Travelzoo 2010 Annual Report Download - page 51

Liability to Former Stockholders
On October 15, 2004, we announced a program under which we would make cash payments to people who
establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit requests to
convert shares into Travelzoo Inc. within the required time period. We account for the cost of this program as an
expense recorded in general and administrative expenses and a current accrued liability. The ultimate 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 the Company’s common stock price. The Company’s common stock price affects 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. We believe that only a portion of such requests were valid. In order
to receive payment under the program, a person is required to establish that such person validly held shares in
Travelzoo.com Corporation.
Since the total cost of the program is not reliably estimable, the amount of expense recorded in a period is equal
to the actual number of valid claims received during the period multiplied by (i) the number of shares held by each
individual former stockholder and (ii) the applicable settlement price based on the recent price of our common stock
at the date the claim is received as stipulated by the program. Requests are generally paid within 30 days of receipt.
Please refer to Note 3 to the consolidated financial statements for further details about our liabilities to former
stockholders.
Results of Operations
The following table sets forth, as a percentage of total revenues, the results of our operations for the years
ended December 31, 2010, 2009 and 2008.
2010 2009 2008
Year Ended December 31,
Revenues ................................................. 100.0% 100.0% 100.0%
Cost of revenues............................................ 6.4 6.0 3.5
Gross profit ............................................. 93.6 94.0 96.5
Operating expenses:
Sales and marketing ....................................... 48.3 52.9 53.6
General and administrative .................................. 24.4 26.5 26.4
Total operating expenses .................................. 72.7 79.4 80.0
Income from operations ...................................... 20.9 14.6 16.5
Other income and expenses, net ................................ (0.1) (0.1) 1.0
Income from continuing operations before income taxes .............. 20.8 14.5 17.5
Income taxes .............................................. 9.2 7.7 10.1
Income from continuing operations .............................. 11.6 6.8 7.4
Loss from discontinued operations, net of taxes ..................... — (1.3) (12.4)
Net income (loss) ......................................... 11.6% 5.5% (5.0)%
For the year ended December 31, 2010, we reported income from continuing operations of approximately
$13.2 million. As of December 31, 2010, we had retained earnings of approximately $40.2 million. Our operating
margin increased to 20.9% for the year ended December 31, 2010 from 14.6% in 2009. The main reason for the
increase in operating margin is our operating expenses as a percentage of revenues decreased for the year ended
December 31, 2010 compared to prior year (see “Operating Expenses” below). This was partially offset by an
increase in cost of revenues as a percentage of revenues for the year ended December 31, 2010 compared to prior
year (see “Cost of Revenues” below).
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