Travelzoo 2010 Annual Report Download - page 59

professional services expenses and a $295,000 increase in rent, office and insurance expense. The $587,000
increase in cost of revenues was due primarily to a $291,000 increase in fees we paid related to user searches on
Fly.com. The strengthening of the U.S. dollar relative to the British Pound Sterling had a favorable impact on the
loss from our operations in Europe. Had foreign exchange rates remained constant in these periods, the loss from
our operations in Europe for the year ended December 31, 2010 would have been approximately $71,000 higher.
In Europe, revenues increased by $6.7 million or 70% in the year ended December 31, 2009 compared to the
year ended December 31, 2008 (see “Revenues” above). Our loss from operations in Europe was $5.5 million in the
year ended December 31, 2009 compared to $7.8 million in the year ended December 31, 2008. The $6.7 million
increase in revenues was offset by a $2.6 million increase in sales and marketing expenses and a $1.5 million
increase in general and administrative expenses. The $2.6 million increase in sales and marketing expenses was due
primarily to a $1.5 million increase in advertising to acquire new subscribers for our e-mail products and a
$1.1 million increase in salary and employee related expenses offset by a $437,000 decrease in advertising to
acquire traffic to our websites. The $1.5 million increase in general and administrative expenses was due primarily
to a $1.4 million increase in salary and employee related expenses. The strengthening of the U.S. dollar relative to
the British Pound Sterling had a favorable impact on the loss from our operations in Europe. Had foreign exchange
rates remained constant in these periods, the loss from our operations in Europe for the year ended December 31,
2009 would have been approximately $177,000 higher.
Interest Income
For the years ended December 31, 2010, 2009 and 2008, interest income consisted primarily of interest earned
on cash, cash equivalents and restricted cash. Our interest income increased to $88,000 for the year ended
December 31, 2010 from $49,000 for the year ended December 31, 2009 due primarily to higher cash balances. Our
interest income decreased to $49,000 for the year ended December 31, 2009 from $284,000 for the year ended
December 31, 2008 due primarily to lower interest rates.
Income Taxes
For the year ended December 31, 2010, we recorded income tax expense of $10.3 million. For the years ended
December 31, 2009 and 2008, we recorded income tax expense from continuing operations of $7.3 million and
$8.2 million, respectively. Our effective tax rate for 2010 and our effective tax rates from continuing operations for
2009 and 2008 were 44%, 53% and 58%, respectively. For the years ended December 31, 2010 and December 31,
2009, we recorded reductions of $224,000 and $39,000 of income tax expense, related to the reversal of tax
liabilities previously recorded for uncertain tax positions, 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 2010 compared to 2009 due primarily to the decrease in losses from our Europe business segment. Our
effective tax rate decreased in 2009 compared to 2008 due primarily to the decrease in losses from our Europe
business segment. Our losses from our Europe business segment were treated as having no recognizable tax
benefits.
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 operations in Canada and Europe, and
corresponding U.S. tax credits, if any.
During the year ended December 31, 2008, the Company realized tax benefits of $110,000 upon the exercise of
stock options by Ralph Bartel. The tax benefit reduced the Company’s income tax payable and increased additional
paid-in capital by this amount.
We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are
no longer subject to U.S. federal and certain state tax examinations for years before 2005 and are no longer subject
to California tax examinations for years before 2004. In the third quarter of 2010, we reached a final settlement with
the Internal Revenue Service with regard to the examination of the Company’s 2005 and 2006 tax years, as a result
of which we paid additional taxes of approximately $544,000, including interest, and recorded a tax benefit of
approximately $202,000 due to the release of previously established tax liabilities and related interest.
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