UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2005

OR

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

For the Transition Period from                      to                     

Commission File Number 1-15168

CERIDIAN CORPORATION

(Exact name of Registrant as specified in its charter)

 

3311 East Old Shakopee Road
Minneapolis, Minnesota 55425

(Address of principal executive offices)

Telephone No.: (952) 853-8100

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

CERIDIAN CORPORATION
Annual Report on Form 10-K
For the fiscal year ended December 31, 2005
Table of Contents

 

CERIDIAN CORPORATION

PART I

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Ceridian Corporation and its subsidiaries contained in this report that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements based on current expectations and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Important factors known to us that could cause material differences are described in this report, including in Part I, Item 1A, “Risk Factors” of this report. You should carefully consider each cautionary factor and all of the other information in this report. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the Securities and Exchange Commission.

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

Item 1.                        Business

General

Ceridian Corporation was formed on August 8, 2000 and is incorporated in Delaware. Our principal executive office is located at 3311 East Old Shakopee Road, Minneapolis, Minnesota 55425, and our telephone number is (952) 853-8100.

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

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

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continuing operations of the operations that were transferred to us by Ceridian’s predecessor in the spin-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.

Financial Information About Segments

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

Human Resource Solutions

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

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

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

 

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

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trusts and mortgages. The maturity of these investments is carefully managed to meet the related payment obligations. Due to the significance of this investment income, our quarterly revenue and profitability fluctuate as a result of changes in interest rates and in the amount of customer funds held.

Market

The market for human resource solutions covers a comprehensive range of information management, human resource administration and employee assistance services and software. These products and services include:

·                    transaction-oriented administrative services and software products, primarily in areas such as payroll processing, tax filing and benefits enrollment and administration; and

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

We believe that the market for these solutions will continue to grow as organizations seek to reduce costs, improve productivity and add services for employees by outsourcing administrative services and further automating internal processes. We also believe the demand for human resource solutions will increase as organizations seek assistance in maintaining their compliance with the increasing scope and complexity of laws and regulations governing businesses and increasingly complicated work-life issues faced by employers and employees.

We generally classify customers in the human resource solutions market by employer size into three categories, each of which represents a distinct market opportunity for us:

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

We believe, however, that with regard to any size employer, a provider of a core transaction-based service, such as payroll processing or tax filing services, is afforded opportunities to complement that core

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service with additional products and services that are natural adjuncts to that service, such as time and labor management, health insurance portability compliance administration, flexible spending account administration, employee self-service, benefits eligibility and enrollment, employee assistance and work-life services, and retirement plan administration. Our ability to wrap value-added services around a core service or product in an integrated manner will, we believe, lead to revenue growth and our ability to achieve higher margins.

Further, we believe that customers are increasingly seeking providers that can take responsibility for entire human resource management processes. These human resource outsourcing (referred to in this report as “HRO”) relationships transfer responsibility for managing each core process from the employer to the provider. Through HRO, we are able to provide our customers with a comprehensive suite of modular, fully managed HRS products and services described above. By fully managing the products and services that we can otherwise provide on a stand-alone basis and presenting a single face to our customers’ employees, we are able to transfer responsibility for managing each core HR process from the employer to the provider. Our HRO customizing to date typically involves: (1) conversion and implementation consulting services; (2) processing and hosting services related to payroll, tax filing services and benefits needs; and (3) administration of payroll or benefits functions.

Products and Services

Our human resource management solutions include:

·                    payroll processing, tax filing and other HR services;

·                    benefits administration services; and

·                    work-life and employee assistance programs.

Payroll Processing, Tax Filing and Other HR Services.

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

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

Our HR/payroll product suite provides an integrated HR/payroll and benefits solution with outsourced payroll and tax filing services to customers primarily in the corporate and enterprise customer markets. It is primarily available in a hosted “application service provider” environment. On a limited basis within Ceridian Centrefile Limited, it also can be managed in-house as an installed application. Our hosted solutions provide customers with secure 24/7 access to our solutions using a standard web browser.

Our HR/payroll web product is a web-enabled, fully hosted integrated payroll and human resource administration solution, designed specifically for the corporate and enterprise customer

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markets. Ceridian’s HR/payroll web product also includes integrated time management and self-service features, as well as wage attachments and disbursements, Internet payroll management, and customization features within the core product offering.

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

Tax Filing.   Our payroll tax filing services for customers in the United States consist primarily of collecting funds for federal, state and local employment taxes from customers based on payroll information provided by the customers, remitting funds collected to the appropriate taxing authorities, filing applicable returns and handling related regulatory correspondence and amendments. Our tax filing services are provided not only to employers who utilize our payroll processing service, but also to local and regional payroll processors and directly to employers as stand alone tax services. Payroll-related tax filing services are typically priced on a fee-per-item-processed basis.

Other HR Services.   We also provide customers with a number of other HR solutions. Such services include time and attendance, administration of payroll and benefit functions, talent acquisition and management, expense management and human capital management services. These services are generally designed to automate, streamline and integrate certain traditional HR services to provide our customers with the ability to focus less on administration and more on their core business.

Benefits Administration Services.   We provide employee health and welfare benefits administration and qualified plan administration services to our customers. Employee health and welfare benefits administration services include health insurance portability (i.e., the Consolidated Omnibus Budget Reconciliation Act, or “COBRA,” and the Health Insurance Portability and Accountability Act of 1996, or “HIPAA”) compliance services. Health and welfare benefits administration services also encompass benefits 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 Internal Revenue Code Section 125 plans including fully administered and self-administered flexible spending accounts and premium-only plans. We also provide administration and benefits billing services for benefits provided to retired and inactive employees, including retiree healthcare, disability, surviving dependent, family leave and severance benefits.

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

Work-Life and Employee Assistance Programs.   We provide customers of all sizes and their employees with a single source for fully integrated work-life and employee assistance programs (which we refer to in this report as “LifeWorks”). Our customers include employers in both the private and public sectors, including the U.S. Department of Defense. Services are delivered through on-line access and telephonically, and through face-to-face counseling provided by referral resources.

The services and programs we 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 mode of access to services that best meet its needs. These products range from “high touch technology” capabilities allowing employees to access specific information on-line to comprehensive “person-to-person” consultation and referral services. Also included are specialized service options, such as assistance with college selection,

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elder care assessment and facility review services, and health and wellness services. These services address employee effectiveness issues and seek to improve employee retention and productivity, reduce absenteeism and increase recruitment success. Consultants provide confidential assistance 24 hours a day to customers’ employees to help them address issues ranging from everyday matters to crisis situations. Supporting these consultants are research and subject matter experts who provide specialized expertise or referrals in areas such as parenting/child care, elder care, disabilities, addiction disorders, mental health, health and wellness, financial, legal, managerial/supervisory and education/schooling issues. We have also entered into arrangements with some service and product providers to provide additional leading edge services and expertise to our customers.

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

International Operations

Our international HRS operations are primarily conducted in Canada, through Ceridian Canada Ltd. (“Ceridian Canada”) and in the United Kingdom, through Ceridian Centrefile Limited (“Ceridian Centrefile”). Ceridian Canada provides payroll processing services, HRIS solutions, tax filing services, work-life and employee assistance programs and recruitment services to its customers. Ceridian Canada handles payroll as well as tax filing funds for our Canadian customers. These Canadian operations collect payroll and payroll tax amounts from customers, remit tax amounts to applicable governmental authorities and make direct deposits of payroll amounts to employees’ bank accounts. As a result, revenue from our payroll processing services in Canada includes investment income received in lieu of additional fees from temporarily holding these amounts in trust. We also charge fees for services to our Canadian customers that are similar in nature to those provided in the United States.

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

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

There are risks associated with operating internationally. We refer you to Part I, Item 1A, “Risk Factors” of this report.

Customers

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

Customer retention is an important factor in the amount and predictability of revenue and profits in our HRS businesses. The length of time it takes for a contract to become profitable depends on a number of factors such as the pricing of the contract, the number of employees covered by the contract, the

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

Sales and Marketing

Our HRS services are marketed in the United States through our direct sales force operating throughout the country. We currently utilize, and seek to develop other, cooperative marketing relationships with other companies offering products or services that complement our businesses as well as informal and formal marketing alliances with human resource consulting firms, other outsourcing firms and benefits brokers. The most significant source of customer leads for these transaction-based products and services are referrals from these marketing relationships and existing 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 direct sales forces. Customer leads for the products and services of these businesses are generally obtained through referrals, trade shows, product demonstration seminars, third party resellers and direct sales efforts. We are exploring additional cooperative arrangements with other benefits brokers and human resource services providers. We are also seeking to further integrate and coordinate the sales and marketing efforts of our businesses and to sell a greater variety of our products and services to the customers of our various businesses.

Competition

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

We believe that the majority of all payroll processing and tax filing in the United States, Canada and the United Kingdom is supported by in-house systems, with the remainder supported by third party providers. In the United States, 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, national providers in terms of revenue. ADP serves employers of all sizes, while Paychex generally focuses on small to medium size employers. Other third party payroll and tax filing providers are generally regional and local competitors, although larger, national providers of benefits administration and 401(k) processing services or financial institutions may expand further into outsourced payroll processing. In Canada, we believe that our Ceridian Canada subsidiary is the second largest outsourced payroll services provider in terms of revenue, facing competition from other national providers, including ADP, and local providers. In the United Kingdom, we believe that our Ceridian Centrefile subsidiary is the second largest outsourced payroll processing provider in terms of revenue, competing with several other national providers, including a subsidiary of ADP and a division of Northgate Information Solutions, and local providers. Competition in both the payroll processing and HRIS areas also comes from a number of large, national software companies that provide both payroll processing software for in-house processing as well as HRIS software, often in conjunction with other enterprise management software applications.

Apart from payroll processing and tax filing, our other human resource solutions generally compete with a variety of national and regional application software companies, consulting firms, financial services companies and human resource services providers. Generally, the market for these products and services is evolving and is not dominated by a small number of competitors.

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

·                    customer service;

·                    leadership in technology applications;

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·                    choice of services;

·                    integrated platforms;

·                    performance;

·                    price;

·                    functionality;

·                    ease and flexibility of use;

·                    expertise in HR processes;

·                    regulatory compliance in the delivery of products and services; and

·                    data security and privacy.

We believe that the ability to integrate human resource management solutions with a customer’s other acquired services and in-house applications and the ability to provide solutions delivered through the Internet are increasingly important competitive factors. While we believe our businesses will be able to compete effectively in the overall human resource solutions market, our ability to compete effectively will depend in large measure on our ability to timely develop and implement the appropriate technology solutions, particularly those which incorporate industry standard architecture and Internet-based solutions, and provide leading-edge customer service.

Regulation

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

Research and Development

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

The table below reflects the amount of research and development expenses for our HRS businesses for the periods indicated.

 

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Comdata

Comdata provides transaction processing, financial services and regulatory compliance services primarily to the transportation and retail industries. Comdata operations are located substantially in the United States with some operations in Canada. Approximately 2% of Comdata’s revenue for each of 2005, 2004 and 2003 was derived from customers outside of the United States. Comdata’s revenue from products and services for the years ended December 31, 2005, 2004 and 2003 was as follows:

 

Principal Markets

The trucking segment of the transportation industry is comprised of both long haul fleets and local fleets. Private fleets predominate in the local fleet segment, but play a lesser role in the long haul fleet segment. Common carriers, which provide trucking services to companies that do not have fleets of trucks of their own, predominate in the long haul fleet segment, which is comprised of less-than-truckload and truckload components. The less-than-truckload component, which involves trucks that make multiple stops to load and unload, is characterized by large capital requirements. The truckload component involves the transportation of full loads directly from shipper to final destination without going through any sorting terminals.

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

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

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

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Products and Services

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

Trucking Company Services.   Comdata’s financial services, most commonly initiated through the use of Comdata’s proprietary Comdata card, are designed to enable truck drivers to obtain funding for purchases and cash advances at truck stops and other locations en route to their destination. Drivers may use the Comdata card to purchase fuel, lodging and other approved items, obtain cash advances from ATM machines or through the use of Comchek drafts, and make direct deposits of pay, settlements (for non-employee owner-operators) or trip advances to personal bank accounts. In 2005, Comdata processed approximately 91.3 million funds transfer transactions involving approximately $20.8 billion for the transportation industry.

Use of the Comdata card allows the trucking company customer greater control over its expenses by allowing it to set limits on the use 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 also enables Comdata to capture and provide transaction and trip-related information to trucking company customers. This information greatly enhances a customer’s ability to track and plan fuel purchases and other trip expenses and to settle with drivers. Comdata also provides information gathering and processing services in connection with fueling transactions that Comdata does not fund, but that are billed instead directly by the truck stop to the trucking company. Fees for these “direct bill” transactions are substantially lower than fees for Comdata funded transactions. Comdata also provides fuel price tracking reports and fuel management programs within a network of truck stops, including cost/plus fuel purchase programs.

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

In addition to the Comdata card, Comdata provides Comchek drafts, which are drawn on Comdata and payable through a bank. When a truck driver makes a request at a truck stop for a Comchek transaction, Comdata verifies that the driver’s company has established sufficient credit. Upon presentation of valid identification, the truck stop obtains an authorization number from Comdata and prints a Comchek draft. Comdata funds the underlying transaction when the truck stop (or other payee) negotiates the draft by depositing it in its bank account. Comdata bills the trucking 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 trucking company remits payment to Comdata by wire transfer, electronic transfer or check, typically within seven days, although customers that do not meet Comdata’s credit criteria are required to prepay their accounts. Risks associated with fraudulent or unauthorized transactions are allocated between Comdata and its customers based upon which party may be at fault under a specific circumstance and based upon which party is in the better position to control or eliminate these types of transactions. Historically the number of fraudulent or unauthorized

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transactions attributable to this aspect of Comdata’s business has been minimal compared to the aggregate dollar amount of funds Comdata has transferred annually. Comdata is licensed by 41 states as a seller of checks or money transmitter and, pursuant to these licenses, undergoes annual examinations by several states with respect to the integrity of its funds transfer methods and procedures.

Comdata’s regulatory compliance division assists in determining the permits needed for a designated trip, truck and load; purchases those permits on behalf of the customer; and delivers them by facsimile machine to the carrier or a truck stop where they can be picked up by the driver. Comdata also provides other regulatory compliance services, such as processing and auditing of driver trip logs, reporting of fuel taxes, annual licensing and motor vehicle registration verification. Vehicle escort services for oversized loads are also provided.

Truck Stop Services.   Comdata maintains a nationwide electronic data network with 24-hour independent truck stop service centers that utilize point-of-sale devices and other computer equipment to facilitate communication with Comdata’s database and operations centers. The service centers accept Comdata’s payment instruments as a method of payment pursuant to a service center agreement with Comdata.

Comdata’s merchant services division provides fueling centers with PC-based, point of sale systems that automate the various transactions that occur at a fuel purchase desk and systems which enable customers to transact card-based fuel purchases at the fuel pump. These systems accept many types of fuel purchase cards currently used by drivers. The merchant services division additionally offers point-of-sale systems for use at attended and unattended fuel sites.

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

Financial Services.   Comdata’s financial services business purchases accounts receivable due to trucking companies from manufacturers and shippers at a discount and with recourse back to the trucking company in the event of non-payment. This permits trucking companies to receive payment on shipping invoices sooner than they may otherwise receive payment from shippers. While the majority of Comdata’s financial services portfolio relates to trucking company operations as described above, Comdata may, on occasion, enter into a factoring arrangement with a business outside the trucking industry.

Merchant Bank Card Transaction Processing.   Following its acquisition of Tranvia, Inc., a merchant processing company (“Tranvia”), in March 2005, Comdata has offered transaction processing services to merchants for a variety of card-based products, such as traditional bank credit and debit cards carrying the Visa or MasterCard logos. Such transaction processing services include transaction authorization, settlement and reporting. Tranvia acquires clients through both direct sales and, indirectly, through third parties, such as banks and other financial institutions and independent sales organizations.

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

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

BusinessLink.   Comdata’s BusinessLink product is a payment transaction services card with credit and debit capabilities principally designed to provide businesses with control over payments to and spending by their employees. The BusinessLink card allows businesses to authenticate and authorize individual employee purchases and provide payroll to employees. A BusinessLink customer can review reports of transactions made by its employees over the Internet, as well as request the issuance of new employee cards. The BusinessLink product offers businesses the capability of performing these services on a single, customizable employee card. The BusinessLink card may be customized for each individual employee within a business. Comdata intends to expand the services currently available under the BusinessLink card. The BusinessLink product has been initially introduced to Comdata’s principal markets, transportation and retail. Comdata believes that the BusinessLink card has application to businesses in other industries. In 2005, more than 2,900 customers used the BusinessLink card.

Sales and Marketing; Customers

Comdata markets its card-based financial and data management services, delivered through both proprietary and branded payment networks, to several industries, the largest of which is the transportation industry. Comdata markets its services to the transportation industry throughout the United States and Canada through a direct sales force located at its headquarters in Brentwood, Tennessee. Comdata provides services to more than 20,000 long haul and local trucking fleets with more than 900,000 active fuel cards. Comdata also provides services to more than 8,500 truck stops, travel centers and repair facilities nationwide. Contracts generally range from one to three years in duration.

Through SVS, Comdata markets its private label cash cards, electronic payroll cards and ancillary services throughout the United States and Canada through a direct sales force located in Louisville, Kentucky. SVS sales efforts are also being conducted in Europe, South Africa and other areas on a modest basis. All SVS transaction processing is conducted in Louisville, Kentucky regardless of the location in the world where the sale occurs or the card is used. In 2005, SVS provided cash cards and/or payroll distribution services to more than 410 customers. The contracts with these customers are generally three years in duration.

Suppliers

Comdata’s current business relies upon relationships with third-party suppliers, such as MasterCard, to effect and support transactions, including access to the Cirrus ATM network and the Maestro point-of-sale debit network. The ability of Comdata to continue to provide some of its services in the manner in which it currently delivers them may be affected by actions taken by third-party suppliers, including MasterCard or other similar card associations. Comdata has applied to form a Utah industrial bank that would likely become a direct participant in the MasterCard credit and debit networks. This application is subject to FDIC approval, which is currently pending until, among other things, the issues with the Securities and Exchange Commission investigation discussed in Part I, Item 3, “Legal Proceedings” of this report, are substantively resolved.

Competition

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

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credit and debit card associations and companies, such as Visa, MasterCard, American Express and Discover, are significant competitors of Comdata since they make cash available to, and facilitate purchases of fuel and other products by, holders of their cards on a nationwide basis. Several other companies also offer similar services, including First Data Corporation, T-Chek Systems, Inc., Fleet One, L.L.C., FleetCor and Wright Express Corp. In addition, truck stops often negotiate directly with trucking companies for a direct billing relationship. Some of Comdata’s competitors, such as Transportation Clearing House, LLC, an affiliate of Flying J, Inc., are under common ownership with entities that operate or franchise nationwide truck stop chains. In addition, Comdata competes with truck stops and other service centers that offer similar products and services.

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

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

·                    ability to provide services to trucking companies and drivers at a large number of locations in the continental United States and Canada;

·                    ability to offer a variety of services, frequently tailored to an individual customer’s needs;

·                    proprietary databases regarding funds transfers and fuel purchases;

·                    long-term relationships in the transportation industry;

·                    high quality of customer service; and

·                    long-time reputation in the transportation industry.

Comdata’s retail services division (which principally includes SVS) competes with a number of national companies in providing private label cards, including ValueLink, a division of First Data Corporation. Comdata believes that it is one of the leading providers of private label cards to large retailers in the United States. Comdata’s retail services division competes on the bases of breadth of services offered, systems, technology and price. Comdata believes that one of the competitive weaknesses of its retail services division is that most of its competitors have established relationships with many of the potential customers of Comdata’s retail services division to provide additional and unrelated products and services to these customers, such as credit card processing and check authorization services. By providing these other services which Comdata’s retail services division does not provide, these competitors have an advantage of being able to bundle their products and services together and present them to existing customers with whom they have established relationships. Another competitive weakness of Comdata’s retail services division is that its competitors have greater financial, sales and marketing resources and better brand name recognition than Comdata’s retail services division.

Comdata believes the competitive strengths of Comdata’s retail services division are:

·                    leading edge information and communications systems which provide real-time connectivity with retailers’ existing platforms;

·                    breadth of solutions offered; and

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·                    experience in transaction processing and related services providing for high quality control and reduced time of implementation of cash card solutions.

Network and Data Processing Operations

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

Regulation

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

Research and Development

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

The table below reflects the amount of research and development expenses for Comdata for the periods indicated.

 

Other Investments and Divestitures

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

Intellectual Property

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

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to us. U.S. trademark and service mark registrations are generally for a term of 10 years, renewable every 10 years as long as the trademark or service mark is used in the regular course of trade.

We have entered into confidentiality agreements with most of our key employees and consultants. In addition, we have entered into license agreements with customers of our businesses, which agreements impose restrictions on these customers’ use of our proprietary software and other intellectual property rights.

Seasonality

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

In Comdata’s transportation business, trucking activity has traditionally diminished at the end of December of each year, which has led to declining accounts receivable balances and increased cash flow from operations.

Employees

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

Backlog

Although our businesses are typically characterized by long-term customer relationships that result in a high level of recurring revenue, a substantial portion of our customer contracts used by our businesses are terminable by our customers upon relatively short notice periods, including contracts that have been extended beyond their original terms. In addition, orders for products and services are terminable by our customers, and no order for one of our products or services is considered firm until the contract is executed. The timing of the delivery of our products and services is largely dependent upon the customer. As such, we do not have backlog information that can be provided for our businesses.

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

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Executive Officers of Registrant

Our executive officers as of March 1, 2006 are:

 

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

Upon the completion of our spin-off from Ceridian’s predecessor on March 31, 2001, with the exception of Messrs. Neve and Strobel who joined Ceridian in 2005, each of our executive officers resigned as an executive officer from Ceridian’s predecessor and was thereafter reappointed to the equivalent position within Ceridian. In connection with this spin-off, Mr. Turner resigned as a director of Ceridian’s predecessor and became a director of Ceridian. Except as specifically noted, our executive officers have held the following positions with Ceridian, Ceridian’s predecessor and certain other entities for the past five years:

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

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

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

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

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

Randy W. Strobel has served as Vice President and Controller since June 2005. Mr. Strobel was Vice President of Finance of Mesaba Aviation, Inc., an aviation company, from October 2002 until June 2005, and Controller of Mesaba Aviation from October 2001 until September 2002. He was an independent finance consultant from March 2000 until September 2001.

Available Information

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

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current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

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

Item 1A.                Risk Factors

Our business faces many risks. Any of the risks and uncertainties discussed below, or elsewhere in this report or our other filings with the Securities and Exchange Commission, could have a material impact on our business, financial condition or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. 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 decline significantly.

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

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

·       customer satisfaction;

·       new product and service offerings;

·       customer service levels;

·       price;

·       customer viability; and

·       competition.

We expect that a portion of our anticipated future revenue growth in each of our business segments will be derived from:

·       the continued selling of products and services to our existing customers;

·       the selling of additional products and services to our existing customers;

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

·       the selling of products and services to new customers.

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Our ability to retain existing customers, attract new customers and grow revenue will depend on a variety of factors, including:

·       the quality and perceived value of our product and service offerings by existing and new customers;

·       effective sales and marketing efforts;

·       our speed to market and avoidance of difficulties or delays in development of new products and services;

·       the level of market acceptance of new products and services;

·       our ability to integrate technology into our products and services to avoid obsolescence and provide scalability;

·       the successful implementation of products and services for new and existing customers;

·       the regulatory needs and requirements facing our company and our customers; and

·       our ability to meet increased customer regulatory requirements, including our customers that are governmental agencies or entities.

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

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

Our ability to improve profit margins in our HRS business will depend on factors that include the degree to which and the speed with which we are able to increase operational efficiencies and reduce operating costs. We may not be able to reduce our overall cost structure compared to our revenues, or otherwise improve productivity. We may face delays or difficulties in implementing product, process and system improvements. We may not be able to quickly and effectively install new products and services for customers. We may face delays or difficulties in consolidating various functions, including administrative functions, eliminating duplicate operations and consolidating facilities. We may not be able to successfully outsource or offshore various operating and administrative functions, to the extent we deem appropriate. Any of these factors could adversely affect the timing or effectiveness of cost reduction and margin improvement efforts in our business and our ability to successfully compete in the markets we serve.

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

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

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The loss of our contract with the U.S. Department of Defense would likely have an adverse affect on our HRS business.

We currently provide customized work-life and employee assistance services to U.S. Armed Services personnel under a contract with the U.S. Department of Defense. Our contract with the U.S. Department of Defense will expire on March 31, 2006. We are currently negotiating a contract extension with the U.S. Department of Defense that would extend our relationship with them through approximately September 30, 2006. It is our understanding that the U.S. Department of Defense intends to issue a request for proposal to enter into a long-term contract with a provider to begin on or about October 1, 2006. We intend to respond to this request for proposal. If we are unsuccessful in securing an extension of the existing contract or securing a new contract with the U.S. Department of Defense, the loss of this customer would likely have an adverse affect on our HRS business.

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

Any security breach in our business processes and/or systems has the potential to impact our customer information and our financial reporting capabilities which could result in the potential loss of business and our ability to accurately report financial results. In addition, any issues of data privacy as it relates to unauthorized access to or loss of customer and/or employee information could result in the potential loss of business, damage to our market reputation, litigation and regulatory investigation and penalties. We cannot assure you that our continued investment in the security of our IT systems and continued efforts to improve the controls within the IT and business processes will prevent attempts to breach our security. If our security is breached, our business and operating results could be adversely affected.

Political and economic factors may adversely affect our business and operating results.

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

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

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

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

·       interest rates, with a corresponding impact on investment income from invested customer funds which are held pending remittance to taxing authorities, customer employees and other third parties.

Decreased employment levels, as well as slowed economic conditions, could negatively affect wage and bonus payments, orders and the timing of product installations, and negatively impact the operating results of our HRS business.

Government regulation changes on timing or amount of remittances and changes in interest rates may reduce our investment income from customer deposits.

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

In addition, changes in interest rates will affect our revenue and earnings from this source. Interest rate changes are difficult to predict and could be significant.

Changes in or the elimination of governmental regulations may negatively impact our revenue and earnings and the way we conduct our business.

Changes in or the elimination of governmental regulations may adversely affect our revenue and earnings and the way in which we conduct our business. Changes in governmental regulations are difficult to predict and could be significant. For example, the extent and type of benefits that employers are required to or may choose to provide employees and/or the amount and type of federal or state taxes employers and employees are required to pay will affect the revenue and earnings associated with the products or services that we may sell. As another example, Comdata is currently licensed on the state level by the banking or financial institutions departments of numerous states. Continued licensing by these states is subject to ongoing satisfaction of compliance requirements regarding safety and soundness, including, for example, posting of surety bonds to guarantee payment of funds in transit. Changes in this regulatory environment, including the implementation of new or varying measures by the government, may significantly affect or change the manner in which we currently conduct some of the aspects of our business. Further, if we are unable to timely and appropriately comply with existing or changed government regulations, we may be subject to sanctions and the payment of fines and penalties.

Our investments in our business may not improve our business performance.

We have ongoing and continued initiatives to invest in and improve the performance of our businesses. These initiatives include:

·       improving our customer service model;

·       improving customer retention;

·       continuing product enhancements;

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·       improving our return on information technology investments;

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

·       consolidating and improving efficiencies at our processing centers; and

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

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

Further, each of our U.S. HRS operating functions and our HRS operations in Canada and the United Kingdom require substantial ongoing investment in maintaining and improving infrastructure and product solutions. We may not have sufficient financial resources to fund all of the desired or necessary investments.

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

Our investments may not improve the performance of our technology.

We have ongoing and continued initiatives to invest in and improve the performance of information technology (IT) systems and technology based products and services. These initiatives include:

·       standardizing the IT development process;

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

·       providing scalability;

·       upgrading our financial systems; and

·       continuing rationalization of our staff and locations.

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

Any problems or delays we may experience in implementing system upgrades and conversions could adversely affect our business.

We expect to continue our efforts to transition to new or enhanced data processing systems and/or software, including systems that process customer data and internal management information systems. The successful implementation of these new or enhanced systems will be critical to the effective delivery of products and services and the efficient operation of our businesses. Problems or delays with the installation or initial operation of the new or enhanced systems could disrupt or increase costs in connection with our delivery of services and with our operations planning, financial reporting and management. From time to time, we have experienced these types of problems or delays.

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

As a provider of information management and data processing services in both of our business segments, we need to rapidly adapt and respond to the technological advances offered by our competitors and the technological requirements of our customers in order to maintain or improve upon our competitive position. There can be no assurance that we will develop and release new products and services or product and service enhancements within the required time frames and within targeted costs. Significant delays, difficulties or added costs in introducing new products and services or enhancements, either through internal development, acquisitions or cooperative relationships with other companies, could adversely affect the market acceptance of our products and services and our operating results.

In the event of a catastrophic occurrence our ability to protect client data and maintain operations may be impaired.

In the event of a catastrophic occurrence, either natural or man-made, our ability to protect our infrastructure, including client data, and maintain ongoing operations may be significantly impaired. We cannot assure you that our business continuity and disaster recovery plans and strategies will be successful in mitigating the effects of a catastrophic occurrence. We could potentially lose control of customer data and may experience significant interruptions of our operations and service to our customers.

Our success is dependent on the retention and acquisition of talented people and the skills and abilities of our management team and key personnel.

We must continue to attract, hire, train, develop and retain talented people to fill the key roles within the organization. We must provide challenging roles, with accountability and commensurate rewards, to attract and retain the appropriate individuals to the organization. If we are unable to attract and retain talented employees who work effectively as members of teams, it could impact our ability to deliver the expected results from our operations.

The success and performance of our business is dependent upon retaining and attracting management and key personnel with the appropriate skills, abilities and market knowledge for each of our operating functions and geographic areas, as well as for product development. There is no assurance we can retain our current management and key personnel or attract additional talent and skills to our existing team. We must continue to retain, attract and develop a core group of management personnel with the appropriate skills, abilities and market knowledge and continually develop appropriate succession plans to continue to grow our business. The failure to do so could have a material adverse effect on our business, operating results and financial condition.

We are subject to risks related to our international operations, which may adversely affect our operating results.

Approximately 24% of HRS revenue in 2005 was obtained from our international operations. Our Ceridian Canada operations provide certain HRS services for our Canadian customers, and our Ceridian Centrefile subsidiary primarily provides certain HRS services in the United Kingdom. We are beginning to expand our international HRS business into other countries by engaging a partner within a country to provide us with payroll administration and processing services for that country. Comdata also has small operations in Canada, and is beginning to expand its business into Europe. Approximately 2% of Comdata’s revenue in 2005 was derived from customers outside of the United States. In addition to the risks otherwise described herein, international operations are subject to further additional risks that could adversely affect those operations or our business as a whole, including:

·       costs of customizing products and services for foreign customers;

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·       difficulties in managing and staffing international operations;

·       difficulties with or inability to engage global partners;

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

·       longer sales and payment cycles;

·       the burdens of complying with a wide variety of foreign laws;

·       exposure to legal jurisdictions which may not recognize or interpret customer contracts in predictable ways;

·       exposure to local economic and political conditions; and

·       unfavorable currency exchange rates.

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

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

Our business is dependent on several vendors and suppliers, the loss of whom could adversely affect our consolidated results of operations. In particular, Comdata’s current business relies upon its relationships with third party suppliers, such as MasterCard, to effect and support transactions, including access to the Cirrus ATM network and the Maestro point-of-sale debit network. The ability of Comdata to continue to provide some of its services in the manner in which it currently delivers them may be affected by actions taken by third party suppliers, including MasterCard or other similar card associations. Comdata’s application to form a Utah industrial bank that would likely become a direct participant in the MasterCard credit and debit networks is subject to FDIC approval, which is currently pending and may not be approved until, among other things, the issues with the Securities and Exchange Commission investigation discussed below are substantively resolved. Any adverse change in Comdata’s relationship with these vendors or Comdata’s inability to timely and effectively establish an industrial bank or find other timely and effective alternatives to these vendor relationships could likely adversely affect Comdata’s business and results of operations and could adversely affect our consolidated results of operations as well.

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

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

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new customers. Mistakes may occur in connection with this service. Our HRS division or its subsidiaries and its customers may be subject to penalties imposed by tax authorities for late filings or underpayment of taxes.

Retirement plan assets are remitted directly by our customers to investment vehicles selected by the plan administrator or plan sponsor. Because tracking, processing and administering retirement plans is complex, providers of these services on occasion make mistakes in connection with this service. Our HRS division or its subsidiaries and its customers are subject to cash penalties and legal liabilities imposed by regulatory authorities for non-compliance with required reporting and processing of retirement plan contributions.

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

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

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

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

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

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An adverse outcome of this SEC investigation or other inquiries from regulatory bodies could have a material adverse effect on us and result in:

·       the institution of administrative or civil proceedings;

·       sanctions and the payment of fines and penalties;

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

·       changes in personnel;

·       shareholder lawsuits; and

·       increased review and scrutiny of us by our customers, regulatory authorities, the media and others.

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

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

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

Our ability to implement and execute our strategic plans may not be successful and, accordingly, we may not be successful in achieving our strategic goals.

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

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Our strategy to make acquisitions of and investments in complementary businesses, products and technologies may not be successful and involves risks that could adversely affect our business and operating results.

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

·       the availability of suitable acquisition candidates and investments at acceptable costs;

·       our ability to compete effectively for these acquisition candidates and investments; and

·       the availability of capital to complete these acquisitions and investments.

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

·       inaccurate assessment of undisclosed liabilities;

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

·       potential loss of key employees or customers of the acquired businesses;

·       difficulties in assimilating the operations and products of an acquired business or in realizing projected efficiencies and cost savings;

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

·       increase in our indebtedness and a limitation in our ability to access additional capital when needed.

In addition, from an accounting perspective, most acquisitions and investments involve periodic assessments of the recoverable value of goodwill and other intangible assets. Such assessments could result in an impairment of the goodwill or other intangible assets recorded which may have an adverse impact on our financial condition or operating results.

These risks could be heightened if we complete several acquisitions or investments within a relatively short period of time. The benefits of an acquisition or investment may often take considerable time to be realized, or may never be realized, and we cannot guarantee that any acquisition or investment will in fact produce the revenue, earnings or business synergies that we anticipated at the time of the transaction.

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

The governing documents for our $250 million revolving credit facility and the $150 million Comdata receivables securitization facility contain a number of significant provisions that, among other things, restrict our ability to:

·       sell assets;

·       incur more indebtedness;

·       grant or incur liens on our assets;

·       make investments or acquisitions;

·       enter into leases or assume contingent obligations;

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·       engage in mergers or consolidations; and

·       engage in transactions with our affiliates.

These restrictions could limit our ability to finance our future operations or capital needs or make acquisitions that may be in our best interest. In addition, our credit facilities require that we satisfy several financial covenants. Our ability to comply with these financial requirements and other restrictions may be affected by events beyond our control, and our inability to comply with them could result in a default under a credit facility. If a default occurs under one of these facilities, the lenders under the other facility could elect to declare all of the outstanding borrowings, as well as accrued interest and fees, to be due and payable under that other facility and require us to apply all of our available cash to repay those borrowings. In addition, a default may result in higher rates of interest and the inability to obtain additional capital.

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

As we disclosed in our “Management’s Report on Internal Control Over Financial Reporting” set forth in Part II, Item 8 “Financial Statements and Supplementary Data”, and as disclosed in Part II, Item 9A “Controls and Procedures” of this report, we have concluded that our internal control over financial reporting was not effective based on applicable evaluation criteria as of December 31, 2005 as a result of our identification of a “material weakness” (as defined by the Public Company Accounting Oversight Board in its Auditing Standard No. 2, “An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements”) relating to inadequate revenue recognition procedures and controls with respect to the analysis of certain complex multiple element revenue arrangements. While we are taking steps to correct this material weakness, this material weakness will not be considered remediated until the new and improved internal controls operate for a period of time, are tested and it is concluded that such new and improved internal controls are operating effectively. If we fail to remediate this material weakness, we could be unable to provide timely and reliable financial information, which could have a material adverse effect on our business, results of operations or financial condition. Furthermore, it is uncertain what impact an adverse audit opinion on the effectiveness of our internal control over financial reporting will have upon our stock price or business.

Item 1B.     Unresolved Staff Comments.

None.

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Item 2.                        Properties

Our principal executive offices are located at 3311 East Old Shakopee Road, Minneapolis, Minnesota 55425. As of February 1, 2006, the principal computer and office facilities used in our businesses were located in the metropolitan areas of Minneapolis, Minnesota; Atlanta, Georgia; Los Angeles, California; Chicago, Illinois; St. Louis, Missouri; Louisville, Kentucky; Raleigh, North Carolina; Nashville, Tennessee; Dallas, Texas; El Paso, Texas; St. Petersburg, Florida; Philadelphia, Pennsylvania; in London, England; in Winnipeg, Manitoba and Markham, Ontario, Canada; and in Mauritius.

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

Facilities

(in thousands of square feet)

 

With the exception of our St. Petersburg, Florida facility, we conduct all of our operations in leased facilities, including our 211,000 square feet Minneapolis headquarters complex in Minneapolis, Minnesota. Most of these leases contain renewal options and require payment for taxes, insurance and maintenance.

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

Item 3.                        Legal Proceedings

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

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

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Securities Class Actions

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

Ceridian believes these claims are without merit and intends to vigorously defend itself in this action. We cannot estimate the possible loss or range of loss from these matters.

Derivative Actions

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

Ceridian will appropriately defend itself in the consolidated action. We cannot estimate the possible loss or range of loss from these matters.

SEC Investigation

On January 22, 2004, we filed a Current Report on Form 8-K, under Item 5, stating that we announced that we are responding to a document request from the Securities and Exchange Commission, and that we have been advised that the SEC has issued a formal order of investigation. In February 2004, we provided documents responsive to the SEC. In July 2004, we advised the SEC of the investigation being directed by the Audit Committee of our Board of Directors. We have kept the SEC advised on a regular basis of the Audit Committee’s investigation. On December 10, 2004, we received a further formal confidential document request from the SEC. The second request broadened the areas of inquiry to include, among other things, Ceridian’s restatements, revenue recognition, capitalization, expense recognition, how we respond to any internal ethics complaints, and Ceridian’s accounting policies and procedures. The formal document requests state that the SEC investigation is a non-public, fact-finding inquiry, and that the investigation and document requests do not mean that the SEC has concluded that we have violated any securities laws. As is common in SEC investigations, on June 15, 2005, we received a subpoena from the SEC seeking certain additional documents that relate to some of the areas of inquiry identified above. The subpoena is consistent with investigations of this type and was anticipated. We continue to fully cooperate with the SEC and are in the process of responding to the SEC’s additional document request and subpoena and cannot estimate when such investigation will conclude.

Item 4.                        Submission of Matters to a Vote of Security Holders

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

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PART II

Item 5.                        Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed and trades on The New York Stock Exchange under the symbol “CEN”. The number of holders of record of our common stock on March 1, 2006 was 10,922. We have not declared or paid any cash dividends on our common stock since our inception, and our Board of Directors presently intends to retain all earnings for use in the business for the foreseeable future. The transfer agent and registrar for our common stock is the Bank of New York.

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

 

 

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

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

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

(3)          24,495 shares were repurchased from an employee in connection with the payment of withholding taxes resulting from the exercise of a stock option award.

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Item 6.                        Selected Financial Data

The selected consolidated historical financial information set forth below should be read along with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our 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)

(1)          Continuing operations only.

Item 7.                        Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

Ceridian Corporation is an information services company principally serving the human resource (“HR”), transportation and retail markets. Our human resource solutions (“HRS”) business segment enables customers to outsource a broad range of human resource processes. We have HRS operations primarily in the United States, Canada and the United Kingdom. Our Comdata subsidiary (which we refer to in this report as “Comdata”) provides transaction processing, financial services and regulatory compliance services primarily to the transportation and retail industries. Comdata’s products and services

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include payment processing and the issuance of credit, debit and stored value cards. Our businesses are more fully described in Part I, Item 1, “Business” and in Note M, “Segment Data.”

A number of events or transactions occurred during the period covered by this discussion that had a significant effect on the year-to-year comparisons of our financial condition and performance, including:

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

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

·       Income tax matters.   In 2005, we repatriated $130.3 million of accumulated earnings from Ceridian Canada under the American Jobs Creation Act of 2004, resulting in an additional tax expense of $5.2 million. During 2005, we reduced our income tax provision by $24.5 million due to favorable settlements of specific matters related to U.S. federal income taxes, along with other credits related primarily to state statute expirations. During 2004, we reduced our tax by $16.3 million related to tax settlements and $7.0 million related to a valuation allowance realization and we increased tax expense by $12.3 million for a proposed tax adjustment on international earnings. During 2003, we reduced our income tax provision by $3.9 million due to favorable settlements.

·       Derivative instruments.   Our diesel fuel and interest rate derivative instruments contributed to the variability of costs and expenses during the reported periods in this report. For 2005, the loss on derivatives was $11.6 million, mainly due to diesel fuel derivatives, and for 2004, the loss on derivatives was $0.3 million. For 2003, the gain on derivatives was $14.7 million, mainly due to interest rate derivatives.  

·       Acceleration of W-2 information delivery.   In 2003, we advanced the delivery and billing by U.S. HRS of W-2 information for our customers to December from the following January, which affected the comparison of 2004 to 2003 results of operations. This resulted in the recognition of $9.2 million of W-2 revenue in December 2003 that otherwise would have been recognized in January 2004.

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Results of Operations
2005 Compared to 2004

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

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

Consolidated Results—Overview

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

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

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

Business Segment Results

We measure business segment results by reference to earnings before interest and taxes (“EBIT”) because interest income and interest expense are not allocated to our segments. Revenue between business segments is not material and is eliminated upon consolidation. Expenses incurred by corporate center operations are directly charged or otherwise 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 services and other corporate overhead such as occupancy and aircraft costs. Certain of these costs are charged to the business segment based on usage and the remainder is allocated on a consistent basis based on a percentage of revenue.

HRS

 

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

Cost of revenue as a percent of revenue improved from 59.7% in 2004 to 57.3% in 2005. The improvement was mainly driven by a decrease of 6.9 percentage points in cost of revenue as a percent of

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revenue in Payroll and Tax Services as a result of reorganization efforts that reduced cost and by increased interest income on invested customer funds without significant incremental costs.  The improvement in the cost of revenue as a percent of revenue in Payroll and Tax Services was partially offset by increases in cost of revenue as a percent of revenue in Benefit Services, LifeWorks, Ceridian Canada, and Ceridian Centrefile mainly due to compensation and benefit increases.

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

We have maintained interest rate derivatives for the purpose 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 rate derivative instruments was $26.8 million at December 31, 2004.

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

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

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

Comdata

 

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Comdata revenue increased $52.9 million or 14.8% from 2004 to 2005 as revenue from transportation services contributed $27.6 million and revenue from retail services contributed $25.3 million. The $27.6 million increase in transportation services revenue in 2005 over 2004 related primarily to revenue from the long haul business, which increased $17.4 million including a $10.4 million increase resulting from higher fuel prices. A 4.4% increase in transaction volume in 2005 over 2004, including the impact of the growing acceptance of the BusinessLink card, provided the remaining $7.0 million increase in long haul revenue. Local fleet revenue grew $3.9 million in 2005 over 2004, primarily due to $2.5 million from higher fuel prices. Also major local fleet customers increased their utilization of Comdata’s products and services, including the BusinessLink card. Comdata earns fee revenue for a portion of the card transactions based on a percentage of the total cost of each fuel purchase. An increase or decrease in the price of fuel increases or decreases the total dollar amount of fuel purchases and corresponding Comdata revenue. The remaining increase in transportation services revenue in 2005 compared to 2004 of $6.3 million included increases of $2.4 million from sales of products and services to truck stops, due largely to increased outsourcing of maintenance services, and $3.2 million from regulatory compliance services, due largely to price increases related to improved delivery of services.

In 2005, revenue from retail services increased primarily due to higher levels of retail cards in use, greater transaction volume and the addition of new customers. As described in the “Revenue Recognition” section of Note A, “Accounting Policies,” revenue from retail services is generally deferred and recognized largely over a six-month period following the activation of a card, which typically takes place about seven months after the shipment of the card to the retailer. Cards delivered increased by approximately 50% and transactions processed increased approximately 22% in 2005.

Comdata cost of revenue as a percent of revenue improved from 47.5% in 2004 to 46.5% in 2005. The improvement was primarily due to higher margins on fuel transactions resulting from higher fuel prices.

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

R&D expense increased $2.2 million in 2005 over 2004 due primarily to a higher level of application development for existing products and services and product development around the BusinessLink card.

The loss on derivative instruments related to the diesel fuel price contracts increased to $9.3 million in 2005 from $1.4 million in 2004. Our diesel fuel price risk management objective is to protect Comdata earnings from the effects of falling diesel fuel prices by entering into derivative instruments that convert the floating price of fuel used in revenue calculations to a fixed price. During 2004, we entered into a diesel fuel price derivative instrument covering approximately 66% of our total risk for the period 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 fuel price risk for the full year with a combination of diesel fuel price derivative instruments with similar terms and an average strike price of $1.92 per gallon. During 2005, there were payments of $8.2 million to counterparties as well as an unrealized loss of $1.1 million, resulting in a $9.3 million net loss reported in (gain) loss on derivative instruments on our consolidated statement of operations. During 2004, there were payments of $2.2 million to counterparties as well as an unrealized gain of $0.8 million resulting in a $1.4 million net loss reported in (gain) loss on derivative instruments on our consolidated statement of operations.

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

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

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

2004 Compared to 2003

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

 

Consolidated Results—Overview

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

Total costs and expenses increased $215.5 million in 2004. Cost of revenue increased $55.8 million primarily due to increased revenues in 2004. Cost of revenue as a percent of revenue remained approximately the same from 2003 to 2004. SG&A expense increased $109.2 million primarily due to the $40.9 million increase in 2004 due to accelerated amortization of the CobraServ trademark. In addition, the 2004 increase in SG&A expenses was in part driven by $9.4 million of increased accounting compliance costs in U.S. HRS, $7.1 million of increased technology support costs in U.S. HRS, and $8.5 million of an increase related to currency exchange rate changes. The remainder of the increase mainly relates to increased compensation expense, contracted services, occupancy costs, and royalties. The change in the (gain) loss on derivative instruments of $15.0 million is primarily related to the interest rate derivative instruments and rising interest rates. Other expense (income) increased $29.0 million in 2004 mainly due to the charge taken as a result of the sale of our SourceWeb Assets in 2004. Our 2004 interest income increased $0.6 million compared to 2003 due to both a higher average level of cash and equivalents and

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

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

Business Segment Results

We measure business segment results by reference to EBIT because interest income and interest expense are not allocated to our segments. Revenue between business segments is not material and is eliminated upon consolidation. Expenses incurred by corporate center operations are directly charged or otherwise 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 services and other corporate overhead such as occupancy and aircraft costs. Certain of these costs are charged to the business segment based on usage and the remainder is allocated on a consistent basis based on a percentage of revenue.

HRS

 

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

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$12.5 million including an increase of $9.7 million from currency exchange rate changes and $2.8 million due primarily to growth in small business services and managed payroll services.

Cost of revenue as a percent of revenue improved from 60.1% in 2003 to 59.7% in 2004. The improvement is mainly due to a decrease of 2.4 percentage points in cost of revenue as a percent of revenue in Ceridian Canada which was driven by cost reduction efforts and a decrease of 1.6 percentage points in cost of revenue as a percent of revenue for Benefit Services. The improvements in the cost of revenue as a percent of revenue for Ceridian Canada and Benefit Services were partially offset by increases in cost of revenue as a percent of revenue in Payroll and Tax Services mainly due to higher implementation costs and in LifeWorks mainly due to costs associated with the U.S. Department of Defense contract.

SG&A expense for HRS increased $101.8 million from 2003 to 2004 due to an increase of $24.9 million related to selling expense and an increase of $76.9 million related to general and administrative expense. The increase in selling expense is primarily attributed to staff additions, higher occupancy costs, royalties and contracted services. The increase in general and administrative expense includes the $40.9 million expense for accelerated amortization of the CobraServ trademark, an increase of $36.0 million primarily due to increased accounting compliance costs of $9.4 million in U.S. HRS, increased technology support costs of $7.1 million in U.S. HRS and $6.2 million related to currency exchange rate changes, with the remaining increase primarily attributed to increased compensation, benefits and severance costs.

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

The reduction of $14.4 million in gains from interest rate derivative instruments in 2004 compared to 2003 included a decrease in realized gains of $1.2 million from cash settlements and a decrease in unrealized gains of $13.2 million from revaluation of the future expected benefit from these instruments over their remaining terms. These results reflected the rise of interest rates during 2004.

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

HRS EBIT decreased from earnings of $48.5 million in 2003 to a loss of $72.6 million in 2004. This decrease in EBIT was mainly driven by losses in Payroll and Tax Services, which includes HRO costs for the administration of payroll and benefit functions, as well as Benefit Services. Contributing to the losses were the $40.9 million of accelerated amortization of the CobraServ trademark in Benefit Services and the $28.5 million charge to earnings taken as a result of the sale of the SourceWeb Assets in Payroll and Tax Services. The losses in Payroll and Tax Services as well as Benefit Services were partially offset by increased EBIT from LifeWorks, Ceridian Canada and Ceridian Centrefile.

Comdata

 

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Comdata revenue increased $36.3 million in 2004 compared to 2003 as revenue from retail services contributed $21.2 million and revenue from transportation services contributed $15.1 million. Revenue from retail services increased in 2004 over 2003 due to higher levels of cards in use, greater transaction volume and the addition of new customers. As described in the “Revenue Recognition” section of Note A, “Accounting Policies,” revenue from retail services is generally deferred and recognized largely over a six-month period following the activation of a card, which typically takes place about seven months after the shipment of the card to the retailer. Cards delivered increased 18% and transactions processed increased 30% from 2003 to 2004. The $15.1 million increase in transportation services revenue in 2004 over 2003 related primarily to revenue from the long haul business, which increased $12.2 million including $5.5 million resulting from higher fuel prices. A higher level of transactions in 2004 over 2003, including the impact of the growing acceptance of the BusinessLink card, provided the remaining $6.7 million increase in long haul revenue. Local fleet revenue grew $3.5 million in 2004 over 2003, primarily due to $2.3 million from higher fuel prices. Also major local fueling customers increased their utilization of Comdata products and services, including the BusinessLink card. The remaining net decrease in transportation services revenue in 2004 compared to 2003 of $0.6 million reflected lower revenue from phone services and point of sale terminal equipment sales that were offset in part by modest increases in revenue for financial services and regulatory compliance services.

Cost of revenue increased $16.8 million in 2004 over 2003 including an increase of $17.5 million from retail services due to the higher revenue levels. The remaining decrease in cost of revenue included increases totaling $1.6 million in bank fees and costs related to point of sale terminal equipment sales, which were more than offset by cost savings from reorganization and other cost reduction actions.

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

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

Comdata EBIT increased from $104.3 million in 2003 to $115.6 million in 2004 primarily due to increased revenues. EBIT as a percent of revenue remained approximately the same from 2003 to 2004.

Balance Sheets at December 31, 2005 and 2004

Our consolidated balance sheets reflect operating assets and liabilities, as well as assets and liabilities related to customer funds. Customer funds assets arise from amounts that our customers have advanced to us to pay their employees, remit to taxing authorities, or pay for benefits services to other third parties. Customer funds obligations represent our liability to pay the amounts due to these third parties on behalf of our customers. Customer funds assets are held substantially in trust accounts and are invested in high-quality short-term investments or highly-rated fixed income securities and are not utilized in our operations except for earnings from those investments that are included in our revenue.

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

Current liabilities increased $140.3 million during 2005 as short-term debt and current portion of long-term obligations increased $10.6 million, Comdata drafts and settlements payable increased $79.3 million and deferred income increased $26.6 million to $114.0 million. The increase in short-term debt and current portion of long-term obligations represents the combination of management’s intent to repay certain debt in 2006 as well as stated maturities of other debt offset by the payment of the Ceridian Centrefile overdraft facility. As of December 31, 2005, $20.7 million of our revolving credit facility was classified as a current liability as it is our intention to repay this amount in 2006. Noncurrent liabilities increased $8.1 million primarily due to an increase of $15.7 million in employee benefit plan obligations offset by decreases in long-term obligations and other noncurrent liabilities.

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

Cash Flows

Consolidated Statements of Cash Flows Highlights
(Dollars in millions)

 

Cash Balances and Operating Activities

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

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

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Investing Activities

 

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

During 2004, our capital expenditures included $32.9 million for property and equipment and $32.9 million for software and development costs. Our expenditures for acquisitions of investments and businesses (net of cash acquired) amounted to $19.3 million resulting primarily from the HRS acquisition of Recruiting Solutions, Inc., a provider of web-based recruiting products, for $11.0 million and Comdata’s acquisition of Datamark Technologies, Inc., a provider of stored value and customer loyalty programs, for $4.1 million. Our proceeds from sales of businesses and assets amounted to $17.1 million and consisted largely of $11.1 million from the sale of marketable securities and $4.0 million from the sale of the SourceWeb Assets.

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

Financing Activities

 

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

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

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outstanding on our Comdata receivables securitization facility by $20.0 million and the Ceridian Centrefile overdraft facility by $9.0 million of which $8.3 million was attributable to debt reduction and $0.7 million was due to the foreign currency translation effect. We made payments of $5.9 million on capital leases. In connection with the sale of the SourceWeb Assets in 2004, we accrued a liability of $19.2 million representing the fair value of an associated guaranteed future minimum royalty obligation to The Ultimate Software Group, Inc. (“Ultimate”). We made principal payments of $5.3 million related to the Ultimate royalty obligation during 2005. During 2005, we repurchased 10,736,450 shares of our common stock on the open market at an average net price of $20.71 per share, resulting in financing cash outflows of $222.3 million for settled trades. Proceeds from exercises of stock options and employee stock plan purchases amounted to $92.2 million during 2005.

Our financing activities for 2004 resulted in net cash outflows of $93.5 million. We repaid $65.0 million of our Comdata receivable securitization facility. We repurchased 4,012,400 shares of our common stock for $80.3 million on the open market at an average net price of $20.01 per share. We also received proceeds of $50.5 million for exercises of stock options and employee stock plan purchases.

During 2003, we reduced our borrowings under our domestic revolving credit facility by $40.0 million and our Comdata receivable securitization facility by $10.0 million. Also during 2003, we entered into two capital lease arrangements resulting in an obligation of $22.2 million to be paid over a 60-month period. We repurchased 1,844,100 shares of our common stock for $28.8 million on the open market at an average net price of $15.60 per share. Proceeds from exercises of stock options and employee stock plan purchases amounted to $42.3 million during 2003.

For further information on financing cash flows, see Note F, “Financing” and the following section of this discussion entitled “Liquidity and Capital Resources.”

Liquidity and Capital Resources

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

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

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

In addition at December 31, 2005, we had a $150.0 million receivables securitization facility with a term ending in June 2008, which uses selected Comdata trade receivables as collateral for borrowings (the “Comdata Credit Facility”). We had unused borrowing capacity under the Comdata Credit Facility amounting to $95.0 million as of December 31, 2005. We may increase or decrease our use of the Comdata Credit Facility up to four times a month provided there are sufficient accounts receivable to use as collateral. As of December 31, 2005, the aggregate amount of receivables serving as collateral amounted to $230.2 million. The interest rate on the amount outstanding is either at the third-party multi-seller commercial paper conduit’s pooled A-1/P-1 commercial paper rate or at our choice of either prime or LIBOR plus 1.5% (4.26% at December 31, 2005). The Comdata Credit Facility is subject to financial covenants similar to those included in the 2005 Revolving Credit Facility. We are in compliance with all covenants related to our credit facilities.

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

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

As described in the preceding discussion of financing activities in the “Cash Flows” section of this discussion, we repurchased Ceridian common stock pursuant to our stock repurchase program. We repurchased 10,736,450 shares in 2005, 4,012,400 shares in 2004 and 1,844,100 shares in 2003. As of December 31, 2005, we were authorized to purchase up to 15,614,050 additional shares of our common stock under the authorization from our Board of Directors. We generally use our treasury stock to address our obligations under our stock compensation plans.

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