section. Weintend to satisfy the disclosure requirement under Item 5.05 of Form 8-Kregarding an amendment to, or a waiver from, a provision of the Code of Conductby our executive officers or directors by posting such information on ourwebsite, at the address and location specified above.

We refer you to our Proxy Statement and the heading “OtherMatters—Director Nominations” for information on stockholder nominations to ourBoard of Directors. This information is incorporated by reference into thisitem of the report.

We refer you to our ProxyStatement and the heading “Meetings of the Board of Directors and Committees ofthe Board” for information regarding our Audit Committee and the heading“Election of Directors (Item 1) — Director Independence” for informationregarding our “audit committee financial expert.” This information isincorporated by reference into this item of the report.

**Item 11.**                 ExecutiveCompensation

We refer you to our ProxyStatement and the headings “Compensation Discussion and Analysis,” “ExecutiveCompensation,” “Director Compensation,” “Compensation Committee Interlocks andInsider Participation” and “Compensation Committee Report.” This information isincorporated by reference into this item of the report. 

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

We refer you to our Proxy Statement 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, 2006.

| ** **                                                  | ** ** | **(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     |       |       | 9,263,194  |  (1)                                                                                                                                            |       |                                                                                                        | $          | 20.07 |   |   |   | 3,565,233 |  (2) |   |
| Equity  compensation plans not approved by security holders |       |       | 475,526    |                                                                                                                                                 |       |                                                                                                        | $          | 19.29 |   |   |   | 51,015 |  (3) |   |
| Total                                                       |       |       | 9,738,720  |                                                                                                                                                 |       |                                                                                                        |       |   |   |   | 3,616,248 |   |   |
|                                                             |            |            |            |                                                                                                                                                      |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

----

(1)          Column (a) includesthe amount includes stock option and restricted stock unit awards. 

Column (a) does not include any unvestedrestricted stock awards that have been issued. 

The Ceridian Corporation Deferred Compensation Planallows executive officers the opportunity to invest in various book accounts,including one that tracks the performance of our common stock (referred to as “phantomstock”). Upon distribution, such participants will receive the amounts investedin phantom stock in the form of shares of our common stock from either theCeridian Corporation Amended and Restated 2001 Long-Term Stock Incentive Plan,the Ceridian Corporation 2004 Long-Term Stock Incentive Plan or a successorplan. Column (a) does not include the number of shares that are currentlycredited to participants’ phantom stock accounts and would be issued asCeridian common stock upon a complete distribution of all amounts in thephantom stock account as of December 31, 2006.

The Ceridian Corporation Non-Employee DirectorCompensation Program allows non-employee directors of the Board to receive allor a portion of each annual retainer in the form of restricted stock ordeferred restricted stock units. The restricted stock and deferred restrictedstock units vest over the year, but remains subject to transferabilityrestrictions until the director leaves the Board. Upon leaving the Board, anysuch deferred restricted stock units will be paid in the form of shares of ourcommon stock. Awards made under this program are made under either the CeridianCorporation Amended and Restated 2001 Long-Term Incentive Plan, the CeridianCorporation 2004 Long-Term Stock Incentive Plan, or a successor plan. Column (a) doesnot include the number of shares of restricted stock or deferred restrictedstock units that have been elected by a director as all or a portion of theirannual retainer.

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(2)          The following number ofshares remained available for issuance under each of our equity compensationplans that have been approved by our stockholders as of December 31, 2006.Grants under these plans may be in the form of any of the listed types of awards:

| **Plan**                                                  | ** ** | ** ** | ** ** | **Number of Shares** | ** ** | **Types of Awards**                                                                                                                                              | ** ** |
|-----------------------------------------------------------|------------|------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Amended and Restated  2001 Long-Term Stock Incentive Plan |       |       | 1,483,557  |                           |       | Stock options, restricted stock, performance units                                                                                                                         |       |
| 2004 Long-Term Stock  Incentive Plan, as amended          |       |       | 2,081,676  |                           |       | Stock options,  stock appreciation rights, restricted stock, restricted stock units, dividend  equivalents, performance awards, stock awards, and other stock-based awards |       |

 

(3)          In2001, our Board adopted the Ceridian Corporation 2001 Savings-Related ShareOption Plan (“2001 SAYE”). The 2001 SAYE has not been approved by ourstockholders. This plan was available to employees of our subsidiaries in theUnited Kingdom and had been approved by Inland Revenue under a “save-as-you-earn”plan design. Under the 2001 SAYE,employee-participants could commit to save a specified amount from after-taxpay for a fixed period (either three or five years). At the end of the periodchosen, participants have the choice to receive the savings amount andaccumulated tax-free interest credits either in cash or to use the amount topurchase common stock from Ceridian at an exercise price equal to the marketprice of our common stock as of the beginning of the savings contract period,less a 15% discount. As of December 31, 2006, 51,015 shares of our commonstock are eligible to be purchased under the 2001 SAYE pursuant to savingsschemes that were in effect prior to December 31, 2006. In October 2005,the Compensation and Human Resources Committee determined not to permit futuresavings schemes****under the 2001 SAYE.

**Item 13.**                 CertainRelationships and Related Transactions, and Director Independence

We refer you to our ProxyStatement and the heading “Certain Relationships and Transactions with RelatedPersons” and “Electionof Directors (Item 1)—Director Independence.” This information is incorporatedby reference into this item of the report.

**Item 14.**                 PrincipalAccounting Fees and Services

We refer you to our Proxy Statement 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,Financial Statement Schedules

**(a) 1.   FinancialStatements of Registrant**

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

**(a) 2.   FinancialStatement Schedules of Registrant**

None

**(a) 3.   Exhibits**

Thefollowing is a complete list of exhibits filed or incorporated by reference aspart of this report.
| Exhibit | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.01    |       | Amended and Restated Certificate of Incorporation of  Ceridian Corporation, as amended (incorporated by reference to  Exhibit 3.01 to Ceridian’s Annual Report on Form 10-K for the year  ended December 31, 2005 (File No. 001-15168)).                                                                                                                                                                                                                                                                        |
| 3.02    |       | Amended and Restated  Bylaws of Ceridian Corporation (formerly known as New Ceridian Corporation)  (incorporated by reference to Exhibit 3.2 to Ceridian’s Registration  Statement on Form 10 (File No. 001-16149)).                                                                                                                                                                                                                                                                                                 |
| 4.01    |       | Rights Agreement, dated  as of November 6, 2001, between Ceridian Corporation and The Bank of New  York, as Rights Agent, including the form of Certificate of Designation,  Preferences and Rights of Series A Preferred Stock as Exhibit A,  the form of Rights Certificate as Exhibit B and the Summary of Rights to  Purchase Preferred Stock as Exhibit C (incorporated by reference to  Exhibit 4.1 to Ceridian’s Current Report on Form 8-K filed by  Ceridian on November 6, 2001). |
| 10.01   |       | Distribution Agreement  between Arbitron Inc., formerly known as Ceridian Corporation, and Ceridian  Corporation, formerly known as New Ceridian Corporation, dated  February 14, 2001 (exhibits and schedules omitted) (incorporated by  reference to Exhibit 10.1 to Ceridian’s Registration Statement on  Form 10 (File No. 001-16149)).                                                                                                                                                                     |
| 10.02   |       | Amendment No. 1 to  Distribution Agreement between Arbitron Inc., formerly known as Ceridian  Corporation, and Ceridian Corporation, formerly known as New Ceridian  Corporation, dated March 30, 2001 (exhibits and schedules omitted)  (incorporated by reference to Exhibit 10.02 to Ceridian’s Annual Report  on Form 10-K for the year ended December 31, 2000 (File  No. 001-16149)).                                                                                                           |
| 10.03*  |       | Executive Employment  Agreement between Ceridian Corporation and Kathryn V. Marinello, dated  October 1, 2006 (incorporated by reference to Exhibit 10.1 to  Ceridian’s Current Report on Form 8-K with the earliest event  reported dated October 1, 2006 and filed with the Securities and  Exchange Commission on October 9, 2006).                                                                                                                                                                     |
| 10.04*  |       | Executive Employment  Agreement between Ceridian Corporation and Perry H. Cliburn, dated  December 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.05*  |       | Executive Employment  Agreement between Ceridian Corporation and Gary A. Krow, dated  January 29, 2002 (incorporated by reference to Exhibit 10.11 to  Ceridian’s Annual Report on Form 10-K for the year ended  December 31, 2001).                                                                                                                                                                                                                                                                            |
| 10.06*  |       | 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).                                                                                                                                                                                                                                               |

108

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| 10.07* |   | Executive Employment Agreement  between Ceridian Corporation and Gary M. Nelson, dated January 29, 2002  (incorporated by reference to Exhibit 10.12 to Ceridian’s Annual Report  on Form 10-K for the year ended December 31, 2001).                                                                                                                                                                      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.08* |   | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and Gary M.  Nelson, dated November 21, 2002 (incorporated by reference to  Exhibit 10.15 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2002).                                                                                                                                        |
| 10.09* |   | 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).                                                                                                                                                                                        |
| 10.10* |   | Executive Employment  Agreement between Ceridian Corporation and Michael F. Shea, dated  January 29, 2007.                                                                                                                                                                                                                                                                                                                     |
| 10.11* |   | Executive Employment  Agreement between Ceridian Corporation and Karius K. Tarapore, dated  December 14, 2006.                                                                                                                                                                                                                                                                                                                 |
| 10.12* |   | Executive Employment  Agreement between Ceridian Corporation and Ronald L. Turner, dated  January 29, 2002 (incorporated by reference to Exhibit 10.08 to  Ceridian’s Annual Report on Form 10-K for the year ended  December 31, 2001).                                                                                                                                                                   |
| 10.13* |   | Amendment No. 1 to  the Executive Employment Agreement between Ceridian Corporation and Ronald L.  Turner, dated November 21, 2002 (incorporated by reference to  Exhibit 10.09 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2002).                                                                                                                                      |
| 10.14* |   | Amendment No. 2 to  the Executive Employment Agreement between Ceridian Corporation and Ronald L.  Turner, dated October 25, 2006 (incorporated by reference to  Exhibit 10.4 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated October 25, 2006 and filed with the  Securities and Exchange Commission on October 26, 2006).                                     |
| 10.15* |   | Ceridian Corporation  2004 Long-Term Stock Incentive Plan, as amended (incorporated by reference to  Exhibit 10.1 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated March 8, 2006 and filed with the  Securities and Exchange Commission on March 9, 2006).                                                                                                                 |
| 10.16* |   | Form of Ceridian  Corporation Non-Qualified Stock Option Award Agreement (under the Ceridian  Corporation 2004 Long-Term Stock Incentive Plan) (incorporated by reference  to Exhibit 10.2 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated February 17, 2006 and filed with the  Securities and Exchange Commission on February 23, 2006).                           |
| 10.17* |   | Form of Ceridian  Corporation Restricted Stock Unit Agreement (under the Ceridian Corporation  2004 Long-Term Stock Incentive Plan) (incorporated by reference to  Exhibit 10.1 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated February 17, 2006 and filed with the  Securities and Exchange Commission on February 23, 2006).                                      |
| 10.18* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (under the Ceridian Corporation  2004 Long-Term Stock Incentive Plan) (incorporated by reference to  Exhibit 10.3 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated February 17, 2006 and filed with the  Securities and Exchange Commission on February 23, 2006).                                     |
| 10.19* |   | Form of Ceridian  Corporation Non-Qualified Stock Option Award Agreement (for Non-Employee  Director Awards under the Ceridian Corporation 2004 Long-Term Stock Incentive  Plan) (incorporated by reference to Exhibit 10.3 to Ceridian’s Current  Report on Form 8-K with the earliest event reported dated  March 8, 2006 and filed with the Securities and Exchange Commission on  March 9, 2006). |

109

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| 10.20* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (for Non-Employee Director  Awards under the Ceridian Corporation 2004 Long-Term Stock Incentive Plan)  (incorporated by reference to Exhibit 10.4 to Ceridian’s Current Report  on Form 8-K with the earliest event reported dated March 8,  2006 and filed with the Securities and Exchange Commission on March 9,  2006).                           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.21* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (for Non-Employee Director  Retainer Restricted Share Awards under the Ceridian Corporation 2004  Long-Term Stock Incentive Plan) (incorporated by reference to  Exhibit 10.5 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated March 8, 2006 and filed with the  Securities and Exchange Commission on March 9, 2006). |
| 10.22* |   | 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).                                                                                                                                                                                                                                          |
| 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).                                                                                                                                                                                                                    |
| 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).                                                                                                                                               |
| 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).                                                                                                                                                         |
| 10.26* |   | Ceridian Corporation  Non-Employee Director Compensation Program (incorporated by reference to  Exhibit 10.2 to Ceridian’s Current Report on Form 8-K with  the earliest event reported dated March 8, 2006 and filed with the  Securities and Exchange Commission on March 9, 2006).                                                                                                                                      |
| 10.27* |   | Ceridian Corporation  Amended and Restated Employee Stock Purchase Plan (incorporated by reference  to Exhibit 10.02 to Ceridian’s Quarterly Report on Form 10-Q  for the quarterly period ended June 30, 2004).                                                                                                                                                                                                                |
| 10.28* |   | Ceridian Corporation  Amended and Restated 2001 Director Performance Incentive Plan (incorporated  by reference to Exhibit 10.17 to Ceridian’s Annual Report on  Form 10-K or the year ended December 31, 2001).                                                                                                                                                                                                                |
| 10.29* |   | Form of Ceridian  Corporation Non-Statutory Stock Option Award Agreement (under the Amended and  Restated 2001 Director Performance Incentive Plan) (incorporated by reference  to Exhibit 10.18 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                                                                          |
| 10.30* |   | Form of Ceridian  Corporation Restricted Stock Award Agreement (under the Amended and Restated  2001 Director Performance Incentive Plan) (incorporated by reference to  Exhibit 10.19 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                                                                                    |
| 10.31* |   | 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)).                                                                                                                                                                 |

110

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| 10.32* |   | 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)).                                                                                                                                                                                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33* |   | 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)).                                                                                                                                                                                                       |
| 10.34* |   | 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)).                                                                                                                                                                                                        |
| 10.35* |   | Ceridian Corporation  Benefit Equalization Plan, Fourth Declaration of Amendment (incorporated by  reference to Exhibit 10.2 to Ceridian’s Current Report on Form 8-K  with the earliest event reported dated October 25, 2006 and filed with  the Securities and Exchange Commission on October 26, 2006).                                                                                                                               |
| 10.36* |   | 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)).                                                            |
| 10.37* |   | 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)).                                                                      |
| 10.38* |   | 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)).                                                                          |
| 10.39* |   | 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).                                                                                     |
| 10.40* |   | Fourth Declaration of Amendment  to Ceridian Corporation Employees’ Benefit Protection Trust Agreement, dated  as of October 25, 2006, between Ceridian Corporation and US Bank  National Association (incorporate by reference to Exhibit 10.3 to  Ceridian’s current Report on Form 8-K with the earliest event reported  dated October 25, 2006 and filed with the Securities and Exchange  Commission on October 26, 2006). |
| 10.41* |   | Ceridian Corporation  Deferred Compensation Plan (2002 Revision) (incorporated by reference to  Exhibit 10.01 to Ceridian’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 2002).                                                                                                                                                                                                                                 |
| 10.42* |   | First Declaration of  Amendment to the Ceridian Corporation Deferred Compensation Plan (2002  Revision) (incorporated by reference to Exhibit 10.1 to Ceridian’s Current  Report on Form 8-K with the earliest event reported dated  October 25, 2006 and filed with the Securities and Exchange Commission  on October 26, 2006).                                                                                                        |
| 10.43* |   | 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).                                                                                                                                                                                                                             |

111

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| 10.44* |   | Amendment No. 1 to  the Split Dollar Agreement between Ronald L. Turner and Ceridian Corporation  (incorporated by reference to Exhibit 10.5 to Ceridian’s Current Report  on Form 8-K with the earliest event reported dated  October 25, 2006 and filed with the Securities and Exchange Commission  on October 26, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.45* |   | Form of  Indemnification Agreement between Ceridian Corporation and its Directors  (incorporated by reference to Exhibit 10.01 to Ceridian’s Quarterly  Report on Form 10-Q for the quarterly period ended June 30,  2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.46* |   | Ceridian Corporation  2001 Savings-Related Share Option Plan (incorporated by reference to Exhibit 10.38  to Ceridian’s Annual Report on Form 10-K for the year ended  December 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.47  |   | Credit Agreement, dated  as of November 18, 2005, among Ceridian Corporation, as the Borrower,  Ceridian Canada Ltd, as the Canadian Borrower, Bank of America, N.A., as the  Administrative Agent, Swingline Lender and L/C Issuer, Bank of America, N.A.,  acting through its Canada branch, as the Canadian Subfacility Agent, JPMorgan  Chase Bank, NA and Wachovia Bank, National Association, as Co-Syndication  Agents, PNC Bank, National Association and Wells Fargo Bank, National  Association, as Co-Documentation Agents, the other lenders party hereto and  Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager  (schedules omitted) (incorporated by reference to Exhibit 10.1 to  Ceridian’s Current Report on Form 8-K with the earliest event  reported dated November 18, 2005 and filed with the Securities and  Exchange Commission on November 21, 2005). |
| 10.48  |   | Amendment No.1 to Credit  Agreement entered into as of October 25, 2006 among Ceridian  Corporation, as Borrower, Ceridian Canada Ltd, as the Canadian Borrower, Bank  of America, N.A., in its capacity as administrative agent for the Lenders,  and each of the Lenders under the Credit Agreement, dated as of November 18,  2006 (incorporated by reference as Exhibit 10.01 to Ceridian’s Quarterly  Report on Form 10-Q for the quarterly period ended June 30,  2002).                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.49  |   | Receivable Sales  Agreement, dated as of June 24, 2002, between Comdata Network, Inc.  and Comdata Funding Corporation (incorporated by reference as  Exhibit 10.01 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.50  |   | Receivable Purchase  Agreement, dated as of June 24, 2002, among Comdata Funding Corporation,  Comdata Network, Inc., Jupiter Securitization Corporation, the Financial  Institutions party thereto and Bank One, NA (incorporated by reference to  Exhibit 10.02 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.51  |   | Performance Undertaking,  dated as of June 24, 2002, executed by Ceridian Corporation in favor of  Comdata Funding Corporation (incorporated by reference to Exhibit 10.03  to Ceridian’s Quarterly Report on Form 10-Q for the quarterly  period ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.52  |   | Amendment No. 1 to  Receivables Purchase Agreement entered into as of June 20, 2003 among  Comdata Funding corporation, Comdata Network, Inc., Jupiter  Securitization Corporation, each Financial Institution party thereto, and  Bank One NA (incorporated by reference to Exhibit 10.01 to Ceridian’s  Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.53  |   | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

112

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| 10.54 |   | Amendment No. 3 to  Receivables Purchase Agreement and Amendment No. 1 to Performance  Undertaking entered into as of August 4, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA (incorporated by  reference to Exhibit 10.01 to Ceridian’s Quarterly Report on  Form 10-Q for the quarterly period ended September 30, 2004).                                                                               |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.55 |   | Amendment No. 4 to  Receivables Purchase Agreement and Amendment No. 2 to Performance  Undertaking entered into as of September 30, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA (incorporated by  reference to Exhibit 10.02 to Ceridian’s Quarterly Report on  Form 10-Q for the quarterly period ended September 30, 2004).                                                                           |
| 10.56 |   | Amendment No. 5 to  Receivables Purchase Agreement and Amendment No. 3 to Performance  Undertaking entered into as of November 9, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA (incorporated by  reference to Exhibit 10.11 to Ceridian’s Quarterly Report on  Form 10-Q for the quarterly period ended September 30, 2004).                                                                             |
| 10.57 |   | Amendment No. 6 to  Receivables Purchase Agreement and Amendment No. 4 to Performance  Undertaking entered into as of December 31, 2004 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and Bank One, NA. (incorporated by  reference to Exhibit 10.12 to Ceridian’s Quarterly Report on  Form 10-Q for the quarterly period ended September 30, 2004).                                                                           |
| 10.58 |   | Amendment No. 7 to  Receivables Purchase Agreement and Amendment No. 5 to Performance  Undertaking entered into as of January 14, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and JPMorgan Chase Bank, N.A., as  successor in merger to Bank One, NA (incorporated by reference to  Exhibit 10.13 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 2004).                       |
| 10.59 |   | Amendment No. 8 to  Receivables Purchase Agreement and Amendment No. 6 to Performance  Undertaking entered into as of March 31, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and JPMorgan Chase Bank, N.A., as  successor in merger to Bank One, NA. (incorporated by reference to  Exhibit 10.62 to Ceridian’s Annual Report on Form 10-K for  the year ended December 31, 2004).                                        |
| 10.60 |   | Amendment No. 9 to  Receivables Purchase Agreement and Amendment No. 6 to Performance  Undertaking entered into as of May 15, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  each Financial Institution party thereto, and JPMorgan Chase Bank, N.A., as  successor in merger to Bank One, NA (incorporated by reference to  Exhibit 10.02 to Ceridian’s Quarterly Report on Form 10-Q for  the quarterly period ended March 31, 2005).                               |
| 10.61 |   | Amendment No. 10 to  Receivables Purchase Agreement entered into as of June 16, 2005 among  Comdata Funding Corporation, Comdata Network, Inc., Jupiter Securitization  Corporation, each Financial Institution party thereto, and JPMorgan Chase  Bank, N.A., as successor in merger to Bank One, NA (incorporated by reference  to Exhibit 10.01 to Ceridian’s Current Report on Form 8-K  with the earliest event reported dated June 16, 2005 and filed with the  Securities and Exchange Commission on June 22, 2005). |

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| 10.62 |   | Amendment No. 1 to  Receivables Sales Agreement and Amendment No. 11 to Receivables Purchase  Agreement entered into as of November 7, 2005 among Comdata Funding  Corporation, Comdata Network, Inc., each Financial Institution party  thereto, Jupiter Securitization Corporation and JPMorgan Chase Bank, N.A.  (incorporated by reference to Exhibit 10.01 to Ceridian’s Quarterly  Report on Form 10-Q for the quarterly period ended  September 30, 2005).                 |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.63 |   | Amendment No. 12 to  Receivables Purchase Agreement entered into as of June 15, 2006 among  Comdata Funding Corporation, Comdata Network, Inc., Jupiter  Securitization Corporation, each Financial Institution party thereto, and  JPMorgan Chase Bank, N.A (incorporated by reference to Exhibit 10.1 to  Ceridian’s Current Report on Form 8-K with the earliest event  reported dated June 15, 2006 and filed with the Securities and Exchange  Commission on June 19, 2006). |
| 21.01 |   | Subsidiaries of  Ceridian.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.01 |   | Consent of Independent  Registered Public Accounting Firm-KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 24.01 |   | Power of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.01 |   | Certification of our  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.02 |   | Certification of our  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.01 |   | Certification of our  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.02 |   | Certification of our  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                            |

----

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

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

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, as of February 28, 2007.

|            | **CERIDIAN CORPORATION** |                                    |
|------------|--------------------------|-----------------------------------------|
|            | By                       | /s/ KATHRYN V. MARINELLO                |   |
| ** ** |                     | Kathryn V. Marinello                    |
| ** ** | * *                 | *President and Chief Executive Officer* |
|            |                          |                                         |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities indicated as of February 28, 2007.

| /s/ KATHRYN V. MARINELLO                                                                |   |                                                                                      | /s/ DOUGLAS C. NEVE             |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|---------------------------------|--------|
| Kathryn V.  Marinello                                                                   |   | Douglas C. Neve                                                                           |
| *President  and Chief Executive Officer*

*(Principal  Executive Officer) and Director* |   | *Executive  Vice President and Chief Financial Officer*

*(Principal  Financial Officer)* |
| /s/ RANDY W. STROBEL                                                                    |   |                                                                                      |                            |   |
| Randy W. Strobel

*Vice  President and Controller*

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

 

115

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**CERIDIANCORPORATIONANNUAL REPORT ON FORM 10-K**

**Exhibit Index**

| Exhibit | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Description** |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.01*   |       | Amended and Restated  Certificate of Incorporation of Ceridian Corporation, as amended.                                                                                                                                                                                                                                                                                                  |
| 3.02*   |       | Amended and  Restated Bylaws of Ceridian Corporation (formerly known as New Ceridian  Corporation).                                                                                                                                                                                                                                                                                      |
| 4.01*   |       | Rights Agreement,  dated as of November 6, 2001, between Ceridian Corporation and The Bank  of New York, as Rights Agent, including the form of Certificate of  Designation, Preferences and Rights of Series A Preferred Stock as  Exhibit A, the form of Rights Certificate as Exhibit B and the  Summary of Rights to Purchase Preferred Stock as Exhibit C. |
| 10.01*  |       | Distribution  Agreement between Arbitron Inc., formerly known as Ceridian Corporation, and  Ceridian Corporation, formerly known as New Ceridian Corporation, dated  February 14, 2001 (exhibits and schedules omitted).                                                                                                                                                            |
| 10.02*  |       | Amendment  No. 1 to Distribution Agreement between Arbitron Inc., formerly known as  Ceridian Corporation, and Ceridian Corporation, formerly known as New  Ceridian Corporation, dated March 30, 2001 (exhibits and schedules  omitted).                                                                                                                                      |
| 10.03*  |       | Executive  Employment Agreement between Ceridian Corporation and Kathryn V. Marinello,  dated October 1, 2006.                                                                                                                                                                                                                                                                      |
| 10.04   |       | Executive  Employment Agreement between Ceridian Corporation and Perry H. Cliburn, dated  December 14, 2006.                                                                                                                                                                                                                                                                        |
| 10.05*  |       | Executive  Employment Agreement between Ceridian Corporation and Gary A. Krow, dated  January 29, 2002.                                                                                                                                                                                                                                                                             |
| 10.06*  |       | Amendment  No. 1 to the Executive Employment Agreement between Ceridian Corporation  and Gary A. Krow, dated November 21, 2002.                                                                                                                                                                                                                                                |
| 10.07*  |       | Executive  Employment Agreement between Ceridian Corporation and Gary M. Nelson, dated  January 29, 2002.                                                                                                                                                                                                                                                                           |
| 10.08*  |       | Amendment  No. 1 to the Executive Employment Agreement between Ceridian Corporation  and Gary M. Nelson, dated November 21, 2002.                                                                                                                                                                                                                                              |
| 10.09*  |       | Executive  Employment Agreement between Ceridian Corporation and Douglas C. Neve, dated  March 14, 2005.                                                                                                                                                                                                                                                                            |
| 10.10   |       | Executive  Employment Agreement between Ceridian Corporation and Michael F. Shea, dated  January 29, 2007.                                                                                                                                                                                                                                                                          |
| 10.11   |       | Executive  Employment Agreement between Ceridian Corporation and Karius K. Tarapore,  dated December 14, 2006.                                                                                                                                                                                                                                                                      |
| 10.12*  |       | Executive  Employment Agreement between Ceridian Corporation and Ronald L. Turner, dated  January 29, 2002.                                                                                                                                                                                                                                                                         |
| 10.13*  |       | Amendment  No. 1 to the Executive Employment Agreement between Ceridian Corporation  and Ronald L. Turner, dated November 21, 2002.                                                                                                                                                                                                                                            |
| 10.14*  |       | Amendment  No. 2 to the Executive Employment Agreement between Ceridian Corporation  and Ronald L. Turner, dated October 25, 2006.                                                                                                                                                                                                                                             |
| 10.15*  |       | Ceridian  Corporation 2004 Long-Term Stock Incentive Plan, as amended.                                                                                                                                                                                                                                                                                                                   |
| 10.16*  |       | Form of  Ceridian Corporation Non-Qualified Stock Option Award Agreement (under the  Ceridian Corporation 2004 Long-Term Stock Incentive Plan).                                                                                                                                                                                                                                     |

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| 10.17* |   | Form of  Ceridian Corporation Restricted Stock Unit Agreement (under the Ceridian  Corporation 2004 Long-Term Stock Incentive Plan).                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18* |   | Form of  Ceridian Corporation Restricted Stock Award Agreement (under the Ceridian  Corporation 2004 Long-Term Stock Incentive Plan).                                                                         |
| 10.19* |   | Form of  Ceridian Corporation Non-Qualified Stock Option Award Agreement (for  Non-Employee Director Awards under the Ceridian Corporation 2004 Long-Term  Stock Incentive Plan).                             |
| 10.20* |   | Form of  Ceridian Corporation Restricted Stock Award Agreement (for Non-Employee  Director Awards under the Ceridian Corporation 2004 Long-Term Stock Incentive  Plan).                                       |
| 10.21* |   | Form of  Ceridian Corporation Restricted Stock Award Agreement (for Non-Employee  Director Retainer Restricted Share Awards under the Ceridian Corporation 2004  Long-Term Stock Incentive Plan).             |
| 10.22* |   | Ceridian  Corporation 2002 Employee Stock Incentive Plan.                                                                                                                                                          |
| 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 Non-Employee Director Compensation Program.                                                                                                                                                  |
| 10.27* |   | Ceridian  Corporation Amended and Restated Employee Stock Purchase Plan.                                                                                                                                           |
| 10.28* |   | Ceridian  Corporation Amended and Restated 2001 Director Performance Incentive Plan.                                                                                                                               |
| 10.29* |   | Form of  Ceridian Corporation Non-Statutory Stock Option Award Agreement (under the  Amended and Restated 2001 Director Performance Incentive Plan).                                                          |
| 10.30* |   | Form of  Ceridian Corporation Restricted Stock Award Agreement (under the Amended and  Restated 2001 Director Performance Incentive Plan).                                                                    |
| 10.31* |   | Ceridian  Corporation Benefit Equalization Plan, as amended.                                                                                                                                                       |
| 10.32* |   | Ceridian  Corporation Benefit Equalization Plan, First Declaration of Amendment.                                                                                                                                   |
| 10.33* |   | Ceridian  Corporation Benefit Equalization Plan, Second Declaration of Amendment.                                                                                                                                  |
| 10.34* |   | Ceridian  Corporation Benefit Equalization Plan, Third Declaration of Amendment.                                                                                                                                   |
| 10.35* |   | Ceridian  Corporation Benefit Equalization Plan, Fourth Declaration of Amendment.                                                                                                                                  |
| 10.36* |   | Ceridian  Corporation Employees’ Benefit Protection Trust Agreement, dated as of  December 1, 1994, between Ceridian Corporation and First Trust National  Association.                                  |
| 10.37* |   | First Declaration  of Amendment to Ceridian Corporation Employees’ Benefit Protection Trust  Agreement, effective as of January 1, 1999, between Ceridian Corporation  and US Bank National Association. |
| 10.38* |   | 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.     |
| 10.39* |   | 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.      |
| 10.40* |   | Fourth Declaration  of Amendment to Ceridian Corporation Employees’ Benefit Protection Trust  Agreement, dated as of October 25, 2006, between Ceridian Corporation  and US Bank National Association.   |

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| 10.41* |   | Ceridian  Corporation Deferred Compensation Plan (2002 Revision).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.42* |   | First Declaration  of Amendment to the Ceridian Corporation Deferred Compensation Plan (2002  Revision).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.43* |   | Split Dollar  Agreement between Ronald L. Turner and Ceridian Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.44* |   | Amendment  No. 1 to the Split Dollar Agreement between Ronald L. Turner and  Ceridian Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.45* |   | Form of  Indemnification Agreement between Ceridian Corporation and its Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.46* |   | Ceridian  Corporation 2001 Savings-Related Share Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.47* |   | Credit Agreement,  dated as of November 18, 2005, among Ceridian Corporation, as the  Borrower, Ceridian Canada Ltd, as the Canadian Borrower, Bank of America,  N.A., as the Administrative Agent, Swingline Lender and L/C Issuer, Bank of  America, N.A., acting through its Canada branch, as the Canadian Subfacility  Agent, JPMorgan Chase Bank, NA and Wachovia Bank, National Association, as  Co-Syndication Agents, PNC Bank, National Association and Wells Fargo Bank,  National Association, as Co-Documentation Agents, the other lenders party  hereto and Banc of America Securities LLC, as Sole Lead Arranger and Sole  Book Manager (schedules omitted). |
| 10.48* |   | Amendment No.1 to  Credit Agreement entered into as of October 25, 2006 among Ceridian  Corporation, as Borrower, Ceridian Canada Ltd, as the Canadian Borrower, Bank  of America, N.A., in its capacity as administrative agent for the Lenders,  and each of the Lenders under the Credit Agreement, dated as of  November 18, 2006.                                                                                                                                                                                                                                                                                                                                  |
| 10.49* |   | Receivable Sales  Agreement, dated as of June 24, 2002, between Comdata Network, Inc.  and Comdata Funding Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.50* |   | Receivable  Purchase Agreement, dated as of June 24, 2002, among Comdata Funding  Corporation, Comdata Network, Inc., Jupiter Securitization Corporation,  the Financial Institutions party thereto and Bank One, N.A.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.51* |   | Performance  Undertaking, dated as of June 24, 2002, executed by Ceridian Corporation  in favor of Comdata Funding Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.52* |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.53* |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.54* |   | 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.                                                                                                                                                                                                                                                                                                                                                              |
| 10.55* |   | 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.                                                                                                                                                                                                                                                                                                                                                         |
| 10.56* |   | 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.                                                                                                                                                                                                                                                                                                                                                           |

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| 10.57* |   | Amendment  No. 6 to Receivables Purchase Agreement and Amendment No. 4 to  Performance Undertaking entered into as of December 31, 2004 among  Comdata Funding Corporation, Comdata Network, Inc., Jupiter  Securitization Corporation, each Financial Institution party thereto, and  Bank One, NA.                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.58* |   | 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. |
| 10.59* |   | 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.   |
| 10.60* |   | Amendment  No. 9 to Receivables Purchase Agreement and Amendment No. 6 to  Performance Undertaking entered into as of May 15, 2005 among Comdata  Funding Corporation, Comdata Network, Inc., Jupiter Securitization  Corporation, each Financial Institution party thereto, and JPMorgan Chase  Bank, N.A., as successor in merger to Bank One, NA.     |
| 10.61* |   | Amendment  No. 10 to Receivables Purchase Agreement entered into as of  June 16, 2005 among Comdata Funding Corporation, Comdata  Network, Inc., Jupiter Securitization Corporation, each Financial  Institution party thereto, and JPMorgan Chase Bank, N.A., as successor in  merger to Bank One, NA.                                                       |
| 10.62* |   | Amendment  No. 1 to Receivables Sales Agreement and Amendment No. 11 to  Receivables Purchase Agreement entered into as of November 7, 2005 among  Comdata Funding Corporation, Comdata Network, Inc., each Financial  Institution party thereto, Jupiter Securitization Corporation and JPMorgan  Chase Bank, N.A.                                      |
| 10.63* |   | Amendment  No. 12 to Receivables Purchase Agreement entered into as of  June 15, 2006 among Comdata Funding Corporation, Comdata  Network, Inc., Jupiter Securitization Corporation, each Financial  Institution party thereto, and JPMorgan Chase Bank, N.A.                                                                                                 |
| 21.01  |   | Subsidiaries of  Ceridian.                                                                                                                                                                                                                                                                                                                                                   |
| 23.01  |   | Consent of  Independent Registered Public Accounting Firm-KPMG LLP.                                                                                                                                                                                                                                                                                                          |
| 24.01  |   | Power of  Attorney.                                                                                                                                                                                                                                                                                                                                                          |
| 31.01  |   | Certification of  our Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                               |
| 31.02  |   | Certification of  our Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                               |
| 32.01  |   | Certification of  our Chief Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                               |
| 32.02  |   | Certification of our  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                               |

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*                    Incorporatedby Reference.

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