Travelzoo 2013 Annual Report Download - page 90

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In April 2002, Travelzoo.com Corporation was merged into Travelzoo Inc. Under and subject to the terms of the merger
agreement, holders of promotional shares of Travelzoo.com Corporation (“Netsurfers”) who established that they had satisfied
certain prerequisite qualifications were allowed a period of 2 years following the effective date of the merger to receive one
share of Travelzoo Inc. in exchange for each share of common stock of Travelzoo.com Corporation. The records of
Travelzoo.com Corporation showed that, assuming all of the shares applied for by the Netsurfer stockholders were validly
issued, there were 11,295,874 shares of Travelzoo.com Corporation outstanding. As of April 25, 2004, two years following the
effective date of the merger, 7,180,342 shares of Travelzoo.com Corporation had been exchanged for shares of Travelzoo Inc.
Prior to that date, the remaining shares which were available for issuance pursuant to the merger agreement were also included
in the issued and outstanding common stock of Travelzoo Inc. and included in the calculation of basic and diluted earnings per
share. After April 25, 2004, the Company ceased issuing shares to the former stockholders of Travelzoo.com Corporation; and
therefore, no additional shares are reserved for issuance to any former stockholders, because their right to receive shares has
now expired. On April 25, 2004, the number of shares reported as outstanding was reduced from 19,425,147 to 15,309,615 to
reflect actual shares issued as of the expiration date. Earnings per share calculations reflect this reduction of the number of
shares reported as outstanding. As of December 31, 2013, there were 14,991,179 shares of common stock outstanding.
On April 21, 2011, the Company entered into an agreement with the State of Delaware resolving all claims relating to an
unclaimed property review which began in 2010. The primary issue raised in the preliminary findings from the review, received
by the Company on April 12, 2011, concerned the shares of Travelzoo which have not been claimed by former Netsurfer
stockholders of Travelzoo.com, which remained unexchanged in the 2002 merger, as discussed in the preceding paragraph. In
the preliminary findings under the unclaimed property review, up to 3.0 million shares were identified as “demandable” under
Delaware escheat laws. While the Company continues to take the position that such shares were a promotional incentive and
were issuable only to persons who establish their eligibility as stockholders, the Company determined that it was in its best
interest to promptly resolve all claims relating to the unclaimed property review. The Company made a $20.0 million cash
payment to the State of Delaware on April 27, 2011 and received a complete release of those claims.
Since March 2012, the Company has become subject to unclaimed property reviews by most of the other states in the
United States. The auditing firm representing these states in the reviews has presented to the Company preliminary findings,
which relate primarily to the promotional shares which remained unexchanged in the 2002 merger that were not covered by the
settlement and release by the State of Delaware. During the three months ended March 31, 2012, the Company recorded a $3.0
million charge for the contingency related to the promotional shares which remained unexchanged in the 2002 merger.
In October 2013, the Company entered into settlement agreements with 35 additional states to resolve those states’ claims
related to similar unclaimed property audits. The multi-state settlement relates to approximately 700,000 additional shares of
the Company that were not claimed by residents of those states following the merger, which those states claimed were subject
to escheat. While the Company disputes the states’ claims, the Company determined that it was in its best interest to resolve the
disputes and settle with 35 of the states. The remaining states have or may raise claims on approximately 400,000 additional
shares that were not claimed following the merger by residents in those states.
During the three months ended September 30, 2013, the Company recorded a $22.0 million charge related to settlements
it entered into and for potential future settlements with the remaining states. During the three months ended December 31,
2013, the Company made cash payments of $12.3 million to the settled states after completion of the required due diligence.
The Company intends to continue to challenge the applicability of escheat rights with the remaining states, in that, among
other reasons, the shares of the predecessor Bahamas corporation were offered for free as part of a promotional incentive
program to qualified individuals. In addition, there were certain conditions applicable to the issuance of shares to so-called
"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 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, and the
remaining Netsurfer stockholders who have not qualified to receive shares in the Company, or who have not participated in the
cash payments program referred to below, have not demonstrated their actual compliance with the conditions to the issuance of
shares by Travelzoo.com Corporation. The Company does not know how many of the requests for shares originally received by
Travelzoo.com Corporation in 1998 were valid, but the Company believes that only a portion of such requests were valid. In
response to the pending reviews referred to above, and in response to other persons claiming to be former stockholders of
Travelzoo.com Corporation, the Company intends to assert that the claimant must establish that the original Netsurfer
stockholders complied with the conditions to issuance of their shares.