10-K 1 cnne12311810-k.htm 10-K Document

 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018

or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Commission File No. 1-38300
 _________________________________
 CANNAE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
82-1273460
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1701 Village Center Circle
Las Vegas, Nevada 89134
 (Address of principal executive offices, including zip code)
 
(702) 323-7330
 (Registrant’s telephone number,
including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Cannae Common Stock, $0.0001 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
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 þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ      No o 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ    No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
     Accelerated filer o
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 þ
 
The aggregate market value of the shares of Cannae Common Stock held by non-affiliates of the registrant as of June 30, 2018, was $1,246,373,513 based on the closing price of $18.55 as reported by the New York Stock Exchange.
As of February 28, 2019 there were 72,223,692 shares of Cannae common stock outstanding.
The information in Part III hereof for the fiscal year ended December 31, 2018, will be filed within 120 days after the close of the fiscal year that is the subject of this Report.
 
 
 
 
 



CANNAE HOLDINGS, INC.
FORM 10-K
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


PART I

Item 1.
Business 
Introductory Note
The following describes the business of Cannae Holdings, Inc. and its subsidiaries. Except where otherwise noted, all references to “we,” “us,” “our,” "Cannae", "Cannae Holdings", "the Company," or “CNNE” are to Cannae Holdings, Inc. and its subsidiaries, taken together.
Company Background
On November 17, 2017, Fidelity National Financial, Inc. (“FNF”) redeemed each outstanding share of its FNF Ventures ("FNFV") Group common stock, par value $0.0001, for one share of common stock, par value $0.0001, of a newly formed entity, Cannae Holdings, Inc., with cash in lieu of fractional shares (the "Split-Off"). In conjunction with the Split-Off, FNF contributed to us its majority and minority equity investment stakes in a number of entities, including American Blue Ribbon Holdings, LLC ("ABRH"), Ceridian Holding, LLC, T-System Holdings, LLC ("T-System"), and various other controlled portfolio companies and other minority equity investments. On November 20, 2017, Cannae common stock began “regular-way” trading on The New York Stock Exchange under the “CNNE” stock symbol.
On April 26, 2018, our minority-owned subsidiary Ceridian HCM Holding, Inc. ("Ceridian"), the parent of Ceridian Holding, LLC, completed its initial public offering (the "Ceridian IPO"). Following the Ceridian IPO, Ceridian's shares trade on the New York Stock Exchange ("NYSE") and the Toronto Stock Exchange ("TSX") under the ticker symbol “CDAY.” We retained the majority of our investment in Ceridian following its IPO. As of December 31, 2018, we own 23.5% of the outstanding common stock of Ceridian.
On February 8, 2019, Cannae and an investment consortium (the “Consortium”) including CC Capital Partners LLC and Thomas H. Lee Partners along with other investors completed the previously announced acquisition of The Dun & Bradstreet Corporation, a Delaware corporation ("Dun & Bradstreet")(the "DNB Acquisition"). Of our previously disclosed $900.0 million commitment to purchase common equity of the parent of Dun & Bradstreet, we retained and funded a $505.6 million investment, representing 24.5% of the outstanding common equity, and syndicated the remainder to other investors.
Refer to discussion under Recent Developments in Item 7 of Part II of this Annual Report on Form 10-K (this "Annual Report") for further information on the Ceridian IPO and DNB Acquisition and related transactions.
Description of Business
We are a holding company engaged in actively managing and operating a group of companies and investments with a net asset value of approximately $1.1 billion as of December 31, 2018. Our business consists of managing and operating majority-owned subsidiaries, as well as making additional majority and minority equity portfolio investments in businesses, in order to achieve superior financial performance and maximize the value of these assets. Our primary investments as of December 31, 2018 include our ownership interest in Ceridian; majority equity ownership stakes in ABRH, 99 Restaurants Holdings, LLC ("99 Restaurants") and T-System and various other controlled portfolio companies and minority equity and debt investments.
As of December 31, 2018, we had the following reportable segments:
Restaurant Group.  This segment consists of the operations of ABRH and 99 Restaurants, in which we have 65.4% and 88.5% ownership interests, respectively. ABRH and its affiliates are the owners and operators of the O'Charley's, Village Inn and Bakers Square food service and restaurant concepts, as well as the Legendary Baking bakery operation. 99 Restaurants and its affiliates are the owners and operators of the Ninety Nine Restaurants & Pub restaurant concept. ABRH and 99 Restaurants collectively operate more than 550 company and franchise family and casual dining restaurants and bakery operations in 40 states and Guam.
On November 6, 2018, we completed an internal restructuring of the Restaurant Group whereby 99 Restaurants was separated from ABRH. Refer to discussion under Recent Developments in Item 7 of Part II of this Annual Report for further information.
Ceridian.  This segment consists of our 23.5% ownership interest in Ceridian. Ceridian is a global human capital management (“HCM”) software company. Dayforce, Ceridian's flagship cloud HCM platform, provides human resources (“HR”), payroll, benefits, workforce management, and talent management functionality. In addition to Dayforce, Ceridian sells Powerpay, a cloud HR and payroll solution for the Canadian small business market, through both direct sales and established partner channels. Ceridian also continues to support customers using its Bureau solutions, which Ceridian generally stopped actively selling to new customers in 2012, following the acquisition of Dayforce. Ceridian invests in maintenance and necessary updates to support its Bureau customers and continues to migrate them to Dayforce. We account for our investment in Ceridian under the equity method of accounting and therefore its results of operations do not consolidate into ours.

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T-System. This segment consists of the operations of our 97%-owned subsidiary, T-System, acquired on October 16, 2017. T-System is a provider of clinical documentation and coding solutions to hospital-based and free-standing emergency departments and urgent care facilities. T-System organizes itself into two businesses. The Clinical Documentation business offers software solutions providing clinical staff with full workflow operations that drive documentation completeness and revenue optimization to more than 240 customers at more than 450 customer sites. Additionally, the patented T-Sheet is the industry standard for emergency department documentation, with more than 200 customers at more than 475 customer sites. The Coding Software & Outsourced Solutions business provides a full-service outsourced coding solution as well as a cloud-based software-as-a-service solution for self-service coding. These offerings help more than 75 customers at over 400 sites optimize their revenue cycle workflow and customer revenue reimbursement through improved coding accuracy and compliance and coder productivity compared to in-house coding.
Corporate and Other.  This segment consists of our share in the operations of controlled and uncontrolled portfolio companies including our 24.8% equity interest in Triple Tree Holdings, LLC ("Triple Tree"), our wholly-owned subsidiary Cannae Timber Resources LLC ("CTR"), our interest in the debt of Colt Holding LLC ("Colt Defense"), and other various majority and minority equity investments. Triple Tree is an independent, research-driven investment banking firm focused on mergers and acquisitions, financial restructuring, and principal investing services for innovative, high-growth businesses in the healthcare industry. CTR and its subsidiaries currently operate and invest in golf and real estate properties and develop, manage and operate residential and recreational properties, including a 1,800-acre ranch-style luxury resort and residential community in Oregon and an 18-hole championship golf facility in Idaho. Colt Defense researches, develops, manufactures and sells firearms for military and personal defense and recreational purposes in the U.S. and internationally. As of December 31, 2018, we own debt of Colt Defense with a market value of $17.8 million.
Strategy
We actively manage a group of companies and investments with a net asset value of approximately $1.1 billion as of December 31, 2018. Our strategy for the Company is to continue our activities with respect to such business investments to achieve superior financial performance, maximize and ultimately monetize the value of those assets and to continue to pursue similar investments in businesses and to grow and achieve superior financial performance with respect to such newly acquired businesses.
Restaurant Group. Our restaurant operations are focused in the family dining and casual dining segments of the restaurant industry. The Restaurant Group's strategy is to achieve long-term profit growth and drive increases in same store sales and guest counts. We have a highly experienced management team that is focused on enhancing the guest experience at our restaurants and building team member engagement. We also utilize a shared service platform that takes advantage of the combined back-office synergies of our restaurant operating companies. We expect to continue to maintain a strong balance sheet for our Restaurant Group to provide stability in all operating environments.
Ceridian. Ceridian's business has transformed from a legacy service-bureau model into a cloud-based provider model, and in the second half of 2016, Cloud revenue surpassed Bureau revenue for the first time. Ceridian's flagship cloud offering, Dayforce, is a cloud solution that meets HCM needs with one employee record and one user experience throughout the application. As evidenced by its more than 60% compound annual growth rate since 2012, we believe that the Dayforce cloud offering, built on a single database, enjoys a competitive advantage in the marketplace. We believe Ceridian's Dayforce offering is a market leader as shown by both extensive recognition and industry awards. Nucleus Research named Dayforce as the leader in both HCM technology and Workforce Management, based on functionality and usability. In addition, Gartner Peer Insights placed Ceridian's Dayforce offering in the leader quadrant in global payroll services, and Ventana Research found Dayforce as the leader in both usability and capability in its Value Index. During 2016, Ceridian won several awards for Dayforce, including a TekTonic Award from HRO Today Magazine, a Gold American Business Award for best new product, and a Ventana Research Technology Innovation Award, among others.
T-System. T-System is engaged in providing clinical, financial, operational, and regulatory solutions for hospital emergency room ("ER") departments, free-standing emergency departments ("ED"), and urgent care healthcare facilities. T-System offers documentation solutions, including EV, an emergency department information system; EV for physicians, a solution with ER-specific clinical content and workflow for emergency physicians; T Sheets Digital, a documentation solution for urgent care; and T Sheets, which provides patient care through medical records/documentation and optimized reimbursement. We also provide charge capture and coding solutions that combine intelligent coding technology with services to improve quality and compliance, and result in accurate coding and financial outcomes for various types of facilities ranging from critical access hospitals to children's hospitals; and Advanced Coding System, which facilitates accurate coding for simple encounters and multiple patient complaints, and ensures optimal reimbursement for care provided. In the past several years, there has been an increased push for interoperability across systems to address the fact that patient records will contain information from more than one health care IT system. We believe that we are positioned to take the steps to create interoperability between T-System solutions and other large IT systems.
Acquisitions, Dispositions, Minority Owned Operating Affiliates and Financings. Acquisitions have been an important part of our growth strategy. Dispositions have been an important aspect of our strategy of returning value to shareholders. On an ongoing

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basis, with assistance from our advisors, we actively evaluate possible transactions, such as acquisitions and dispositions of business units and operating assets and business combination transactions.
In the future, we may seek to sell certain investments or other assets to increase our liquidity. Further, our management has stated that we may make acquisitions in lines of business that are not directly tied to, or synergistic with, our current operating segments. In the past we have obtained majority and minority investments in entities and securities where we see the potential to achieve above market returns. Fundamentally our goal is to acquire quality companies that are well-positioned in their respective industries, run by best-in-class management teams in industries that have attractive organic and acquired growth opportunities. We leverage our operational expertise and track record of growing industry leading companies and our active interaction with management of acquired companies, directly or through our board of directors, to ultimately provide value for our shareholders.
There can be no assurance that any suitable opportunities will arise or that any particular transaction will be completed. We have made a number of acquisitions and dispositions over the past several years to strengthen and expand our service offerings and customer base in our various businesses, to expand into other businesses or where we otherwise saw value, and to monetize investments in assets and businesses.
Through the date of this Annual Report, we have made significant progress both monetizing currently held investments and deploying capital toward new investments. Refer to discussion under Recent Developments in Item 7 of Part II of this Annual Report for further information.
Intellectual Property
Restaurant Group. We regard our service marks, including "O'Charley's", "Ninety Nine", "Village Inn", "Legendary Baking", and "Bakers Square", and other service marks and trademarks as having significant value and as being important factors in the marketing of our restaurants. We have also obtained trademarks for several of our menu items and for various advertising slogans. We are aware of names and marks similar to our service marks and trademarks used by other persons in certain geographic areas where we have restaurants. However, we believe such uses will not adversely affect us. Our policy is to pursue registration of our marks whenever possible and to oppose vigorously any infringement of our marks.
We license the use of our registered trademarks and service marks to franchisees and third parties through franchise arrangements and licenses. The franchise and license arrangements restrict franchisees' and licensees' activities with respect to the use of our trademarks and service marks, and impose quality control standards in connection with goods and services offered in connection with the trademarks and service marks.
Ceridian. Ceridian and its subsidiaries own or have the rights to various trademarks, trade names and service marks, including the following: Ceridian®, Dayforce® and various logos used in association with these terms.
T-System.T-System's intellectual property includes the following: T SheetsTM, T-System EVTM, and T-System EV4PTM. T Sheets is one of the most widely used and accepted documentation systems in emergency medicine. T Sheets is built with the most comprehensive and up-to-date clinical content and serves as the clinical documentation backbone of T-System’s industry leading software solutions. T-System EVTM and EV4PTM are category-leading best-of-breed software solutions used by the episodic care market.
Seasonality
Restaurant Group. Average weekly sales per restaurant are typically higher in the first and fourth quarters than in other quarters, and the Restaurant Group typically generates a disproportionate share of its earnings from operations in the first and fourth quarters. Holidays, severe weather and other disruptive conditions may impact sales volumes seasonally in some operating regions. Our revenues in future periods will continue to be subject to these and other factors that are beyond our control and, as a result, are likely to fluctuate.
Ceridian. Ceridian has in the past and expects in the future to experience seasonal fluctuations in its revenues and new customer contracts with the fourth quarter historically being its strongest quarter for new customer contracts, renewals, and customer go-lives. Although the growth of Ceridian's cloud solutions and the ratable nature of its fees makes this seasonality less apparent in its overall results of operations, we expect Ceridian's revenue to fluctuate quarterly and to be higher in the fourth and first quarters of each year. Fourth quarter revenue is driven by year-end processing fees and Dayforce customer go-lives; and first quarter revenue is driven by revenue earned for printing of year-end tax packages.
T-System. The Clinical Documentation segment of T-System's business is impacted by seasonal volume increases in the first and fourth quarters compared to other quarters. The increase in charts coded is generated by seasonal flu volumes that impact the visits to health care facilities.



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Inventory 
Restaurant Group. In the restaurant group's Legendary Baking business, sales of baked goods are greatest during the holiday season in the fourth quarter. As a result of inventory requirements to meet this demand, inventory is built up over the course of the first nine months of the year.
Competition
Restaurant Group. The restaurant industry is highly competitive and is often affected by changes in consumer tastes and discretionary spending patterns; changes in general economic conditions; public safety conditions or concerns; demographic trends; weather conditions; the cost of food products, labor, energy and other operating costs; and governmental regulations. Higher labor costs due to state and local minimum wage increases and shopping pattern shifts to e-commerce and “ready to eat” grocery and convenience stores have had a negative impact on restaurant performance, particularly in the casual and family dining restaurants in which the Company operates.
The restaurant industry is also characterized by high capital investments for new restaurants and relatively high fixed or semi-variable restaurant operating expenses.  Because of the high fixed and semi-variable expenses, changes in sales in existing restaurants are generally expected to significantly affect restaurant profitability because many restaurant costs and expenses are not expected to change at the same rate as sales.  Restaurant profitability can also be negatively affected by inflationary and regulatory increases in operating costs and other factors.  The most significant commodities that may affect our cost of food and beverage are beef, seafood, poultry, and dairy, which accounted for approximately half of our overall cost of food and beverage in the past. Generally, temporary increases in these costs are not passed on to guests; however, in the past, we have adjusted menu prices to compensate for increased costs of a more permanent nature. Our revenues in future periods will continue to be subject to these and other factors that are beyond our control and, as a result, are likely to fluctuate.
Ceridian. The market for HCM products is highly competitive. Ceridian's products compete primarily on the basis of technology, delivered functionality and performance, price, and service. Its competitors include (i) large service bureaus, primarily Automatic Data Processing Inc.; (ii) companies, such as Oracle, Kronos, Lawson, Ultimate Software and Workday that offer human resource management and payroll software products for use on mainframes, client/server environments and/or Web servers; and (iii) smaller service providers, such as Paychex.
T-System. The market for healthcare solutions is subject to intense competition and subject to rapid technological change. T-System offers solutions and services to support the clinical, financial, and operational needs for hospital ER departments, free-standing EDs, and urgent care and family practice healthcare facilities. Our competitors include companies such as Allscripts Healthcare Solutions, Cerner Corporation, Medhost, and Epic Systems.
Due to the pace of change within the market, we expect that major software information system companies, start-up companies, and other companies would produce new software solutions or services that would compete with evolving industry standards and requirements.
Competitive Strengths
Proven management team.  Our executive management team has a proven track record of investment identification and management. Our executive management's breadth of knowledge of capital markets allows us to identify companies and strategic assets with attractive value propositions, to structure investments to maximize their value, and to return the value created to shareholders.
Information Security
We and our unconsolidated affiliates are highly dependent on information technology networks and systems to securely process, transmit and store electronic information. Attacks on information technology systems continue to grow in frequency, complexity and sophistication. Such attacks have become a point of focus for individuals, businesses and governmental entities. These attacks can create system disruptions, shutdowns or unauthorized disclosure of confidential information, including non-public personal information, consumer data and proprietary business information.
We and our unconsolidated affiliates remain focused on making strategic investments in information security to protect the clients and information systems of our operating subsidiaries and unconsolidated affiliates. This includes both capital expenditures and operating expenses on hardware, software, personnel and consulting services. As the primary products and services of our operating subsidiaries and unconsolidated affiliates evolve, we apply a comprehensive approach to the mitigation of identified security risks. We have established risk management policies, including those related to information security and cybersecurity, designed to monitor and mitigate information security related risks.
Employees
As of February 1, 2019, Cannae and our consolidated subsidiaries had 26,413 full-time equivalent employees, which includes 25,920 in our Restaurant Group, 280 at T-System and 213 in the various businesses comprising our Corporate and other segment.

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None of our employees are unionized or represented by any collective agency. We believe that our relations with employees are generally good.
Statement Regarding Forward-Looking Information
 The statements contained in this Form 10-K or in our other documents or in oral presentations or other statements made by our management that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions, or strategies regarding the future. These statements relate to, among other things, future financial and operating results of the Company. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms and other comparable terminology. Actual results could differ materially from those anticipated in these statements as a result of a number of factors, including, but not limited to the following:
changes in general economic, business, and political conditions, including changes in the financial markets;
compliance with extensive government regulation of our operating subsidiaries and adverse changes in applicable laws or regulations or in their application by regulators;
loss of key personnel that could negatively affect our financial results and impair our operating abilities;
our potential inability to find suitable acquisition candidates, as well as the risks associated with acquisitions in lines of business that will not necessarily be limited to our traditional areas of focus, or difficulties integrating acquisitions;
other risks detailed in "Risk Factors" below and elsewhere in this document and in our other filings with the SEC.
 We are not under any obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. You should carefully consider the possibility that actual results may differ materially from our forward-looking statements.
 Additional Information
The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC. The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements and other information with the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
 Our website address is www.cannaeholdings.com. We make available free of charge on or through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. However, the information found on our website is not part of this or any other report.
Item 1A.      Risk Factors
Factors Relating to the Company's Corporate History and Structure 
We are a holding company and will depend on distributions from our subsidiaries for cash.
We are a holding company whose primary assets are the securities of our portfolio companies. Our ability to pay interest on our outstanding debt, if any, and our other obligations and to pay dividends, if any, is dependent on the ability of our subsidiaries to pay dividends or make other distributions or payments to us (such ability of our subsidiaries also being subject to certain restrictions under their respective credit agreements and other debt instruments, as applicable). If our portfolio companies are not able to pay dividends to us, we may not be able to meet our obligations or pay dividends on our common stock. The ability of the Cannae Holdings portfolio companies to pay dividends or to make other payments or advances to us depends on their individual operating results and any statutory, regulatory or contractual restrictions to which they may be or may become subject.
We have a limited operating history as a separate company upon which you can evaluate our performance.
We have a limited operating history as a public company. Accordingly, there can be no assurance that our business will be successful on a long-term basis. We may not be able to grow our businesses as planned and may not be profitable.
We may become subject to the Investment Company Act of 1940.
We do not believe that we are subject to regulation under the Investment Company Act of 1940, as amended (the "40 Act"). We were formed for the purpose of effecting the Split-Off and for controlling, operating or holding, as applicable, the FNFV Group's business and investments, including the portfolio companies. We engage primarily in the business of managing and operating our controlled subsidiaries. Our officers and any employees who provide services to us pursuant to the terms of our

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corporate services agreement with FNF devote their activities to the businesses of these portfolio companies. Our interest in the portfolio companies comprises substantially all of our assets and substantially all of our income, if any, is derived from restaurant revenue from our Restaurant Group, the revenue of T-System, and dividends and other distributions made on our interests in portfolio companies. Based on these factors, we believe that we are not an investment company under the 40 Act, including under Section 3(b)(1) of the 40 Act. If, at any time, we become primarily engaged in the business of investing, reinvesting or trading in securities, we could become subject to regulation under the 40 Act. Following any such change in our business and after giving effect to any applicable grace periods, we may be required to register as an investment company, which could result in significant registration and compliance costs, could require changes to our corporate governance structure and financial reporting, and could restrict our activities going forward. In addition, if we were to become inadvertently subject to the 40 Act, any violation of the 40 Act could subject us to material adverse consequences, including potentially significant regulatory penalties and the possibility that certain of our contracts would be deemed unenforceable.
Factors Relating to the Restaurant Businesses 
General macroeconomic factors, including unemployment, energy prices and interest rates, and certain economic and business factors specific to the restaurant and bakery industries that are largely out of our restaurant businesses' control may materially and adversely affect consumer behavior and have a material adverse effect on our business, financial condition and results of operations.
General economic conditions may materially and adversely affect the financial condition and results of operations of our restaurant businesses, which we also refer to as our Restaurant Group companies. Recessionary economic cycles, a protracted economic slowdown, a worsening economy, increased unemployment, increased energy prices, rising interest rates, a downgrade of the United States ("U.S.") government's long-term credit rating, financial market volatility and unpredictability or other national, regional and local regulatory and economic conditions or other industry-wide cost pressures could affect consumer behavior and spending for restaurant dining occasions and result in increased pressure with respect to our Restaurant Group companies' pricing, guest count levels and commodity costs, which could lead to a decline in our Restaurant Group companies' sales and earnings. Job losses, foreclosures, bankruptcies and falling home prices could cause customers to make fewer discretionary purchases, and any significant decrease in our Restaurant Group companies' guest counts or profit will negatively impact their financial performance. In addition, if gasoline, natural gas, electricity and other energy costs increase, or credit card, home mortgage and other borrowing costs increase with rising interest rates, our Restaurant Group companies' customers may have lower disposable income and reduce the frequency with which they dine at restaurants, may spend less during each visit at our Restaurant Group companies' restaurants or may choose more inexpensive restaurants. These factors could also cause the Restaurant Group companies to, among other things, reduce the number and frequency of new restaurant openings, close restaurants or delay the reimaging of the Restaurant Group companies' existing restaurant locations.
Furthermore, we cannot predict the effects that actual or threatened armed conflicts, terrorist attacks, efforts to combat terrorism, including military action against any foreign state or local group located in a foreign state, heightened security requirements on local, regional, national or international economies or a failure to protect information systems for critical infrastructure, such as the electrical grid and telecommunications systems, could have on the Restaurant Group companies' operations, the economy or consumer confidence generally. Any of these events could affect consumer spending patterns or result in increased costs for the Restaurant Group companies due to security measures.
The business results of our Restaurant Group companies depend on a number of industry-specific factors as well, many of which are beyond the Restaurant Group companies' control. The full service dining sector of the restaurant industry is affected by seasonal fluctuation of sales volumes, consumer confidence, consumer spending patterns and consumer preferences, including changes in consumer tastes and dietary habits, and the level of consumer acceptance of our restaurant brands. The performance of individual restaurants may also be materially and adversely affected by factors applicable to those restaurants, such as demographic trends, severe weather, traffic patterns and the type, number and location of competing restaurants.
Unfavorable changes in the above factors or in other business and economic conditions affecting our Restaurant Group companies' customers or industry could increase costs, reduce guest counts in some or all restaurants or impose practical limits on pricing, any of which could lower profit margins and have a material adverse effect on our business, financial condition and results of operations.
The Restaurant Group companies could face significant competition for customers, real estate and employees and competitive pressure to adapt to changes in conditions driving customer demand. The Restaurant Group companies' inability to compete effectively may affect guest counts, sales and profit margins, which could have a material adverse effect on our business, financial condition and results of operations.
The restaurant industry is intensely competitive with a substantial number of restaurant operators that compete directly and indirectly with the Restaurant Group companies with respect to price, service, ambiance, brand, customer service, dining experience, location, food quality and variety and value perception of menu items and there are other well established competitors with substantially greater financial and other resources than the Restaurant Group companies. Some of our Restaurant Group companies'

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competitors advertise on national television, which may provide customers with greater awareness and name recognition than our Restaurant Group companies can achieve through their advertising efforts. There is also active competition for management personnel and attractive suitable real estate sites. Consumer tastes and perceptions, nutritional and dietary trends, guest count patterns and the type, number and location of competing restaurants often affect the restaurant business, and our Restaurant Group companies' competitors may react more efficiently and effectively to those conditions. For instance, prevailing health or dietary preferences or perceptions of our Restaurant Group companies' products may cause consumers to avoid certain menu items or products our Restaurant Group companies offer in favor of foods that are perceived as more healthy, and such choices by consumers could have a material adverse effect on our business, financial condition and results of operations. Further, our Restaurant Group companies face growing competition from the supermarket industry, with the improvement of their "convenient meals" in the deli and prepared food sections, from quick service and fast casual restaurants and online food delivery services as a result of food and beverage offerings by those food providers. As our Restaurant Group companies' competitors expand operations in markets where our restaurant businesses operate or expect to operate, we expect competition to intensify. If our Restaurant Group companies are unable to continue to compete effectively, their guest counts, sales and profit margins could decline, which could have a material adverse effect on our business, financial condition and results of operations.
Historically, customer spending patterns for the Restaurant Group companies' restaurants are generally highest in the fourth quarter of the year and lowest in the third quarter of the year. Sales activity during the holidays may affect seasonal sales volumes in some of the markets in which our restaurant businesses operate. The quarterly results of our Restaurant Group companies have been and will continue to be affected by the timing of new restaurant openings and their associated costs (which are often materially greater during the first several months of operation than thereafter), restaurant closures and exit-related costs, labor availability and costs for hourly and management personnel, profitability of restaurants, especially in new markets, trends in comparable restaurant sales, changes in borrowings and interest rates, changes in consumer preferences and competitive conditions, fluctuations in food and commodity prices, fluctuations in costs attributable to public company compliance and impairments of goodwill, intangible assets and property, fixtures and equipment. As a result of these and other factors, the Restaurant Group companies' financial results for any quarter may not be indicative of the results that may be achieved for a full fiscal year.
If our restaurant businesses are unable to effectively grow revenue and profitability at certain of their locations, our Restaurant Group companies may be required to record impairment charges to their restaurant assets, the carrying value of their goodwill or other intangible assets, which could have a material adverse effect on our financial condition and results of operations.
Our Restaurant Group companies assess the potential impairment of their long-lived assets whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable. Factors considered include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner in which an asset is being used, an expectation that an asset will be disposed of significantly before the end of its previously estimated useful life and significant negative industry or economic trends. Our Restaurant Group companies annually review and compare the carrying value of intangible assets, including goodwill, to the fair value. We cannot accurately predict the amount and timing of any recorded impairment to our Restaurant Group companies' assets. Should the value of goodwill or other intangible or long-lived assets become impaired, there could be a material adverse effect on our financial condition and results of operations.
Increased commodity, energy and other costs could decrease our Restaurant Group companies' profit margins or cause the Restaurant Group companies to limit or otherwise modify their menus, which could have a material adverse effect on our business, financial condition and results of operations.
The cost, availability and quality of ingredients restaurant operations use to prepare their food is subject to a range of factors, many of which are beyond their control. A significant component of our restaurant businesses' costs will be related to food commodities, including beef, pork, chicken, seafood, poultry, dairy products, oils, produce, fruit, flour and other related costs such as energy and transportation over which we may have little control, which can be subject to significant price fluctuations due to seasonal shifts, climate conditions, industry demand, changes in international commodity markets and other factors. If there is a substantial increase in prices for these commodities, our Restaurant Group companies' results of operations may be negatively affected. In addition, the Restaurant Group companies' restaurants are dependent upon frequent deliveries of perishable food products that meet certain specifications. Shortages or interruptions in the supply of perishable food products caused by unanticipated demand, problems in production or distribution, disease or food-borne illnesses, inclement weather or other conditions could adversely affect the availability, quality, and cost of ingredients, which would likely lower revenues, damage the Restaurant Group companies' reputation or otherwise harm our business.
The Restaurant Group companies are also subject to the general risks of inflation. The performance of our Restaurant Group companies' business is also adversely affected by increases in the price of utilities, such as natural gas, whether as a result of inflation, shortages or interruptions in supply, or otherwise. The Restaurant Group companies' business will also incur significant costs for insurance, labor, marketing, taxes, real estate, borrowing and litigation, all of which could increase due to inflation, changes in laws and regulations, competition or other events beyond the Restaurant Group companies' control.

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Negative customer experiences or negative publicity surrounding our Restaurant Group companies' restaurants or other restaurants could adversely affect sales in one or more of our Restaurant Group companies' restaurants and make our concepts less valuable, which could have a material adverse effect on our business, financial condition and results of operations.
Because we believe our Restaurant Group companies' success depends significantly on their ability to provide exceptional food quality, outstanding service and an excellent overall dining experience, adverse publicity, whether or not accurate, relating to food quality, public health concerns, illness, safety, injury or government or industry findings concerning our Restaurant Group companies' restaurants, restaurants operated by other food service providers or others across the food industry supply chain could affect our Restaurant Group companies more than it would other restaurants that compete primarily on price or other factors. If customers perceive or experience a reduction in the food quality, service or ambiance at our Restaurant Group companies' restaurants or in any way believe our Restaurant Group companies' restaurants have failed to deliver a consistently positive experience, the value and popularity of one or more of our Restaurant Group companies' concepts could suffer. Further, because our restaurant businesses rely heavily on "word-of-mouth," as opposed to more conventional mediums of advertisement, to establish concept recognition, our restaurant businesses may be more adversely affected by negative customer experiences than other dining establishments, including those of our restaurant businesses' competitors.
Our restaurant businesses could suffer due to reduced demand for our restaurant businesses' brands or specific menu offerings if our restaurant businesses are the subject of negative publicity or litigation regarding allegations of food-related contaminations or illnesses, which could have a material adverse effect on our business, financial condition and results of operations.
Food safety is a top priority, and our Restaurant Group companies dedicate substantial resources to ensuring that their customers enjoy safe, quality food products. Food-related contaminations and illnesses may be caused by a variety of food-borne pathogens, such as e-coli or salmonella, which are frequently carried on unwashed fruits and vegetables, from a variety of illnesses transmitted by restaurant workers, such as hepatitis A, which may not be diagnosed prior to being infectious, and from contamination of food by foreign substances. Contamination and food borne illness incidents could also be caused at the point of source or by food suppliers and distributors. As a result, we cannot control all of the potential sources of contamination or illness that can be contained in or transmitted from our Restaurant Group companies' food. Regardless of the source or cause, any report of food-borne illnesses or other food safety issues including food tampering or contamination, at one of our Restaurant Group companies' restaurants could adversely affect the reputation of our Restaurant Group companies' brands and have a negative impact on their sales. Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our Restaurant Group companies' competitors or at one of our Restaurant Group companies' suppliers could result in negative publicity about the food service industry generally and adversely impact our Restaurant Group companies' sales.
If any person becomes injured or ill, or alleges becoming injured or ill, as a result of eating our Restaurant Group companies' food, our Restaurant Group companies may temporarily close some restaurants or their bakery facilities, which would decrease their revenues, and our restaurant businesses may be liable for damages or be subject to governmental regulatory action, either of which could have long-lasting, negative effects on our restaurant businesses' reputation, financial condition and results of operations, regardless of whether the allegations are valid or whether our restaurant businesses are found liable. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.
Our Restaurant Group companies' failure to comply with government regulation, and the costs of compliance or non-compliance, could have a material adverse effect on our business, financial condition and results of operations.
The Restaurant Group companies are subject to various federal, state and local laws and regulations affecting their business. Each of their restaurants and their bakery division are subject to licensing and regulation by a number of federal, state and local governmental authorities, which may include, among others, alcoholic beverage control, health and safety, nutritional menu labeling, health care, environmental and fire agencies. Difficulty in obtaining or failure to obtain the required licenses, including liquor or other licenses, permits or approval could delay or prevent the development of a new restaurant in a particular area. Additionally, difficulties or inabilities to retain or renew licenses, or increased compliance costs due to changed regulations, could adversely affect operations at existing restaurants.
While only approximately 9% of the Restaurant Group companies' consolidated restaurant sales in 2018 were attributable to the sale of alcoholic beverages, approximately 19% of the restaurant sales at Ninety Nine were attributable to the sale of alcoholic beverages in 2018. Alcoholic beverage control regulations require each restaurant to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily operations of the Restaurant Group companies' restaurants, including minimum ages of patrons and employees, hours of operation, advertising, training, wholesale purchasing, inventory control and the handling, storage and dispensation of alcoholic beverages. The failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurant's operations.

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Our restaurant businesses' operations are also subject to federal and state labor laws, including the Fair Labor Standards Act of 1938, as amended, governing such matters as minimum wages, overtime, tip credits and worker conditions. The Restaurant Group companies' employees who receive tips as part of their compensation, such as servers, are generally paid at a minimum wage rate, after giving effect to applicable tip credits. The Restaurant Group companies rely on their employees to accurately disclose the full amount of their tip income, and they base their Federal Insurance Contributions Act tax reporting on the disclosures provided to them by such tipped employees. Significant numbers of these personnel are paid at rates related to the applicable minimum wage and thus, further increases in the federal or state minimum wage or other changes in these laws could increase our Restaurant Group companies' labor costs. Their ability to respond to minimum wage increases by increasing menu prices will depend on the responses of their competitors and customers.
In 2010, the Patient Protection and Affordable Care Act of 2010 (the "PPACA") was signed into law in the U.S. to require healthcare coverage for many uninsured individuals and expand coverage to those already insured. Starting in 2015, the PPACA required the Restaurant Group companies to offer healthcare benefits to all full-time employees (including full-time hourly employees) that meet certain minimum requirements of coverage and affordability, or face penalties. Continued compliance with the requirements of the PPACA and rising costs of healthcare may impose additional administrative costs. The costs and other effects of these healthcare requirements may significantly increase our Restaurant Group companies' healthcare coverage costs in future periods and could have a material adverse effect on our business, financial condition and results of operations.
 There is also a potential for increased regulation of certain food establishments in the U.S., where compliance with Hazard Analysis & Critical Control Points ("HACCP") management systems may now be required. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from raw material production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have required restaurants to develop and implement HACCP programs and the U.S. government continues to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the Food Safety Modernization Act, signed into law in January 2011, granted the FDA new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls. We anticipate that the new requirements may impact the restaurant industry. Additionally, our Restaurant Group companies' suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require the Restaurant Group companies' to take actions that could be costly for them or otherwise harm their business.
In addition, in order to develop and construct restaurants, the Restaurant Group companies must comply with applicable zoning, land use and environmental regulations. Such regulations have not had a material effect on its operations to date, but more stringent and varied requirements of local governmental bodies could delay or prevent construction and increase development costs for new restaurants. The Restaurant Group companies are also subject to federal and state laws which prohibit discrimination and other accessibility standards as mandated by the Americans with Disabilities Act (the "ADA"), which generally, among other things, prohibits discrimination in accommodation or employment based on disability. The ADA became effective as to public accommodations and employment in 1992. Pursuant to the ADA, our restaurant businesses may in the future have to modify restaurants, by adding access ramps or redesigning certain architectural fixtures for example, to provide service to or make reasonable accommodations for disabled persons. While these expenses could be material, the Restaurant Group companies' current expectation is that any such actions will not require substantial capital expenditures.
The Restaurant Group companies are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. There also has been increasing focus by the U.S. on other environmental matters, such as climate change, the reduction of greenhouse gases and water consumption. This increased focus may lead to new initiatives directed at regulating an as yet unspecified array of environmental matters, such as the emission of greenhouse gases, and "cap and trade" initiatives could effectively impose a tax on carbon emissions. Legislative, regulatory or other efforts to combat climate change or other environmental concerns could result in future increases in the cost of raw materials, commodities, taxes, transportation and utilities, which could decrease our Restaurant Group companies' operating profits and necessitate future investments in facilities and equipment.
The Restaurant Group companies are subject to laws and regulations relating to information security, privacy, cashless payments, gift cards and consumer credit, protection and fraud, and any failure or perceived or alleged failure to comply with these laws and regulations could harm their reputation or lead to litigation, which could have a material adverse effect on our financial condition and results of operations.
The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or an insufficient or ineffective response to significant regulatory or public policy issues, could increase our Restaurant Group companies' cost structure or lessen their operational efficiencies and talent availability, and therefore have a material adverse effect on our financial condition and results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal

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liability. Compliance with these laws and regulations can be costly and can increase the Restaurant Group companies' exposure to litigation or governmental investigations or proceedings.
Restaurant companies, including our restaurant companies, are the target of claims and lawsuits from time to time in the ordinary course of business. Proceedings of this nature, if successful, could result in our payment of substantial costs and damages, which could have a material adverse effect on our business, financial condition and results of operations.
Our Restaurant Group companies and other restaurant companies have been subject to claims and lawsuits alleging various matters from time to time in the ordinary course of business, including those that follow. Claims and lawsuits may include class action lawsuits, alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, the sharing of tips amongst certain employees, overtime eligibility of assistant managers and failure to pay for all hours worked. Although our restaurant businesses will maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these matters. Accordingly, if our restaurant businesses are required to pay substantial damages and expenses as a result of these types or other lawsuits, such payments or expenses could have a material adverse effect on our business and results of operations.
Occasionally, our Restaurant Group companies' customers may file complaints or lawsuits against the Restaurant Group companies alleging that they are responsible for some illness or injury the customers suffered at or after a visit to one of the Restaurant Group companies' restaurants, including actions seeking damages resulting from food-borne illness and relating to notices with respect to chemicals contained in food products required under state law. Our Restaurant Group companies may also be subject to a variety of other claims from third parties arising in the ordinary course of their business, including personal injury claims, contract claims and claims alleging violations of federal and state laws. In addition, most of our Restaurant Group companies' restaurants are subject to state "dram shop" or similar laws which generally allow a person to sue our restaurant businesses if that person was injured by a legally intoxicated person who was wrongfully served alcoholic beverages at one of our Restaurant Group companies' restaurants. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers. In addition, the Restaurant Group companies may also be subject to lawsuits from their employees or others alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits in the restaurant industry have resulted in the payment of substantial damages by the defendants.
Additionally, certain of the Restaurant Group companies' tax returns and employment practices are subject to audits by the IRS and various state tax authorities. Such audits could result in disputes regarding tax matters that could lead to litigation that would be costly to defend or could result in the payment of additional taxes, which could have a material adverse effect on our business, results of operations and financial condition.
Regardless of whether any claims against the Restaurant Group companies are valid or whether they are liable, claims may be expensive to defend and may divert resources away from their operations. In addition, such claims may generate negative publicity, which could reduce customer traffic and sales. Although our restaurant businesses will maintain what they believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. Defense costs, even for unfounded claims, or a judgment or other liability in excess of our restaurant businesses' insurance coverage for any claims or any adverse publicity resulting from claims could have a material adverse effect on our business, results of operations and financial condition.
The Restaurant Group companies rely heavily on information technology and any material failure, interruption, or security breach in their systems could have a material adverse effect on our business, financial condition and results of operations.
The Restaurant Group companies rely heavily on information technology systems across their operations and corporate functions, including for order and delivery from suppliers and distributors, point-of-sale processing in their restaurants, management of their supply chains, payment of obligations, collection of cash, bakery production, data warehousing to support analytics, finance or accounting systems, labor optimization tools, gift cards, online business and various other processes and transactions, including the storage of employee and customer information. The Restaurant Group companies' ability to effectively manage their business and coordinate the production, distribution and sale of their products will depend significantly on the reliability and capacity of these systems. In August 2015, the Restaurant Group companies upgraded their information systems using a third-party provider. However, the failure of these systems to operate effectively, maintenance problems or problems with transitioning to upgraded or replacement systems could cause delays in product sales and reduced efficiency of our restaurant businesses' operations, and significant capital investments could be required to remediate the problem.
The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Compliance with these requirements may result in cost increases due to necessary systems changes and the development of new administrative processes. In addition, customers and employees have a high expectation that our restaurant businesses will adequately protect their personal information. The majority of our restaurant

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businesses' restaurant sales are by credit or debit cards. We and other restaurants and retailers have experienced security breaches in which credit and debit card information of their customers has been stolen.
In addition, any breach in customer payment information could result in investigations by the U.S. Secret Service Electronic Crimes Task Force ("ECTF") and increased cost in our restaurant businesses' efforts to cooperate with the ECTF.
The Restaurant Group companies also maintain certain personal information regarding their employees. In addition to government investigations, the Restaurant Group companies may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of their customers' credit or debit card information or if customer or employee information is obtained by unauthorized persons or used inappropriately. If the Restaurant Group companies fail to comply with these laws and regulations or experience a significant breach of customer, employee or company data, their reputation could be damaged and they could experience lost sales, fines or lawsuits. Additionally, if a person is able to circumvent the security measures intended to protect our Restaurant Group companies' employee or customer private data, he or she could destroy or steal valuable information and disrupt our restaurant businesses' operations. The Restaurant Group companies may also be required to incur additional costs to modify or enhance their systems in order to prevent or remediate any such attacks.
The success of the Restaurant Group depends, in part, on its intellectual property, which we may be unable to protect.
We regard our service marks, including "O'Charley's", "Ninety Nine", "Village Inn", "Legendary Baking", and "Bakers Square", and other service marks and trademarks as having significant value and as being important factors in the marketing of our restaurants. We have also obtained trademarks for several of our menu items and for various advertising slogans. We are aware of names and marks similar to our service marks and trademarks used by other persons in certain geographic areas where we have restaurants. We believe such uses will not adversely affect us and our policy is to pursue registration of our marks whenever possible and to oppose vigorously any infringement of our marks.
We license the use of our registered trademarks and service marks to franchisees and third parties through franchise arrangements and licenses. The franchise and license arrangements restrict franchisees' and licensees' activities with respect to the use of our trademarks and service marks, and impose quality control standards in connection with goods and services offered in connection with the trademarks and service marks.
Occasionally, third parties may assert that we are, or may be, infringing on or misappropriating their intellectual property rights. In these cases, we intend to defend against claims or negotiate licenses when we consider these actions appropriate. Intellectual property cases are uncertain and involve complex legal and factual questions. If we become involved in this type of litigation, it could consume significant resources and divert our attention from business operations.
If we are found to infringe on the intellectual property rights of others, we could incur significant damages, be enjoined from continuing to use certain marks, or be required to obtain a license to continue using the affected marketing and promotional materials. A license could be very expensive to obtain or may not be available at all. Similarly, changing our marketing plan to avoid infringing the rights of others may be costly or impracticable.
Factors Relating to Ceridian
Ceridian's solutions and business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy, data protection, and information security. Any failure by Ceridian or its third party service providers, as well as the failure of its platform or services, to comply with applicable laws and regulations could have a material adverse effect on our business, financial condition, and results of operations.
Ceridian is subject to a variety of U.S. and international laws and regulations, including regulation by various federal government agencies, including the FTC, and state and local agencies. The United States and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security, and storage of Personally Identifiable Information ("PII") of individuals; and the FTC and many state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data. Self-regulatory obligations, other industry standards, policies, and other legal obligations may apply to Ceridian's collection, distribution, use, security, or storage of PII or other data relating to individuals. In addition, most states and some foreign governments have enacted laws requiring companies to notify individuals of data security breaches involving certain types of PII. These obligations may be interpreted and applied in an inconsistent manner from one jurisdiction to another and may conflict with one another, other regulatory requirements, or Ceridian's internal practices. Any failure or perceived failure by Ceridian to comply with U.S., E.U., or other foreign privacy or security laws, regulations, policies, industry standards, or legal obligations, or any security incident that results in the unauthorized access to, or acquisition, release, or transfer of, PII may result in governmental enforcement actions, litigation, fines and penalties, or adverse publicity and could cause Ceridian's customers to lose trust in it, which could harm its reputation and have a material adverse effect on our business, financial condition, and results of operations.
We expect that there will continue to be new proposed laws, regulations, and industry standards concerning privacy, data protection and information security in the United States, Canada, the European Union, and other jurisdictions, and we cannot yet

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determine the impact such future laws, regulations, and standards may have on Ceridian's business. For example, in May 2018, the General Data Protection Regulation came into force, bringing with it a complete overhaul of E.U. data protection laws: the new rules supersede E.U. data protection legislation, impose more stringent E.U. data protection requirements, and provide for greater penalties for non-compliance. Changing definitions of what constitutes PII may also limit or inhibit Ceridian's ability to operate or to expand its business, including limiting strategic partnerships that may involve the sharing of data. Also, some jurisdictions require that certain types of data be retained on servers within these jurisdictions. Ceridian's failure to comply with applicable laws, directives, and regulations may result in enforcement action against it, including fines and imprisonment, and damage to Ceridian's reputation, any of which may have an adverse effect on its business and operating results. Further, in October 2015, the European Court of Justice issued a ruling invalidating the U.S.-E.U. Safe Harbor Framework, which facilitated transfers of PII to the United States in compliance with applicable E.U. data protection laws. In July 2016, the E.U. and the U.S. political authorities adopted the E.U.-U.S. Privacy Shield, replacing the Safe Harbor Framework and providing a new mechanism for companies to transfer E.U. PII to the United States. U.S. organizations wishing to self-certify under the Privacy Shield must pledge their compliance with its seven core and sixteen supplemental principles, which are based on European Data Protection Law.
If Ceridian's service is perceived to cause, or is otherwise unfavorably associated with, violations of privacy or data security requirements, it may subject it or its customers to public criticism and potential legal liability. Public concerns regarding PII processing, privacy and security may cause some of its customers’ end users to be less likely to visit their websites or otherwise interact with them. If enough end users choose not to visit Ceridian's customers’ websites or otherwise interact with them, Ceridian's customers could stop using its platform. This, in turn, may reduce the value of its services and slow or eliminate the growth of its business. Existing and potential privacy laws and regulations concerning privacy and data security and increasing sensitivity of consumers to unauthorized processing of PII may create negative public reactions to technologies, products, and services such as Ceridians.
Evolving and changing definitions of what constitutes PII and / or “Personal Data” within the United States, Canada, the European Union, and elsewhere, especially relating to the classification of internet protocol, or IP addresses, machine or device identification numbers, location data and other information, may limit or inhibit Ceridian's ability to operate or to expand its business. Future laws, regulations, standards and other obligations could impair Ceridian's ability to collect or to use information that it utilizes to provide email delivery and marketing services to its customers, thereby impairing its ability to maintain and to grow its customer base and to increase revenue. Future restrictions on the collection, use, sharing, or disclosure of our customers’ data or additional requirements for express or implied consent of customers for the use and disclosure of such information may limit our ability to develop new services and features.
Privacy concerns and laws or other domestic or foreign data protection regulations may reduce the effectiveness of Ceridian's applications, which could have a material adverse effect on our business, financial condition, and results of operations.
Ceridian's customers can use its applications to collect, to use, and to store PII regarding their employees, independent contractors, and job applicants. Federal, state, and foreign government bodies and agencies have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage and disclosure of PII obtained from individuals. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of Ceridian's customers, or to its business directly, may limit the use and adoption of Ceridian's applications and reduce overall demand, or lead to significant fines, penalties, or liabilities for any non-compliance with such privacy laws. Furthermore, privacy concerns may cause Ceridian's customers’ workers to resist providing PII necessary to allow its customers to use its applications effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of Ceridian's applications in certain industries.
All of these domestic and international legislative and regulatory initiatives may adversely affect Ceridian's customers’ ability to process, to handle, to store, to use, and to transmit demographic information and PII from their employees, independent contractors, job applicants, customers, and suppliers, which could reduce demand for our applications. The European Union and many countries in Europe have stringent privacy laws and regulations, which may impact Ceridian's ability to profitably operate in certain European countries.
Further, international data protection regulations trending toward increased localized data residency rules make transfers from outside the regulation’s jurisdiction increasingly complex and may impact our ability to deliver solutions that meet all customers’ needs. If the processing of PII were to be further curtailed in this manner, our solutions could be less effective, which may reduce demand for our applications, which could have a material adverse effect on our business, financial condition, and results of operations.
In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional, or different self-regulatory standards that may place additional burdens on us. If the processing of PII were to be

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curtailed in this manner, our solutions would be less effective, which may reduce demand for our applications, which could have a material adverse effect on our business, financial condition, and results of operations.
Ceridian's indebtedness could have a material adverse effect on our business, financial condition and results of operations.
Ceridian's outstanding indebtedness as of December 31, 2018 consisted of (i) a Senior Term Loan in the original principal amount of $680.0 million and (ii) a $300.0 million committed Revolving Facility. The Senior Credit Facilities are secured substantially by all of our assets. The Senior Term Loan has a maturity date of April 30, 2025, and the Revolving Facility has a maturity date of April 30, 2023. As of December 31, 2018, we had $678.3 million outstanding principal under our Senior Term Loan and no principal outstanding under our Revolving Facility.
Ceridian's outstanding indebtedness and any additional indebtedness it incurs may have important consequences for Ceridian, including, without limitation, that:
Ceridian may be required to use a substantial portion of its cash flow to pay the principal of and interest on its indebtedness;
Ceridian's indebtedness and leverage may increase its vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressures;
Ceridian's ability to obtain additional financing for working capital, capital expenditures, acquisitions and for general corporate and other purposes may be limited;
Ceridian's indebtedness may expose it to the risk of increased interest rates because certain of its borrowings, including and most significantly its borrowings under its Senior Credit Facilities, are at variable rates of interest;
Ceridian's indebtedness may prevent it from taking advantage of business opportunities as they arise or successfully carrying out its plans to expand its business; and
Ceridian's flexibility in planning for, or reacting to, changes in its business and industry may be limited.
Under the terms of the agreements governing Ceridian's Senior Credit Facilities, Ceridian is required to comply with specified operating covenants and, under certain circumstances, a financial covenant applicable to the Revolving Facility, which may limit Ceridian's ability to operate its business as it otherwise might operate it. For example, the obligations under the Senior Credit Facilities may be accelerated upon the occurrence of an event of default, including, without limitation, payment defaults, cross-defaults to certain material indebtedness, covenant defaults, material inaccuracy of representations and warranties, bankruptcy events, material judgments, material defects with respect to guarantees and collateral, and change of control. If not cured, an event of default could result in any amounts outstanding, including any accrued interest and unpaid fees, becoming immediately due and payable, which would require Ceridian, among other things, to seek additional financing in the debt or equity markets, to refinance or restructure all or a portion of its indebtedness, to sell selected assets, and/or to reduce or to delay planned capital or operating expenditures. Such measures might not be sufficient to enable Ceridian to service its debt, and any such financing or refinancing might not be available on economically favorable terms or at all. If Ceridian is not able to generate sufficient cash flows to meet its debt service obligations or are forced to take additional measures to be able to service its indebtedness, it could have a material adverse effect on our business, financial condition, and results of operations.
An information security breach of Ceridian's systems or the loss of, or unauthorized access to, customer information, failure to comply with the U.S. Federal Trade Commission’s (“FTC”) ongoing consent order regarding data protection, or a system disruption could have a material adverse effect on our business, market brand, financial condition, and results of operations.
Ceridian's business is dependent on its payroll, transaction, financial, accounting, and other data processing systems. Ceridian relies on these systems to process, on a daily and time sensitive basis, a large number of complicated transactions. Ceridian electronically receives, processes, stores, and transmits data and personally identifiable information (“PII”) about its customers and their employees, as well as its vendors and other business partners, including names, social security numbers, and checking account numbers. Ceridian keeps this information confidential. However, Ceridian's websites, networks, applications and technologies, and other information systems may be targeted for sabotage, disruption, or data misappropriation. The uninterrupted operation of Ceridian's information systems and Ceridian's ability to maintain the confidentiality of PII and other customer and individual information that resides on its systems are critical to the successful operation of Ceridian's business. While Ceridian has information security and business continuity programs, these plans may not be sufficient to ensure the uninterrupted operation of its systems or to prevent unauthorized access to the systems by unauthorized third parties. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and may not be recognized until launched against a target, Ceridian may be unable to anticipate these techniques or to implement adequate preventative measures. These concerns about information security are increased with the mounting sophistication of social engineering. Ceridian's network security hardening may be bypassed by phishing and other social engineering techniques that seek to use end user behaviors to distribute computer viruses and malware into its systems, which might disrupt Ceridian's delivery of services and make them unavailable, and might also

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result in the disclosure or misappropriation of PII or other confidential or sensitive information. In addition, a significant cyber security breach could prevent or delay Ceridian's ability to process payment transactions.
Any information security breach in Ceridian's business processes or of its processing systems has the potential to impact its customer information and its financial reporting capabilities, which could result in the potential loss of business and Ceridian's ability to accurately report financial results. If any of these systems fail to operate properly or become disabled even for a brief period of time, Ceridian could potentially miss a critical filing period, resulting in potential fees and penalties, or lose control of customer data, all of which could result in financial loss, a disruption of Ceridian's businesses, liability to customers, regulatory intervention, or damage to its reputation. The continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. If Ceridian's security measures are breached as a result of third party action, employee or subcontractor error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to customer data, Ceridian's reputation may be damaged, its business may suffer, and Ceridian could incur significant liability. Ceridian may also experience security breaches that may remain undetected for an extended period of time. Techniques used to obtain unauthorized access or to sabotage systems change frequently and are growing increasingly sophisticated. As a result, Ceridian may be unable to anticipate these techniques or to implement adequate preventative measures.
This environment demands that Ceridian continuously improve its design and coordination of security controls throughout the company. Despite these efforts, it is possible that Ceridian's security controls over data, training, and other practices it follows may not prevent the improper disclosure of PII or other confidential information. Any issue 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 Ceridian's market reputation, litigation, and regulatory investigation and penalties. For example, in December 2009 a criminal hacked into Ceridian's discontinued U.S. payroll application. Following receipt of an “access letter” in May 2010 from the FTC for a non-public review of the matter, Ceridian worked with the FTC and entered into a twenty-year consent order which became final in June 2011. Ceridian conceded no wrongdoing in the order and they were not subject to any monetary fines or penalties. However, in connection with the order, Ceridian is required to, among other things, maintain a comprehensive information security program that is reasonable and appropriate for its size, and complexity, and for the type of PII it collects. Ceridian is also required to have portions of its security program, which apply to certain segments of its U.S. business, reviewed by an independent third party on a biennial basis. Maintaining, updating, monitoring, and revising an information security program in an effort to ensure that it remains reasonable and appropriate in light of changes in security threats, changes in technology, and security vulnerabilities that arise from legacy systems is time-consuming and complex, and is an ongoing effort.
There may be other such security vulnerabilities that come to Ceridian's attention. The independent third party that reviews Ceridian's security program pursuant to the FTC consent order may determine that the existence of vulnerabilities in its security controls or the failure to remedy them in a timeframe they deem appropriate means that its security program does not provide a reasonable level of assurance that the security, confidentiality, and integrity of PII is protected by Ceridian (or that there was a failure to protect at some point in the reporting period). While Ceridian has taken and continues to take steps to ensure compliance with the consent order, if they are determined not to be in compliance with the consent order, or if any new breaches of security occur, the FTC may take enforcement actions or other parties may initiate a lawsuit. Any such resulting fines and penalties could have a material adverse effect on Ceridian's liquidity and financial results, and any reputational damage therefrom could adversely affect Ceridian's relationships with its existing customers and its ability to attain new customers. Ceridian's continued investment in the security of its technology systems, continued efforts to improve the controls within its technology systems, business processes improvements and the enhancements to its culture of information security may not successfully prevent attempts to breach Ceridian's security or unauthorized access to PII or other confidential, sensitive or proprietary information. In addition, in the event of a catastrophic occurrence, either natural or man-made, Ceridian's ability to protect its infrastructure, including PII and other customer data, and to maintain ongoing operations could be significantly impaired. Ceridian's business continuity and disaster recovery plans and strategies may not be successful in mitigating the effects of a catastrophic occurrence. Insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, Ceridian's insurance policies may not cover all claims made against them, and defending a suit, regardless of its merit, could be costly and divert management’s attention. If Ceridian's security is breached, if PII or other confidential information is accessed, if Ceridian fails to comply with the consent order or if Ceridian experiences a catastrophic occurrence, it could have a material adverse effect on its business, financial condition, and results of operations, and ultimately the value of our investment in Ceridian.
Litigation and regulatory investigations aimed at Ceridian or resulting from actions of its predecessor may result in significant financial losses and harm to its reputation.
Ceridian faces risk of litigation, regulatory investigations, and similar actions in the ordinary course of its business, including the risk of lawsuits and other legal actions relating to breaches of contractual obligations or tortious claims from customers or other third parties, fines, penalties, interest, or other damages as a result of erroneous transactions, breach of data privacy laws, or lawsuits and legal actions related to Ceridian's predecessors. Any such action may include claims for substantial or unspecified compensatory damages, as well as civil, regulatory, or criminal proceedings against Ceridian's directors, officers, or employees;

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and the probability and amount of liability, if any, may remain unknown for significant periods of time. Ceridian may be also subject to various regulatory inquiries, such as information requests, and book and records examinations, from regulators and other authorities in the geographical markets in which Ceridian operates. A substantial liability arising from a lawsuit judgment or settlement or a significant regulatory action against Ceridian or a disruption in its business arising from adverse adjudications in proceedings against its directors, officers, or employees could have a material adverse effect on Ceridian's business, financial condition, and results or operations and ultimately the value of our investment in Ceridian.
Additionally, Ceridian is subject to claims and investigations as a result of its predecessor, Control Data Corporation (“CDC”), Ceridian Corporation, and other former entities for whom Ceridian is successor-in-interest with respect to assumed liabilities. For example, in September 1989, CDC became party to an environmental matters agreement with Seagate Technology plc (“Seagate”) related to groundwater contamination on a parcel of real estate in Omaha, Nebraska sold by CDC to Seagate. In February 1988, CDC entered into an arrangement with Northern Engraving Corporation and the Minnesota Pollution Control Agency in relation to groundwater contamination at a site in Spring Grove, Minnesota. In August 2017, Ceridian received notice of a mesothelioma claim related to CDC. Although Ceridian is fully reserved for the groundwater contamination liabilities, Ceridian cannot at this time accurately assess the merits of these claims, and cannot be certain if additional liabilities related to such predecessor companies will surface. Moreover, even if Ceridian ultimately prevails in or settles any litigation, regulatory action, or investigation, Ceridian could suffer significant harm to its reputation, which could materially affect its ability to attract new customers, to retain current customers, and to recruit and to retain employees, which could have a material adverse effect on Ceridian's business, financial condition, and results of operations, and ultimately, the value of our investment in Ceridian.
The failure of Ceridian's business to comply with applicable laws could result in substantial taxes, penalties and liabilities that could have a material adverse effect on our business, financial condition and results of operations.
Ceridian is subject to various laws and regulations, and its failure to comply with such laws and regulations could adversely affect our business. For example, Ceridian's customers remit employer and employee tax funds to its businesses. Ceridian processes the data received from its customers and remits the funds along with a tax return to the appropriate taxing authorities when due. Under various service agreements with its customers, Ceridian assumes financial responsibility for the payment of the taxes, penalties and liabilities assessed against its customers arising out of its failure 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 Ceridian. These taxes, penalties and liabilities could, in some cases, be substantial and could adversely affect Ceridian's business and operating results. Additionally, Ceridian's failure to fulfill its obligations under its customer agreements could adversely affect Ceridian's reputation, its relationship with its customers and its ability to gain new customers. In addition, mistakes may occur in connection with this service. Ceridian and its customers may be subject to penalties imposed by tax authorities for late filings or underpayment of taxes.
Ceridian is subject to risks related to its international operations, which could have a material adverse effect on our business, financial condition and results of operations.
Approximately 30% of Ceridian's revenue for the year ended December 31, 2018 was obtained from companies headquartered outside of the United States, primarily from Canada. Ceridian's Canada operations provide certain HCM solutions for its Canadian customers. Ceridian is continuing to expand its international Cloud solutions into other countries. As such, Ceridian's international operations are subject to risks that could adversely affect those operations or its business as a whole, including:
costs of localizing products and services for foreign customers;
difficulties in managing and staffing international operations;
difficulties and increased expenses related to introducing corporate policies and controls in our international operations;
difficulties with or inability to engage global partners;
longer sales and payment cycles;
the burdens of complying with a wide variety of foreign laws;
compliance with applicable anti-bribery laws, including the Foreign Corrupt Practices Act;
additional regulatory compliance requirements;
exposure to legal jurisdictions that may not recognize or interpret customer contracts appropriately;
potentially adverse tax consequences, including the complexities of foreign value added tax systems, the tax cost on the repatriation of earnings, and changes in tax rates;
restrictions on transfer of funds, laws and business practices favoring local competitors;

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reduced or varied protection for intellectual property and other legal rights as compared to the United States;
practical difficulties in enforcing intellectual property and other rights outside of the United States;
exposure to local economic and political conditions; and
changes in currency exchange rates, and in particular, changes in the currency exchange rate between U.S. dollars and Canadian dollars.
In addition, we anticipate that customers and potential customers may increasingly require and demand that a single vendor provide HCM solutions and services for their employees in a number of countries. If we are unable to provide the required services on a multinational 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 multinational strategy, additional investment and efforts may be necessary to implement such strategy. Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.

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Factors Relating to T-System
The healthcare industry is heavily regulated at the local, state and federal levels. T-System's failure to comply with regulatory requirements could create liability for us, result in adverse publicity and negatively affect T-System's business.
The healthcare industry is heavily regulated and is constantly evolving due to the changing political, legislative and regulatory landscapes. In some instances, to the extent that they are subject to these laws and regulations, these regulations directly impact T-System's business. However, these regulations also impact T-System's business indirectly as, in a number of circumstances, T-System's solutions and services must be capable of being used by its customers in a way that complies with those laws and regulations, even though T-System may not be directly regulated by the specific healthcare laws and regulations. There is a significant number of wide-ranging regulations, including regulations in the areas of healthcare fraud, e-prescribing, claims processing and transmission, medical devices, the security and privacy of patient data, the American Reinvestment and Recovery Act ("ARRA") meaningful use program, and interoperability standards, that may be directly or indirectly applicable to T-System's operations and relationships or the business practices of its customers.
Economic, market and other factors may cause a decline in spending for information technology and services by T-System's current and prospective customers which may result in less demand for its products, lower prices and, consequently, lower revenues and a lower revenue growth rate.
The purchase of T-System's information system involves a significant financial commitment by its customers. At the same time, the healthcare industry faces significant financial pressures that could adversely affect overall spending on healthcare information technology and services. For example, the recent actual and potential reductions in federal and state funding for Medicare and Medicaid has caused hospitals to reduce, eliminate or postpone information technology related and other spending. To the extent spending for healthcare information technology and services declines or increases slower than T-System's anticipates, demand for its products and services, as well as the prices it charges, could be adversely affected. Accordingly, we cannot assure you that T-System will be able to increase or maintain its revenues or its revenue growth rate.
If T-System's security is breached, it could be subject to liability, and clients could be deterred from using its products and services.
T-System's business relies on the secure electronic transmission, storage and hosting of sensitive information, including Protected Health Information ("PHI"), financial information and other sensitive information relating to its clients, company and workforce. As a result, T-System faces risk of a deliberate or unintentional incident involving unauthorized access to its computer systems or data that could result in the misappropriation or loss of assets or the disclosure of sensitive information, the corruption of data, or other disruption of its business operations. Similarly, denial-of-service, ransomware or other Internet-based attacks may range from mere vandalism of T-System's electronic systems to systematic theft of sensitive information and intellectual property. We believe that, in recent years, companies in T-System's industry have been targeted by such events with increasing frequency, primarily due to the increasing value of healthcare-related data.
Various risks could affect T-System's worldwide operations, exposing it to significant costs.
T-System conducts operations in the United States, India, and the Philippines, either directly or through its service providers. Such worldwide operations expose T-System to potential operational disruptions and costs as a result of a wide variety of events, including local inflation or economic downturn, currency exchange fluctuations, political turmoil, terrorism, labor issues, natural disasters, unfavorable intellectual property protection, and pandemics. Any such disruptions or costs could have a negative effect on T-System's ability to provide its services or meet its contractual obligations, the cost of its services, client and user satisfaction, its ability to attract or maintain clients and users, and, ultimately, its profits.
If T-System is unable to effectively grow revenue and profitability we may be required to record impairment charges to their assets, the carrying value of their goodwill or other intangible assets, which could have a material adverse effect on our financial condition and results of operations.
We assess the potential impairment of T-System's long-lived assets whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable. Factors considered include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner in which an asset is being used, an expectation that an asset will be disposed of significantly before the end of its previously estimated useful life and significant negative industry or economic trends. We annually review and compare the carrying value of intangible assets, including goodwill, to the fair value. We cannot accurately predict the amount and timing of any recorded impairment to T-System's assets and there could be a material adverse effect on our financial condition and results of operations.


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Factors Relating to the Company's Corporate and Other Businesses 
Competition and technology may erode the Corporate and Other business franchises and result in lower earnings, which could have a material adverse effect on our business, financial condition and results of operations.
Each of the Corporate and Other businesses face intense competitive pressures within markets in which they operate. While we will manage our businesses with the objective of achieving long-term sustainable growth by developing and strengthening competitive advantages, many factors, including market and technology changes, may erode or prevent the strengthening of competitive advantages. Accordingly, future operating results will depend to some degree on whether our Corporate and Other businesses are successful in protecting or enhancing their competitive advantages. If our Corporate and Other businesses are unsuccessful in these efforts, our periodic operating results in the future may decline from current levels.
The Corporate and Other businesses, from time to time in the ordinary course of business, are involved in legal proceedings and may experience unfavorable outcomes, which could have a material adverse effect on our business, financial condition and results of operations.
The Corporate and Other businesses, from time to time in the ordinary course of business, are involved in pending and threatened litigation matters, some of which include claims for punitive or exemplary damages. These companies are also subject to compliance with extensive government laws and regulations related to employment practices and policies. The Corporate and Other businesses may not be able to successfully resolve these types of conflicts to their satisfaction, and these matters may involve claims for substantial amounts of money or for other relief that might necessitate changes to their business or operations. The defense of these actions may be both time consuming and expensive and their outcomes cannot be predicted with certainty. Determining reserves for pending litigation is a complex, fact-intensive process that requires significant legal judgment. It is possible that unfavorable outcomes in one or more such proceedings could result in substantial payments that could have a material adverse effect on the Corporate and Other businesses' cash flows in a particular period or on our business, financial condition and results of operations.
Failure to comply with, or changes in, laws or regulations applicable to the Corporate and Other businesses could have a material adverse effect on our business, financial condition and results of operations.
The Corporate and Other businesses will be subject to certain laws, such as certain environmental laws, takeover laws, anti-bribery and anti-corruption laws, escheat or abandoned property laws, and antitrust laws, that may impose requirements on us and them as an affiliated group. As a result, we could become jointly and severally liable for all or part of fines imposed on our Corporate and Other businesses or be fined directly for violations committed by these businesses, and such fines imposed directly on us could be greater than those imposed on such businesses. Compliance with these laws or contracts could also require us to commit significant resources and capital towards information gathering and monitoring thereby increasing our operating costs.
Similarly, the Corporate and Other businesses may be subject to contractual obligations which may impose obligations or restrictions on their affiliates. The interpretation of such contractual provisions will depend on local laws. Given that we do not control all of the Corporate and Other businesses and that they generally operate independently of each other, there is a risk that we could contravene one or more of such laws, regulations and contractual arrangements due to limited access and opportunities to monitor compliance. In addition, compliance with these laws or contracts could require us to commit significant resources and capital towards information gathering and monitoring thereby increasing our operating costs.
We need qualified personnel to manage and operate our Corporate and Other businesses, which could have a material adverse effect on our business, financial condition and results of operations.
In our decentralized business model, we need qualified and competent management to direct day-to-day business activities of our Corporate and Other businesses. Our Corporate and Other businesses also need qualified and competent personnel in executing their business plans and serving their customers, suppliers and other stakeholders. Changes in demographics, training requirements and the unavailability of qualified personnel could negatively impact our Corporate and Other businesses' ability to meet demands of customers to supply goods and services. Recruiting and retaining qualified personnel is important to all of our Corporate and Other businesses' operations. Although our Corporate and Other businesses have adequate personnel for the current business environment, unpredictable increases in demand for goods and services may exacerbate the risk of not having sufficient numbers of trained personnel, which could have a negative impact on our operating results, financial condition and liquidity.

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Factors Relating to the Company's Investments 
Our management may seek growth through acquisitions in lines of business that will not necessarily be limited to our current areas of focus or geographic areas. This expansion of our business subjects us to associated risks, such as the diversion of management's attention and lack of experience in operating such businesses, which could have a material adverse effect on our business, financial condition and results of operations.
We may make acquisitions in lines of business that are not directly tied to or synergistic with our current portfolio companies. Accordingly, we may in the future acquire businesses in industries or geographic areas with which management is less familiar than we are with our current businesses.
The acquisition and integration of any business we may acquire involves a number of risks and may result in unforeseen operating difficulties and expenditures in assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired business. Furthermore, acquisitions may:
involve our entry into geographic or business markets in which we have little or no prior experience;
involve difficulties in retaining the customers of the acquired business; 
involve difficulties and expense associated with regulatory requirements, competition controls or investigations;
result in a delay or reduction of sales for both us and the business we acquire; and 
disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our current business.
To complete future acquisitions, we may determine that it is necessary to use a substantial amount of our cash or engage in equity or debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters that make it more difficult for us to obtain additional capital in the future and to pursue other business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all, which could limit our ability to engage in acquisitions. Moreover, we can make no assurances that the anticipated benefits of any acquisition, such as operating improvements or anticipated cost savings, would be realized or that we would not be exposed to unexpected liabilities in connection with any acquisition.
Further, an acquisition may negatively affect our operating results because it may require us to incur charges and substantial debt or other liabilities, may cause adverse tax consequences, substantial depreciation and amortization of deferred compensation charges, may require the amortization, write-down or impairment of amounts related to deferred compensation, goodwill and other intangible assets, may include substantial contingent consideration payments or other compensation that reduce our earnings during the quarter in which incurred, or may not generate sufficient financial return to offset acquisition costs.
We may often pursue investment opportunities that involve business, regulatory, legal or other complexities, which could have a material adverse effect on our business, financial condition and results of operations.
As an element of our investment style, we may pursue unusually complex investment opportunities. This could often take the form of substantial business, regulatory or legal complexity. Our tolerance for complexity may present risks, as such transactions can be more difficult, expensive and time-consuming to finance and execute; it may be more difficult to manage or realize value from the assets acquired in such transactions; and such transactions may sometimes entail a higher level of regulatory scrutiny or a greater risk of contingent liabilities. Any of these risks could harm our performance.
The loss of key personnel could impair our operating abilities and could have a material adverse effect on our business, financial condition and results of operations.
Our success will substantially depend on our ability to attract and retain key members of our senior management team and officers. If we lose one or more of these key employees, our operating results and in turn the value of our common stock could be materially adversely affected. Although we will have employment agreements with many of our officers, there can be no assurance that the entire term of the employment agreement will be served or that the employment agreement will be renewed upon expiration.
The due diligence process that we undertake in connection with new acquisitions may not reveal all facts that may be relevant in connection with an investment.
Before making acquisitions, we will conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, we may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisers, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an acquisition, we will rely on the resources

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available to us, including information provided by the target of the investment and, in some circumstances, third party investigations. The due diligence investigation that we will carry out with respect to any opportunity may not reveal or highlight all relevant facts (including fraud) that may be necessary or helpful in evaluating such opportunity. Moreover, such an investigation will not necessarily result in the investment being successful.
Factors Relating to the Split-Off
We may incur material costs as a result of our separation from FNF, which could have a material adverse effect on our business, financial condition and results of operations.
We will incur costs and expenses not previously incurred as a result of our separation from FNF. These increased costs and expenses may arise from various factors, including financial reporting or costs associated with complying with the federal securities laws (including compliance with the Sarbanes-Oxley Act of 2002, tax administration and human resources related functions.) Although FNF will continue to provide many of these services for us at no-cost (other than reimbursement of FNF's out-of-pocket costs and expenses) under the corporate services agreement for up to three years following the Split-Off. If the corporate services agreement is not mutually terminated by Cannae Holdings and FNF prior to the expiration of the initial three-year term, the corporate services agreement will automatically renew for successive one-year terms on mutually agreeable arm's length terms unless FNF and Cannae Holdings mutually agree to terminate the agreement. We cannot assure you that we will not incur third-party vendor costs or out-of-pocket expenses under the corporate services agreement that are material to our business. Moreover, we will have to develop internal departments/functions to perform the services at the end of the term of the corporate services agreement.
Our company has overlapping directors and officers with FNF, which may lead to conflicting interests.
Four of our executive officers, Brent B. Bickett, Richard L. Cox, Michael L. Gravelle and David Ducommun, are also employed by FNF or FNF's subsidiaries and two of our directors, William P. Foley, II and Richard N. Massey also serve on the boards of directors of FNF or its subsidiaries. Our executive officers and members of our board of directors have fiduciary duties to our stockholders. Likewise, any such persons who serve in similar capacities at FNF or any other public company have fiduciary duties to that company's stockholders. We also are party to a variety of related party agreements and relationships with FNF and certain of FNF's subsidiaries and FNF and subsidiaries of FNF have an ownership interest in Cannae Holdings. From time to time, we may enter into transactions with FNF and/or its respective subsidiaries or other affiliates. There can be no assurance that the terms of any such transactions will be as favorable to our company, FNF or any of our or its respective subsidiaries or affiliates as would be the case where there is no overlapping officer or director.
Our agreements with FNF were negotiated while we were a subsidiary of FNF.
We have a number of inter-company agreements covering matters such as tax sharing and our responsibility for certain liabilities previously undertaken by FNF for certain of our businesses. In addition, we have entered into (i) a corporate services agreement with FNF, pursuant to which FNF provides to us certain "back office" services at no-cost (other than reimbursement of FNF's out-of-pocket costs and expenses), (ii) a voting agreement with FNF, pursuant to which FNF agrees to appear or cause all shares of Cannae Holdings common stock that FNF or its subsidiaries, as applicable, own after the Split-Off to be counted as present at any meeting of the stockholders of Cannae Holdings, for the purpose of establishing a quorum, and agrees to vote all of such Cannae Holdings shares (or cause them to be voted) in the same manner as, and in the same proportion to, all shares voted by holders of Cannae Holdings common stock (other than FNF and its subsidiaries), (iii) a registration rights agreement, pursuant to which FNF or its subsidiaries, as applicable, received registration rights with respect to the shares in Cannae held by FNF and (iv) a revolver note with FNF, pursuant to which Cannae Holdings may borrow revolving loans, the proceeds of which may be used for investment purposes and working capital needs, from FNF from time to time in an aggregate amount not to exceed $100.0 million. The terms of all of these agreements were established while we were a wholly-owned subsidiary of FNF, and hence may not be the result of arm's length negotiations. We believe that the terms of these inter-company agreements are commercially reasonable and fair to all parties under the circumstances; however, conflicts could arise in the interpretation or any extension or renegotiation of the foregoing agreements after the Split-Off.
Factors Relating to the Company's Common Stock and the Securities Market 
Our charter, bylaws and provisions of Delaware law may discourage or prevent strategic transactions, including a takeover of our company, even if such a transaction would be beneficial to our stockholders.
Provisions contained in our charter and bylaws and provisions of the Delaware General Corporate Law ("DGCL"), could delay or prevent a third party from entering into a strategic transaction with us, as applicable, even if such a transaction would benefit our stockholders. For example, our charter and bylaws:
authorize the issuance of "blank check" preferred stock that could be issued by us upon approval of our board of directors to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive; 

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provide that directors may be removed from office only for cause and that any vacancy on our board of directors may only be filled by a majority of our directors then in office, which may make it difficult for other stockholders to reconstitute our board of directors;
provide that special meetings of the stockholders may be called only upon the request of a majority of our board of directors or by our executive chairman, chief executive officer or president, as applicable; 
require advance notice to be given by stockholders for any stockholder proposals or director nominees; 
provide that directors are elected by a plurality of the votes cast by stockholders, which results in each director nominee elected by a plurality winning his or her seat upon receiving one "for" vote; and 
provide that the board of directors is divided into three classes, as nearly equal in number as possible, with one class being elected at each annual meeting of stockholders, which could make it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of Cannae.
These restrictions and provisions could keep us from pursuing relationships with strategic partners and from raising additional capital, which could impede our ability to expand our business and strengthen our competitive position. These restrictions could also limit stockholder value by impeding a sale of our company.
Factors Relating to the Company's Investment in Dun & Bradstreet
Our investment in D&B may expose us to certain risks, which could have a material adverse effect on our results of operations or financial position.
On February 8, 2019, Cannae and an investment consortium (the “Consortium”) including CC Capital Partners LLC and Thomas H. Lee Partners along with other investors completed the previously announced acquisition of The Dun & Bradstreet Corporation, a Delaware corporation ("Dun & Bradstreet" or "D&B")(the "DNB Acquisition"). Of our previously disclosed $900.0 million commitment to purchase common equity of the parent of Dun & Bradstreet, we retained and funded a $505.6 million investment, representing 24.5% of the outstanding common equity, and syndicated the remainder to other investors.
Refer to discussion under Recent Developments in Item 7 of Part II of this Annual Report for further information on the DNB Acquisition and related transactions.
D&B’s strategy is designed to drive long-term sustainable growth as one global company delivering content through modern channels to serve customer needs with their forward-leaning culture. The achievement of their strategic initiatives depends on a number of factors, including but not limited to their ability to maintain the integrity of their brand and reputation, customer demand for their products, the effect of macro-economic challenges on their customers and vendors, their reliance on third parties to provide data and certain operational services and their ability to protect their information technology. D&B may not be able to successfully implement their strategic initiatives in accordance with their expectations, or in the timeframe they desire, which may result in us not realizing our expected return on investment, or a negative return on investment.
D&B has undertaken a strategic and operational review of their business to help them find ways to accelerate value realization, including certain cost saving initiatives. Based on this review, D&B intends to undertake certain strategic and cost saving initiatives, which they believe will help them to achieve this goal. They cannot guarantee they will be able to successfully implement these strategic or cost saving initiatives. Furthermore, they may be unable to achieve, or may be delayed in achieving, some or all of the benefits from such initiatives. Additionally, even if they achieve these goals, they may not receive the expected benefits of the initiatives, or the costs of implementing these initiatives could exceed the related benefits. If they are unable to successfully implement these initiatives, if these initiatives are not as successful as planned or if they do not receive the expected benefits of these initiatives, they may not be able to meet their value realization expectations, which may result in us not realizing our expected return on investment, or a negative return on investment.
We expect our investment will be accounted for under the equity method of accounting, through which we will record our proportionate share of their net earnings or loss in our consolidated financial statements. Equity-method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. If our equity-method investment is not recoverable, we may be required to record an impairment charge, which could have a material adverse effect on our results of operations.
Our company has overlapping directors with D&B, which may lead to conflicting interests.
Two of our directors, William P. Foley, II and Richard N. Massey also serve on the boards of directors of D&B or its parent and subsidiaries. From time to time, we may enter into transactions with D&B and/or its respective subsidiaries or other affiliates. There can be no assurance that the terms of any such transactions will be as favorable to our company, D&B or any of our or its respective subsidiaries or affiliates as would be the case where there is no overlapping director.

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Item 1B.
Unresolved Staff Comments
None.
Item 2.  
Properties
Our corporate headquarters are located in Las Vegas, Nevada in leased facilities.
Restaurant Group. The Restaurant Group's headquarters are located in Nashville, Tennessee with other office locations in Woburn, Massachusetts and Denver, Colorado. The majority of the restaurants are leased from third parties, and are located in 40 states throughout the United States and Guam. Substantially all of our Restaurant Group's revenues are generated in those states.
Ceridian. The principal executive offices of Ceridian are located in Minneapolis, Minnesota and Toronto, Ontario. As of December 31, 2018, Ceridian's principal computer and office facilities are located in the metropolitan areas of Minneapolis, Minnesota; Atlanta, Georgia; Los Angeles, California; Chicago, Illinois; St. Petersburg, Florida; St. Louis, Missouri; Honolulu, Hawaii; Louisville, Kentucky; in Winnipeg, Manitoba, Montreal, Quebec, Ottawa, Ontario, Calgary, Alberta, Halifax, Nova Scotia, Charlottetown, Prince Edward Island, Canada; and in Ebene, Mauritius.
T-System. T-System's headquarters are located in Dallas, Texas with other leased offices located in Kansas City, Kansas.
Corporate and Other. The Golf & Real Estate segment of CTR owns a 1,800 acre ranch-style luxury resort and residential community in Bend/Powell Butte, Oregon and an 18-hole championship golf facility located in Rock Creek, Idaho.
Item 3.
Legal Proceedings  
For a description of our legal proceedings see discussion under Legal and Regulatory Contingencies in Note M. Commitments and Contingencies to our Consolidated and Combined Financial Statements included in Item 8 of Part II of this Annual Report, which is incorporated by reference into this Part I, Item 3.

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PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock trades on The New York Stock Exchange under the trading symbol "CNNE".
Information concerning securities authorized for issuance under our equity compensation plans will be included in Item 12 of Part III of this Annual Report.
PERFORMANCE GRAPH
Set forth below is a graph comparing cumulative total shareholder return on our Cannae Holdings (CNNE) common stock against the cumulative total return on the S&P 500 Index and against the cumulative total return of a peer group index consisting of certain companies against which we compete for the period ending December 31, 2018. The peer group comparison has been weighted based on their stock market capitalization. The graph assumes an initial investment of $100.00 on November 20, 2017, the date which CNNE began trading.

cnneitem5graph2018a02.jpg

 
 
11/20/2017
12/31/2017
12/31/2018
 
 
 
 
 
Cannae Holdings, Inc.
 
100.00

92.60

93.09

S&P 500
 
100.00

104.21

99.64

Peer Group (1)
 
100.00

105.90

88.01

(1) This peer group consists of the following companies: Apollo Global Management, LLC, Ares Capital Corporation, BlackRock, Inc., The Blackstone Group L.P., The Carlyle Group L.P., Compass Diversified Holdings, Jefferies Financial Group Inc., KKR & Co. Inc., and Qurate Retail Inc.
On January 31, 2019, the last reported sale price of Cannae Holdings common stock on The New York Stock Exchange was $19.34 per share. We had approximately 5,073 shareholders of record of Cannae Holdings common stock.

23



Item 6. 
Selected Financial Data
The information set forth below should be read in conjunction with the Consolidated and Combined Financial Statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. Certain reclassifications have been made to the prior year amounts to conform with the 2018 presentation.
On June 6, 2017, we closed on the sale of OneDigital for $560.0 million in an all-cash transaction. The operations of One Digital are included in discontinued operations for the years ended December 31, 2017, 2016 and 2015. We recognized a pre-tax gain of $276.0 million on the sale and $126.3 million in income tax expense, which are included in Net earnings from discontinued operations on the Consolidated and Combined Statement of Operations for the quarter ended June 30, 2017.
On September 28, 2015, we completed the distribution of J. Alexander's to FNFV shareholders. The results of J. Alexander's operations are included through the distribution date.
On December 31, 2014, we completed the distribution of Remy International, Inc. to FNFV shareholders. The results of operations of Remy are included in discontinued operations for the year ended December 31, 2014.
Summary Balance Sheet Data:
 
As of December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(in millions)
Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
323.0

 
$
245.6

 
$
141.7

 
$
273.8

 
203.0

Total assets
1,459.5

 
1,487.2

 
1,473.3

 
1,469.5

 
1,918.1

Notes payable, long term
42.2

 
12.7

 
93.3

 
92.8

 
113.0

Equity
1,199.7

 
1,153.1

 
1,009.8

 
1,056.5

 
1,483.6


24


Summary Statement of Operations Data:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(in millions, except per share amounts)
Operating Data:
 

 
 

 
 

 
 

 
 

Operating revenue
$
1,205.4

 
$
1,169.5

 
$
1,178.4

 
$
1,414.7

 
$
1,453.8

Expenses:
 

 
 

 
 

 
 

 
 

Operating Expenses:
 
 
 
 
 
 
 
 
 
Cost of restaurant revenues
991.3

 
991.0

 
984.1

 
1,195.2

 
1,219.6

Personnel costs
170.3

 
103.2

 
68.3

 
85.4

 
110.7

Depreciation and amortization
61.3

 
49.3

 
44.7

 
49.8

 
53.2

Other operating expenses, including asset impairments
132.3

 
104.4

 
83.5

 
96.4

 
90.6

Total operating expenses
1,355.2

 
1,247.9

 
1,180.6

 
1,426.8

 
1,474.1

Operating loss
(149.8
)
 
(78.4
)
 
(2.2
)
 
(12.1
)
 
(20.3
)
Total other income (expense), net
168.4

 
3.2

 
7.4

 
8.3

 
(1.4
)
Earnings (loss) before income taxes, equity in (loss) earnings of unconsolidated affiliates, and noncontrolling interest
18.6

 
(75.2
)
 
5.2

 
(3.8
)
 
(21.7
)
Income tax expense (benefit)
13.1

 
(16.6
)
 
(10.4
)
 
(19.7
)
 
160.3

Earnings (loss) before equity in (loss) earnings of unconsolidated affiliates
5.5

 
(58.6
)
 
15.6

 
15.9

 
(182.0
)
Equity in (loss) earnings of unconsolidated affiliates
(16.1
)
 
3.4

 
(29.5
)
 
(26.0
)
 
431.9

(Loss) earnings from continuing operations, net of tax
(10.6
)
 
(55.2
)
 
(13.9
)
 
(10.1
)
 
249.9

Earnings from discontinued operations, net of tax

 
147.7

 
2.0

 
2.8

 
10.1

Net (loss) earnings
(10.6
)
 
92.5

 
(11.9
)
 
(7.3
)
 
260.0

Less: Net (loss) earnings attributable to noncontrolling interests
(38.2
)
 
(16.3
)
 
0.5

 
15.6

 
3.8

Net earnings (loss) attributable to Cannae Holdings
$
27.6

 
$
108.8

 
$
(12.4
)
 
$
(22.9
)
 
$
256.2

 
 
 
 
 
 
 
 
 
 
Per Share Data:
 

 
 

 
 

 
 

 
 

Basic
 
 
 
 
 
 
 
 


Net earnings (loss) from continuing operations attributable to Cannae Holdings common shareholders (1)
$
0.39

 
$
(0.55
)
 
$
(0.21
)
 
$
(0.36
)
 
$
3.49

Net earnings from discontinued operations attributable to Cannae Holdings common shareholders (1)

 
2.09

 
0.03

 
0.04

 
0.14

Net earnings (loss) per share attributable to Cannae Holdings common shareholders (1)
$
0.39

 
$
1.54

 
$
(0.18
)
 
$
(0.32
)
 
$
3.63

Weighted average shares outstanding Cannae Holdings, basic basis (1)
71.2

 
70.6

 
70.6

 
70.6

 
70.6

Diluted
 
 
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations attributable to Cannae Holdings common shareholders (1)
$
0.39

 
$
(0.55
)
 
$
(0.21
)
 
$
(0.36
)
 
$
3.49

Net earnings from discontinued operations attributable to Cannae Holdings common shareholders (1)

 
2.09

 
0.03

 
0.04

 
0.14

Net earnings (loss) per share attributable to Cannae Holdings common shareholders (1)
$
0.39

 
$
1.54

 
$
(0.18
)
 
$
(0.32
)
 
$
3.63

Weighted average shares outstanding Cannae Holdings, diluted basis (1)
71.3

 
70.6

 
70.6

 
70.6

 
70.6

Cash dividends paid per share Cannae Holdings common stock
$

 
$

 
$

 
$

 
$

Book value per share Cannae Holdings (1)(2)
$
16.61

 
$
16.33

 
$
14.30

 
$
14.96

 
$
21.01

______________________________________
(1)
On November 17, 2017, the date of the consummation of the Split-Off, 70.6 million common shares of CNNE were distributed to FNFV Group shareholders. For comparative purposes, the weighted average number of common shares outstanding and basic and diluted earnings per share for the years ended December 31, 2016, 2015, and 2014 were calculated using the number of shares distributed as if those shares were issued and outstanding beginning January 1, 2014.
(2)
Book value per share is calculated as equity at December 31 of each year presented divided by actual shares outstanding at December 31 of each year presented.

25


Summary Quarterly Financial Data (Unaudited)
Selected quarterly financial data is as follows:
 
Quarter Ended
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
(in millions, except per share amounts)
2018:
 

 
 

 
 

 
 

Operating revenue (1)
$
292.4

 
$
302.3

 
$
293.5

 
$
317.2

(Loss) earnings before income taxes, equity in (loss) earnings of unconsolidated affiliates, and noncontrolling interest (1)
(9.7
)
 
(0.2
)
 
(12.8
)
 
41.3

Net (loss) earnings attributable to Cannae Holdings (1)
$
(1.1
)
 
$
(19.8
)
 
$
1.5

 
$
47.0

Basic (loss) earnings per share attributable to Cannae Holdings common shareholders (1)
$
(0.02
)
 
$
(0.28
)
 
$
0.02

 
$
0.66

Diluted (loss) earnings per share attributable to Cannae Holdings common shareholders (1)
$
(0.02
)
 
$
(0.28
)
 
$
0.02

 
$
0.66

Cash dividends paid per share Cannae Holdings common stock
$

 
$

 
$

 
$

2017:
 
 
 
 
 
 
 
Operating revenue
$
275.3

 
$
295.5

 
$
281.3

 
$
317.4

(Loss) earnings before income taxes, equity in losses of unconsolidated affiliates, and noncontrolling interest
(2.2
)
 
(35.4
)
 
(21.2
)
 
(16.4
)
Net earnings (loss) attributable to Cannae Holdings
$
0.5

 
$
126.4

 
$
(16.6
)
 
$
(1.5
)
Basic earnings (loss) per share attributable to Cannae Holdings common shareholders
$

 
$
1.79

 
$
(0.24
)
 
$
(0.02
)
Diluted earnings (loss) per share attributable to Cannae Holdings common shareholders
$

 
$
1.79

 
$
(0.24
)
 
$
(0.02
)
Cash dividends paid per share Cannae Holdings common stock
$

 
$

 
$

 
$

(1)
Previously reported quarterly information is different from the previously reported amounts in our Form 10-Qs for the periods ended March 31, June 30 and September 30, 2018 due to immaterial corrections made during the fourth quarter of 2018. Operating revenue for the quarters ended March 31 and June 30, 2018 decreased by $1.5 million and $1.6 million, respectively, from the previously reported amounts. (Loss) earnings before income taxes, equity in (loss) earnings of unconsolidated affiliates, and noncontrolling interest for the quarters ended March 31, June 30, and September 30, 2018 (increased) decreased by $(0.9) million, $(1.2) million, and $0.6 million, respectively from the previously reported amounts. Net (loss) earnings attributable to Cannae Holdings for the quarters ended March 31, June 30, and September 30, 2018 increased (decreased) by $0.6 million, $(1.0) million, and $0.4 million, respectively from the previously reported amounts. Basic loss per share attributable to Cannae Holdings common shareholders and Diluted loss per share attributable to Cannae Holdings common shareholders for the quarter ended June 30, 2018 increased by $0.02 per share from the previously reported amounts. The corrections relate to the immaterial correction of errors discussed further in Note A Business and Summary of Significant Accounting Policies to our Consolidated and Combined Financial Statements.



26


Item 7.  
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated and Combined Financial Statements and the Notes thereto and Selected Financial Data included elsewhere in this Form 10-K.
Overview
For a description of our business, including descriptions of segments, see the discussion under Business in Item 1 of Part I of this Annual Report, which is incorporated by reference into this Part II, Item 7 of this Annual Report.
Recent Developments
Dun & Bradstreet
On August 8, 2018, we entered into an agreement to partner with an investment consortium (the “Consortium”) including CC Capital Partners LLC and Thomas H. Lee Partners along with other investors to acquire The Dun & Bradstreet Corporation, a Delaware corporation ("Dun & Bradstreet") (the "DNB Acquisition"). Contemporaneously, Dun & Bradstreet entered into an Agreement and Plan of Merger (the "Merger Agreement") by and between Dun & Bradstreet, Star Parent, L.P. ("Star"), a Delaware limited partnership, and Star Merger Sub, Inc. ("Merger Sub"), a Delaware corporation and a wholly owned subsidiary of Star, and upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Dun & Bradstreet (the "Merger"), with Dun & Bradstreet continuing as the surviving company in the Merger. Under the terms of the Merger, Dun & Bradstreet shareholders received $145.00 in cash for each share of common stock they owned at closing.
On February 8, 2019, the DNB Acquisition closed and was financed through a combination of $2.1 billion of common equity financing provided by the Consortium, $1.1 billion of preferred equity from preferred equity sources and $4.0 billion of debt financing from various lenders.
Of our previously disclosed $900.0 million commitment to purchase common equity of Star and Dun & Bradstreet, we retained and funded a $505.6 million investment, representing 24.5% of the outstanding common equity, and syndicated the remainder to other investors. We expect to account for the DNB Investment as an equity method investment which will result in our initial investment being recorded as an Investment in unconsolidated affiliate on our balance sheet and our portion (24.5%) of Dun & Bradstreet's periodic earnings or losses to be included in Equity in earnings (losses) of unconsolidated affiliates, outside of operating income or loss, on our statement of operations.
Dun & Bradstreet is a global leader in commercial data and analytics and provides various services helping companies improve their operational performance.
Ceridian
On April 26, 2018, Ceridian's previously announced registration statement on Form S-1 was declared effective by the SEC and Ceridian priced its initial public offering of 21,000,000 shares of common stock at a price of $22.00 per share (the "Ceridian IPO"). In addition, the underwriters of the Ceridian IPO were granted and exercised a 30-day option to purchase up to an additional 3,150,000 shares at the initial public offering price, less underwriting discounts and commissions. The New York Stock Exchange ("NYSE") and the Toronto Stock Exchange ("TSX") have approved the listing of Ceridian's shares. Ceridian’s shares trade on the NYSE and TSX under the ticker symbol “CDAY.”
In accordance with the terms of our management agreement with Ceridian, the agreement was terminated upon closing of the Ceridian IPO. The termination resulted in a termination fee of $5.6 million which was paid to us on May 1, 2018 and is included in Other operating revenue on the Consolidated and Combined Statement of Operations for the year ended December 31, 2018.
Subsequent to the Ceridian IPO, and participation in a concurrent private placement investment in which we acquired 1,521,030 shares of CDAY representing an investment of $33.4 million from funds previously invested by us and held at Ceridian, we owned a total of 37,135,921 shares of CDAY. We recorded a gain of $63.2 million related to our change in ownership of Ceridian which is included in Realized gains, net on the Consolidated and Combined Statement of Operations for the year ended December 31, 2018. The recorded gain is net of $21.1 million of losses (exclusive of $4.4 million of income tax benefit) related to reclassification adjustments from Other comprehensive income.
On May 7, 2018, the Compensation Committee of the Board of Directors approved a success bonus of up to $67.1 million resulting from the successful Ceridian IPO. The success bonus was calculated based on 10% of the value of our investment in Ceridian in excess of our basis in Ceridian prior to the Ceridian IPO. The success bonus was paid to certain members of the Board of Directors and management who contributed to acquiring and growing Ceridian over Cannae’s and its predecessor’s ten year ownership of Ceridian, and was paid in a combination of cash and stock. On May 16, 2018, we issued 991,906 shares of our common stock for the stock portion of the bonuses. The remaining $46.9 million was paid in cash during the year ended December 31, 2018. The expense resulting from the success bonus is included in Personnel expense on the Consolidated and Combined Statement of Operations for the year ended December 31, 2018.

27


LifeWorks Corporation Ltd. ("LifeWorks"), a former minority-owned subsidiary of Ceridian, was distributed pro-rata to Ceridian shareholders contemporaneously with the Ceridian IPO. On July 27, 2018, LifeWorks was sold to Morneau Shepell, Inc. for $325.0 million. Cannae's cash proceeds for its equity interest in LifeWorks were $56.2 million. We recorded a gain of $24.0 million on the sale which is included in Realized gains (losses), net on the Consolidated and Combined Statements of Operations for the year ended December 31, 2018.
On November 16, 2018, we completed the sale of 4,396,694 shares of common stock of Ceridian as part of an underwritten secondary public offering by certain stockholders of Ceridian at a public offering price of $36.00 per share. In connection with the sale, the Company received $34.695 per share (after the applicable underwriter discount) for aggregate proceeds of $152.5 million. We recorded a gain of $92.6 million on the sale which is included in Realized gains (losses), net on the Consolidated and Combined Statements of Operations for the year ended December 31, 2018. Subsequent to the sale, we own 23.5% of the outstanding common stock of Ceridian.
Restaurant Group
On November 6, 2018, we entered into various definitive agreements with Fidelity Newport Holdings, LLC ("FNH", a subsidiary of the Company and the direct parent of ABRH), ABRH and 99 Restaurants (together with its direct and indirect subsidiaries, the "99 Companies") pursuant to which the following occurred (collectively, the "ABRH-99 Restructuring"): (i) ABRH and certain of its direct and indirect subsidiaries transferred to the applicable 99 Companies those assets principally associated with the 99 Restaurants brand that were not already owned by the 99 Companies; (ii) the existing intercompany credit facility (with an outstanding balance of approximately $133.0 million in principal, plus accrued but unpaid interest and fees) under which we were the sole lender to ABRH, for the benefit of ABRH and its subsidiaries, including the 99 Companies (the “Intercompany Credit Facility”), was modified so that 99 Holdings became the direct borrower (and ABRH and all of its direct and indirect subsidiaries, other than the 99 Companies, were released from their obligations thereunder); (iii) $100.0 million of the outstanding balance due to Cannae under the Intercompany Credit Facility was exchanged for 66.7% of the direct equity interest in 99 Holdings (with ABRH being the direct holder of the remaining 33.3% of the equity interests in 99 Holdings); (iv) FNH paid a facilitation fee to us in the form of 18,023,407 Class A units of FNH and (v) ABRH agreed to continue to provide support services to the 99 Companies. As a result of the ABRH-99 Restructuring, Cannae (x) owns 65.4% of FNH directly and (y) 88.5% of 99 Holdings beneficially (through a combination of its directly held equity interests in 99 Holdings and the equity interests it holds in FNH).
On December 21, 2018, a wholly-owned subsidiary of 99 Restaurants entered into a credit agreement (the "99 Restaurants Credit Facility") with various banks. Proceeds of $36.2 million were received at closing and primarily used to repay the remaining balance outstanding under the Intercompany Credit Facility. See Note K for further details of the material terms of the agreements.
During the year ended December 31, 2018, we entered into a plan to sell certain real estate assets of ABRH including its corporate offices located in Nashville, Tennessee and Denver, Colorado. In conjunction with the plan of sale, we reclassified $9.3 million of assets held for sale from Property and equipment, net to Prepaid expenses and other current assets on the Consolidated and Combined Balance Sheet as of December 31, 2018.
Other Developments
On November 7, 2018, our wholly-owned subsidiary entered into a Margin Loan Agreement (the "Loan Agreement"), and certain other related agreements, with various lenders pursuant to which we may borrow up to $300.0 million (the "Margin Facility") in term loans at an interest rate of the three-month LIBOR plus an applicable margin. See Note K to our Consolidated and Combined Financial Statements included in Item 8 of Part II of this Annual Report for further discussion.
On August 10, 2018, our Board of Directors adopted a resolution increasing the size of the Company’s Board of Directors to eight, and elected Erika Meinhardt to serve on our Board of Directors. Ms. Meinhardt will serve in Class II of our Board of Directors, and her term will expire at the annual meeting of our shareholders to be held in 2019. Ms. Meinhardt has not been appointed to any committee of our Board.
Acquisitions and Dispositions
       The results of operations and financial position of the entities acquired during any year are included in the Consolidated and Combined Financial Statements from and after the date of acquisition. In the years ended December 31, 2017 and 2016, we made several acquisitions and dispositions of businesses. See Note B Acquisitions and Dispositions of our Consolidated and Combined Financial Statements included in Item 8 of Part II of this Annual Report for further discussion.
Related Party Transactions 
Our financial statements for all years presented reflect transactions with FNF. See Note R to our Consolidated and Combined Financial Statements included in Item 8 of Part II of this Annual Report for further discussion.


28


Business Trends and Conditions 
Restaurant Group
       The restaurant industry is highly competitive and is often affected by changes in consumer tastes and discretionary spending patterns; changes in general economic conditions; public safety conditions or concerns; demographic trends; weather conditions; the cost of food products, labor, energy and other operating costs; and governmental regulations. Higher labor costs due to state and local minimum wage increases and shopping pattern shifts to e-commerce and “ready to eat” grocery and convenience stores have had a negative impact on restaurant performance, particularly in the casual and family dining restaurants in which the company operates.  
The restaurant industry is also characterized by high capital investments for new restaurants and relatively high fixed or semi-variable restaurant operating expenses.  Because of the high fixed and semi-variable expenses, changes in sales in existing restaurants are generally expected to significantly affect restaurant profitability because many restaurant costs and expenses are not expected to change at the same rate as sales.  Restaurant profitability can also be negatively affected by inflationary and regulatory increases in operating costs and other factors.  The most significant commodities that may affect our cost of food and beverage are beef, seafood, poultry, and dairy, which accounted for approximately half of our overall cost of food and beverage in the past. Generally, temporary increases in these costs are not passed on to guests; however, in the past, we have adjusted menu prices to compensate for increased costs of a more permanent nature.
Average weekly sales per restaurant are typically higher in the first and fourth quarters than in other quarters, and we typically generate a disproportionate share of our earnings from operations in the first and fourth quarters. Holidays, severe weather and other disruptive conditions may impact sales volumes seasonally in some operating regions.
Our revenues in future periods will continue to be subject to these and other factors that are beyond our control and, as a result, are likely to fluctuate.
Ceridian
As of December 31, 2018, we own a 23.5% interest in Ceridian. Ceridian is a global company that offers a broad range of services and software designed to help employers more effectively manage employment processes, such as payroll, payroll related tax filing, human resource information systems, employee self-service, time and labor management, and recruitment and applicant screening. As a result of Ceridian's acquisition of Dayforce Corporation in 2012, which built Dayforce, a cloud HCM solution, Ceridian generally stopped actively selling its bureau solutions to new customers in the United States to focus its resources on expanding the Dayforce platform and growing cloud solutions. Through the year ended December 31, 2018, Ceridian’s cloud revenue is more than double its legacy bureau revenue and continues to grow.
    Over the last several years, a number of factors have significantly affected Ceridian’s results of operations, including its capital restructuring resulting from the initial acquisition by Thomas H. Lee Partners, L.P., a Delaware limited partnership ("THL") and FNFV, LLC of all of the outstanding equity of the Ceridian entities that was completed on November 9, 2007 (such acquisition, the "2007 Merger"), and the related interest expense, the accounting and purchase price allocations from the 2007 Merger, the acquisition in 2012 of the Dayforce legal entities, and Ceridian’s corporate restructuring following the 2013 separation of Ceridian HCM and Comdata. Other factors that have affected Ceridian’s results of operations over the last several years include the levels of customer trust funds held, transaction volumes, price increases, foreign currency exchange rates, interest rates (including interest earned on customer trust funds and interest expense on debt), customer employment levels, and its cost savings initiatives. Ceridian is subject to the risks arising from adverse changes in domestic and global economic conditions. Ceridian believes all of such factors may continue to significantly affect its results of operations.
T-System
The healthcare industry is impacted by several factors that can impact the business landscape in which T-System operates. In the past several years health care providers have shown a preference for single IT platforms across all venues. During this same time, there has been a push for interoperability across different healthcare IT systems due to the likelihood that a single patient will have medical information from multiple health care facilities or providers. Healthcare IT systems continue to face rising costs from factors such as legislative and regulatory reform, complex reimbursement models, and difficulties in electronic data exchange. These factors may continue to impact the results of T-System’s operations.
Critical Accounting Policies and Estimates 
Our consolidated financial statements are prepared in accordance with U.S. GAAP. See Note A to our Consolidated and Combined Financial Statements included in Item 8 of Part II of this Annual Report for discussion our significant accounting policies.
The accounting policies and estimates described below are those we consider critical in preparing our Consolidated and Combined Financial Statements. Management is required to make estimates and assumptions that can affect the reported amounts

29


of assets and liabilities and disclosures with respect to contingent assets and liabilities at the date of the Consolidated and Combined Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.
Valuation of Goodwill. Goodwill represents the excess of cost over fair value of identifiable net assets acquired and assumed in a business combination. Goodwill and other intangible assets with indefinite useful lives are reviewed for impairment annually or more frequently if circumstances indicate potential impairment, through a comparison of fair value to the carrying amount. We have the option to first assess goodwill for impairment based on a review of qualitative factors to determine if events and circumstances exist which will lead to a determination that the fair value of a reporting unit is greater than its carrying amount, prior to performing a full fair-value assessment. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test is unnecessary. However, if the Company concludes otherwise, then it is required to perform the quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. Goodwill impairment, if any, is measured as the amount by which a reporting unit’s carrying value exceeds its fair value.
We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on at least an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) annually in the fourth quarter (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
We use a combination of discounted cash flow analyses and market approaches to determine the fair value of each of our reporting units. Our discounted cash flow projections include assumptions for growth rates for revenues, costs and earnings, which are based on various long-range financial and operational plans of each reporting unit. Additionally, discount rates used in our goodwill analysis are based on weighted-average cost of capital, driven by comparable public companies, the prevailing interest rates, credit ratings, financing abilities and opportunities of each reporting unit, among other factors. Our market-based valuations utilize earnings multiples of comparable public companies, which are reflective of the market in which each respective reporting unit operates, and recent comparable market transactions. Changes in the factors used in our fair value estimates, including declines in industry or company-specific sales, margin erosion, discount rates used, and market multiples could have a significant impact on the fair values of the reporting units.
For the year ended December 31, 2018, we recorded $26.7 million of impairment to goodwill in our ABRH reporting unit within our Restaurant Group segment. The impairment charge was a result of deteriorating operating results and cash flow resulting from declining same store sales and increased costs.
For years ended December 31, 2017 and 2016, we determined that there were no events or circumstances which indicated that the carrying value of goodwill exceeded the fair value and no impairment was recorded.
With the completion of the T-System acquisition in October 2017, we established new T-System reporting units. Because these reporting units consist solely of the acquired businesses, the book value of which equaled its fair value as of the acquisition date, no cushion of fair value over book value existed at the acquisition date. During our 2018 goodwill impairment testing of the reporting unit, we determined that T-System's two reporting units' cushion of fair value over book value was nominal. Given that the fair value is not substantially in excess of the book value, relatively small decreases in future cash flows from forecasted results or changes in discount rates or other assumptions could result in impairment of goodwill.
Valuation of Other Intangible Assets. We have other intangible assets, not including goodwill, which consist primarily of customer relationships and contracts, trademarks and tradenames which are generally recorded in connection with acquisitions at their fair value, franchise rights, the fair value of purchased software and capitalized software development costs. Intangible assets with estimable lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In general, customer relationships are amortized over their estimated useful lives using an accelerated method which takes into consideration expected customer attrition rates. Contractual relationships are generally amortized over their respective contractual lives. Useful lives of computer software range from 3 to 10 years. Trademarks and tradenames are generally considered intangible assets with indefinite lives and are reviewed for impairment at least annually. Capitalized software development costs and purchased software are recorded at cost and amortized using the straight-line method over their estimated useful life.
Our primary indefinite-lived other intangible assets are the tradenames of our Restaurant Group brands. Tradenames are tested for impairment annually in the fourth quarter (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a tradename below its carrying value. We use a relief from royalty method to determine the fair value of our tradenames which includes assumptions for growth rates for revenues, tax rates, discount rates

30


and royalty rates. Changes in the factors used in our fair value estimates, including declines in industry or company-specific sales, discount rates used, and royalty rates could have a significant impact on the fair values of our tradenames.
We recorded $5.8 million of impairment expense related to a tradename and an abandoned software project in our Restaurant Group in the year ended December 31, 2018. We recorded $2.9 million of impairment expense related to a tradename in our Restaurant Group in the year ended December 31, 2017. We recorded no impairment expense related to other intangible assets in the year ended December 31, 2016.
Accounting for Income Taxes. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact of changes in tax rates and laws on deferred taxes, if any, is applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted.
Refer to Note L to our Consolidated and Combined Financial Statements included in Item 8 of Part II of this Annual Report for further discussion of our accounting for income taxes.
Revenue Recognition.
On January 1, 2018, we adopted ASC Topic 606 by applying the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The adoption of ASC Topic 606 did not have a significant impact on the timing or amount of recognition of revenue for our primary sources of revenue. Differences between our historical revenue recognition and revenue which would have been recorded had we restated prior periods in conformity with ASC Topic 606 are not considered material.We recorded a cumulative effect adjustment to opening equity as of January 1, 2018 of $1.9 million as a result of the adoption of ASC Topic 606. As a result of errors identified in our adjustment for the cumulative effect of the adoption of ASC Topic 606 as of the date of adoption (January 1, 2018), as further discussed in Note A Business and Summary of Significant Accounting Policies to our Consolidated and Combined Financial Statements, the cumulative effect adjustment decreased by $2.4 million from the $4.3 million (net of tax), as reported, to $1.9 million (net of tax), as corrected.
Our revenue consists of:
 
 
 
 
Year ended December 31,
 
 
 
 
2018
Revenue Stream
 
Segment
 
Total Revenue
Restaurant revenue:
 
 
 
(in millions)
Restaurant sales
 
Restaurant Group
 
$
1,023.0

Bakery sales
 
Restaurant Group
 
88.8

Franchise and other
 
Restaurant Group
 
6.0

Total restaurant revenue
 
 
 
1,117.8

Other operating revenue:
 
 
 
 
T-System, point-in-time
 
T-System
 
24.5

T-System, over time
 
T-System
 
33.4

Real estate and resort
 
Corporate and other
 
23.2

Other
 
Corporate and other
 
6.5

Total other operating revenue
 
 
 
87.6

Total operating revenues
 
 
 
1,205.4

Restaurant revenue consists of restaurant sales, bakery operations, and, to a lesser extent, franchise revenue and other revenue. Restaurant sales include food and beverage sales and gift card breakage, are net of applicable state and local sales taxes and discounts, and are recognized at a point in time as services are performed and goods are provided. Revenue from bakery operations is recognized at a point in time in the period during which the products are shipped and control transfers to the customer. Franchise revenue and other revenue consist of development fees and royalties on sales by franchised units. Initial franchise fees are recognized as income upon commencement of the franchise operation and completion of all material services and conditions by the Company. Royalties are calculated as a percentage of the franchisee sales and recognized in the period in which the sales are generated. Revenue resulting from the sale of gift cards is recognized in the period in which the gift card is redeemed and is recorded as deferred revenue until recognized.

31


T-System recognizes revenue when a customer obtains control of the promised goods or services. The amount of revenue recognized is determined by the consideration that T-System expects to be entitled to in exchange for the goods and services.
T-System offers a software as a service solution with full-service coding ("RevCycle+") available, through contracts with customers to either provide access to its proprietary coding software platform or provide medical chart coding services. Billing for both services occurs monthly as services are provided. Billing for medical chart coding services is based on a fixed monthly fee. Revenue for RevCycle+ is recognized ratably over the term of the contract as services are consumed by the customer. Revenue for implementation and upfront training services provided to the customer, if any, are billed separately and recognized at a point in time upon completion of such services as T-System's performance obligation is considered complete.
T-System sells an electronic version of the medical documentation system (“EV”), provided in the form of a non-exclusive license to use the software at the sites under the agreement. The Company sells software licenses through recurring fixed-term or subscription fee arrangements and one-time perpetual license arrangements. Software contracts include performance obligations that are both satisfied at a point in time and over a period of time as goods and services are transferred. T-System also sells legacy medical documentation templates ("T-Sheets") to emergency care providers to be used for documentation of patient care. T-Sheets includes various optional recurring fixed-term or subscription licenses which are recognized over time after access to the template has been delivered to the customer.
Other operating revenue consists of income generated by our resort operations which includes sales of real estate, lodging rentals, food and beverage sales, and other income from various resort services offered. Revenue is recognized upon closing of the sale of real estate or once goods and services have been provided and billed to the customer.
Certain Factors Affecting Comparability 
Year ended December 31, 2017. On October 16, 2017, we completed the T-System Merger. The results of operation of T-System subsequent to the T-System Merger are included in the T-System segment.
On June 6, 2017, we closed on the sale of OneDigital for $560.0 million in an all-cash transaction. As a result of the sale of OneDigital, we have reclassified the financial results of OneDigital to discontinued operations for all periods presented in our Consolidated and Combined Statements of Operations.

32


Results of Operations
 Consolidated Results of Operations
 Net earnings.  The following table presents certain financial data for the years indicated:
 
Year ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Revenues:
 
 
 
 
 
Restaurant revenue
$
1,117.8

 
$
1,129.0

 
$
1,157.6

Other operating revenue
87.6

 
40.5

 
20.8

Total operating revenues
1,205.4

 
1,169.5

 
1,178.4

Operating expenses:
 
 
 
 
 
Cost of restaurant revenue
991.3

 
991.0

 
984.1

Personnel costs
170.3

 
103.2

 
68.3

Depreciation and amortization
61.3

 
49.3

 
44.7

Other operating expenses
105.6

 
104.4

 
83.5

Goodwill impairment
26.7

 

 

Total operating expenses
1,355.2

 
1,247.9

 
1,180.6

Operating loss
(149.8
)
 
(78.4
)
 
(2.2
)
Other income (expense):
 
 
 
 
 
Interest and investment income
6.3

 
5.3

 
3.3

Interest expense
(4.7
)
 
(7.0
)
 
(5.2
)
Realized gains, net
166.8

 
4.9

 
9.3

Total other income
168.4

 
3.2

 
7.4

Earnings (loss) from continuing operations before income taxes and equity in (losses) earnings of unconsolidated affiliates
18.6

 
(75.2
)
 
5.2

Income tax expense (benefit)
13.1

 
(16.6
)
 
(10.4
)
Earnings (loss) from continuing operations before equity in (losses) earnings of unconsolidated affiliates
5.5

 
(58.6
)
 
15.6

Equity in (losses) earnings of unconsolidated affiliates
(16.1
)
 
3.4

 
(29.5
)
Loss from continuing operations
(10.6
)
 
(55.2
)
 
(13.9
)
Net earnings from discontinued operations, net of tax

 
147.7

 
2.0

Net (loss) earnings
(10.6
)
 
92.5

 
(11.9
)
Less: Net (loss) earnings attributable to non-controlling interests
(38.2
)
 
(16.3
)
 
0.5

Net earnings (loss) attributable to Cannae Holdings, Inc. common shareholders
$
27.6

 
$
108.8

 
$
(12.4
)
Revenues 
Total revenue in 2018 increased $35.9 million compared to 2017, primarily due to an increase in revenue in our T-System and Corporate and Other segments, offset by a decline in revenue in the Restaurant Group segment. Total revenue in 2017 decreased $8.9 million compared to 2016, primarily due to a decrease in revenue in our Restaurant Group, partially offset by an increase in revenue in our Corporate and Other segment.
The change in revenues from our segments is discussed in further detail at the segment level below.
Expenses
Our operating expenses consist primarily of personnel costs, cost of restaurant revenue, other operating expenses, and depreciation and amortization.
Personnel costs include base salaries, commissions, benefits, stock-based compensation and bonuses paid to employees, and are one of our most significant operating expenses. Personnel costs that are directly attributable to the operations of the Restaurant Group are included in Cost of restaurant revenue.  
Cost of restaurant revenue includes cost of food and beverage, primarily the costs of beef, groceries, produce, seafood, poultry and alcoholic and non-alcoholic beverages, net of vendor discounts and rebates, payroll and related costs and expenses directly relating to restaurant level activities, and restaurant operating costs including occupancy and other operating expenses at the restaurant level.

33


Other operating expenses include professional fees, advertising costs, travel expenses and impairments of operating assets.
Depreciation and amortization expense consists of our depreciation related to investments in property and equipment as well as amortization of intangible assets.
The change in expenses from our segments is discussed in further detail at the segment level below. 
Income tax expense (benefit) on continuing operations was $13.1 million, $(16.6) million, and $(10.4) million for the years ended December 31, 2018, 2017, and 2016, respectively. The effective tax rate for the years ended December 31, 2018, 2017, and 2016 was 70.4%, 22.0%, and (204.3)%, respectively. The increase in the effective tax rate in 2018 from 2017 is primarily attributable to the change in tax laws disallowing the tax deductibility of certain executive compensation. The increase in the effective tax rate in 2017 from 2016 is primarily attributable to increased net earnings and decreased losses from unconsolidated affiliates in 2017 from 2016. The fluctuation in income tax benefit as a percentage of earnings from continuing operations before income taxes is attributable to our estimate of ultimate income tax liability and changes in the characteristics of net earnings year to year, such as the weighting of operating income versus investment income.
For a detailed breakout of our effective tax rate, see Note L to our Consolidated and Combined Financial Statements included in Item 8 of Part II of this Annual Report.
Other
Net realized gains totaled $166.8 million, $4.9 million, and $9.3 million for the years ended December 31, 2018, 2017, and 2016, respectively. The net realized gain for the year ended December 31, 2018 is primarily attributable to $92.6 million gain on the sale of Ceridian shares in the fourth quarter of 2018, $63.2 million of realized gains associated with the Ceridian IPO and the gain of $24.0 million on the sale of LifeWorks, partially offset by impairment losses of $12.5 million recognized on fixed maturity securities in the 2018 period and $5.1 million of realized gains associated with sales of equity investment securities in the 2017 period. The net realized gain for the year ended December 31, 2017 is primarily attributable to the sale of equity securities available for sale. The net realized gain for the year ended December 31, 2016 primarily includes a net realized gain of $15.0 million on the sale of our 15% ownership interest in Stillwater Insurance ("Stillwater"), a property and casualty insurance company sold during the second quarter of 2016 for proceeds of $36.0 million. The gain was partially offset by net realized losses of $2.5 million on the sale of the Max & Erma's restaurant concept by our Restaurant Group, and net realized losses of $3.0 million on impairment of a cost method investment in our Corporate and Other segment.
Equity in (losses) earnings of unconsolidated affiliates was $(16.1) million, $3.4 million, and $(29.5) million for the years ended December 31, 2018, 2017, and 2016, respectively, and consisted of our equity in the net loss of Ceridian and other investments in unconsolidated affiliates. The increase in equity in loss of unconsolidated affiliates is primarily attributable to increased losses at Ceridian for the year ended December 31, 2018 compared to 2017.
Net Earnings
Net earnings attributable to Cannae decreased $81.2 million in the year ended December 31, 2018, compared to the 2017 period. The decrease consisted of a $34.7 million decrease in earnings in our Corporate and Other segment and $7.7 million decrease in net earnings from T-System, acquired in the fourth quarter of 2017, in addition to a $38.8 million increased loss at our Restaurant Group. Total net earnings attributable to Cannae increased $121.2 million in the year ended December 31, 2017, compared to the 2016 period. The increase consisted of a $140.1 million increase in earnings in our Corporate and Other segment and $1.5 million in net earnings from T-System, acquired in the fourth quarter of 2017, partially offset by a $20.4 million increased loss at our Restaurant Group.
The change in net earnings from the segments is discussed in further detail at the segment level below.

34


Segment Results of Operations
Restaurant Group
The following table presents the results from operations of our Restaurant Group segment:
 
Year ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Revenues:
 

 
 
 
 
Restaurant revenue
$
1,117.8

 
$
1,129.0

 
$
1,157.6

Operating expenses:
 
 
 
 
 
Cost of restaurant revenue
991.3

 
991.0

 
984.1

Personnel costs
47.3

 
52.8

 
52.9

Depreciation and amortization
44.9

 
43.6

 
42.4

Other operating expenses
86.3

 
71.1

 
70.2

Goodwill impairment
26.7

 

 

Total operating expenses
1,196.5

 
1,158.5

 
1,149.6

Operating (loss) income
(78.7
)
 
(29.5
)
 
8.0

Other expense:
 
 
 
 
 
Interest expense
(16.0
)
 
(6.6
)
 
(4.7
)
Realized losses, net
(2.1
)
 

 
(2.5
)
Total other expense
(18.1
)
 
(6.6
)
 
(7.2
)
(Loss) earnings from continuing operations before income taxes and equity in losses of unconsolidated affiliates
(96.8
)
 
(36.1
)
 
0.8

Total revenues for the Restaurant Group segment decreased $11.2 million, or 1.0% in the year ended December 31, 2018 from the 2017 period. The decrease is primarily attributable to a decrease in restaurant sales, primarily driven by closed restaurants, decreased comparable store sales and guest counts overall, partially offset by increases in bakery sales. Total revenues for the Restaurant Group segment decreased $28.6 million, or 2.5% in the year ended December 31, 2017 from the 2016 period primarily due to a $17.3 million, or 1.6%, decrease in consolidated comparable store sales, a decrease of $8.4 million related to the inclusion of revenue from the Max & Erma's restaurant concept in the 2016 period, a $5.2 million decrease from the net effect of new and closed restaurants, and a $4.5 million decrease related to timing of store days, partially offset by a $7.1 million increase in third-party bakery operation sales.
Comparable Store Sales. One method we use in evaluating the performance of our restaurants is to compare sales results for restaurants period over period. We include a restaurant in our comparable store sales figures starting in the first period following a new restaurant's first seventy-eight weeks of operations. Changes in comparable store sales reflect changes in sales for the comparable store group of restaurants over a specified period of time. This measure highlights the performance of existing restaurants, as the impact of new restaurant openings is excluded. Comparable store sales for our Restaurant Group decreased 0.6% and 1.6 % in the years ended December 31, 2018 and 2017, respectively, from the prior fiscal years. The decrease in both periods is primarily attributable to decreased comparable store sales at our O'Charley's, Village Inn and Baker's Square concepts, partially offset by increased comparable store sales at our 99 Restaurants concept.
Other operating expenses increased by $15.2 million or 21.4% in the year ended December 31, 2018 from the 2017 period. The increase is primarily attributable to impairments of other intangible assets in the 2018 period.
Cost of restaurant revenue increased $0.3 million, or less than 1%, in the year ended December 31, 2018 from the 2017 period. Cost of restaurant revenue increased $6.9 million or 0.7% in the year ended December 31, 2017 from the 2016 period. Cost of restaurant revenue as a percentage of restaurant revenue were approximately 88.7%, 87.8%, and 85.0% in the years ended December 31, 2018, 2017 and 2016, respectively. The increase in cost of restaurant revenue as a percentage of restaurant revenue in the 2018 period from the comparable 2017 period was primarily attributable to increased cost of food and labor. The increase in cost of restaurant revenue as a percentage of restaurant revenue in the 2017 period from the comparable 2016 period was primarily driven by reduced operating leverage associated with lower same store sales, increased hourly labor costs, and an increase in value promotions offered in the 2017 period.
For the year ended December 31, 2018, we recorded $26.7 million of impairment to goodwill in our ABRH reporting unit in our Restaurant Group segment. The impairment charge was a result of deteriorating operating results and cash flow resulting from

35


declining same store sales and increased costs. The impairment recorded was calculated as the deficit between the carrying value of ABRH compared to its fair value determined by performing a combination of discounted cash flow and market approaches.
Loss from continuing operations before income taxes increased $60.7 million in the year ended December 31, 2018 from the 2017 period. The increase in loss was primarily attributable to the factors discussed above. (Loss) earnings from continuing operations before income taxes decreased $36.9 million in the year ended December 31, 2017 from the 2016 period.
Ceridian
We own a 23.5% economic interest in Ceridian. We account for our investment in Ceridian under the equity method of accounting; therefore, its results of operations do not consolidate into ours. Details relating to the results of operations of Ceridian (NYSE: "CDAY") can be found in its periodic filings with the SEC. The audited financial statements of Ceridian can also be found at Exhibit 99.1 to this Annual Report.
T-System
We acquired T-System on October 16, 2017. The following table presents the results from operations of our T-System segment :
 
Year ended December 31,
 
2018
 
2017
 
(In millions)
Revenues:
 

 
 
Other operating revenue
$
57.9

 
12.9

Total operating revenues
57.9

 
12.9

Operating expenses:
 
 
 
Personnel costs
33.1

 
7.6

Depreciation and amortization
15.0

 
3.1

Other operating expenses
13.8

 
3.1

Total operating expenses
61.9


13.8

Operating loss
(4.0
)
 
(0.9
)
Other expense:
 
 
 
Interest expense
(4.3
)
 

Total other expense
(4.3
)


Loss from continuing operations before income taxes and equity in losses of unconsolidated affiliates
$
(8.3
)

$
(0.9
)
The increases in our revenues, expenses and operating loss for our T-System segment are attributable to the recording of a full year of results of operation for the segment in the 2018 period.
Corporate and Other
The Corporate and Other segment consists of certain other unallocated corporate overhead expenses, and other smaller investments.
The Corporate and Other segment generated revenues of $29.7 million, $27.6 million, and $20.8 million for the years ended December 31, 2018, 2017, and 2016, respectively. Revenues increased $2.1 million in 2018 compared to 2017 primarily driven by a $5.6 million termination fee associated with the termination of our management agreement with Ceridian, partially offset by a decrease in real estate sales. Revenues increased $6.8 million in 2017 compared to 2016 primarily due to growth in sales of real estate.
Personnel costs were $89.9 million, $42.8 million, and $15.4 million in the years ended December 31, 2018, 2017, and 2016, respectively. The increase in 2018 from 2017 is primarily attributable to investment success bonuses associated with the Ceridian IPO and sale of LifeWorks. The increase in 2017 from 2016 is primarily attributable to Investment Success Incentive Program bonuses associated with the sale of OneDigital.
Other operating expenses for the Corporate and Other segment were $5.5 million, $30.2 million, and $13.3 million in the years ended December 31, 2018, 2017 and 2016, respectively. The decrease in the 2018 period from the 2017 period is primarily attributable to lower corporate overhead costs and decreased expense in our real estate operations. The increase in the 2017 period from the 2016 period is primarily attributable to increased cost at our real estate subsidiaries and costs associated with our separation from FNF.

36


This segment generated earnings (losses) from continuing operations before income taxes of $123.7 million, $(38.2) million, and $4.4 million for the years ended December 31, 2018, 2017, and 2016, respectively. The increase in earnings in 2018 compared to 2017 is attributable to the aforementioned changes in revenues and expenses as well as a $92.6 million gain on sale of Ceridian shares in the fourth quarter of 2018, $63.2 million of realized gains associated with the Ceridian IPO and the gain of $24.0 million on the sale of LifeWorks, partially offset by impairment losses of $12.5 million recognized on fixed maturity securities in the 2018 period and $5.1 million of realized gains associated with sales of equity investment securities in the 2017 period. The decrease in earnings in 2017 compared to 2016 is attributable to the aforementioned changes in revenue and expenses.
Discontinued Operations
As a result of the sale of OneDigital, the financial results of OneDigital have been reclassified to discontinued operations for the years ended December 31, 2017 and 2016. Earnings from discontinued operations were $147.7 million and $2.0 million for the years ended December 31, 2017 and 2016, respectively. The increase in 2017 compared to 2016 was primarily attributable to the after-tax gain of $149.7 million on the sale of OneDigital.
Liquidity and Capital Resources
Cash Requirements.  Our current cash requirements include personnel costs, operating expenses, taxes, payments of interest and principal on our debt, capital expenditures, business acquisitions, and stock repurchases. There are no restrictions on our retained earnings regarding our ability to pay dividends to stockholders, although there are limits on the ability of certain subsidiaries to pay dividends to us, as a result of provisions in certain debt agreements. The declaration of any future dividends is at the discretion of our Board of Directors. Additional uses of cash flow are expected to include stock repurchases, acquisitions, and debt repayments.
We continually assess our capital allocation strategy, including decisions relating to reducing debt, repurchasing our stock, and/or conserving cash. We believe that all anticipated cash requirements for current operations will be met from internally generated funds, cash dividends from subsidiaries, cash generated by investment securities, potential sales of non-strategic assets, and borrowings on existing credit facilities. Our short-term and long-term liquidity requirements are monitored regularly to ensure that we can meet our cash requirements. We forecast the needs of all of our subsidiaries and periodically review their short-term and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying such forecasts.
We are focused on evaluating our assets and investments as potential vehicles for creating liquidity. Our intent is to use that liquidity for general corporate purposes, including, potentially reducing debt, repurchasing shares of our stock, other strategic initiatives and/or conserving cash.
Operating Cash Flows. Our cash flows (used in) provided by operations for the years ended December 31, 2018, 2017, and 2016 were $(22.9) million, $(90.7) million and $60.3 million, respectively. The decrease in cash used in operations of $67.8 million from 2018 to 2017 is primarily attributable to decreased taxes paid of $117.5 million in the 2018 period from the comparable period in 2017, partially offset by cash provided by discontinued operations of $17.3 million in the 2017 period, increased cash bonus expenses of $26.4 million in the 2018 period, and decreased consolidated pretax loss (increased earnings) in the 2018 period. The remainder of the variance is attributable to the timing of payment and receipt of accounts payable and receivable. The decrease in cash provided by operations of $151.0 million from 2017 to 2016 is primarily attributable to increased payments for income taxes in the 2017 period which primarily related to the sale of OneDigital. The proceeds from the sale of OneDigital were recorded as an investing cash flow.
Investing Cash Flows. Our cash flows provided by (used in) investing activities for the years ended December 31, 2018, 2017, and 2016 were $186.7 million, $91.7 million and $(168.2) million, respectively. The increase in cash provided by investing activities of $95.0 million from 2018 to 2017 is primarily attributable to proceeds from the sale of Ceridian shares and LifeWorks in 2018, and decreased outflow for acquisitions in 2018 compared to 2017, partially offset by net purchases of short term investments in 2018 and the sale of One Digital in 2017. The increase in cash provided by (decrease in cash used in) investing activities of $259.9 million from 2017 to 2016 is primarily attributable to proceeds of $326.0 million from the sale of OneDigital, decreased investments in unconsolidated affiliates of $67.2 million, and lower spending on other investments in the 2017 period, partially offset by increased cash used for acquisitions of businesses, primarily T-System, in the 2017 period.
Capital Expenditures. Total capital expenditures for property and equipment and other intangible assets were $15.9 million, $40.1 million and $55.2 million for the years ended December 31, 2018, 2017, and 2016, respectively. Capital expenditures in the 2018 period primarily consist of purchases of property and equipment in our Restaurant Group segment and to a lesser extent property improvements at our real estate operations. The decrease in expenditures in the 2018 period from the 2017 period is reflective of a decrease in spending in our Restaurant Group segment and decreased spending at OneDigital due to its sale in June 2017. Capital expenditures in the 2017 period primarily consist of purchases of property, equipment and software in our Restaurant Group segment. The decrease in expenditures in the 2017 period from the 2016 period is primarily attributable to the sale of OneDigital.

37


Financing Cash Flows. Our cash flows (used in) provided by financing activities for the years ended December 31, 2018, 2017, and 2016 were $(86.4) million, $98.2 million and $(20.8) million, respectively. The decrease in cash provided by (increase in cash used in) financing activities of $184.6 million from 2018 to 2017 is primarily attributable to the payoff of ABRH's external debt and decreased borrowings in the 2018 period. The increase in cash provided by (decrease in cash used in) financing activities of $119.0 million from 2017 to 2016 is primarily attributable to the $100 million FNF Investment and an increase in net borrowings (net of debt service payments).
Financing Arrangements. In our Restaurant Group, financing arrangements are used both as part of our overall capitalization structure as well as to fund purchases of seasonal inventory in advance of sales. For a description of our historical financing arrangements see Note K to our Consolidated and Combined Financial Statements included in Item 8 of Part II of this Annual Report. On February 7, 2019, we borrowed $150 million under our Margin Facility and drew the entire $100 million available under our FNF Revolver and used the proceeds to fund, in part, the DNB Acquisition.
       Contractual Obligations. Unconditional purchase obligations include agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. The Restaurant Group has unconditional purchase obligations with various vendors, primarily related to food and beverage obligations with fixed commitments in regards to the time period of the contract and the quantities purchased with annual price adjustments that can fluctuate. Future purchase obligations are estimated by assuming historical purchase activity over the remaining, non-cancellable terms of the various agreements. For agreements with minimum purchase obligations, at least the minimum amounts we are legally required to purchase are included. These agreements do not include fixed delivery terms. We used both historical and projected volume and pricing as of December 31, 2018 to determine the amount of the obligations.
     As of December 31, 2018, our required annual payments relating to these contractual obligations were as follows:
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
 
 
Notes payable
$
5.9

 
$
6.6

 
$
5.8

 
$
5.8

 
$
16.1

 
$
9.1

 
$
49.3

Operating lease payments
62.0

 
57.7

 
51.3

 
40.7

 
34.1

 
133.2

 
379.0

Unconditional purchase obligations
194.4

 
80.9

 
46.7

 
8.9

 
3.4

 
7.3

 
341.6

Total
$
262.3

 
$
145.2

 
$
103.8

 
$
55.4

 
$
53.6


$
149.6

 
$
769.9

Capital Stock Transactions. On May 7, 2018, the Compensation Committee of the Board of Directors approved a success bonus of up to $67.1 million resulting from the successful Ceridian IPO. The success bonus was calculated based on 10% of the excess value of our investment in Ceridian HCM over our basis in Ceridian prior to the Ceridian IPO. The success bonus was paid to certain members of the Board of Directors and management who contributed to acquiring and growing Ceridian over Cannae’s and its predecessor’s ten year ownership of Ceridian and was paid in a combination of cash and stock. On May 16, 2018, we issued 991,906 shares of our common stock for the stock portion of the bonuses.
On November 17, 2017, FNF completed the previously announced Split-Off of its FNFV Group and redeemed each outstanding share of its FNFV Group common stock, par value $0.0001, for one share of common stock, par value $0.0001, of Cannae (NYSE: CNNE), with cash in lieu of fractional shares. As of November 17, 2017, FNF and Cannae are separate publicly traded companies. 
On November 16, 2017, certain subsidiaries of FNF contributed an aggregate of $100.0 million to us in exchange for 5,706,134 shares of Cannae common stock.
Equity Security Investments. During the year ended December 31, 2018, we sold the remainder of our equity securities holdings for gross proceeds of $17.7 million resulting in net realized gains of $0.1 million.
Off-Balance Sheet Arrangements. We do not engage in off-balance sheet activities other than facility and equipment operating leasing arrangements.
Recent Accounting Pronouncements 
For a description of recent accounting pronouncements, see Note S to our Consolidated and Combined Financial Statements included in Item 8 of Part II of this Annual Report.

38


Item 7A. 
Quantitative and Qualitative Disclosure about Market Risk
Commodity Price Risk
We are exposed to market price fluctuations in beef, seafood, produce and other food product prices. Given the historical volatility of beef, seafood, produce and other food product prices, these fluctuations can materially impact the food and beverage costs incurred in our Restaurant Group segment. While our Restaurant Group companies have taken steps to qualify multiple suppliers who meet our standards as suppliers for our restaurants and have entered into agreements with suppliers for some of the commodities used in our restaurant operations, there can be no assurance that future supplies and costs for such commodities will not fluctuate due to weather and other market conditions outside of our control. Consequently, such commodities can be subject to unforeseen supply and cost fluctuations. Dairy costs can also fluctuate due to government regulation. Because we typically set our menu prices in advance of our food product prices, our menu prices cannot immediately take into account changing costs of food items. To the extent that we are unable to pass the increased costs on to our guests through price increases, our results of operations would be adversely affected. We do not use financial instruments to hedge our risk to market price fluctuations in beef, seafood, produce and other food product prices at this time.
 


39


Item 8.    Financial Statements and Supplementary Data

CANNAE HOLDINGS, INC.
INDEX TO FINANCIAL INFORMATION
 


40


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 
To the shareholders and the Board of Directors
Cannae Holdings, Inc.
Las Vegas, Nevada

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Cannae Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated and combined financial statements as of and for the year ended December 31, 2018, of the Company and our report dated March 18, 2019, expressed an unqualified opinion and included an explanatory paragraph related to a change in accounting principle for revenue due to the adoption of FASB ASC 606, Revenue from Contracts with Customers ("ASC 606"), on January 1, 2018 using a modified retrospective method.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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


41


Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment:

Material weaknesses exist related to the Company’s control activities, information and communication, and monitoring activities around the Company’s adoption and subsequent application of ASC 606 at the Company’s T System subsidiary and are attributable to the failure of management to (1) design and implement control activities over the accuracy and completeness of the underlying information used to derive the revenue related accounting entries for the adoption and application of ASC 606 at T System; (2) design and implement control activities, including the related supporting documentation, around the determination of the ongoing revenue accounting at T System; and (3) monitor related revenue control activities at T System in order to prevent or detect material misstatements.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated and combined financial statements as of and for the year ended December 31, 2018, of the Company, and this report does not affect our report on such financial statements.

/s/ Deloitte & Touche LLP
Las Vegas, Nevada
March 18, 2019

42


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 
To the shareholders and the Board of Directors
Cannae Holdings, Inc.
Las Vegas, Nevada

Opinion on the Financial Statements
We have audited the accompanying consolidated and combined balance sheets of Cannae Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated and combined statements of operations, comprehensive earnings (loss), equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We did not audit the consolidated financial statements of Ceridian HCM Holdings, Inc., the Company's investment in which is accounted for by use of the equity method. The accompanying financial statements of the Company include its equity investment in Ceridian HCM Holdings, Inc. of $359.7 million and $324.9 million as of December 31, 2018 and 2017, respectively, and its equity in (losses) earnings in Ceridian HCM Holdings, Inc. of ($20.5) million, $1.9 million and ($29.1) million for the years ended December 31, 2018, 2017 and 2016, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Ceridian HCM Holdings, Inc., is based solely on the report of the other auditors.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2019, expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses identified.
Change in Accounting Principle
As discussed in Notes A and S to the financial statements, the Company has changed its method of accounting for revenue due to the adoption of FASB ASC 606, Revenue from Contracts with Customers, on January 1, 2018 using a modified retrospective method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP
Las Vegas, Nevada
March 18, 2019

We have served as the Company’s auditor since 2017.


43


CANNAE HOLDINGS, INC.
CONSOLIDATED AND COMBINED BALANCE SHEETS
 
December 31,
2018
 
December 31,
2017
 
 (in millions)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
323.0

 
$
245.6

Short-term investments
31.4

 

Trade receivables
49.8

 
35.8

Inventory
22.3

 
29.7

Equity securities, at fair value

 
17.7

Prepaid expenses and other current assets
25.2

 
21.4

Total current assets
451.7

 
350.2

Investments in unconsolidated affiliates
397.2

 
424.9

Property and equipment, net
176.4

 
218.8

Other intangible assets, net
175.8

 
214.5

Goodwill
164.8

 
202.7

Fixed maturity securities available for sale, at fair value
17.8

 
14.8

Deferred tax assets
16.9

 
10.6

Other long term investments and noncurrent assets
58.9

 
50.7

Total assets
$
1,459.5

 
$
1,487.2

LIABILITIES AND EQUITY
Current liabilities:
 

 
 

Accounts payable and other accrued liabilities, current
$
98.4

 
$
100.7

Income taxes payable
24.2

 
0.8

Deferred revenue, current
31.5

 
26.1

Notes payable, current
5.9

 
122.2

Total current liabilities
160.0

 
249.8

Deferred revenue, long-term
0.2

 
9.1

Notes payable, long-term
42.2

 
12.7

Accounts payable and other accrued liabilities, long-term
57.4

 
62.5

Total liabilities
259.8

 
334.1

Commitments and contingencies - see Note M


 


Equity:
 

 
 
Cannae common stock, $0.0001 par value; authorized 115,000,000 shares as of December 31, 2018 and December 31, 2017; issued of 72,234,330 and 70,858,143 as of December 31, 2018 and December 31, 2017, respectively; and outstanding of 72,223,692 and 70,858,143 as of December 31, 2018 and December 31, 2017, respectively

 

Preferred stock, $0.0001 par value; authorized 10,000,000 shares; issued and outstanding, none as of December 31, 2018 and December 31, 2017

 

Retained earnings
45.8

 
0.2

Additional paid-in capital
1,146.2

 
1,130.2

Less: Treasury stock, 10,638 shares as of December 31, 2018, at cost
(0.2
)
 

Accumulated other comprehensive loss
(67.2
)
 
(71.0
)
Total Cannae shareholders' equity
1,124.6

 
1,059.4

Noncontrolling interests
75.1

 
93.7

Total equity
1,199.7

 
1,153.1

Total liabilities and equity
$
1,459.5

 
$
1,487.2


See Notes to Consolidated and Combined Financial Statements


44


CANNAE HOLDINGS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
 
Year ended December 31,
 
2018
 
2017
 
2016
 
 (in millions)

Revenues:
 
 
 
 
 
Restaurant revenue
$
1,117.8

 
$
1,129.0

 
$
1,157.6

Other operating revenue
87.6

 
40.5

 
20.8

Total operating revenues
1,205.4

 
1,169.5

 
1,178.4

Operating expenses:
 
 
 
 
 
Cost of restaurant revenue
991.3

 
991.0

 
984.1

Personnel costs
170.3

 
103.2

 
68.3

Depreciation and amortization
61.3

 
49.3

 
44.7

Other operating expenses
105.6

 
104.4

 
83.5

Goodwill impairment, see Note A
26.7

 

 

Total operating expenses
1,355.2

 
1,247.9

 
1,180.6

Operating loss
(149.8
)
 
(78.4
)
 
(2.2
)
Other income (expense):
 
 
 
 
 
Interest and investment income
6.3

 
5.3

 
3.3

Interest expense
(4.7
)
 
(7.0
)
 
(5.2
)
Realized gains, net
166.8

 
4.9

 
9.3

Total other income
168.4

 
3.2

 
7.4

Earnings (loss) from continuing operations before income taxes and equity in earnings (losses) of unconsolidated affiliates
18.6

 
(75.2
)
 
5.2

Income tax expense (benefit)
13.1

 
(16.6
)
 
(10.4
)
Earnings (loss) from continuing operations before equity in (losses) earnings of unconsolidated affiliates
5.5

 
(58.6
)
 
15.6

Equity in (losses) earnings of unconsolidated affiliates
(16.1
)
 
3.4

 
(29.5
)
Loss from continuing operations
(10.6
)
 
(55.2
)
 
(13.9
)
Net earnings from discontinued operations, net of tax - see Note N

 
147.7

 
2.0

Net (loss) earnings
(10.6
)
 
92.5

 
(11.9
)
Less: Net (loss) earnings attributable to non-controlling interests
(38.2
)
 
(16.3
)
 
0.5

Net earnings (loss) attributable to Cannae Holdings, Inc. common shareholders
$
27.6

 
$
108.8

 
$
(12.4
)
 
 
 
 
 
 
Amounts attributable to Cannae Holdings, Inc. common shareholders
 
 
 
 
 
Net earnings (loss) from continuing operations attributable to Cannae Holdings, Inc. common shareholders
$
27.6

 
$
(38.7
)
 
$
(14.3
)
Net earnings from discontinued operations attributable to Cannae Holdings, Inc. common shareholders

 
147.5

 
1.9

Net earnings (loss) attributable to Cannae Holdings, Inc. common shareholders
$
27.6

 
$
108.8

 
$
(12.4
)
Earnings per share
 
 
 
 
 
Basic
 
 
 
 
 
Net earnings (loss) per share from continuing operations
$
0.39

 
$
(0.55
)
 
$
(0.21
)
Net earnings per share from discontinued operations

 
2.09

 
0.03

Net earnings (loss) per share
$
0.39

 
$
1.54

 
$
(0.18
)
Diluted
 
 
 
 
 
Net earnings (loss) per share from continuing operations
$
0.39

 
$
(0.55
)
 
$
(0.21
)
Net earnings per share from discontinued operations

 
2.09

 
0.03

Net earnings (loss) per share
$
0.39

 
$
1.54

 
$
(0.18
)
 
 
 
 
 
 
Weighted average shares outstanding Cannae Holdings common stock, basic basis
71.2

 
70.6

 
70.6

Weighted average shares outstanding Cannae Holdings common stock, diluted basis
71.3

 
70.6

 
70.6

See Notes to Consolidated and Combined Financial Statements

45


CANNAE HOLDINGS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
 
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Net (loss) earnings
$
(10.6
)
 
$
92.5

 
$
(11.9
)
Other comprehensive earnings (loss), net of tax:
 
 
 

 
 

Unrealized gain (loss) on investments and other financial instruments, net (excluding investments in unconsolidated affiliates) (1)
0.9

 
(8.7
)
 
2.6

Unrealized (loss) gain relating to investments in unconsolidated affiliates (2)
(12.0
)
 
8.9

 
4.8

Reclassification of unrealized losses on investments in unconsolidated affiliates, net of tax, included in net earnings (3)
24.0

 

 

Reclassification of unrealized losses (gains) on investments and other financial instruments, net of tax, included in net earnings (4)
7.0

 
(3.1
)
 

Other comprehensive earnings (loss)
19.9

 
(2.9
)
 
7.4

Comprehensive earnings (loss)
9.3

 
89.6

 
(4.5
)
Less: Comprehensive (loss) earnings attributable to noncontrolling interests
(38.2
)
 
(16.3
)
 
0.5

Comprehensive earnings (loss) attributable to Cannae
$
47.5

 
$
105.9

 
$
(5.0
)

(1)
Net of income tax expense (benefit) of $0.3 million, $(3.1) million and $1.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
(2)
Net of income tax (benefit) expense of $(3.2) million, $2.4 million and $2.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.
(3)
Net of income tax benefit of $6.4 million for the year ended December 31, 2018.
(4)
Net of income tax (benefit) expense of $(1.9) million and $1.9 million for the years ended December 31, 2018 and 2017, respectively.
See Notes to Consolidated and Combined Financial Statements



46


CANNAE HOLDINGS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
 
Common Stock
 
Parent Investment in FNFV
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comp (Loss) Earnings
 
Treasury Stock
 
Non-controlling
Interests
 
Total
Equity
 
Shares
 
$
 
 
 
 
 
Shares
 
$
 
 
 
 
 
 
 
(in millions)

Balance, December 31, 2015

 
$

 
$
1,018.4

 
$

 
$

 
$
(75.5
)
 
$

 
$

 
$
113.6

 
$
1,056.5

Other comprehensive earnings — unrealized gain on investments and other financial instruments, net of tax

 

 

 

 

 
2.6

 

 

 

 
2.6

Other comprehensive earnings — unrealized gain on investments in unconsolidated affiliates, net of tax

 

 

 

 

 
4.8

 

 

 

 
4.8

Subsidiary stock-based compensation

 

 

 

 

 

 

 

 
1.2

 
1.2

Ceridian stock-based compensation

 

 
5.1

 

 

 

 

 

 

 
5.1

Acquisition of Brasada

 

 

 

 

 

 

 

 
2.0

 
2.0

Dissolution of consolidated subsidiary

 

 

 

 

 

 

 

 
(0.3
)
 
(0.3
)
Net change in Parent investment in FNFV

 

 
(49.5
)
 

 

 

 

 

 

 
(49.5
)
Subsidiary dividends paid to noncontrolling interests

 

 

 

 

 

 

 

 
(0.7
)
 
(0.7
)
Net (loss) earnings