Travelzoo 2006 Annual Report Download - page 55

compared to the same period in 2004 offset by a 1 percentage point decrease in general and administrative expenses
as a percentage of revenue. Sales and marketing expenses for North America increased to $24.7 million in the year
ended December 31, 2005 compared to $15.7 million in the same period in 2004. The $9.0 million increase was
primarily due to a $7.6 million increase in advertising expense and a $1.4 million increase in salary expense.
Europe
2006 2005 2004
Year Ended December 31,
(In thousands)
Net revenues .......................................... $3,232 $ 757 $ —
Loss from operations .................................... (1,586) (1,117) —
Loss from operations as a % of revenues ..................... 49% 148% n/a
In Europe, revenues increased to $3.2 million in the year ended December 31, 2006 from $757,000 for the
same period in 2005. We began operations in Europe in May 2005.
Our loss from operations in Europe was $1.6 million in the year ended December 31, 2006 compared to
$1.1 million in the year ended December 31, 2005. The $2.5 million increase in revenues was offset by a $2.9 million
increase in operating expenses. The increase in operating expenses was primarily due to a $1.1 million increase in
expenses related to the acquisition of subscribers and Web site traffic and a $1.1 million increase in salary expense
due to an increase in headcount and a $331,000 increase in office expenses.
Interest Income
Interest income consists primarily of interest earned on cash, cash equivalents and investments. Our interest
income increased to $1.2 million for the year ended December 31, 2006 from $961,000 for the year ended
December 31, 2005 due primarily to higher interest rates. Our interest income increased to $961,000 for the year
ended December 31, 2005 from $126,000 for the year ended December 31, 2004 primarily as a result of increased
interest income due to increased cash and short term investments from the issuance of common stock in a private
placement transaction in 2004 and also from higher interest rates.
Income Taxes
For the year ended December 31, 2006, we recorded an income tax provision of $14.2 million. For the years
ended December 31, 2005 and 2004, we recorded income tax provisions of $7.9 million and $5.1 million,
respectively. Our effective tax rates for 2006, 2005 and 2004 were 46%, 50% and 46%, respectively. Our income is
generally taxed in the U.S. and our income tax provisions reflect federal and state statutory rates applicable to our
levels of income, adjusted to take into account expenses that are treated as having no recognizable tax benefit. Our
effective tax rate decreased in 2006 compared to 2005 due primarily to a decrease in the expenses related to the
program to make cash payments to former stockholders which were treated as non tax deductible expenses for
financial statement reporting purposes. Our effective tax rate increased in 2005 compared to 2004 due primarily to
losses from our European operations in 2005 which were treated as having no recognizable tax benefit.
We expect that our effective tax rate in future periods may fluctuate depending on the total amount of expenses
representing payments to former stockholders, losses or gains incurred by our European and Canadian operations,
related European and Canadian tax liabilities and corresponding U.S. tax credits, if any.
During the years ended December 31, 2005 and 2004, the Company realized tax benefits of $435,000 and
$1.9 million, respectively, upon the exercises of stock options by directors. The tax benefit reduced the Company’s
income tax payable and increased additional paid-in capital by this amount.
Liquidity and Capital Resources
As of December 31, 2006 we had $33.4 million in cash, cash equivalents and short-term investments. Cash,
cash equivalents and short-term investments decreased from $44.4 million on December 31, 2005 primarily as a
result of cash provided by operating activities offset by cash used in financing activities as explained below. Cash,
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