Travelzoo Inc. Form 8-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549


FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 or 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event
reported):      January 30, 2003


Travelzoo Inc.
(Exact Name of Registrant as Specified in Charter)


Delaware
  333-55026
  36-4415727
(State or Other
Jurisdiction of
Incorporation)


  (Commission
File Number)


  (I.R.S Employer
Identification No.)



590 Madison Avenue, 21st Floor
New York, New York

  10022
 
(Address of Principal Executive Offices)   (Zip Code)  


Registrant's telephone number, including area code:

(212) 521-4200

Item 5.        Other Events.

        Travelzoo Inc. is submitting an application to be listed on the NASDAQ SmallCap Market. In connection therewith, Travelzoo Inc. is furnishing to NASDAQ its audited consolidated financial statements for the year ended December 31, 2002. Such financial statements are filed herewith.


Item 7.        Financial Statements and Exhibits.

          (c)        Exhibits

  99.1 Travelzoo Inc.'s:   (i)  audited consolidated balance sheets as of December 31, 2002 and December 31, 2001; and (ii) audited consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002.

SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


 


TRAVELZOO INC.
(Registrant)



Date:  January 30, 2003 By:  /s/ Ralph Bartel
    Ralph Bartel
Chairman of the Board and Chief Executive
Officer
Travelzoo Inc. Financials for Form 8-K
TRAVELZOO INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

  Independent Auditors' Report F-2

  Consolidated Balance Sheets F-3

  Consolidated Statements of Operations F-4

  Consolidated Statements of Stockholders' Equity F-5

  Consolidated Statements of Cash Flows F-6

  Notes to Consolidated Financial Statements F-7





F-1

INDEPENDENT AUDITORS' REPORT

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, 2002 and 2001, 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, 2002. 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 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.

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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

  /s/ KPMG LLP

Mountain View, California
January 13, 2003






F-2

TRAVELZOO INC.
CONSOLIDATED BALANCE SHEETS
    December 31,  
   
 
    2002     2001  
   
   
 
Assets            
Current assets:            
     Cash and cash equivalents $ 1,258,273   $ 609,919  
     Accounts receivable, less allowance for doubtful            
        accounts of $55,925 and $55,228 as of December            
        31, 2002 and December 31, 2001, respectively   1,311,399     892,337  
     Deposits   22,339     32,508  
     Prepaid expenses and other current assets   114,909     18,179  
     Deferred income taxes   81,313     65,051  
   
   
 
          Total current assets   2,788,233     1,617,994  
             
Deposits   64,923      
Deferred income taxes   32,054     15,298  
Property and equipment, net   142,091     137,200  
Intangible assets, net   212,293     360,238  
   
   
 
          Total assets $ 3,239,594   $ 2,130,730  
   
   
 
             
Liabilities and Stockholders' Equity            
Current liabilities:            
     Accounts payable $ 442,349   $ 175,351  
     Accrued expenses   547,680     284,318  
     Deferred revenue   19,179     86,721  
     Income tax payable   439,432     646,457  
   
   
 
          Total liabilities   1,448,640     1,192,847  
   
   
 
             
Commitments            
             
Stockholders’ equity:            
     Preferred stock, $0.01 par value; 5,000,000 shares            
        authorized        
     Common stock, $0.01 par value; 40,000,000 shares            
        authorized,19,425,147 shares issued and            
        outstanding both years   194,251     194,251  
     Additional paid-in capital   (116,078)     (116,078)  
     Retained earnings   1,712,781     859,710  
   
   
 
          Total stockholders’ equity   1,790,954     937,883  
   
   
 
          Total liabilities and stockholders’ equity $ 3,239,594   $ 2,130,730  
   
   
 

See accompanying notes to consolidated financial statements

F-3

TRAVELZOO INC.
CONSOLIDATED STATEMENT OF OPERATIONS
    Years Ended  
    December 31,  
   
 
    2002   2001   2000  
   
 
 
 
Revenues:              
     Advertising $ 9,847,516   6,141,456   3,852,066  
     Commissions   304   6,482   97,451  
   
 
 
 
          Total revenues   9,847,820   6,147,938   3,949,517  
Cost of revenues   351,169   304,081   282,195  
   
 
 
 
          Gross profit   9,496,651   5,843,857   3,667,322  
   
 
 
 
Operating expenses:              
     Sales and marketing   5,726,557   3,274,747   1,484,495  
     General and administrative   2,293,846   1,354,088   1,201,982  
     Merger expenses   54,538   332,721   231,303  
   
 
 
 
          Total operating expenses   8,074,941   4,961,556   2,917,780  
   
 
 
 
Income from operations   1,421,710   882,301   749,542  
Interest income   3,971   2,702    
   
 
 
 
Income before income taxes   1,425,681   885,003   749,542  
Income taxes   572,610   521,268   387,856  
   
 
 
 
Net income $ 853,071   363,735   361,686  
   
 
 
 
               
Net income per share:              
     Basic and diluted net income              
     per share $ .04   .02   .02  
   
 
 
 
     Shares used in computing basic              
     net income per share   19,425,147   19,425,147   19,372,791  
   
 
 
 
     Shares used in computing diluted              
     net income per share   19,896,353   19,425,147   19,466,810  
   
 
 
 

See accompanying notes to consolidated financial statements



F-4

TRAVELZOO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
        Additional     Total
                                Common Stock                                 Paid-in   Retained   Stockholders'
  Shares   Amount   Capital   Earnings   Equity
   
 
 
 
 
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     
 
 
 
 
 
Net income   —        —        —         853,071        853,071     
 
 
 
 
 
Balances, December 31, 2002   19,425,147      $ 194,251        (116,078)        1,712,781        1,790,954     
 
 
 
 
 

See accompanying notes to consolidated financial statements





F-5

TRAVELZOO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
    Years Ended December 31,
    2002   2001   2000
   
 
 
Cash flows from operating activities:            
     Net income $ 853,071 $ 363,735 $ 361,686
     Adjustments to reconcile net income to net cash
      provided by operating activities:
           
        Depreciation and amortization   194,373   138,628   54,914
        Deferred income taxes   (33,018)   28,196   (93,381)
        Provision for losses on accounts receivable   14,571   (88,507)   135,144
        Loss on disposal of property and equipment     567   4,212
        Stock-based compensation expense       9,221
        Non-cash revenues   (3,410)   (16,449)  
        Changes in operating assets and liabilities:            
           Accounts receivable   (433,633)   (19,870)   (591,562)
           Deposits   (54,754)   78,244   (102,566)
           Prepaid expenses and other current assets   (96,730)   92,819   (92,765)
           Accounts payable   266,998   (1,541)   113,086
           Accrued expenses   263,362   60,839   133,975
           Deferred revenue   5,295   11,384   (3,300)
           Income tax payable   (207,025)   122,653   479,881
   
 
 
             Net cash provided by operating            
             activities   769,100   770,698   408,545
   
 
 
Cash flows from investing activities:            
     Purchases of property and equipment   (120,746)   (31,365)   (227,589)
     Purchases of intangible assets     (125,000)   (200,000)
   
 
 
           Net cash used in investing activities   (120,746)   (156,365)   (427,589)
   
 
 
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 (used in) provided by financing activities     (50,000)   53,500
   
 
 
Net increase in cash and cash equivalents   648,354   564,333   34,456
Cash and cash equivalents at beginning of year   609,919   45,586   11,130
   
 
 
Cash and cash equivalents at end of year $ 1,258,273 $ 609,919 $ 45,586
   
 
 
             
Supplemental disclosure of cash flow information:            
     Cash paid for income taxes net refunds received $ 812,653 $ 385,102 $ 1,356
   
 
 
Non cash investing activities:            
     Intangible asset acquired for future advertising            
        Services $ $ 89,286 $
   
 
 
     Reduction in carry amounts of intangible asset            
        and deferred revenue $ (69,427)   $
   
 
 

See accompanying notes to consolidated financial statements

F-6

TRAVELZOO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
(1) Summary of Significant Accounting Policies

  (a)     Description of Business and Basis of Presentation

  The consolidated financial statements include the accounts of Travelzoo Inc. and its wholly-owned subsidiaries (the “Company” or “Travelzoo”). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company publishes the Travelzoo website, the Travelzoo Top 20 e-mail newsletter, and the Weekend.com e-mail newsletter which provide advertising opportunities for the travel industry.

  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 also issued 5,155,874 shares via the Internet to approximately 700,000 stockholders (“the Netsurfer stockholders”) for no cash consideration. In 1998, Mr. Bartel also founded Silicon Channels Corporation, a California corporation, to operate the Travelzoo website. 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 was dissolved. 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. Stockholders have a period of two years to receive shares of Travelzoo Inc. Travelzoo.com Corporation had 11,295,874 shares outstanding. As of December 31, 2002, 6,791,612 shares of Travelzoo.com Corporation had been exchanged for shares of Travelzoo Inc. The remaining 4,504,262 shares of Travelzoo Inc. that may be exchanged are included in the issued and outstanding common stock of Travelzoo Inc. and earnings per share calculations. 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 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 Travelzoo Inc. are identical to the combined results of Travelzoo.com Corporation and Travelzoo Inc.

  (b)     Revenue Recognition

  Revenue consists of advertising sales and commissions from e-commerce transactions. Advertising revenues are derived principally from the sale of display advertising, classified advertising, and banner advertising on the Travelzoo website and in the Travelzoo Top 20 e-mail newsletter. Commissions are generated from bookings of travel services through customer advertising on the Travelzoo website.

F-7

  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, no significant obligations remain at the end of the period, and collection of the resulting receivable is deemed probable. If fixed-fee advertising is displayed over a term greater than one month, revenues are recognized ratably over the period. To the extent that any minimum guaranteed impressions are not met during the contract period, the Company defers recognition of the corresponding revenues until the guaranteed impressions are achieved. Fees for banner advertising and other variable-fee advertising arrangements are recognized based on the number of impressions displayed or clicks delivered during the period.

  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 customers for the display of advertising on the Travelzoo website. The Company recorded these revenues on a net basis. The gross revenue received by DoubleClick from advertising on the Travelzoo website was $82,939, $600,454, and $430,130 for the years ended December 31, 2002, 2001, and 2000 respectively. The Company’s share of this income, which has been recorded as revenue, was $38,354, $332,736, and $231,885 for the years ended December 31, 2002, 2001, and 2000 respectively. The agreement with DoubleClick was canceled as of August 23, 2002.

  Revenues from advertising barter transactions are recognized in the period during which the advertisements are displayed on the Travelzoo 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 Company 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-, $-0-, and $37,000 for the years ended December 31, 2002, 2001, and 2000, respectively.

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

  (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. Diluted net income per share is computed by adjusting the weighted-average number of common shares 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 income per share:

F-8

      Year Ended  
      December 31,  
   
 
      2002     2001     2000  
     
   
   
 
  Basic net income per share:                  
     Net income $ 853,071   $ 363,735   $ 361,686  
     
   
   
 
     Weighted average common shares   19,425,147     19,425,147     19,372,791  
     
   
   
 
              Basic net income per share $ 0.04   $ 0.02   $ 0.02  
     
   
   
 
                     
  Diluted net income per share:                  
     Net income $ 853,071   $ 363,735   $ 361,686  
     
   
   
 
     Weighted average common shares   19,425,147     19,425,147     19,372,791  
     Effect of dilutive securities-stock                  
     options   471,206         94,019  
     
   
   
 
     Weighted average                  
           common and potential common                  
           shares   19,896,353     19,425,147     19,466,810  
     
   
   
 
              Diluted net income per share $ 0.04   $ 0.02   $ 0.02  
     
   
   
 
  For the year ended December 31, 2001, all outstanding stock options were excluded from the calculation of diluted earnings per share because their effect was antidilutive.

  (d)     Use of Estimates

  Management of the Company 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.

  (e)     Property and Equipment

  Property and equipment consisted of the following:

      December 31,
 
    2002
  2001
 
  Computer hardware and software $ 249,801   182,461  
  Office equipment   141,266   95,063  
     
   
 
    391,067   277,524  
  Less accumulated depreciation   248,976   140,324  
     
   
 
  Total $ 142,091   137,200  
     
   
 

F-9

  (f)     Intangible Assets

  Intangible assets consist of the following:

      December 31,
 
    2002
  2001
 
  Acquired amortized intangible assets:          
  Internet domain names $ 344,857   414,286  
           
  Less accumulated amortization   132,564   54,048  
   
 
 
  Total $ 212,293   360,238  
   
 
 

  Amortization expense was $78,518, $50,714, and $3,333 for the years ended December 31, 2002, 2001 and 2000, 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 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 was recognized as the clicks were delivered. During the years ended December 31, 2002 and 2001, $3,410 and $16,449 of revenues related to this arrangement were 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.

  Estimated future amortization expense related to intangible assets at December 31, 2002 is as follows:

  2003 $ 65,500  
  2004   65,500  
  2005   62,167  
  2006   19,126  
   
 
  $ 212,293
 

  (g)     Advertising Costs

  Advertising costs (including barter advertising) amounted to $3,960,464, $2,264,488 and $1,161,800 for the years ended December 31, 2002, 2001, and 2000, respectively. During the years ended December 31, 2002, 2001 and 2000, $3,960,464, $2,264,488 and $1,124,800, respectively, of advertising services were purchased from the Company’s customers under non-barter arrangements.

  (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.

F-10

  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, 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.

  (i)     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 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. 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 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. Deferred stock-based compensation for options granted to employees is determined as the excess of the fair value of the 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.

  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 share would have been adjusted to the amounts reported in the following table.

      Year Ended
December 31,

      2002
  2001
  2000
  Net income as reported $ 853,071 $ 363,735 $ 361,686
  Stock-based compensation included
     in determination of net income
      9,221
  Stock-based compensation determined
     under the fair-value based method
  1,908   56,182   11,765
     
 
 
  Pro-forma net income as if the fair
      value based method had been applied
     to all awards
$ 851,163 $ 307,553 $ 359,142
     
 
 
  Pro-forma basic and diluted net income
     per share as if the fair value based
     method had been applied to all awards
$ 0.04 $ 0.02 $ 0.02
     
 
 

F-11

  The fair value of options granted was calculated as of the grant date using the Black-Scholes method with the following assumptions:

      2002
  2001
  2000
  Numbers of options granted 33,589 210,000 70,000
  Grant date fair value of the common
     stock
$ 0.56 $ 0.39 $ 0.18
  Expected life of the option (in years) 5 10 10
  Annual volatility 51% 85% 85%
  Risk-free interest rates 4.5% 4.5% 4.5%
  Dividend Rate

  (k)     Website Development Costs

  Prior to June 30, 2000, website development costs were expensed as incurred. The Company 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 internal website development costs that qualify for capitalization have been incurred.

  (l)     Recent Accounting Pronouncements

  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 Company 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. The Company adopted SFAS No. 142 as of the beginning of 2002 and the effect of adoption did not have a material impact on the condensed consolidated financial statements.

  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 Company will adopt SFAS No. 143 at the beginning of 2002, and the adoption did 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 Company’s financial statements beginning in 2002. The adoption of this statement did not have a material impact on the consolidated financial statements.

F-12

  In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds the requirement that all gains and losses from extinguishment of debt be classified as an extraordinary item. Additionally, SFAS No. 145 requires that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 is effective for the Company beginning in 2003, and the effect of adoption is not expected to have a material impact on the consolidated financial statements.

  In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. The requirements of this Statement are effective prospectively for exit or disposal activities initiated after December 31, 2002; however, early application of the Statement is encouraged. The Company’s adoption of Statement 146 will not have a material impact on its historical financial position or results of operations.

  In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the new disclosure requirements of this statement.

(2) Commitments

  The Company leases office space in Mountain View, California, and in New York, New York, under operating leases which expire on December 31, 2003 and June 30, 2004, respectively. The future minimum rental payments under these operating leases as of December 31, 2002, total $556,940 and $197,940 for 2003 and 2004, respectively. Rent expense was $471,766, $302,355 and $154,498 for the years ended December 31, 2002, 2001, and 2000, respectively.

(3) Allowance for Doubtful Accounts

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


F-13

  Balance at December 31, 1999 10,000       
       Additions - charged to costs and expenses 135,144       
 
 
  Balance at December 31, 2000 145,144       
       Deductions - credited to costs and expenses, net (88,507)      
       Deductions - write-offs (1,409)      
 
 
  Balance at December 31, 2001 55,228       
       Additions - charged to costs and expenses, net 14,572       
       Deductions - write-offs (13,875)      
 
 
  Balance at December 31, 2002 $ 55,925       
 
 

(4) Income Taxes

  Income tax expense (benefit) for the years ended December 31, 2002, 2001, and 2000 consisted of the following:

      Current
  Deferred
  Total
 
  2002:              
          Federal 453,851   (26,836)   427,015  
          State   151,777   (6,182)   145,595  
   
 
 
 
    $ 605,628   (33,018)   572,610  
   
 
 
 
  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  
   
 
 
 

  Income tax expense for the years ended December 31, 2002, 2001, and 2000, 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:

      2002
  2001
  2000
 
  Federal tax at statutory rates $ 485,714    307,423   254,844  
  State taxes, net of federal income tax benefit   96,093    99,146   57,451  
  Foreign taxes   —    250   250  
  Non-deductible merger expenses and other   (9,197)   114,449   75,311  
  Total income tax expense $ 572,610    521,268   387,856  

F-14

  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, 2002, and 2001, are as follows:

        2002
  2001
 
  Deferred tax assets:            
       Accruals and allowances   39,204   28,104  
       State income taxes     36,733   36,948  
       Capitalized start-up costs     760   1,531  
       Property and equipment       3,968  
       Intangible assets     39,462   13,073  
     
 
 
            Gross deferred tax assets

116,159

83,624  
               
  Deferred tax liabilities:            
       State income taxes     (3,275)  
       Property and equipment     (2,792)    
     
 
 
            Gross deferred tax liabilities     (2,792)   (3,275)  
     
 
 
  Net deferred tax assets     113,367   80,349  
     
 
 

  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, 2002 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, 2002 19,425,147 shares of common stock and no shares of preferred stock were issued and outstanding. During 2000, the Company granted to an employee 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.

  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 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.

F-15

  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. In October 2002, 1,411 options were forfeited upon the resignation of a director. All other options are vested as of December 31, 2002. The options expire in March 2012.

(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, 2002, the Company has one operating segment: online advertising.

  Significant customer information is as follows:

Percentage of Total Revenue Percent of Accounts
Receivable
   
 
    Year Ended December 31,
  December 31,
Customer   2002
  2001
  2000
  2002
  2001
A   *   *   *   12%   *
B   13%   15%   22%   *   19%
C   *   *   11%    
D   *   13%   *     15%
E   14%   *     21%   11%

  All of the above customers are located in the United States of America.

  *   Less than 10%


(7) Unaudited Quarterly Information

  The following represents unaudited quarterly financial data for 2002 and 2001.



F-16

    Quarters Ended  
   
 
  Dec 31,   Sept 30,   June 30,   Mar 31,   Dec 31,   Sept 30,   June 30,   Mar 31,  
    2002   2002   2002   2002   2001   2001   2001   2001  
   
 
 
 
 
 
 
 
 
                (In Thousands)              
Revenues:                                  
   Advertising $ 3,132   2,538   2,211   1,966   1,723   1,574   1,537   1,308  
   Commissions             1   3   3  
   
 
 
 
 
 
 
 
 
      Total revenues   3,132   2,538   2,211   1,966   1,723   1,575   1,540   1,311  
Cost of revenues   89   90   86   86   79   74   75   77  
   
 
 
 
 
 
 
 
 
      Gross profit   3,043   2,448   2,125   1,880   1,644   1,501   1,465   1,234  
Operating expenses:                                  
   Sales and marketing   1,904   1,510   1,316   996   1,115   920   790   450  
   General and administrative   647   522   562   562   418   373   366   197  
   Merger expenses         55   29   62   113   128  
   
 
 
 
 
 
 
 
 
      Total operating expenses   2,551   2,032   1,878   1,613   1,562   1,355   1,269   775  
Income from operations   492   416   247   267   82   146   196   459  
Interest income   2   1     1   1   1   1    
   
 
 
 
 
 
 
 
 
Income before income taxes   494   417   247   268   83   147   197   459  
Income taxes   168   171   101   133   68   86   127   241  
   
 
 
 
 
 
 
 
 
Net income $ 326   246   146   135   15   61   70   218  
 

 
 
 
 
 
 
 
 
Basic and diluted net                                  
income per share $ .02   .01   .01         .01   .01  
 

 
 
 
 
 
 
 
 



F-17