EX-99.1 5 tm2122068d7_exh99x1.htm EX-99.1 tm2122068-7_1012ba_DIV_03-exh99x1 - block - 40.0314554s
 
Exhibit 99.1
(Subject to Completion, Dated September 21, 2021)
Alliance Data Systems Corporation
3075 Loyalty Circle
Columbus, Ohio 43219
          , 2021
Dear ADS Stockholder:
On May 12, 2021, Alliance Data Systems Corporation (“ADS”) announced the next step in its strategic transformation and repositioning of ADS through the spinoff of its LoyaltyOne segment from ADS (the “Separation”), which is expected to become effective on           , 2021. On the effective date of the Separation, Loyalty Ventures Inc., a Delaware corporation formed in anticipation of the Separation (“Loyalty Ventures”), will become an independent, publicly traded company and will hold, directly or indirectly through its subsidiaries, the assets and liabilities associated with the Loyalty Ventures business.
The Separation is subject to conditions as described in the enclosed information statement. Subject to the satisfaction or waiver of these conditions, the Separation will be completed by way of a pro rata distribution of 81% of the outstanding shares of Loyalty Ventures common stock to ADS’ stockholders of record as of the close of business on           , 2021, the distribution record date (the “Distribution”).
Each ADS stockholder of record will receive one share of Loyalty Ventures common stock, $0.01 par value, for every           shares of ADS common stock, par value $0.01 per share, held by such stockholder on the record date. The distribution of these shares will be made in book-entry form, which means that no physical share certificates will be issued. At any time following the Distribution, stockholders may request that their shares of Loyalty Ventures common stock be transferred to a brokerage or other account. No fractional shares of Loyalty Ventures common stock will be issued. The distribution agent for the Distribution will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing prices and distribute the net cash proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the Distribution.
ADS expects to receive a private letter ruling from the Internal Revenue Service (“IRS”) and an opinion from counsel to the effect that, among other things, the Distribution, together with certain related transactions, will qualify as a transaction that is tax-free for U.S. federal income tax purposes, except to the extent of any cash received in lieu of fractional shares.
The Distribution does not require ADS stockholder approval, nor do you need to take any action to receive your shares of Loyalty Ventures common stock. ADS’ common stock will continue to trade on the New York Stock Exchange under the ticker symbol “ADS.” Loyalty Ventures intends to apply to have its shares of common stock listed on the Nasdaq Stock Market under the ticker symbol “LYLT.”
The enclosed information statement, which we are mailing to all ADS stockholders, describes the Separation in detail and contains important information about Loyalty Ventures, including the historical combined financial statements prepared on a carve-out basis. We urge you to read this information statement carefully.
We want to thank you for your continued support of ADS.
Sincerely,
   
Ralph J. Andretta
President and Chief Executive Officer
 

 
Loyalty Ventures Inc.
c/o Alliance Data Systems Corporation
7500 Dallas Parkway, Suite 700
Plano, Texas 75024
          , 2021
Dear Future Loyalty Ventures Stockholder:
I am excited to welcome you as a future stockholder of our new company, Loyalty Ventures Inc. (“Loyalty Ventures”). Following the spinoff by Alliance Data Systems Corporation (“ADS”) of its LoyaltyOne segment as an independent, publicly traded company, we will continue to be a leading provider of tech-enabled, data-driven consumer loyalty solutions.
The spinoff will permit Loyalty Ventures to concentrate on its core competencies and growth opportunities in the loyalty space, and will provide Loyalty Ventures with increased flexibility and speed to design and implement corporate strategies unique to our business separate from the regulatory requirements of ADS. Further, Loyalty Ventures will be able to allocate resources, incentivize employees and deploy capital and reinvest its cash flow to capture our long-term opportunities.
At Loyalty Ventures, we design our loyalty solutions around specific clients’ needs and goals, with a focus on helping partners achieve their strategic and financial objectives from increased consumer basket size, shopper traffic and frequency and digital reach to enhanced program reporting and analytics. Loyalty Ventures will own and operate the AIR MILES Reward Program, Canada’s most recognized loyalty program, and Netherlands-based BrandLoyalty, a global provider of purpose-driven, tailor-made campaign-based loyalty solutions for grocers and other high-frequency retailers whose network spans across 6 continents and 54 countries.
I encourage you to learn more about Loyalty Ventures and our business by reading the attached information statement. We intend to apply to list our common stock on the Nasdaq Stock Market under the ticker symbol “LYLT.” We look forward to earning your continued support for many years to come.
Sincerely,
   
Charles L. Horn
President and Chief Executive Officer
 

 
Preliminary Information Statement
(Subject to Completion, Dated September 21, 2021)
INFORMATION STATEMENT
Loyalty Ventures Inc.
Common Stock
($0.01 Par Value)
Alliance Data Systems Corporation (“ADS”) is furnishing this information statement in connection with the separation of its LoyaltyOne segment from its remaining business and the creation of an independent, publicly traded company, named Loyalty Ventures Inc. (“Loyalty Ventures”). Loyalty Ventures, directly or indirectly through its subsidiaries, will hold the assets, liabilities and legal entities comprising the Loyalty Ventures business after certain restructuring transactions are completed (the “Restructuring”). 81% of the outstanding shares of SpinCo common stock owned by ADS will be distributed to the stockholders of ADS (the “Distribution” and, together with the Restructuring, the “Separation”). Loyalty Ventures is currently an indirect, wholly-owned subsidiary of ADS.
Each holder of ADS common stock will receive one share of common stock of Loyalty Ventures for every           shares of ADS common stock held as of the close of business on           , 2021, the record date for the Distribution.
The distribution of Loyalty Ventures’ shares is expected to be completed after the market closing on           , 2021 (the “Distribution Date”). Immediately after ADS completes the Distribution, Loyalty Ventures will be an independent, publicly traded company. We expect that, for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income in connection with the Distribution, except to the extent of any cash you receive in lieu of fractional shares.
No vote or other action is required by you to receive shares of Loyalty Ventures common stock in the Separation. You will not be required to pay anything for the new shares or to surrender any of your shares of ADS common stock. We are not asking you for a proxy and you should not send us a proxy or your share certificates.
There currently is no trading market for Loyalty Ventures common stock. We expect to apply to have Loyalty Ventures’ shares of common stock listed on the Nasdaq Stock Market (“Nasdaq”) under the ticker symbol “LYLT.” Assuming that Nasdaq authorizes Loyalty Ventures’ common stock for listing, we anticipate that a limited market, commonly known as a “when-issued” trading market, for Loyalty Ventures’ common stock will commence on           , 2021 and will continue up to and including the Distribution Date. We expect the “regular-way” trading of Loyalty Ventures’ common stock will begin on the first trading day following the Distribution Date.
In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 17.
We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect, and have elected, to comply with certain reduced public company reporting requirements for future filings.
Neither the U.S. Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.
This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.
The date of this information statement is           , 2021.
A Notice of Internet Availability of Information Statement Materials containing instructions describing how to access the information statement was first mailed to ADS stockholders on or about           , 2021.
 

 
TABLE OF CONTENTS
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NOT REGARDING THE USE OF CERTAIN TERMS
We use the following terms to refer to the items indicated:

“We,” “us,” “our,” “Company,” “Loyalty Ventures Inc.” and “Loyalty Ventures,” unless the context otherwise requires, refer to Loyalty Ventures, the entity that at the time of the Distribution will hold, directly or indirectly through its subsidiaries, the assets and liabilities associated with the Spin Business, as defined below, and whose shares ADS will distribute in connection with the Separation. Where appropriate in the context, the foregoing terms also include the subsidiaries of this entity; these terms may be used to describe the Spin Business prior to completion of the Separation.

The “Spin Business” refers to the business, operations, products, services and activities of ADS’ LoyaltyOne segment. See “Business” for more information.

Except where the context otherwise requires, the term “ADS” refers to Alliance Data Systems Corporation, the entity that owns Loyalty Ventures prior to the Separation and that after the Separation will be a separately traded public company consisting of its remaining operations.

The term “Distribution” refers to the distribution of 81% of the shares of Loyalty Ventures common stock owned by ADS to stockholders of ADS as of the record date.

The term “Restructuring” refers to the series of transactions, which will result in all of the assets, liabilities and legal entities comprising the Spin Business being owned directly, or indirectly through its subsidiaries, by Loyalty Ventures.

Except where the context otherwise requires, the term “Separation” refers to the separation of the Spin Business from ADS and the creation of an independent, publicly traded company, Loyalty Ventures, through (1) the Restructuring and (2) the Distribution.

The term “Distribution Date” means the date on which the Distribution occurs.
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this information statement that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections, forecasts or assumptions of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including the numerous risks discussed under the caption entitled “Risk Factors.”
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Except as required by law, neither ADS nor we are under any duty to update any of these forward-looking statements after the date of this information statement to conform our prior statements to actual results or revised expectations.
 
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SUMMARY
This summary highlights information contained elsewhere in this information statement. This summary does not contain all of the information that you should consider. You should read this entire information statement carefully, especially the risks of owning our common stock discussed under “Risk Factors” and our audited combined financial statements, our unaudited pro forma combined financial statements and the respective notes to those statements appearing elsewhere in this information statement. Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement assumes the completion of all the transactions referred to in this information statement in connection with the Separation.
Overview
We are a leading provider of tech-enabled, data-driven consumer loyalty solutions. Our solutions are focused on helping partners achieve their strategic and financial objectives, from increased consumer basket size, shopper traffic and frequency and digital reach to enhanced program reporting and analytics. We design our loyalty solutions around specific clients’ needs and goals, which can be both transactional and emotional. The essence of loyalty is derived from a mix of emotions and memory. By activating these unconscious influences, we help financial services providers, retailers and other consumer-facing businesses create and increase customer loyalty across multiple touch points from traditional to digital to mobile and emerging technologies. We own and operate the AIR MILES Reward Program, Canada’s most recognized loyalty program, and Netherlands-based BrandLoyalty, a global provider of purpose-driven, tailor-made campaign-based loyalty solutions for grocers and other high-frequency retailers.
The AIR MILES Reward Program is an end-to-end loyalty platform, combining technology, data/analytics and other solutions to help our clients (who we call sponsors) drive increased engagement by consumers (who we call collectors) with their brand. The AIR MILES Reward Program operates as a full service coalition loyalty program for our sponsors. We provide all marketing, customer service, rewards and redemption management for our sponsors. We typically grant sponsors exclusivity in their market category, enabling them to realize incremental sales and increase market share as a result of their participation in the AIR MILES Reward Program. The AIR MILES Reward Program enables collectors to earn AIR MILES reward miles as they shop across a broad range of sponsors from financial institutions, grocery and liquor, e-commerce, specialty retail, pharmacy, petroleum retail, and home furnishings to hardware, that participate in the AIR MILES Reward Program. These AIR MILES reward miles can be redeemed by collectors for travel, entertainment, experiences, merchandise or other rewards. Through our AIR MILES cash program option, collectors can also instantly redeem their AIR MILES reward miles earned in the AIR MILES cash program option toward in-store purchases at participating sponsors, such as Shell Canada. We estimate approximately two-thirds of Canadian households actively participate in the AIR MILES Reward Program.
BrandLoyalty is a worldwide leader in campaign-based loyalty solutions that positively impact consumer behavior on a mass scale. We pride ourselves on being a business with purpose by connecting high-frequency retailers, supplier partners and consumers to create sustainable solutions for today’s challenges. We design, implement, conduct and evaluate innovative, digitally-enhanced, tailor-made loyalty campaigns. These campaigns are tailored for the specific client and are designed to reward key customer segments based on their spending levels during defined campaign periods. At BrandLoyalty, we aim to let all shoppers feel emotionally connected when they shop at our clients, by designing campaigns with the right mechanics and rewards that instantly change shopping behavior and engender loyalty. The rewards we offer come from top brands with high creative standards such as Disney, Zwilling, and vivo | Villeroy & Boch.
We will be headquartered in Dallas, Texas. At December 31, 2020, we had over 1,400 employees. For the year ended December 31, 2020, we generated $764.8 million in revenues, $75.1 million of net income and $173.4 million in adjusted EBITDA. In addition, for the six months ended June 30, 2021, we generated $327.5 million in revenues, $33.5 million of net income and $71.1 million in adjusted EBITDA. Upon our separation from ADS, we expect to trade under the ticker symbol “LYLT” on Nasdaq.
Our strategies
Our goal is to accelerate stakeholder value creation through the continued development of loyalty platforms for the tech-forward business and consumer era. We intend to pursue a variety of new omnichannel
 
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initiatives, including expanding geographies and verticals; further enriching tech and analytic capabilities; employing sustainable solutions; and seeking additional strategic partnerships.
Attract new clients and grow existing client base
The AIR MILES Reward Program continues to focus on broadening our sponsor base and expanding the network effects of the coalition. We seek to attract new sponsors and deepen existing relationships by enhancing our solutions portfolio. Deployment of enriched marketing and advertising capabilities will further sponsors’ ability to reach and engage collectors, increasing the value proposition for sponsors and reward suppliers alike. Diversifying the sponsor network, including expansion to non-traditional partnerships and alliances, including new arrangements with business-to-business e-commerce platforms that enable smaller, local e-commerce partners to incorporate AIR MILES reward miles in their promotional activities, will allow for a stronger and broader ecosystem to capture a larger portion of total consumer spend within the AIR MILES Reward Program. A core advantage to being a part of the AIR MILES Reward Program is the benefit to each partner as the coalition expands.
Similarly, we believe there is market opportunity for BrandLoyalty to grow its client base by adding new grocers in existing markets. Additional opportunity exists in the form of diversification into adjacent segments, such as convenience stores and pharmacies, which are a natural fit for BrandLoyalty due to the high frequency and spend profile of the customer base. Further expansion into new growing verticals like e-commerce and food delivery is also expected to present significant opportunities.
By diversifying and growing our ability to integrate advanced data analytics with marketing and loyalty services, we seek to position ourselves to serve the modern consumer, thus increasing the value proposition for our clients by delivering long-term integrated growth opportunities and ultimately delivering returns for our stakeholders.
Invest in technology to better engage consumers
The AIR MILES Reward Program continues to focus on driving collector engagement to enhance the benefit to the entire coalition of sponsors. The AIR MILES Reward Program has focused on enhancing digital initiatives targeting younger demographic channels as well as the broader collector base as a whole. By providing in-store and mobile access and increasing the relevancy of personalized, targeted, real-time offers, the AIR MILES Reward Program is improving effectiveness of digital campaigns and overall collector engagement. We will continue to invest in technology to deliver new digital products and solutions to improve collector engagement and the sponsor value proposition. An expansive collector and sponsor base results in an expanding database, which can be used to create and monetize new and innovative supplemental solutions for all partners of the ecosystem.
BrandLoyalty has built a first-class technology platform and an array of digital tools, including the Bright Loyalty Platform, the Analytical Framework, StorePal and other features to support its campaign-based loyalty solutions. The Analytical Framework provides full-cycle loyalty program design, real-time feedback and evaluation to adjust programs in progress or apply learnings to future designs. BrandLoyalty’s Bright Loyalty Platform provides shoppers the ability to collect and share points digitally, earn badges, play games, view leaderboards and level up to achieve better status and more exclusive perks. BrandLoyalty also offers StorePal to directly support in-store staff with program execution through state-of-the-art A.I. analysis and collaboration to improve in-store marketing, display placement, staff program knowledge and stock availability.
We believe opportunities exist to leverage the digital loyalty capabilities of BrandLoyalty’s platform and the highly advanced data science platform of the AIR MILES Reward Program to enhance the digital tools and capabilities of both businesses.
Expand into new geographies
We will seek to expand our geographic reach to accelerate growth. Our client-centered approach and almost 30-year operating history has resulted in unique, rich shopper and market data, which we use to generate insights for brands globally. There is substantial opportunity to reach untapped markets across the
 
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globe, which will serve as a growth lever in the near-term and solidify sustainable sources of revenue going forward. In the near term, BrandLoyalty expects to increase its presence in the United Kingdom, the United States and the Nordic region. We also intend to enhance our product offerings and geographic footprint through opportunistic acquisitions that complement our business. We will consider select acquisition opportunities that expand the breadth of our product portfolio, enhance our market positioning and accelerate our presence in attractive geographies, while maintaining alignment with our culture.
Our competitive strengths
Global tech-enabled loyalty leader
Over the past three decades, the AIR MILES Reward Program has built one of the largest loyalty rewards programs in Canada and established itself as a household name. The AIR MILES Reward Program operates as a unique and differentiated coalition loyalty platform. Through our advanced technological capabilities, our sponsors have access to both an extensive scale of customer insights and digital reach, providing a superior understanding of consumer behavior, media response, and trends. As of December 31, 2020, the AIR MILES Reward Program platform extends across 10 million collector accounts, with a sponsor base of approximately 135 sponsors that covered approximately 80% of the average household spend categories across all regions of Canada. Today, our AIR MILES Reward Program partners with over 300 brands and offers collectors thousands of locations to earn. Our expansive national coverage through sponsor partnerships spans brick & mortar physical locations, online retailers and financial institutions to drive continued value to our collectors and, in turn, added awareness and recognition of the AIR MILES brand. The breadth of sponsors and reward suppliers enables collector engagement on a recurring basis and drives powerful network effects.
BrandLoyalty’s global network spans across 6 continents and 54 countries, partnering with approximately 200 retailers worldwide. BrandLoyalty offers thousands of locations for customers to earn and continues to maintain close relationships with retailers and build its client portfolio through its 20 sales offices. While BrandLoyalty operates centrally, understanding and building relationships in the local market enhances our delivery capability all over the world.
Rich consumer data platforms
Our robust data and analytics platforms utilizing SKU-level transactional data allow for personalized offerings to drive loyalty for retailers. The AIR MILES Reward Program data platform enables the collection and synthesis of thousands of attributes per collector, supporting hundreds of advanced analytic, predictive models and machine learning algorithms. Unique identifiers track spend across hundreds of retail partners and digital properties through almost 30 years of history. Our dataset provides visibility into collector activity across the coalition, supplemented with third party data, to gather a holistic view of the collector profile that enables us to benefit collectors with a more personalized experience and benefits sponsors by driving engagement through more effective, highly-targeted, relevant marketing and personalized campaigns and offers.
The BrandLoyalty data and analytics platform is optimized through a large historical database of campaign insights, extensive shopper research and market intelligence. BrandLoyalty’s proprietary analytical software is designed to maximize campaign performance by analyzing billions of consumer transactions from campaigns across the world to more accurately identify the appropriate consumer segment, reward product and price point for each retailer. Our data analytics support the retailer from start to finish by identifying the right campaign type, providing predictions and insights on campaigns in execution and evaluating campaigns following completion.
Strong technology platforms
Our technology platforms were built to support the services and solutions we deliver with underlying principles of agility, versatility, scalability, and security at every level. Our platforms allow us to design, adapt and optimize loyalty campaigns and deliver better value to our clients. Our platforms provide the ability to automate workflow and target customers in real time and across multiple collector-facing channels. Our data processing platform enables data science, data sharing, product building and model factory capabilities,
 
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which turn customer data into meaningful insights. Our traditional marketing and AI capabilities identify and match collectors and deliver personalization at scale through multiple digital channels.
We have opportunities to integrate components of each platform within the other, creating meaningful opportunities to cross-sell the AIR MILES Reward Program and BrandLoyalty solutions. The AIR MILES Reward Program’s data lake, issuance engine, access to rewards and personalization platform combined with BrandLoyalty’s digital platform and campaign-based offerings gives us a unique position from which to offer a full suite of capabilities, both short-term and long-term, globally, while adhering to privacy laws, consumer expectations and client contract terms.
Deep, long-term relationships with clients and sponsors
We have maintained deep, long-standing relationships with large consumer-based businesses, including well-known worldwide brands, such as Shell Canada, Sobeys Inc., Bank of Montreal, Rewe and Albert Heijn.
For the AIR MILES Reward Program, we utilize our large collector base together with our data and analytical capabilities to deepen our existing relationships with our sponsors, some of which have been part of the program for almost 30 years, and continue to drive powerful benefits to collectors in the program. By continuing to engage our collectors with personalized marketing experiences and scaled rewards, our sponsors recognize the significant benefit to staying in the AIR MILES Reward Program and increasing their customer spend (issuance) opportunity. We believe that our success with sponsors and our ability to offer a variety of redemption options, both aspirational and instant, drive the appeal of AIR MILES Reward Program to collectors. By delivering a personalized and seamless digital experience, we provide collectors the ability to earn AIR MILES reward miles across an increasing network of sponsors and by offering them attractive redemption options, we create an efficient sales channel that brings brand awareness to reward suppliers.
At BrandLoyalty, we have had longstanding relationships with both the world’s leading grocery retailers who value our broad portfolio of offerings and full service approach as well as our high-quality rewards suppliers. We believe we have well-established positions with our clients, who have for many years entrusted us to enhance critical relationships with their customers and manage sensitive customer transaction data. We expect our strong client relationships will continue to drive our recurring revenue base, which we believe will contribute to our success and growth. The result is proven sales growth for retailers and strong connections between those retailers, their consumers and our exclusive merchandise and other reward suppliers.
Experienced management team with deep industry expertise
We have a strong executive management team with a proven track record, including decades of demonstrated leadership at the company. Our current executive management team has an average of over 13 years of industry experience. Charles Horn, who will serve as our president and chief executive officer following the Distribution, is currently an executive vice president at ADS and has overseen the LoyaltyOne segment since August 2019, in addition to the oversight of numerous other ADS board initiatives to include service as interim chief executive officer of ADS prior to Mr. Andretta’s appointment. Prior to 2019, Mr. Horn spent nearly a decade in the role of executive vice president and chief financial officer for ADS where his primary responsibilities included providing strategic direction to executive management and the board of directors, as well as evaluation and control of the capital structure of ADS, ensuring the company maintained transparency and consistency in financial reporting and accounting practices across the enterprise while serving as the key contact with the investment community. Blair Cameron will continue to serve as president of the AIR MILES Reward Program, overseeing the entire operations and strategy of the program. Mr. Cameron first joined the AIR MILES Reward Program team over 16 years ago, serving in roles of increasing responsibility. Claudia Mennen will continue to serve as BrandLoyalty’s chief executive officer. Following nearly 10 years of experience at PricewaterhouseCoopers and as chief financial officer and vice president of finance at two other companies, Ms. Mennen joined BrandLoyalty as its chief financial officer in early 2012 before also taking on the role of chief financial officer of the LoyaltyOne segment for ADS in 2018. In 2019, she became chief executive officer of BrandLoyalty, where she has led retail and loyalty strategies and operations.
 
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The Separation
On May 12, 2021, ADS announced a plan to distribute to ADS’ stockholders 81% of the shares of common stock of a newly formed company, Loyalty Ventures, that would hold the Spin Business. Loyalty Ventures is currently an indirect, wholly-owned subsidiary of ADS and, at the time of the Distribution will hold, directly or indirectly through its subsidiaries, the assets and liabilities associated with the Spin Business.
The Separation will be achieved through the transfer of all the assets and liabilities of the Spin Business to Loyalty Ventures or its subsidiaries in the Restructuring and the distribution of 81% of the outstanding capital stock of Loyalty Ventures pro rata to holders of ADS common stock as of the close of business on                 , 2021, the record date for the Distribution. At the effective time of the Distribution, ADS stockholders will receive one share of Loyalty Ventures common stock for every                 shares of ADS common stock held on the record date. The Separation is expected to be completed on                 , 2021. Immediately following the Separation, ADS stockholders as of the record date for the Distribution will own 81% of the outstanding shares of common stock of Loyalty Ventures. ADS will retain a 19% ownership interest in Loyalty Ventures. ADS will vote its Loyalty Ventures common stock in the same proportion as the votes cast in respect of the common stock not owned by ADS on any matter presented for a vote of Loyalty Ventures’ stockholders. ADS may transfer all or a portion of such retained ownership interest in Loyalty Ventures to one or more of ADS’ creditors in satisfaction of ADS’ third party debt within one year of the Distribution, and any remaining ownership interest in Loyalty Ventures will be disposed by ADS no later than 5 years after the Distribution.
Before the Distribution, we will enter into a Separation and Distribution Agreement and several other ancillary agreements with ADS to effect the Separation and provide a framework for our relationship with ADS after the Separation. These agreements will provide for the allocation between Loyalty Ventures and ADS of ADS’ assets, liabilities and obligations (including with respect to employee matters, intellectual property matters, tax matters and certain other matters). Loyalty Ventures and ADS will also enter into a Transition Services Agreement, which will provide for various corporate, administrative and information technology services.
The ADS board of directors believes separating the Spin Business from ADS is in the best interests of ADS and its stockholders and has concluded the Separation will provide ADS and Loyalty Ventures with a number of potential opportunities and benefits, including the following:

Strategic and Management Focus.   Permit the management team of each company to focus on its own strategic priorities with financial targets that best fit its own business, opportunities, market development and geographical focus. We believe the Separation will enable each company’s management team to better position its businesses to capitalize on developing macroeconomic trends, increase managerial focus to pursue its individual strategies and leverage its key strengths to drive performance. The management of each resulting company will be able to concentrate on its core competencies and growth opportunities, and will have increased flexibility and speed to design and implement corporate strategies based on the characteristics of its business.

Resource Allocation and Capital Deployment.   Allow each company to allocate resources, incentivize employees and deploy capital to capture the significant long-term opportunities in their respective markets. The Separation will enable each company’s management team to implement a capital structure, dividend policy and growth strategy tailored to each unique business. Both businesses are expected to have direct access to the debt and equity capital markets to fund their respective growth strategies.

Investor Choice.   Provide investors, both current and prospective, with the ability to value the two companies based on their distinct business characteristics and make more targeted investment decisions based on those characteristics. Separating the two businesses will provide investors with a discrete investment opportunity so that investors interested in companies in our business will have the opportunity to acquire stock of Loyalty Ventures.
The distribution of our common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. For more information, see “Risk Factors — Risks relating to
 
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the Separation” and “The Separation — Conditions to the Distribution” included elsewhere in this information statement.
Corporate information
Loyalty Ventures was incorporated in Delaware on June 21, 2021. Loyalty Ventures does not currently have any operations, has no assets and is not expected to conduct any operations until the completion of the Restructuring on or prior to the Distribution Date, pursuant to which the Spin Business assets will be contributed to and the Spin Business liabilities will be assumed by Loyalty Ventures in accordance with the Separation and Distribution Agreement and other agreements entered into in connection with the Separation. We are currently in the process of identifying office space for our corporate headquarters in the United States. For the time being, our principal executive offices are located at c/o Alliance Data Systems Corporation, 7500 Dallas Parkway, Suite 700, Plano, Texas 75024 and our telephone number is (214) 494-3000. Our website is                 . Our website and the information to be contained therein or connected thereto is not incorporated into this information statement or the registration statement of which it forms a part.
 
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QUESTIONS AND ANSWERS ABOUT THE SEPARATION
Please see “The Separation” for a more detailed description of the matters summarized below.
Q:   Why am I receiving this document?
A:   You are receiving this document because you are a holder of shares of ADS common stock on the record date for the Distribution and, as such, will be entitled to receive shares of Loyalty Ventures common stock upon completion of the transactions described in this information statement. We are sending you this document to inform you about the Separation and to provide you with information about Loyalty Ventures and its business and operations upon completion of the Separation.
Q:   What do I have to do to participate in the Separation?
A:   Nothing. You will not be required to pay any cash or deliver any other consideration in order to receive the shares of Loyalty Ventures common stock that you will be entitled to receive upon completion of the Separation. In addition, no stockholder approval will be required for the Separation and therefore you are not being asked to provide a proxy with respect to any of your shares of ADS common stock in connection with the Separation and you should not send us a proxy.
Q:   Why is ADS separating the Spin Business from its other businesses?
A:   The ADS board of directors believes separating our business from ADS’ other business will provide both companies with a number of potential opportunities and benefits, such as enabling (1) the management team of each company to focus on its own strategic priorities with financial targets that best fit its own business, opportunities, market development and geographical focus; (2) each company to allocate resources and deploy capital in a manner consistent with its own priorities; and (3) investors, both current and prospective, to value the two companies based on their distinct business characteristics and make more targeted investment decisions based on those characteristics.
Q:   What is Loyalty Ventures?
A:   Loyalty Ventures is a newly formed Delaware corporation that will hold the Spin Business, directly or indirectly through its subsidiaries, and be publicly traded on Nasdaq following the Separation.
Q:   How will ADS accomplish the Separation of Loyalty Ventures?
A:   The Separation involves the Restructuring (i.e., the transfer of the assets and liabilities related to the Spin Business to Loyalty Ventures or its subsidiaries) and the Distribution (i.e., ADS’ distribution to its stockholders of 81% of the outstanding shares of Loyalty Ventures’ common stock). Following this Restructuring and Distribution, Loyalty Ventures will be a publicly traded company independent from ADS, and ADS will retain a 19% ownership interest in Loyalty Ventures. ADS’ Loyalty Ventures common stock will be voted in the same proportion as the votes cast in respect of the common stock not owned by ADS on any matter presented for a vote of Loyalty Ventures’ stockholders.
Q:   What will I receive in the Distribution?
A:   At the effective time of the Distribution, you will be entitled to receive one share of Loyalty Ventures common stock for every                 shares of ADS common stock held by you on the record date.
Q:   How does my ownership in ADS change as a result of the Separation?
A:   Your ownership of ADS stock will not be affected by the Separation.
Q:   What is the record date for the Distribution?
A:   The record date for the Distribution is           , 2021, and ownership will be determined as of the close of business on that date. When we refer to the record date in this information statement, we are referring to that time and date.
Q:   When will the Distribution occur?
A:   The Distribution is expected to occur on           , 2021.
 
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Q:   As a holder of shares of ADS common stock as of the record date for the Distribution, how will shares of Loyalty Ventures be distributed to me?
A:   At the effective time, we will instruct our transfer agent and distribution agent to make book-entry credits for the shares of Loyalty Ventures common stock that you are entitled to receive. Since shares of Loyalty Ventures common stock will be in uncertificated book-entry form, you will receive share ownership statements in place of physical share certificates.
Q:   What if I hold my shares through a broker, bank or other nominee?
A:   ADS stockholders who hold their shares through a broker, bank or other nominee will have their brokerage account credited with Loyalty Ventures common stock. For additional information, those stockholders should contact their broker or bank directly.
Q:   Why is no ADS stockholder vote required to approve the Separation and its material terms?
A:   ADS is incorporated in Delaware. Delaware law does not require a stockholder vote to approve the Separation because the Separation will be effected by a stock dividend and does not constitute a sale, lease or exchange of all or substantially all of the assets of ADS.
Q:   How will fractional shares be treated in the Distribution?
A:   You will not receive fractional shares of Loyalty Ventures common stock in the Distribution. The distribution agent will aggregate and sell on the open market the fractional shares of Loyalty Ventures common stock that would otherwise be issued in the Distribution, and if you would otherwise be entitled to receive a fractional share of Loyalty Ventures common stock in connection with the Distribution, you will instead receive the net cash proceeds of the sale attributable to such fractional share.
Q:   What are the U.S. federal income tax consequences to me of the Distribution?
A:   A condition to the closing of the Separation is ADS’ receipt of a private letter ruling from the IRS and an opinion of Davis Polk & Wardwell LLP to the effect that the Distribution, together with certain related transactions, will qualify under the Internal Revenue Code of 1986, as amended (the “Code”), as a transaction that is tax-free to ADS and to its stockholders. On the basis that the Distribution so qualifies, for U.S. federal income tax purposes, you will not recognize any gain or loss, and no amount will be included in your income in connection with the Distribution, except with respect to any cash received in lieu of fractional shares. You should review the section entitled “The Separation—material U.S. federal income tax consequences of the Distribution” for a discussion of the material U.S. federal income tax consequences of the Distribution.
Q:   How will I determine the tax basis I will have in my ADS shares after the Distribution and the Loyalty Ventures shares I receive in the Distribution?
A:   Generally, for U.S. federal income tax purposes, your aggregate basis in your shares of ADS common stock and the shares of Loyalty Ventures common stock you receive in the Distribution (including any fractional shares for which cash is received) will equal the aggregate basis of ADS common stock held by you immediately before the Distribution. This aggregate basis should be allocated between your shares of ADS common stock and the shares of Loyalty Ventures common stock you receive in the Distribution (including any fractional shares for which cash is received) in proportion to the relative fair market value of each immediately following the Distribution. See “The Separation—Material U.S. federal income tax consequences of the Distribution.”
Q:   How will ADS’ common stock and Loyalty Ventures’ common stock trade after the Separation?
A:   There is currently no public market for Loyalty Ventures’ common stock. We expect to have Loyalty Ventures’ shares of common stock listed on Nasdaq under the ticker symbol “LYLT.” ADS common stock will continue to trade on the New York Stock Exchange (“NYSE”) under the ticker symbol “ADS.”
 
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Q:   If I sell my shares of ADS common stock before or on the Distribution Date, will I still be entitled to receive Loyalty Ventures shares in the Distribution with respect to the sold shares?
A:   Beginning on or shortly before the record date and continuing up to and including the Distribution Date, we expect there will be two markets in ADS common stock: a “regular-way” market and an “ex-distribution” market. Shares of ADS common stock that trade on the “regular-way” market will trade with an entitlement to receive shares of our common stock to be distributed in the Distribution. Shares that trade on the “ex-distribution” market will trade without an entitlement to receive shares of our common stock to be distributed in the Distribution, so that holders who initially sell ADS shares ex-distribution will still be entitled to receive shares of Loyalty Ventures common stock even though they have sold their shares of ADS common stock before the Distribution, because the ADS shares were sold after the record date. Therefore, if you owned shares of ADS common stock on the record date and sell those shares on the “regular-way” market before the Distribution Date, you will also be selling the right to receive the shares of our common stock that would have been distributed to you in the Distribution. If you own shares of ADS common stock as of the close of business on the record date and sell these shares in the “ex-distribution” market on any date up to and including the Distribution Date, you will still receive the shares of our common stock that you would be entitled to receive in respect of your ownership of the shares of ADS common stock that you sold. You are encouraged to consult with your financial advisor regarding the specific implications of selling your ADS common stock prior to or on the Distribution Date.
Q:   Will I receive a stock certificate for Loyalty Ventures shares distributed as a result of the Distribution?
A:   No. Registered holders of ADS common stock who are entitled to participate in the Distribution will receive a book-entry account statement reflecting their ownership of Loyalty Ventures common stock. For additional information, registered stockholders in the U.S., Canada or Puerto Rico should contact ADS’ transfer agent, Computershare Trust Company, N.A. (“Computershare”), in writing at: Computershare Inc., Computershare Trust Company, 150 Royall Street, Canton MA 02021, Toll Free at 1-877-373-6374 or through its website at www.computershare.com/investor. Stockholders from outside the U.S., Canada and Puerto Rico may call 1-781-575-2879. See “The Separation—When and how you will receive the Distribution of Loyalty Ventures’ shares.”
Q:   Can ADS decide to cancel the Distribution of the Loyalty Ventures’ common stock even if all the conditions have been met?
A:   Yes. ADS has the right to terminate, or modify the terms of, the Separation at any time prior to the Distribution, even if all of the conditions to the Distribution are satisfied.
Q:   Do I have appraisal rights?
A:   No, ADS stockholders do not have any appraisal rights in connection with the Separation.
Q:   Will Loyalty Ventures incur any debt in connection with the Separation?
A:   Yes. We intend to enter into new financing arrangements in anticipation of the Separation consisting of a term loan B facility (the ‘‘new term loan facility’’). We expect to incur approximately $675.0 million of new debt from the proceeds of the new term loan facility, the net proceeds of which we intend to use to fund a portion of a cash transfer of $750.0 million to ADS, or one or more of its subsidiaries, as part of the Restructuring. See “The Separation—Incurrence of debt.”
Following the Separation, our debt obligations could restrict our business and may adversely impact our financial condition, results of operations or cash flows. In addition, our separation from ADS may increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to the businesses collectively. Also, our business, financial condition, results of operations and cash flows could be harmed by a deterioration of our credit profile or by factors adversely affecting the credit markets generally. See “Risk Factors—Risks relating to the Separation.”
Q:   Does Loyalty Ventures intend to pay cash dividends?
A:   We do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to reduce our debt as well as
 
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fund the development and expansion of our business. The declaration and amount of any dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, cash flows, capital requirements of our business, covenants associated with our debt obligations, legal requirements, industry practice and any other factors the board of directors deems relevant. See “Dividend Policy.”
Q:
Will the Separation affect the trading price of my ADS stock?
A:   Yes. The trading price of shares of ADS common stock immediately following the Distribution is expected to be lower than immediately prior to the Distribution because the trading price will no longer reflect the value of the Spin Business. We cannot provide you with any assurance regarding the price at which the ADS shares will trade following the Separation.
Q:
What will happen to outstanding ADS equity awards?
A:   In connection with the Separation, outstanding ADS equity awards will generally be adjusted, amended or otherwise addressed in a manner that is intended to preserve the value of such awards as of immediately before and after the Distribution.
Specifically, we intend that, in connection with the Separation, (i) outstanding ADS equity awards held by individuals who will continue to be employed by or provide services to ADS will be equitably adjusted to reflect the difference in the value of ADS common stock before and after the Distribution in a manner that is intended to preserve the overall intrinsic value of the awards, and (ii) certain outstanding ADS equity awards held by individuals who are employed by or otherwise providing services to Loyalty Ventures, or whose employment or engagement will be transferred to Loyalty Ventures in connection with the Separation, will either be accelerated and settled or canceled and replaced in a manner that is intended to generally preserve the intrinsic value of the awards.
The specific adjustment mechanics will be agreed between Loyalty Ventures and ADS and set forth in the Employee Matters Agreement that we intend to enter into with ADS prior to the Separation.
Q:   What will the relationship between ADS and Loyalty Ventures be following the Separation?
A:   After the Separation, ADS will retain a 19% ownership interest in Loyalty Ventures common stock, while each of ADS and Loyalty Ventures will be independent, publicly traded companies with their own management teams and boards of directors. ADS’ Loyalty Ventures common stock will be voted in the same proportion as the votes cast in respect of the common stock not owned by ADS on any matter presented for a vote of Loyalty Ventures’ stockholders. The chair of ADS’ board is expected to be the chair of Loyalty Ventures’ board for a single fixed term of up to three years, subject to IRS approval. In connection with the Separation, we will enter into a number of agreements with ADS that, among other things, govern the Separation and allocate responsibilities for obligations arising before and after the Separation, including, among others, obligations relating to our employees, taxes, liabilities and real and intellectual property. See “The Separation—Agreements with ADS.”
Q:   Who is the transfer agent for Loyalty Ventures common stock?
A:   Computershare will be the transfer agent for Loyalty Ventures common stock. Computershare’s mailing address is C/O: Shareholder Services, P.O. Box 505000, Louisville, Kentucky 40233-5000 and Computershare’s phone number for stockholders in the U.S., Canada or Puerto Rico is Toll Free 1-800-446-2617 and for stockholders from outside the U.S., Canada and Puerto Rico is                 .
Q:   Who is the distribution agent for the Distribution?
A:   Computershare Trust Company, N.A.
Q:   Who can I contact for more information?
A:   If you have questions relating to the mechanics of the distribution of Loyalty Ventures shares, you should contact the distribution agent:
 
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Computershare Inc.
Computershare Trust Company,
150 Royall Street
Canton, Massachusetts 02021
Toll-Free: 1-877-373-6374
International: 1-781-575-2879
Before the Separation, if you have questions relating to the transactions described herein, you should contact ADS at:
Brian Vereb
Alliance Data Systems Corporation
3075 Loyalty Circle
Columbus, Ohio 43219
investorrelations@alliancedata.com
After the Separation, if you have questions relating to the transactions described herein, you should contact Loyalty Ventures at:
John J. Chesnut
Loyalty Ventures
7500 Dallas Parkway, Suite 700
Plano, Texas 75024
investorrelations@loyalty.com
 
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SUMMARY OF THE SEPARATION
The following is a summary of the material terms of the Separation, including the Restructuring, the Distribution and certain other related transactions.
Distributing Company
ADS, a Delaware corporation. After the Distribution, ADS will retain a 19% ownership interest in Loyalty Ventures common stock.
Distributed Company
Loyalty Ventures, a Delaware corporation, is a wholly owned subsidiary of ADS and, at the time of the Distribution, will hold, directly or indirectly through its subsidiaries, all of the assets and liabilities of the Spin Business. After the Distribution, Loyalty Ventures will be an independent, publicly traded company.
Distributed Company Structure
Loyalty Ventures is a parent company. At the time of the Distribution it will own the shares of a number of subsidiaries operating its businesses.
Record Date
The record date for the Distribution is on the close of business on          , 2021.
Distribution Date
The Distribution Date is          , 2021.
Distributed Securities
ADS will distribute 81% of the shares of Loyalty Ventures common stock outstanding immediately prior to the Distribution. Based on the approximately          shares of ADS common stock outstanding on          , 2021, and applying the distribution ratio of one share of Loyalty Ventures common stock for every          shares of ADS common stock, ADS will distribute approximately          shares of Loyalty Ventures common stock to ADS stockholders who hold ADS common stock as of the record date.
Distribution Ratio
Each holder of ADS common stock will receive one share of Loyalty Ventures common stock for every          shares of ADS common stock held as of the close of business on               , 2021.
Fractional Shares
ADS will not distribute any fractional shares of Loyalty Ventures common stock to ADS stockholders. Instead, as soon as practicable after the Distribution Date, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing prices and distribute the net cash proceeds, net of brokerage fees and commissions, transfer taxes and other costs and after making appropriate deductions of the amounts required to be withheld for U.S. federal income tax purposes, if any, from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the Distribution. The distribution agent will determine when, how, through which broker-dealers and at what prices to sell the aggregated fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any minimum sale price for the fractional shares or to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable to the recipient stockholders for U.S. federal income tax purposes as described in “The Separation—Material U.S. federal income tax consequences of the Distribution.”
 
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Distribution Method
Loyalty Ventures common stock will be issued only by direct registration in book-entry form. Registration in book-entry form is a method of recording stock ownership when no physical paper share certificates are issued to stockholders, as is the case in this Distribution.
Conditions to the Distribution
The Distribution is subject to the satisfaction or waiver by ADS of the following conditions, as well as other conditions described in this information statement in “The Separation—Conditions to the Distribution”:

The board of directors of ADS will have approved the Distribution.

The SEC will have declared effective our registration statement on Form 10, of which this information statement is a part, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), no stop order suspending the effectiveness of our registration statement on Form 10 will be in effect, and no proceedings for such purpose will have been instituted or threatened by the SEC, and this information statement, or a notice of Internet availability thereof, will have been mailed to the holders of ADS common stock as of the record date for the Distribution;

Our common stock to be delivered in the Distribution will have been approved for listing on Nasdaq, subject to official notice of issuance;

ADS will have received a private letter ruling from the IRS and an opinion of Davis Polk & Wardwell LLP, in each case reasonably satisfactory to ADS, to the effect that, for U.S. federal income tax purposes, the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code;

Any material governmental approvals and consents and any material permits, registrations and consents from third parties, in each case, necessary to effect the distribution and to permit the operations of our business after the Distribution Date substantially as conducted as of the date of the Separation and Distribution Agreement will have been obtained; and

No event or development will have occurred or exist that, in the judgment of the ADS board of directors, in its sole and absolute discretion, makes it inadvisable to effect the Separation or other transactions contemplated by the Separation and Distribution Agreement or by any of the ancillary agreements contemplated by the Separation and Distribution Agreement.
The fulfillment of the conditions to the Distribution will not create any obligations on ADS’ part to effect the Separation, and the ADS board of directors has reserved the right, in its sole discretion, to abandon, modify or change the terms of the Separation, including by accelerating or delaying the timing of
 
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the consummation of all or part of the Distribution, at any time prior to the Distribution Date.
Stock Exchange Listing
We expect to apply to have our shares of common stock listed on Nasdaq under the ticker symbol “LYLT.”
Dividend Policy
We do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the reduction of our debt as well as the development and expansion of our business. The declaration and amount of any dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, cash flows, capital requirements of our business, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors the board of directors deems relevant. For more information, see “Dividend Policy.”
Transfer Agent
Computershare Trust Company, N.A.
U.S. Federal Income Tax
Consequences
A condition to the closing of the Separation is ADS’ receipt of a private letter ruling from the IRS and an opinion of Davis Polk & Wardwell LLP to the effect that the Distribution, together with certain related transactions, will qualify under the Code as a transaction that is tax-free to ADS and to its stockholders. You should review the section entitled “The Separation—Material U.S. federal income tax consequences of the Distribution” for a discussion of the material U.S. federal income tax consequences of the Distribution.
 
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SUMMARY RISK FACTORS
We are subject to a number of risks, including risks related to the Separation, including the Restructuring and the Distribution, and other related transactions. The following summary of our principal risks provides an overview of the uncertainty inherent in investing in us presents and is not exhaustive. This summary is qualified in its entirety by reference to the complete description of our risk factors set forth immediately below. Please read “Risk Factors” carefully for a more thorough description of these and other risks. With regard to strategic business risks and our competitive environment, we caution that the pervasive impacts of COVID-19 on the macroeconomic environment will continue to heighten all of our risks for an indeterminate duration.
Risks relating to the separation include failure to realize anticipated benefits, expenditure of limited resources, lack of independent operating history, incurrence of additional debt, discretionary actions of the ADS board of directors, inequitable indemnities, insufficient remedies or markets for our equity securities, conflicts of interest, and potential tax-related liabilities.

Our business may be harmed if anticipated benefits from the Separation fail to materialize or their realization is delayed.

Without history operating as an independent company, our historical combined financials and unaudited pro forma financial information may not necessarily be representative of the results we would have achieved as an independent, publicly traded company and may not be indicative of our future prospects.

We may incur significant costs and diversion of executive management and other resources to create the infrastructure necessary to operate as an independent publicly traded company, or experience operational disruptions in connection with the Separation.

Until the Distribution occurs, the ADS board of directors in its sole discretion may change the terms of the Separation to be less favorable to us.

Following the Separation, our newly incurred debt obligations may restrict our business, increase our cost of debt funding and/or decrease our overall debt capacity and commercial credit availability.

Reciprocal indemnifications with ADS in connection with the Separation may not equitably allocate responsibility, may be insufficient to insure us for liabilities incurred or may require us to divert cash to fund obligations to ADS.

Without rights to approve or dissenter’s rights in connection with the Separation, ADS stockholders may seek to sell their ADS and/or Loyalty Ventures shares, and the post-Distribution value may not equal or exceed the pre-Distribution value and there may not be a sufficient trading market for one or both companies.

Certain Loyalty Ventures directors, executive officers and other personnel may continue to own significant positions in ADS relative to their assets, giving rise to conflicts of interest during the transition.

If the Restructuring, Separation and Distribution fail to qualify as tax-free due to a prior breach of any covenant or representation by us or if we fail to comply with the restrictions placed on us for subsequent periods, we may be responsible for significant tax-related liabilities.
Risks relating to our business strategy, competitive environment and operations include client concentration, loss of sponsors, clients, rewards suppliers or collector engagement, disruptions in reward quality or availability, failure to identify new business opportunities, changes in consumer preference or behavior, potential for data breach or other restrictions on the use of consumer information, operating in complex global legal environments and fluctuations in global economic conditions.

Our ten largest clients represented just over half of our combined revenue in 2020, and BrandLoyalty’s client commitments are not long-term.

Loss of sponsors, business by our clients, relationships with rewards suppliers or changes in collector redemption amounts or patterns may limit both growth and profitability.
 
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Airline or travel industry disruptions, including airline competition, market availability, operating restrictions, restructurings or insolvencies, could limit collector engagement in the AIR MILES Reward Program.

Failure to accurately forecast consumer demand for our BrandLoyalty campaigns could result in excess inventories or inventory shortages.

Inability to anticipate and respond to market trends and changes in consumer preferences for loyalty program features or rewards could reduce demand for our services.

Failure of rewards suppliers to deliver in contracted quantities, in a timely manner and meeting quality standards could adversely affect our reputation with sponsors, clients and loyalty program participants.

Opportunities to grow our business may be limited by inability to identify suitable acquisitions or new business opportunities, or to effectively integrate businesses we acquire.

Failures in data protection, cyber and information security and protection of intellectual property rights could critically impair our products, services and ability to conduct business as well as expose us to legal claims.

Consumer protection, data protection and data privacy and security laws restrict functionality that enhance loyalty and marketing program capabilities and their appeal to sponsors, clients and loyalty program participants.

Complex international laws as well as operating in jurisdictions lacking developed regulatory and legal systems requires extensive effort to manage compliance.

Global economic factors beyond our control may impact demand for our services and cause fluctuations in foreign currency exchange rates that impact our results of operations.
Risks relating to our indebtedness include maintaining adequate liquidity and servicing our outstanding indebtedness.

High levels of indebtedness may restrict our ability to compete, react to changes in our business and incur additional indebtedness to fund future needs.
Risks relating to our common stock include lack of an existing trading market, differences in our profile from that of ADS, restrictive provisions in our charter documents and potential for dilution.

No public market currently exists for our common stock, and the market price and trading volume of our common stock may be volatile, making resale of your Loyalty Ventures shares at or above the initial market price following the Separation difficult.

Because our common stock will not be included in the Standard & Poor’s Midcap 400 Index, or other stock indices, and is not expected to pay a recurring dividend, significant amounts of our common stock distributed to current ADS investors with defined investment policies requiring such features will likely need to be sold in the open market where there may not be offsetting demand.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and certain provisions of Delaware law could delay or prevent a change in control of Loyalty Ventures.

A large number of our shares are or will be eligible for future sale, which may dilute your percentage ownership in Loyalty Ventures and cause the market price of our common stock to decline.
 
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RISK FACTORS
You should carefully consider each of the following risks and all of the other information contained in this information statement. Some of these risks relate principally to our separation from ADS, while others relate principally to our business and the industry in which we operate or to the securities markets generally and ownership of our common stock. Our business, prospects, results of operations, financial condition or cash flows could be materially and adversely affected by any of these risks, and, as a result, the trading price of our common stock could decline.
Risks relating to the separation
We may not realize the anticipated benefits from the Separation, and the Separation could harm our business.
We may not be able to achieve the full strategic and financial benefits expected to result from the Separation, or such benefits may be delayed. The Separation is expected to enhance strategic and management focus, provide a distinct investment identity and allow us to efficiently allocate resources and deploy capital. We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:

The Separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business;

Following the Separation, we may be more susceptible to economic downturns and other adverse events than if we were still a part of ADS;

Following the Separation, our business will be less diversified than ADS’ business prior to the Separation and also experience a loss of scale and access to certain financial, managerial and professional resources that may have benefited us in the past; and

The other actions required to separate the respective businesses could disrupt our operations.
If we fail to achieve some or all of the benefits expected to result from the Separation, or if such benefits are delayed, our business could be harmed.
We have no history of operating as an independent, publicly traded company, and our historical combined financials and unaudited pro forma financial information is not necessarily representative of the results that we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.
Our historical combined and unaudited pro forma combined financial information included in this information statement have been derived from ADS’ consolidated financial statements and accounting records and are not necessarily indicative of our future results of operations, financial condition or cash flows, nor do they reflect what our results of operations, financial condition or cash flows would have been as an independent public company during the periods presented. In particular, the historical combined financial information included in this information statement is not necessarily indicative of our future results of operations, financial condition or cash flows primarily because of the following factors:

Prior to the Separation, our business has been operated by ADS as part of its broader corporate organization, rather than as an independent company. ADS or one of its affiliates provide support for various functions including internal audit, finance, accounting, tax, human resources, procurement, information technology, and public company reporting functions ;

Our historical combined financial results reflect the direct, indirect and allocated costs for such services historically provided by ADS, and these costs may significantly differ from the comparable expenses we would have incurred as an independent, publicly traded company;

Our cost of debt and other capital may significantly differ from that which is reflected in our historical combined financial statements;
 
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The historical combined financial information may not fully reflect the costs associated with the Separation, including the costs related to being an independent public company;

Our historical combined financial information does not reflect our obligations under the various transitional and other agreements we will enter into with ADS in connection with the Separation; and

Currently, our business is integrated with that of ADS and we benefit from ADS’ size and scale in costs, employees and vendor and customer relationships. Thus, costs we will incur as an independent company may significantly exceed comparable costs we would have incurred as part of ADS and some of our customer relationships may be weakened or lost. For example, some of our contract counterparties may have contracted with us because we were part of ADS, and we may have difficulty obtaining favorable terms in our contractual arrangements in the future as a result of our separation from ADS.
We based the pro forma adjustments included in this information statement on available information and assumptions that we believe are reasonable and factually supportable; actual results, however, may vary. In addition, our unaudited pro forma combined financial information included in this information statement may not give effect to various ongoing additional costs we may incur in connection with being an independent public company. Accordingly, our unaudited pro forma combined financial statements do not reflect what our results of operations, financial condition or cash flows would have been as an independent public company and are not necessarily indicative of our future financial condition or results of operations.
Please refer to “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and the notes to those statements included elsewhere in this information statement.
We will incur significant costs to create the corporate infrastructure necessary to operate as an independent public company.
ADS currently performs all or part of certain corporate functions for us, including internal audit, finance, accounting, tax, human resources, procurement, information technology, and public company reporting functions. The cost of these services allocated to us in our historical combined financial statements was based on management estimates and may not be indicative of the costs had we operated on a standalone basis, independent of ADS. Following the Separation, ADS will continue to provide certain of these services to us on a transitional basis, for a period of up to two years following the Distribution pursuant to a Transition Services Agreement that we will enter into with ADS. See “The Separation—Agreements with ADS—Transition Services Agreement.” ADS may not successfully execute all of these functions during the transition period or we may have to expend significant efforts or costs materially in excess of those estimated under the Transition Services Agreement. Any interruption in these services could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In addition, at the end of this transition period, we will need to perform these functions ourselves or hire third parties to perform these functions on our behalf. The costs associated with performing or outsourcing these functions are not reflected in our historical combined financial statements. We expect to incur costs beginning in the fourth quarter of 2021 to establish the necessary infrastructure. A significant increase in the costs of performing or outsourcing these functions could materially and adversely affect our business, results of operations, financial condition and cash flows.
Furthermore, we may experience certain operational disruptions in connection with the Separation as we transition to operating as an independent public company, including information technology disruptions with respect to our public company reporting functions as certain data, software, information technology hardware and other information technology assets and systems are transitioned or re-allocated between us and ADS, or as we implement new systems or upgrades in connection with such transition. Our ability to effectively manage and meet our public company reporting obligations depends significantly on information technology systems, and any failure, disruption, interruption, malfunction or other issue with respect to such systems could have a material adverse effect on our business and results of operations.
 
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The obligations associated with being a public company will require significant resources and management attention.
Currently, we are not directly subject to the reporting and other requirements of the Exchange Act. Following the effectiveness of the registration statement of which this information statement forms a part, we will be directly subject to such reporting and other obligations under the Exchange Act and the rules of Nasdaq. As an independent public company, we are required to, among other things:

Prepare and distribute periodic reports, proxy statements and other stockholder communications in compliance with the federal securities laws and rules as well as Nasdaq requirements;

Have our own board of directors and committees thereof, which comply with federal securities laws and rules as well as Nasdaq requirements;

Institute our own financial reporting and disclosure compliance functions;

Establish an investor relations function;

Establish internal policies and procedures, including those relating to trading in our securities, disclosure controls and procedures and other domestic and international laws and regulations applicable to our business; and

Comply with the financial reporting rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act and the Public Company Accounting Oversight Board.
These reporting and other regulatory and compliance obligations will place significant demands on our management and our administrative and operational resources, including accounting resources, and we expect to face increased legal, accounting, administrative and other costs and expenses relating to these demands that we had not incurred as a segment of ADS. Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the Separation.
Prior to the Separation, our financial results were included within the consolidated results of ADS, and we were not directly subject to reporting and other requirements of the Exchange Act. These and other obligations will place significant demands on our management, administrative, and operational resources, including accounting and information technology resources. To comply with these requirements, we anticipate that we will need to duplicate information technology infrastructure, implement additional financial and management controls, reporting systems and procedures and hire additional accounting, finance, tax, treasury and information technology staff. If we are unable to do this in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired and our business could be harmed.
If we fail to maintain effective internal controls, we may not be able to report our financial results accurately or timely, or prevent or detect fraud, which could have a material adverse effect on our business or the market price of our securities.
In accordance with Section 404 of the Sarbanes-Oxley Act, our management will be required to conduct an annual assessment of the effectiveness of our internal control over financial reporting and include a report on these internal controls in the annual reports we will file with the SEC on Form 10-K. Due to our “emerging growth company” status as defined in the Jumpstart Our Business Startups Act, or JOBS Act, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controls until the later of our second annual report following the completion of the Separation or the date we no longer qualify as an “emerging growth company.” When required, this process will require significant documentation of policies, procedures and systems, review of that documentation by management and by our outside independent registered public accounting firm, and
 
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testing of our internal controls over financial reporting by our staff and our outside independent registered public accounting firm. This process will involve considerable time and attention, may strain our internal resources, and will increase our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter. If management or our independent registered public accounting firm determines that our internal control over financial reporting is not effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by Nasdaq, the SEC or other regulatory authorities, which could require additional financial and management resources. In addition, if our controls are not effective, our ability to accurately and timely report our financial position could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock from Nasdaq, and could have a material adverse effect on our business, financial condition, prospects and results of operations.
Until the Distribution occurs, ADS has sole discretion to change the terms of the Separation in ways that may be unfavorable to us.
Until the Distribution occurs, Loyalty Ventures’ business will remain a segment of ADS. Completion of the Separation remains subject to the satisfaction or waiver of certain conditions, some of which are in the sole and absolute discretion of ADS, including final approval by the ADS board of directors. Additionally, ADS has the sole and absolute discretion to change certain terms of the Separation, including the amount of any cash transfer we make to ADS, the amount of our indebtedness and the allocation of contingent liabilities, which changes could be unfavorable to us. In addition, ADS may decide at any time prior to the completion of the Separation not to proceed with the Separation and Distribution.
In connection with the Separation, ADS will indemnify us for certain liabilities and we will indemnify ADS for certain liabilities. If we are required to act under these indemnities to ADS, we may need to divert cash to meet those obligations, which could adversely affect our financial results. Moreover, the ADS indemnity may not be sufficient to insure us against the full amount of liabilities for which ADS will be allocated responsibility, and ADS may not be able to satisfy its indemnification obligations to us in the future.
Pursuant to the Separation and Distribution Agreement and other agreements with ADS, ADS will agree to indemnify us for certain liabilities, and we will agree to indemnify ADS for certain liabilities, as discussed further in “The Separation—Agreements with ADS.” Payments that we may be required to provide under indemnities to ADS are not subject to any cap, may be significant and could negatively affect our business, particularly under indemnities relating to our actions that could affect the tax-free nature of the Separation. Third parties could also seek to hold us responsible for any liabilities that ADS has agreed to retain, and under certain circumstances, we may be subject to continuing contingent liabilities of ADS following the Separation that arise relating to the operations of the Spin Business during the time that it was a business segment of ADS prior to the Separation, such as certain tax liabilities which relate to periods during which taxes of the Spin Business were reported as a part of ADS; any liabilities retained by ADS which relate to contracts or other obligations entered into jointly by the Spin Business and ADS’ retained business; and any liabilities arising from third-party claims in respect of contracts in which both ADS and the Spin Business supply goods or provide services.
After the Separation, we will only have limited access to the insurance policies maintained by ADS for events occurring prior to the Separation and ADS’ insurers may deny coverage to us under such policies. Furthermore, there can be no assurance that we will be able to obtain insurance coverage following the Separation on terms that justify its purchase, and any such insurance may not be adequate to offset costs associated with certain events.
In connection with the Separation, we will enter into agreements with ADS to address several matters associated with the Separation, including insurance coverage. The Separation and Distribution Agreement will provide that following the Distribution, Loyalty Ventures will no longer have insurance coverage under ADS insurance policies in connection with events occurring before, as of or after the Distribution, other than coverage for (i) events occurring prior to the Distribution and covered by occurrence-based policies of
 
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ADS as in effect as of the Distribution and (ii) events or acts occurring prior to the Distribution and covered by claims-made policies of ADS as in effect as of the Distribution. However, after the Separation, ADS’ insurers may deny coverage to us for losses associated with occurrences prior to the Separation. Accordingly, we may be required to temporarily or permanently bear the costs of such lost coverage. In addition, we will have to obtain our own insurance policies after the Distribution is complete.
Although we expect to have insurance policies in place as of the Distribution that cover certain, but not all, hazards that could arise from our operations, we can provide no assurance that we will be able to obtain such coverage, that the cost of such coverage will be similar to those incurred by ADS or that such coverage will be adequate to protect us from costs incurred with certain events. The occurrence of an event that is not insured or not fully insured could have a material adverse effect on our results of operations, financial condition and cash flows in the future. See “The Separation—Agreements with ADS.”
Transfer or assignment to us of some contracts and other assets will require the consent of a third-party. If such consent is not given, we may not be entitled to the benefit of such contracts, investments and other assets in the future.
Transfer or assignment of some of the contracts and other assets in connection with the Separation will require the consent of a third-party to the transfer or assignment. Similarly, in some circumstances, we are joint beneficiaries of contracts, and we will need to enter into a new agreement with the third-party to replicate the existing contract or assign the portion of the existing contract related to our business. While we anticipate that most of these contract assignments and new agreements will be obtained prior to the Separation, we may not be able to obtain all required consents or enter into all such new agreements, as applicable, until after the Distribution Date. Some parties may use the requirement of a consent to seek a fee or more favorable contractual terms from us, which could include our having to obtain letters of credit or other forms of credit support. If we are unable to obtain such consents or such credit support on commercially reasonable and satisfactory terms, we may be unable to obtain some of the benefits, assets and contractual commitments that are intended to be allocated to us as part of the Separation. In addition, where we do not intend to obtain consent from third-party counterparties based on our belief that no consent is required, the third-party counterparties may challenge the transaction on the basis that the terms of the applicable commercial arrangements require their consent. We may incur substantial litigation and other costs in connection with any such claims and, if we do not prevail, our ability to use these assets could be adversely impacted.
We cannot provide assurance that all such required third-party consents and new agreements will be procured or put in place, as applicable, prior to the Distribution Date. Consequently, we may not realize certain of the benefits that are intended to be allocated to us as part of the Separation.
After the Separation, some of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in ADS.
Because of their current or former positions with ADS, following the Separation, some of our directors, executive officers and other employees may own shares of ADS common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. This ownership may create, or may create the appearance of, conflicts of interest when these individuals are faced with decisions that could have different implications for ADS or us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between ADS and us regarding the terms of the agreements governing the Separation and the relationship thereafter between the companies.
The combined post-Distribution value of ADS and Loyalty Ventures shares may not equal or exceed the pre-Distribution value of ADS shares.
After the Separation, we expect that ADS common stock will continue to be traded on the NYSE. We expect to apply to list the shares of our common stock on Nasdaq. We cannot assure you that the combined trading prices of ADS common stock and our common stock after the Separation, as adjusted for any changes in the combined capitalization of both companies, will be equal to or greater than the trading price of ADS common stock prior to the Separation. Until the market has fully evaluated the business of ADS
 
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without our business and potentially thereafter, the price at which ADS common stock trades may fluctuate significantly. Similarly, until the market has fully evaluated our business operated as an independent, publicly traded company and potentially thereafter, the price at which our common stock trades may fluctuate significantly.
We potentially could have received better terms from unaffiliated third parties than the terms we received in our agreements with ADS.
The agreements we entered into with ADS in connection with the Separation were negotiated while we were still part of ADS’ business. See “The Separation—Agreements with ADS.” Accordingly, during the period in which the terms of those agreements will have been negotiated, we did not have an independent board of directors or a management team independent of ADS. The terms of the agreements negotiated in the context of the Separation relate to, among other things, the allocation of assets, intellectual property, liabilities, rights and other obligations between ADS and us, and arm’s-length negotiations between ADS and an unaffiliated third-party in another form of transaction, such as a buyer in a sale of a business transaction, may have resulted in more favorable terms to the unaffiliated third-party.
ADS stockholders do not have dissenters’ rights with respect to the Separation.
ADS stockholders do not have any dissenters’ rights in connection with the Separation. Therefore, any ADS stockholders who disagree with the Separation will be left without recourse other than selling their Loyalty Ventures and/or ADS shares. Further, such stockholders may be unable to subsequently sell their shares at the prices they desire or at all.
If the Restructuring and Distribution, together with certain related transactions, do not qualify as transactions that are tax-free for U.S. federal income tax purposes or non-U.S. tax purposes, ADS and/or holders of ADS common stock could be subject to significant tax liability.
It is intended that the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code. The consummation of the Separation and the related transactions is conditioned upon the receipt of a private letter ruling from the IRS and opinion of Davis Polk & Wardwell LLP to the effect that such transactions will qualify for this intended tax treatment. In addition, it is intended that the Restructuring steps will qualify as transactions that are tax-free for U.S. federal income tax purposes. The private letter ruling and the opinion will rely on certain representations, assumptions and undertakings, including those relating to the past and future conduct of our business, and neither the private letter ruling nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter ruling does not address all the issues that are relevant to determining whether the Distribution will qualify for tax-free treatment. Notwithstanding the private letter ruling and the opinion, the IRS could determine that the Distribution should be treated as a taxable transaction for U.S. federal income tax purposes if it determines that any of the representations, assumptions or undertakings that were included in the request for the private letter ruling are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling. For more information regarding the private letter ruling and the opinion see “The Separation—Material U.S. federal income tax consequences of the Distribution—Private letter ruling and tax opinion.”
If the Restructuring and Distribution fail to qualify for tax-free treatment, for any reason, ADS and/or holders of ADS common stock would be subject to substantial U.S. federal income taxes as a result of the Restructuring, Distribution and certain related transactions. See “The Separation—Material U.S. federal income tax consequences of the Distribution.”
 
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If the Restructuring or Distribution is taxable to ADS as a result of a breach by us of any covenant or representation made by us in the Tax Matters Agreement (as defined below), we will generally be required to indemnify ADS and this indemnification obligation, or the payment thereof, could have a material adverse effect on us.
As described above, it is intended that the Restructuring and Distribution, together with certain related transactions, will qualify as tax-free transactions to ADS and to holders of ADS common stock, except with respect to any cash received in lieu of fractional shares. If the Restructuring, Distribution and/or related transactions are not so treated or are taxable to ADS (see “The Separation—Material U.S. federal income tax consequences of the Distribution”) due to a breach by us (or any of our subsidiaries) of any covenant or representation made by us in the Tax Matters Agreement, we will generally be required to indemnify ADS for all tax-related losses suffered by ADS. In addition, we will not control the resolution of any tax contest relating to taxes suffered by ADS in connection with the Separation, and we may not control the resolution of tax contests relating to any other taxes for which we may ultimately have an indemnity obligation under the Tax Matters Agreement. In the event that ADS suffers tax-related losses in connection with the Separation that must be indemnified by us under the Tax Matters Agreement, the indemnification liability, or the payment thereof, could have a material adverse effect on us.
We will be subject to significant restrictions on our actions following the Separation in order to avoid triggering significant tax-related liabilities.
The Tax Matters Agreement generally will prohibit us from taking certain actions that could cause the Distribution and certain related transactions to fail to qualify as tax-free transactions, including:

During the two-year period following the Distribution Date (or otherwise pursuant to a “plan” within the meaning of Section 355(e) of the Code), we may not cause or permit certain business combinations or transactions to occur;

During the two-year period following the Distribution Date, we may not discontinue the active conduct of our business (within the meaning of Section 355(b)(2) of the Code);

During the two-year period following the Distribution Date, we may not sell or otherwise issue our common stock in certain circumstances;

During the two-year period following the Distribution Date, we may not redeem or otherwise acquire any of our common stock, other than pursuant to open-market repurchases of less than 20% of our common stock (in the aggregate);

During the two-year period following the Distribution Date, we may not amend our certificate of incorporation (or other organizational documents) or take any other action, whether through a stockholder vote or otherwise, affecting the voting rights of our common stock; and

More generally, we may not take any action that could reasonably be expected to cause the Separation and certain related transactions to fail to qualify as tax-free transactions for U.S. federal income tax purposes or for non-U.S. tax purposes.
If we take any of the actions above and such actions result in tax-related losses to ADS, we generally will be required to indemnify ADS for such tax-related losses under the Tax Matters Agreement. See “The Separation—Agreements with ADS—Tax Matters Agreement.” Due to these restrictions and indemnification obligations under the Tax Matters Agreement, we may be limited in our ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may otherwise be in our best interests. Also, our potential indemnity obligation to ADS might discourage, delay or prevent a change of control that our stockholders may consider favorable.
 
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Risks relating to our business strategy and operations
Impacts related to the COVID-19 pandemic are expected to continue to pose risks to our business for the foreseeable future, heighten many of our known risks and may have a material adverse impact on our results of operations, financial condition and liquidity.
Following the declaration by the WHO in the first quarter of 2020 of COVID-19 as a global pandemic and the rapid spread of COVID-19, international, provincial, federal, state and local government or other authorities have instituted certain preventative measures, including border closures, travel bans, prohibitions on group events and gatherings, shutdowns or other operational restrictions on certain businesses, curfews, shelter-in-place orders, quarantines and recommendations to practice social distancing. Certain jurisdictions have begun reopening only to return to more stringent restrictions where increases in COVID-19 cases occur. These restrictions have continued to disrupt economic activity worldwide, resulting in volatility in the global capital markets, instability in the credit and financial markets, reduced commercial and consumer confidence and spending, widespread furloughs and layoffs, closure or restricted operating conditions for retail stores, labor shortages, disruption in supply chains (including availability of raw materials, ability to manufacture goods and delivery of finished products to suppliers and retailers), and near complete cessation of many hospitality and travel industry operations. Even as vaccines are introduced and administered, governmental restrictions are lifted and economies gradually reopen, the ongoing economic impacts, including government economic stimulus, and health concerns associated with the pandemic, the emergence of more transmissible variants and the global availability and efficacy of vaccines, may continue to affect consumer behavior, spending levels and retail preferences.
Specific impacts on our operations and financial results include, but are not limited to, the following:

Short and long-term difficulties of our retail partners in consumer-based businesses due to restricted foot traffic, limitations of our e-commerce platform, trouble maintaining supply chain integrity for both availability of desired products and delivery to end consumers, and reduced consumer confidence and spending may result in reduced sales for our retail partners.

Deferral of campaign-based loyalty programs or the inability to source or deliver rewards for these programs across borders may reduce or defer revenue or increase our costs of operations. We estimate that revenue declined 15% in our BrandLoyalty segment in 2020 due to campaigns postponed by retailers and reduced foot traffic. In 2021, supply chain capacity limitations continue and logistical expenses remain elevated, with shipping container costs increasing over 500%.

Reduced demand for hospitality, airline and other travel-related rewards within the AIR MILES Reward Program due to the various COVID-19 restrictions negatively impacts redemption revenue as collectors both changed existing reward travel and are unable to schedule future reward travel with any certainty as to the duration of restrictions. In 2020, redemptions associated with travel declined by 1.7 billion AIR MILES reward miles, although we were able to offset part of this decline with additional merchandise reward options that increased redemptions by approximately 400 million AIR MILES reward miles.

Volatility in the financial markets may increase our cost of capital and/or limit its availability.

Increased operational risk, including impacts to our data, customer care center and other network integrity and availability in addition to heightened cybercriminal activity and other cyberfraud risk, may affect our ability to timely and effectively meet the needs of our sponsors, collectors, retailers or other consumers across our lines of business.

Increased risks to the health and safety of our associates and that of our third-party vendors may impact our ability to maintain service levels for our partners.
Despite the emergence of vaccines, surges in COVID-19 cases, including variants of the strain, may cause people to self-quarantine or governments to shut down nonessential businesses again. The broad availability of COVID-19 vaccines globally and the willingness of individuals to be vaccinated are difficult to predict. The pace and shape of the COVID-19 recovery as well as the impact and extent of potential resurgences is not presently known. We continue to evaluate the nature and extent of changes to the
 
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market and economic conditions related to the COVID-19 pandemic and current and potential impact on our business and financial position. However, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our future results of operations or cash flows at this time.
To the extent the COVID-19 pandemic continues to adversely affect our business, results of operations, financial condition and liquidity, many of the other risks described in this “Risk Factors” section may also be heightened.
Our 10 largest clients represented 55% and 46%, respectively, of our combined revenue for the years ended December 31, 2020 and 2019, and the loss of any of these clients could cause a significant reduction in our combined revenue.
We depend on a limited number of large clients for a significant portion of our combined revenue. Our 10 largest clients represented approximately 55% and 46%, respectively, of our revenue for the years ended December 31, 2020 and 2019. The Bank of Montreal represented approximately 15% and 12%, respectively, of our combined revenue for the years ended December 31, 2020 and 2019. Our contract with Bank of Montreal expires in 2023, subject to further automatic renewals as well as certain rights of either party to terminate following notice of default and cure provisions. A decrease in revenue from any of our significant clients, including Bank of Montreal, for any reason, including a decrease in pricing or activity, or a decision either to utilize another service provider or to no longer procure the services we provide, could have a material adverse effect on our combined revenue.
If redemptions by the AIR MILES Reward Program collectors are greater than expected, or if the costs related to redemption of AIR MILES reward miles increase, our profitability could be adversely affected.
Although our AIR MILES reward miles do not expire with the exception of cases of inactivity, as described in “Management’s Discussion and Analysis—Discussion of Critical Accounting Estimates,” a portion of our revenue is based on our estimate of the number of AIR MILES reward miles that will go unused by the collector base. The percentage of AIR MILES reward miles not expected to be redeemed is known as “breakage.”
Breakage is based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure, the introduction of new program options and changes to rewards offered. If there is any significant change in or failure by management to reasonably estimate breakage, or if actual redemptions are greater than our estimates, our profitability could be adversely affected. The AIR MILES Reward Program also exposes us to risks arising from potentially increasing reward costs. Our profitability could be adversely affected if costs related to redemption of AIR MILES reward miles increase. A 10% increase in the cost of redemptions would have resulted in a decrease in pre-tax income of $21.6 million for the year ended December 31, 2020.
The loss of our most active AIR MILES Reward Program collectors could adversely affect our growth and profitability.
Our most active AIR MILES Reward Program collectors drive a disproportionately large percentage of our AIR MILES reward miles issued. Historically, approximately 15% of our collectors — who utilize one of several credit card programs offered by sponsors in the AIR MILES Reward Program — generate approximately 70% of annual AIR MILES reward miles issuance. The loss of a significant portion of these collectors, for any reason, could impact our ability to generate significant revenue from sponsors. The continued appeal of our loyalty and rewards programs will depend in large part on our ability to remain affiliated with sponsors that are desirable to both existing and future collectors and to offer rewards that are both attainable and attractive.
 
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Airline or travel industry disruptions, such as an airline insolvency, could negatively affect the AIR MILES Reward Program, our revenues and profitability.
Air travel is one of the appeals of the AIR MILES Reward Program to collectors. If one or more of our airline suppliers sharply reduces its fleet capacity and route network, we may not be able to satisfy our collectors’ demands for airline tickets. Tickets or other travel arrangements, if available, could be more expensive than a comparable airline ticket under our current supply agreements with existing suppliers, and the routes offered by other airlines or travel services may be inadequate, inconvenient or undesirable to the redeeming collectors. As a result, we may experience higher air travel redemption costs, and collector satisfaction with the AIR MILES Reward Program might be adversely affected.
As a result of airline or travel industry disruptions, including, but not limited to, the current impacts of COVID-19, political instability, terrorist acts or war, some collectors could determine that air travel is too dangerous, burdensome or otherwise undesirable. Consequently, collectors might forego redeeming AIR MILES reward miles for air travel and therefore might not participate in the AIR MILES Reward Program to the extent they previously did, which could adversely affect our business, results of operations, financial condition and liquidity.
Our BrandLoyalty business does not generally have long-term agreements with its clients.
Our agreements for BrandLoyalty campaigns are generally short-term and must be renegotiated for each campaign. As a result, our relationship with our BrandLoyalty clients may change on short notice. Future agreements with respect to volume, pricing or new campaign rewards, among other things, are subject to negotiation with each client for each campaign. No assurance can be given that our clients will continue to do business with us at prior levels, if at all, and the loss of campaigns from certain retailers could have a material adverse effect on our business, results of operations, financial condition and liquidity.
If we fail to accurately forecast consumer demand for our BrandLoyalty campaigns we could experience excess inventories or inventory shortages, which could result in reduced operating margins and cash flows and adversely affect our business.
To meet anticipated demand for our campaign rewards, BrandLoyalty sources rewards inventory from key manufacturers and other suppliers in advance of client programs. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of consumer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could have a material adverse effect on our operating results, financial condition and cash flows. For example, in the year ended December 31, 2019, BrandLoyalty wrote down inventory by $18.4 million for the discontinuance of certain campaign rewards product lines. Conversely, if we underestimate consumer demand for our campaign rewards or if our key suppliers fail to timely supply campaign rewards, BrandLoyalty may experience inventory shortages. Inventory shortages might delay shipments or the ability to offer or the success of campaign-based loyalty programs, negatively impacting retailer and consumer relationships. A failure to accurately predict the level of demand for our campaign rewards could adversely affect BrandLoyalty’s business, results of operations, financial condition and liquidity.
Our AIR MILES Reward Program and BrandLoyalty businesses rely on relationships with the sponsors and rewards suppliers, respectively, with which we partner and a failure to maintain or renew relationships with our sponsors and suppliers could negatively affect our revenues and profitability.
The success of each of our AIR MILES Reward Program and BrandLoyalty businesses is dependent on maintaining relationships with their respective sponsors and rewards suppliers. These relationships are governed by agreements with fixed terms and varying provisions regarding termination, ranging from notice to events of default and cure. If we are unable to maintain or renew our relationships with our most significant sponsors and reward suppliers, the value proposition for sponsors and collectors in the AIR MILES Reward Program coalition and demand for BrandLoyalty’s campaign-based loyalty programs may be impacted; further, our sponsors and clients may elect an alternative provider for their loyalty programs, each of which could have a material adverse effect on our business, results of operations, financial condition and liquidity.
 
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Competition in the markets for the services that we offer is intense and we expect it to intensify.
The markets for our loyalty program products and services are highly competitive and we expect the continued evolution of loyalty products and services, including the technological capabilities associated therewith, and competition to provide the same to intensify. We generally compete with advertising and other promotional and loyalty programs, both traditional and online, for a portion of a client’s total marketing budget. Competition may intensify as more competitors enter our market. Competitors may target our sponsors, collectors, clients and their consumers as well as draw rewards from our rewards suppliers. The continued attractiveness of our loyalty and rewards programs will also depend on our ability to remain affiliated with sponsors and clients that are desirable to consumers and to offer rewards that are both attainable and attractive. Our ability to generate significant revenue from sponsors and clients will depend on our ability to differentiate ourselves through the loyalty program products and services we provide and the attractiveness of our programs to collectors and consumers, including our ability to adapt to new or even disruptive technological developments. We may not be able to continue to compete successfully against current and emerging loyalty program providers in our space.
Our inability to anticipate and respond to market trends and changes in consumer preferences could adversely affect our financial results.
Our continued success depends on our ability to anticipate, gauge and react in a timely and cost-effective manner to changes in market trends and consumer preference for loyalty programs, their rewards and the associated technological capabilities. We must continually adapt our services to evolving distribution channels, relentlessly pursue a favorable mix of reward options, successfully manage our inventories, and consistently update and refine our approach with respect to how and where we offer our loyalty programs and services, including our ability to adapt to new or even disruptive technological developments. For example, within our AIR MILES Reward Program, failure to drive innovation to meet the evolving needs of sponsors and collectors with competitive program design and reward elements that offer sufficient flexibility to permit different segments of sponsors and collectors to reward their customers, meet their service expectations or offer desired rewards to remain their preferred loyalty program will limit engagement with the program. Engagement and issuance growth from current sponsors and collectors provides the necessary momentum to be successful expanding to new sponsors and collectors. Within BrandLoyalty, consumer preference and behavior evolve with the latest commercial trends and the popularity of characters and shows. This progression requires BrandLoyalty to constantly adapt its offering — to innovate and invest to maintain the relevance and strength of its campaign-based loyalty programs and associated rewards. Failure to do so could have a material adverse effect on our results of operations and financial condition.
The failure of our rewards suppliers to deliver products and services at contracted service levels or standards or in sufficient quantities and in a timely manner could adversely affect our relationship with our sponsors and clients, our reputation with loyalty program participants, and the financial results of our business.
The success of our loyalty programs requires that collectors redeeming AIR MILES reward miles and consumers seeking BrandLoyalty rewards receive timely delivery of any product or access of any service that constitutes the reward. The failure of our rewards suppliers to deliver products and services at contracted service levels or standards or in sufficient quantities and in a timely manner could adversely affect our relationship with our sponsors and clients and our reputation with loyalty program participants. BrandLoyalty works with contractors outside of the United States to manufacture or contract to manufacture certain reward products. We have in the past, and may in the future face unanticipated interruptions and delays. In that respect, we are subject to risks related to supply chains on a global scale, including industrial accidents, environmental events, strikes and other labor disputes, disruption in information systems, political instability, rapid changes in trade regulations or enforcement, shipping or other customs delays, product quality control, safety and environmental compliance issues and other regulatory issues, as well as natural disasters, global or local health crises international conflicts, terrorist acts and other external factors over which we have no control, such as closures or restricted operating conditions for manufacturers and the resultant supply chain disruptions. Any delay in the provision of rewards could damage our reputation, leading to a decrease in participation in our loyalty programs. We may also be required to find alternative, more expensive suppliers at short notice or otherwise incur other expenses to remediate the delay or failure in
 
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performance by the supplier. In addition, if a third party vendor fails to meet contractual requirements, such as compliance with our code of conduct, applicable laws or regulations and standards, including environmental, health and safety standards as well as product safety standards, our business operations could suffer economic or reputational harm that could result in an adverse effect on the financial results of our business.
Economic factors beyond our control, and changes in the global economic environment, including fluctuations in inflation and currency exchange rates, could result in lower revenues, higher costs and reduced operating margins and earnings.
Downturns in the economy or the performance of retailers, due to economic factors beyond our control including the impact of COVID-19, may result in a decrease in the demand for our products and services. Virtually all of our loyalty program services are sold outside of the United States, and we conduct purchase and sale transactions in multiple currencies, which exposes our results to the volatility of global economic conditions, including inflation and fluctuations in foreign currency exchange rates. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom’s exit from the European Union, commonly referred to as “Brexit” or new or proposed U.S. policy changes that impact the U.S. Dollar value relative to other international currencies. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company’s foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our rewards products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition.
We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities.
If we fail to identify suitable acquisitions or new business opportunities, or to effectively integrate the businesses we acquire it could negatively affect our business.
We believe that acquisitions and the identification and pursuit of new business opportunities will be a component of our growth strategy. However, we may not be able to locate and secure future acquisition candidates or to identify and implement new business opportunities on terms and conditions that are acceptable to us. If we are unable to identify attractive acquisition candidates or accretive new business opportunities, our growth could be limited.
In addition, there are numerous risks associated with acquisitions and the implementation of new businesses, including, but not limited to:

the difficulty and expense that we incur in connection with the acquisition or new business opportunity;

the inability to satisfy pre-closing conditions preventing consummation of the acquisition or new business opportunity;

the potential for adverse consequences when conforming the acquired company’s accounting policies to ours;

the diversion of management’s attention from other business concerns;

the potential loss of customers or key employees of the acquired company;
 
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the impact on our financial condition due to the timing of the acquisition or new business implementation or the failure of the acquired or new business to meet operating expectations;

the assumption of unknown liabilities of the acquired company;

the uncertainty of achieving expected benefits of an acquisition including revenue, human resources, technological or other cost savings, operating efficiencies or synergies;
Furthermore, if the operations of an acquired or new business do not meet expectations, our profitability may decline and we may seek to restructure the acquired business or to impair the value of some or all of the assets of the acquired or new business.
Risks related to information technology, cybersecurity and privacy matters
Loss of data center or cloud computing capacity, interruption due to cyber-attacks, loss of network connectivity or inability to utilize proprietary software of third-party vendors could affect our ability to timely meet the needs of our clients and their customers.
Our ability, and that of our third-party service providers, to protect our data centers against damage, loss or performance degradation from fire, power loss, network failure, cyber-attacks, including ransomware or denial of service attacks, and other disasters is critical. In order to provide many of our services, we must be able to store, retrieve, process and manage large amounts of data as well as periodically expand and upgrade our technology capabilities. Any damage to our data centers or cloud computing environments, or those of our third-party service providers, any failure of our network links that interrupts our operations or any impairment of our ability to use our software or the proprietary software of third party vendors, including impairments due to cyber-attacks, could adversely affect our ability to meet our clients’ needs and their confidence in utilizing us for future services.
Failure to safeguard data could affect our reputation and may expose us to legal claims.
Information security risks for those businesses like us that hold and rely on large amounts of data continue to increase. Although we have extensive physical and cyber security controls and associated procedures, our networks have in the past been, and in the future may be, subject to unauthorized access or access attempts. In such instances of unauthorized access or access attempts, the integrity of our data has been and may again be affected. Should our sponsors, collectors, or our customers or their consumers, have security and privacy concerns that lead them to resist providing the personal data necessary to support our loyalty and marketing programs, our business would be negatively impacted. In addition, any unauthorized release of customer information or any public perception that we released consumer information without authorization could subject us to legal claims or regulatory enforcement actions.
Legislation relating to consumer privacy and data security may affect our ability to collect data that we use in providing our loyalty and marketing services, which, among other things, could negatively affect our ability to satisfy our clients’ needs.
Data protection and consumer privacy laws and regulations continue to evolve, increasing restrictions on our ability to collect and disseminate customer information. In addition, the enactment of new or amended legislation or industry regulations pertaining to consumer, public or private sector privacy issues could have a material adverse impact on our marketing services, including placing restrictions upon the collection, sharing and use of information that is currently legally permissible.
In the United States, the federal Do-Not-Call Implementation Act makes it more difficult to telephonically communicate with prospective and existing customers. Similar measures were implemented in Canada beginning September 1, 2008. Regulations in both the United States and Canada give consumers the ability to “opt out,” through a national do-not-call registry and state do-not-call registries, of having telephone solicitations placed to them by companies that do not have an existing business relationship with the consumer. In addition, regulations require companies to maintain an internal do-not-call list for those who do not want the companies to solicit them through telemarketing. These regulations could limit our ability to provide services and information to our clients. Failure to comply with these regulations could have
 
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a negative impact on our reputation and subject us to significant penalties. Further, the Federal Communications Commission has approved interpretations of rules related to the federal Telephone Consumer Protection Act defining robo-calls broadly, which may affect our ability to contact customers and may increase our litigation exposure.
In the United States, the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 restricts our ability to send commercial electronic mail messages, the primary purpose of which is advertising or promoting a commercial product or service, to our customers and prospective customers. The act requires that a commercial electronic mail message provide the customers with an opportunity to opt-out from receiving future commercial electronic mail messages from the sender.
In the United States, California enacted the California Consumer Privacy Act, or CCPA, which went into effect on January 1, 2020. The CCPA provides individual privacy rights for California consumers and places increased privacy and security obligations on entities handling certain personal data of consumers and households. The CCPA requires disclosures to consumers about companies’ data collection, use and sharing practices; provides consumers ways to opt-out of certain sales or transfers of personal information; and provides consumers with additional causes of action. The CCPA prohibits companies from discriminating against consumers who have opted out of the sale of their personal information, subject to a narrow exception. The CCPA provides for certain monetary penalties and for enforcement of the statute by the California Attorney General or by consumers whose rights under the law are not observed. It also provides for damages, as well as injunctive or declaratory relief, if there has been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security procedures.
In November 2020, California voters passed Proposition 24, known as the California Privacy Rights Act or CPRA. The CPRA, which will amend existing CCPA requirements, and goes into effect in most meaningful respects on January 1, 2023 with a one-year lookback period, includes limitations on the sharing of personal information for cross context behavioral advertising and the use of “sensitive” personal information; the creation of a new correction right; and the establishment of a new agency to enforce California privacy law.
The enactment of the CCPA is prompting similar legislative developments in other states in the United States, creating the potential for a patchwork of overlapping but different state laws. These developments could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely affect our business, results of operations, and financial condition. For example, in March 2021, Virginia enacted the Virginia Consumer Data Protection Act, and in June 2021, Colorado passed the Colorado Privacy Act, comprehensive privacy statutes that share similarities with the CCPA and CPRA and are set to become effective on January 1, 2023 and July 1, 2023, respectively. Many other states are currently reviewing or proposing the need for greater regulation of the collection, sharing, use and other processing of consumer data for marketing purposes or otherwise, and there remains increased interest at the federal level as well, including two federal privacy regulations introduced in Congress in late 2020.
In Canada, the Personal Information Protection and Electronic Documents Act, or PIPEDA, requires an organization to obtain a consumer’s consent to collect, use or disclose personal information. Under this act, consumer personal information may be used only for the purposes for which it was collected. We allow our customers to voluntarily “opt-out” from receiving either one or both promotional and marketing mail or promotional and marketing electronic mail. Heightened consumer awareness of, and concern about, privacy may result in customers “opting-out” at higher rates than they have historically. This would mean that a reduced number of customers would receive bonus and promotional offers and therefore those customers may collect fewer AIR MILES reward miles. The Government of Canada has tabled the Digital Charter Implementation Act to modernize Canada’s existing private sector privacy law (PIPEDA).
Canada’s Anti-Spam Legislation, or CASL, may restrict our ability to send “commercial electronic messages,” defined to include text, sound, voice and image messages to email, or similar accounts, where the primary purpose is advertising or promoting a commercial product or service to our customers and
 
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prospective customers. CASL requires, in part, that a sender have consent to send a commercial electronic message, and provide the customers with an opportunity to opt out from receiving future commercial electronic email messages from the sender.
On May 25, 2018, the General Data Protection Regulation, or GDPR, a European Union-wide legal framework to govern data collection, use and sharing and related consumer privacy rights came into force. The GDPR replaced the European Union Directive 95/46/EC and applies to and binds the EU Member States and the European Economic Area countries, which includes a total of 30 countries. The GDPR details greater compliance obligations on organizations, including the implementation of a number of processes and policies around data collection and use. These, and other terms of the GDPR, could limit our ability to provide services and information to our customers. In addition, the GDPR includes significant penalties for non-compliance.
In general, the GDPR, and other European Union and Member State specific privacy and data governance laws, could also lead to adaptation of our technologies or practices to satisfy local privacy requirements and standards that may be more stringent than in the U.S. Similarly, it is possible that in the future, U.S. and foreign jurisdictions may adopt legislation or regulations that impair our ability to effectively track consumers’ use of our advertising services, such as the FTC’s proposed “Do-Not-Track” standard or other legislation or regulations similar to EU Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” which directs EU Member States to ensure that accessing personal information on an internet user’s computer, such as through a cookie, is allowed only if the internet user has given his or her consent. Changes in technology from technology manufacturers and web browser providers, like Apple and Google, may also impact our tracking abilities and advertising services.
In July 2020, the Court of Justice of the European Union, or CJEU, ruled the EU-US Privacy Shield Framework, one of the primary safeguards that allowed U.S. companies to import personal data from the EU to the U.S., was invalid. The CJEU’s decision also raised questions about whether the most commonly used mechanism for cross-border transfers of personal data out of the European Economic Area, namely, the European Commission’s Standard Contractual Clauses, can lawfully be used for personal data transfers from the EU to the U.S. or other third countries the European Commission has determined do not provide adequate data protections under their laws. On June 4, 2021, the European Commission adopted new Standard Contractual Clauses, which impose on companies additional obligations relating to data transfers, including the obligation to conduct a transfer impact assessment and, depending on a party’s role in the transfer, to implement additional security measures and to update internal privacy practices. If we elect to rely on the new Standard Contractual Clauses for data transfers, we may be required to incur significant time and resources to update our contractual arrangements and to comply with new obligations. If we are unable to implement a valid mechanism for personal data transfers from the EU, we will face increased exposure to regulatory actions, substantial fines and injunctions against processing personal data from the EU. Additionally, other countries outside of the EU have enacted or are considering enacting similar cross-border data transfer restrictions and laws requiring local data residency, which could increase the cost and complexity of delivering our services and operating our business. The type of challenges we face in the EU will likely also arise in other jurisdictions that adopt regulatory frameworks of equivalent complexity.
On January 31, 2020, the United Kingdom left the European Union and entered into a Brexit transition period. Following December 31, 2020, and the expiry of transitional arrangements between the UK and EU, the data protection obligations provided in the GDPR continue to apply to UK-related processing of personal data in substantially unvaried form under the so-called ‘UK GDPR’ (i.e., the GDPR as it continues to form part of UK law by virtue of section 3 of the EU (Withdrawal) Act 2018, as amended). However, going forward, there is increasing risk for divergence in application, interpretation and enforcement of the data protection laws as between the UK and EU.
In addition to the jurisdictions noted above, there is also rapid development of new privacy laws and regulations elsewhere around the globe, including amendments of existing data protection laws, to the scope of such laws and penalties for noncompliance. Failure to comply with these international data protection laws and regulations could have a negative impact on our reputation and subject us to significant penalties.
 
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While all 50 U.S. states and the District of Columbia have enacted data breach notification laws, there is currently no such U.S. federal law generally applicable to our businesses. Data breach notification legislation and regulations relating to mandatory reporting came into force in Canada on November 1, 2018. Data breach notification laws have been proposed widely and exist in other specific countries and jurisdictions in which we conduct business. Legislative and regulatory measures, such as mandatory breach notification provisions, impose, among other elements, strict requirements on reporting time frames and providing notice to individuals.
All of these evolving compliance and operational requirements impose significant costs, such as costs related to organizational changes, implementing additional protection technologies, training employees and engaging consultants, which are likely to increase over time. In addition, such requirements may require us to modify or restrict our data processing practices and policies, distract management or divert resources from other initiatives and projects, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Any failure or perceived failure by us to comply with any applicable federal, state or similar foreign laws and regulations relating to data privacy and security could result in damage to our reputation, as well as proceedings or litigation by governmental agencies or other third parties, including class action privacy litigation in certain jurisdictions, which would subject us to significant fines, sanctions, awards, damages, penalties or judgments, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks related to other legal and regulatory matters
Legislation relating to consumer protection may affect our ability to provide our loyalty and marketing services, which, among other things, could negatively affect our ability to satisfy our clients’ needs.
The enactment of new or amended legislation or industry regulations pertaining to consumer protection, or any failure to comply with such changes, could have a material adverse impact on our loyalty and marketing services. Such changes could result in a negative impact to our reputation, an adverse effect on our profitability or an increase in our litigation exposure.
For example, Ontario’s Protecting Rewards Points Act (Consumer Protection Amendment), 2016, and additional related regulations, prohibit suppliers from entering into or amending consumer agreements to provide for the expiry of rewards points due to the passage of time alone, while permitting the expiry of rewards points if the underlying consumer agreement is terminated and that agreement provides that reward points expire upon termination. Similar legislation pertaining to the expiry of rewards points due to the passage of time alone is also in effect in Quebec as well as limitations on changes to the valuation of rewards points.
Our failure to protect our intellectual property rights may harm our competitive position, litigation to protect our intellectual property rights or defend against third party allegations of infringement or license violations may be costly, any of which could negatively impact our business, results of operations and profitability.
Third parties may infringe or misappropriate our trademarks or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. The actions we take to protect our trademarks and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights. Third parties may also assert claims for infringement or violation of the terms of a license agreement to which we are a party against us. Any claims and an adverse determination in any resulting litigation could subject us to significant liability for damages and require us to either design around a third party’s patent or license alternative technology from another party. In addition, litigation is time consuming and expensive to defend and could result in the diversion of our time and resources. Further, our competitors or other third parties may independently design around or develop similar technology, or otherwise duplicate our services or products in a way that would preclude us from asserting our intellectual property rights against them. In addition, our contractual arrangements may not effectively prevent disclosure of our intellectual property or confidential
 
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and proprietary information or provide an adequate remedy in the event of an unauthorized disclosure, any of which could result in liability to us and negatively impact our business, results of operations, financial condition and profitability.
Litigation, regulatory actions and compliance issues could subject us to significant fines, penalties, judgments, remediation costs and/or requirements resulting in increased expenses.
We are involved, from time to time, in litigation, other legal claims, regulatory actions or other proceedings or actions by governmental authorities involving matters associated with or incidental to our business in the ordinary course, including, among other things, matters involving customer or vendor disputes, breaches of contractual obligations, class actions or purported class actions, trademark and other intellectual property protection and licensing disputes, import/export regulations, taxation, and employment matters. The resolution of currently pending matters could subject us to significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, diminished earnings and damage to our reputation. We contest liability and/or the amount of damages as appropriate in each pending matter. The outcome of pending and future matters could be material to our results of operations, financial condition and cash flows depending on, among other factors, the level of our earnings for that period.
We are subject to risks related to our international operations.
We maintain significant operations internationally, operating in greater than 50 countries. As of December 31, 2020, substantially all of our revenues and long-lived assets were attributable to our operations outside the United States. Our international operations are subject to many risks and uncertainties, including:

fluctuations in foreign currency exchange rates, which have affected and may in the future affect our results of operations, reported earnings, the value of our foreign assets, the relative prices at which we and foreign competitors offer solutions in the same markets and the cost of certain inventory and non-inventory items required by our operations;

changes in foreign laws, regulations and policies, including restrictions on foreign investment, trade, import and export license requirements, quotas, trade barriers and other protection measures imposed by foreign countries, as well as changes in U.S. laws and regulations relating to tariffs and taxes, foreign trade and investment by our international operations;

lack of a developed legal system, elevated levels of corruption, strict currency controls, adverse tax consequences or foreign ownership requirements, difficult or lengthy regulatory approvals, or lack of enforcement for non-compete agreements in certain jurisdictions;

difficulties and costs associated with complying with, and enforcing remedies under, a wide variety of complex, and potentially conflicting, domestic and international laws, treaties and regulations, including the European Union’s General Data Protection Regulation (“GDPR”), the U.S. Foreign Corrupt Practices Act (“FCPA”), Canada’s Corruption of Foreign Public Officials Act (“CFPOA”), the U.K. Bribery Act 2010 (“UKBA”) and different regulatory structures and changes in regulatory environments;

potentially reduced protection for, and difficulty enforcing, intellectual property rights, especially in jurisdictions that do not respect and protect intellectual property rights to the same extent as the United States;

failure to effectively and immediately implement processes and policies across our diverse operations and employee base;

adverse weather conditions, social, economic and geopolitical conditions, such as political instability, environmental hazards, natural disasters, terrorist attacks, war or other military action or violent revolution;

significant health hazards or pandemics, which could result in closed factories, reduced workforces, scarcity of raw materials, and scrutiny or embargoing of goods produced in certain areas;
 
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industry and contractual standards that are specific by region and which may generate different or additional business risk to operate; and

disruption due to labor disputes.
We are also subject to the interpretation and enforcement by governmental agencies of international laws, rules, regulations or policies, including any changes thereto, such as restrictions on trade, import and export license requirements, privacy and data protection laws, and tariffs and taxes, which may require us to adjust our operations in certain markets where we do business. We face legal and regulatory risks in all jurisdictions where we operate; in particular, we cannot predict with certainty the outcome of various contingencies or the impact that pending or future legislative and regulatory changes may have on our business.
Furthermore, our extensive international operations may result in violations, or allegations of violations, of the FCPA, UKBA or CFPOA and similar international anti-bribery laws, which could adversely affect our reputation and business. These laws generally prohibit companies and their intermediaries from making improper payments to government officials or other third parties for the purpose of obtaining or retaining business. As part of our business, we or our partners may do business with state-owned enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA, UKBA or CFPOA. There can be no assurance that our policies, procedures, training and compliance programs will effectively prevent violation of all U.S. and international laws and regulations with which we are required to comply. Violations of such laws and regulations, or any of the other factors outlined above, could subject us to penalties that could adversely affect our reputation, business, financial condition or results of operations.
Risks relating to our indebtedness
Our level of indebtedness could materially adversely affect our ability to generate sufficient cash to repay our outstanding debt, our ability to react to changes in our business and our ability to incur additional indebtedness to fund future need.
We will have a high level of indebtedness, which requires a high level of interest and principal payments. Subject to the limits contained in our debt instruments, we may be able to incur substantial additional indebtedness from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of indebtedness could intensify. Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our higher level of indebtedness, combined with our other financial obligations and contractual commitments, could:

make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing our indebtedness;

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions or other new business and other corporate purposes;

increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage or require us to dispose of assets to raise funds if needed for working capital;

limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;

limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other new business and other corporate purposes;

delay investments and capital expenditures;

cause any refinancing of our indebtedness to be at higher interest rates and require us to comply with more onerous covenants, which could further restrict our business operations; and
 
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prevent us from raising the funds necessary to repurchase all notes tendered to us upon the occurrence of certain changes of control.
Restrictions imposed by the agreements governing our outstanding or future indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.
The terms of the agreements governing our debt limit us and our subsidiaries from engaging in specified types of transactions. These covenants limit our and our subsidiaries’ ability, among other things, to:

incur additional debt;

declare or pay dividends, redeem stock or make other distributions to stockholders

make investments;

create liens or use assets as security in other transactions;

merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;

enter into transactions with affiliates;

sell or transfer certain assets; and

enter into any consensual encumbrance or restriction on the ability of certain of our subsidiaries to pay dividends or make loans or sell assets to us.
As a result of these covenants and restrictions, we may be limited in how we conduct our business and we may be unable to raise additional indebtedness to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
Risks relating to our common stock
Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile and you may not be able to resell your shares at or above the initial market price of our common stock following the Separation.
Prior to the Separation, there will have been no trading market for shares of our common stock. An active trading market may not develop or be sustained for our common stock after the Separation, and we cannot predict the prices at which our common stock will trade after the Separation. The market price of our common stock could fluctuate significantly due to a number of factors, many of which are beyond our control, including:

Our different profile from ADS, such as not being included in Standard & Poor’s Midcap 400 Index or similar index, not paying a recurring dividend and not being a financial institution;

Fluctuations in our quarterly or annual earnings results or those of other companies in our industry;

Failures of our operating results to meet the estimates of securities analysts or the expectations of our stockholders, or changes by securities analysts in their estimates of our future earnings;

Announcements by us or our sponsors, clients, suppliers or competitors;

Changes in market valuations or earnings of other companies in our industry;

Changes in laws or regulations which adversely affect our industry or us;

General economic, industry and stock market conditions;

Future significant sales of our common stock by our stockholders or the perception in the market of such sales;
 
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Future issuances of our common stock by us; and

The other factors described in these “Risk Factors” and elsewhere in this information statement.
These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.
The trading market for our common stock may also be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth company status will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
A large number of our shares are or will be eligible for future sale, which may cause the market price of our common stock to decline.
Upon completion of the Separation, we estimate that we will have outstanding an aggregate of approximately                 shares of our common stock (based on shares of ADS common stock outstanding on           , 2021). All of those shares (other than those held by our “affiliates”) will be freely tradable without restriction or registration under the Securities Act of 1933, as amended (the “Securities Act”). Shares held by our affiliates, which include our directors and executive officers, can be sold subject to volume, manner of sale and notice provisions of Rule 144 under the Securities Act. We estimate that our directors and executive officers, who may be considered “affiliates” for purposes of Rule 144, will beneficially own approximately           shares of our common stock immediately following the Separation. We are unable to predict whether large amounts of our common stock will be sold in the open market following the Separation. We are also unable to predict whether a sufficient number of buyers will be in the market at that time. As discussed in the immediately following risk factor, certain index funds will likely be required to sell shares of our common stock that they receive in the Separation. In addition, other ADS stockholders may sell the shares of our common stock they receive in the Separation for various reasons. For example, such stockholders may not believe our business profile or level of market capitalization as an independent company fits their investment profile.
Because our common stock will not be included in the Standard & Poor’s Midcap 400 Index, and it may not be included in other stock indices, significant amounts of our common stock will likely need to be sold in the open market where there may not be offsetting demand.
A portion of ADS’ outstanding common stock is held by index funds tied to the Standard & Poor’s Midcap 400 Index and other stock indices. Based on a review of publicly available information as of                 , 2021, we believe approximately    % of ADS’ outstanding common stock is held by index funds. Because our common stock will not be included in the Standard & Poor’s Midcap 400 Index, and it may not be included in other stock indices at the time of the Separation, index funds currently holding shares of ADS common stock will likely be required to sell the shares of our common stock they receive in the
 
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Separation. There may not be sufficient buying interest to offset sales by those index funds. Accordingly, our common stock could experience a high level of volatility immediately following the Separation and, as a result, the price of our common stock could be adversely affected.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and certain provisions of Delaware law could delay or prevent a change in control of Loyalty Ventures.
The existence of certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law could discourage, delay or prevent a change in control of Loyalty Ventures that a stockholder may consider favorable. These include provisions:

Providing for a classified board of directors (until after our seventh annual meeting);

Providing that our directors may be removed by our stockholders only for cause while our board is classified;

Providing that the removal of our directors without cause after our board is de-classified must be approved by the holders of not less than a majority of the total voting power of Loyalty Ventures;

Providing the right to our board of directors to issue one or more classes or series of preferred stock without stockholder approval;

Authorizing a large number of shares of stock that are not yet issued, which would allow our board of directors to issue shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us;

Prohibiting stockholders from calling special meetings of stockholders (until after our seventh annual meeting) or taking action by written consent; and

Establishing advance notice and other requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted on by stockholders at the annual stockholder meetings.
We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions apply even if a takeover offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in our and our stockholders’ best interests. See “Description of Capital Stock.”
Our amended and restated certificate of incorporation will designate Delaware as the exclusive forum for certain litigation that may be initiated by our stockholder and will contain an exclusive federal forum provision for certain claims under the Securities Act, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us and limit the market price of our common stock.
Pursuant to our amended and restated certificate of incorporation, as will be in effect upon the completion of the Separation, unless we consent in writing to the selection of an alternative forum, a state court located within the state of Delaware (or, if no state court located within the state of Delaware has jurisdiction, the federal court for the district of Delaware) shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim for or based on a breach of a fiduciary duty owed by any of our directors or officers or other employees or agents to us or to our stockholders, including a claim alleging the aiding and abetting of such a breach of fiduciary duty; (iii) any action asserting a claim against us or any of our directors or officers or other employees or agents arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws; (iv) any action asserting a claim related to or involving us that is governed by the internal affairs doctrine; or (v) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the Delaware General Corporation Law. Our amended and restated bylaws provide that the foregoing Delaware exclusive forum provisions do not apply to any action asserting claims under the Exchange Act or the
 
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Securities Act. The forum selection clause in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us and limit the market price of our common stock.
For claims brought under the Securities Act, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all claims brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder and our amended and restated certificate of incorporation will provide that the federal district courts of the United States of America will, to the fullest extent permitted by law, be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act (the “Federal Forum Provision”). Application of our Federal Forum Provision means that suits brought by our stockholders to enforce any duty or liability created by the Securities Act must be brought in federal court and cannot be brought in state court. This provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act, or the rules and regulations thereunder.
The Federal Forum Provision described above is intended to apply to the fullest extent permitted by law. However, the enforceability of forum selection provisions in the governing documents of other companies has been challenged in legal proceedings, and it is possible that a court could find the Federal Forum Provision to be inapplicable or unenforceable with respect to actions arising under the Securities Act.
Your percentage ownership in Loyalty Ventures may be diluted in the future.
In the future, your percentage ownership in Loyalty Ventures may be diluted because of equity issuances for acquisitions, strategic investments, capital market transactions or otherwise, including equity awards that we may grant to our directors, officers and employees. Our compensation committee may grant additional equity awards to our employees after the Separation. These awards would have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.
In addition, our amended and restated certificate of incorporation authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, powers, preferences and relative, participating, optional and other rights, and such qualifications, limitations or restrictions as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or dividend, distribution or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock. See “Description of Capital Stock—Preferred stock.”
Our common stock is and will be subordinate to all of our future indebtedness and any preferred stock, and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries.
Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any class or series of preferred stock that our board of directors may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors and preferred stockholders, if any.
We cannot assure you that our board of directors will declare dividends in the foreseeable future.
We do not currently intend to pay any cash dividends on our capital stock for the foreseeable future. The declaration and payment of dividends, if any, will always be subject to the discretion of our board of directors. The timing and amount of any dividends declared will depend on, among other things, our earnings, financial condition and cash requirements and availability, our ability to obtain debt and equity financing on acceptable terms as contemplated by our growth strategy and the terms of our outstanding indebtedness. We may incur expenses or liabilities or be subject to other circumstances in the future that reduce or eliminate the amount of cash that we have available for distribution as dividends, including as a result of the risks described herein.
 
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THE SEPARATION
General
On May 12, 2021, ADS announced that it was moving forward with a plan to distribute to ADS’ stockholders 81% of the shares of common stock of Loyalty Ventures through the Separation, including the Restructuring and the Distribution. Loyalty Ventures is currently a wholly owned subsidiary of ADS and, at the time of the Distribution, ADS will hold, through its subsidiaries, the assets and liabilities associated with the Spin Business. The Separation will be achieved through the transfer of all the assets and liabilities of the Spin Business to Loyalty Ventures or its subsidiaries through the Restructuring and the distribution of 81% of the outstanding capital stock of Loyalty Ventures to holders of ADS common stock on the record date of           , 2021 through the Distribution. At the effective time of the Distribution, ADS stockholders will receive one share of Loyalty Ventures common stock for every                 shares of ADS common stock held on the record date. The Separation is expected to be completed on           , 2021. Immediately following the Separation, ADS stockholders as of the record date will own 81% of the outstanding shares of common stock of Loyalty Ventures. ADS will retain a 19% ownership interest in Loyalty Ventures. ADS will vote its Loyalty Ventures common stock in the same proportion as the votes cast in respect of the common stock not owned by ADS on any matter presented for a vote of Loyalty Ventures’ stockholders. ADS may transfer all or a portion of this retained ownership interest in Loyalty Ventures to one or more of ADS’ creditors in satisfaction of ADS third party debt within one year of the Distribution. ADS will dispose of any remaining ownership interest in Loyalty Ventures as soon as is warranted consistent with the business reasons for the retention but, in any event, not later than 5 years after the Distribution.
As part of the Separation, we will enter into a Separation and Distribution Agreement and several other agreements to effect the Separation and provide a framework for our relationship with ADS after the Separation. These agreements will provide for the allocation between us and ADS of the assets, liabilities and obligations of ADS and its subsidiaries, and will govern the relationship between Loyalty Ventures and ADS after the Separation. At the Effective Time and subject to IRS approval, the chair of the board of ADS will be the chair of the Company’s board. In addition to the Separation and Distribution Agreement, the other principal agreements to be entered into with ADS include:

A Tax Matters Agreement;

A Transition Services Agreement; and

An Employee Matters Agreement.
The Separation as described in this information statement is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see “—Conditions to the Distribution” below. We cannot provide any assurances that ADS will complete the Separation.
Reasons for the Separation
The ADS board of directors believes separating the Spin Business from ADS is in the best interests of ADS and its stockholders and has concluded the Separation will provide ADS and Loyalty Ventures with a number of potential opportunities and benefits, including the following:

Strategic and Management Focus.   Permit the management team of each company to focus on its own strategic priorities with financial targets that best fit its own business and opportunities, market development and geographical focus. We believe the Separation will enable each company’s management team to better position its businesses to capitalize on developing macroeconomic trends, increase managerial focus to pursue its individual strategies and leverage its key strengths to drive performance. The management of each resulting company will be able to concentrate on its core competencies and growth opportunities, and will have increased flexibility and speed to design and implement corporate strategies based on the characteristics of its unique business.

Resource Allocation and Capital Deployment.   Allow each company to allocate resources, incentivize employees and deploy capital to capture the significant long-term opportunities in their respective markets. The Separation will enable each company’s management team to implement a capital
 
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structure, dividend policy and growth strategy tailored to each unique business. Both businesses are expected to have direct access to the debt and equity capital markets to fund their respective growth strategies.

Investor Choice.   Provide investors, both current and prospective, with the ability to value the two companies based on their distinct business characteristics and make more targeted investment decisions based on those differences. Separating the two businesses will provide investors with a more targeted investment opportunity so that investors interested in companies in the loyalty space will have the opportunity to acquire stock of Loyalty Ventures while those focused on financial institutions may acquire stock of ADS.
The financial terms of the Separation, including the new indebtedness expected to be incurred by Loyalty Ventures or entities that are, or will become, prior to the completion of the Separation, subsidiaries of Loyalty Ventures, and the amount of the cash transfer to ADS has been, or will be, determined by the ADS board of directors based on a variety of factors, including establishing an appropriate pro forma capitalization for Loyalty Ventures as a stand-alone company considering the historical earnings of the Spin Business and the level of indebtedness relative to earnings of comparable companies.
The number of shares you will receive
For every                 shares of ADS common stock you own as of the close of business on           , 2021, the record date for the Distribution, you will receive one share of Loyalty Ventures common stock on the Distribution Date for the Separation.
Treatment of fractional shares
The distribution agent will not distribute any fractional shares of our common stock to ADS stockholders. Instead, as soon as practicable on or after the Distribution Date for the Separation, the distribution agent for the Distribution will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing prices and distribute the net cash proceeds from the sales, net of brokerage fees and commissions, transfer taxes and other costs and after making appropriate deductions of the amounts required to be withheld for U.S. federal income tax purposes, if any, pro rata to each holder who would otherwise have been entitled to receive a fractional share in the Distribution. The distribution agent will determine when, how, through which broker-dealers and at what prices to sell the aggregated fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any minimum sale price for the fractional shares or to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable to the recipient stockholders for U.S. federal income tax purposes as described below in “The Separation—Material U.S. federal income tax consequences of the Distribution—The Distribution.”
When and how you will receive the distribution of Loyalty Ventures shares
ADS will distribute the shares of our common stock on           , 2021 to holders of record as of the close of business on the record date for the Distribution. The Distribution is expected to be completed following the market closing on the Distribution Date for the Separation. ADS’ transfer agent and registrar, Computershare, will serve as transfer agent and registrar for the Loyalty Ventures common stock and as distribution agent in connection with the Distribution.
If you own ADS common stock as of the close of business on the record date for the Distribution, the shares of Loyalty Ventures common stock that you are entitled to receive in the Distribution will be issued electronically, as of the Distribution Date for the Separation, to your account as follows:

Registered Stockholders.   If you own your shares of ADS stock directly, either in book-entry form through an account at Computershare and/or if you hold paper stock certificates, you will receive your shares of Loyalty Ventures common stock by way of direct registration in book-entry form. Registration in book-entry form is a method of recording stock ownership when no physical paper share certificates are issued to stockholders, as will be the case in the Distribution.
 
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On or shortly after the Distribution Date for the Separation, the distribution agent will mail to you an account statement that indicates the number of shares of Loyalty Ventures common stock that have been registered in book-entry form in your name.
Stockholders having any questions concerning the mechanics of having shares of our common stock registered in book-entry form may contact Computershare at the address set forth in “Summary—Questions and Answers About the Separation” in this information statement.

Beneficial Stockholders.   Many ADS stockholders hold their shares of ADS common stock beneficially through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your ADS common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of Loyalty Ventures common stock that you are entitled to receive in the Distribution. If you have any questions concerning the mechanics of having shares of common stock held in “street name,” we encourage you to contact your bank or brokerage firm.
Results of the Separation
After the Separation, we will be an independent, publicly traded company that directly or indirectly holds the assets and liabilities of the Spin Business. Immediately following the Separation, we expect to have approximately                 stockholders of record, based on the number of registered stockholders of ADS common stock on           , 2021, applying a distribution ratio of one share of our common stock for every           shares of ADS common stock. We expect to have approximately                 shares of Loyalty Ventures common stock outstanding. The actual number of shares to be distributed will be determined on the record date.
Before the completion of the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with ADS to effect the Separation and provide a framework for our relationship with ADS after the Separation. These agreements will provide for the allocation between Loyalty Ventures and ADS of ADS’ assets, liabilities and obligations subsequent to the Separation (including with respect to transition services, employee matters, intellectual property matters and tax matters). At the Effective Time and subject to IRS approval, the chair of the board of ADS will be the chair of the Company’s board.
For a more detailed description of these agreements, see “—Agreements with ADS” below. The Separation will not affect the number of outstanding shares of ADS common stock or any rights of ADS stockholders.
Incurrence of debt
We intend to enter into new financing arrangements in anticipation of the Separation. We expect to incur approximately $675.0 million of new debt from the proceeds of the new term loan facility, the net proceeds of which we intend to use to fund a portion of a cash transfer of $750.0 million to ADS as part of the Restructuring, which ADS will use to pay down a portion of the outstanding term loans under its credit agreement.
Costs of the Separation
Subject to the terms of the Separation and Distribution Agreement, each of ADS and Loyalty Ventures will pay certain non-recurring third-party costs and expenses related to the Separation and incurred prior to the completion of the Separation. Such non-recurring amounts are expected to include investment banker fees (other than fees and expenses in connection with the debt financing), third-party legal and accounting fees, consent fees and similar costs. It is preliminarily estimated that the costs related to the Separation to be incurred during Loyalty Ventures’ transition to being a stand-alone public company will be approximately $33.0 million to $36.0 million, of which approximately $10.0 million will be paid by Loyalty Ventures and the remainder of such costs will be paid by ADS. See “—Agreements with ADS—Transition Services Agreement” for fees related to the Transition Services Agreement.
 
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Material U.S. federal income tax consequences of the Distribution
The following is a discussion of the material U.S. federal income tax consequences of the Distribution to U.S. Holders (as defined below) of ADS common stock. This discussion is based on the Code, applicable Treasury regulations, administrative interpretations and court decisions as in effect as of the date of this information statement, all of which may change, possibly with retroactive effect. For purposes of this discussion, a “U.S. Holder” is a beneficial owner of ADS common stock that is for U.S. federal income tax purposes:

A citizen or resident of the U.S.;

A corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the U.S., any state therein or the District of Columbia; or

An estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
This discussion addresses only the consequences of the Distribution to U.S. Holders that hold ADS common stock as a capital asset. It does not address all aspects of U.S. federal income taxation that may be important to a U.S. Holder in light of that stockholder’s particular circumstances or to a U.S. Holder subject to special rules, such as:

A financial institution, regulated investment company or insurance company;

A tax-exempt organization;

A dealer or broker in securities, commodities or foreign currencies;

A stockholder that holds ADS common stock as part of a hedge, appreciated financial position, straddle, conversion, or other risk reduction transaction;

A stockholder that holds ADS common stock in a tax-deferred account, such as an individual retirement account; or

A stockholder that acquired ADS common stock pursuant to the exercise of options or similar derivative securities or otherwise as compensation.
If a partnership, or any entity treated as a partnership for U.S. federal income tax purposes, holds ADS common stock, the tax treatment of a partner in such partnership generally will depend on the status of the partners and the activities of the partnership. A partner in a partnership holding ADS common stock should consult its tax advisor.
A U.S. Holder who acquired different blocks of ADS common stock at different times and at different prices generally must apply the rules described in the following sections separately to each identifiable block of shares of ADS common stock. A U.S. Holder who holds ADS common stock with differing bases or holding periods should consult its tax adviser.
This discussion of material U.S. federal income tax consequences is not a complete analysis or description of all potential U.S. federal income tax consequences of the Distribution. This discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. In addition, it does not address any U.S. federal, estate, gift or other non-income tax or any non-U.S., state or local tax consequences of the Distribution. Accordingly, each holder of ADS common stock should consult his, her or its tax advisor to determine the particular U.S. federal, state or local or non-U.S. income or other tax consequences of the Distribution to such holder.
Private letter ruling and tax opinion
The consummation of the Separation, along with certain related transactions, is conditioned upon the receipt of a private letter ruling from the IRS. Although a private letter ruling from the IRS generally is binding on the IRS, if the factual representations or assumptions made in the private letter ruling request are inaccurate or incomplete in any material respect, ADS will not be able to rely on the ruling. Furthermore,
 
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the IRS will not rule on whether a distribution such as the Distribution satisfies certain legal requirements necessary to obtain tax-free treatment under Section 355 of the Code. Rather, the private letter ruling will be based on representations by ADS that those requirements have been satisfied, and any inaccuracy in those representations could invalidate the ruling.
The consummation of the Separation, along with certain related transactions, is further conditioned upon the receipt of opinion of Davis Polk & Wardwell LLP substantially to the effect that the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code, which we refer to as the “Tax Opinion.” In rendering the Tax Opinion to be given as of the closing of the Separation, which we refer to as the “Closing Tax Opinion,” Davis Polk & Wardwell LLP will rely on (i) customary representations and covenants made by us and ADS, including those contained in certificates of officers of us and ADS, and (ii) specified assumptions, including an assumption regarding the completion of the Separation and certain related transactions in the manner contemplated by the transaction agreements. In addition, Davis Polk & Wardwell’s ability to provide the Closing Tax Opinion will depend on the absence of changes in existing facts or law between the date of this information statement and the closing date of the Distribution. If any of the representations, covenants or assumptions on which Davis Polk & Wardwell LLP will rely is inaccurate, Davis Polk & Wardwell LLP may not be able to provide the Closing Tax Opinion or the tax consequences of the Separation could differ from those described below. The opinion of Davis Polk & Wardwell LLP does not preclude the IRS or the courts from adopting a contrary position.
The Distribution
Assuming that the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code, and that the Restructuring steps will qualify as transactions that are tax-free for U.S. federal income tax purposes, in general, for U.S. federal income tax purposes:

The Separation will not result in the recognition of income, gain or loss to ADS or us;

No gain or loss will be recognized by, and no amount will be included in the income of, U.S. Holders of ADS common stock upon the receipt of our common stock in the Distribution;

The aggregate tax basis of the shares of our common stock (including fractional shares deemed received and exchanged for cash, as described below) distributed in the Distribution to a U.S. Holder of ADS common stock will be determined by allocating the aggregate tax basis such U.S. Holder has in the shares of ADS common stock immediately before such Distribution between such ADS common stock and our common stock in proportion to the relative fair market value of each immediately following the Distribution;

The holding period of any shares of our common stock received by a U.S. Holder of ADS common stock in the Distribution will include the holding period of the shares of ADS common stock held by a U.S. Holder prior to the Distribution; and

A U.S. Holder of ADS common stock that receives cash in lieu of a fractional share of our common stock will recognize capital gain or loss, measured by the difference between the cash received for such fractional share and the U.S. Holder’s tax basis in that fractional share, determined as described above, and such gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period in the ADS common stock is more than one year as of the closing date of the Distribution.
In general, if the Distribution, together with certain related transactions, does not qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code, the Distribution will be treated as a taxable dividend to holders of ADS common stock in an amount equal to the fair market value of our common stock received, to the extent of such holder’s ratable share of ADS’ earnings and profits. In addition, if the Separation does not qualify as a tax-free transaction, ADS will recognize taxable gain, which could result in significant tax to ADS.
 
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Even if the Separation were otherwise to qualify as a tax-free transaction, the Distribution will be taxable to ADS under Section 355(e) of the Code if 50% or more of either the total voting power or the total fair market value of the stock of ADS or our common stock is acquired as part of a plan or series of related transactions that includes the Distribution. If Section 355(e) applies as a result of such an acquisition, ADS would recognize taxable gain as described above, but the Distribution would generally be tax-free to you. Under some circumstances, the Tax Matters Agreement would require us to indemnify ADS for the tax liability associated with the taxable gain. See “—Agreements with ADS—Tax Matters Agreement.”
Under the Tax Matters Agreement, we will generally be required to indemnify ADS for the resulting taxes in the event that the Separation and/or related transactions fail to qualify for their intended tax treatment due to any action by us or any of our subsidiaries (see “—Agreements with ADS—Tax Matters Agreement”). If the Separation were to be taxable to ADS, the liability for payment of such tax by ADS or by us under the Tax Matters Agreement could have a material adverse effect on ADS or us, as the case may be.
Information reporting and backup withholding
U.S. Treasury regulations generally require holders who own at least 5% of the total outstanding stock of ADS (by vote or value) and who receive our common stock pursuant to the Distribution to attach to their U.S. federal income tax return for the year in which the Distribution occurs a detailed statement setting forth certain information relating to the tax-free nature of the Distribution. ADS and/or we will provide the appropriate information to each holder upon request, and each such holder is required to retain permanent records of this information. In addition, payments of cash to a U.S. Holder of ADS common stock in lieu of fractional shares of our common stock in the Distribution may be subject to information reporting. Such payments that are subject to information reporting may also be subject to backup withholding, unless such U.S. Holder provides the withholding agent with a correct taxpayer identification number and otherwise complies with the requirements of the backup withholding rules. Backup withholding does not constitute additional tax, but merely an advance payment, which may be refunded or credited against a U.S. Holder’s U.S. federal income tax liability, provided the required information is timely supplied to the IRS.
Appraisal rights
No ADS stockholder will have any appraisal rights in connection with the Separation.
Listing and trading of our common stock
As of the date of this information statement, there is no public market for our common stock. We expect to apply for listing of our common stock on Nasdaq under the ticker symbol “LYLT.”
Trading between record date and Distribution Date
Beginning on the record date for the Distribution and continuing up to and including the Distribution Date for the Separation, we expect there will be two markets in ADS common stock: a “regular-way” market and an “ex-distribution” market. Shares of ADS common stock that trade on the “regular-way” market will trade with an entitlement to receive shares of Loyalty Ventures common stock in the Distribution. Shares that trade on the “ex-distribution” market will trade without an entitlement to receive shares of Loyalty Ventures common stock in the Distribution. Therefore, if you sell shares of ADS common stock in the “regular-way” market after the close of business on the record date for the Distribution and up to and including through the Distribution Date, you will be selling your right to receive shares of Loyalty Ventures common stock in the Distribution. If you own shares of ADS common stock as of the close of business on the record date for the Distribution and sell those shares in the “ex-distribution” market, up to and including through the Distribution Date, you will still receive the shares of Loyalty Ventures common stock that you would be entitled to receive in respect of your ownership, as of the record date, of the shares of ADS common stock that you sold.
Furthermore, beginning on           , 2021 and continuing up to and including the Distribution Date for the Separation, we expect there will be a “when-issued” market in our common stock. “When-issued”
 
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trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of Loyalty Ventures common stock that will be distributed to ADS stockholders on the Distribution Date. If you own shares of ADS common stock as of the close of business on the record date, you would be entitled to receive shares of our common stock in the Distribution. You may trade this entitlement to receive shares of Loyalty Ventures common stock, without trading the shares of ADS common stock you own, in the “when-issued” market. On the first trading day following the Distribution Date, we expect “when- issued” trading with respect to Loyalty Ventures common stock will end and “regular-way” trading in Loyalty Ventures common stock will begin.
Conditions to the Distribution
We expect the Distribution will be effective on           , 2021, the Distribution Date, provided that, among other conditions described in the Separation and Distribution Agreement, the following conditions will have been satisfied or waived by ADS in its sole discretion:

The Separation-related restructuring transactions contemplated by the Separation and Distribution Agreement (the “Restructuring Transactions”) and the consummation of certain new Loyalty Ventures financing arrangements contemplated by the Separation and Distribution Agreement will each have been completed;

The ADS board of directors will have approved the Distribution and will not have abandoned the Distribution or terminated the Separation and Distribution Agreement at any time prior to the Distribution;

The SEC will have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, no stop order suspending the effectiveness of our registration statement on Form 10 will be in effect and no proceedings for such purpose will have been instituted or threatened by the SEC, and this information statement, or a notice of Internet availability thereof, will have been mailed to the holders of ADS common stock as of the record date for the Distribution;

All actions and filings necessary or appropriate under applicable federal, state or other securities laws or “blue sky” laws and the rules and regulations thereunder will have been taken and, where applicable, become effective or accepted;

Our common stock to be delivered in the Distribution will have been approved for listing on Nasdaq, subject to official notice of issuance;

The Loyalty Ventures board of directors, as named in this information statement, will have been duly appointed;

Each of the ancillary agreements contemplated by the Separation and Distribution Agreement will have been executed and delivered by the parties thereto;

ADS will have received a private letter ruling from the IRS and an opinion of Davis Polk & Wardwell LLP (each of which will not have been revoked or modified in any material respect), in each case reasonably satisfactory to ADS, to the effect that, for U.S. federal income tax purposes, the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code;

No applicable law will have been adopted, promulgated or issued that prohibits the consummation of the distribution or any of the transactions contemplated by the Separation and Distribution Agreement;

Any material governmental approvals and consents and any material permits, registrations and consents from third parties, in each case, necessary to effect the distribution and to permit the operation of the Spin Business after the Distribution substantially as conducted as of the date of the Separation and Distribution Agreement will have been obtained;
 
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No event or development will have occurred or exist that, in the judgment of the ADS board of directors, in its sole and absolute discretion, makes it inadvisable to effect the Distribution or other transactions contemplated by the Separation and Distribution Agreement; and

Certain necessary actions to complete the Separation will have occurred, including (a) the amended and restated certificate of incorporation and amended and restated bylaws of Loyalty Ventures, in substantially the form attached as exhibits to the registration statement of which this information statement forms a part, will be in effect and (b) ADS will have entered into a distribution agent agreement with a distribution agent or otherwise provided instructions to a distribution agent regarding the Distribution.
The fulfillment of the foregoing conditions will not create any obligations on ADS’ part to effect the Separation, and the ADS board of directors has reserved the right, in its sole discretion, to abandon, modify or change the terms of the Separation, including by accelerating or delaying the timing of the consummation of all or part of the Distribution, at any time prior to the Distribution Date.
Agreements with ADS
As part of the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with ADS to effect the Separation and provide a framework for our relationships with ADS after the Separation. These agreements will provide for the allocation between us and ADS of the assets, liabilities and obligations of ADS and its subsidiaries, and will govern the relationships between Loyalty Ventures and ADS subsequent to the Separation (including with respect to transition services, employee matters, intellectual property matters and tax matters).
In addition to the Separation and Distribution Agreement (which will contain many of the key provisions related to our Separation from ADS and the distribution of our shares of common stock to ADS stockholders), these agreements include, among others:

A Tax Matters Agreement;

A Transition Services Agreement; and

An Employee Matters Agreement.
The forms of the principal agreements described below have been filed as exhibits to the registration statement of which this information statement forms a part. The following descriptions of these agreements are summaries of the material terms of these agreements.
The Separation and Distribution Agreement
The Separation and Distribution Agreement will govern the overall terms of the Separation. Generally, the Separation and Distribution Agreement will include ADS’ and our agreements relating to the restructuring steps to be taken to complete the Separation, the assets and rights to be transferred, liabilities to be assumed and related matters.
Subject to the receipt of required governmental and other consents and approvals and the satisfaction of other closing conditions, in order to accomplish the Separation, the Separation and Distribution Agreement will provide for ADS and us to transfer specified assets between the companies that will operate the Spin Business after the Distribution, on the one hand, and ADS’ remaining businesses, on the other hand. The Separation and Distribution Agreement will require ADS and us to use reasonable efforts to obtain consents, approvals and amendments required to assign the assets and liabilities that are to be transferred pursuant to the Separation and Distribution Agreement.
Unless otherwise provided in the Separation and Distribution Agreement or any of the related ancillary agreements, all assets will be transferred on an “as is, where is” basis. Generally, if the transfer of any assets or any claim or right or benefit arising thereunder requires a consent that will not be obtained before the distribution for the Separation, or if the transfer or assignment of any such asset or such claim or right or benefit arising thereunder would be ineffective or would adversely affect the rights of the transferor
 
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thereunder so that the intended transferee would not in fact receive all such rights, the party retaining any asset that otherwise would have been transferred shall hold such asset in trust for the use and benefit of the party entitled thereto and retain such liability for the account of the party by whom such liability is to be assumed, and take such other action as may be reasonably requested by the party to which such asset is to be transferred, or by whom such liability is to be assumed, as the case may be, in order to place such party, insofar as reasonably possible, in the same position as would have existed had such asset or liability been transferred prior to the Distribution.
The Separation and Distribution Agreement will specify those conditions that must be satisfied or waived by ADS prior to the completion of the Separation, which are described further above in “—Conditions to the Distribution.” In addition, ADS will have the right to determine the date and terms of the Separation, and will have the right, at any time until completion of the distribution, to determine to abandon or modify the distribution and to terminate the Separation and Distribution Agreement.
In addition, the Separation and Distribution Agreement will govern the treatment of indemnification, insurance and litigation responsibility and management. Generally, the Separation and Distribution Agreement will provide for uncapped cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of ADS’ retained businesses with ADS. The Separation and Distribution Agreement will also establish procedures for handling claims subject to indemnification and related matters.
Tax Matters Agreement
In connection with the Separation, we and ADS will enter into a tax matters agreement (the “Tax Matters Agreement”) that will govern the parties’ respective rights, responsibilities and obligations with respect to taxes, including taxes arising in the ordinary course of business, and taxes, if any, incurred as a result of the failure of the Distribution (and certain related transactions) to qualify for tax-free treatment for U.S. federal income tax purposes. The Tax Matters Agreement will also set forth the respective obligations of the parties with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters.
In general, the Tax Matters Agreement will govern the rights and obligations that we and ADS have after the Separation with respect to taxes for both pre- and post-closing periods. Under the Tax Matters Agreement, ADS generally will be responsible for all of our pre-closing income taxes. We will generally be responsible for all other income taxes and all non-income taxes primarily related to Loyalty Ventures that are due and payable after the Separation.
The Tax Matters Agreement will further provide that:

Without duplication for our indemnification obligations described in the prior paragraph, we will generally indemnify ADS against (i) taxes arising in the ordinary course of business for which we are responsible (as described above), (ii) any liability or damage resulting from a breach by us or any of our affiliates of a covenant or representation made in the Tax Matters Agreement and (iii) taxes resulting from the failure of the Distribution (and certain related transactions) to qualify for tax-free treatment that are attributable to certain of our actions; and

ADS will indemnify us against (i) taxes for which ADS is responsible under the Tax Matters Agreement (as described above) and (ii) any liability or damage resulting from a breach by ADS or any of its affiliates of a covenant or representation made in the Tax Matters Agreement.
In addition to the indemnification obligations described above, the indemnifying party will generally be required to indemnify the indemnified party against any interest, penalties, additions to tax, losses, assessments, settlements or judgments arising out of or incident to the event giving rise to the indemnification obligation, along with costs incurred in any related contest or proceeding.
Further, the Tax Matters Agreement generally will prohibit us and our affiliates from taking certain actions that could cause the Separation and certain related transactions to fail to qualify for their intended tax treatment, including:
 
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During the two-year period following the Distribution Date (or otherwise pursuant to a “plan” within the meaning of Section 355(e) of the Code), we may not cause or permit certain business combinations or transactions to occur;

During the two-year period following the Distribution Date, we may not discontinue the active conduct of our business (within the meaning of Section 355(b)(2) of the Code);

During the two-year period following the Distribution Date, we may not sell or otherwise issue our common stock in certain circumstances;

During the two-year period following the Distribution Date, we may not redeem or otherwise acquire any of our common stock, other than pursuant to open-market repurchases of less than 20% of our common stock (in the aggregate);

During the two-year period following the Distribution Date, we may not amend our certificate of incorporation (or other organizational documents) or take any other action, whether through a stockholder vote or otherwise, affecting the voting rights of our common stock; and

More generally, we may not take any action that could reasonably be expected to cause the Separation and certain related transactions to fail to qualify as tax-free transactions for U.S. federal income tax purposes or non-U.S. tax purposes.
In the event that the Separation and certain related transactions fail to qualify for their intended tax treatment, in whole or in part, and ADS is subject to tax as a result of such failure, the Tax Matters Agreement will determine whether ADS must be indemnified for any such tax by us. As a general matter, under the terms of the Tax Matters Agreement, we are required to indemnify ADS for any tax-related losses in connection with the Separation due to any action by us or any of our subsidiaries following the Separation. Therefore, in the event that the Separation and/or related transactions fail to qualify for their intended tax treatment due to any action by us or any of our subsidiaries, we will generally be required to indemnify ADS for the resulting taxes.
Transition Services Agreement
The Transition Services Agreement will set forth the terms on which ADS will provide to us, and we will provide to ADS, on a transitional basis, certain services or functions that the companies historically have shared. Transition services will include various corporate, administrative and information technology services. The Transition Services Agreement will provide for the provision of specified transition services, generally for a period of up to two years following the Distribution. Compensation for transition services will be determined using an internal cost allocation methodology based on cost or cost plus a margin. We estimate the fees associated with the Transition Services Agreement to be approximately $2.4 million annually. See “— Costs of the Separation” for other anticipated costs associated with the Separation and Distribution.
Employee Matters Agreement
We intend to enter into an Employee Matters Agreement with ADS prior to the Separation that will govern each company’s respective compensation and benefit obligations with respect to current and former employees, directors and consultants. The Employee Matters Agreement will set forth general principles relating to employee matters in connection with the Separation, such as the placement of employees, the assumption and retention of liabilities and related assets, expense reimbursements, workers’ compensation, leaves of absence, the provision of comparable benefits, employee service credit, the sharing of employee information and duplication or acceleration of benefits.
The Employee Matters Agreement generally will allocate liabilities and responsibilities relating to employee compensation and benefit plans and programs with ADS retaining liabilities (both pre- and post-Distribution) and responsibilities with respect to ADS participants who will remain with ADS and Loyalty Ventures assuming liabilities and responsibilities with respect to participants who will transfer to or be immediately employed by Loyalty Ventures in connection with the Separation. The Employee Matters Agreement will provide that, following the Distribution and an agreed upon transition period during which ADS will be providing employment-related transition services to U.S. based employees, Loyalty Ventures
 
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active employees generally will no longer participate in benefit plans sponsored or maintained by ADS and will commence participation in Loyalty Ventures benefit plans.
The Employee Matters Agreement will also provide that (i) the Distribution does not constitute a change in control under ADS’ plans, programs, agreements or arrangements and (ii) unless specifically set out in the Employee Matters Agreement,the Distribution and the assignment, transfer or continuation of the employment of employees with another entity will not constitute a severance event under applicable plans, programs, agreements or arrangements.
Transferability of shares of our common stock
The shares of our common stock that you will receive in the Distribution will be freely transferable, unless you are considered an “affiliate” of ours under Rule 144 under the Securities Act. Persons who can be considered our affiliates after the Separation generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by or are under common control with us, and may include certain of our officers and directors. In addition, individuals who are affiliates of ADS on the Distribution Date may be deemed to be affiliates of ours. We estimate that our directors and executive officers, who may be considered “affiliates” for purposes of Rule 144, will beneficially own approximately                 shares of our common stock immediately following the Separation. See “Ownership of Common Stock by Certain Beneficial Owners and Management” included elsewhere in this information statement. Our affiliates may sell shares of our common stock received in the Distribution only:

Under a registration statement that the SEC has declared effective under the Securities Act; or

Under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.

In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell, within any three-month period, a number of shares of our common stock that does not exceed the greater of:

One percent of our common stock then outstanding; or

The average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 for the sale.
Rule 144 also includes notice requirements and restrictions governing the manner of sale for sales by our affiliates. Sales may not be made under Rule 144 unless certain information about us is publicly available.
Reason for furnishing this information statement
This information statement is being furnished solely to provide information to ADS stockholders who are entitled to receive shares of our common stock in the Distribution. The information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities. We believe the information contained in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither ADS nor we undertake any obligation to update such information except in the normal course of our respective public disclosure obligations.
 
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DIVIDEND POLICY
We do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to pay down our outstanding indebtedness and fund the development and expansion of our business. The declaration and amount of any dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, cash flows, capital requirements of our business, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors the board of directors deems relevant. In addition, our ability to pay cash dividends on our capital stock may be limited by the terms of any future debt or preferred securities we issue or any credit facilities we enter into.
 
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CAPITALIZATION
The following table sets forth our cash and equivalents and our capitalization as of June 30, 2021 on a historical and pro forma basis to give effect to the Separation, the incurrence of debt and other matters, as discussed in “The Separation.”
The pro forma adjustments are based upon available information and assumptions that management believes are reasonable; however, such adjustments are subject to change based on the finalization of the terms of the Separation and the agreements which define our relationship with ADS after the completion of the Separation. In addition, such adjustments are estimates and may not prove to be accurate.
You should read the information in the following table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Financial Statements” and our historical combined financial statements and the related notes included elsewhere in this information statement.
We are providing the capitalization table for information purposes only. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operating as an independent, publicly traded company on June 30, 2021 and is not necessarily indicative of our future capitalization or financial condition.
As of June 30, 2021
Actual
Pro Forma
(Unaudited)
(in thousands, except
share amounts)
Cash and equivalents(1)
$ 205,715 $ 118,970
Indebtedness:
Current portion of debt(2):
Short-term borrowings
6,750
Long-term:
Long-term debt(2)
649,801
Total indebtedness(2)
656,551
Equity:
Common stock, par value $0.01; shares authorized, shares issued and outstanding, pro forma(3)
Additional paid-in-capital
200,177
Parent’s net investment
1,012,586
Accumulated other comprehensive loss
(25,571) (25,571)
Total equity
$ 987,015 $ 174,606
Total capitalization
$ 987,015 $ 174,606
(1)
Reflects pro forma cash following receipt of debt proceeds and the net cash transfer to ADS. See “Notes to Unaudited Pro Forma Combined Financial Statements of Loyalty Ventures” for additional information.
(2)
Reflects an estimated $675.0 million of new long-term debt from the proceeds of the new term loan facility we expect to incur in connection with the Separation, less an estimated debt discount of $10.1 million and estimated debt issuance costs of $8.3 million.
(3)
At Separation, ADS’ net investment in us will be reduced to 19%, reflecting the distribution of our common stock to ADS’ stockholders at a distribution ratio of one share of our common stock for every        shares of ADS common stock.
 
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements (the “Unaudited Pro Forma Combined Financial Statements”) of Loyalty Ventures have been derived from the historical combined financial statements (the “Combined Financial Statements”) included elsewhere in this information statement. The Unaudited Pro Forma Combined Financial Statements of Loyalty Ventures should be read in conjunction with the Combined Financial Statements and accompanying notes, “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement. The Unaudited Pro Forma Combined Financial Statements of Loyalty Ventures constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this information statement.
The unaudited pro forma combined statement of operations (the “Unaudited Pro Forma Combined Statement of Operations”) of Loyalty Ventures for the six months ended June 30, 2021 and the fiscal year ended December 31, 2020 have been prepared as though the Separation and Distribution occurred on January 1, 2020. The unaudited pro forma combined balance sheet (the “Unaudited Pro Forma Combined Balance Sheet”) of Loyalty Ventures as of June 30, 2021 has been prepared as though the Separation and Distribution occurred on June 30, 2021. The Unaudited Pro Forma Combined Financial Statements of Loyalty Ventures are for illustrative purposes only, and do not reflect what Loyalty Ventures’ financial position and results of operations would have been had the Separation and Distribution occurred on the dates indicated and are not necessarily indicative of Loyalty Ventures’ future financial position and future results of operations.
The following Unaudited Pro Forma Combined Financial Statements of Loyalty Ventures give effect to the Separation and Distribution and related adjustments in accordance with Article 11 of the Securities and Exchange Commission’s Regulation S-X. In May 2020, the SEC adopted Release No.33-10786, “Amendments to Financial Disclosures about Acquired and Disposed Businesses,” or the Final Rule. The Final Rule is effective on January 1, 2021 and the unaudited pro forma condensed combined financial information herein is presented in accordance therewith.
The Unaudited Pro Forma Combined Financial Statements have been adjusted to give effect of the following transactions:

The anticipated post-Separation capital structure, including the incurrence of debt and the distribution of cash to ADS;

the distribution of shares of Loyalty Ventures’ common stock by ADS to its stockholders and the elimination of the Parent’s net investment;

the impact of, and transactions contemplated by, the Separation Agreement and the other transaction agreements to be entered into by ADS and Loyalty Ventures in connection with the Separation and Distribution; and

the impact of certain transactions that are not expected to have a continuing effect on our results of operations.
A final determination regarding our capital structure has not yet been made, and the Separation and Distribution Agreement, Tax Matters Agreement, Transition Services Agreement, Employee Matters Agreement, and any other transaction agreements have not been finalized. As such, the Unaudited Pro Forma Combined Financial Statements may be revised in future amendments to reflect the changes on our proposed capital structure and the final form of those agreements, to the extent any such changes would be deemed material.
Subject to the terms of the Separation and Distribution Agreement, each of ADS and Loyalty Ventures will pay certain non-recurring third-party costs and expenses related to the Separation and incurred prior to the completion of the Separation. Such non-recurring amounts are expected to include investment banker fees (other than fees and expenses in connection with the debt financing), third-party legal and accounting fees, consent fees and similar costs. It is preliminarily estimated that the costs related to the Separation to be incurred during Loyalty Ventures’ transition to being a stand-alone public company will be
 
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approximately $33.0 million to $36.0 million, of which approximately $10.0 million will be paid by Loyalty Ventures and the remainder of such costs will be paid by ADS. See “The Separation—Costs of the Separation.”
To operate as an independent, publicly traded company, we expect our recurring costs to replace certain services to approximate those costs historically allocated to us from ADS. The significant assumptions involved in determining our estimates of the recurring costs of being an independent, publicly traded company include, but are not limited to, costs to perform financial reporting, tax, corporate governance, treasury, legal, internal audit and investor relations activities; compensation expense, including equity-based awards, and benefits; and incremental third-party costs with respect to insurance, audit services, tax services, employee benefits and legal services. The operating expenses reported in our historical combined statements of operations include allocations of certain ADS costs. These costs include allocation of ADS corporate costs that benefit us, including corporate governance, executive management, finance, legal, information technology, human resources, and other general and administrative costs. We estimate the costs to operate as an independent, publicly traded company approximate the amount of allocated costs that have been presented in our historical combined statements of operations and as such an autonomous entity pro forma adjustment has not been made to the accompanying Unaudited Pro Forma Combined Statement of Operations. Certain factors could impact these stand-alone public company costs, including the finalization of our staffing and infrastructure needs.
 
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Unaudited Pro Forma Combined Balance Sheet of Loyalty Ventures
As of June 30, 2021
Transaction
Pro Forma
Adjustments
Adjusted
(in thousands)
ASSETS
Cash and cash equivalents
$ 205,715 $ (86,745) (a) $ 118,970
Accounts receivable, net
265,729 36,510 (c) 302,239
Inventories 162,254 162,254
Redemption settlement assets, restricted
745,086 745,086
Other current assets
21,262 21,262
Total current assets
1,400,046 (50,235) 1,349,811
Property and equipment, net
90,329 90,329
Right of use assets – operating
107,916 18 (c) 107,934
Deferred tax asset, net
66,839 (f) 66,839
Intangible assets, net
4,102 4,102
Goodwill
725,632 725,632
Investment in unconsolidated subsidiaries – related party
2 (2) (d)
Other non-current assets
3,774 1,244 (b) 5,018
Total assets
$ 2,398,640 $ (48,975) $ 2,349,665
LIABILITIES AND EQUITY
Accounts payable
$ 65,831 $ 2 (c) $ 65,833
Accrued expenses
53,439 29 (c) 53,468
Deferred revenue
942,154 942,154
Current operating lease liabilities
9,888 26 (c) 9,914
Current portion of debt
6,750 (b) 6,750
Other current liabilities
103,384 103,384
Total current liabilities
1,174,696 6,807 1,181,503
Deferred revenue
100,630 100,630
Long-term operating lease liabilities
111,727 111,727
Long-term and other debt
649,801 (b) 649,801
Other liabilities
24,572 106,826 (c) 131,398
Total liabilities
1,411,625 763,434 2,175,059
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.01
(e)
Additional paid-in capital
200,177 (e) 200,177
Parent’s net investment
1,012,586 (1,012,586) (e)
Accumulated other comprehensive income (loss)
(25,571) (25,571)
Total equity
987,015 (812,409) 174,606
Total liabilities and equity
$ 2,398,640 $ (48,975) $ 2,349,665
See Notes to Unaudited Pro Forma Combined Financial Statements of Loyalty Ventures.
 
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Unaudited Pro Forma Combined Statement of Operations of Loyalty Ventures
For The Six Months Ended June 30, 2021
Historical
Transaction
Pro Forma
Adjustments
Adjusted
(in thousands)
Revenues
Redemption, net
$ 183,695 $ $ 183,695
Services
133,438 133,438
Other
10,326 10,326
Total revenue
327,459 327,459
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)
252,937 252,937
General and administrative
7,590 7,590
Depreciation and other amortization
17,571 17,571
Amortization of purchased intangibles
883 883
Total operating expenses
278,981 278,981
Operating income
48,478 48,478
Interest (income) expense, net
(182) 19,161 (g) 18,979
Income before income taxes and loss from investment in unconsolidated subsidiaries
48,660 (19,161) 29,499
Provision (benefit) for income taxes
15,074 (h) 15,074
Loss from investment in unconsolidated subsidiaries – related party, net of tax
42 (42) (d)
Net income
$ 33,544 $ (19,119) $ 14,425
Pro forma earnings per share
Basic
Diluted
Pro forma weighted average shares outstanding:
Basic
(i)
Diluted
(i)
See Notes to Unaudited Pro Forma Combined Financial Statements of Loyalty Ventures.
 
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Unaudited Pro Forma Combined Statement of Operations of Loyalty Ventures
For The Year Ended December 31, 2020
Historical
Transaction
Pro Forma
Adjustments
Adjusted
(in thousands)
Revenues
Redemption, net
$ 473,067 $ $ 473,067
Services
264,050 264,050
Other
27,689 27,689
Total revenue
764,806 764,806
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)
587,615 587,615
General and administrative
14,315 14,315
Depreciation and other amortization
28,988 28,988
Amortization of purchased intangibles
48,953 48,953
Total operating expenses
679,871 679,871
Operating income
84,935 84,935
Gain on sale of a business
(10,876) (10,876)
Interest (income) expense, net
(834) 38,322 (g) 37,488
Income before income taxes and loss from investment in unconsolidated subsidiaries
96,645 (38,322) 58,323
Provision (benefit) for income taxes
21,324 (h) 21,324
Loss from investment in unconsolidated subsidiaries – related party, net of tax
246 (246) (d)
Net income
$ 75,075 $ (38,076) $ 36,999
Pro forma earnings per share
Basic
Diluted
Pro forma weighted average shares outstanding:
Basic
(i)
Diluted
(i)
See Notes to Unaudited Pro Forma Combined Financial Statements of Loyalty Ventures.
 
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF Loyalty Ventures
a.
The following represents adjustments to reflect the expected cash at Separation.
June 30, 2021
(in thousands)
Cash received from the incurrence of debt issued at 98.5%
$ 664,875
Cash received as a contribution from ADS
7,948
Cash transferred to ADS at Separation
(750,000)
Cash paid for debt issuance costs
(9,568)
Pro forma adjustment to cash
$ (86,745)
b.
Reflects $675.0 million of term loan borrowings issued at 98.5% expected to be incurred in connection with the Separation and Distribution and anticipated financing fees to be paid by Loyalty Ventures of $9.6 million. Loyalty Ventures also intends to enter into a $150.0 million revolving credit facility to support the business after consummation of the Separation and Distribution, but does not expect to draw on this facility immediately. The financing fees related to the term loan are shown as a reduction to long-term debt. The financing fees related to the revolving credit facility are reflected as a non-current asset in the Unaudited Pro Forma Combined Balance Sheet.
June 30, 2021
(in thousands)
Debt to be issued
$ 675,000
Debt discount
(10,125)
Deferred financing fees – term loan
(8,324)
Pro Forma adjustment to debt
$ 656,551
Current portion of debt
6,750
Long term portion of debt
649,801
Deferred financing fees – revolving credit facility
1,244
Pro forma adjustment to non-current assets
$ 1,244
c.
Assets and liabilities of certain corporate entities associated with the international businesses will be contributed by ADS to Loyalty Ventures. In addition, pursuant to the terms of the Tax Matters Agreement, ADS will be responsible for all pre-distribution tax payables and tax reserves, but will also be entitled to receive all pre-distribution tax receivables when realized. As such, we have made the following adjustments in the unaudited pro forma combined balance sheet as of June 30, 2021:
June 30, 2021
Contribution by
ADS
Tax assets and
liabilities
Total
(in thousands)
Accounts receivable, net
$ 4,246 $ 32,264 $ 36,510
Right of use asset
18 18
Accounts payable
(2) (2)
Accrued expenses
(29) (29)
Current operating lease liability
(26) (26)
Other liabilities
(106,826) (106,826)
Net assets transferred
$ 4,207 $ (74,562) $ (70,355)
d.
Represents a pro forma adjustment for its investment in Comenity Canada L.P., which was sold to an affiliate of ADS in August 2021, as a result of the transaction, and will not have a continuing effect on our results of operations.
 
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e.
Reflects the reclassification of the Parent’s net investment into additional paid in capital and common stock to reflect the assumed issuance of                 shares of our common stock with $0.01 par value. We have assumed the number of outstanding shares of our common stock based on the number of shares of ADS common stock outstanding on June 30, 2021 and a distribution ratio of one share of our common stock for every           shares of ADS common stock.
June 30, 2021
(in thousands)
Elimination of ADS’ net investment
$ (1,012,586)
Cash transferred to ADS at Separation
750,000
Effect of ADS net assets transferred/retained(1)
62,409
Pro forma adjustment to additional paid in capital
$ (200,177)
(1)
A detail of the net assets transferred/retained are as follows:
June 30, 2021
(in thousands)
Cash contributed by ADS
$ (7,948)
Assets and liabilities of certain Corporate entities
70,355
Investment in unconsolidated subsidiary sold to ADS
2
Pro forma adjustment to additional paid in capital
$ 62,409
f.
As a result of the pro forma adjustments, the deferred tax asset will increase and be offset by a corresponding increase to the valuation allowance, resulting in a zero effect on the historical deferred tax asset balance.
g.
Reflects interest expense related to $675.0 million of indebtedness issued at 98.5% that Loyalty Ventures expects to enter into in connection with the Separation and Distribution and amortization of anticipated financing fees of $9.6 million to be paid by Loyalty Ventures. The expected interest rate on the debt is approximately 5.25% with a seven year term. Interest expense may be higher or lower if Loyalty Ventures’ actual interest rate differs.
Six Months Ended
June 30, 2021
Year Ended
December 31, 2020
(in thousands)
Interest expense on debt
$ 17,719 $ 35,438
Amortization of debt discount and deferred financing charges
1,442 2,884
Pro forma adjustment to interest expense
$ 19,161 $ 38,322
h.
Reflects no tax impact of the pro forma adjustments to pre-tax income as these adjustments would only increase the deferred tax asset with a corresponding increase to the valuation allowance required. The effective tax rate of Loyalty Ventures could be different depending on activities occurring subsequent to the distribution.
i.
The number of Loyalty Ventures weighted average common shares used to compute the basic earnings per share for the six months ended June 30, 2021 and the year ended December 31, 2020 is based on the number of ADS shares outstanding at each respective period assuming a distribution ratio of one share of Loyalty Ventures for every           shares of ADS. The number of ADS shares used to determine the assumed distribution reflects the ADS shares outstanding as of the balance sheet date. While the actual future impact of potential dilution from Loyalty Ventures shares related to equity awards granted to Loyalty Ventures’ employees under share-based plans will depend on various factors, pro forma weighted average shares outstanding were not adjusted as Loyalty Ventures does not currently have an estimate of the future dilutive impact. The actual number of shares of our common stock may be different from this estimated amount.
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our audited combined financial statements and the notes thereto, included elsewhere in this information statement, as well as the information presented under “Unaudited Pro Forma Combined Financial Statements,” and “Business.” The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed elsewhere in this information statement. See in particular “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”
Overview
We are a leading provider of tech-enabled, data-driven consumer loyalty solutions. Our solutions are focused on helping partners achieve their strategic and financial objectives, from increased consumer basket size, shopper traffic and frequency and digital reach to enhanced program reporting and analytics. We design our loyalty solutions around specific clients’ needs and goals, which can be both transactional and emotional. The essence of loyalty is derived from a mix of emotions and memory. By activating these unconscious influences, we help financial services providers, retailers and other consumer-facing businesses create and increase customer loyalty across multiple touch points from traditional to digital to mobile and emerging technologies. We own and operate the AIR MILES Reward Program, Canada’s most recognized loyalty program, and Netherlands-based BrandLoyalty, a global provider of purpose-driven, tailor-made campaign-based loyalty solutions for grocers and other high-frequency retailers.
The AIR MILES Reward Program is an end-to-end loyalty platform, combining technology, data/analytics and other solutions to help our clients (who we call sponsors) drive increased engagement by consumers (who we call collectors) with their brand. The AIR MILES Reward Program operates as a full service coalition loyalty program for our sponsors. We provide all marketing, customer service, rewards and redemption management for our sponsors. We typically grant sponsors exclusivity in their market category, enabling them to realize incremental sales and increase market share as a result of their participation in the AIR MILES Reward Program. The AIR MILES Reward Program enables collectors to earn AIR MILES reward miles as they shop across a broad range of sponsors from financial institutions, grocery and liquor, e-commerce, specialty retail, pharmacy, petroleum retail, and home furnishings to hardware, that participate in the AIR MILES Reward Program. These AIR MILES reward miles can be redeemed by collectors for travel, entertainment, experiences, merchandise or other rewards. Through our AIR MILES cash program option, collectors can also instantly redeem their AIR MILES reward miles earned in the AIR MILES cash program option toward in-store purchases at participating sponsors, such as Shell Canada. We estimate approximately two-thirds of Canadian households actively participate in the AIR MILES Reward Program.
BrandLoyalty is a worldwide leader in campaign-based loyalty solutions that positively impact consumer behavior on a mass scale. We pride ourselves on being a business with purpose by connecting high-frequency retailers, supplier partners and consumers to create sustainable solutions for today’s challenges. We design, implement, conduct and evaluate innovative, digitally-enhanced, tailor-made loyalty campaigns. These campaigns are tailored for the specific client and are designed to reward key customer segments based on their spending levels during defined campaign periods. At BrandLoyalty, we aim to let all shoppers feel emotionally connected when they shop at our clients, by designing campaigns with the right mechanics and rewards that instantly change shopping behavior and engender loyalty. The rewards we offer come from top brands with high creative standards such as Disney, Zwilling, and vivo | Villeroy & Boch.
Background
On May 12, 2021, ADS announced the repositioning of ADS through the spinoff of the Spin Business from its remaining businesses to create an independent, publicly traded company. Directly or indirectly through our subsidiaries, we will hold the assets and liabilities of the Spin Business after the Separation. Each holder of ADS common stock will receive one share of common stock of Loyalty Ventures for every
 
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shares of ADS common stock held as of the close of business on the record date for the Distribution. Following the Separation, we will be an independent, publicly traded company, and ADS will retain a 19% interest in us, all or a portion of which ADS may transfer to one or more of ADS' creditors in satisfaction of ADS' third party debt within one year of the Distribution, and any remaining interest will be disposed by ADS not later than 5 years after the Distribution. For additional information, see “The Separation.” ADS’ Loyalty Ventures common stock will be voted in the same proportion as the votes cast in respect of the common stock not owned by ADS on any matter presented for a vote of Loyalty Ventures’ stockholders.
Basis of presentation
We have historically operated as part of ADS and not as a standalone company, and we were a reportable segment of ADS. Combined financial statements representing the historical operations of Loyalty Ventures’ business have been derived from the historical accounting records of ADS and are presented on a carve-out basis. Our combined financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The combined financial statements may not be indicative of future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had we operated as an independent, publicly traded company during the periods presented, particularly because of changes we expect to experience in the future as a result of the Separation, including changes in the financing, cash management, operations, cost structure and personnel needs of our business.
The cash and equivalents held by ADS at the corporate level are not specifically identifiable and therefore have not been reflected in the combined balance sheet. ADS’ third-party long-term debt and the related interest expense have not been allocated for any of the periods presented as it was not the legal obligor of such debt.
All revenues and expenses as well as assets and liabilities directly associated with the business activity of the Loyalty Ventures business are included in the combined financial statements. The combined financial statements also include allocations of certain general and administrative expenses from ADS. ADS allocated $14.3 million, $14.8 million and $14.0 million of corporate overhead costs that directly or indirectly benefit Loyalty Ventures’ business for the years ended December 31, 2020, 2019 and 2018, respectively, that are included in general and administrative expense within our combined statements of income. In addition, ADS allocated $3.9 million and $3.6 million for the three months ended June 30, 2021 and 2020, respectively, and $7.6 million and $7.2 million for the six months ended June 30, 2021 and 2020, respectively, of corporate overhead costs that directly or indirectly benefit Loyalty Ventures’ business, that are included in general and administrative expense within our combined statements of income. These assessments relate to information technology, finance, accounting, tax services, human resources, and other functional support. These allocations were determined based on management estimates on the number of employees and non-employee costs associated with the use of these functions by us and may not be indicative of the costs that we would otherwise incur on a standalone basis or had we operated independently of ADS.
COVID-19
Following the declaration by the WHO in the first quarter of 2020 of COVID-19 as a global pandemic and the rapid spread of COVID-19, international, provincial, federal, state and local government or other authorities have imposed varying degrees of restrictions on social and commercial activity in an effort to improve health and safety. As the global COVID-19 pandemic has continued to evolve, our priority has been and continues to be, the health and safety of our employees, with the vast majority of our employees continuing to work from home.
The effects of the COVID-19 pandemic negatively impacted our results of operations and year-over-year comparisons. For the year ended December 31, 2020 and through the six months ended June 30, 2021,
 
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AIR MILES reward miles issuances and redemptions declined largely due to the downturn in the travel market as a result of the pandemic and related restrictions such as border closures repressing travel-related redemptions. The AIR MILES Reward Program continues to pivot the rewards portfolio to emphasize more non-travel options, aiming to drive higher merchandise redemptions. In addition, the AIR MILES Reward Program is working with airline partners to plan for the increasing return of airline travel during the second half of 2021. At BrandLoyalty, new program activity is increasing with consumers actively engaged in loyalty campaigns, with particular success in products focused on the home. However, both the uncertainty remaining with the U.K. and many Asian and European countries still subject to varying degrees of restrictions as well as recent disruptions to port services in southern China amid COVID-19 resurgences exacerbating already challenged global supply chain conditions, could negatively impact our results of operations in the second half of 2021.
Despite the roll-out of vaccines, surges in COVID-19 cases, including variants of the strain, may cause people to self-quarantine or governments to shut down nonessential businesses again. The broad availability of COVID-19 vaccines and the willingness of individuals to be vaccinated are difficult to predict. The pace and shape of the COVID-19 recovery as well as the impact and extent of potential resurgences is not presently known. We continue to evaluate the nature and extent of changes to the market and economic conditions related to the COVID-19 pandemic and current and potential impact on our business and financial position. However, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our future results of operations or cash flows at this time.
 
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Combined Results of Operations
Three Months Ended June 30,
% Change
Six Months Ended June 30,
% Change
2021
2020
2021 to
2020
2021
2020
2021 to
2020
(in thousands, except percentages)
Revenues
Redemption, net
$ 78,831 $ 84,675 (7)% $ 183,695 $ 205,547 (11)%
Services
67,215 60,008 12 133,438 130,227 2
Other
4,859 6,388 (24) 10,326 13,402 (23)
Total revenue
150,905 151,071 327,459 349,176 (6)
Operating expenses
Cost of operations (exclusive of
depreciation and amortization
disclosed separately below)
117,092 108,850 8 252,937 253,161
General and administrative
3,905 3,591 9 7,590 7,163 6
Depreciation and other amortization
8,977 6,547 37 17,571 12,954 36
Amortization of purchased intangibles
444 11,807 (96) 883 23,630 (96)
Total operating expenses
130,418 130,795 278,981 296,908 (6)
Operating income
20,487 20,276 1 48,478 52,268 (7)
Gain on sale of a business
(10,876) (100)
Interest income, net
(113) (82) 38 (182) (349) (48)
Income before income taxes and
loss (income) from investment in
unconsolidated subsidiaries –
related party
20,600 20,358 1 48,660 63,493 (23)
Provision for income taxes
6,090 441 1,281 15,074 13,849 9
Loss (income) from investment in unconsolidated subsidiaries – related party, net of tax
5 (10) (150) 42 58 (28)
Net income
$ 14,505 $ 19,927 (27)% $ 33,544 $ 49,586 (32)%
Key Operating Metrics (in millions):
AIR MILES reward miles issued
1,139.2 1,053.1 8% 2,250.8 2,368.9 (5)%
AIR MILES reward miles redeemed
800.3 608.2 32% 1,539.6 1,602.2 (4)%
Supplemental Information:
Average CAD to USD foreign currency exchange rate
0.81 0.72 13% 0.80 0.73 10%
Average EUR to USD foreign currency exchange rate
1.21 1.10 10% 1.21 1.10 10%
 
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Three months ended June 30, 2021 compared to the three months ended June 30, 2020
Revenue.   Total revenue decreased $0.2 million to $150.9 million, for the three months ended June 30, 2021 as compared to $151.1 million for the three months ended June 30, 2020. The net decrease was due to the following:

Redemption, net.   Revenue decreased $5.8 million, or 7%, to $78.8 million for the three months ended June 30, 2021, as redemption revenue from our campaign-based loyalty programs decreased $5.2 million due to delays in programs in market due to the continued impact of COVID-19. The decrease in revenue was tempered by favorability in foreign currency exchange rates.

Services.   Revenue increased $7.2 million, or 12%, to $67.2 million for the three months ended June 30, 2021 due to the favorable impact of foreign currency exchange rates.

Other revenue.   Other revenue decreased $1.5 million, or 24%, to $4.9 million due to a decline in ancillary revenue associated with surplus inventory in our BrandLoyalty segment.
Cost of operations.   Cost of operations increased $8.2 million, or 8%, to $117.1 million as compared to $108.9 million due to a $6.3 million increase in payroll and benefits expense, including an increase in incentive compensation and exempt wages, and a $7.1 million increase in operating expenses across various expense categories such as associate engagement at BrandLoyalty and marketing for additional AIR MILES Reward Program promotions. These increases were offset in part by a $5.1 million decrease in cost of redemptions due to the decline in redemption revenue discussed above.
General and administrative.   General and administrative expenses increased $0.3 million, or 9%, to $3.9 million for the three months ended June 30, 2021 as compared to $3.6 million for the three months ended June 30, 2020, due an increase in payroll and benefits expense.
Depreciation and other amortization.   Depreciation and other amortization increased $2.4 million, or 37%, to $9.0 million for the three months ended June 30, 2021 as compared to $6.5 million for the three months ended June 30, 2020, primarily due to amortization associated with previous investments in digital technology within our AIR MILES Reward Program segment.
Amortization of purchased intangibles.   Amortization of purchased intangibles decreased $11.4 million, or 96%, to $0.4 million for the three months ended June 30, 2021, as compared to $11.8 million for the three months ended June 30, 2020, due to the fully amortized customer contracts in our BrandLoyalty segment.
Interest income, net.   Total interest income, net remained flat at $0.1 million.
Taxes.   Provision for income taxes increased $5.6 million to $6.1 million for the three months ended June 30, 2021 from $0.4 million for the three months ended June 30, 2020. The effective tax rate for the three months ended June 30, 2021 was 29.6% as compared to 2.2% for the prior year. The increase in the effective tax rate for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 was primarily due to discrete tax benefits related to the expiration of statutes of limitation and the resolution of tax audits in various foreign jurisdictions in the prior year.
Loss (income) from investment in unconsolidated subsidiaries—related party.   The loss from unconsolidated subsidiaries — related party was de minimis. Our investment in our unconsolidated subsidiary, Comenity Canada, L.P. was sold to an affiliate of ADS in August 2021 for CDN $5.2 million.
Six months ended June 30, 2021 compared to the six months ended June 30, 2020
Revenue.    Total revenue decreased $21.7 million, or 6%, to $327.5 million for the six months ended June 30, 2021 from $349.2 million for the six months ended June 30, 2020. The net decrease was due to the following:

Redemption, net.   Revenue decreased $21.9 million, or 11%, to $183.7 million for the six months ended June 30, 2021 as redemption revenue from our campaign-based loyalty programs decreased $19.5 million due to delays in programs in market which were impacted by COVID-19. The decrease in revenue was tempered by favorability in foreign currency exchange rates.
 
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Services.    Revenue increased $3.2 million, or 2%, to $133.4 million for the six months ended June 30, 2021 due to the favorable impact of foreign currency exchange rates.

Other revenue.   Revenue decreased $3.1 million, or 23%, to $10.3 million due in part to a decline in ancillary revenue associated with surplus inventory within our BrandLoyalty segment.
Cost of operations.   Cost of operations decreased $0.2 million to $252.9 million for the six months ended June 30, 2021 as compared to $253.2 million for the three months ended June 30, 2020, as a $12.6 million decrease in cost of redemptions due to the decline in redemption revenue was offset by an increase of $5.8 million in payroll and benefits expense associated with higher incentive compensation and a $6.5 million increase in operating expenses across various expense categories such as associate engagement expense at BrandLoyalty, marketing expense due to additional AIR MILES Reward Program promotions, professional fees, and realized losses on securities and foreigncurrency.
General and administrative.   General and administrative expenses increased $0.4 million, or 6%, to $7.6 million for the six months ended June 30, 2021 as compared to $7.2 million for the six months ended June 30, 2020, due to an increase in payroll and benefits expense.
Depreciation and other amortization.   Depreciation and other amortization increased $4.6 million, or 36%, to $17.6 million for the six months ended June 30, 2021 as compared to $13.0 million for the six months ended June 30, 2020, primarily due to additional capitalized software assets placed into service for digital investments for the AIR MILES Reward Program segment.
Amortization of purchased intangibles.   Amortization of purchased intangibles decreased $22.7 million, or 96%, to $0.9 million for the six months ended June 30, 2021, as compared to $23.6 million for the six months ended June 30, 2020, due to the fully amortized customer contracts in our BrandLoyalty segment.
Gain on sale of a business.   In January 2020, ADS sold Precima, a provider of retail strategy and customer data applications, resulting in a pre-tax gain of $10.9 million.
Interest income, net.   Total interest income, net decreased $0.2 million, or 48%, to $0.2 million for the six months ended June 30, 2021 as compared to $0.3 million for the six months ended June 30, 2020, due to lower interest rates.
Taxes.   Provision for income taxes increased $1.2 million to $15.1 million for the six months ended June 30, 2021 from $13.8 million for the six months ended June 30, 2020. The effective tax rate for the six months ended June 30, 2021 was 31.0% as compared to 21.8% for the prior year. The increase in the effective tax rate for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was due to discrete tax benefits related to the expiration of statutes of limitation and the resolution of tax audits in various foreign jurisdictions in the prior year.
Loss (income) from investment in unconsolidated subsidiaries—related party.   The loss from unconsolidated subsidiaries — related party was de minimis. Our investment in our unconsolidated subsidiary, Comenity Canada, L.P. was sold to an affiliate of ADS in August 2021 for CDN $5.2 million.
 
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Years Ended December 31,
% Change
2020
2019
2018
2020 to
2019
2019 to
2018
(in thousands, except percentages)
Revenues
Redemption, net
$ 473,067 $ 637,321 $ 676,279 (26)% (6)%
Services
264,050 367,647 368,170 (28)
Other
27,689 28,163 23,929 (2) 18
Total revenue
764,806 1,033,131 1,068,378 (26) (3)