Travelzoo 2005 Annual Report Download

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L
TRA
VEZOO
TRA
VEL
ZOO
NASDAQ: TZOO
2005 Annual Report
2006 Proxy Statement

Table of contents

  • Page 1
    TRAVELZ OO NASDAQ: TZOO 2005 Annual Report 2006 Proxy Statement

  • Page 2
    ... written notice to Travelzoo's Corporate Secretary at 590 Madison Avenue, 21st Floor, New York, New York 10022. If you hold your shares in street name through a bank, broker, or other nominee, please bring identiÃ'cation and proof of ownership, such as an account statement or letter from your bank...

  • Page 3
    ... INC. 590 Madison Avenue 21st Floor New York, New York 10022 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held on June 1, 2006 April 28, 2006 To the Stockholders of Travelzoo Inc.: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Travelzoo Inc., a Delaware corporation, will be...

  • Page 4
    ... the attached proxy card, date and sign it, and return it via mail to Travelzoo Inc., Attention: Corporate Secretary, 590 Madison Avenue, 21st Floor, New York, New York 10022. If you vote by proxy, the persons named on the card (your ""proxies'') will vote your shares in the manner you indicate. You...

  • Page 5
    ... at the meeting. We will publish the Ã'nal results in our Quarterly Report on Form 10-Q for the second quarter of 2006, which we intend to Ã'le on or before August 14, 2006. You can obtain a copy of the Form 10-Q by logging on to Travelzoo's investor relations Web site at www.travelzoo.com/ir, by...

  • Page 6
    ... the University of Eichstaett, Germany. Holger Bartel, Ph.D., has served as a director since June 2005 and was elected Executive Vice President in 2001 after serving as Vice President of Sales and Marketing since 1999. From 1995 to 1998, Mr. Bartel was an Engagement Manager at McKinsey & Company in...

  • Page 7
    ...Mr. Holger Bartel Mr. Ehrlich Mr. Neale-May Ms. Urso Number of 2005 Meetings Chair Member Member Member Member 4 Chair Chair Member Member 4 Member 2 Member Chair 4 The Company does not require that directors attend the Annual Meeting. Ralph Bartel, our Chairman of the Board of Directors...

  • Page 8
    ... SEC Ã'lings, press releases and other broadly disseminated correspondence. Nominating Committee Travelzoo does not have a nominating committee of the Board of Directors. Since it is a ""Controlled Company'' under Rule 4350(c)(5) of the NASD Manual, on account of the stock ownership by Ralph Bartel...

  • Page 9
    ... with laws and regulations and Travelzoo's business conduct policies. Audit Committee David J. Ehrlich (Chairman) Donovan Neale-May Kelly M. Urso Director Compensation During 2005, we compensated Mr. Ehrlich, Mr. Neale-May, and Ms. Urso for their services to us. Such compensation consisted...

  • Page 10
    ...2006: Name and Address of BeneÃ'cial Owner Number of Shares of Common Stock(1) Percent of Outstanding Common Stock Ralph Bartel 590 Madison Avenue 21st Floor New York, New York 10022 14,799,886 94% (1) Includes 12,563,470 shares of common stock and 2,171,416 shares of common stock that could be...

  • Page 11
    ... the University of Eichstaett, Germany. Holger Bartel, Ph.D., has served as a director since June 2005 and was elected Executive Vice President in 2001 after serving as Vice President of Sales and Marketing since 1999. From 1995 to 1998, Mr. Bartel was an Engagement Manager at McKinsey & Company in...

  • Page 12
    ... was elected Senior Vice President and General Manager, Europe, in 2005 after serving as Vice President of Business Development since 2001. From 1999 to 2001, he was Chief Operating OÇcer of Weekends.com. Mr. Loughlin holds a BSc(Hons) in Technology Management from StaÃ...ordshire University and...

  • Page 13
    ... competitive with other similarly sized publicly traded companies, with particular emphasis on those in the Internet and media industries, and ‚ linking the compensation of executives to the operating and Ã'nancial performance of the company by reviewing the salary regularly and making adjustments...

  • Page 14
    ... company. The committee does not have a formula for its determination and the committee considers all factors in making its decision. Executive salaries are reviewed annually by the committee. Stock-Based Compensation Travelzoo did not compensate executives with stock or stock options in 2005. CEO...

  • Page 15
    ... stockholder return is provided because Travelzoo's stock wasn't registered under Section 12 of the Exchange Act prior to that date. Price information is not given for periods prior to 2002 because the shares of the Company were not publicly traded before 2002. 3000 2500 500 Publishing TravelzooS...

  • Page 16
    ... of internal control over Ã'nancial reporting, and (2) KPMG's independent audit of the Company's internal control over Ã'nancial reporting. (2) Audit-related fees consisted of fees for services that are normally provided by the independent registered public accounting Ã'rm in connection with...

  • Page 17
    ... any stockholder residing at an address to which only one copy was mailed. Requests for additional copies should be directed to Investor Relations, Travelzoo Inc., 590 Madison Avenue, 21st Floor, New York, New York 10022 or by telephone at (212) 521-4200. Other We will bear the cost of solicitation...

  • Page 18
    ... STATEMENT OF PURPOSE The Audit Committee (the ""Committee'') will assist the Board of Directors (the ""Board'') of Travelzoo Inc. (the ""Company'') in fulÃ'lling the Board's oversight responsibilities with regard to the Company's Ã'nancial reporting process. The duties of the Committee are ones of...

  • Page 19
    ...included in the Annual Report on Form 10-K. 7. Review and discuss, prior to issuance or Ã'ling, the Company's Ã'nancial statements proposed to be included in the Company's public earnings reports and the Company's Quarterly Reports on Form 10-Q with the Company's Ã'nancial management and independent...

  • Page 20
    2. Review all related party transactions and potential conÃ-ict of interest situations involving the Company's principal shareholders or members of the Board or senior management. 3. Authorize and oversee investigations deemed appropriate by the Committee into any matters within the Committee's ...

  • Page 21
    ...) 36-4415727 (I.R.S. Employer IdentiÃ'cation No.) 590 Madison Avenue, 21st Floor, New York, New York (Address of Principal Executive OÇces) 10022 (Zip Code) Registrant's telephone number, including area code: (212) 521-4200 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE...

  • Page 22
    ... PART III Directors and Executive OÇcers of the Registrant Executive Compensation Security Ownership of Certain BeneÃ'cial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accountant Fees and Services PART IV Exhibits and...

  • Page 23
    ... 20 e-mail newsletter, and the NewsÃ-ash e-mail product. The Company also operates SuperSearch, a pay-per-click travel search engine. More than 500 companies purchase our advertising services, including American Airlines, ATA, Avis Rent A Car, British Airways, Caesars Entertainment, Delta Air Lines...

  • Page 24
    ...,250,479 shares of common stock outstanding, and earnings per share calculations reÃ-ect that number of outstanding shares. In October 2004, the Company announced a program under which it would make cash payments to persons who establish that they were stockholders of Travelzoo.com Corporation, and...

  • Page 25
    ... provide airlines, hotels, cruise lines, vacation packagers, and other travel suppliers with a fast, Ã-exible, and cost-eÃ...ective way to advertise their sales and specials to millions of Internet users. Our publications include the Travelzoo Web sites, the Travelzoo Top 20 e-mail newsletter, and the...

  • Page 26
    ... Travelzoo Web sites Content Web sites in the U.S. and in the U.K. listing thousands of outstanding sales and specials from more than 500 travel companies Popular e-mail newsletter listing 20 of the week's most outstanding deals from selected travel companies Regionally-targeted e-mail alert service...

  • Page 27
    ...20 newsletter, NewsÃ-ash, and our SuperSearch search engine provide consumers information on current special oÃ...ers at no cost to the consumer. Key features of our products include: ‚ Aggregation of OÃ...ers From Many Companies. Our Travelzoo Web sites (www.travelzoo.com and www.travelzoo.co.uk) and...

  • Page 28
    ... airlines, hotels, cruise lines, vacations packagers, tour operators, car rental companies, and travel agents. Some of our clients are: American Airlines Apple Vacations ATA Avis Rent A Car British Airways Budget Rent A Car Caesars Entertainment CheapTickets Delta Air Lines Dollar Rent A Car Expedia...

  • Page 29
    .... The development of competing technologies by market participants or the emergence of new industry standards may adversely aÃ...ect our competitive position. Competition could result in reduced margins on our services, loss of market share or less use of our products by travel companies and consumers...

  • Page 30
    ..., our founder, Ã'led with the United States Patent and Trademark OÇce (""PTO'') to register the trademark ""Travelzoo'' for ""providing information and news in the Ã'eld of travel via an on-line global communications network and travel agency services, namely making reservations and booking for...

  • Page 31
    ... growth, we expect that the number of our employees will continue to increase for the foreseeable future. Internet Access to Other Information We make available free of charge, on or through our Web site (www.travelzoo.com), annual reports on Form 10-K, quarterly reports on Form 10-Q and current...

  • Page 32
    ... our Web sites; ‚ technical diÇculties or system downtime aÃ...ecting the Internet generally or the operation of our products and services speciÃ'cally; and ‚ payments which we may make to previous stockholders of Travelzoo.com Corporation who failed to submit requests for shares in Travelzoo Inc...

  • Page 33
    ... services. To remain competitive, we must continually improve the responsiveness, functionality and features of our products and services. We may not succeed in developing features, functions, products or services that travel companies and Internet users Ã'nd attractive. This could reduce the number...

  • Page 34
    ...and clients needs. Our success is dependent on our ability to develop new and enhanced software, services and related products to meet rapidly evolving technological requirements for online advertising. Our current technology may not meet the future technical requirements of travel companies. Trends...

  • Page 35
    ...business could be materially adversely aÃ...ected. Risks Related to the Market for our Shares Our stock price has been volatile historically and may continue to be volatile. The trading price of our common stock has been and may continue to be subject to wide Ã-uctuations. During 2005, the sales price...

  • Page 36
    ... general liability insurance. Claims may be asserted against us relating to shares not issued in our 2002 merger. The merger of Travelzoo.com Corporation into the Company became eÃ...ective on April 25, 2002. Stockholders of Travelzoo.com Corporation were allowed a period of two years following the...

  • Page 37
    ..., and in our earnings per share, which could adversely aÃ...ect 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...

  • Page 38
    ...by third parties. While we have a trademark for ""Travelzoo,'' many companies in the industry have similar names including the word ""travel''. We expect that infringement claims in our markets will increase in number as more participants enter the markets. We may be subject to legal proceedings and...

  • Page 39
    ... $ 31.31 $ 10.60 On February 28, 2006, the last reported sales price of the common stock on the NASDAQ National Market was $18.58 per share. As of February 21, 2006, there were approximately 125,194 stockholders of record. Dividend Policy Travelzoo has not declared or paid any cash dividends since...

  • Page 40
    ... Our publications include the Travelzoo Web sites (www.travelzoo.com and www.travelzoo.co.uk), the Travelzoo Top 20 e-mail newsletter, and the NewsÃ-ash e-mail product. We also operate SuperSearch, a pay-per-click travel search engine. More than 500 travel companies purchase our advertising services...

  • Page 41
    ...nancial indicators: ‚ Growth of number of subscribers of the Company's newsletters and page views of the homepages of the Travelzoo Web sites; ‚ Operating margin; ‚ Growth in revenues in the absolute and relative to the growth in reach of the Company's publications; ‚ Revenue per employee as...

  • Page 42
    ... 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...

  • Page 43
    ... forth the number of subscribers of each of our e-mail publications in both the U.S. and the U.K. as of December 31, 2005 and 2004 and the total number of page views for the homepage of the Travelzoo Web site in U.S. for the year ended December 31, 2005 and 2004 and the number of page views for the...

  • Page 44
    ... ended December 31, 2005, 68% of revenues were generated from the Travelzoo Web site and the Travelzoo Top 20 newsletter. The number of subscribers of the Travelzoo Top 20 newsletter in North America increased by 13%. Page views of the homepage of the Travelzoo Web site in North America increased...

  • Page 45
    ... our advertising campaigns was to acquire new subscribers for our e-mail products, promote SuperSearch and increase brand awareness for Travelzoo. For the years ended December 31, 2005, 2004, and 2003, advertising expenses accounted for 78%, 75%, and 71% respectively, of sales and marketing expenses...

  • Page 46
    ... we make cash payments to former stockholders of Travelzoo.com Corporation, who failed to submit requests for shares in Travelzoo Inc. within the required time period. The expenses are based on the number of actual valid requests received and the Company's stock price. The Company expects expenses...

  • Page 47
    ... our media suppliers as well as increased activity from competitors using similar forms of online advertising for their own marketing eÃ...orts. The decline in new subscriber acquisition costs for North America in Q3 2004 and Q4 2005 reÃ-ect the eÃ...ect of new advertising campaigns which were tested at...

  • Page 48
    ... eÃ...ective tax rate increased in 2005 and 2004 because the expenses related to the program to make cash payments to former stockholders were treated as non tax deductible expenses for Ã'nancial statement reporting purposes. In addition, the losses in 2005 from our Travelzoo (Europe) Ltd operations...

  • Page 49
    ... stockholders of Travelzoo.com Corporation based on claims received as of December 31, 2005. The total liability incurred under 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...

  • Page 50
    ...of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the statement of operations. The accounting provisions of SFAS 123R are eÃ...ective for annual reporting periods beginning after June 15, 2005. The...

  • Page 51
    ... INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity and Comprehensive Income Consolidated Statements of Cash Flows...

  • Page 52
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Travelzoo Inc.: We have audited the accompanying consolidated balance sheets of Travelzoo Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of ...

  • Page 53
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Travelzoo Inc.: We have audited management's assessment, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A, that Travelzoo Inc. (""the Company'') ...

  • Page 54
    ... liabilities: Accounts payable 2,372,650 Accrued expenses 3,393,842 Deferred revenue 295,878 Income tax payable 856,362 Total liabilities Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value; 5,000,000 shares authorized, none outstanding Common stock, $0.01...

  • Page 55
    TRAVELZOO INC. CONSOLIDATED STATEMENTS OF OPERATIONS 2005 Years Ended December 31, 2004 2003 Revenues Cost of revenues Gross proÃ't Operating expenses: Sales and marketing General and administrative Total operating expenses Income from operations Interest income Loss on foreign currency ...

  • Page 56
    ... 31, 2005, 2004, and 2003 Common Stock Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Stockholders Equity Balances, December 31, 2003 19,425,147 $194,251 $ (116,078) Reduction of reported shares outstanding upon expiration of merger exchange...

  • Page 57
    ... activities: Proceeds from issuance of common stock, net of related costs Proceeds from stock option exercises Recovery of proÃ't from purchase and sale of stock by employees Net cash provided by (used in) Ã'nancing activities EÃ...ect of exchange rate changes on cash Net increase (decrease...

  • Page 58
    ... exchange rates for the period. The Company was formed as a result of a combination and merger of entities founded by the Company's majority stockholder, Ralph Bartel. In 1998, Mr. Bartel founded Travelzoo.com Corporation, a Bahamas corporation, which issued 5,155,874 shares via the Internet to...

  • Page 59
    ...is based in part on the recent level of the stock price at the date valid requests are received. 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...

  • Page 60
    ... derived from the sale of advertising in the U.S. on the Travelzoo Web site, in the Travelzoo Top 20 e-mail newsletter, in NewsÃ-ash and in SuperSearch. Revenues generated from the Company's operations in the U.K. were approximately $758,000 during the period from May 4, 2005 (inception) to December...

  • Page 61
    ... SFAS No. 128, Earnings per Share. Basic net income per share is computed using the weighted-average number of common shares outstanding for the period, including shares reserved for issuance to former stockholders of Travelzoo.com Corporation reported as outstanding prior to April 25, 2004. Diluted...

  • Page 62
    ... costs amounted to $20.3 million, $11.8 million and $6.7 million for the years ended December 31, 2005, 2004, and 2003, respectively. During the years ended December 31, 2005, 2004 and 2003, $-0-, $-0- and $429,296, respectively, of advertising services were purchased from the Company's clients...

  • Page 63
    ..., 2005, 2004 and 2003. All previously granted awards were fully vested as of January 1, 2003. (m) Web Site Development Costs The Company accounts for Web site development costs in accordance with EITF Issue No. 00-02, Accounting for Website Development Costs. Internal Web site development costs that...

  • Page 64
    .... Rent expense was $1,570,434, $1,132,516, and $885,816 for the years ended December 31, 2005, 2004, and 2003, respectively. It is possible that claims may be asserted against the Company in the future by former stockholders of Travelzoo.com Corporation seeking to receive shares in the Company...

  • Page 65
    ...is based in part on the recent level of the stock price at the date valid requests are received. 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...

  • Page 66
    ... million was recorded in stockholders' equity for the tax beneÃ't of stock option exercises. Income tax expense for the years ended December 31, 2005, 2004 and 2003 diÃ...ered from the amounts computed by applying the U.S. federal statutory tax rate applicable to the Company's level of pretax income...

  • Page 67
    ...pursuant to the merger agreement were 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 no...

  • Page 68
    ... to be used for general corporate purposes, including new product development and marketing expenditures, and potential acquisitions or strategic investments. In 2005, the Company incurred issuance costs of $123,729 related to the registration of these shares of common stock with the SEC. The...

  • Page 69
    TRAVELZOO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within a company for making operational decisions and ...

  • Page 70
    ... Sept 30, 2005 June 30, 2005 Sept 30, June 30, Mar 31, 2004 2004 2004 Revenues 13,901 $13,384 $12,258 $11,228 $10,509 $9,507 $7,201 $6,462 Cost of revenues 249 225 224 179 166 183 166 179 Gross proÃ't 13,652 Operating expenses: Sales and marketing 7,632 General and administrative 2,496 Total...

  • Page 71
    .... Travelzoo management's assessment of the eÃ...ectiveness of Travelzoo's internal control over Ã'nancial reporting as of December 31, 2005 has been audited by KPMG LLP, Travelzoo's independent registered public accounting Ã'rm, as stated in their report which appears in Part II, Item 8 of this Annual...

  • Page 72
    ... Engineering from University of Illinois at Chicago Circle. Christopher Loughlin was elected Senior Vice President and General Manager, Europe, in May 2005 after serving as Vice President of Business Development since 2001. From 1999 to 2001, he was Chief Operating OÇcer of Weekends.com. Mr...

  • Page 73
    ... by reference to the information set forth under the caption ""Stock Ownership by Directors and Executive OÇcers'' and ""Security Ownership of Certain BeneÃ'cial Owners'' in the Proxy Statement relating to our 2006 Annual Meeting of Stockholders to be Ã'led with the SEC within 120 days after...

  • Page 74
    ... Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRAVELZOO INC. By: RALPH BARTEL Ralph Bartel Chairman of the Board, Chief Executive OÇcer, and Chief Financial OÇcer /s/ Date: March 15, 2006 KNOW...

  • Page 75
    ... UK Ltd and Christopher Loughlin (Incorporated by reference to Exhibit 10.1 to our Form 10-K (File No. 000-50171), Ã'led August 15, 2005) 21.1 ÃŒ Subsidiaries of Travelzoo Inc. ** 23.1 ÃŒ Consent of Independent Registered Public Accounting Firm** 24.1 ÃŒ Power of Attorney (included on signature...

  • Page 76
    EXHIBIT 21.1 SUBSIDIARIES OF TRAVELZOO INC. Travelzoo.com Canada, Inc., a corporation formed under the Business Corporations Act of Canada Travelzoo (Europe) Ltd, a corporation formed under the Companies Acts 1985 to 1989 of the United Kingdom

  • Page 77
    ...of internal control over Ã'nancial reporting as of December 31, 2005 and the eÃ...ectiveness of internal control over Ã'nancial reporting as of December 31, 2005, which reports appear in the December 31, 2005 annual report on Form 10-K of Travelzoo Inc. /s/ KPMG LLP Mountain View, California March 15...

  • Page 78
    ... 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ralph Bartel, certify that: 1. I have reviewed this annual report on Form 10-K of Travelzoo Inc.; 2. Based on my knowledge, this annual report does not contain any...

  • Page 79
    ... Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized and the...15, 2006 /s/ RALPH BARTEL Ralph Bartel Chairman of the Board, Chief Executive OÇcer, and Chief Financial OÇcer The foregoing certiÃ'cation is being ...

  • Page 80
    Investors Relations: Travelzoo Inc. ATTN: Investor Relations 590 Madison Avenue 21st Floor New York, NY 10022 Web site: www.travelzoo.com/ir