TRAVELZOO - Quarter Report: 2008 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.: 000-50171
TRAVELZOO INC.
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) |
36-4415727 (I.R.S. employer identification no.) |
|
590 Madison Avenue, 37th Floor, New York, New York |
10022 (Zip code) |
|
(Address of principal executive offices) |
Registrants telephone number, including area code: (212) 484-4900
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 whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of Travelzoo common stock outstanding as of November 3, 2008 was
14,285,479 shares.
TRAVELZOO INC.
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PART IIOTHER INFORMATION |
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EX-31.1 | ||||||||
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PART IFINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
TRAVELZOO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value)
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 15,836 | $ | 22,641 | ||||
Accounts receivable, less allowance for
doubtful accounts of $426 and $290 as of
September 30, 2008 and December 31, 2007,
respectively |
10,122 | 9,969 | ||||||
Deposits |
223 | 272 | ||||||
Prepaid expenses and other current assets |
2,574 | 1,982 | ||||||
Deferred income taxes |
1,393 | 1,393 | ||||||
Total current assets |
30,148 | 36,257 | ||||||
Deposits, less current portion |
387 | 349 | ||||||
Restricted cash |
875 | | ||||||
Property and equipment, net |
3,614 | 622 | ||||||
Intangible assets, net |
49 | 58 | ||||||
Total assets |
$ | 35,073 | $ | 37,286 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 6,169 | $ | 4,960 | ||||
Accrued expenses |
4,665 | 4,608 | ||||||
Deferred revenue |
686 | 450 | ||||||
Deferred rent |
109 | 37 | ||||||
Total current liabilities |
11,629 | 10,055 | ||||||
Long-term tax liabilities |
880 | 1,256 | ||||||
Deferred rent, less current portion |
844 | 73 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value (40,000 shares
authorized; 14,285 and 14,250 shares issued
and outstanding as of September 30, 2008 and
December 31, 2007, respectively) |
143 | 143 | ||||||
Additional paid-in capital |
185 | | ||||||
Retained earnings |
21,951 | 25,939 | ||||||
Accumulated other comprehensive loss |
(559 | ) | (180 | ) | ||||
Total stockholders equity |
21,720 | 25,902 | ||||||
Total liabilities and stockholders equity |
$ | 35,073 | $ | 37,286 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TRAVELZOO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues |
$ | 18,807 | $ | 19,943 | $ | 61,525 | $ | 59,798 | ||||||||
Cost of revenues |
867 | 295 | 2,034 | 669 | ||||||||||||
Gross profit |
17,940 | 19,648 | 59,491 | 59,129 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
11,582 | 10,954 | 37,496 | 31,015 | ||||||||||||
General and administrative |
6,717 | 3,756 | 19,393 | 9,945 | ||||||||||||
Total operating expenses |
18,299 | 14,710 | 56,889 | 40,960 | ||||||||||||
Income (loss) from operations |
(359 | ) | 4,938 | 2,602 | 18,169 | |||||||||||
Other income and expense: |
||||||||||||||||
Interest income |
63 | 312 | 277 | 1,103 | ||||||||||||
Gain (loss) on foreign currency |
(78 | ) | 68 | 67 | 103 | |||||||||||
Income (loss) before income taxes |
(374 | ) | 5,318 | 2,946 | 19,375 | |||||||||||
Income taxes |
1,415 | 3,164 | 6,934 | 10,312 | ||||||||||||
Net income (loss) |
$ | (1,789 | ) | $ | 2,154 | $ | (3,988 | ) | $ | 9,063 | ||||||
Basic net income (loss) per share |
$ | (0.13 | ) | $ | 0.15 | $ | (0.28 | ) | $ | 0.60 | ||||||
Diluted net income (loss) per share |
$ | (0.13 | ) | $ | 0.14 | $ | (0.28 | ) | $ | 0.56 | ||||||
Shares used in computing basic
net income (loss) per share |
14,285 | 14,659 | 14,268 | 15,053 | ||||||||||||
Shares used in computing diluted
net income (loss) per share |
14,285 | 15,873 | 14,268 | 16,278 |
See accompanying notes to unaudited condensed consolidated financial statements.
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TRAVELZOO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2008 | 2007 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (3,988 | ) | $ | 9,063 | |||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
409 | 132 | ||||||
Provision for (recovery of) losses on accounts receivable |
244 | (52 | ) | |||||
Tax benefit from exercise of stock options |
(110 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(573 | ) | (2,018 | ) | ||||
Deposits |
1 | (96 | ) | |||||
Prepaid expenses and other current assets |
(510 | ) | (571 | ) | ||||
Accounts payable |
628 | 2,881 | ||||||
Accrued expenses |
363 | 892 | ||||||
Deferred revenue |
250 | (283 | ) | |||||
Deferred rent |
846 | 72 | ||||||
Income tax payable |
| 3 | ||||||
Long-term tax liabilities |
(376 | ) | | |||||
Net cash provided by (used in) operating activities |
(2,816 | ) | 10,023 | |||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(2,951 | ) | (335 | ) | ||||
Restricted cash |
(875 | ) | | |||||
Purchase of intangible assets |
| (5 | ) | |||||
Net cash used in investing activities |
(3,826 | ) | (340 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of stock options |
75 | | ||||||
Tax benefit from exercise of stock options |
110 | | ||||||
Repurchase of common stock |
| (19,823 | ) | |||||
Net cash provided by (used in) financing activities |
185 | (19,823 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
(348 | ) | (22 | ) | ||||
Net decrease in cash and cash equivalents |
(6,805 | ) | (10,162 | ) | ||||
Cash and cash equivalents at beginning of period |
22,641 | 33,415 | ||||||
Cash and cash equivalents at end of period |
$ | 15,836 | $ | 23,253 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for income taxes, net of refunds received |
$ | 7,343 | $ | 10,404 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TRAVELZOO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: The Company and Basis of Presentation
Travelzoo Inc. (the Company or Travelzoo) is a global Internet media company. Travelzoos
publications and products include the Travelzoo Web sites (www.travelzoo.com, cn.travelzoo.com,
www.travelzoo.ca, www.travelzoo.co.jp, www.travelzoo.com.au, www.travelzoo.com.hk,
www.travelzoo.com.tw, www.travelzoo.co.uk, www.travelzoo.de, www.travelzoo.es, www.travelzoo.fr,
among others), the Travelzoo Top 20 e-mail newsletter, the Newsflash e-mail alert service, the
SuperSearch pay-per-click travel search tool, and the Travelzoo Network, a network of third-party
Web sites that list travel deals published by Travelzoo.
Travelzoo is controlled by Ralph Bartel, who held beneficially approximately 58.1% of the
outstanding shares as of November 3, 2008.
The accompanying unaudited condensed consolidated financial statements have been prepared by
the Company in accordance with the rules and regulations of the U.S. Securities and Exchange
Commission (SEC). Certain information and footnote disclosure normally included in consolidated
financial statements prepared in accordance with generally accepted accounting principles in the
United States of America have been condensed or omitted in accordance with such rules and
regulations. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company, and its results of operations
and cash flows. These condensed consolidated financial statements should be read in conjunction
with the Companys audited consolidated financial statements and related notes as of and for the
year ended December 31, 2007, included in the Companys Form 10-K filed with the SEC on March 17,
2008.
The condensed 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. All foreign subsidiaries use the local currency of their respective
countries as their functional currency. Assets and liabilities are translated into U.S. dollars at
exchange rates prevailing at the balance sheet dates. Revenues, costs and expenses are translated
into U.S. dollars at average exchange rates for the period.
The results of operations for the three months and nine months ended September 30, 2008 are
not necessarily indicative of the results that may be expected for the year ending December 31,
2008 or any other future period, and the Company makes no representations related thereto.
Certain prior period amounts have been reclassified to conform to current year presentation.
Specifically, $268,000 and $691,000 for the three month and nine month periods ending September 30,
2007, respectively, have been reclassified from cost of revenues to general and administrative
expense. These amounts are primarily costs associated with salary and benefits for software
developers and professional services related to software development.
The Company was formed as a result of a combination and merger of entities founded by the
Companys majority stockholder, 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 Netsurfer stockholders for no cash consideration. In 1998, Mr. Bartel also founded
Silicon Channels Corporation, a California corporation, to operate the Travelzoo Web 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 Corporation 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.
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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. Earnings per share calculations reflect this
reduction of the number of shares reported as outstanding. As of September 30, 2008, there were
14,285,479 shares of common stock outstanding.
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 being required to issue up to an additional approximately 4,069,000 shares of common
stock for no additional payment.
On October 15, 2004, the Company announced a program under which it would make cash payments
to people who establish that they were former stockholders of Travelzoo.com Corporation, and who
failed to submit requests to convert shares into Travelzoo Inc. within the required time period.
The accompanying condensed consolidated financial statements include a charge in general and
administrative expenses of $14,000 for these cash payments for the nine months ended September 30,
2008. The liability was $3,000 as of September 30, 2008. The liability is based on the actual
number of valid requests received from former stockholders through September 30, 2008 which had not
yet been processed for payment. 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 Companys
common stock price. The Companys 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 an additional approximately 4,069,000 shares had not submitted
claims under the program as of September 30, 2008.
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Note 2: Revenue Recognition
All revenue consists of advertising sales. Advertising insertions are either sold by fixed-fee
arrangements or sold by variable-fee arrangements.
The Company recognizes revenues in accordance with Securities and Exchange Commission Staff
Accounting Bulletin (SAB) 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 as described below, with the exception of Travelzoo Top 20 or Newsflash insertions,
which are recognized upon delivery. 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. |
The Companys standard payment terms are 30 days net. Insertion orders that include fixed-fee
advertising are invoiced upon acceptance of the insertion order and on the first day of each month
over the term of the insertion order, with the exception of Travelzoo Top 20 or Newsflash
insertions, which are primarily invoiced upon delivery. Insertion orders that include variable-fee
advertising are invoiced at the end of the month. The Companys 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 Travelzoos 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.
Revenue from advertising sold to clients through agencies is reported at the net amount billed
to the agency.
Note 3: Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157
establishes a framework for measuring the fair value of assets and liabilities. This framework is
intended to provide increased consistency in how fair value determinations are made under various
existing accounting standards which permit, or in some cases require, estimates of fair market
value. SFAS 157 became effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. In February 2008, the FASB issued Staff Position (FSP) No.
157-2, which delayed the effective date of SFAS 157 one year for all non-financial assets and
non-financial liabilities, except those recognized or disclosed at fair value in the financial
statements on a recurring basis. In accordance with FSP No. 157-2, the Company will measure the
remaining assets and liabilities no later than the quarter ended March 31, 2009 and has not yet
determined the
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impact of this standard on our condensed consolidated financial statements. The partial
adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our
condensed consolidated financial statements. See Note 4 for information and related disclosures
regarding the fair value of our financial assets.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 provides the option to report certain financial
assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting
that can occur when related assets and liabilities are recorded on different bases. The Company
adopted SFAS 159 on January 1, 2008 and did not elect to use fair value to re-measure any of its
assets or liabilities.
Note 4: Financial Instruments
At September 30, 2008, restricted cash consisted of a certificate of deposit for $875,000
serving as collateral for a standby letter of credit for the security deposit of our corporate
headquarters. Cash equivalents consist of highly liquid investments with remaining maturities of
three months or less on the date of purchase held in money market funds. The Company believes that
the carrying amounts of these financial assets are a reasonable estimate of their fair value. The
fair value of these financial assets was determined using the following inputs at September 30,
2008 (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 10,822 | $ | 10,822 | $ | | $ | | ||||||||
Total |
$ | 10,822 | $ | 10,822 | $ | | $ | | ||||||||
Note 5: Internal-Use Software and Web Site Development
The Company includes in fixed assets the capitalized cost of internal-use software and Web
site development, including software used to upgrade and enhance its Web site and processes
supporting the Companys business in accordance with Statement of Position 98-1, Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use and Emerging Issues Task
Force Issue No. 00-02, Accounting for Website Development Costs. Costs incurred in the planning
stage and operating stage are expensed as incurred while costs incurred in the application
development stage and infrastructure development stage are capitalized, assuming such costs are
deemed to be recoverable.
During the three month and nine month periods ended September 30, 2008, the Company
capitalized internal-use software costs and Web site development costs totaling
$472,000 and $1.1 million, respectively. The capitalized Web
site development costs relate to a new
travel search engine for the Web site. Capitalized internal-use
software costs and capitalized Web site development costs are amortized using
the straight-line method over the estimated useful life of the software.
Note 6: Stock-Based Compensation and Stock Options
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which addresses the accounting for stock-based payment transactions whereby an
entity receives employee services in exchange for equity instruments, including stock options.
Stock-based compensation for awards granted prior to January 1, 2006 is based upon the grant-date
fair value of such compensation as determined under the pro forma provisions of SFAS No. 123,
Accounting for Stock-Based Compensation.
As described in Note 1, 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 per share, are outstanding as of September 30, 2008, and expire in
January 2011.
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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 per share for their services
as a director in 2000 and 2001. A total of 210,000 options were granted. The options expire in
October 2011. 150,000 options were exercised during the year ended December 31, 2005, 17,275
options were exercised during the year ended December 31, 2006, and 30,000 options were exercised
during the nine months ended September 30, 2008. As of September 30, 2008, 12,725 of these options
are vested and remain outstanding.
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 per share that vested in connection with their
services as a director in 2002. A total of 35,000 options were granted. The options expire in March
2012. In October 2002, 1,411 options were cancelled upon the resignation of a director. 23,589
options were exercised during the year ended December 31, 2004 and 5,000 options were exercised
during the nine months ended September 30, 2008. As of September 30, 2008, 5,000 of these options
are vested and remain outstanding.
The Company did not record any stock-based compensation in fiscal years 2006, 2007, or in the
nine months ended September 30, 2008. In addition, all previously issued options vested prior to
January 1, 2003.
Option activity as of September 30, 2008 and changes during the nine months ended September
30, 2008 were as follows:
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Remaining | Aggregate | ||||||||||||||
Shares | Price | Contractual Life | Intrinsic Value | |||||||||||||
(in thousands) | ||||||||||||||||
Outstanding at December 31, 2007 |
2,211,074 | $ | 1.03 | |||||||||||||
Options exercised |
(35,000 | ) | $ | 2.14 | ||||||||||||
Outstanding at September 30, 2008 |
2,176,074 | $ | 1.01 | 2.34 years | $ | 15,036 | ||||||||||
Exercisable and fully vested at September 30, 2008 |
2,176,074 | $ | 1.01 | 2.34 years | $ | 15,036 |
The aggregate intrinsic value in the table above represents the total pretax intrinsic value
(the difference between the Companys closing stock price on the last trading day of the third
quarter of fiscal 2008 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option holders exercised their options
on September 30, 2008. This amount changes based upon the fair market value of the Companys stock.
The Companys policy is to issue shares from its authorized shares to fulfill stock option
exercises.
Note 7: Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average number of common
shares outstanding for the period. Diluted net income (loss) per share is computed by adjusting the
weighted-average number of common shares outstanding for the effect of dilutive 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.
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The following table sets forth the calculation of basic and diluted net income (loss) per
share (in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Basic net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | (1,789 | ) | $ | 2,154 | $ | (3,988 | ) | $ | 9,063 | ||||||
Weighted average common shares |
14,285 | 14,659 | 14,268 | 15,053 | ||||||||||||
Basic net income (loss) per share |
$ | (0.13 | ) | $ | 0.15 | $ | (0.28 | ) | $ | 0.60 | ||||||
Diluted net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | (1,789 | ) | $ | 2,154 | $ | (3,988 | ) | $ | 9,063 | ||||||
Weighted average common shares |
14,285 | 14,659 | 14,268 | 15,053 | ||||||||||||
Effect of dilutive securities: stock options |
| 1,214 | | 1,225 | ||||||||||||
Diluted weighted average common shares |
14,285 | 15,873 | 14,268 | 16,278 | ||||||||||||
Diluted net income (loss) per share |
$ | (0.13 | ) | $ | 0.14 | $ | (0.28 | ) | $ | 0.56 | ||||||
Options to purchase 2,176,074 shares of common stock were outstanding as of September 30, 2008
but have been excluded from the computation of diluted net loss per share for the three months and
nine months ended September 30, 2008 as their effect was anti-dilutive.
Note 8: Commitments and Contingencies
The Company leases office space in Australia, Canada, China, France, Germany, Hong Kong,
Japan, Spain, Taiwan, the U.K., and the U.S. under operating leases which expire between April 30,
2009 and January 31, 2014. The future minimum lease payments under these operating leases as of
September 30, 2008 total $14,198,000. The future lease payments consist of $1,215,000 due in 2008,
$4,313,000 due in 2009, $2,558,000 due in 2010, $1,994,000 due in 2011, $2,033,000 due in 2012 and
$2,085,000 thereafter.
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 being required to issue up to an additional approximately 4,069,000 shares of common
stock for no additional payment.
On October 15, 2004, the Company announced a program under which it would make cash payments
to people who establish that they were former stockholders of Travelzoo.com Corporation, and who
failed to submit requests to convert shares into Travelzoo Inc. within the required time period.
The accompanying condensed consolidated financial statements include a charge in general and
administrative expenses of $14,000 for these cash payments for the nine months ended September 30,
2008. The liability was $3,000 as of September 30, 2008. The liability is based on the actual
number of valid requests received from former stockholders through the reporting date which had not
yet been processed for payment. 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 Companys
common stock price. The Companys 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
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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 4,069,000 shares had not submitted claims under the program.
Note 9: Income Taxes
In determining the quarterly provisions for income taxes, the Company uses an estimated annual
effective tax rate which is based on our expected annual income and statutory tax rates in the U.S.
The effective tax rate does not reflect any tax benefits from the losses of our foreign operations.
For the three months ended September 30, 2008, we recorded a $421,000 reduction of income tax
expense related to the reversal of tax liabilities previously recorded for uncertain tax
provisions. For the nine months ended September 30, 2008, our effective tax rate was 235%.
As of September 30, 2008 and December 31, 2007, the total amount of unrecognized tax benefits
was approximately $795,000 and $1.1 million, respectively, which if recognized, would reduce the
Companys effective tax rate in the future periods.
The Company includes interest and penalties related to unrecognized tax positions in income
tax expense. As of September 30, 2008 and December 31, 2007, the Company had approximately $85,000
and $111,000, respectively, in accrued interest related to uncertain tax positions. The Company has
not accrued any penalties related to our uncertain tax positions as we believe that it is more
likely than not that there will not be any assessment of penalties.
The Company is no longer subject to U.S. federal and certain state tax examinations for years
before 2005 and is no longer subject to California and Illinois tax examinations for years before
2004.
Note 10: Segment Reporting and Significant Customer Information
The Company manages its business geographically and has three reportable operating segments:
North America, Europe and Asia Pacific. North America consists of the Companys operations in
Canada and the U.S. Europe consists of the Companys operations in France, Germany, Spain, and the
U.K. The Company began operations in Europe in May 2005. Asia Pacific consists of the Companys
operations in Australia, China, Hong Kong, Japan, and Taiwan. The Company began operations in Asia
Pacific in April 2007.
Management relies on an internal management reporting process that provides revenue and
segment operating income (loss) for making financial decisions and allocating resources. Management
believes that segment revenues and operating income (loss) are appropriate measures of evaluating
the operational performance of the Companys segments.
The following is a summary of operating results and assets (in thousands) by business segment:
North | Asia | |||||||||||||||||||
Three months ended September 30, 2008: | America | Europe | Pacific | Elimination | Consolidated | |||||||||||||||
Revenues from unaffiliated customers |
$ | 16,006 | $ | 2,594 | $ | 207 | $ | | $ | 18,807 | ||||||||||
Intersegment revenues |
13 | 9 | | (22 | ) | | ||||||||||||||
Total net revenues |
16,019 | 2,603 | 207 | (22 | ) | 18,807 | ||||||||||||||
Operating income (loss) |
4,222 | (2,248 | ) | (2,334 | ) | 1 | (359 | ) |
North | Asia | |||||||||||||||||||
Three months ended September 30, 2007: | America | Europe | Pacific | Elimination | Consolidated | |||||||||||||||
Revenues from unaffiliated customers |
$ | 18,332 | $ | 1,611 | $ | | $ | | $ | 19,943 | ||||||||||
Intersegment revenues |
33 | | | (33 | ) | | ||||||||||||||
Total net revenues |
18,365 | 1,611 | | (33 | ) | 19,943 | ||||||||||||||
Operating income (loss) |
7,066 | (1,423 | ) | (706 | ) | 1 | 4,938 |
North | Asia | |||||||||||||||||||
Nine months ended September 30, 2008: | America | Europe | Pacific | Elimination | Consolidated | |||||||||||||||
Revenues from unaffiliated customers |
$ | 54,025 | $ | 7,183 | $ | 317 | $ | | $ | 61,525 | ||||||||||
Intersegment revenues |
77 | 39 | | (116 | ) | | ||||||||||||||
Total net revenues |
54,102 | 7,222 | 317 | (116 | ) | 61,525 | ||||||||||||||
Operating income (loss) |
17,415 | (6,502 | ) | (8,313 | ) | 2 | 2,602 |
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North | Asia | |||||||||||||||||||
Nine months ended September 30, 2007: | America | Europe | Pacific | Elimination | Consolidated | |||||||||||||||
Revenues from unaffiliated customers |
$ | 55,406 | $ | 4,392 | $ | | $ | | $ | 59,798 | ||||||||||
Intersegment revenues |
152 | 5 | | (157 | ) | | ||||||||||||||
Total net revenues |
55,558 | 4,397 | | (157 | ) | 59,798 | ||||||||||||||
Operating income (loss) |
22,540 | (3,266 | ) | (1,107 | ) | 2 | 18,169 |
North | Asia | |||||||||||||||||||
As of September 30, 2008 | America | Europe | Pacific | Elimination | Consolidated | |||||||||||||||
Property and equipment, net: |
$ | 3,274 | $ | 166 | $ | 174 | $ | | $ | 3,614 | ||||||||||
Total assets |
57,405 | 4,388 | 3,185 | (29,905 | ) | 35,073 | ||||||||||||||
North | Asia | |||||||||||||||||||
As of December 31, 2007 | America | Europe | Pacific | Elimination | Consolidated | |||||||||||||||
Property and equipment, net: |
$ | 383 | $ | 70 | $ | 169 | $ | | $ | 622 | ||||||||||
Total assets |
45,801 | 3,525 | 2,094 | (14,134 | ) | 37,286 | ||||||||||||||
Revenue for each segment is recognized based on the customer location within a designated
geographic region. Property and equipment are attributed to the geographic region in which the
assets are located.
Significant customer information is as follows:
Percent of Revenues | Percent of Revenues | Percent of Accounts Receivable | ||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | December 31, | |||||||||||||||||||||
Customer | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||
Travelport Limited |
13 | % | 15 | % | 12 | % | 15 | % | 18 | % | 14 | % | ||||||||||||
Expedia, Inc. |
* | 12 | % | * | 11 | % | * | 18 | % |
* | Less than 10% |
The agreements with these customers are in the form of multiple insertion orders from groups
of entities under common control, in either the Companys standard form or in the customers form.
Note 11: Comprehensive Income (Loss)
The following are components of comprehensive income (loss) (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net income (loss) |
$ | (1,789 | ) | $ | 2,154 | $ | (3,988 | ) | $ | 9,063 | ||||||
Other comprehensive loss: |
||||||||||||||||
Foreign currency translation adjustments |
(189 | ) | (17 | ) | (379 | ) | (31 | ) | ||||||||
Total comprehensive income (loss) |
$ | (1,978 | ) | $ | 2,137 | $ | (4,367 | ) | $ | 9,032 | ||||||
Accumulated other comprehensive loss, as reflected in the condensed consolidated balance
sheets, consists of cumulative foreign currency translation adjustments.
Note 12: Foreign Currency
Realized gains and losses from foreign currency transactions are recognized as gain or loss on
foreign currency. The Company does not use derivatives for hedging or speculative purposes.
Note 13: Related Party Transaction
In November 2007, the Company entered into an independent contractor agreement with Holger Bartel, the Companys
current Chief Executive Officer, a member of the Companys Board of Directors and brother of Ralph Bartel, who
controls the Company, to provide consulting services. Fees and expenses for these services during the nine months
ended September 30, 2008 totaled approximately $591,000. Effective October 1, 2008, Holger Bartel was elected as
Chief Executive Officer of the Company and the independent contractor agreement between the Company and Holger
Bartel was terminated on September 30, 2008.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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 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. Travelzoos 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 SEC filings. The forward-looking statements included in this report
reflect the beliefs of our management on the date of this report. Travelzoo undertakes no
obligation to update publicly any forward-looking statements for any reason, even if new
information becomes available or other circumstances occur in the future.
Overview
Travelzoo is a global Internet media company. We publish 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 and products include the Travelzoo Web sites (www.travelzoo.com,
cn.travelzoo.com, www.travelzoo.ca, www.travelzoo.co.jp, www.travelzoo.com.au,
www.travelzoo.com.hk, www.travelzoo.tw, www.travelzoo.co.uk, www.travelzoo.de, www.travelzoo.es,
www.travelzoo.fr, among others), the Travelzoo Top 20 e-mail newsletter, and the Newsflash e-mail
alert service. We also operate SuperSearch, a pay-per-click travel search tool, and the Travelzoo
Network, a network of third-party Web sites that list deals published by Travelzoo. More than 900
travel companies purchase our advertising services.
Our revenues are advertising revenues, consisting of listing fees paid primarily by travel
companies to advertise their offers on the Travelzoo Web sites, in the Travelzoo Top 20 e-mail
newsletter, in the Newsflash e-mail alert service, in SuperSearch, and through the Travelzoo
Network. Revenues are principally generated from the sale of advertising in the U.S. Listing fees
are based on placement, number of listings, number of impressions, or number of clickthroughs.
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.
We have three operating segments based on geographic regions: North America, Europe and Asia
Pacific. North America consists of our operations in Canada and the U.S. Europe consists of our
operations in France, Germany, Spain, and the U.K. Asia Pacific consists of our operations in
Australia, China, Hong Kong, Japan, and Taiwan.
When evaluating the financial condition and operating performance of the Company, management
focuses on the following financial and non-financial indicators:
| Growth in the number of subscribers to the Companys newsletters and page views of the homepages of the Travelzoo Web sites; | ||
| Operating margin; | ||
| Growth in revenues in the absolute and relative to the growth in reach of the Companys publications; and | ||
| Revenue per employee as a measure of productivity. |
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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 managements judgments and estimates. These significant
accounting policies relate to revenue recognition, the allowance for doubtful accounts, 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 as described below. 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. | ||
| 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. |
Revenue from advertising sold to clients through agencies is reported at the net amount billed
to the agency.
Allowance for Doubtful Accounts
We record a provision for doubtful accounts based on our historical experience of write-offs
and 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 clients 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.
Liability to Former Stockholders
On October 15, 2004, we announced a program under which we would make cash payments to people
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. 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
15
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Companys common stock price. The Companys 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. We believe 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. Please refer to Note 8 to
our unaudited condensed consolidated financial statements for further details about our liabilities
to former stockholders.
Results of Operations
The following table sets forth, as a percentage of total revenues, the results of our
operations for the periods indicated.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of revenues |
4.6 | 1.5 | 3.3 | 1.1 | ||||||||||||
Gross profit |
95.4 | 98.5 | 96.7 | 98.9 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
61.6 | 54.9 | 61.0 | 51.9 | ||||||||||||
General and administrative |
35.7 | 18.8 | 31.5 | 16.6 | ||||||||||||
Total operating expenses |
97.3 | 73.7 | 92.5 | 68.5 | ||||||||||||
Income (loss) from operations |
(1.9 | ) | 24.8 | 4.2 | 30.4 | |||||||||||
Other income and expenses, net |
(0.1 | ) | 1.9 | 0.6 | 2.0 | |||||||||||
Income (loss) before income taxes |
(2.0 | ) | 26.7 | 4.8 | 32.4 | |||||||||||
Income taxes |
7.5 | 15.9 | 11.3 | 17.2 | ||||||||||||
Net income (loss) |
(9.5 | %) | 10.8 | % | (6.5 | %) | 15.2 | % | ||||||||
For the three months ended September 30, 2008, we reported a loss from operations of
approximately $359,000. For the nine months ended September 30, 2008, we reported income from
operations of approximately $2.6 million. As of September 30, 2008, we had retained earnings of
approximately $22.0 million. Our loss from operations was 1.9% of revenues for the three months
ended September 30, 2008 compared to income from operations of 24.8% for the same period last year.
Our income from operations decreased to 4.2% of revenues for the nine months ended September 30,
2008 from 30.4% for the same period last year. The decrease in our income from operations is due
primarily to an increase of our cost of revenues, our sales and marketing expenses and our general
and administrative expenses (see Cost of Revenues and Operating Expenses below). For the three
months ended September 30, 2008, our cost of revenues, sales and marketing expenses and general and
administrative expenses as a percentage of revenue increased while our revenues decreased. For the
nine months ended September 30, 2008, our cost of revenues, sales and marketing expenses and
general and administrative expenses as a percentage of revenue increased at a higher rate than the
rate of the increase of our revenues.
We do not know whether our sales and marketing expenses as a percentage of revenue will
continue to increase in future periods. Increased competition in our industry may require us to
increase advertising for our brand and for our products. Increases in the average cost of acquiring
new subscribers (see Subscriber Acquisition below) may result in an increase of sales and
marketing expenses as a percentage of revenue. We may decide to accelerate our subscriber
acquisition for various strategic and tactical reasons and, as a result, increase our marketing
expenses. We may see a unique opportunity for a brand marketing campaign that will result in an
increase of marketing expenses. Further, our strategy to replicate our business model in selected
foreign markets (see Growth Strategy below) may result in a significant increase in our sales and
marketing expenses and have a material adverse impact on our results of operations. We expect
fluctuations of sales and marketing expenses as a percentage of revenue from quarter to quarter.
Some of the fluctuations may be significant and have a material impact on our results of
operations.
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We do not know what our general and administrative expenses as a percentage of revenue will be
in future periods. There may be fluctuations that have a material impact on our results of
operations. We expect our headcount to continue to increase in the future. The Companys headcount
is one of the main drivers of general and administrative expenses. Therefore, we expect our
absolute general and administrative expenses to continue to increase. In addition, we expect our
expansion into foreign markets to result in a significant additional increase in our general and
administrative expenses. We expect that we will incur significant expenses in 2008 in order to
allow management to report on, and our independent auditors to opine on, our internal controls over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our general and
administrative expenses as a percentage of revenue may also fluctuate depending on the number of
requests received related to a program under which the Company intends to make cash payments to
people 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.
Reach
The following table sets forth the number of subscribers of each of our e-mail publications in
North America, Europe, and Asia Pacific as of September 30, 2008 and 2007 and the total number of
page views for the homepages of the Travelzoo Web sites in North America, Europe, and Asia Pacific
for the nine months ended September 30, 2008 and 2007. Management considers the page views for the
Travelzoo homepages as indicators for the growth of Web site traffic. Management reviews these
non-financial metrics with the objective of monitoring the reach of our products and evaluating
whether the Company is able to convert higher reach into higher revenues.
September 30, | Year-over-Year | |||||||||||
2008 | 2007 | Growth | ||||||||||
Subscribers: |
||||||||||||
North America |
||||||||||||
Travelzoo Top 20 |
10,642,000 | 10,498,000 | 1 | % | ||||||||
Newsflash |
8,693,000 | 8,376,000 | 4 | % | ||||||||
Europe |
||||||||||||
Travelzoo Top 20 |
2,064,000 | 1,215,000 | 70 | % | ||||||||
Newsflash |
1,960,000 | 1,114,000 | 76 | % | ||||||||
Asia Pacific |
||||||||||||
Travelzoo Top 20 |
1,064,000 | 43,000 | 2,374 | % | ||||||||
Newsflash |
974,000 | 39,000 | 2,397 | % |
Nine Months Ended September 30, | Year-over-Year | |||||||||||
2008 | 2007 | Growth* | ||||||||||
Page views of homepages of Travelzoo Web sites: |
||||||||||||
North America |
22,314,000 | 26,777,000 | (17 | )% | ||||||||
Europe |
5,658,000 | 6,854,000 | (17 | )% | ||||||||
Asia Pacific |
7,710,000 | 277,000 | 2,683 | % |
* | The comparability of year-over-year changes of page views of the homepages of Travelzoo Web sites may be limited due to the design and navigation of the Web sites. |
In North America, revenues for the nine months ended September 30, 2008 decreased by 3% from
the same period last year. The total number of subscribers in North America to the Travelzoo Top 20
e-mail newsletter as of September 30, 2008 increased by 1% compared to September 30, 2007 and page
views of the homepages of the Travelzoo Web sites in North America for the nine months ended
September 30, 2008 decreased by 17% from the same period last year. In North America, revenues for
the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
decreased while the number of subscribers to our e-mail publications increased and Web site traffic
decreased.
In Europe, revenues for the nine months ended September 30, 2008 increased by 64% from the
same period last year. The total number of subscribers in Europe to the Travelzoo Top 20 e-mail
newsletter as of September 30, 2008 increased by 70% compared to September 30, 2007 and page views
17
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of the
homepages of the Travelzoo Web sites in Europe for the nine months ended September 30, 2008 decreased by 17% from the same period last year. In Europe, revenues increased at a lower
rate than the rate of growth in subscribers to the Travelzoo Top 20 e-mail newsletter. Management
believes that the lower rate of growth in revenues is caused by our start-up strategy. In Germany,
France, and Spain, we focused on rapidly building a significant subscriber base.
In Asia Pacific, we generated $317,000 in revenue for the nine months ended September 30,
2008. We did not generate any revenues in Asia Pacific in the nine months ended September 30, 2007.
We began operations in Australia, China, Hong Kong, Japan, and Taiwan during 2007 and have focused
on rapidly building a significant subscriber base in the countries in which we operate.
Revenues
Our total revenues decreased to $18.8 million for the three months ended September 30, 2008
from $19.9 million for the three months ended September 30, 2007. This represents a decrease of
$1.1 million or 6%. $2.3 million of the decrease in revenues came from our operations in North
America and was attributed primarily to a decrease in revenues from our Travelzoo Web site,
Travelzoo Top 20 newsletter, Newsflash and SuperSearch and decreased spending from certain clients,
offset by the addition of new clients and an increase in revenue from Travelzoo Network. The
decrease in revenues from our operations in North America was offset by a $992,000 increase in
revenues from our operations in Europe, an increase of 62% year over year. We also had a $207,000
increase in revenues from our operations in Asia Pacific which did not generate any revenues in the
three months ended September 30, 2007.
Our total revenues increased to $61.5 million for the nine months ended September 30, 2008
from $59.8 million for the nine months ended September 30, 2007. This represents an increase of
$1.7 million or 3%. Revenues from our operations in Europe increased by $2.8 million, or 64%, year
over year. Our operations in Asia Pacific, which did not generate any revenue in the nine months
ended September 30, 2007, generated $317,000 in revenues in the nine months ended September 30,
2008. The increase in revenues from our operations in Europe and Asia Pacific was offset by a $1.5
million decrease in revenues from our operations in North America and was attributed primarily to a
decrease in revenues from SuperSearch and Newsflash and decreased spending from certain clients,
offset by an increase in revenue from our Travelzoo Top 20 newsletter and Travelzoo Network.
As discussed in Note 10 in the notes to the condensed consolidated financial statements, one
client accounted for 10% or more of our total revenues during the three months and nine months
ended September 30, 2008 and two clients each accounted for 10% or more of our total revenues
during the three months and nine months ended September 30, 2007. No other clients accounted for
10% or more of our total revenues during the three months and nine months ended September 30, 2008
and 2007. The agreements with these clients are in the form of multiple insertion orders from
groups of entities under common control. Management expects revenue concentration to remain
significant in the foreseeable future because there is a high concentration in the online travel
agency industry.
Management believes that our ability to increase revenues in the future depends mainly on the
following factors:
| Our ability to increase our advertising rates; | ||
| Our ability to sell more advertising to existing clients; | ||
| Our ability to increase the number of clients; | ||
| Our ability to develop new revenue streams; and | ||
| Our ability to launch new products. |
We believe that we can increase our advertising rates if the reach of our publications
increases. We do not know if we will be able to increase the reach of our publications. We believe
that we can sell more advertising 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 have 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. We do not know if we will have
market acceptance of our new products.
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Historically, we have increased advertising rates as of January 1 of each year. However, we
did not increase our advertising rates in the U.S. on January 1, 2008 due to intense price
competition in our industry. We intend to review advertising rates and consider increases
once a year as of January 1. However, there is no assurance that we will increase our advertising rates. Depending on the level of competition in the industry and the condition of
the online advertising market, we may decide not to increase our advertising rates.
Average annualized revenue per employee decreased to $363,000 for the three months ended
September 30, 2008 from $623,000 for the three months ended September 30, 2007. The decrease in
average revenue per employee for the three months ended September 30, 2008 compared to the three
months ended September 30, 2007 was primarily due to the increase in headcount related to the
start-up of our business in Europe and Asia Pacific and the decrease in revenue in North America.
Cost of Revenues
Cost of revenues consists of network expenses, including fees we pay for co-location services,
depreciation of network equipment, payments made to affiliate partners of the Travelzoo Network,
and salary expenses associated with network operations staff. Our cost of revenues increased to
$867,000 for the three months ended September 30, 2008 from $295,000 for the three months ended
September 30, 2007. Our cost of revenues increased to $2.0 million for the nine months ended
September 30, 2008 from $669,000 for the nine months ended September 30, 2007. As a percentage of
revenue, cost of revenues increased to 5% and 3%, respectively, for the three months and nine
months ended September 30, 2008 from 1% for the three months and nine months ended September 30,
2007. The $572,000 increase in cost of revenues for the three months ended September 30, 2008
compared to the three months ended September 30, 2007 was primarily due to a $205,000 increase in
payments made to affiliate partners of the Travelzoo Network and a $144,000 increase in fees we pay
for co-location services. The $1.4 million increase in cost of revenues for the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007 was primarily due to a
$753,000 increase in payments made to affiliate partners of the Travelzoo Network, a $204,000
increase in salary expense and a $158,000 increase in professional services expense.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of advertising and promotional expenses, salary
expenses associated with sales and marketing staff, expenses related to our participation in
industry conferences, and public relations expenses. Sales and marketing expenses increased to
$11.6 million for the three months ended September 30, 2008 from $11.0 million for the three months
ended September 30, 2007. Sales and marketing expenses increased to $37.5 million for the nine
months ended September 30, 2008 from $31.0 million for the nine months ended September 30, 2007.
The goal of our advertising was to acquire new subscribers for our e-mail products, increase the
traffic to our Web sites, and increase brand awareness for Travelzoo. The $628,000 increase in
sales and marketing expenses for the three months ended September 30, 2008 compared to the three
months ended September 30, 2007 was primarily due to an $847,000 increase in salary expense due
primarily to an increase in the headcount of our sales and marketing staff, a $390,000 increase in
advertising to acquire new subscribers for our e-mail products and a $346,000 increase in trade
marketing and public relations expenses offset by a $908,000 decrease in advertising to acquire
traffic to our Web sites. For the three months ended September 30, 2008 and 2007, advertising
expenses accounted for 59% and 69%, respectively, of total sales and marketing expenses. The $6.5
million increase in sales and marketing expenses for the nine months ended September 30, 2008
compared to the nine months ended September 30, 2007 was primarily due to a $3.1 million increase
in salary expense due primarily to an increase in the headcount of our sales and marketing staff
and a $2.9 million increase in advertising to acquire new subscribers for our e-mail products. For
the nine months ended September 30, 2008 and 2007, advertising expenses accounted for 62% and 68%
of total sales and marketing expenses, respectively.
Our goal is to increase our revenues from advertising sales. One important factor that drives
our revenues is our advertising rates. We believe that we can increase our advertising rates 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 and continue to promote our brand.
One significant 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.
In May 2005, we began operations in the U.K. In 2006, we began operations in Canada, Germany,
and Spain. In 2007, we began operations in Australia, China, France, Hong Kong, Japan, and Taiwan.
The start-up of our business in Europe and Asia Pacific is expected to result in a relatively high
level of sales and marketing expense in the foreseeable future.
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General and Administrative
General and administrative expenses consist primarily of compensation for administrative,
executive, and software development staff, fees for professional services, rent, bad debt expense,
amortization of intangible assets, and general office expense. General and administrative expenses
increased to $6.7 million for the three months ended September 30, 2008 from $3.8 million for the
three months ended September 30, 2007. General and administrative expenses increased to $19.4
million for the nine months ended September 30, 2008 from $9.9 million for the nine months ended
September 30, 2007. The $3.0 million increase in general and administrative expenses for the three
months ended September 30, 2008 compared to the three months ended September 30, 2007 was primarily
due to a $1.4 million increase in salary and employee related expenses due primarily to an increase
in headcount, a $730,000 increase in rent and office expense, and a $697,000 increase in
professional services expenses. The $9.4 million increase in general and administrative expenses
for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
was primarily due to a $5.0 million increase in salary and employee related expenses due primarily
to an increase in headcount, a $2.2 million increase in rent and office expense, and a $1.7 million
increase in professional services expenses.
In the nine months ended September 30, 2008 and 2007, the Company recorded expense of $14,000
and $94,000, respectively, related to a program under which the Company makes cash payments to
people 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
expense is based on the number of actual valid claims received and the Companys stock price. The
Company cannot reliably estimate future expenses incurred under this program because it is based on
the number of valid requests received and future levels of the Companys common stock price.
We expect our headcount to increase in the future. The Companys headcount is one of the main
drivers of general and administrative expenses. Therefore, we expect our general and administrative
expenses to continue to increase.
Our strategy to replicate our business model in foreign markets is expected to result in a
significant additional increase in our general and administrative expenses in the foreseeable
future.
Subscriber Acquisition
The table set forth below provides for each quarter in 2005, 2006, 2007, and the first nine
months of 2008, an analysis of our average cost for acquisition of new subscribers for our
Travelzoo Top 20 newsletter and our Newsflash e-mail alert service for our North America, Europe,
and Asia Pacific operating segments.
The table includes the following data:
| Average Cost per Acquisition of a New Subscriber: This is the quarterly cost 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. | ||
| Subscribers Removed From List: Subscribers who were removed from our lists 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. | ||
| Balance: This is the number of subscribers at the end of the quarter, computed by taking the previous quarters subscriber balance, adding new subscribers during the current quarter, and subtracting unsubscribes during the current quarter. |
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North America:
Average Cost per | Subscribers | ||||||||||||||||||
Acquisition of a | Removed | ||||||||||||||||||
Period | New Subscriber | New Subscribers | From List | Balance | |||||||||||||||
Q1 2005 |
$ | 2.59 | 659,459 | (475,938 | ) | 8,329,258 | |||||||||||||
Q2 2005 |
$ | 2.62 | 806,734 | (533,109 | ) | 8,602,883 | |||||||||||||
Q3 2005 |
$ | 3.19 | 740,768 | (422,868 | ) | 8,920,783 | |||||||||||||
Q4 2005 |
$ | 2.41 | 729,460 | (273,389 | ) | 9,376,854 | |||||||||||||
Q1 2006 |
$ | 2.54 | 714,643 | (317,947 | ) | 9,773,550 | |||||||||||||
Q2 2006 |
$ | 2.11 | 737,735 | (532,676 | ) | 9,978,609 | |||||||||||||
Q3 2006 |
$ | 1.86 | 491,524 | (327,471 | ) | 10,142,662 | |||||||||||||
Q4 2006 |
$ | 1.56 | 373,559 | (288,883 | ) | 10,227,338 | |||||||||||||
Q1 2007 |
$ | 2.61 | 730,063 | (345,896 | ) | 10,611,505 | |||||||||||||
Q2 2007 |
$ | 3.03 | 552,488 | (335,304 | ) | 10,828,689 | |||||||||||||
Q3 2007 |
$ | 3.92 | 385,408 | (255,008 | ) | 10,959,089 | |||||||||||||
Q4 2007 |
$ | 3.78 | 279,967 | (242,822 | ) | 10,996,234 | |||||||||||||
Q1 2008 |
$ | 4.97 | 296,565 | (270,427 | ) | 11,022,372 | |||||||||||||
Q2 2008 |
$ | 3.39 | 348,506 | (303,623 | ) | 11,067,255 | |||||||||||||
Q3 2008 |
$ | 3.73 | 360,916 | (292,052 | ) | 11,136,119 | |||||||||||||
Europe:
| |||||||||||||||||||
Average Cost per | Subscribers | ||||||||||||||||||
Acquisition of a | Removed | ||||||||||||||||||
Period | New Subscriber | New Subscribers | From List | Balance | |||||||||||||||
Q3 2005 |
$ | 1.65 | 127,857 | (5,577 | ) | 140,153 | |||||||||||||
Q4 2005 |
$ | 2.02 | 174,514 | (16,898 | ) | 297,769 | |||||||||||||
Q1 2006 |
$ | 2.15 | 143,666 | (16,831 | ) | 424,604 | |||||||||||||
Q2 2006 |
$ | 2.69 | 129,438 | (34,070 | ) | 519,972 | |||||||||||||
Q3 2006 |
$ | 1.23 | 126,566 | (29,794 | ) | 616,744 | |||||||||||||
Q4 2006 |
$ | 2.94 | 69,489 | (30,943 | ) | 655,290 | |||||||||||||
Q1 2007 |
$ | 3.89 | 159,439 | (31,350 | ) | 783,379 | |||||||||||||
Q2 2007 |
$ | 4.43 | 206,003 | (39,690 | ) | 949,692 | |||||||||||||
Q3 2007 |
$ | 2.96 | 331,903 | (32,689 | ) | 1,248,906 | |||||||||||||
Q4 2007 |
$ | 5.85 | 165,781 | (33,357 | ) | 1,381,330 | |||||||||||||
Q1 2008 |
$ | 3.90 | 362,417 | (45,152 | ) | 1,698,595 | |||||||||||||
Q2 2008 |
$ | 4.89 | 226,156 | (31,055 | ) | 1,893,696 | |||||||||||||
Q3 2008 |
$ | 4.52 | 253,961 | (38,418 | ) | 2,109,239 | |||||||||||||
Asia Pacific:
| |||||||||||||||||||
Average Cost per | Subscribers | ||||||||||||||||||
Acquisition of a | Removed | ||||||||||||||||||
Period | New Subscriber | New Subscribers | From List | Balance | |||||||||||||||
Q2 2007 |
$ | 2.46 | 1,068 | (4 | ) | 1,064 | |||||||||||||
Q3 2007 |
$ | 2.23 | 42,106 | (138 | ) | 43,032 | |||||||||||||
Q4 2007 |
$ | 2.90 | 180,446 | (9,013 | ) | 214,465 | |||||||||||||
Q1 2008 |
$ | 3.12 | 393,311 | (26,199 | ) | 581,577 | |||||||||||||
Q2 2008 |
$ | 3.37 | 369,491 | (38,048 | ) | 913,020 | |||||||||||||
Q3 2008 |
$ | 2.46 | 194,462 | (43,588 | ) | 1,063,894 |
In North America, we have noted a trend of increasing average 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 North America in Q3 2006 was
impacted by a credit received from a vendor in the amount of $170,000.
In Europe, we see a large fluctuation in the average cost per new subscriber. The average cost
fluctuates from quarter to quarter and from country to country.
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We began operations in Asia Pacific in April 2007 and started acquiring new subscribers in
Australia, China, Hong Kong, Japan, and Taiwan.
Increasing average cost per subscriber is likely to result in 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 may be that greater absolute and relative marketing expenditure is necessary to
continue to grow the reach of our publications. However, 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.
Segment Information
We have presented the business segments in this report based on our organizational structure
as of September 30, 2008.
North America
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net revenues |
$ | 16,019 | $ | 18,365 | 54,102 | $ | 55,558 | |||||||||
Income from operations |
4,222 | 7,066 | 17,415 | 22,540 | ||||||||||||
Income from operations as a % of revenues |
26.4 | % | 38.5 | % | 32.2 | % | 40.6 | % |
In
North America, revenues decreased 13% in the three months ended September 30, 2008 compared to the same
period in 2007. The decrease in revenue was primarily due to decreased revenue from our Travelzoo
Web site, Travelzoo Top 20 newsletter, Newsflash and SuperSearch and decreased spending from
certain clients, offset by the addition of new clients and an increase in revenue from Travelzoo
Network. Sales and marketing expenses as a percentage of revenue decreased to 45% or $7.3 million
for the three months ended September 30, 2008 from 47% or $8.7 million for the three months ended
September 30, 2007. The $1.4 million decrease in sales and marketing expense was primarily due to a
$1.1 million decrease in advertising to acquire traffic to our Web sites and a $286,000 decrease in
expenses for brand marketing campaigns. General and administrative expenses as a percentage of
revenue increased to 24% or $3.8 million for the three months ended September 30, 2008 from 13% or
$2.3 million for the three months ended September 30, 2007. The $1.4 million increase in general
and administrative expense was primarily due to an $831,000 increase in salary and employee related
expenses and a $603,000 increase in professional services expense. Income from operations for North America as a percentage of revenue in the three months ended
September 30, 2008 compared to the three months ended September 30, 2007 decreased to 26.4% from
38.5%.
In
North America, revenues decreased 3% in the nine months ended September 30, 2008 compared to the same
period in 2007. The decrease in revenue was primarily due to decreased revenue from SuperSearch and
Newsflash and decreased spending from certain clients, offset by the addition of new clients and
an increase in revenue from our Travelzoo Top 20 newsletter and Travelzoo Network. Sales and marketing
expenses as a percentage of revenue decreased to 44% or $23.5 million for the nine months ended
September 30, 2008 from 46% or $25.3 million for the nine months ended September 30, 2007. The $1.7
million decrease in sales and marketing expense was primarily due to a $1.3 million decrease in
advertising to acquire traffic to our Web sites and a $1.1 million decrease in advertising to
acquire new subscribers for our e-mail products offset by a $641,000 increase in salary expense.
General and administrative expenses as a percentage of revenue increased to 21% or $11.4 million
for the nine months ended September 30, 2008 from 13% or $7.1 million for the nine months ended
September 30, 2007. The $4.3 million increase in general and administrative expense was primarily
due to a $2.7 million increase in salary and employee related expenses, a $984,000 increase in rent
and office expense, and a $960,000 increase in professional services
expense. Income from operations for North America as a percentage of revenue in the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007 decreased to 32.2% from
40.6%.
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Europe
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net revenues |
$ | 2,603 | $ | 1,611 | $ | 7,222 | $ | 4,397 | ||||||||
Loss from operations |
(2,248 | ) | (1,423 | ) | (6,502 | ) | (3,266 | ) | ||||||||
Loss from operations as a % of revenues |
86.4 | % | 88.3 | % | 90.0 | % | 74.3 | % |
In
Europe, revenues
increased $992,000 or 62% in the three months ended September 30, 2008 compared to the same period
in 2007. The increase in revenue was driven by the addition of new clients, increases in our
advertising rates, increased spending from existing clients, and new product offerings and revenue
streams. Sales and marketing expenses increased to $3.0 million for the three months ended
September 30, 2008 from $2.1 million for the three months ended September 30, 2007. The $953,000
increase in sales and marketing expense was due primarily to a $402,000 increase in salary expense,
a $233,000 increase in advertising to acquire traffic to our Web sites, and a $165,000 increase in
advertising to acquire new subscribers for our e-mail products. General and administrative expenses
increased by $770,000 to $1.7 million for the three months ended September 30, 2008 compared to the
prior year period due primarily to a $185,000 increase in bad debt expense, a $164,000 increase in
intercompany charges, a $146,000 increase in salary expense, and a $109,000 increase in rent and
office expense. Our loss from operations in Europe was $2.2 million for the three months ended September 30,
2008 compared to a loss of $1.4 million for the three months ended September 30, 2007.
In
Europe, revenues
increased $2.8 million or 64% in the nine months ended September 30, 2008 compared to the same
period in 2007. The increase in revenue was driven by the addition of new clients, increases in our
advertising rates, increased spending from existing clients, and new product offerings and revenue
streams. Sales and marketing expenses increased to $9.1 million for the nine months ended September
30, 2008 from $5.5 million for the nine months ended September 30, 2007. This $3.6 million increase
was due primarily to a $1.3 million increase in salary expense, a $1.2 million increase in
advertising to acquire new subscribers for our e-mail products, and an $830,000 increase in
advertising to acquire traffic to our Web sites. General and administrative expenses increased by
$2.3 million to $4.4 million for the nine months ended September 30, 2008 compared to the prior
year period due primarily to a $767,000 increase in salary expenses, a $389,000 increase in
professional services expense which includes recruiting expenses, and a $375,000 increase in rent
and office expense. Our loss from operations in Europe was $6.5 million for the nine months ended September 30,
2008 compared to a loss of $3.3 million for the nine months ended September 30, 2007.
Asia Pacific
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net revenues |
$ | 207 | $ | | $ | 317 | $ | | ||||||||
Loss from operations |
(2,334 | ) | (706 | ) | (8,313 | ) | (1,107 | ) |
In
Asia Pacific, revenues in
the three months ended September 30, 2008 were $207,000. We began operations in Asia Pacific in the
second quarter of 2007 and we did not generate any revenues in the three months ended September 30,
2007. Sales and marketing expense increased to $1.3 million for the three months ended September
30, 2008 from $193,000 for the three months ended September 30, 2007. The $1.1 million increase was
primarily due to a $433,000 increase in salary expense and a $388,000 increase in advertising to
acquire new subscribers for our e-mail products. General and administrative expenses increased to
$1.2 million for the three months ended September 30, 2008 from $513,000 for the three months ended
September 30, 2007. The $724,000 increase was primarily due to a $335,000 increase in salary and
employee related expenses and a $272,000 increase in rent and office
expense. Our loss from operations in Asia Pacific was $2.3 million for the three months ended September
30, 2008 compared to a loss of $706,000 for the three months ended September 30, 2007.
In
Asia Pacific, revenues
in the nine months ended September 30, 2008 were $317,000. We did not generate any revenues in the
nine months ended September 30, 2007. Sales and marketing expense increased to $4.8 million for the
nine months ended September 30, 2008 from $225,000 for the nine months ended September 30, 2007.
The increase of $4.6 million was
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primarily due to a $2.9 million increase in advertising to acquire new subscribers for our
e-mail products and a $1.2 million increase in salary expense. General and administrative expenses
increased to $3.7 million for the nine months ended September 30, 2008 from $882,000 for the nine
months ended September 30, 2007. The $2.8 million increase was primarily due to a $1.4 million
increase in salary and employee related expenses, an $889,000 increase in rent and office expense,
and a $355,000 increase in professional services and recruiting
expenses. Our loss from operations in Asia Pacific was $8.3 million for the nine months ended September
30, 2008 compared to a loss of $1.1 million for the nine months ended September 30, 2007.
Income Taxes
We recorded income tax provisions of $1.4 million and $3.2 million for the three months ended
September 30, 2008 and September 30, 2007, respectively. We recorded income tax provisions of $6.9
million and $10.3 million for the nine months ended September 30, 2008 and September 30, 2007,
respectively. For the three months ended September 30, 2008, we recorded a $421,000 reduction of
income tax expense related to the reversal of tax liabilities previously recorded for uncertain tax
positions. 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 and expenses, adjusted to take into
account expenses that are treated as having no recognizable tax benefit. For the three months ended
September 30, 2008, our effective tax rate was (378%). For the nine months ended September 30,
2008, our effective tax rate was 235%. Losses of approximately $4.7 million and $14.7 million for
the three months and nine months ended September 30, 2008, respectively, from our Europe and Asia
Pacific business segments were treated as having no recognizable tax benefit.
We expect that our effective tax rate in future periods may fluctuate depending on the total
amount of expenses related to payments to former stockholders, from losses or gains incurred by our
operations in Canada, Europe and Asia Pacific, and corresponding U.S. tax credits, if any.
Liquidity and Capital Resources
As of September 30, 2008, we had $15.8 million in cash and cash equivalents. Cash and cash
equivalents decreased from $22.6 million as of December 31, 2007 primarily as a result of cash used
in operating activities and investing activities as explained below. We expect that cash on hand
will be sufficient to provide for working capital needs for at least the next 12 months.
Nine Months Ended September 30, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Net cash provided by (used in) operating activities |
$ | (2,816 | ) | $ | 10,023 | |||
Net cash used in investing activities |
(3,826 | ) | (340 | ) | ||||
Net cash provided by (used in) financing activities |
185 | (19,823 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
(348 | ) | (22 | ) | ||||
Net decrease in cash and cash equivalents |
$ | (6,805 | ) | $ | (10,162 | ) | ||
Cash provided by or used in operating activities is net income or net loss adjusted for
certain non-cash items and changes in assets and liabilities. Net cash used in operating
activities in the nine months ended September 30, 2008 increased by $12.8 million compared to the
nine months ended September 30, 2007. The increase in cash used in operating activities was due
primarily to increases in cash used in our operations in Asia Pacific and Europe.
Net cash used in investing activities was $3.8 million in the nine months ended September 30,
2008. Net cash used in investing activities was $340,000 during the nine months ended September 30,
2007. Purchases of property and equipment in the nine months ended September 30, 2008 increased by
$2.6 million compared to the nine months ended September 30, 2007 due primarily to capitalized
internal-use software costs, leasehold improvements and office furniture purchased for new offices,
and computers and equipment purchased for a second data center. During the nine months ended
September 30, 2008, we used $875,000 for the purchase of restricted cash which serves as the
collateral for a standby letter of credit for the security deposit of our corporate headquarters.
Net cash provided by financing activities was $185,000 for the nine months ended September 30,
2008. Net cash used in financing activities was $19.8 million for the nine months ended September
30, 2007. For the nine months ended September 30, 2008, net cash provided by financing activities
was due to the exercise of stock options. For the nine months ended September 30, 2007, net cash
used in financing activities was due to the repurchase of common stock.
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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 and launch of new
products, expansion of our operations, including subscriber marketing, in North America, Europe,
and Asia Pacific, the amount of resources we devote to promoting awareness of the Travelzoo brand,
and cash payments to former stockholders of Travelzoo.com Corporation. Since the inception of the
program under which we would 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, we have incurred expenses of $2.7 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 substantial increases in our sales and marketing expenses and our
general and administrative expenses since inception, and we anticipate that these increases will
continue for the foreseeable future. We believe cash on hand and cash 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 for at least the next 12 months,
unanticipated events and opportunities or a less favorable than expected development of our
business in Asia Pacific and Europe 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.
If the development of our business in Asia Pacific and Europe is less favorable than expected,
we may decide to significantly reduce the size of our operations and marketing expenses in these
markets with the objective of reducing cash outflow. In the nine months ended September 30, 2008,
cash used in operating activities in Asia Pacific and Europe was $8.1 million and $6.0 million,
respectively.
The following summarizes our principal contractual commitments as of September 30, 2008 (in
thousands):
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||||||||
Operating leases |
$ | 1,215 | $ | 4,313 | $ | 2,558 | $ | 1,994 | $ | 2,033 | $ | 2,085 | $ | 14,198 | ||||||||||||||
Purchase obligations |
427 | | | | | | 427 | |||||||||||||||||||||
Total commitments |
$ | 1,642 | $ | 4,313 | $ | 2,558 | $ | 1,994 | $ | 2,033 | $ | 2,085 | $ | 14,625 | ||||||||||||||
The table above excludes net unrecognized tax benefits of approximately $795,000 as of
September 30, 2008, because the Company is unable to make reasonably reliable estimates on the
timing of the cash settlements with the respective taxing authorities.
Growth Strategy
Our growth strategy has two main elements:
| Replicate our business model in selected foreign markets in Asia Pacific and in Europe; and | ||
| Expand the scope of our business model. |
In 2007, we began to allocate significant resources to the development of the Travelzoo
Network, a network of third-party Web sites that list travel deals published by Travelzoo.
In 2008, we are continuing to develop shows and events listings.
In 2008, we plan to launch a new travel search engine.
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Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157
establishes a framework for measuring the fair value of assets and liabilities. This framework is
intended to provide increased consistency in how fair value determinations are made under various
existing accounting standards which permit, or in some cases require, estimates of fair market
value. SFAS 157 became effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. In February 2008, the FASB issued Staff Position (FSP) No.
157-2, which delayed the effective date of SFAS 157 one year for all non-financial assets and
non-financial liabilities, except those recognized or disclosed at fair value in the financial
statements on a recurring basis. In accordance with FSP No. 157-2, we will measure the remaining
assets and liabilities no later than the quarter ended March 31, 2009 and have not yet determined
the impact of this standard on our condensed consolidated financial statements. The partial
adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our
condensed consolidated financial statements. See Note 4 for information and related disclosures
regarding the fair value of our financial assets.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 provides the option to report certain financial
assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting
that can occur when related assets and liabilities are recorded on different bases. The Company
adopted SFAS 159 on January 1, 2008 and did not elect to use fair value to re-measure any of its
assets or liabilities.
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
We cannot assure you that we will be profitable.
In the nine months ended September 30, 2008, we generated a net loss. Although we generated
net income in 2007 and in prior years, there is no assurance that we will be profitable in the
future. It is likely that we will not sustain profitability in 2008. We expect our operations in
Asia Pacific and Europe to incur significant losses in the
foreseeable future. During the nine months ended September 30,
2008, our revenues in North America have decreased while our
operating expenses in North America have increased. We expect that this will have a
material negative impact on our operating margins and net income. Furthermore, we forecast our
future expense levels based on our operating plans and our estimates of future revenues. We may
find it necessary to significantly accelerate expenditures relating to our sales and marketing
efforts or otherwise increase our financial commitment to creating and maintaining brand awareness
among Internet users and travel companies. 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 be
profitable.
Any of these developments could result in a significant decrease in the trading price of our common
stock.
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, including our acquisition of new subscribers and our expansion efforts in other regions; |
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| 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 sites; | ||
| technical difficulties or system downtime affecting the Internet generally or the operation of our products and services specifically; | ||
| payments which we may make to previous stockholders of Travelzoo.com Corporation who failed to submit requests for shares in Travelzoo Inc. within the required time period; and | ||
| volatility of our operating results in new markets. |
We may significantly increase our operating expenses related to advertising campaigns for
Travelzoo for a certain period if we see a unique opportunity for a brand marketing campaign, if we
find it necessary to respond to increased brand marketing by a competitor, or if we decide to
accelerate our acquisition of new subscribers.
If revenues fall below our expectations in any quarter and we are unable to quickly reduce our
operating expenses in response, our operating results would be lower than expected and our stock
price may fall.
We depend on one client for a substantial part of our revenues.
In the nine months ended September 30, 2008, one client accounted for 12% of our revenues.
The agreements with this client are in the form of multiple insertion orders from entities under
the common control of this client, in either the Companys standard form or in the clients form.
The loss of this client may result in a significant decrease in our revenues, which could have a
material adverse effect on our business.
Our business model may not be adaptable to a changing market.
Our current revenue model depends on advertising fees paid primarily 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.
In the nine months ended September 30, 2008 our cash and cash equivalents decreased by $6.8
million. We intend to continue to grow our business, and intend to fund our current operations and
anticipated growth from the cash on hand. However, this may not be sufficient to meet our needs. We
may not be able to obtain 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.
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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.
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. Recessions may have a material adverse affect
on our business and financial condition.
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, which could
result 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.
Any such event could reduce our revenue and harm our operating results and financial condition. We
do not carry business interruption insurance to compensate us for losses that may occur as a result
of any of these events.
Risks Related to Our Markets and Strategy
Our international expansion is expected to result in substantial operating losses, and is subject
to other material risks.
In May 2005, we began operations in the U.K. In 2006, we began operations in Canada, Germany,
and Spain. In 2007, we began operations in Australia, China, France, Hong Kong, Japan, and Taiwan.
We expect our operations in Asia Pacific and Europe will incur significant losses in the next two
to three years primarily as a result of significant expenses related to subscriber acquisition and
other marketing activities. These losses may not have any recognizable tax benefit. We expect that
this will have a material negative impact on our operating margins and net income. Any of these
developments could result in a significant decrease in the trading price of our common stock. In
addition to uncertainty about our ability to generate net income from our foreign operations and
expand our international market position, there are certain risks inherent in doing business
internationally, including:
| trade barriers and changes in trade regulations; | ||
| difficulties in developing, staffing and simultaneously managing foreign operations as a result of distance, language and cultural differences; | ||
| stringent local labor laws and regulations; | ||
| currency exchange rate fluctuations; | ||
| risks related to government regulation; and | ||
| potentially adverse tax consequences. |
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We may not be able to continue developing awareness of our brand name.
We believe that continuing to build awareness of the Travelzoo brand 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 U.S. in 2001 or the current
global financial crisis 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 such 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:
| rapidly changing technology in online advertising; | ||
| evolving industry standards, including both formal and de facto standards 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 industrys 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.
Since the commencement of our operations, we have experienced a period of rapid growth. In
order to execute our business plan, we must continue to grow significantly. As of September 30,
2008, we had 207 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
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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 could otherwise have a
material adverse effect on our business.
Our
operations may be adversely affected by changes in our senior management.
Effective October 1, 2008, Holger Bartel was elected as Chief Executive Officer of the
Company, replacing Ralph Bartel, who has served as Chairman of the Board of Directors, President
and Chief Executive Officer since the founding of the Company. Ralph Bartel continues as Chairman
of the Board. Holger Bartel is the brother of Ralph Bartel. He served as Executive Vice
President of the Company from 2001 to 2007, and has served as a director of the Company since 2005,
and has extensive familiarity with the business and operations of the Company. However, there can
be no assurances that these changes in the senior management of the Company will not have an
adverse effect on the business of the Company, on a temporary basis or otherwise.
Intense competition may adversely affect our ability to achieve or maintain market share and
operate profitably.
We face intense competition. We compete for advertising dollars with large Internet portal
sites, such as America Online, 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 compete with search engines
like Google and Yahoo! Search that offer pay-per-click listings. We also compete with travel
meta-search engines and online travel deal publishers. We also compete with large online travel
agencies like Expedia and Priceline that also offer advertising placements. In addition, we compete
with newspapers, magazines, and other traditional media companies that operate Web sites which
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 Travelzoo 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.
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 Holger Bartel, our Chief Executive Officer. 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 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. 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.
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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, is our largest
stockholder, holding beneficially, as of November 3, 2008, approximately 58.1% of our outstanding
shares with options to increase his percentage ownership to 63.5% 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. |
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 2002 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 shares in the Company. 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.
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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 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, 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 4,069,000
shares of common stock for no additional payment, which would result in substantial dilution of the
ownership interests of the other stockholders, and in our earnings per share, which could adversely
affect the market price of our common stock.
On October 15, 2004, we announced a program under which we would make cash payments to persons
who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to
submit requests to convert shares into Travelzoo Inc. within the required time period. The
accompanying condensed consolidated financial statements include a charge in general and
administrative expenses of $14,000 for these cash payments for the nine months ended September 30,
2008. The liability was $3,000 as of September 30, 2008. The liability is based on the actual
number of valid requests received from former stockholders through September 30, 2008 that remain
unpaid. 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 4,069,000 shares had not submitted
claims under the program as of September 30, 2008.
Our internal controls over financial reporting may not be effective, and our independent auditors
may not be able to certify as to the effectiveness of our internal controls, which could have a
significant and adverse effect on our business.
We are obligated to evaluate our internal controls over financial reporting in order to allow
management to report on, and our independent auditors to opine on, our internal controls over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and
regulations of the SEC. In our 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. 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 Travelzoo brand 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.
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We have registered the Travelzoo trademark in the U.S., Australia, Canada, China, Hong Kong,
Japan, South Korea, Taiwan, and the U.K. If we are unable to protect our rights in the mark in
North America, Europe, and Asia Pacific, a key element of our strategy of promoting Travelzoo as 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 are uncertain and still evolving. The laws of
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 managements 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 3. Quantitative and Qualitative Disclosures About Market Risk
We believe that our potential exposure to changes in market interest rates is not material.
The Company has no outstanding debt and is not a party to any derivative transactions. We invest
in highly liquid investments with short maturities. Accordingly, we do not expect any material loss
from these investments.
Our operations in Asia Pacific expose us to foreign currency risk associated with agreements
being denominated in Australian Dollars, Chinese Yuan, Hong Kong Dollars, Japanese Yen, and Taiwan
Dollars. Our operations in Canada expose us to foreign currency risk associated with agreements
being denominated in Canadian Dollars. Our operations in Europe expose us to foreign currency risk
associated with agreements being denominated in British Sterling Pounds and Euros. We are exposed
to foreign currency risk associated with fluctuations of these currencies as the financial position
and operating results of our operations in Asia Pacific, Canada and Europe will be translated into
U.S. Dollars for consolidation purposes. We do not use derivative instruments to hedge these
exposures.
Item 4. Controls and Procedures
As of September 30, 2008, we carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief Executive Officer along
with the Companys Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Companys Chief Executive Officer along with the Companys Chief Financial Officer
concluded that our disclosure controls and procedures were effective to ensure that the information
required to be disclosed by us in this quarterly report was recorded, processed, summarized and
reported within the time periods specified in the SECs rules and regulations and were also
effective to ensure that information required to be disclosed by us in this quarterly report was
accumulated and communicated to our management including the Companys Chief Executive Officer and
the Companys Chief Financial Officer to allow timely decisions regarding its disclosure.
During the three months ended September 30, 2008, 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 Companys internal control over financial reporting.
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PART IIOTHER INFORMATION
Item 1A. Risk Factors
An updated description of the risk factors associated with our business is included under
Risk Factors in Managements Discussion and Analysis of Financial Condition and Results of
Operations, contained in Item 2 of Part I of this report. This description includes any material
changes to and supersedes the description of the risk factors associated with our business
previously disclosed in Item 1A of our 2007 Annual Report on Form 10-K and is incorporated herein
by reference.
Item 6. Exhibits
The following table sets forth a list of exhibits:
Exhibit | ||
Number | Description | |
3.1
|
Certificate of Incorporation of Travelzoo Inc. (Incorporated by reference to our Pre-Effective Amendment No. 6 to 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 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, effective as of October 1, 2008, by and between Travelzoo Inc. and Holger Bartel (Incorporated by reference to Exhibit 99.1 on Form 8-K (File No. 000-50171), filed September 23, 2008). | |
10.2
|
Amendment No. 1 to Employment Agreement, effective September 23, 2008, by and between Travelzoo Inc. and Max Rayner (Incorporated by reference to Exhibit 99.1 on Form 8-K (File No 000-50171), filed September 29, 2008). | |
10.3
|
Amendment No. 1 to Employment Agreement, effective September 23, 2008, by and between Travelzoo Inc. and Wayne Lee (Incorporated by reference to Exhibit 99.2 on Form 8-K (File No 000-50171), filed September 29, 2008). | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Filed herewith | |
| Furnished herewith |
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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 thereunto duly authorized.
TRAVELZOO INC. | ||||
(Registrant) | ||||
By: | /s/ Wayne Lee | |||
Wayne Lee | ||||
Chief Financial Officer (Principal Financial Officer and Authorized Signatory) |
Date: November 10, 2008
35