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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No.: 000-50171 TRAVELZOO INC. (Exact Name of Registrant as Specified in Its Charter)
 DELAWARE
    
    36-4415727(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)590 Madison Avenue, 21st Floor,
    
    10022New York, New York
    
    (Zip Code)(Address of Principal Executive Offices)
 Registrants telephone number, including area code:
(212) 521-4200 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.01 Par Value
(Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes þ No o As of June 30, 2004, the aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the closing sales price for the Registrants Common Stock, as reported on
the NASDAQ SmallCap Market, was $57,538,253. The number of shares outstanding of the Registrants Common Stock as of March 28, 2005 was
16,250,479. Documents Incorporated by Reference Portions of the Registrants Proxy Statement for its 2005 Annual Meeting of Stockholders are
incorporated by reference in this Form10-K in response to Part III, Items 5, 10, 11, 12, 13, and
14.   1




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TRAVELZOO INC. Table of Contents PagePART IItem 1.
    
    Business
    
    3Item 2.
    
    Properties
    
    17Item 3.
    
    Legal Proceedings
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    17PART IIItem 5.
    
    Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    18Item 6.
    
    Selected Consolidated Financial Data
    
    19Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    28Item 8.
    
    Consolidated Financial Statements
    
    29Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    47Item 9A.
    
    Controls and Procedures
    
    47Item 9B.
    
    Other Information
    
    47PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    47Item 11.
    
    Executive Compensation
    
    48Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    48Item 13.
    
    Certain Relationships and Related Transactions
    
    48Item 14.
    
    Principal Accountant Fees and Services
    
    48PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    48Signatures
    
    
    
    50Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a)Certification Pursuant to Section 906
  2




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PART I The information in this Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements are based upon current expectations, assumptions,
estimates and projections about Travelzoo Inc. and our industry. These forward-looking statements
are subject to the many risks and uncertainties that exist in our operations and business
environment that may cause actual results, performance or achievements of Travelzoo to be different
from those expected or anticipated in the forward-looking statements. Any statements contained
herein that are not statements of historical fact may be deemed to be forward-looking statements.
For example, words such as may, will, should, estimates, predicts, potential,
continue, strategy, believes, anticipates, plans, expects, intends, and similar
expressions are intended to identify forward-looking statements. Travelzoos actual results and the
timing of certain events could differ significantly from those anticipated in such forward-looking
statements. Factors that might cause or contribute to such a discrepancy include, but are not
limited to, those discussed elsewhere in this Report in the section entitled Risk Factors and the
risks discussed in our other Securities and Exchange Commission (SEC) filings. The
forward-looking statements included in this report reflect the beliefs of our management on the
date of this report. We undertake no obligation to update publicly any forward-looking statements
for any reason, even if new information becomes available or other events or circumstances occur in
the future. 
 Item 1.Business Overview Travelzoo Inc. (the Company or Travelzoo) is an Internet media company that publishes
travel offers from hundreds of travel companies. As the Internet is becoming consumers preferred
medium to search for travel offers, we provide airlines, hotels, cruise lines, vacation packagers,
and other travel companies with a fast, flexible, and cost-effective way to reach millions of
users. While our products provide advertising opportunities for travel companies, they also provide
Internet users with a free source of information on current sales and specials from hundreds of
travel companies. Our publications include the TravelzooWeb site, the Travelzoo Top 20e-mail newsletter, and
the Newsflashe-mail product.The Company also operates SuperSearch, a pay-per-click travel search
engine. More than 300 companies purchase our advertising services, including American Airlines, ATA,
Avis Rent-A-Car, British Airways, Carnival Cruise Lines, Liberty Travel, Delta Air Lines, Expedia,
Fairmont Hotels & Resorts, JetBlue Airways, Kimpton Hotels, Marriott Hotels, Caesars Entertainment,
Spirit Airlines, Starwood Hotels & Resorts Worldwide, Royal Caribbean, United Airlines, US Airways,
and Vanguard Rent-A-Car. Our revenues are generated from advertising sales. Our revenues have grown rapidly since we
began operations in 1998, primarily driven by an increasing number of travel companies listing
their sales and specials on the TravelzooWeb site and in the Travelzoo Top 20newsletter. Our
revenues increased from approximately $84,000 for the period from May 21, 1998 (inception) to
December 31, 1998, to approximately $33.7 million for the year ended December 31, 2004. Our principal business office is located at 590 Madison Avenue, 21st Floor, New York, New York
10022. Travelzoo is controlled by Ralph Bartel, who holds approximately 78% of the outstanding shares. The Company was formed as a result of a combination and merger of entities founded by the
Companys majority stockholder, Mr. Ralph Bartel. In 1998, Mr. Bartel founded Travelzoo.com
Corporation, a Bahamas corporation, which issued 5,155,874 shares via the Internet to approximately
700,000 stockholders for no cash consideration (Netsurfer shares). In 1998, Mr. Bartel also
founded Silicon Channels Corporation, a California corporation, to operate the TravelzooWeb site.
During 2001, Travelzoo Inc. was formed as a subsidiary of Travelzoo.com Corporation, and Mr. Bartel
contributed all of the outstanding shares of Silicon Channels to Travelzoo Inc. in exchange for
8,129,273 shares of Travelzoo Inc. and options to acquire an additional 2,158,349 shares at $1.00.
The merger was accounted for as a combination of entities under common control using as-if
pooling-of-interests accounting. Under this method of accounting, the assets and liabilities of
Silicon Channels Corporation and Travelzoo Inc. were carried forward to the combined company at
their historical costs. In addition, all prior period financial statements of Travelzoo Inc. were
restated to include the combined results of operations, financial position and cash flows of
Silicon Channels Corporation. 3




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During January 2001, the Board of Directors of Travelzoo.com Corporation proposed that
Travelzoo.com Corporation be merged with Travelzoo Inc. whereby Travelzoo Inc. would be the
surviving entity. On March 15, 2002, the stockholders of Travelzoo.com Corporation approved the
merger with Travelzoo Inc. On April 25, 2002, the certificate of merger was filed in Delaware upon
which the merger became effective and Travelzoo.com Corporation ceased to exist. Each outstanding
share of common stock of Travelzoo.com Corporation was converted into the right to receive one
share of common stock of Travelzoo Inc. Under and subject to the terms of the merger agreement,
stockholders were allowed a period of two years following the effective date of the merger to
receive shares of Travelzoo Inc. 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 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 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. As of December 31, 2004, there were 16,233,204 shares of common stock outstanding,
and earnings per share calculations reflect the reduction of the number of shares reported as
outstanding during the period. In October 2004, the Company announced a program under which it will make cash payments to
persons who establish that they were stockholders of Travelzoo.com Corporation, and who failed to
submit requests for shares in Travelzoo Inc. within the required time period. See Note 2 to the
accompanying consolidated financial statements. The merger of Travelzoo.com Corporation into Travelzoo Inc. was accounted for as a combination
of entities under common control using as-if pooling-of-interests accounting. Under this method
of accounting, the assets and liabilities of Travelzoo.com Corporation and Travelzoo Inc. were
carried forward at their historical costs. In addition, all prior period financial statements of
Travelzoo Inc. were restated to include the combined results of operations, financial position and
cash flows of Travelzoo.com Corporation. The restated results of operations and cash flows of
Travelzoo Inc. are identical to the combined results of Travelzoo.com Corporation and Travelzoo
Inc. On August 18, 2004, Travelzoo became listed on the NASDAQ National Market under the symbol
TZOO. In October 2004, the Company completed a private placement offering of 750,000 newly-issued
shares of common stock for gross proceeds of $30.0 million to a group of investors. The proceeds
from the offering are intended to be used for general corporate purposes, including new product
development and marketing expenditures, and potential acquisitions or strategic investments. Our Industry According to the Newspaper Association of America, travel companies spent $1.3 billion in 2004
on national advertising in newspapers (source: Business Analysis and Research, NAA, 2005). We
believe that newspapers are currently the main medium for travel companies to advertise their
offers. We believe that several factors are causing and will continue to cause travel companies to
increase their spending on Internet advertising of offers: The Internet Is Consumers Preferred Information Source.Market research shows that the
Internet has become consumers preferred information source for travel (source: Forrester Research,
2002). Benefits of Internet Advertising vs. Print Advertising.Internet advertising provides travel
companies advantages compared to print advertising. These advantages include real-time listings,
real-time updates, and performance tracking. See    Benefits to Travel Companies. New Advertising Opportunities.The Internet allows travel companies to advertise their sales
and specials in a fast, flexible, and cost-effective manner that has not been possible before. Suppliers Selling Directly.We believe that many travel suppliers prefer to sell directly to
consumers through suppliers Web sites versus selling through travel agents. Internet advertising
attracts consumers to suppliers Web sites. 4




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Problems Travel Companies Face and Limitations of Newspaper Advertising We believe that travel companies often face the challenge of being able to effectively and
quickly market and sell excess inventory (i.e. airline seats, hotel rooms, or cruise cabins that
are likely to be unfilled). The success of marketing excess inventory can have a substantial impact
on a travel companys net income. Almost all costs of travel services are fixed. That is, the costs
do not vary with sales. A relatively small amount of unsold inventory can have a significant impact
on the profitability of a travel company. Our management believes that travel companies need a fast, flexible, and cost-effective
solution for marketing excess inventory. The solution must be fast, because travel services are a
quickly expiring commodity. The period between the time when a company realizes that there is
excess inventory and the time when the value of the travel service has become worthless is very
short. The solution must be flexible, because the travel industry is dynamic and the demand for
excess inventory is difficult to forecast. It is difficult for travel companies to price excess
inventory and to forecast the marketing effort needed to sell excess inventory. The marketing must
be cost-effective because excess inventory is often sold at highly discounted prices, which lowers
margins. Our management believes that newspaper advertising, with respect to advertising excess
inventory, suffers from a number of limitations which do not apply to the Internet:  
    typically, ads must be submitted 2 to 5 days prior to the publication date, which makes
it difficult to advertise last-minute inventory;
    once an ad is published, it cannot be updated or deleted when an offer is sold out;
    once an ad is published, the travel company cannot change a price;
    in many markets, the small number of newspapers and other print media reduces
competition, resulting in high rates for newspaper advertising; and
    newspaper advertising does not allow for detailed performance tracking. Our Products and Services We provide airlines, hotels, cruise lines, vacation packagers, and other travel suppliers with
a fast, flexible, and cost-effective way to advertise their sales and specials to millions of
users. Our publications include the TravelzooWeb site, the Travelzoo Top 20e-mail newsletter, and
the Newsflashe-mail alert service. The Company also operates SuperSearch, a pay-per-click travel
search engine. While our products provide advertising opportunities for travel companies, they also
provide Internet users with a free source of information on current sales and specials from
hundreds of travel companies. As travel companies increasingly utilize the Internet to promote their offers, we believe that
our products will enable them to take advantage of the lower cost and real-time communication
enabled by the Internet. Our listing management software allows travel companies to add, update,
and delete special offer listings on a real-time basis. Our software also provides travel companies
with real-time performance tracking, enabling them to optimize their marketing campaigns. The following table presents an overview of our products: Publication
    
    
    
    
    
    Advertiser
    
    
    ConsumerPublication
    
    
    Content
    
    
    Schedule
    
    
    Reach/Usage*
    
    
    Benefits
    
    
    BenefitsTravelzooWeb site
    
    
    Web site listing
thousands of
outstanding sales
and specials from
approximately 340
travel companies
    
    
    24/7
    
    
    3.0 million unique
visitors per month
    
    
    Broad reach,
sustained exposure,
targeted placements
by destination and
travel segment
    
    
    24/7 access to
deals, ability to
search and browse
by destination or
keyword
 5




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Publication
    
    
    
    
    
    Advertiser
    
    
    ConsumerPublication
    
    
    Content
    
    
    Schedule
    
    
    Reach/Usage*
    
    
    Benefits
    
    
    BenefitsTravelzoo
Top 20
    
    
    Popular e-mail
newsletter listing
20 of the weeks
most outstanding
deals from selected
travel companies
    
    
    Weekly
    
    
    8.0 million
subscribers
    
    
    Mass push
advertising vehicle
to quickly
stimulate
incremental travel
    
    
    Weekly access to 20
outstanding,
handpicked deals
chosen from among
thousandsNewsflash
    
    
    Regionally-targeted
e-mail alert
service with a
single
time-sensitive and
newsworthy travel
offer
    
    
    Within 2 hours of
an offer being
identified
    
    
    4.7 million
subscribers
    
    
    Regional targeting,
100% share of voice
for advertiser,
flexible
publication
schedule
    
    
    Breaking news
offers delivered
just-in-timeSuperSearch
    
    
    Travel search
engine using a
proprietary
algorithm to
recommend sites and
enable one-click
searching
    
    
    On-demand
    
    
    3.0 million monthly
searches
    
    
    Drives qualified
traffic directly to
advertiser site on
a pay-per-click
basis
    
    
    Saves time and
money by
identifying the
sites most likely
to have great rates
for a specific
itinerary
 * For TravelzooWeb site, reach information is based on comScore Media Metrix, 3/2004. For Top
20, Newsflash, and SuperSearch, reach/usage information is based on internal Travelzoo statistics
as of December 31, 2004. In 2004, the TravelzooWeb site and the Travelzoo Top 20e-mail newsletter accounted for
approximately 80% of our total revenues. In July 2004, we discontinued our Weekend.come-mail newsletter. Although we analyze the reach of each of our products with the goal of improving the quality for
both Internet users and advertisers, we do not account for the cost of each product or the
profitability of each product separately. We do not allocate resources based on the performance of
each product. Our Chief Executive Officer, who is our chief operating decision maker, reviews the
financial information and operating results prepared on a company-wide basis. Benefits to Travel Companies Key features of our solution for travel companies include:  
    Real-Time Listings of Special Offers.Our technology allows travel companies to
advertise new special offers on a real-time basis.
    Real-Time Updates.Our technology allows travel companies to update their listings on a
real-time basis.
    Real-Time Performance Reports.We provide travel companies with real-time tracking of
the performance of their advertising campaigns. Our solution enables travel companies to
optimize their campaigns by removing or updating unsuccessful listings and further promote
successful listings.
    Access to Millions of Consumers.We provide travel companies fast access to millions of
travel shoppers.
    National Reach.We offer travel companies access to Internet users across the U.S. Benefits to Consumers Our TravelzooWeb site, our Travelzoo Top 20newsletter, Newsflash, and our SuperSearchsearch
engine provide consumers information on current special offers at no cost to the consumer. Key
features of our products include: 6




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
    Aggregation of Offers From Many Companies.Our TravelzooWeb site and our Travelzoo Top
20e-mail newsletter aggregate information on current special offers from approximately 340
travel companies. This saves the consumer time when searching for travel sales and specials.
    Current Information.Compared to newspaper ads, we provide consumers more current
information, since our technology enables travel companies to update their listings on a
real-time basis.
    Search tools.We provide consumers with the ability to search for specific special
offers. Growth Strategy Key elements of our strategy include:  
    Build Strong Brand Awareness.We believe that it is essential to establish a strong
brand with Internet users and within the travel industry. We currently utilize an online
marketing program to promote our brand to Internet users. In addition, we believe that we
build brand awareness by product excellence that is promoted by word-of-mouth. We utilize
sponsorships at industry conferences and public relations to promote our brand within the
travel industry.
    Increase Reach.In order to attract more users to our products, we intend to expand our
advertising campaigns as our business grows. We believe that we also can attract more users
by product excellence that is promoted by word-of-mouth.
    Quality User Base.We believe that, in addition to increasing our reach, we need to
maintain the quality of our user base. We believe that high quality content attracts a
quality user base.
    Increase Number of Advertising Clients.We intend to continue to grow our advertising
client base by expanding the size of our sales force. See    Sales and Marketing.
    Excellent Service.We believe that it is important to provide our advertising clients
with excellent service.
    Replicate Business Model in Foreign Markets.We believe that there is an opportunity to
replicate our business model in selected foreign markets. We believe that there will be an
additional market opportunity for us. In addition, we believe that we would strengthen our
strategic position if we offered global advertising solutions to existing and new clients. Clients As of December 31, 2004, our client base included approximately 340 travel companies,
including airlines, hotels, cruise lines, vacations packagers, tour operators, car rental
companies, and travel agents. Some of our clients are: American Airlines
    
    JetBlue AirwaysApple Vacations
    
    Kimpton HotelsATA
    
    Liberty TravelAvis Rent A Car
    
    LufthansaBritish Airways
    
    Marriott HotelsBudget Rent A Car
    
    Pleasant HolidaysCaesars Entertainment
    
    Royal CaribbeanDollar Rent A Car
    
    Spirit AirlinesExpedia
    
    Starwood Hotels & Resorts WorldwideFairmont Hotels and Resorts
    
    Travelocity.comFunjet Vacations
    
    United AirlinesHawaiian Airlines
    
    US AirwaysHilton Hotels
    
    Virgin Atlantic
 For the year ended December 31, 2004, our largest client, Click Here, Inc., an advertising
agency representing Travelocity.com, accounted for 12% of our revenues. For the year ended December
31, 2003, our two largest clients accounted for 11% and 10% of our revenues, respectively. For the
year ended December 31, 2002, our two largest clients accounted for 15% and 14% of our revenues,
respectively. No other clients accounted for 10% or more of revenues in 2004, 2003, or 2002. 7




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We have written agreements with Click Here, Inc. Copies of the agreements are filed as
exhibits to this Report. The agreements provide that Travelzoo will be paid for the publication of
ads on a cost-per-click basis. The agreements for 2004 were not cancelable by Click Here, Inc. The
agreements for 2005 are cancelable by Click Here, Inc. upon 90 days written notice. The payment
terms are net 60 days with no discount for early payment. Sales and Marketing As of December 31, 2004, our direct sales force consisted of a Senior Vice President of Sales,
a Vice President of Business Development, four advertising sales directors, and four advertising
sales managers. We currently utilize an online marketing program to promote our brands to Internet users and
acquire new subscribers for our e-mail products. In addition, we believe that we build brand
awareness by product excellence that is promoted by word-of-mouth. We utilize sponsorships at
industry conferences and public relations to promote our brands within the travel industry. Technology We have designed our technology to serve a large volume of Web traffic and send a large volume
of e-mails in an efficient and scaleable manner. We co-locate our production servers with SAVVIS, a global provider of hosting, network, and
application services. SAVVISs facility includes features such as power redundancy, multiple egress
and peering to other ISPs, fire suppression and access to our own separate physical space. We
believe our arrangements with SAVVIS will allow us to grow without being limited by our own
physical and technological capacity, and will also provide us with sufficient bandwidth for our
anticipated needs. Because of the design of our Web site, our users are not required to download or
upload large files from or to our Web site, which allows us to continue increasing the number of
our visitors and page views without adversely affecting our performance or requiring us to make
significant additional capital expenditures. Our software is written using open standards, such as Visual Basic Script, and HTML, and
interfaces with products from Microsoft. We have standardized our hardware platform on HP servers
and Cisco switches. Competition We compete with large Internet portal sites, such as About.com, America Online, Lycos, MSN and
Yahoo!, that offer listings or other advertising opportunities for travel companies. We also
compete with search engines like Google or Overture that offer pay-per-click listings. In addition,
we compete with newspapers, magazines and other traditional media companies that operate Web sites
which provide advertising opportunities. We expect to face additional competition as other
established and emerging companies, including print media companies, enter our market. We believe
that the primary competitive factors are price and performance. Many of our current and potential competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources and larger client bases than we do. In
addition, current and potential competitors may make strategic acquisitions or establish
cooperative relationships to expand their businesses or to offer more comprehensive solutions. New technologies could increase the competitive pressures that we face. The development of
competing technologies by market participants or the emergence of new industry standards may
adversely affect 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. If we
are not able to compete effectively with current or future competitors as a result of these and
other factors, our business could be materially adversely affected. Government Regulation and Legal Uncertainties There are increasing numbers of laws and regulations pertaining to the Internet, including
laws and regulations relating to user privacy, liability for information retrieved from or
transmitted over the Internet, online content regulation, user privacy and domain name
registration. Moreover, the applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, patent, trademark, trade secret,
obscenity, libel and personal privacy is uncertain and developing. 8




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Privacy Concerns.Government agencies are considering adopting regulations regarding the
collection and use of personal identifying information obtained from individuals when using
Internet sites or e-mail services. While we have implemented and intend to implement additional
programs designed to enhance the protection of the privacy of our users, these programs may not
conform to any regulations which may be adopted by these agencies. In addition, these regulatory
and enforcement efforts may adversely affect our ability to collect demographic and personal
information from users, which could have an adverse effect on our ability to provide advertisers
with demographic information. The European Union (the EU) has adopted a directive that imposes
restrictions on the collection and use of personal data. The directive could impose restrictions
that are more stringent than current Internet privacy standards in the United States. The directive
may adversely affect our activities to the extent that we may seek to collect data from users in EU
member countries. Anti-Spam Legislation. In December 2003, the CAN-SPAM Act of 2003, a new federal anti-spam
law, was enacted. This new law pre-empts various state anti-spam laws and establishes a single
standard for e-mail marketing and customer communications. We believe that this new law will
overall benefit our business as we do not use spam techniques or practices and will benefit now
that others are prohibited from doing so. Domain Names.Domain names are the users Internet addresses. The current system for
registering, allocating and managing domain names has been the subject of litigation and of
proposed regulatory reform. We own the domain names for travelzoo.com, travelzoo.net,
travelzoo.org, travelzoo.ca, travelzoo.co.uk, weekend.com, and weekends.com, and have registered
Travelzoo and Weekend.com as trademarks in the United States. Because of these protections, it
is unlikely, yet possible, that third parties may bring claims for infringement against us for the
use of our domain name and trademark. In the event such claims are successful, we could lose the
ability to use our domain names. There can be no assurance that our domain name will not lose its
value, or that we will not have to obtain entirely new domain names in addition to or in lieu of
our current domain name if changes in overall Internet domain name rules result in a restructuring
in the current system of using domain names which include .com, .net, .gov, .edu and other
extensions. Jurisdictions.Due to the global nature of the Internet, it is possible that, although our
transmissions over the Internet originate primarily in California, the governments of other states
and foreign countries might attempt to regulate our business activities. In addition, because our
service is available over the Internet in multiple states and foreign countries, these
jurisdictions may require us to qualify to do business as a foreign corporation in each of these
states or foreign countries, which could subject us to taxes and other regulations. Intellectual Property Our success depends to a significant degree upon the protection of our brand names, including
Travelzooand Travelzoo Top 20.If we were unable to protect the Travelzooand Travelzoo Top 20
brand names, our business could be materially adversely affected. We rely upon a combination of
copyright, trade secret and trademark laws to protect our intellectual property rights. The steps
we have taken to protect our proprietary rights, however, may not be adequate to deter
misappropriation of proprietary information. We may not be able to detect unauthorized use of our proprietary information or take
appropriate steps to enforce our intellectual property rights. In addition, the validity,
enforceability and scope of protection of intellectual property in Internet-related industries is
uncertain and still evolving. The laws of other countries in which we may market our services in
the future are uncertain and may afford little or no effective protection of our intellectual
property. On June 21, 1999, Mr. Bartel, our founder, filed with the United States Patent and Trademark
Office (PTO) to register the trademark Travelzoo for providing information and news in the
field of travel via an on-line global communications network and travel agency services, namely
making reservations and booking for transportation, providing information and news in the field
of travel via an on-line global communications network and travel agency services, namely making
reservations and booking for temporary lodging, and promoting the goods and services of others
through the offer of travel goods and services and shopping club services, namely providing
information on travel goods and services to members. The PTO published that mark for opposition on
October 31, 2000. On January 22, 2001, Mr. Bartel, who filed the trademark application as an
individual, transferred the ownership of the pending trademark Travelzoo to Travelzoo Inc. The
mark was registered by the PTO on January 23, 2001. 9




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On November 2, 2000, we filed with the United States Patent and Trademark Office to register
the trademark Weekend.com for providing information via websites on global computer networks in
the field travel, providing information via websites on global computer networks in the fields of
entertainment, recreation, and sports, and providing information via websites on global computer
networks in the fields of fashion, fitness, health and exercise. The mark was registered by the
PTO on November 5, 2002. On March 18, 2002, we filed with the United States Patent and Trademark Office to register the
trademark Top 20 for promoting the goods and services of others through the offer of travel
goods and services and shopping club services, namely providing information on travel goods and
services to members, providing information and news in the field of travel via an on-line global
communications network and travel agency services namely making reservations and booking for
transportation, and providing information and news in the field of travel via an on-line global
communications network and travel agency services, namely, making reservations and booking for
temporary travel lodging. The mark was registered by the PTO on May 13, 2003. 10




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Employees As of December 31, 2004, we had 49 employees, of whom 14 worked in sales, business
development, and marketing, 23 in production, 3 in network operations and 9 were involved in
finance, administration, and corporate operations. None of our employees is represented under
collective bargaining agreements. We consider our relations with our employees to be good. Because
of our anticipated further growth, we expect that the number of our employees will continue to
increase for the foreseeable future. RISK FACTORS Investing in our common stock involves a high degree of risk. Any or all of the risks listed
below as well as other variables affecting our operating results could have a material adverse
effect on our business, our quarterly and annual operating results or financial condition, which
could cause the market price of our stock to decline or cause substantial volatility in our stock
price, in which event the value of your common stock could decline. You should also keep these risk
factors in mind when you read forward-looking statements. Risks Related to Our Financial Condition and Business Model Our limited operating history makes our business difficult to evaluate. We have only a limited operating history for you to consider in evaluating our business. As a
young company, we face risks and uncertainties relating to our ability to successfully implement
our business plan. You must consider the risks, expenses and uncertainties which can materially
affect the business of a young company like ours. These risks include uncertainty whether we will
be able to:  
    increase awareness of the Travelzoobrand;
    attract and retain additional travel companies to list their special offers with us;
    attract additional Internet users to the TravelzooWeb site;
    increase the functionality of our products and services;
    maintain our current, and develop new, business relationships;
    respond effectively to competitive pressures; and
    continue to develop and upgrade our technology. We cannot assure you that we will sustain profitability. Although we have been profitable in the past, there is no assurance that we will continue to
be profitable. We forecast our future expense levels based on our operating plans and our estimates
of future revenues. We may find it necessary to accelerate expenditures relating to our sales and
marketing efforts or otherwise increase our financial commitment to creating and maintaining brand
awareness among travel companies and Internet users. If our revenues grow at a slower rate than we
anticipate, or if our spending levels exceed our expectations or cannot be adjusted to reflect
slower revenue growth, we may not generate sufficient revenues to sustain profitability. In this
case, the value of the shares of Travelzoo could be reduced. Fluctuations in our operating results may negatively impact our stock price. Our quarterly operating results may fluctuate significantly in the future due to a variety of
factors that could affect our revenues or our expenses in any particular quarter. You should not
rely on quarter-to-quarter comparisons of our results of operations as an indication of future
performance. Factors that may affect our quarterly results include:  
    mismatches between resource allocation and client demand due to difficulties in
predicting client demand in a new market;
    changes in general economic conditions that could affect marketing efforts generally and
online marketing efforts in particular;
    the magnitude and timing of marketing initiatives; 11




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
    the maintenance and development of our strategic relationships;
    the introduction, development, timing, competitive pricing and market acceptance of our
products and services and those of our competitors;
    our ability to attract and retain key personnel;
    our ability to manage our anticipated growth and expansion;
    our ability to attract traffic to our Web site;
    technical difficulties or system downtime affecting the Internet generally or the
operation of our products and services specifically; and
    payments which we make to previous stockholders of Travelzoo.com Corporation who failed
to submit requests for shares in Travelzoo Inc. within the required time period. In addition, we plan to significantly increase our operating expenses related to advertising
campaigns for Travelzooand the expansion of our sales and production departments. If revenues fall
below our expectations in any quarter and we are unable to quickly reduce our spending in response,
our operating results would be lower than expected and our stock price may fall. In addition, we are required under U.S. Generally Accepted Accounting Principles to review our
intangible assets for impairment when events or changes in circumstances indicate the carrying
value may not be recoverable. We may be required to record a significant expense or charge to
earnings in our financial statements in the period any impairment of intangible assets is
determined. We depend on one client for a substantial part of our revenues. In the fiscal year ended December 31, 2004, one client, Click Here, Inc., an advertising
agency representing Travelocity.com, accounted for 12% of our revenues. The loss of this client may
result in a significant decrease in our revenues and results of operations, which could have a
material adverse effect on our business. We have written agreements with Click Here, Inc. Copies
of the agreements are filed as exhibits to this Report. The agreements provide that Travelzoo will
be paid for the publication of ads on a cost-per-click basis. The agreements for 2004 were not
cancelable by Click Here, Inc. The agreements for 2005 are cancelable by Click Here, Inc. upon 90
days written notice. The payment terms are net 60 days with no discount for early payment. Our business model is unproven and may not be adaptable to a changing market. Our current revenue model depends on advertising fees paid by travel companies. If current
clients decide not to continue advertising their offers with us and we are unable to replace them
with new clients, our business may be adversely affected. To be successful, we must provide online
marketing solutions that achieve broad market acceptance by travel companies. In addition, we must
attract sufficient Internet users with attractive demographic characteristics to our products. It
is possible that we will be required to further adapt our business model in response to changes in
the online advertising market or if our current business model is not successful. If we are not
able to anticipate changes in the online advertising market or if our business model is not
successful, our business could be materially adversely affected. We may not be able to obtain sufficient funds to grow our business and any additional financing may
be on terms adverse to your interests. We intend to continue to grow our business, and intend to fund our current operations and
anticipated growth from the cash flow generated from our operations and our retained earnings.
However, these sources may not be sufficient to meet our needs. We may not be able to obtain
additional financing on commercially reasonable terms, or at all. If additional financing is not available when required or is not available on acceptable
terms, we may be unable to fund our expansion, successfully promote our brand name, develop or
enhance our products and services, take advantage of business opportunities, or respond to
competitive pressures, any of which could have a material adverse effect on our business. If we choose to raise additional funds through the issuance of equity securities, you may
experience significant dilution of your ownership interest, and holders of the additional equity
securities may have rights senior to those of the holders of our common stock. If we obtain
additional financing by issuing debt securities, the terms of these securities could restrict or
prevent us from paying dividends and could limit our flexibility in making business decisions. 12




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Our business may be sensitive to recessions. The demand for online advertising may be linked to the level of economic activity and
employment in the U.S. and abroad. Specifically, our business is dependent on the demand for online
advertising from travel companies. The last recession decreased consumer travel and caused travel
companies to reduce or postpone their marketing spending generally, and their online marketing
spending in particular. If the current economic recovery does not continue, our business and
financial condition could be materially adversely affected. Our operations could be significantly hindered by the occurrence of a natural disaster or other
catastrophic event. Our operations are susceptible to outages due to fire, floods, power loss, telecommunications
failures, break-ins and similar events. In addition, a significant portion of our network
infrastructure is located in Northern California, an area susceptible to earthquakes. We do not
have multiple site capacity in the event of any such occurrence. Outages could cause significant
interruptions of our service. In addition, despite our implementation of network security measures,
our servers are vulnerable to computer viruses, physical and electronic break-ins, and similar
disruptions from unauthorized tampering with our computer systems. We do not carry business
interruption insurance to compensate us for losses that may occur as a result of any of these
events. Technological or other assaults on our service could harm our business. We are vulnerable to coordinated attempts to overload our systems with data, resulting in
denial or reduction of service to some or all of our users for a period of time. We have
experienced denial of service attacks in the past, and may experience such attempts in the future.
We do not carry business interruption insurance to compensate us for losses that may occur as a
result of any of these events. Any such event could reduce our revenue and harm our operating
results and financial condition. Risks Related to Our Markets and Strategy We may not be able to develop awareness of our brand name. We believe that continuing to build awareness of the Travelzoobrand name is critical to
achieving widespread acceptance of our business. Brand recognition is a key differentiating factor
among providers of online advertising opportunities, and we believe it could become more important
as competition in our industry increases. In order to maintain and build brand awareness, we must
succeed in our marketing efforts. If we fail to successfully promote and maintain our brand, incur
significant expenses in promoting our brand and fail to generate a corresponding increase in
revenue as a result of our branding efforts, or encounter legal obstacles which prevent our
continued use of our brand name, our business could be materially adversely affected. Our business may be sensitive to events affecting the travel industry in general. Events like the war with Iraq or the terrorist attacks on the United States in 2001 have a

negative impact on the travel industry. We are not in a position to evaluate the net effect of
these circumstances on our business. In the longer term, our business might be negatively affected
by financial pressures on the travel industry. However, our business may also benefit if travel
companies increase their efforts to promote special offers or other marketing programs. If the
events result in a long-term negative impact on the travel industry, such impact could have a
material adverse effect on our business. We will not be able to attract travel companies or Internet users if we do not continually enhance
and develop the content and features of our products and 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 find attractive. This could reduce
the number of travel companies and Internet users using our products and materially adversely
affect our business. We may lose business if we fail to keep pace with rapidly changing technologies 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 that
could have a critical impact on our success include: 13




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
    rapidly changing technology in online advertising;
    evolving industry standards, including both formal and de factostandards relating to online advertising;
    developments and changes relating to the Internet;
    competing products and services that offer increased functionality; and
    changes in travel company and Internet user requirements. If we are unable to timely and successfully develop and introduce new products and
enhancements to existing products in response to our industrys changing technological
requirements, our business could be materially adversely affected. Our business and growth will suffer if we are unable to hire and retain highly skilled personnel. Our future success depends on our ability to attract, train, motivate and retain highly
skilled employees. We may be unable to retain our skilled employees, or attract, assimilate and
retain other highly skilled employees in the future. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. If we are unable to hire and
retain skilled personnel, our growth may be restricted, which could adversely affect our future
success. We may not be able to effectively manage our expanding operations. We have recently experienced a period of rapid growth. In order to execute our business plan,
we must continue to grow significantly. As of December 31, 2004, we had 49 employees. We expect
that the number of our employees will continue to increase for the foreseeable future. This growth
has placed, and our anticipated future growth will continue to place, a significant strain on our
management, systems and resources. We expect that we will need to continue to improve our financial
and managerial controls and reporting systems and procedures. We will also need to continue to
expand and maintain close coordination among our sales, production, marketing, IT, and finance
departments. We may not succeed in these efforts. Our inability to expand our operations in an
efficient manner could cause our expenses to grow disproportionately to revenues, our revenues to
decline or grow more slowly than expected and otherwise have a material adverse effect on our
business. Intense competition may adversely affect our ability to achieve or maintain market share and
operate profitably. We compete with large Internet portal sites, such as About.com, America Online, Lycos, MSN and
Yahoo!, that offer listings or other advertising opportunities for travel companies. These
companies have significantly greater financial, technical, marketing and other resources and larger
client bases. We also compete with search engines like Google and Overture that offer pay-per-click
listings. In addition, we compete with newspapers, magazines and other traditional media companies
that provide online advertising opportunities. We expect to face additional competition as other
established and emerging companies, including print media companies, enter the online advertising
market. Competition could result in reduced margins on our services, loss of market share or less
use of Travelzooby travel companies and consumers. If we are not able to compete effectively with
current or future competitors as a result of these and other factors, our business could be
materially adversely affected. Loss of any of our key management personnel could negatively impact our business. Our future success depends to a significant extent on the continued service and coordination
of our management team, particularly Ralph Bartel, our Chairman, President, Chief Executive
Officer, Chief Financial Officer and Secretary. The loss or departure of any of our officers or key
employees could materially adversely affect our ability to implement our business plan. We do not
maintain key person life insurance for any member of our management team. In addition, we expect
new members to join our management team in the future. These individuals will not previously have
worked together and will be required to become integrated into our management team. If our key
management personnel are not able to work together effectively or successfully, our business could
be materially adversely affected. We may not be able to access third party technology upon which we depend. We use technology and software products from third parties including Microsoft. Technology
from our current or other vendors 14




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may not continue to be available to us on commercially reasonable terms, or at all. Our
business will suffer if we are unable to access this technology, to gain access to additional
products or to integrate new technology with our existing systems. This could cause delays in our
development and introduction of new services and related products or enhancements of existing
products until equivalent or replacement technology can be accessed, if available, or developed
internally, if feasible. If we experience these delays, our business could be materially adversely
affected. 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
fluctuations. During the first eight months of 2004, the sale prices of our common stock on the
NASDAQ SmallCap Market ranged from $7.10 to $34.98 per share. Since our inclusion on the NASDAQ
National Market on August 18, 2004, the sale prices of our common stock on the NASDAQ National
Market ranged from $30.06 to $110.62. Our stock price may fluctuate in response to a number of
events and factors, such as quarterly variations in operating results; announcements of
technological innovations or new products by us or our competitors; changes in financial estimates
and recommendations by securities analysts; the operating and stock price performance of other
companies that investors may deem comparable to us; and news reports relating to trends in our
markets or general economic conditions. In addition, the stock market in general, and the market prices for Internet-related companies
in particular, have experienced volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry fluctuations may adversely affect
the price of our stock, regardless of our operating performance. We are controlled by a principal stockholder. Ralph Bartel, who founded Travelzoo and who is our Chairman of the Board, President, Chief
Executive Officer, Chief Financial Officer and Secretary, is our largest stockholder, holding
approximately 78% of our outstanding shares with options to increase his percentage ownership to
81% on a fully-diluted basis. Through his share ownership, he is in a position to control Travelzoo
and to elect our entire board of directors. Risks Related to Legal Uncertainty We may become subject to burdensome government regulations and legal uncertainties affecting the
Internet which could adversely affect our business. To date, governmental regulations have not materially restricted use of the Internet in our
markets. However, the legal and regulatory environment that pertains to the Internet is uncertain
and may change. Uncertainty and new regulations could increase our costs of doing business, prevent
us from delivering our products and services over the Internet or slow the growth of the Internet.
In addition to new laws and regulations being adopted, existing laws may be applied to the
Internet. New and existing laws may cover issues which include:  
    user privacy;
    anti-spam legislation;
    consumer protection;
    copyright, trademark and patent infringement;
    pricing controls;
    characteristics and quality of products and services;
    sales and other taxes; and
    other claims based on the nature and content of Internet materials.   15




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We may be liable as a result of information retrieved from or transmitted over the Internet. We may be sued for defamation, negligence, copyright or trademark infringement or other legal
claims relating to information that is published or made available in our products. These types of
claims have been brought, sometimes successfully, against online services in the past. The fact
that we distribute information via e-mail may subject us to potential risks, such as liabilities or
claims resulting from unsolicited e-mail or spamming, lost or misdirected messages, security
breaches, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service. In
addition, we could incur significant costs in investigating and defending such claims, even if we
ultimately are not liable. If any of these events occur, our business could be materially adversely
affected. Claims may be asserted against us relating to shares not issued in our recent merger. The merger of Travelzoo.com Corporation into the Company became effective on April 25, 2002.
Stockholders of Travelzoo.com Corporation were allowed a period of two years following the
effective date to receive our shares. After April 25, 2004, two years following the effective date,
we ceased issuing shares to the former stockholders of Travelzoo.com Corporation. Many of the
Netsurfer stockholders, who had applied to receive shares of Travelzoo.com Corporation in 1998
for no cash consideration, did not elect to receive their shares which were issuable in the merger
prior to the end of the two-year period. A total of 4,115,532 of our shares which had been
reserved for issuance in the merger were not claimed. It is possible that claims may be asserted against us in the future by former stockholders of
Travelzoo.com Corporation seeking to receive our shares, whether based on a claim that the two-year
deadline for exchanging their shares was unenforceable or otherwise. In addition, one or more
jurisdictions, including the Bahamas or the State of Delaware, may assert rights to unclaimed
shares under escheat statutes. If such escheat claims are asserted, we intend to challenge the
applicability of escheat rights, among other reasons, in that the identity, residency and
eligibility of the holders in question cannot be determined. There were certain conditions
applicable to the issuance of shares to the 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 required to confirm their
compliance with these conditions, and 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. If claims are asserted by persons claiming to be former
stockholders of Travelzoo.com Corporation, we intend to assert that their rights to receive their
shares expired two years following the effective date of the merger, as provided in the merger
agreement. We also expect to take the position, if escheat or similar claims are asserted in
respect of the unissued shares in the future, that we are not required to issue such shares.
Further, even if it were established that unissued shares were subject to escheat claims, we would
assert that the claimant must establish that the original Netsurfer stockholders complied with the
conditions to issuance of their shares. We are not able to predict the outcome of any future
claims which might be asserted relating to the unissued shares. If such claims were asserted, and
were fully successful, that could result in us being required to issue up to an additional
4,115,532 shares of common stock for no additional payment, which would result in substantial
dilution of the ownership interests of the other stockholders, and in the our earnings per share,
which could adversely affect the market price of the common stock. On October 15, 2004, we announced a program under which we will make cash payments to persons
who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to
submit requests for our shares within the required time period. The accompanying consolidated
financial statements include a charge in general and administrative expenses of $1.2 million for
these cash payments for the year ended December 31, 2004 of which $525,000 remains as a liability
as of December 31, 2004. The liability is based on the number of actual requests received from
former stockholders through December 31, 2004. The 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 our common stock price. Our 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, but we believe that only a portion of such
requests were valid. As noted above, in order to receive payment under the program, a person is
required to establish that such person validly held shares in Travelzoo.com Corporation. Assuming
100% of the requests from 1998 were valid, former stockholders of Travelzoo.com Corporation holding
approximately 4,103,000 shares had not submitted claims under the program as of December 31, 2004. Our internal controls over financial reporting may not be effective, and our independent auditors
may not be able to certify as to their effectiveness, which could have a significant and adverse
effect on our business. We are evaluating our internal controls over financial reporting in order to allow management
to report on, and our independent auditors to attest to, our internal controls over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and 16




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the rules and regulations of the SEC, which we collectively refer to as Section 404. We are
currently performing the system and process evaluation and testing required in an effort to comply
with the management assessment and auditor certification requirements of Section 404, which will
initially apply to us as of December 31, 2005. In the course of our ongoing Section 404 evaluation,
we have identified areas of internal controls that may need improvement and have instituted
remediation efforts where necessary. Currently, none of our identified areas that need improvement
have been categorized as material weaknesses or significant deficiencies. However, we are in the
evaluation process, and we may identify conditions that may result in significant deficiencies or
material weaknesses in the future. We may be unable to protect our registered trademark or other proprietary intellectual property
rights. Our success depends to a significant degree upon the protection of the Travelzoobrand name.
We rely upon a combination of copyright, trade secret and trademark laws and non-disclosure and
other contractual arrangements to protect our intellectual property rights. The steps we have taken
to protect our proprietary rights, however, may not be adequate to deter misappropriation of
proprietary information. The U.S. Patent and Trademark Office registered the trademark for Travelzoo on January 23,
2001. If we are unable to protect our rights in the mark, a key element of our strategy of
promoting Travelzooas a brand could be disrupted and our business could be adversely affected. We
may not be able to detect unauthorized use of our proprietary information or take appropriate steps
to enforce our intellectual property rights. In addition, the validity, enforceability and scope of
protection of intellectual property in Internet-related industries is uncertain and still evolving.
The laws of other countries in which we may market our services in the future are uncertain and may
afford little or no effective protection of our intellectual property. The unauthorized
reproduction or other misappropriation of our proprietary technology could enable third parties to
benefit from our technology and brand name without paying us for them. If this were to occur, our
business could be materially adversely affected. We may face liability from intellectual property litigation that could be costly to prosecute or
defend and distract managements attention with no assurance of success. We cannot be certain that our products, content and brand names do not or will not infringe
valid patents, copyrights or other intellectual property rights held 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 claims from time to time
relating to the intellectual property of others in the ordinary course of our business. We may
incur substantial expenses in defending against these third party infringement claims, regardless
of their merit, and such claims could result in a significant diversion of the efforts of our
management personnel. Successful infringement claims against us may result in monetary liability or
a material disruption in the conduct of our business. 
 Item 2.Properties Our principal offices are located in approximately 4,000 square feet of office space in New
York, New York under an operating lease with HQ Global Workplaces, Inc. that expires on December
31, 2005. Our West Coast offices are located in approximately 3,000 square feet of office space in
Mountain View, California under an operating lease with HQ Global Workplaces, Inc. that expires on
December 31, 2005. Our Chicago offices are located in approximately 2,000 square feet of office
space under an operating lease with Regus Business Centre that expires on July 31, 2005. Our Miami
offices are located in approximately 2,000 square feet of office space under an operating lease
with Regus Business Centre that expires on December 31, 2005. We believe that our leased facilities
are adequate to meet our current needs; however, we intend to expand our operations and therefore
may require additional facilities in the future. We believe that such additional facilities are
available. 
 Item 3.Legal Proceedings From time to time, we are subject to legal proceedings and claims in the ordinary course of
business, including claims of alleged infringement of trademarks, copyrights and other intellectual
property rights, as well as claims by former employees. We are not currently aware of any legal
proceedings or claims pending or threatened that we believe will have, individually or in the
aggregate, a material adverse effect on our financial condition or results of operations. 
 17




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Item 4.Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of 2004. 
 PART II 
 Item 5.Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities Since August 18, 2004, our common stock has been trading on the NASDAQ National Market under
the symbol TZOO. From December 30, 2003 to August 17, 2004, our common stock was traded on the
NASDAQ SmallCap Market under the symbol TZOO. From August 28, 2002 to December 29, 2003, our
common stock was quoted on the OTC Bulletin Board. The following table sets forth, for the periods
indicated, the high and low sales prices per share of our common stock as reported by the OTC
Bulletin Board and NASDAQ. High
    
    
    Low2004:Fourth Quarter
    
    $
    110.62
    
    
    $
    49.88Third Quarter
    
    $
    76.58
    
    
    $
    21.09Second Quarter
    
    $
    31.31
    
    
    $
    7.61First Quarter
    
    $
    10.60
    
    
    $
    7.102003:Fourth Quarter
    
    $
    10.25
    
    
    $
    4.75Third Quarter
    
    $
    11.00
    
    
    $
    3.50Second Quarter
    
    $
    6.50
    
    
    $
    3.55First Quarter
    
    $
    5.00
    
    
    $
    4.00
 On March 28, 2005, the last reported sales price of the common stock on the NASDAQ National
Market was $42.80 per share. 18




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Holders As of March 3, 2005, there were 129,279 holders of record of the common stock. Dividend Policy Travelzoo has not declared or paid any cash dividends since inception and does not expect to
pay cash dividends for the foreseeable future. We currently intend to retain future earnings to
finance the expansion of our business. The payment of dividends will be at the discretion of our
board of directors and will depend upon factors such as future earnings, capital requirements, our
financial condition and general business conditions. We did not purchase any of our equity securities in 2004. Equity Compensation Plan Information Information regarding our equity compensation plans, including both stockholder approved plans
and plans not approved by stockholders, is set forth under the caption Equity Compensation Plan
Information in our Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of Travelzoos fiscal year ended December 31, 2004. 
 Item 6.Selected Consolidated Financial Data The selected consolidated financial data set forth below are derived from audited consolidated
financial statements. The following selected consolidated financial data is qualified in its
entirety by, and should be read in conjunction with, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial statements and the
notes thereto included elsewhere herein. Consolidated Statement of Operations Data: Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands, except per share data)Revenues
    
    $
    33,679
    
    
    $
    17,991
    
    
    $
    9,848
    
    
    $
    6,148
    
    
    $
    3,950Income from operations
    
    
    11,033
    
    
    
    3,739
    
    
    
    1,422
    
    
    
    885
    
    
    
    750Net income
    
    
    6,037
    
    
    
    2,050
    
    
    
    853
    
    
    
    364
    
    
    
    362Net income per share  basic
    
    $
    0.36
    
    
    $
    0.11
    
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.02Net income per share  diluted
    
    $
    0.33
    
    
    $
    0.10
    
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.02Shares used in per share
calculation  basic
    
    
    16,879
    
    
    
    19,425
    
    
    
    19,425
    
    
    
    19,425
    
    
    
    19,373Shares used in per share
calculation  diluted
    
    
    18,475
    
    
    
    20,527
    
    
    
    19,896
    
    
    
    19,425
    
    
    
    19,467
 Consolidated Balance Sheet Data: December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands)Cash and cash equivalents
    
    $
    26,435
    
    
    $
    3,522
    
    
    $
    1,258
    
    
    $
    610
    
    
    $
    46Working capital
    
    
    40,027
    
    
    
    3,460
    
    
    
    1,340
    
    
    
    425
    
    
    
    186Total assets
    
    
    43,257
    
    
    
    6,726
    
    
    
    3,240
    
    
    
    2,131
    
    
    
    1,556Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    $
    40,263
    
    
    $
    3,841
    
    
    $
    1,791
    
    
    $
    938
    
    
    $
    574
 
 Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of Travelzoos financial condition and results of
operations should be read in conjunction with, and is qualified in its entirety by reference to,
the consolidated financial statements and the notes thereto appearing elsewhere in this report. 19




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##### 



Overview Travelzoo Inc. is an Internet media company that publishes travel offers from hundreds of
travel companies. As the Internet is becoming consumers preferred medium to search for travel
offers, we provide airlines, hotels, cruise lines, vacation packagers, and other travel companies
with a fast, flexible, and cost-effective way to reach millions of users. While our products
provide advertising opportunities for travel companies, they also provide Internet users with a
free source of information on current sales and specials from hundreds of travel companies. Our
publications include the TravelzooWeb site, the Travelzoo Top 20e-mail newsletter, and the
Newsflashe-mail product. We also operate SuperSearch, a pay-per-click travel search engine. More
than 300 travel companies purchase our advertising services. Our revenues are advertising revenues, consisting of listing fees paid by travel companies to
advertise their offers on the TravelzooWeb site, in the Travelzoo Top 20e-mail newsletter, in the
Newsflashe-mail product, and in SuperSearch, a pay-per-click travel search engine. Prior to
December 2003, we also generated revenues from banner advertising sales. Revenues are principally
generated from the sale of advertising on our TravelzooWeb site and in our Travelzoo Top 20
newsletter. Listing fees are based on placement, number of listings, number of impressions, or
number of clickthroughs. Banner advertising rates are based on CPM rates (cost per thousand
impressions). Smaller advertising agreements  typically $2,000 or less per month  typically renew
automatically each month if they are not terminated by the client. Larger agreements are typically
related to advertising campaigns and are not automatically renewed. When evaluating the financial condition and operating performance of the Company, management
focuses on the following financial and non-financial indicators:  
    Growth of number of subscribers of the Companys newsletters and page views of
selected sections of the TravelzooWeb site;
    Growth in revenues in the absolute and relative to the growth in reach of the Companys products;
    Operating margin;
    Revenue per employee as a measure of productivity. Critical Accounting Policies We believe that there are a number of accounting policies that are critical to understanding
our historical and future performance, as these policies affect the reported amounts of revenue and
the more significant areas involving managements judgments and estimates. These significant
accounting policies relate to revenue recognition, the allowance for doubtful accounts,
recoverability of intangible assets, and liabilities to former stockholders. These policies, and
our procedures related to these policies, are described in detail below. Revenue Recognition We recognize revenue on arrangements in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 104, Revenue Recognition. We recognize advertising revenues in the
period in which the advertisement is displayed, provided that evidence of an arrangement exists,
the fees are fixed or determinable and collection of the resulting receivable is reasonably
assured. If fixed-fee advertising is displayed over a term greater than one month, revenues are
recognized ratably over the period. The Company recognizes revenue for fixed-fee advertising
arrangements ratably over the term of the insertion order. The majority of insertion orders have
terms that begin and end in a quarterly reporting period. In the cases where at the end of a
quarterly reporting period the term of an insertion order is not complete, the Company recognizes
revenue for the period by pro-rating the total arrangement fee to revenue and deferred revenue
based on a measure of proportionate performance of its obligation under the insertion order. The
Company measures proportionate performance by the number of placements delivered and undelivered as
of the reporting date. The Company uses prices stated on its internal rate card for measuring the
value of delivered and undelivered placements. Fees for variable-fee advertising arrangements are
recognized based on the number of impressions displayed or clicks delivered during the period. Under these policies, no revenue is recognized unless persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably
assured. The Company evaluates each of these criteria as follows:  
    Evidence of an arrangement.We consider an insertion order signed by the client or its
agency to be evidence of an arrangement. 20




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##### 




    Delivery.Delivery is considered to occur when the advertising has been displayed and,
if applicable, the clickthroughs have been delivered.
    Fixed or determinable fee.We consider the fee to be fixed or determinable if the fee is
not subject to refund or adjustment and payment terms are standard.
    Collection is reasonably assured.We conduct a credit review for all transactions at the
time of the arrangement to determine the creditworthiness of the client. Collection is
deemed reasonably assured if we expect that the client will be able to pay amounts under the
arrangement as payments become due. If we determine that collection is not reasonably
assured, then we defer the revenue and recognize the revenue upon cash collection.
Collection is deemed not reasonably assured when a client is perceived to be in financial
distress, which may be evidenced by weak industry conditions, a bankruptcy filing, or
previously billed amounts that are past due. Advertising sold to clients through agencies is reported at the net amount billed to the
agency. 21




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##### 



Allowance for Doubtful Accounts We initially record a provision for doubtful accounts based on our historical experience of
write-offs and then adjust this provision at the end of each reporting period based on a detailed
assessment of our accounts receivable and allowance for doubtful accounts. In estimating the
provision for doubtful accounts, management considers the age of the accounts receivable, our
historical write-offs, the creditworthiness of the client, the economic conditions of the clients
industry, and general economic conditions, among other factors. Should any of these factors change,
the estimates made by management will also change, which could impact the level of our future
provision for doubtful accounts. Specifically, if the financial condition of our clients were to
deteriorate, affecting their ability to make payments, additional provision for doubtful accounts
may be required. Intangible Assets As of December 31, 2004, our long-lived assets include intangible assets of $84,000. The
intangible assets consist of two Internet domain names which we acquired in 2001: weekend.com and
weekends.com. We evaluate the recoverability of our intangible assets in accordance with Statement
of Financial Accounting Standards No. 144, Impairment of Long-Lived Assets,when events or
circumstances indicate a potential impairment by estimating the undiscounted cash flows to be
generated from the use of these assets. No impairment losses were recorded related to intangible
assets in 2004. Any impairment losses recorded in the future could have a material adverse impact
on our results of operations. Liability to Former Stockholders On October 15, 2004, we announced a program under which we will make cash payments to persons
who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to
submit requests for shares in 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. 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 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 number of actual 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. 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, 2004, 2003 and 2002. Year EndedDecember 31,2004
    
    
    2003
    
    
    2002Revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    2
    
    
    
    2
    
    
    
    4Gross profit
    
    
    98
    
    
    
    98
    
    
    
    96Operating expenses:Sales and marketing
    
    
    47
    
    
    
    53
    
    
    
    58General and administrative.
    
    
    18
    
    
    
    24
    
    
    
    23Merger expenses
    
    
    
    
    
    
    
    
    
    
    1Total operating expenses
    
    
    65
    
    
    
    77
    
    
    
    82Income from operations
    
    
    33
    
    
    
    21
    
    
    
    14
 22




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##### 



Year EndedDecember 31,2004
    
    
    2003
    
    
    2002Interest income
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    
    33
    
    
    
    21
    
    
    
    14Income taxes
    
    
    15
    
    
    
    10
    
    
    
    5Net income
    
    
    18
    %
    
    
    11
    %
    
    
    9
    %
 For the year ended December 31, 2004, we reported income from operations of approximately
$11.0 million. As of December 31, 2004, we had retained earnings of approximately $9.8 million. Our
operating margin increased to 32.8% for the year ended December 31, 2004 from 20.8% in 2003. Our
operating margin increased because revenues grew faster than operating expenses. Certain expenses
such as office expense, salaries expense, network expense, and other fixed costs have increased at
a slower rate than our revenues have. Although our operating margin increased in each of the last three years, we do not know if
this trend will continue. Increased competition in our industry could force us to increase our
marketing expenditures and could limit our ability to increase our advertising rates. Further,
losses from our strategy to replicate our business model in selected foreign markets may have a
material adverse impact on our results of operations. Reach The following table sets forth the number of subscribers of each of our e-mail publications as
of December 31, 2004 and 2003 and the total number of page views for selected sections of the
TravelzooWeb site for the years ended December 31, 2004 and 2003. Management considers the
Travelzoohomepage and the front pages of destination categories as indicators for the growth of
our Web site traffic. Management reviews these non-financial metrics for two reasons: First, to
monitor our progress in increasing the reach of our products. Second, to evaluate if we are able to
convert higher reach into higher revenues. Year EndedDecember 31,2004
    
    
    2003
    
    
    Year-over-Year GrowthSubscribers:Travelzoo Top 20
    
    
    8,028,000
    
    
    
    6,148,000
    
    
    
    +31
    %Newsflash
    
    
    4,676,000
    
    
    
    2,658,000
    
    
    
    +76
    %Page views of selected sections of
TravelzooWeb site:Homepage
    
    
    31,835,000
    
    
    
    21,532,000
    
    
    
    +48
    %Front pages of destination categories
    
    
    55,858,000
    
    
    
    41,025,000
    
    
    
    +36
    %
 Management believes that the increase in reach of its products in the year ended December 31,
2004 was in line with its strategy and goals. The Companys revenues for the year ended December 31, 2004 increased by 87% from the previous
year. In the year ended December 31, 2003, 100% of revenues were generated from the TravelzooWeb
site and the Travelzoo Top 20newsletter. In the year ended December 31, 2004, 80% of revenues
were generated from the TravelzooWeb site and the Travelzoo Top 20newsletter. The number of
subscribers of the Travelzoo Top 20newsletter increased by 31%. Page views of selected sections of
the TravelzooWeb site increased by 48% and 36%. Management believes that the data for the years
ended December 31, 2004 and 2003 indicate that the Company was able to generate higher revenues as
reach increased. Revenues Our total revenues increased to $33.7 million for the year ended December 31, 2004 from $18.0
million for the year ended December 31, 2003. This represents an increase of 87%. Total revenues
for the year ended December 31, 2003 increased to $18.0 million from $9.8 million for the year
ended December 31, 2002. This represents an increase of 83%. 23




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##### 



16% of our revenue growth in 2004 came from our new product, SuperSearch. The remaining 84%
of revenue growth is attributable to an increase in our advertising rates and an increase in the
number of clients and the volume of advertising sold. Approximately 25% of the revenue growth in
2004 is attributable to an increase in our advertising rates. Approximately 25% of the revenue
growth in 2004 is related to an increase in our prices for advertising placements. Due to the
increase in the reach of our publications, we increased the prices for advertising placements in
2004 on average by 22%. Approximately 59% of our revenue growth in 2004 is attributable to an
increase in the number of clients and in an increase in volume of advertising sold to existing
clients. Management believes that our ability to increase revenues in the future depends mainly on
three factors:  
    Our ability to increase our advertising rates;
    Our ability to sell more advertising to existing clients; and
    Our ability to increase the number of clients. We believe that we can increase our advertising rates only if the reach of our publications
increases. We do not know if we are able to increase the reach of our publications. We believe that
we can sell more advertising only if the market for online advertising continues to grow and if we
can maintain or increase our market share. We believe that the market for online advertising
continues to grow. We do not know if we will be able to maintain or increase our market share. We
historically increased the number of clients in every year since inception. We do not know if we
will be able to increase the number of clients in the future. Average revenue per employee increased to $678,000 for the year ended December 31, 2004 and to
$461,000 for the year ended December 31, 2003 from $379,000 for the year ended December 31, 2002. Cost of Revenues Cost of revenues consists of network expenses, including fees we pay for co-location services,
depreciation of network equipment and salary expenses associated with network operations staff. Our
cost of revenues increased to $695,000 for the year ended December 31, 2004 and to $399,000 for the
year ended December 31, 2003 from $351,000 for the year ended December 31, 2002. As a percentage of
revenue, cost of revenues was 2% for the years ended December 31, 2004 and December 31, 2003, and
4% for the year ended December 31, 2002. The decreases resulted primarily from an increase in
revenues that outpaced the increase in our network operations costs. Cost of revenues did not
increase at the same rate as our revenue growth because we did not need to increase our network
operations staff significantly, and we did not have increases in fees for co-location services to
support the increase in revenues. Operating Expenses Sales and Marketing Sales and marketing expenses consist primarily of advertising and promotional expenses, public
relations expenses, conference expenses, and salary expenses associated with sales and marketing
staff. Sales and marketing expenses increased to $15.7 million for the year ended December 31, 2004
and to $9.6 million for the year ended December 31, 2003 from $5.7 million for the year ended
December 31, 2002. The increase in sales and marketing expenses in both years was primarily due to
increases of our advertising campaigns. The goal of our advertising campaigns was to acquire new
subscribers for our e-mail products and to increase brand awareness for Travelzoo. For the years
ended December 31, 2004, 2003, and 2002, advertising expenses accounted for 75%, 71%, and 69%
respectively, of sales and marketing expenses. Advertising activities during these three year
periods consisted primarily of online advertising. The increase in sales and marketing expenses in
the years ended December 31, 2004 and 2003 was also due to an increase of our sales force and our
decision to hire more experienced sales personnel. Our goal is to increase our revenues from advertising sales. One important factor that drives
our revenues are our advertising rates. We believe that we can increase our advertising rates only
if the reach of our publications increases. In order to increase the reach of our publications, we
have to acquire a significant number of new subscribers in every quarter. Therefore, we expect our
sales and marketing expenses related to our business in the United States of America as a
percentage of revenue to remain at the current level or increase from the current level. The main
factor that impacts our advertising expenses is the average cost per acquisition of a new
subscriber. We believe that the average cost per acquisition depends mainly on the advertising
rates which we pay for media buys, our ability to manage our subscriber acquisition efforts
successfully, and the degree of competition in our industry. 24




---



##### 



If we replicate our business model in selected foreign markets, this could result in a
significant additional increase in our sales and marketing expenses in the foreseeable future. General and Administrative General and administrative expenses consist primarily of compensation for administrative and
executive staff, fees for professional services, rent, bad debt expense, payments made to former
stockholders of Travelzoo.com Corporation, amortization of intangible assets and general office
expense. General and administrative expenses increased to $6.2 million for the year ended December
31, 2004 and to $4.3 million for the year ended December 31, 2003 from $2.3 million for the year
ended December 31, 2002. In 2004, general and administrative expenses increased primarily due to
expenses of $1.2 million for cash payments made to former stockholders of Travelzoo.com Corporation
and also due to increases in expenses for office space and legal and professional services. General
and administrative expenses in 2003 include $328,000 of expenses paid by the Company for a
secondary offering of common stock to meet the listing requirements of the NASDAQ SmallCap Market. We expect that we will incur significant expenses in 2005 in order to allow management to
report on, and our independent auditors to attest to, our internal controls over financial
reporting, as required by Section 404 for the Sarbanes-Oxley Act of 2002. At this time, the total
cost is not reliably estimable as it will be dependent on the number of areas requiring improvement
and on remediation efforts where necessary. Currently, none of our identified areas that need
improvement have been categorized as material weaknesses or significant deficiencies. However, we
are still in the evaluation process, and we may identify conditions that may result in significant
deficiencies or material weaknesses in the future. We expect our headcount to continue to increase in the future. The Companys headcount is one
of the main drivers of general and administrative expenses. Therefore, we expect our general and
administrative expenses to continue to increase. If we replicate our business model in foreign markets, this could result in a significant
additional increase in our general and administrative expenses. In the year ended December 31, 2004, the Company recorded expenses of $1.2 million related to
a program under which 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 claims received and the Companys stock price.
The Company expects expenses related to the program to decrease in future periods. Merger Expenses Merger expenses consist of expenses relating to the registration statement and proxy statement
filed with the SEC relating to the merger of Travelzoo.com Corporation into Travelzoo Inc. which
was completed in 2002. As a result, merger expenses was $-0- for the years ended December 31, 2004
and 2003, and $55,000 for the year ended December 31, 2002. The expenses consisted mostly of fees
for professional services, primarily legal and accounting. Subscriber Acquisition The table set forth below provides for each quarter in 2002, 2003, and 2004, an analysis of
our average cost for acquisition of new subscribers for our Travelzoo Top 20newsletter and our
Newsflashe-mail alert service. The table includes the following data:  
    Average Cost per Acquisition of a New Subscriber: This is the quarterly costs of
consumer marketing programs whose purpose was primarily to acquire new subscribers,
divided by total new subscribers added during the quarter.
    New Subscribers: Total new subscribers who signed up for at least one of our
e-mail publications throughout the quarter. This is an unduplicated subscriber
number, meaning a subscriber who signed up for two or more of our publications is
only counted once.
    Unsubscribes: Subscribers who were removed from our list throughout the quarter
either as a result of their requesting removal, or based on periodic list
maintenance after we determined that the e-mail address was likely no longer valid. 25




---



##### 




    Balance: This is the number of subscribers at the end of the quarter, computed
by taking the previous quarters subscriber balance, adding new subscribers during
the current quarter, and subtracting unsubscribes during the current quarter. Average Cost perAcquisition of a NewPeriod
    
    Subscriber
    
    
    New Subscribers
    
    
    Unsubscribes
    
    
    BalanceQ1 2002
    
    $
    0.93
    
    
    
    254,140
    
    
    
    (24,547
    )
    
    
    1,614,130Q2 2002
    
    $
    0.95
    
    
    
    590,266
    
    
    
    (156,204
    )
    
    
    2,048,192Q3 2002
    
    $
    1.01
    
    
    
    740,656
    
    
    
    (51,566
    )
    
    
    2,737,282Q4 2002
    
    $
    1.31
    
    
    
    799,958
    
    
    
    (55,064
    )
    
    
    3,482,176Q1 2003
    
    $
    1.62
    
    
    
    693,872
    
    
    
    (213,423
    )
    
    
    3,962,625Q2 2003
    
    $
    1.58
    
    
    
    924,902
    
    
    
    (172,403
    )
    
    
    4,715,124Q3 2003
    
    $
    1.52
    
    
    
    1,108,045
    
    
    
    (248,964
    )
    
    
    5,574,205Q4 2003
    
    $
    2.17
    
    
    
    869,286
    
    
    
    (240,907
    )
    
    
    6,202,584Q1 2004
    
    $
    2.23
    
    
    
    920,063
    
    
    
    (185,151
    )
    
    
    6,937,496Q2 2004
    
    $
    2.58
    
    
    
    858,899
    
    
    
    (634,702
    )
    
    
    7,161,693Q3 2004
    
    $
    1.26
    
    
    
    1,298,962
    
    
    
    (602,628
    )
    
    
    7,858,027Q4 2004
    
    $
    1.70
    
    
    
    694,026
    
    
    
    (343,139
    )
    
    
    8,145,737
 We have noted a general trend of increasing cost per new subscriber over the last few years,
driven by a gradual increase in online advertising rates by our media suppliers as well as
increased activity from competitors using similar forms of online advertising for their own
marketing efforts. The decline in new subscriber acquisition costs in Q3 2004 and Q4 2004 reflects
the effect of new advertising campaigns which were tested at that time. We do not consider the
decline in new subscriber costs in Q3 2004 and Q4 2004 to be necessarily indicative of a
longer-term trend that our subscriber costs are likely to stay at this level or are likely to
decline further. The operational impact of increased acquisition cost is higher absolute marketing expenses and
potentially higher relative marketing expenses as a percentage of revenue. Going forward we expect
continued upward pressure on online advertising rates and continued activity from competitors,
which will likely increase our cost per new subscriber over the long term. The effect on
operations is that greater absolute and relative marketing expenditure may be necessary to continue
to grow the reach of our publications. It is possible that the factors driving subscriber
acquisition cost increases can be partially or completely offset by new or improved methods of
subscriber acquisition using techniques which are under evaluation. Thus we are not able to
meaningfully predict the short-term quarterly trend in the cost of acquiring new subscribers. Income Taxes For the year ended December 31, 2004, we recorded an income tax provision of $5.1 million. For
the years ended December 31, 2003 and 2002, we recorded income tax provisions of $1.7 million and
$573,000, 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. Our effective tax
rate fluctuated in years prior to 2004 because merger expenses and stock offering costs reported as
expenses in the consolidated financial statements were not deductible for tax purposes and thereby
increased the effective tax rate for financial reporting purposes in those periods. The effective
tax rate increased in 2004 because the expenses related to the program to make cash payments to
former stockholders were treated as non tax deductible expenses for financial statement reporting
purposes. The effective tax rates for 2004, 2003, and 2002 were 46%, 45%, and 40%, respectively.
The effective tax rate in future periods will continue to fluctuate depending on the timing and
amounts of expenses of payments to former stockholders. During the year ended December 31, 2004, the Company realized tax benefits of $1,931,924 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. 26




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##### 



Liquidity and Capital Resources As of December 31, 2004, we had $36.4 million in cash, cash equivalents and short-term
investments. Cash, cash equivalents and short-term investments increased from $3.5 million on
December 31, 2003 primarily as a result of cash provided by operating activities and financing
activities explained below. Cash and cash equivalents increased to $3.5 million on December 31,
2003 from $1.3 million on December 31, 2002 primarily as a result of cash provided by operations
explained below. We expect that cash flows generated from operations will continue to be sufficient
to provide for working capital needs for at least the next 12 months. Net cash provided by operating activities in the year ended December 31, 2004 was $4.5
million. Net cash provided by operating activities in the year ended December 31, 2003 was $2.4
million. Net cash provided by operating activities in the year ended December 31, 2002 was
$769,000. In the year ended December 31, 2004, net cash provided by operating activities resulted
primarily from net income and a net increase in accrued expenses and tax benefit of stock options
exercises offset by an increase in accounts receivable and a decrease in income tax payable. The
tax benefit of stock options resulted from exercises during 2004 of stock options by directors. The
increase in accounts receivable resulted from higher revenues during 2004 and greater days of sales
outstanding relating to a higher mix of variable fee advertising, which has a longer collection
period than fixed fee advertising because it is billed in arrears while fixed fee advertising is
billed in advance. In the year ended December 31, 2003, net cash provided by operating activities
resulted primarily from net income and a net increase in income tax payable and accrued expenses
offset by an increase in accounts receivable. The increase in accounts receivable resulted from
higher revenues during 2003. The increase in taxes payable was the result of higher income tax
expense in 2003, and the increase in accrued liabilities was the result of higher operating
expenses in 2003. In the year ended December 31, 2002, net cash provided by operating activities
resulted primarily from net income and an increase in accounts payable and accrued expenses offset
by income tax payments and an increase in accounts receivable. Net cash used in investing activities was $10.1 million, $120,000 and $121,000 during the
years ended December 31, 2004, 2003 and 2002, respectively. In all periods, net cash was used in
investing activities for equipment purchases, except for 2004, which included $10.0 million for
purchases of short-term investments. Net cash provided by financing activities was $28.5 million in the year ended December 31,
2004. The net cash provided in the year ended December 31, 2004 was due primarily from the
proceeds from issuance of common stock in a private placement transaction and upon exercises of
stock options by directors. There were no cash flows related to financing activities in the years
ended December 31, 2003 and 2002. Our capital requirements depend on a number of factors, including market acceptance of our
products and services, the amount of our resources we devote to development of our advertising
products, cash payments to former stockholders of Travelzoo.com Corporation, expansion of our
operations, and the amount of our resources we devote to promoting awareness of the Travelzoo
brand. Since the inception of the cash payment program to former stockholders of Travelzoo.com
Corporation, we have incurred expenses of $1.2 million. While future payments for this program are
expected to decrease, the total cost of this program is still undeterminable because it is
dependent on our stock price and on the number of claims ultimately received. Consistent with our
growth, we have experienced a substantial increase in our sales and marketing expenses since
inception, and we anticipate that these increases will continue for the foreseeable future. We
believe cash on hand and generated during those periods will be sufficient to pay such costs. In
addition, we will continue to evaluate possible investments in businesses, products and
technologies, the consummation of any of which would increase our capital requirements. Although we currently believe that we have sufficient capital resources to meet our
anticipated working capital and capital expenditure requirements beyond the next 12 months,
unanticipated events and opportunities may require us to sell additional equity or debt securities
or establish new credit facilities to raise capital in order to meet our capital requirements. If
we sell additional equity or convertible debt securities, the sale could dilute the ownership of
our existing stockholders. If we issue debt securities or establish a new credit facility, our
fixed obligations could increase, and we may be required to agree to operating covenants that would
restrict our operations. We cannot be sure that any such financing will be available in amounts or
on terms acceptable to us. The following summarizes our principal contractual commitments as of December 31, 2004 (in
thousands): 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    TotalOperating leases
    
    $
    1,082
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,082Purchase obligations
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Total commitments
    
    $
    1,128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,128
 27




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##### 



Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R,
Share-Based Payments, which requires the measurement 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 effective
for reporting periods beginning after June 15, 2005. The Company is to adopt SFAS 123R in the
third quarter of 2005. The pro forma disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. Note 1(k) to our consolidated financial
statements reports the pro forma net income and net income per share amounts, for 2002 through
2004, as if we had used a fair-value-based method similar to the methods required under SFAS 123R
to measure compensation expense for employee stock based compensation. Although there are no
unvested stock-based compensation awards as of December 31, 2004, the Company may grant such
instruments in the future. As a result, the adoption of SFAS No. 123R could have a significant
adverse impact on the Companys consolidated statement of operations and net income per share. In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition,which superseded Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. The primary purpose of SAB 104 was to rescind accounting guidance contained
in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of
the issuance of Emerging Issues Task Force 00-21 (EITF 00-21), Accounting for Revenue Arrangements
with Multiple Deliverables. SAB 104 also incorporated certain sections of the SECs Revenue
Recognition in Financial Statements  Frequently Asked Questions and Answersdocument. The
adoption of SAB 104 did not have a material impact on Companys consolidated financial position,
results of operations, or cash flows. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk The Company has no outstanding debt, is not a party to any derivatives transactions, and does
not have any other material liabilities or assets which are subject to risks relating to currency
exchange rates and commodity price risks. We invest in highly liquid investments with short
maturities. Accordingly, we do not expect any material loss from these investments and believe that
our potential exposure to changes in market interest rates is not material. 28




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##### 



Item 8.Consolidated Financial Statements TRAVELZOO INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    30Consolidated Balance Sheets
    
    
    31Consolidated Statements of Operations
    
    
    32Consolidated Statements of Stockholders Equity
    
    
    33Consolidated Statements of Cash Flows
    
    
    34Notes to Consolidated Financial Statements
    
    
    35
 29




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##### 



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 as of December 31, 2003 and 2004, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the years in the three-year period
ended December 31, 2004. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Travelzoo Inc. and subsidiaries as of December 31,
2003 and 2004, and the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. /s/ KPMG LLP Mountain View, California
January 22, 2005 30




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##### 



TRAVELZOO INC. 
 CONSOLIDATED BALANCE SHEETS December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,434,989
    
    
    $
    3,521,637Short term investments
    
    
    10,031,738
    
    
    
    Accounts receivable, less allowance for doubtful accounts of $127,547 and
$71,459 as of December 31, 2004 and December 31, 2003, respectively
    
    
    5,327,279
    
    
    
    2,369,915Deposits
    
    
    163,130
    
    
    
    97,086Prepaid expenses and other current assets
    
    
    674,208
    
    
    
    131,618Deferred tax assets
    
    
    390,895
    
    
    
    225,270Total current assets
    
    
    43,022,239
    
    
    
    6,345,526Deposits, less current portion
    
    
    
    
    
    
    42,525Deferred tax assets, less current portion
    
    
    43,237
    
    
    
    27,552Property and equipment, net
    
    
    108,399
    
    
    
    164,034Intangible assets, net
    
    
    83,563
    
    
    
    146,793Total assets
    
    $
    43,257,438
    
    
    $
    6,726,430LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    439,425
    
    
    $
    223,627Accrued expenses
    
    
    2,464,269
    
    
    
    1,328,537Deferred revenue
    
    
    91,137
    
    
    
    22,312Income tax payable
    
    
    
    
    
    
    1,310,874Total liabilities
    
    
    2,994,831
    
    
    
    2,885,350Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value; 5,000,000 shares authorized, none
outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 40,000,000 shares authorized, 16,233,204
shares outstanding as of December 31, 2004 and 19,425,147 shares
reported as outstanding as of December 31, 2003
    
    
    162,332
    
    
    
    194,251Additional paid-in capital
    
    
    30,299,991
    
    
    
    (116,078
    )Retained earnings
    
    
    9,800,284
    
    
    
    3,762,907Total stockholders equity
    
    
    40,262,607
    
    
    
    3,841,080Total liabilities and stockholders equity
    
    $
    43,257,438
    
    
    $
    6,726,430
 See accompanying notes to consolidated financial statements 31




---



##### 



TRAVELZOO INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31,2004
    
    
    2003
    
    
    2002Revenues
    
    $
    33,679,232
    
    
    $
    17,991,241
    
    
    $
    9,847,820Cost of revenues
    
    
    694,713
    
    
    
    399,039
    
    
    
    351,169Gross profit
    
    
    32,984,519
    
    
    
    17,592,202
    
    
    
    9,496,651Operating expenses:Sales and marketing
    
    
    15,730,623
    
    
    
    9,564,384
    
    
    
    5,726,557General and administrative
    
    
    6,220,573
    
    
    
    4,288,985
    
    
    
    2,293,846Merger expenses
    
    
    
    
    
    
    
    
    
    
    54,538Total operating expenses
    
    
    21,951,196
    
    
    
    13,853,369
    
    
    
    8,074,941Income from operations
    
    
    11,033,323
    
    
    
    3,738,833
    
    
    
    1,421,710Interest income
    
    
    126,499
    
    
    
    13,192
    
    
    
    3,971Income before income taxes
    
    
    11,159,822
    
    
    
    3,752,025
    
    
    
    1,425,681Income tax expense
    
    
    5,122,445
    
    
    
    1,701,899
    
    
    
    572,610Net income
    
    $
    6,037,377
    
    
    $
    2,050,126
    
    
    $
    853,071Net income per share:Basic net income per share
    
    $
    0.36
    
    
    $
    0.11
    
    
    $
    0.04Diluted net income per share
    
    $
    0.33
    
    
    $
    0.10
    
    
    $
    0.04Shares used in computing basic net income per share
    
    
    16,879,227
    
    
    
    19,425,147
    
    
    
    19,425,147Shares used in computing diluted net income per share
    
    
    18,474,775
    
    
    
    20,526,951
    
    
    
    19,896,353
 See accompanying notes to consolidated financial statements 32




---



##### 



TRAVELZOO INC. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Years Ended December 31, 2004, 2003, and 2002
 Additional
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    EquityBalances, December 31, 2001
    
    
    19,425,147
    
    
    
    194,251
    
    
    
    (116,078
    )
    
    
    859,710
    
    
    
    937,883Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    853,071
    
    
    
    853,071Balances, December 31, 2002
    
    
    19,425,147
    
    
    
    194,251
    
    
    
    (116,078
    )
    
    
    1,712,781
    
    
    
    1,790,954Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,050,126
    
    
    
    2,050,126Balances, December 31, 2003
    
    
    19,425,147
    
    
    $
    194,251
    
    
    $
    (116,078
    )
    
    $
    3,762,907
    
    
    $
    3,841,080Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,037,377
    
    
    
    6,037,377Reduction of reported
shares outstanding upon
expiration of merger
exchange period
    
    
    (4,115,532
    )
    
    
    (41,155
    )
    
    
    41,155
    
    
    
    
    
    
    
    Proceeds from exercises of
options
    
    
    173,589
    
    
    
    1,736
    
    
    
    369,031
    
    
    
    
    
    
    
    370,767Tax benefit of
non-qualified stock
options exercise
    
    
    
    
    
    
    
    
    
    
    1,931,924
    
    
    
    
    
    
    
    1,931,924Recovery of profit from
purchase and sale of stock
by employees
    
    
    
    
    
    
    
    
    
    
    34,390
    
    
    
    
    
    
    
    34,390Proceeds from issuance of
common stock, net of
related issuance costs
    
    
    750,000
    
    
    
    7,500
    
    
    
    28,039,569
    
    
    
    
    
    
    
    28,047,069Balances, December 31, 2004
    
    
    16,233,204
    
    
    $
    162,332
    
    
    $
    30,299,991
    
    
    $
    9,800,284
    
    
    $
    40,262,607
 See accompanying notes to consolidated financial statements 33




---



##### 



TRAVELZOO INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    6,037,377
    
    
    $
    2,050,126
    
    
    $
    853,071Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    161,329
    
    
    
    163,284
    
    
    
    194,373Deferred income taxes
    
    
    (181,310
    )
    
    
    (139,455
    )
    
    
    (33,018
    )Provision for losses on accounts receivable
    
    
    121,088
    
    
    
    15,534
    
    
    
    14,571Loss on disposal of property and equipment
    
    
    
    
    
    
    415
    
    
    
    Non-cash revenues
    
    
    
    
    
    
    
    
    
    
    (3,410
    )Tax benefit of stock option exercises
    
    
    1,931,924
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,078,452
    )
    
    
    (1,074,050
    )
    
    
    (433,633
    )Deposits
    
    
    (23,519
    )
    
    
    (52,349
    )
    
    
    (54,754
    )Prepaid expenses and other current assets
    
    
    (542,590
    )
    
    
    (16,709
    )
    
    
    (96,730
    )Accounts payable
    
    
    215,798
    
    
    
    (218,722
    )
    
    
    266,998Accrued expenses
    
    
    1,135,732
    
    
    
    780,857
    
    
    
    263,362Deferred revenue
    
    
    68,825
    
    
    
    3,133
    
    
    
    5,295Income tax payable
    
    
    (1,310,874
    )
    
    
    871,442
    
    
    
    (207,025
    )Net cash provided by operating activities
    
    
    4,535,328
    
    
    
    2,383,506
    
    
    
    769,100Cash flows from investing activities:Purchases of property and equipment
    
    
    (39,776
    )
    
    
    (120,142
    )
    
    
    (120,746
    )Purchases of short-term investments
    
    
    (10,031,738
    )
    
    
    
    
    
    
    Purchases of intangible assets
    
    
    (2,688
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (10,074,202
    )
    
    
    (120,142
    )
    
    
    (120,746
    )Cash flows from financing activities:Proceeds from issuance of common stock, net of related costs
    
    
    28,047,069
    
    
    
    
    
    
    
    Proceeds from stock option exercises
    
    
    370,767
    
    
    
    
    
    
    
    Recovery of profit from purchase and sale of stock by
employees
    
    
    34,390
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    28,452,226
    
    
    
    
    
    
    
    Net increase in cash and cash equivalents
    
    
    22,913,352
    
    
    
    2,263,364
    
    
    
    648,354Cash and cash equivalents at beginning of year
    
    
    3,521,637
    
    
    
    1,258,273
    
    
    
    609,919Cash and cash equivalents at end of year
    
    $
    26,434,989
    
    
    $
    3,521,637
    
    
    $
    1,258,273Supplemental disclosure of cash flow information:Cash paid for income taxes net of refunds received
    
    $
    4,682,705
    
    
    $
    969,912
    
    
    $
    812,653Reduction in carry amounts of intangible asset and
deferred revenue
    
    $
    
    
    
    $
    
    
    
    $
    (69,427
    )
 See accompanying notes to consolidated financial statements 34




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##### 



TRAVELZOO INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004, 2003, and 2002
 (1) Summary of Significant Accounting Policies (a) The Company and Basis of Presentation Travelzoo Inc. is an Internet media company that publishes sales and specials for hundreds of
travel companies. The Companys products include the TravelzooWeb Site, the Travelzoo Top 20
e-mail newsletter, the Newsflashe-mail product, and the SuperSearchpay-per-click travel search
engine. The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation. The Company was formed as a result of a combination and merger of entities founded by the
Companys majority stockholder, Mr. Ralph Bartel. In 1998, Mr. Bartel founded Travelzoo.com
Corporation, a Bahamas corporation, which issued 5,155,874 shares via the Internet to approximately
700,000 stockholders for no cash consideration (Netsurfer shares). In 1998, Mr. Bartel also
founded Silicon Channels Corporation, a California corporation, to operate the TravelzooWeb site.
During 2001, Travelzoo Inc. was formed as a subsidiary of Travelzoo.com Corporation, and Mr. Bartel
contributed all of the outstanding shares of Silicon Channels to Travelzoo Inc. in exchange for
8,129,273 shares of Travelzoo Inc. and options to acquire an additional 2,158,349 shares at $1.00.
The merger was accounted for as a combination of entities under common control using as-if
pooling-of-interests accounting. Under this method of accounting, the assets and liabilities of
Silicon Channels Corporation and Travelzoo Inc. were carried forward to the combined company at
their historical costs. In addition, all prior period financial statements of Travelzoo Inc. were
restated to include the combined results of operations, financial position and cash flows of
Silicon Channels Corporation. During January 2001, the Board of Directors of Travelzoo.com Corporation proposed that
Travelzoo.com Corporation be merged with Travelzoo Inc. whereby Travelzoo Inc. would be the
surviving entity. On March 15, 2002, the stockholders of Travelzoo.com Corporation approved the
merger with Travelzoo Inc. On April 25, 2002, the certificate of merger was filed in Delaware upon
which the merger became effective and Travelzoo.com Corporation ceased to exist. Each outstanding
share of common stock of Travelzoo.com Corporation was converted into the right to receive one
share of common stock of Travelzoo Inc. Under and subject to the terms of the merger agreement,
stockholders were allowed a period of two years following the effective date of the merger to
receive shares of Travelzoo Inc. 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 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 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. As of December 31, 2004, there were 16,233,204 shares of common stock outstanding,
and earnings per share calculations reflect the reduction of the number of shares reported as
outstanding during the period. The merger of Travelzoo.com Corporation into Travelzoo Inc. was accounted for as a combination
of entities under common control using as-if pooling-of-interests accounting. Under this method
of accounting, the assets and liabilities of Travelzoo.com Corporation and Travelzoo Inc. were
carried forward at their historical costs. In addition, all prior period financial statements of
Travelzoo Inc. were restated to include the combined results of operations, financial position and
cash flows of Travelzoo.com Corporation. The restated results of operations and cash flows of
Travelzoo Inc. are identical to the combined results of Travelzoo.com Corporation and Travelzoo
Inc. (b) Revenue Recognition Substantially all revenue consists of advertising sales. Advertising revenues are derived from
the sale of advertising on the 35




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##### 



TravelzooWeb site, in the Travelzoo Top 20e-mail newsletter, in Newsflash, and in
SuperSearch. The Company recognizes revenues in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 104, Revenue Recognition. Advertising revenues are recognized in the period in which the advertisement is displayed, provided
that evidence of an arrangement exists, the fees are fixed or determinable and collection of the
resulting receivable is reasonably assured. Where collectibility is not reasonably assured, the
revenue will be recognized upon cash collection, provided that the other criteria for revenue
recognition have been met. The Company recognizes revenue for fixed-fee advertising arrangements
ratably over the term of the insertion order. The majority of insertion orders have terms that
begin and end in a quarterly reporting period. In the cases where at the end of a quarterly
reporting period the term of an insertion order is not complete, the Company recognizes revenue for
the period by pro-rating the total arrangement fee to revenue and deferred revenue based on a
measure of proportionate performance of its obligation under the insertion order. The Company
measures proportionate performance by the number of placements delivered and undelivered as of the
reporting date. The Company uses prices stated on its internal rate card for measuring the value
of delivered and undelivered placements. Fees for variable-fee advertising arrangements are
recognized based on the number of impressions displayed or clicks delivered during the period. Under these policies, no revenue is recognized unless persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection is deemed
reasonably assured. The Company evaluates each of these criteria as follows:  
    Evidence of an arrangement.The Company considers an insertion order signed by the client
or its agency to be evidence of an arrangement.
    Delivery.Delivery is considered to occur when the advertising has been displayed and, if
applicable, the click-throughs have been delivered.
    Fixed or determinable fee.The Company considers the fee to be fixed or determinable if
the fee is not subject to refund or adjustment and payment terms are standard.
    Collection is deemed reasonably assured.The Company conducts a credit review for all
transactions at the time of the arrangement to determine the creditworthiness of the client.
Collection is deemed reasonably assured if it is expected that the client will be able to
pay amounts under the arrangement as payments become due. If it is determined that
collection is not reasonably assured, then revenue is deferred and recognized upon cash
collection. Collection is deemed not reasonably assured when a client is perceived to be in
financial distress, which may be evidenced by weak industry conditions, a bankruptcy filing,
or previously billed amounts that are past due. During the year ended December 31, 2004, the Company recognized $0 in revenue on a
cash-received basis from the year ended December 31, 2003. As of December 31, 2004, the Company
deferred recognition of $19,774 of advertising delivered during the year ended December 31, 2004
for which collectibility was not reasonably assured. Such revenue will be recognized in future
periods when and if collected. The Companys standard payment terms are 30 days net. The Company invoices its clients
monthly. Insertion orders that include fixed-fee advertising are invoiced upon acceptance of the
order and on the first day of each month included in the term of the insertion order. Insertion
orders that include variable-fee advertising are invoiced at the end of the month. The Companys
standard terms state that in the event that Travelzoo fails to publish advertisements as specified
in the insertion order, the liability of Travelzoo to the client shall be limited to, at
Travelzoos sole discretion, a pro rata refund of the advertising fee, the placement of the
advertisements at a later time in a comparable position, or the extension of the term of the
insertion order until the advertising is fully delivered. The Company believes that no significant
obligations exist after the full delivery of advertising. The Company had outsourced part of its advertising sales and production activities to
DoubleClick, Inc. (DoubleClick). Under the terms of the agreement with DoubleClick, the Company
received a portion of the revenue received by DoubleClick from clients for the display of
advertising on the TravelzooWeb site. The Company recorded these revenues on a net basis. The
gross revenue received by DoubleClick from advertising on the TravelzooWeb site was $-0-, $-0- and
$82,939 for the years ended December 31, 2004, 2003, and 2002 respectively. The Companys share of
this income, which has been recorded as revenue, was $-0-, $-0- and $38,534 for the years ended
December 31, 2004, 2003, and 2002 respectively. The agreement with DoubleClick was canceled as of
August 23, 2002. Revenues for advertising sold to clients through agencies are reported at the net amount
billed to the agency. 36




---



##### 



(c) Net Income Per Share Net income per share has been calculated in accordance with 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 net income per
share is computed by adjusting the weighted-average number of common shares outstanding for the
effect of potential common shares outstanding during the period. Potential common shares included
in the diluted calculation consist of incremental shares issuable upon the exercise of outstanding
stock options calculated using the treasury stock method. The following table sets forth the calculation of basic and diluted net income per share: Year Ended December 31,2004
    
    
    2003
    
    
    2002Basic net income per share:Net income
    
    $
    6,037,377
    
    
    $
    2,050,126
    
    
    $
    853,071Weighted average common shares
    
    
    16,879,227
    
    
    
    19,425,147
    
    
    
    19,425,147Basic net income per share
    
    $
    0.36
    
    
    $
    0.11
    
    
    $
    0.04Diluted net income per share:Net income
    
    $
    6,037,377
    
    
    $
    2,050,126
    
    
    $
    853,071Weighted average common shares
    
    
    16,879,227
    
    
    
    19,425,147
    
    
    
    19,425,147Effect of dilutive securities  stock options
    
    
    1,595,548
    
    
    
    1,101,804
    
    
    
    471,206Weighted average common and potential common shares
    

    
    18,474,775
    
    
    
    20,526,951
    
    
    
    19,896,353Diluted net income per share
    
    $
    0.33
    
    
    $
    0.10
    
    
    $
    0.04
 (d) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ from those
estimates. (e) Property and Equipment Property and equipment consisted of the following: December 31,2004
    
    
    2003Computer hardware and software
    
    $
    323,746
    
    
    $
    316,837Office equipment
    
    
    226,587
    
    
    
    193,722550,333
    
    
    
    510,559Less accumulated depreciation
    
    
    441,934
    
    
    
    346,525Total
    
    $
    108,399
    
    
    $
    164,034
 Property and equipment are stated at cost less accumulated depreciation. Additions,
improvements and major renewals are capitalized. Maintenance, repairs and minor renewals are
expensed as incurred. Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives are 3 years for property and equipment. (f) Intangible Assets Intangible assets consist of the following: December 31,2004
    
    
    2003Acquired amortized intangible assets:Internet domain names
    
    $
    347,547
    
    
    $
    344,857Less accumulated amortization
    
    
    263,984
    
    
    
    198,064Total
    
    $
    83,563
    
    
    $
    146,793
 37




---



##### 



Amortization expense was $65,920, $65,500 and $78,518 for the years ended December 31, 2004,
2003 and 2002, respectively. In October 2001, the Company completed the acquisition of the weekends.com domain name. As
consideration for the purchase, the Company paid the seller $125,000 and agreed to provide a
minimum number of clicks to the sellers other Web sites through advertising placed on the
TravelzooWeb site. The fair value of the advertising services of $89,286 was determined based on
the cash price of similar advertising services and recorded as deferred revenue. The revenue was
recognized as the clicks were delivered. During the years ended December 31, 2002, $3,410 of
revenue related to this arrangement was recognized. The agreement with the seller to provide
advertising services expired on September 30, 2002. As such, $69,427 of advertising was not
delivered and the carrying amounts of the intangible asset and related deferred revenue were
reduced accordingly. Future amortization expense related to intangible assets at December 31, 2004 is as follows: Year ended December 31,2005
    
    $
    62,7052006
    
    
    19,6632007
    
    
    5382008
    
    
    5382009
    
    
    119$
    83,563
 (g) Cash Equivalents and Short-Term Investments Cash equivalents consist of highly liquid investments with remaining maturities of less than
three months on the date of purchase. As of December 31, 2004 and 2003, cash equivalents are
comprised of $25,117,452 and $2,540,395, respectively, held in money market accounts. Short-term investments consist of highly liquid investments with remaining maturities of
greater than three months on date of purchase and less than one year as of December 31, 2004.
Short-term investments as of December 31, 2004 comprise of treasury bonds in the amount of
$10,031,738, which are classified as held-to-maturity and carried at amortized cost, which
approximated the fair value of these investments due to their short maturities. There were no
material unrealized losses as of December 31, 2004. (h) Advertising Costs Advertising production costs are expensed as incurred. Online advertising is expensed as
incurred over the period the advertising is displayed. Advertising costs amounted to $11,770,246,
$6,745,769 and $3,960,464 for the years ended December 31, 2004, 2003, and 2002, respectively.
During the years ended December 31, 2004, 2003 and 2002, $-0-, $429,296 and $546,214, respectively,
of advertising services were purchased from the Companys clients under non-barter arrangements. (i) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets are recognized for deductible temporary differences, along with net
operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax
benefits will be realized. To the extent a deferred tax asset cannot be recognized under the
preceding criteria, valuation allowances must be established. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. (j) Impairment of Long-Lived Assets The Company accounts for long-lived assets in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 144, Impairment of Long-Lived Assets.SFAS No. 144
requires an impairment loss to be recognized on assets to be held and used if the carrying amount
of a long-lived asset group is not recoverable from its undiscounted cash flows. The amount of the
impairment loss is measured as the difference between the carrying amount and the fair value of the
asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. 38




---



##### 



(k) Stock-Based Compensation As allowed under SFAS No. 123, Accounting for Stock-Based Compensation,the Company has
elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees,and related interpretations in accounting for fixed plan stock awards to employees. Had all stock-based compensation awards granted to employees and directors been accounted for
using the fair value based method, net income and net income per share would have been adjusted to
the amounts reported in the following table. Year Ended December 31,2004
    
    
    2003
    
    
    2002Net income as reported
    
    $
    6,037,377
    
    
    $
    2,050,126
    
    
    $
    853,071Add back: Stock-based compensation included in determination of
net income
    
    
    
    
    
    
    
    
    
    
    Deduct: Stock-based compensation determined under the
fair-value based method
    
    
    
    
    
    
    
    
    
    
    (1,908
    )Pro-forma net income as if the fair value based method had
been applied to all awards
    
    $
    6,037,377
    
    
    $
    2,050,126
    
    
    $
    851,163Pro-forma basic net income per share as if the fair value
based method had been applied to all awards
    
    $
    0.36
    
    
    $
    0.11
    
    
    $
    0.04Pro-forma diluted net income per share as if the fair value
based method had been applied to all awards
    
    $
    0.33
    
    
    $
    0.10
    
    
    $
    0.04
 The fair value of options granted was calculated as of the grant date using the Black-Scholes
method with the following assumptions: 2004
    
    
    2003
    
    
    2002Numbers of options granted
    
    
    
    
    
    
    
    
    
    
    33,589Grant date fair value of options
    
    
    
    
    
    
    
    
    
    $
    0.06Grant date fair value of the common stock
    
    
    
    
    
    
    
    
    
    $
    0.56Expected life of the option (in years)
    
    
    
    
    
    
    
    
    
    
    5Annual volatility
    
    
    
    
    
    
    
    
    
    
    51
    %Risk-free interest rates
    
    
    
    
    
    
    
    
    
    
    4.5
    %Dividend Rate
    
    
    
    
    
    
    
    
    
    
    
 (l) 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 qualify for
capitalization have been immaterial for the years ended December 31, 2004, 2003 and 2002. (m) Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R,
Share-Based Payment, which requires the measurement 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 effective
for reporting periods beginning after June 15, 2005. The Company is required to adopt SFAS 123R in
the third quarter of 2005. The pro forma disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. Note 1(k) to the Companys consolidated
financial statements reports the pro forma net income and net income per share amounts, for 2002
through 2004, as if the Company had used a fair-value-based method similar to the methods required
under SFAS 123R to measure compensation expense for employee stock based compensation. Although
there are no unvested stock-based compensation awards as of December 31, 2004, the Company may
grant such instruments in the future. As a result, the adoption of SFAS No. 123R could have a
significant adverse impact on the Companys consolidated statement of operations and net income per
share. In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition,which superseded Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. The primary purpose of SAB 104 was to rescind accounting guidance contained
in SAB 101 related to multiple element revenue arrangements, which was superseded as a 39




---



##### 



result of the issuance of Emerging Issues Task Force Issue No. 00-21 (EITF 00-21), Accounting for
Revenue Arrangements with Multiple Deliverables. SAB 104 also incorporated certain sections of the
SECs Revenue Recognition in Financial Statements  Frequently Asked Questions and Answers
document. The adoption of SAB 104 did not have a material impact on Companys consolidated
financial position, results of operations, or cash flows. 40




---



##### 



(2) Commitments and Contingencies The Company leases office space in Chicago, Miami, Mountain View (California), and New York,
under operating leases which expire on July 31, 2005, December 31, 2005, December 31, 2005 and
December 31, 2005 respectively. The future minimum rental payments under these operating leases as
of December 31, 2004, total $1,082,054 for 2005. Rent expense was $1,132,516, $885,816 and $471,766
for the years ended December 31, 2004, 2003, and 2002, 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, whether based
on a claim that the two-year deadline for exchanging their shares was unenforceable or otherwise.
In addition, one or more jurisdictions, including the Bahamas or the State of Delaware, may assert
rights to unclaimed shares of the Company under escheat statutes. If such escheat claims are
asserted, the Company intends to challenge the applicability of escheat rights, in that, among
other reasons, the identity, residency and eligibility of the holders in question cannot be
determined. There were certain conditions applicable to the issuance of shares to the 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 required to confirm their compliance with these conditions, and 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. If claims are asserted by
persons claiming to be former stockholders of Travelzoo.com Corporation, the Company intends to
assert that their rights to receive their shares expired two years following the effective date of
the merger, as provided in the merger agreement. The Company also expects to take the position, if
escheat or similar claims are asserted in respect of the unissued shares in the future, that it is
not required to issue such shares. Further, even if it were established that unissued shares were
subject to escheat claims, the Company would assert that the claimant must establish that the
original Netsurfer stockholders complied with the conditions to issuance of their shares. The
Company is not able to predict the outcome of any future claims which might be asserted relating to
the unissued shares. If such claims were asserted, and were fully successful, that could result in
the Companys being required to issue up to an additional 4,115,532 shares of common stock for no
additional payment. On October 15, 2004, the Company announced a program under which it will make cash payments to
persons who establish that they were former stockholders of Travelzoo.com Corporation, and who
failed to submit requests for shares in Travelzoo Inc. within the required time period. The
accompanying consolidated financial statements include a charge in general and administrative
expenses of $1.2 million for these cash payments for the year ended December 31, 2004 of which
$525,000 remains as a liability as of December 31, 2004. The liability is based on the number of
actual requests received from former stockholders through the reporting date. The 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. 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. As noted above,
in order to receive payment under the program, a person is required to establish that such person
validly held shares in Travelzoo.com Corporation. Assuming 100% of the requests from 1998 were
valid, former stockholders of Travelzoo.com Corporation holding approximately 4,103,000 shares had
not submitted claims under the program as of December 31, 2004. (3) Allowance for Doubtful Accounts and Accrued Expenses The details of changes to the allowance for doubtful accounts are as follows: Balance at December 31, 2001
    
    $
    55,228Additions  charged to costs and expenses, net
    
    
    14,571Deductions  write-offs
    
    
    (13,874
    )Balance at December 31, 2002
    
    
    55,925Additions  charged to costs and expenses, net
    
    
    15,534Balance at December 31, 2003
    
    
    71,459Additions  charged to costs and expenses, net
    
    
    121,088Deductions  write-offs
    
    
    (65,000
    )Balance at December 31, 2004
    
    $
    127,547
 41




---



##### 



The details of accrued expenses as of December 31, 2004 and 2003 were as follows: December 31,2004
    
    
    2003Liability to former stockholders
    
    $
    525,467
    
    
    $
    Accrued compensation
    
    
    104,592
    
    
    
    81,705Accrued advertising
    
    
    1,460,127
    
    
    
    1,083,493Accrued professional services
    
    
    146,904
    
    
    
    112,295Other accrued expenses
    
    
    227,179
    
    
    
    51,045Total accrued expenses
    
    $
    2,464,269
    
    
    $
    1,328,537
 (4) Income Taxes Income tax expense (benefit) for the years ended December 31, 2004, 2003, and 2002 consisted
of the following current and deferred components categorized by federal and state jurisdictions.
The current provision is generally that portion of income tax expense that is currently payable to
the taxing authorities. The Company makes estimated payments of these amounts during the year. The
deferred tax provision results from changes in the Companys deferred tax assets (future deductible
amounts) and tax liabilities (future taxable amounts), which are presented in the last table of
this footnote. Current
    
    
    Deferred
    
    
    Total2004:Federal
    
    $
    4,116,617
    
    
    $
    (348,285
    )
    
    $
    3,768,332State
    
    
    1,367,429
    
    
    
    (13,316
    )
    
    
    1,354,113$
    5,484,046
    
    
    $
    (361,601
    )
    
    $
    5,122,4452003:Federal
    
    $
    1,342,087
    
    
    $
    (127,594
    )
    
    $
    1,214,493State
    
    
    499,267
    
    
    
    (11,861
    )
    
    
    487,406$
    1,841,354
    
    
    $
    (139,455
    )
    
    $
    1,701,8992002:Federal
    
    $
    453,851
    
    
    $
    (26,836
    )
    
    $
    427,015State
    
    
    151,777
    
    
    
    (6,182
    )
    
    
    145,595$
    605,628
    
    
    $
    (33,018
    )
    
    $
    572,610
 During 2004, an income tax benefit of $1,931,924 was recorded in stockholders equity for the
tax benefit of stock options exercises. Income tax expense for the years ended December 31, 2004, 2003, and 2002, differed from the
amounts computed by applying the U.S. federal statutory tax rate applicable to the Companys level
of pretax income as a result of the following: 2004
    
    
    2003
    
    
    2002Federal tax at statutory rates
    
    $
    3,794,340
    
    
    $
    1,275,097
    
    
    $
    485,714State taxes, net of federal income tax benefit
    
    
    893,714
    
    
    
    321,688
    
    
    
    96,093Non-deductible expenses and other
    
    
    434,391
    
    
    
    105,114
    
    
    
    (9,197
    )Total income tax expense
    
    $
    5,122,445
    
    
    $
    1,701,899
    
    
    $
    572,610
 The tax effects of temporary differences that give rise to significant portions of the
Companys deferred tax assets and liabilities as of December 31, 2004, and 2003, are as follows: 42




---



##### 



2004
    
    
    2003Deferred tax assets:Accruals and allowances
    
    $
    126,597
    
    
    $
    55,519State income taxes
    
    
    250,362
    
    
    
    169,751Intangible assets
    
    
    75,987
    
    
    
    57,674Gross deferred tax assets
    
    $
    452,946
    
    
    $
    282,944Deferred tax liabilities:State income taxes
    
    $
    
    
    
    $
    (9,409
    )Property and equipment
    
    
    (18,814
    )
    
    
    (20,713
    )Gross deferred tax liabilities
    
    
    (18,814
    )
    
    
    (30,122
    )Net deferred tax assets
    
    $
    434,132
    
    
    $
    252,822
 No valuation allowance has been recorded for the deferred tax assets because management
believes that the Company is more likely than not to generate sufficient future taxable income to
realize the related tax benefits. (5) Stockholders Equity As of December 31, 2004 the authorized capital stock of Travelzoo Inc. comprised 40,000,000
shares of $.01 par value common stock and 5,000,000 shares of $.01 par value preferred stock. As of
December 31, 2004, there were 16,233,204 shares outstanding of common stock and no shares of
preferred stock issued or outstanding. During January 2001, the Board of Directors of
Travelzoo.com Corporation proposed that Travelzoo.com Corporation be merged with Travelzoo Inc.
whereby Travelzoo Inc. would be the surviving entity. On March 15, 2002, the stockholders of
Travelzoo.com Corporation approved the merger with Travelzoo Inc. On April 25, 2002, the
certificate of merger was filed in Delaware upon which the merger became effective and
Travelzoo.com Corporation ceased to exist. Each outstanding share of common stock of Travelzoo.com
Corporation was converted into the right to receive one share of common stock of Travelzoo Inc.
Under and subject to the terms of the merger agreement, stockholders were allowed a period of two
years following the effective date of the merger to receive shares of Travelzoo Inc. 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
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 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. As described in note 1(a), as part of the consideration exchanged for the outstanding shares
of Silicon Channels Corporation, the Company also issued to the majority stockholder in January
2001 fully vested and exercisable options to acquire 2,158,349 shares of common stock. The options
have an exercise price of $1.00, are outstanding as of December 31, 2004, and expire in January
2011. In October 2001, the Company granted to each director fully vested and exercisable options to
purchase 30,000 shares of common stock with an exercise price of $2.00 for their services as a
director in 2000 and 2001. A total of 210,000 options were granted. The options expire in October
2011. As of December 31, 2004, 60,000 options remain outstanding. 150,000 of these options were
exercised during the year ended December 31, 2004. In March 2002, Travelzoo Inc. granted to each director options to purchase 5,000 shares of
common stock with an exercise price of $3.00 that vested in connection with their services as a
director in 2002. A total of 35,000 options were granted. In October 2002, 1,411 options were
forfeited upon the resignation of a director. All other options are vested as of December 31, 2004.
The options expire in March 2012. As of December 31, 2004, 10,000 options remain outstanding.
23,589 of these options were exercised during the year ended December 31, 2004. The following table presents the activity related to stock options granted by the Company for
the years ended December 31, 2002, 2003, and 2004. 43




---



##### 



Year Ended December 31,2004
    
    
    2003
    
    
    2002Outstanding at beginning of year
    
    
    2,401,938
    
    
    
    2,401,938
    
    
    
    2,368,349Granted
    
    
    
    
    
    
    
    
    
    
    35,000Exercised
    
    
    (173,589
    )
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    (1,411
    )Outstanding at end of year
    
    
    2,228,349
    
    
    
    2,401,938
    
    
    
    2,401,938Exercisable at end of year
    
    
    2,228,349
    
    
    
    2,401,938
    
    
    
    2,401,938Weighted-average fair value of options granted during the year
    
    
    
    
    
    
    
    
    
    $
    0.06
 The following table summarizes information about stock options outstanding as of December 31,
2004: Shares
    
    
    Weighted-AverageOutstanding and
    
    
    Remaining
    
    
    Weighted-AverageExercise Price
    
    Exercisable
    
    
    Contractual Life
    
    
    Exercise Price$1.00
    
    
    2,158,349
    
    
    7.08 years
    
    $
    1.00$2.00
    
    
    60,000
    
    
    7.83 years
    
    
    2.00$3.00
    
    
    10,000
    
    
    8.25 years
    
    
    3.002,228,349
    
    
    7.11 years
    
    
    1.04
 In October 2003, the Company completed an underwritten secondary offering of 402,500 shares of
common stock sold by the Companys Chief Executive Officer and principal stockholder. The offering
was intended primarily to allow the Company to satisfy the requirement for listing on the NASDAQ
SmallCap Market that the Company have 300 round lot holders. The costs of the offering of $328,000
were paid for by the Company and were included in general and administrative expenses. In October 2004, the Company completed a private placement offering of 750,000 newly-issued
shares of common stock for gross proceeds of $30.0 million to a group of investors. The proceeds
from the offering are intended to be used for general corporate purposes, including new product
development and marketing expenditures, and potential acquisitions or strategic investments. (6) Significant Customer Information and Segment Reporting SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, establishes
standards for the reporting by business enterprises of information about operating segments,
products and 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 assessing performance. As of December 31, 2004, the
Company had one operating segment: online advertising. 44




---



##### 



Significant customer information is as follows: Percent ofPercentage of
    
    
    AccountsTotal Revenue
    
    
    ReceivableYear Ended December 31,
    
    
    December 31,Customer
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003A
    
    
    12
    %
    
    
    *
    
    
    
    *
    
    
    
    19
    %
    
    
    *B
    
    
    *
    
    
    
    10
    %
    
    
    15
    %
    
    
    13
    %
    
    
    14
    %C
    
    
    *
    
    
    
    11
    %
    
    
    14
    %
    
    
    11
    %
    
    
    *
 All of the above customers are located in the United States of America.   *
    
    Less than 10% All sales during the years ended December 31, 2004, 2003, and 2002 were made in the United
States of America. All tangible assets as of December 31, 2004 and 2003 were located in the United
States of America. 45




---



##### 



(7) Unaudited Quarterly Information The following represents unaudited quarterly financial data for 2004 and 2003. Quarters EndedDec 31,
    
    
    Sept 30,
    
    
    June 30,
    
    
    Mar 31,
    
    
    Dec 31,
    
    
    Sept 30,
    
    
    June 30,
    
    
    Mar 31,2004
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2003
    
    
    2003(In thousands)Revenues
    
    $
    10,509
    
    
    $
    9,507
    
    
    $
    7,201
    
    
    $
    6,462
    
    
    $
    5,201
    
    
    $
    4,785
    
    
    $
    4,291
    
    
    $
    3,714Cost of revenues
    
    
    166
    
    
    
    183
    
    
    
    166
    
    
    
    179
    
    
    
    141
    
    
    
    93
    
    
    
    81
    
    
    
    83Gross profit
    
    
    10,343
    
    
    
    9,324
    
    
    
    7,035
    
    
    
    6,283
    
    
    
    5,060
    
    
    
    4,692
    
    
    
    4,210
    
    
    
    3,631Operating expenses:Sales and marketing
    
    
    4,268
    
    
    
    4,339
    
    
    
    3,667
    
    
    
    3,457
    
    
    
    2,821
    
    
    
    2,526
    
    
    
    2,295
    
    
    
    1,924General and administrative.
    
    
    2,348
    
    
    
    1,657
    
    
    
    1,101
    
    
    
    1,115
    
    
    
    1,214
    
    
    
    1,115
    
    
    
    903
    
    
    
    1,057Merger expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    6,616
    
    
    
    5,996
    
    
    
    4,768
    
    
    
    4,572
    
    
    
    4,035
    
    
    
    3,641
    
    
    
    3,198
    
    
    
    2,981Income from operations
    
    
    3,727
    
    
    
    3,328
    
    
    
    2,267
    
    
    
    1711
    
    
    
    1,025
    
    
    
    1,051
    
    
    
    1,012
    
    
    
    650Interest income
    
    
    106
    
    
    
    9
    
    
    
    6
    
    
    
    5
    
    
    
    5
    
    
    
    3
    
    
    
    3
    
    
    
    2Income before income taxes
    
    
    3,833
    
    
    
    3,337
    
    
    
    2,274
    
    
    
    1,716
    
    
    
    1,030
    
    
    
    1,054
    
    
    
    1,015
    
    
    
    652Income tax expense
    
    
    2,104
    
    
    
    1,371
    
    
    
    940
    
    
    
    707
    
    
    
    577
    
    
    
    437
    
    
    
    419
    
    
    
    267Net income
    
    $
    1,729
    
    
    $
    1,966
    
    
    $
    1,334
    
    
    $
    1,009
    
    
    $
    453
    
    
    $
    617
    
    
    $
    596
    
    
    $
    385Basic net income per share
    
    $
    .11
    
    
    $
    .13
    
    
    $
    .08
    
    
    $
    .05
    
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .02Diluted net income per share
    
    $
    .09
    
    
    $
    .11
    
    
    $
    .08
    
    
    $
    .05
    
    
    $
    .02
    
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .02
 The quarterly data presented above for the three months ended September 30, 2004 reflects a
reclassification to general and administrative expenses of $220,000 of expenses previously reported
as other non-operating expenses. 46




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Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 
 Item 9A.Controls and Procedures As of December 31, 2004, we carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys President, Chief Executive
Officer and Chief Financial Officer along with the Companys Controller (Chief Accounting Officer),
of the effectiveness of the design and operation of our disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Companys President, Chief
Executive Officer and Chief Financial Officer along with the Companys Controller (Chief Accounting
Officer) concluded that our disclosure controls and procedures were effective in timely alerting
them to material information relating to the Company (including its consolidated subsidiaries)
required to be included in our periodic SEC filings as of December 31, 2004. During the quarter ended December 31, 2004, there was no change in our internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) that materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting. 
 Item 9B.Other Information Not applicable. 
 PART III 
 Item 10.Directors and Executive Officers of the Registrant Information required by this item is incorporated by reference to the sections entitled
Election of Directors and Section 16(a) Beneficial Ownership Reporting Compliance appearing in
Travelzoos Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of Travelzoos fiscal year ended December 31, 2004. The following table sets forth certain information with respect to the executive officers of
Travelzoo as of March 21, 2005. Name
    
    Age
    
    PositionRalph Bartel, Ph.D.
    
    
    39
    
    
    President, Chief Executive Officer, and Chief Financial OfficerHolger Bartel, Ph.D.
    
    
    38
    
    
    Executive Vice PresidentKelly N. Ford
    
    
    37
    
    
    Vice President of MarketingSteven M. Ledwith
    
    
    47
    
    
    Chief Technology OfficerLisa Su
    
    
    29
    
    
    Controller (Chief Accounting Officer)Shirley Tafoya
    
    
    41
    
    
    Senior Vice President of Sales
 Ralph Bartelfounded Travelzoo in May 1998 and has served as our President, Chief Executive
Officer and Chairman of the Board of Directors since inception. Prior to his founding of Travelzoo,
from 1996 to 1997, Mr. Bartel served as Managing Assistant at Gruner + Jahr AG, the magazine
division of Bertelsmann AG. Mr. Bartel holds a Ph.D. in Communications from the University of
Mainz, Germany, a Ph.D. in Economics from the University of St. Gallen, Switzerland, an MBA in
Finance and Accounting from the University of St. Gallen, Switzerland, and a Masters degree in
Journalism from the University of Eichstaett, Germany. Holger Bartelhas served as Executive Vice President since September 1999. From 1995 to 1998,
Mr. Bartel worked as an Engagement Manager at McKinsey & Company in Los Angeles. From 1992 to 1994,
Mr. Bartel was a research fellow at Harvard Business School. Mr. Bartel holds an MBA in Finance and
Accounting and a Ph.D. in Economics from the University of St. Gallen, Switzerland. He is the
brother of Ralph Bartel. 47




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##### 



Kelly N. Fordhas served as Vice President of Marketing since December 2002. From February
2001 to December 2002, Mr. Ford worked as Director of Media Strategy and Development at America
Online Inc. From January 2000 to November 2000, Mr. Ford worked as Vice President of Marketing at
ISalvage.com, Inc. From 1992 to 2000, Mr. Ford worked at Campbell Soup Company as Marketing
Director. Mr. Ford holds a bachelors degree in Electrical Engineering with Computer Science
Specialty from Stanford University and an MBA from INSEAD. Steven M. Ledwithhas served as our Chief Technology Officer since January 2000. From January
1998 to January 2000, Mr. Ledwith worked as Senior Mechanical Engineer at Radix Technologies, Inc.
Mr. Ledwith holds a bachelors degree in Thermomechanical Engineering from University of Illinois
at Chicago Circle. Lisa Suhas served as Controller (Chief Accounting Officer) since October 1, 2000. From April
1999 to September 2000, Ms. Su was a Treasury Accountant for Webvan Group, Inc. Ms. Su holds a
bachelors degree in economics/accounting from Claremont McKenna College and an MBA in Finance from
California State University, Hayward. Shirley Tafoyahas served as Senior Vice President of Sales since May 2001. From August 1999
to March 2001, Ms. Tafoya worked as Director of Western Sales at Walt Disney Internet Group. From
1998 to 1999, Ms. Tafoya worked as Sales Manager at IDG/ International Data Group. From 1994 to
1998, Ms. Tafoya worked as Director, Global Accounts, at CMP Media. Ms. Tafoya holds a bachelors
degree in Business Administration from Notre Dame de Namur University. 
 Item 11.Executive Compensation Information regarding executive compensation is incorporated by reference to the information
set forth under Executive Compensation in our Definitive Proxy Statement for the Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the end of Travelzoos fiscal year
ended December 31, 2004. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is
incorporated by reference to the information set forth under the caption Stock Ownership by
Directors and Executive Officers and Security Ownership of Certain Beneficial Owners in
Travelzoos Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of Travelzoos fiscal year ended December 31, 2004. 
 Item 13.Certain Relationships and Related Transactions Information regarding certain relationships and related transactions is incorporated by
reference to the information set forth in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of Travelzoos fiscal year
ended December 31, 2004. 
 Item 14.Principal Accountant Fees and Services Information regarding principal auditor fees and services is set forth under Principal
Accountant Fees and Services in the Proxy Statement relating to our 2005 Annual Meeting of
Stockholders and is incorporated herein by reference. 
 PART IV 
 Item 15.Exhibits and Financial Statement Schedules The following documents are filed as part of this report: (1) Our Consolidated Financial Statements are included in Part II, Item 8: Report of Independent Registered Public Accounting Firm 48




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##### 



Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (2) Supplementary Consolidated Financial Statement Schedules: All schedules are omitted because of the absence of conditions under which they are required
or because the required information is included in the consolidated financial statements or notes
thereto. (3) Exhibits: See attached Exhibit Index. 49




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.(Registrant)Date: March 30, 2005By: /s/ Ralph BartelRalph BartelChairman of the Board,Chief Executive Officer, andChief Financial Officer
 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Ralph Bartel as his or her attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to sign any and all amendments to this Form
10-K, with all exhibits and any and all documents required to be filed with respect thereto, with
the Securities and Exchange Commission or any regulatory authority, granting unto such
attorney-in-fact and agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in order to effectuate the same as fully to all intents and
purposes as he or she might or could do if personally present, hereby ratifying and confirming all
that such attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to
be done. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated. Signature
    
    Title
    
    Date/s/ RALPH BARTEL
    
    Chairman of the Board, Chief
    
    March 30, 2005Executive Officer, and ChiefRalph Bartel
    
    Financial Officer/s/ LISA SU
    
    Controller (Chief Accounting
    
    March 30, 2005Officer)Lisa Su/s/ DAVID J. EHRLICHDirector
    
    March 31, 2005David J. Ehrlich/s/ SUZANNA MAKDirector
    
    March 29, 2005Suzanna Mak/s/ DONOVAN NEALE-MAYDirector
    
    March 31, 2005Donovan Neale-May/s/ KELLY M. URSODirector
    
    March 29, 2005Kelly M. Urso
 50




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##### 



EXHIBIT INDEX ExhibitNumber
    
    
    
    Description3.1
    
    
    

Certificate of Incorporation of Travelzoo Inc. (Incorporated
by reference to our Pre-Effective Amendment No. 6 to our
Registration Statement on Form S-4 (File No. 333-55026),
filed February 14, 2002)3.2
    
    
    
    By-laws of Travelzoo Inc. (Incorporated by reference to our
Pre-Effective Amendment No. 6 to our Registration Statement
on Form S-4 (File No. 333-55026), filed February 14, 2002)10.1
    
    
    
    Employment Agreement, dated as of April 1, 2000, between
Silicon Channels Corporation and Ralph Bartel (Incorporated by
reference to our Pre-Effective Amendment No. 6 to our
Registration Statement on Form S-4 (File No. 333-55026),
filed February 14, 2002)*10.2
    
    
    
    Stock Option Agreement dated January 22, 2001, between Ralph
Bartel and Travelzoo Inc. (Incorporated by reference to our
Pre-Effective Amendment No. 6 to our Registration Statement
on Form S-4 (File No. 333-55026), filed February 14, 2002)*10.5
    
    
    
    Form of Director and Officer Indemnification Agreement
(Incorporated by reference to our Pre-Effective Amendment
No. 6 to our Registration Statement on Form S-4 (File No.
333-55026), filed February 14, 2002)10.6
    
    
    
    Agreement with Click Here, Inc. dated January 28, 200510.7
    
    
    
    Agreement with Click Here, Inc. dated November 11, 200410.8
    
    
    
    Agreement with Click Here, Inc. dated July 1, 200410.9
    
    
    
    Agreement with Click Here, Inc. dated January 21, 200521.1
    
    
    
    Subsidiaries of Travelzoo Inc. **23.1
    
    
    
    Consent of Independent Registered Public Accounting Firm**24.1
    
    
    
    Power of Attorney (included on signature page)31.1
    
    
    
    Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a), under the Securities Exchange Act
of 1934, as amended**32.1
    
    
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002**
   *
    
    This exhibit is a management contract or a compensatory plan or arrangement.**
    
    Filed herewith. 51