Travelzoo 2004 Annual Report Download - page 34

escheat claims are asserted, we intend to challenge the applicability of escheat rights, among other reasons, in
that the identity, residency and eligibility of the holders in question cannot be determined. There were certain
conditions applicable to the issuance of shares to the Netsurfer stockholders, including requirements that
(i) they be at least 18 years of age, (ii) they be residents of the U.S. or Canada and (iii) they not apply for
shares more than once. The Netsurfer stockholders were required to conÑrm their compliance with these
conditions, and were advised that failure to comply could result in cancellation of their shares in
Travelzoo.com Corporation. Travelzoo.com Corporation was not able to verify that the applicants met the
requirements referred to above at the time of their applications for issuance of shares. If claims are asserted by
persons claiming to be former stockholders of Travelzoo.com Corporation, we intend to assert that their rights
to receive their shares expired two years following the eÅective date of the merger, as provided in the merger
agreement. We also expect to take the position, if escheat or similar claims are asserted in respect of the
unissued shares in the future, that we are not required to issue such shares. Further, even if it were established
that unissued shares were subject to escheat claims, we would assert that the claimant must establish that the
original Netsurfer stockholders complied with the conditions to issuance of their shares. We are not able to
predict the outcome of any future claims which might be asserted relating to the unissued shares. If such
claims were asserted, and were fully successful, that could result in us being required to issue up to an
additional 4,115,532 shares of common stock for no additional payment, which would result in substantial
dilution of the ownership interests of the other stockholders, and in the our earnings per share, which could
adversely aÅect the market price of the common stock.
On October 15, 2004, we announced a program under which we will make cash payments to persons who
establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit requests
for our shares within the required time period. The accompanying consolidated Ñnancial statements include a
charge in general and administrative expenses of $1.2 million for these cash payments for the year ended
December 31, 2004 of which $525,000 remains as a liability as of December 31, 2004. The liability is based on
the number of actual requests received from former stockholders through December 31, 2004. The total cost
of this program is not reliably estimable because it is based on the ultimate number of valid requests received
and future levels of our common stock price. Our common stock price aÅects the liability because the amount
of cash payments under the program is based in part on the recent level of the stock price at the date valid
requests are received. We do not know how many of the requests for shares originally received by
Travelzoo.com Corporation in 1998 were valid, but we believe that only a portion of such requests were valid.
As noted above, in order to receive payment under the program, a person is required to establish that such
person validly held shares in Travelzoo.com Corporation. Assuming 100% of the requests from 1998 were
valid, former stockholders of Travelzoo.com Corporation holding approximately 4,103,000 shares had not
submitted claims under the program as of December 31, 2004.
Our internal controls over Ñnancial reporting may not be eÅective, and our independent auditors may not
be able to certify as to their eÅectiveness, which could have a signiÑcant and adverse eÅect on our
business.
We are evaluating our internal controls over Ñnancial reporting in order to allow management to report
on, and our independent auditors to attest to, our internal controls over Ñnancial reporting, as required by
Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which we
collectively refer to as Section 404. We are currently performing the system and process evaluation and testing
required in an eÅort to comply with the management assessment and auditor certiÑcation requirements of
Section 404, which will initially apply to us as of December 31, 2005. In the course of our ongoing Section 404
evaluation, we have identiÑed areas of internal controls that may need improvement and have instituted
remediation eÅorts where necessary. Currently, none of our identiÑed areas that need improvement have been
categorized as material weaknesses or signiÑcant deÑciencies. However, we are in the evaluation process, and
we may identify conditions that may result in signiÑcant deÑciencies or material weaknesses in the future.
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