Travelzoo 2005 Annual Report Download - page 37

escheat claims are asserted, we intend to challenge the applicability of escheat rights in that, among other
reasons, 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 4,079,000 shares of common stock for no additional payment, which would result in substantial
dilution of the ownership interests of the other stockholders, and in 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 would 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, 2005, of which $11,000 remains as a liability as of December 31, 2005. The liability is
based on the number of actual requests received from former stockholders through December 31, 2005 that
remain unpaid. 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
4,079,000 shares had not submitted claims under the program as of December 31, 2005.
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 obligated to evaluate 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. In our 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. We may identify
conditions that may result in signiÑcant deÑciencies or material weaknesses in the future.
We may be unable to protect our registered trademark or other proprietary intellectual property rights.
Our success depends to a signiÑcant degree upon the protection of the Travelzoo brand name. We rely
upon a combination of copyright, trade secret and trademark laws and non-disclosure and other contractual
arrangements to protect our intellectual property rights. The steps we have taken to protect our proprietary
rights, however, may not be adequate to deter misappropriation of proprietary information.
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