Travelzoo Inc. Form 10K - April 11, 2002
As filed with the Securities and Exchange Commission on April 11, 2002

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)
[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Financial Statements Only for the fiscal year ended December 31, 2001
or
[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________
Commission file number:   333-55026
TRAVELZOO INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  36-441572
(I.R.S. Employer
Identification No.)

800 West El Camino Real
Suite 180
Mountain View, California 94040
(650) 943-2400

(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

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 [   ] No [X]

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.     [X]

At April 1, 2002, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was approximately $_________*.

*As of December 31, 2001, all the voting and non-voting common stock of the registrant was held by affiliates. Upon consummation of a merger approved on March 15, 2002, Travelzoo.com Corporation will be merged with and into the registrant and the holders of shares of Travelzoo.com Corporation who elect to participate in the merger will become stockholders of the registrant.

At April 9, 2002, 19,425,147 shares of our common stock were outstanding.

Documents Incorporated by Reference:         None

        Pursuant to Securities Exchange Act Rule 15d-2, the registrant hereby files this Special Financial Report containing the audited financial statements of Travelzoo.com Corporation and Affiliate for the fiscal year ended December 31, 2001.



TRAVELZOO.COM CORPORATION
AND AFFILIATE

INDEX TO COMBINED FINANCIAL STATEMENTS

 

 

Page

 

Independent Auditors' Report

F-2

 

Combined Balance Sheets

F-3

 

Combined Statements of Operations

F-4

 

Combined Statements of Stockholders' Equity

F-5

 

Combined Statements of Cash Flows

F-6

 

Notes to Combined Financial Statements

F-7





F-1

Independent Auditors’ Report

The Board of Directors and Stockholders
Travelzoo.com Corporation:

We have audited the accompanying combined balance sheets of Travelzoo.com Corporation and affiliate (collectively, the Companies) as of December 31, 2001 and 2000, and the related combined statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These combined financial statements are the responsibility of the Companies’ management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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.

The accompanying combined financial statements include the accounts of Travelzoo.com Corporation and affiliate, as defined in Note 1(a). The combined financial statements present the combined accounts of entities majority-owned by a principal stockholder engaged in the operation of the www.Travelzoo.com website.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Travelzoo.com Corporation and affiliate as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Mountain View, California
January 25, 2002, except as to Note 10,
which is as of March 15, 2002



F-2

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Combined Balance Sheets

    December 31,
    2001
  2000
Assets        
Current assets:        
     Cash $ 609,919   45,586
     Accounts receivable, less allowance for doubtful accounts
        of $55,228 and $145,144 as of December 31, 2001 and
        December 31, 2000, respectively
  892,337   783,960
Deposits   32,508   110,752
Prepaid expenses and other current assets   18,179   110,998
Deferred income taxes   65,051
  111,113
                Total current assets  

1,617,994

 

1,162,409

Deferred income taxes   15,298   —  
Property and equipment, net   137,200   194,315
Intangible assets, net  

360,238

 

196,667

                Total assets $ 2,130,730
  1,553,391
Liabilities and Stockholders' Equity        
Current liabilities:        
     Accounts payable $ 175,351   176,892
     Accrued expenses   284,318   223,263
     Deferred revenue   86,721   2,500
     Income tax payable   646,457   523,804
     Payable to principal stockholder   —  

  50,216

                Total current liabilities  

1,192,847

 

976,675

Deferred income taxes   —  

  2,568

                Total liabilities  

1,192,847

 

979,243

Commitments and contingency        
Stockholders' equity:        
     Common stock   78,173   78,173
     Retained earnings

 

859,710

  495,975

                Total stockholders' equity  

937,883

 

574,148

                Total liabilities and stockholders' equity $

2,130,730

 

1,553,391

See accompanying notes to combined financial statements        


F-3

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Combined Statements of Operations

    Years ended
December 31,

    2001
  2000
  1999
Revenues:            
     Advertising $ 6,141,456   3,852,066   893,244
     Commissions   6,482
  97,451
  61,015
                Total revenues   6,147,938   3,949,517   954,259
Cost of revenues   304,081
  282,195
  132,803
                Gross profit   5,843,857
  3,667,322
  821,456
Operating expenses:            
     Sales and marketing   3,274,747   1,484,495   350,720
     General and administrative   1,354,088   1,201,982   326,686
     Merger expenses   332,721
  231,303
  —  
                Total operating expenses   4,961,556
  2,917,780
  677,406
Income from operations   882,301   749,542   144,050
Interest income   2,702
  —  
  —  
Income before income taxes   885,003   749,542   144,050
Income taxes   521,268
  387,856
  38,646
Net income

$

363,735

 

361,686

 

105,404

Pro forma net income per share (Note 1(b))(unaudited):            
     Pro forma basic and diluted net income
     per share
$ .02
  .02
  .01
     Shares used in computing pro forma basic
     net income per share
  19,425,147
  19,372,791
  19,323,064
     Shares used in computing pro forma
     diluted net income per share


 

19,425,147

 

19,466,810

 

19,355,147

See accompanying notes to combined financial statements            


F-4

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Combined Statements of Stockholders' Equity
Years Ended December 31, 2001, 2000 and 1999

  Common stock
       
  Travelzoo.com
Corporation

  Travelzoo Inc.
Retained   Total
Stockholders'
  Shares
  Amount
  Shares
  Amount
  Earnings
  equity
Balances, December 31, 1998 11,155,874 $ 10,000   8,129,273 $ 50,000   28,885   88,885
Net income —  
  —  
  —  
  —  
  105,404
  105,404
Balances, December 31, 1999 11,155,874   10,000   8,129,273   50,000   134,289   194,289
Issuance of common stock upon
   exercise of options
70,000   3,500   —     —     —     3,500
Stock-based compensation
   expense
—     9,221   —     —     —     9,221
Issuance of common stock to
   directors
70,000   5,452   —     —     —     5,452
Net income —  
  —  
  —  
  —  
  361,686
  361,686
Balances, December 31, 2000 11,295,874   28,173   8,129,273   50,000   495,975   574,148
Issuance of common stock to
   Travelzoo.com Corporation
—     —     11,295,874   —     —     —  
Net income —  
  —  
  —  
  —  
  363,735
  363,735
Balances, December 31, 2001

11,295,874

$

28,173

 

19,425,147

$

50,000

 

859,710

 

937,883

See accompanying notes to combined financial statements


F-5

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Combined Statements of Cash Flows

    Years ended
December 31,

    2001
  2000
  1999
Cash flows from operating activities:            
     Net income $ 363,735    361,686    105,404 
     Adjustments to reconcile net income to net cash            
        provided by operating activities:            
        Depreciation and amortization   138,628    54,914    5,795 
        Deferred income taxes   28,196    (93,381)   (10,870)
        Provision for losses on accounts receivable   (88,507)   135,144    10,000 
        Loss on disposal of property and equipment   567    4,212    —  
        Stock-based compensation expense   —     9,221    —  
        Non-cash revenues other than barter   (16,449)   —     —  
        Changes in operating assets and
          liabilities:
           
               Accounts receivable   (19,870)   (591,562)   (280,806)
               Deposits   78,244    (102,566)   (5,055)
               Prepaid expenses and other current assets   92,819    (92,765)   (10,534)
               Accounts payable   (1,541)   113,086    55,330 
               Accrued expenses   61,055    134,806    93,909 
               Deferred revenue   11,384    (3,300)   5,800 
               Income tax payable   122,653    479,881    34,466 
               Payable to principal stockholder   (216)
  (831)
  1,047 
                    Net cash (used in) provided by operating
                     activities
 
770,698 

 
408,545 

 
4,486 

Cash flows from investing activities:            
     Purchase of property and equipment   (31,365)   (227,589)   (17,601)
     Purchases of intangible assets   (125,000)   (200,000)   —  
     Loan repayment by principal stockholder   —  
  —  
  12,000 
                    Net cash used in investing activities   (156,365)
  (427,589)
  (5,601)
Cash flows from financing activities:            
     Proceeds from issuance of common stock   —     3,500    —  
     Loans from principal stockholder   —     50,000    —  
               Repayment of loans from principal
               stockholder
 
(50,000)

 
—  

 
—  

                    Cash provided by (used in) financing
                    activities
 
(50,000)

 
53,500 

 
—  

Net increase (decrease) in cash   564,333    34,456    (1,115)
Cash at beginning of year   45,586 
  11,130 
  12,245 
Cash at end of year $ 609,919 
  45,586 
  11,130 
Supplemental disclosure of cash flow information:            
     Cash paid for income taxes $ 385,102    1,356    15,050 
     Non-cash investing activity - intangible asset
     acquired for future advertising services
 
89,286 

 
—  

 
—  

See accompanying notes to combined financial statements

F-6

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



(1)     Summary of Significant Accounting Policies

(a) Description of Business and Basis of Presentation

  The accompanying combined financial statements include the accounts of Travelzoo.com Corporation and its majority-owned subsidiary, Travelzoo Inc., consolidated with its subsidiaries (collectively, the Companies). The combined financial statements present the Companies on a combined basis because of their common ownership by Mr. Ralph Bartel (the Principal Stockholder), and because these entities combined represent the historical operations of the www.Travelzoo.com website business. Travelzoo.com was incorporated in the Bahamas on May 21, 1998. Travelzoo Inc. was incorporated in Delaware as a wholly- owned subsidiary of Travelzoo.com Corporation on January 18, 2001. The Companies operate the www.Travelzoo.com website, which provides an online advertising medium for the travel industry. All intercompany transactions have been eliminated in combination.

  Prior to January 22, 2001, Travelzoo.com Corporation operated the website through service agreements with Silicon Channels Corporation. Silicon Channels Corporation was also founded by the Principal Stockholder and incorporated in California on September 28, 1998. Under the latest service agreement dated January 2, 1999 and in effect for the period from January 2, 1999 to January 22, 2001, Silicon Channels Corporation operated the website, produced and distributed a newsletter and sold advertising in return for 50% of the income before income taxes generated from the website. Prior to January 2, 1999, Silicon Channels Corporation received 5% of the net income generated by the website under a service agreement with Travelzoo.com Corporation dated October 10, 1998. The January 2, 1999 service agreement was terminated on January 22, 2001 in connection with the merger of Silicon Channels Corporation and Travelzoo Inc. described below.

  On January 22, 2001, the Principal Stockholder contributed all the outstanding shares of common stock of Silicon Channels Corporation to Travelzoo Inc. in exchange for 8,129,273 shares of common stock of Travelzoo Inc. and options to acquire 2,158,349 shares of common stock of Travelzoo Inc. at $1.00 per share. Silicon Channels Corporation became a wholly-owned subsidiary of Travelzoo Inc. as a result of the contribution. The transaction 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. have been restated to include the combined results of operations, financial position and cash flows of Silicon Channels Corporation.

  As of December 31, 2001, the Principal Stockholder owned approximately 52% of the outstanding common stock of Travelzoo.com Corporation. The 48% of Travelzoo.com Corporation not owned by the Principal Stockholder was owned by approximately 700,000 individual stockholders. As of December 31, 2001, Travelzoo.com Corporation owned 58% of the outstanding common stock of Travelzoo Inc. and the Principal Stockholder owned the remaining 42%.



F-7

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



  During January 2001, the Board of Directors of Travelzoo.com Corporation proposed that Travelzoo.com Corporation be merged with Travelzoo Inc. whereby Travelzoo Inc. will be the surviving entity. Each share of Travelzoo.com Corporation outstanding at the consummation of the proposed merger will be exchanged for one share of Travelzoo Inc. The proposed merger will be consummated upon approval of the holders of a majority of the outstanding common stock of Travelzoo.com Corporation and the registration of the common stock of Travelzoo Inc. with the U.S. Securities and Exchange Commission. The proposed merger will be 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. will be carried forward to the combined company at their historical costs. In addition, all prior period financial statements of Travelzoo Inc. will be restated to include the combined results of operations, financial position and cash flows of Travelzoo.com Corporation.

  The following unaudited pro forma financial information for the three-year period ended December 31, 2001 is presented to give effect to the proposed merger between Travelzoo.com Corporation and Travelzoo Inc. on the accompanying historical combined statement of stockholders’ equity as if the merger had been consummated on January 1, 1999 using the proposed exchange ratio. The pro forma presentation assumes all stockholders elect to exchange their shares.

  Common Stock
  Additional       Total
  Travelzoo Inc.
  Paid-in   Retained   stockholders'
  Shares
  Amount
  capital
earnings
Equity
Balances, December 31, 1998 19,285,147 $ 192,851 (132,851) 28,885 88,885
Net income —  
  —  
  —  
  105,404
  105,404
Balances, December 31, 1999 19,285,147   192,851   (132,851)   134,289   194,289
Issuance of common stock upon
   exercise of options
70,000   700   2,800    —     3,500
Stock-based compensation expense —     —     9,221    —     9,221
Issuance of common stock to
   directors
70,000   700   4,752   —     5,452
Net income —  
  —  
  —  
  361,686
  361,686
Balances, December 31, 2000 19,425,147   194,251   (116,078)   495,975   574,148
Net income —  
  —  
  —  
  363,735
  363,735
Balances, December 31, 2001 19,425,147
$ 194,251
  (116,078)
  859,710
  937,883

(b) Pro Forma Net Income Per Share (Unaudited)

  Pro forma net income per share gives effect to the proposed merger between Travelzoo.com Corporation and Travelzoo Inc. described in Note 1(a) as if the merger had been consummated on January 1, 1999 using the proposed exchange ratio. The pro forma presentation assumes all stockholders elect to exchange their shares.

  Pro forma basic net income per share is computed using the weighted-average number of outstanding shares of common stock and shares vested under the board of directors’ share program (see Note 5). Pro forma diluted net income per share is computed using the weighted-average number of outstanding shares of common stock described above and dilutive potential common stock from options to purchase common stock using the treasury method and unvested shares issuable under the directors’ program. A reconciliation of the weighted-average basic number of shares and the weighted-average diluted number of shares used in the calculations follows:


F-8

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



      Years ended
December 31,

      2001
  2000
  1999
  Weighted-average basic number of shares   19,425,147   19,372,791   19,323,064
  Effect of directors shares vesting   —     —     32,083
  Effect of employee stock options   —  
  94,019
  —  
  Weighted-average diluted number of shares   19,425,147
  19,466,810
  19,355,147

  For all periods presented, 2,158,349 options to purchase shares of common stock at $1.00 per share were not included in the calculation of pro forma diluted income per share because their effect was antidilutive. In 2001, options to purchase 210,000 shares of common stock at an exercise price of $2.00 also were excluded for the same reason.

(c) Use of Estimates

  Management of the Companies have 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.

(d) Property and Equipment

  Property and equipment is stated at cost, net of accumulated depreciation. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets of three years.

(e) Intangible Assets

  In December 2000, the Companies purchased the Internet domain name Weekend.com for cash of $200,000. In October 2001, the Companies purchased the Internet domain name Weekends.com for $125,000 in cash and $89,286 in future advertising services. These intangible assets are stated at cost, net of accumulated amortization and are being amortized on a straight-line basis over the estimated useful life of five years. Amortization expense of $3,333 and $50,715 was recorded in 2000 and 2001, respectively.

  On January 22, 2001, the Principal Stockholder transferred ownership of the Travelzoo trademark to the Companies. The transfer was recorded at the historical cost basis of the Principal Stockholder of $-0-.

(f) Revenue Recognition

  Revenue consists of advertising and commissions from e-commerce transactions. Advertising revenues are derived principally from the sale of display advertising, classified advertising, and banner advertising on the www.Travelzoo.com website. Commissions are generated from bookings of travel services through customer advertising on the www.Travelzoo.com website.


F-9

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



  Advertising revenues are recognized in the period in which the advertisement is displayed, provided that evidence of an arrangement exists, the fees are fixed and determinable, no significant obligations remain at the end of the period, and collection of the resulting receivable is reasonably assured. If advertising is displayed within one month, revenues are recognized at the end of the display period. If advertising is displayed over two or more months, revenues are recognized ratably over the period. To the extent that the minimum guaranteed impressions are not met during the contract period, the Companies defer recognition of the corresponding revenues until the guaranteed impressions are achieved. Fees for banner advertising are recognized based on the number of impressions displayed or clickthroughs delivered during the period.

  The Companies have outsourced part of their advertising sales and production activities to DoubleClick, Inc. (DoubleClick). Under the terms of the agreement with DoubleClick, the Companies receive a portion of the revenue received by DoubleClick from customers for the display of advertising on the www.Travelzoo.com website. The Companies record these revenues on a net basis. The gross revenue received by DoubleClick from advertising on the www.Travelzoo.com website was $600,454, $430,130, and $137,159 for the years ended December 31, 2001, 2000, and 1999, respectively. The Companies’ share of this income, which has been recorded as revenue, was $332,736, $231,885, and $66,691 for the years ended December 31, 2001, 2000, and 1999, respectively.

  Commissions are recorded as the net amount received by the Companies and are recognized in the period in which the commissions earned are reported to the Companies by the e-commerce partner.

  Revenues from advertising barter transactions are recognized in the period during which the advertisements are displayed on the www.Travelzoo.com website. Expenses from barter transactions are recognized in the period during which the advertisements are displayed on the barter partner’s website. Barter transactions are recorded at the fair value of the advertising provided based on cash received by the Companies for transactions involving similar types of advertising during the six months preceding the transaction in accordance with Emerging Issues Task Force (EITF) Issue No. 99-17, Accounting for Advertising Barter Transactions. The amounts included in advertising revenues and sales and marketing expenses for barter transactions were $-0-, $37,000, and $83,000 for the years ended December 31, 2001, 2000, and 1999, respectively.

  In October 2001, the Companies completed the acquisition of the Weekends.com domain name. As consideration for the purchase, the Companies paid the seller $125,000 and agreed to provide a minimum number of clicks to the seller’s other websites through advertising placed on the Travelzoo website. 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 is being recognized as the clicks are delivered. During 2001, $16,449 of revenue related to this arrangement was recognized.


F-10

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999




(g) Advertising Costs

  Advertising costs (including barter advertising) amounted to $2,264,488, $1,161,800, and $169,374 for the years ended December 31, 2001, 2000, and 1999, respectively.

(h) 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 and operating loss and tax credit carryforwards. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

  The Companies account for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(j) Stock-Based Compensation

  As allowed under SFAS No. 123, Accounting for Stock-Based Compensation, the Companies have 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. Deferred stock-based compensation for options granted to employees is determined as the excess of the fair value of the Companies’ common stock over the exercise price on the date options were granted. Stock-based compensation is amortized over the vesting period of the individual award.

(k) Website Development Costs

  Prior to June 30, 2000, website development costs were expensed as incurred. The Companies adopted EITF Issue No. 00-02, Accounting for Website Development Costs, on June 30, 2000. The adoption of EITF Issue No. 00-02 did not have a significant impact on the combined financial statements. Subsequent to the adoption of EITF No. 00-02, no website development costs that qualify for capitalization have been incurred.


F-11

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



(l) Recent Accounting Pronouncements

  In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 137, Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133, established accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Companies adopted SFAS No. 133 on January 1, 2001. The adoption did not have an impact on the combined financial statements.

  In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 provides guidance on the accounting for a business combination at the date a business combination is completed. The statement requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. The Companies adopted SFAS No. 141 on July 1, 2001. The adoption did not have an effect on the combined financial statements. SFAS No. 142 provides guidance on how to account for goodwill and intangible assets after an acquisition is completed. The most substantive change is that goodwill will no longer be amortized but instead will be tested for impairment periodically. This statement will apply to existing goodwill and intangible assets, beginning with fiscal years starting after December 15, 2001. The Companies will adopt SFAS No. 142 as of the beginning of fiscal 2002 and the effect of adoption will not have a material impact on the combined financial statements since there is no recorded goodwill.

  In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting for obligations associated with retirement of tangible long-lived assets and the associated retirement costs. The Companies will adopt SFAS No. 143 at the beginning of 2002, and the adoption will not have a material impact on the combined financial statements.

  In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Impairment of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and the fair value of the asset. SFAS No. 144 removes goodwill from its scope. SFAS No. 144 is applicable to the Companies' financial statements beginning in 2002. The adoption of this statement will not have a material impact on the combined financial statements.


F-12

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



(2)      Allowance for Doubtful Accounts

        The details of changes to the Companies’ allowance for doubtful accounts are as follows:

  Balance at December 31, 1998   —    
       Additions - charged to costs and expenses $ 10,000  
       Deductions   —  
 
  Balance at December 31, 1999   10,000   
       Additions - charged to costs and expenses   135,144   
       Deductions   —  
 
  Balance at December 31, 2000   145,144 
 
       Additions - credited to costs and expenses, net   (88,507)  
       Deductions - write-offs   (1,409)
 
  Balance at December 31, 2001 $ 55,228 
 

(3)     Property and Equipment

        Property and equipment consisted of the following:

      December 31,
 
      2001
  2000
 
  Computer hardware and software $ 182,461   182,461  
  Office equipment   95,063
  65,407
 
      277,524   247,868  
  Less accumulated depreciation   140,324
  53,553
 
  Total   137,200
  194,315
 

(4)     Payable to Principal Stockholder

  Payable to principal stockholder includes unsecured loans payable of $50,000 and expense reimbursements payable of $216 as of December 31, 2000. The loans did not bear interest and were repaid on March 31, 2001.

(5)     Common Stock

(a) Travelzoo.com Corporation
  As of December 31, 2001 and 2000, the authorized common stock of Travelzoo.com Corporation comprised 2,000,000 shares of series $.01 par value common stock and 20,000,000 shares of series $-0- par value common stock. Issued and outstanding common stock comprises 2,000,000 shares of series $0.01 par value common stock and 9,295,874 shares of series $-0- par value common stock as of December 31, 2000 and 2001. All series of common stock in Travelzoo.com Corporation have identical rights.

  On September 2, 1998, Travelzoo.com Corporation issued 2,000,000 shares of series $0.01 par value and 4,000,000 shares of series $-0- par value common stock to the Principal Stockholder for cash proceeds of $10,000. On the same date, Travelzoo.com Corporation also issued for $-0- cash consideration, 5,155,874 shares of series $-0- par value common stock to approximately 700,000 individuals who had applied for shares during the period from May to July 1998 via the www.Travelzoo.com website.

F-13

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



  On February 20, 1999, a stock program for directors was adopted providing that each director of Travelzoo.com Corporation will receive 10,000 shares of Travelzoo.com Corporation’s common stock as compensation for their services provided in 1999, and that if a director vacated his office prior to year-end, the number of shares of common stock earned will be prorated for the period served. Under this program, the directors earned a total of 70,000 shares of common stock for services provided in 1999. Compensation expense based on the fair value of the stock on the date of grant of $5,452 was accrued in the combined statement of operations for the year ended December 31, 1999, and the shares of common stock were issued in December 2000.

  In March 2000, the Board of Directors of Travelzoo.com Corporation authorized a 2-for-1 stock split of Travelzoo.com Corporation’s common stock. This stock split was effective as of December 1, 2000. All affected share amounts in the accompanying combined financial statements and notes have been presented to reflect retroactively this stock split.

  During 2000, Travelzoo.com Corporation granted to an employee of Silicon Channels Corporation options to purchase 334,676 shares of common stock with an exercise price of $0.05 and a two-year vesting period. In September 2000, upon the termination of the employee, 70,000 options were fully vested under the original terms of the grant and the remaining unvested options were forfeited. The Company recorded stock-based compensation in 2000 of $9,221 based on the intrinsic value of the options that vested. The 70,000 vested options were exercised in September 2000. There are no outstanding stock options as of December 31, 2001.

(b) Travelzoo Inc.

  As of December 31, 2001, 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, 2001, 19,425,147 shares of common stock and no shares of preferred stock were issued and outstanding. In January 2001, Travelzoo Inc. issued 11,295,874 shares of common stock to Travelzoo.com Corporation and 8,129,273 shares of common stock to the Principal Stockholder for all outstanding shares of common stock of Silicon Channels Corporation. The shares of common stock of Silicon Channels Corporation were originally issued to the Principal Stockholder in 1998 for cash proceeds of $50,000.

  As part of the consideration issued for the outstanding shares of Silicon Channels Corporation, Travelzoo Inc. also issued to the Principal 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 and expire in January 2011.

  In October 2001, Travelzoo Inc. 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.


F-14

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



(6)      Income Taxes

        Income tax expense (benefit) for the years ended December 31, 2001, 2000, and 1999 consisted of the following:

    Current
Deferred
Total
 
  2001:            
       Federal 384,153   21,846   405,999  
       State 108,669   6,350   115,019  
       Foreign 250
  —  
  250
 
  $ 493,072
  28,196
  521,268
 

  2000:            
       Federal 380,265   (79,706)   300,559  
       State 100,722   (13,675)   87,047  
       Foreign 250
  —  
  250
 
  $ 481,237
  (93,381)
  387,856
 

  1999:            
       Federal 35,013   (9,473)   25,540  
       State 14,253   (1,397)   12,856  
       Foreign 250
  —  
  250
 
  $ 49,516
  (10,870)
  38,646
 

  Income tax expense for the years ended December 31, 2001, 2000, and 1999, differed from the amounts computed by applying the U.S. federal statutory tax rate applicable to the Companies' level of pretax income as a result of the following:
      2001
2000
1999
 
  Federal tax at statutory rates $ 307,423   254,844   26,195  
  State taxes, net of federal income tax benefit   99,146   57,451   10,713  
  Foreign taxes   250
  250
  250
 
  Non-deductible merger expenses and other   114,449
  75,311
  1,488
 
  Total income tax expense $ 521,268
  387,856
  38,646
 


F-15

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



  The types of temporary differences that give rise to significant portions of the Companies' deferred tax assets and liabilities as of December 31, 2001, and 2000, are as follows:

      2001
  2000
 
  Deferred tax assets:          
       Accruals and allowances   28,104   80,018  
       State income taxes   36,948   31,095  
       Capitalized start-up costs   1,531   2,115  
       Property and equipment   3,968   —    
       Intangible assets   13,073
  —  
 
           Gross deferred tax assets   83,624   113,228  
             
  Deferred tax liabilities:          
       State income taxes   (3,275)   —    
       Property and equipment   —  
  (4,683)
 
            Gross deferred tax liabilities   (3,275)
  (4,683)
 
  Net deferred tax assets   80,349
  108,545
 

  No valuation allowance has been recorded for the deferred tax assets because management believes that the Companies are more likely than not to generate sufficient future taxable income to realize the related tax benefits.

(7)      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.

  The Companies’ chief operating decision-maker, as defined in SFAS No. 131, is considered to be the Principal Stockholder. The Principal Stockholder reviews separate financial information for Travelzoo.com Corporation and Travelzoo Inc. Reportable segment information for each company is as follows:


F-16

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



  Year ended December 31, 1999
    Travelzoo.com
Corporation

  Travelzoo Inc.
  Eliminations
  Combined
Revenue from external customers $ —     954,259   —     954,259
Revenue from income sharing
   arrangements
 
89,430

 
—  

 
(89,430)

 
—  

Total revenues $ 89,430
  954,259
  (89,430)
  954,259
Segment income before income
   taxes

$

78,969

 
65,081

 
—  

 
144,050

Depreciation
$
—  
  5,795
  —  
  5,795
Total assets as of
   December 31, 1999

$
119,647
  397,253
  (112,104)
  404,796

  Year ended December 31, 2000
    Travelzoo.com
Corporation

  Travelzoo Inc.
  Eliminations
  Combined
Revenue from external customers $ —     3,949,517   —     3,949,517
Revenue from income sharing
   arrangements
 
434,468

 
—  

 
(434,468)

 
—  

Total revenues   434,468
  3,949,517
  (434,468)
  3,949,517
Segment income before income
   taxes

$

218,582

 
530,960

 
—  

 
749,542

Depreciation
$
—  
  51,581
  —  
  51,581
Total assets as of
   December 31, 2000

$
599,715
  1,766,397
  (810,606)
  1,555,506

  Year ended December 31, 2001
    Travelzoo.com
Corporation

  Travelzoo Inc.
  Eliminations
  Combined
Revenue from external customers $ —     6,147,938   —     6,147,938
Revenue from income sharing
   arrangements
 
59,333

 
—  

 
(59,333)

 
—  

Total revenues $ 59,333
  6,147,938
  (59,333)
  6,147,938
Segment income before income
   taxes

$

36,498

 
848,505

 
—  

 
885,003

Depreciation
$
—  
  87,913
  —  
  87,913
Total assets as of
   December 31, 2001

$
656,456
  2,563,055
  (1,085,506)
  2,134,005


F-17

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



  To date, substantially all assets and customers of the Companies have been located in the United States of America.

  Significant customer information is as follows:

    Percentage of Total Revenue
  Percentage of Accounts
Receivable

 
    Years ended
December 31,

  December 31,
 
  Customer 1999 2000 2001   1999 2000 2001  
  A 7% 6% 5%   10% 16% 3%  
  B 10% 3% 5%   4% 9%  
  C 23% 22% 15%   39% 16% 19%  
  D 10% 11%   22%  
  E 1% 4% 1%   3% 11%  
  F 8% 13%   9% 15%  
  G 4% 5%   9%  
  H 7%   11%  

(8)      Commitments and Contingency

  The Companies lease office space in Mountain View, California, and in New York City, New York, under operating leases which expire on May 31, 2002. The future minimum rental payments under these operating leases as of December 31, 2001, total $119,818.

  Rent expense was $302,355, $154,498, and $75,000 for the years ended December 31, 2001, 2000, and 1999, respectively.

  The Companies’ offering of “free shares” over the Internet in 1998 was not registered with the United States Securities and Exchange Commission (SEC). The SEC has not asserted any violation of law by the Companies; however, the SEC has indicated that programs for issuing shares such as the Companies’ “free share” offering should be registered with the SEC or qualify for an exemption from such a registration. Federal and state laws provide remedies for persons who acquire securities in an offering that was not registered with the SEC and did not qualify for any exemption from registration. Remedies include rescission, which means that the stockholders would return the securities to the seller and the seller would be required to return the purchase price, and damages for losses incurred in cases where the purchaser no longer holds the securities. The Companies believe that no significant liability exists for potential remedies available under securities laws to recipients of “free shares” primarily since no cash consideration was received for the shares.

(9)     Unaudited Quarterly Information

  The following represents unaudited quarterly financial data for 2001 and 2000.



F-18

TRAVELZOO.COM CORPORATION
AND AFFILIATE

Notes to Combined Financial Statements
December 31, 2001, 2000, and 1999



  Quarters ended,
  Dec 31,
2001

  Sept 30,
2001

  June 30,
2001

  Mar 31,
2001

  Dec 31,
2000

  Sept 30,
2000

  June 30,
2000

  Mar 31,
2000

 
Revenues:                                
     Advertising $     1,723   1,574   1,537   1,308   1,163   1,088   873   728  
     Commissions —  
  1
  3
  3
  5
  52
  21
  19
 
          Total revenues 1,723   1,575   1,540   1,311   1,168   1,140   894   747  
Cost of revenues 79
  74
  75
  77
  56
  97
  74
  55
 
          Gross profit 1,644   1,501   1,465   1,234   1,112   1,043   820   692  
Operating expenses:                                
     Sales and marketing 1,115   920   790   450   343   444   388   309  
     General and administrative 418   373   366   197   532   240   283   147  
     Merger expenses 29
  62
  113
  128
  231
 
 
 
 
          Total operating expenses 1,562   1,355   1,269   775   1,106   684   671   456  
Income from operations 82   146   196   459   6   359   149   236  
Interest income 1
  1
  1
 
 
 
 
 
 
Income before income taxes 83   147   197   459   6   359   149   236  
Income taxes 68
  86
  127
  241
  81
  146
  63
  98
 
Net income (loss) $     15
  61
  70
  218
  (75)
  213
  86
  138
 
Pro forma basic and diluted net
   income per share
$     —
 
  .01
  .01
  (.01)
  .01
  .01
  .01
 

(10)      Subsequent Events

  On March 15, 2002, the stockholders of Travelzoo.com Corporation approved the merger with Travelzoo Inc. whereby Travelzoo Inc. will be the surviving entity.

  In March 2002, Travelzoo Inc. granted to each director fully vested and exercisable options to purchase 5,000 shares of common stock with an exercise price of $3.00 for their services as a director in 2002. A total of 35,000 options were granted. The options expire in March 2012.


F-19

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Special Financial Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mountain View, State of California, on April 9, 2002.

  TRAVELZOO INC.


  By:   /s/   Ralph Bartel
    Ralph Bartel
Chairman of the Board, Chief Executive Officer
and Chief Financial Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature Title Date
  /s/   Ralph Bartel
Ralph Bartel
Chairman of the Board, Chief Executive Officer and Chief Financial Officer
April 9, 2002
  /s/   Lisa Su
Lisa Su
Controller (Chief Accounting Officer)
April 9, 2002
  /s/   David J. Ehrlich
David J. Ehrlich
Director
    
April 8, 2002
  /s/   Donovan Neale-May
Donovan Neale-May
Director
April 9, 2002
  /s/   Kelly M. Urso
Kelly M. Urso
Director
April 8, 2002