TRAVELZOO INC - 10-K Annual Report

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

As of June 30, 2003, the aggregate market value of voting and non-voting common stock held by non-affiliates of the Registrant, based upon the average of the bid and ask prices of such stock on the OTC Bulletin Board, was $5,503,880.

The number of shares outstanding of the Registrant’s Common Stock as of March 26, 2004 was 19,425,147.

The information in this Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations, assumptions, estimates and projections about Travelzoo Inc. and our industry. These forward-looking statements are subject to the many risks and uncertainties that exist in our operations and business environment that may cause actual results, performance or achievements of Travelzoo to be different from those expected or anticipated in the forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may”, “will”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”, “believes”, “anticipates”, “plans”, “expects”, “intends”, and similar expressions are intended to identify forward-looking statements. Travelzoo’s actual results and the timing of certain events could differ significantly from those anticipated in such forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this Report in the section entitled “Risk Factors” and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings. The forward-looking statements included in this report reflect the beliefs of our management on the date of this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events or circumstances occur in the future.

Travelzoo Inc. is an Internet media company that publishes sales and specials for 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 products include the Travelzoo website, the Travelzoo Top 20 newsletter, Newsflash, and the Weekend.com newsletter.

More than 300 companies purchase our advertising services, including American Airlines, American Express, Alamo Rent-A-Car, ATA, Avis Rent-A-Car, British Airways, Carnival Cruise Lines, Liberty Travel, Delta Air Lines, Expedia, Fairmont Hotels & Resorts, JetBlue Airways, Kimpton Hotels, Marriott Hotels, Caesars Entertainment, Spirit Airlines, Starwood Hotels & Resorts Worldwide, Royal Caribbean, United Airlines, and US Airways.

Our revenues are generated from advertising sales. Our revenues have grown rapidly since we began operations in 1998, primarily driven by an increasing number of travel companies listing their sales and specials on the Travelzoo website and in the Travelzoo Top 20 newsletter. Our revenues increased from approximately $84,000 for the period from May 21, 1998 (inception) to December 31, 1998, to approximately $18.0 million for the year ended December 31, 2003.

Our principal business office is located at 590 Madison Avenue, 21st Floor, New York, New York 10022.

Travelzoo was originally incorporated as Travelzoo.com Corporation (“Travelzoo Bahamas”) in the Commonwealth of The Bahamas. In a “Netsurfer Stockholder” offering, Travelzoo Bahamas issued approximately 2.6 million shares of its common stock to approximately 700,000 visitors who registered on the Travelzoo website. No cash payments were required or received for any of the stock issued pursuant to the Netsurfer Stockholder offering. The number of shares issued was increased as a result of a subsequent two-for-one stock split.

In a series of transactions completed in 2002, Travelzoo Bahamas was merged into Travelzoo Inc., a Delaware corporation, and each share of Travelzoo Bahamas was converted into the right to receive one share

of common stock of Travelzoo Inc. As of December 31, 2003, 130,497 former stockholders of Travelzoo Bahamas have taken the steps necessary to receive their shares in Travelzoo Inc., and 15,294,033 shares of common stock have been issued. If all former stockholders of Travelzoo Bahamas accept their shares in Travelzoo Inc., an additional 4,131,114 shares of common stock will be issued. These shares are reported as outstanding shares in our financial statements.

In October 2003, the Company completed an underwritten secondary offering of 402,500 shares of common stock sold by the Company’s Chief Executive Officer and principal stockholder. The offering was intended primarily to allow the Company to satisfy the requirement for listing on the NASDAQ SmallCap Market that the Company have 300 round lot holders.

On December 30, 2003, Travelzoo became listed on the NASDAQ SmallCap Market under the symbol “TZOO.”

According to the Newspaper Association of America, travel companies spent $1.3 billion in 2003 on national advertising in newspapers (source: Market and Business Analysis, NAA, 2004). We believe that newspapers are currently the main medium for travel companies to advertise their sales and specials.

We believe that several factors are causing and will continue to cause travel companies to increase their spending on Internet advertising of sales and specials:

The Internet Is Consumers’ Preferred Information Source. Market research shows that the Internet has become consumers’ preferred information source for travel (source: Forrester Research, 2002).

Benefits of Internet Advertising vs. Print Advertising. Internet advertising provides travel companies advantages compared to print advertising. These advantages include real-time listings, real-time updates, and performance tracking. See “— Benefits to Travel Companies.”

New Advertising Opportunities. The Internet allows travel companies to advertise their sales and specials in a fast, flexible, and cost-effective manner that has not been possible before.

Suppliers Selling Directly. We believe that many travel suppliers prefer to sell directly to consumers through suppliers’ websites versus selling through travel agents. Internet advertising attracts consumers to suppliers’ websites.

We believe that travel companies often face the challenge of being able to effectively market and sell excess inventory (i.e. airline seats, hotel rooms, or cruise cabins that are likely to be unfilled). The success of marketing excess inventory can have a substantial impact on a travel company’s net income. Almost all costs of travel services are fixed. That is, the costs do not vary with sales. A relatively small amount of unsold inventory can have a significant impact on the profitability of a travel company.

Our management believes that travel companies need a fast, flexible, and cost-effective solution for marketing excess inventory. The solution must be fast, because travel services are a quickly expiring commodity. The period between the time when a company realizes that there is excess inventory and the time when the value of the travel service has become worthless is very short. The solution must be flexible, because the travel industry is dynamic and the demand for excess inventory is difficult to forecast. It is difficult for travel companies to price excess inventory. It is difficult for travel companies to forecast the marketing effort needed to sell excess inventory. The marketing must be cost-effective because excess inventory is often sold at highly discounted prices, which lowers margins.

Our management believes that newspaper advertising, with respect to advertising excess inventory, suffers from a number of limitations which do not apply to the Internet:


	•	typically, ads must be submitted 2 to 5 days prior to the publication date, which makes it difficult to advertise last-minute inventory;


	•	once an ad is published, it cannot be updated or deleted when an offer is sold out;

	•	once an ad is published, the travel company cannot change a price;

	•	in many markets, the small number of newspapers and other print media reduces competition, resulting in high rates for newspaper advertising; and

	•	newspaper advertising does not allow for detailed performance tracking.

We provide airlines, hotels, cruise lines, vacation packagers, and other travel suppliers with a fast, flexible, and cost-effective way to advertise their sales and specials to millions of users. Our products include the Travelzoo website, the Travelzoo Top 20 newsletter, Newsflash, and the Weekend.com newsletter. While our products provide advertising opportunities for travel companies, they also provide Internet users with a free source of information on current sales and specials from hundreds of travel companies.

As travel companies increasingly utilize the Internet to promote their special offers, we believe that our products will enable them to take advantage of the lower cost and real-time communication enabled by the Internet. Our listing management software allows travel companies to add, update, and delete special offer listings on a real-time basis. Our software also provides travel companies with real-time performance tracking, enabling them to optimize their marketing campaigns.


*	For Travelzoo website, reach is from comScore Media Metrix, 3/2003. For Top 20, Newsflash, and Weekend.com, reach is based on internal Travelzoo statistics as of 12/31/2003.


	•	Real-Time Listings of Special Offers. Our technology allows travel companies to advertise new special offers on a real-time basis.


	•	Real-Time Updates. Our technology allows travel companies to update their listings on a real-time basis.

	•	Real-Time Performance Reports. We provide travel companies with real-time tracking of the performance of their advertising campaigns. Our solution enables travel companies to optimize their campaigns by removing or updating unsuccessful listings and further promote successful listings.

	•	Access to Millions of Consumers. We provide travel companies fast access to millions of travel shoppers.

	•	National Reach. We offer travel companies access to Internet users across the U.S.

Our Travelzoo website, our Travelzoo Top 20 newsletter, Newsflash, and our Weekend.com newsletter provide consumers information on current special offers at no cost to the consumer. Key features of our products include:


	•	Aggregation of Offers From Many Companies. Our Travelzoo website and our Travelzoo Top 20 e-mail newsletter aggregate information on current special offers from approximately 300 travel companies. This saves the consumer time when searching for travel sales and specials.

	•	Current Information. Compared to newspaper ads, we provide consumers more current information, since our technology enables travel companies to update their listings on a real-time basis.

	•	Search tools. We provide consumers with the ability to search for specific special offers.


	•	Build Strong Brand Awareness. We believe that it is essential to establish a strong brand with Internet users and within the travel industry. We currently utilize an online marketing program to promote our brands to Internet users. In addition, we believe that we build brand awareness by product excellence that is promoted by word-of-mouth. We utilize sponsorships at industry conferences and public relations to promote our brands within the travel industry.

	•	Increase Reach. In order to attract more users to our products, we intend to expand our advertising campaigns as our business grows. We believe that we also can attract more users by product excellence that is promoted by word-of-mouth.

	•	Quality User Base. We believe that, in addition to increasing our reach, we need to maintain the quality of our user base. We believe that high quality content attracts a quality user base.

	•	Increase Number of Advertising Clients. We intend to continue to grow our advertising client base by expanding the size of our sales force. See “— Sales and Marketing.”

	•	Excellent Service. We believe that it is important to provide our advertising clients with excellent service.

As of December 31, 2003, our client base included approximately 300 travel companies, including airlines, hotels, cruise lines, vacations packagers, tour operators, car rental companies, and travel agents. Some of our clients are:

For the year ended December 31, 2003, our two largest clients accounted for 11% and 10% of our revenues, respectively. For the year ended December 31, 2002, our two largest clients accounted for 15% and 14% of our revenues, respectively. For the year ended December 31, 2001, our two largest clients accounted for 15% and 13% of our revenues, respectively. No other clients accounted for 10% or more of revenues in 2003, 2002, or 2001.

As of December 31, 2003, our direct sales force consisted of a Senior Vice President of Sales, a Vice President of Business Development and five advertising sales managers.

We currently utilize an online marketing program to promote our brands to Internet users. In addition, we believe that we build brand awareness by product excellence that is promoted by word-of-mouth. We utilize sponsorships at industry conferences and public relations to promote our brands within the travel industry.

We have designed our technology to serve a large volume of web traffic in an efficient and scaleable manner.

We co-locate our production servers with SAVVIS, a global provider of hosting, network, and application services. SAVVIS’s facility includes features such as power redundancy, multiple egress and peering to other ISPs, fire suppression and access to our own separate physical space. We believe our arrangements with SAVVIS will allow us to grow without being limited by our own physical and technological capacity, and will also provide us with sufficient bandwidth for our anticipated needs. Because of the design of our website, our users are not required to download or upload large files from or to our website, which allows us to continue increasing the number of our visitors and page views without adversely affecting our performance or requiring us to make significant additional capital expenditures.

Our software is written using open standards, such as Visual Basic Script, and HTML, and interfaces with products from Microsoft. We have standardized our hardware platform on Compaq servers and Cisco switches.

We compete with large Internet portal sites, such as About.com, America Online, Lycos, MSN and Yahoo!, that offer listings or other advertising opportunities for travel companies. We also compete with search engines like Google or Overture that offer pay-per-click listings. In addition, we compete with newspapers,

magazines and other traditional media companies that operate websites which provide advertising opportunities. We expect to face additional competition as other established and emerging companies, including print media companies, enter our market.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger client bases than we do. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships to expand their businesses or to offer more comprehensive solutions.

New technologies could increase the competitive pressures that we face. The development of competing technologies by market participants or the emergence of new industry standards may adversely affect our competitive position. Competition could result in reduced margins on our services, loss of market share or less use of our products by travel companies and consumers. If we are not able to compete effectively with current or future competitors as a result of these and other factors, our business could be materially adversely affected.

There are increasing numbers of laws and regulations pertaining to the Internet, including laws and regulations relating to user privacy, liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy and domain name registration. Moreover, the applicability to the Internet of existing laws governing issues such as intellectual property ownership and infringement, copyright, patent, trademark, trade secret, obscenity, libel and personal privacy is uncertain and developing.

Privacy Concerns. Government agencies are considering adopting regulations regarding the collection and use of personal identifying information obtained from individuals when using Internet sites or e-mail services. While we have implemented and intend to implement additional programs designed to enhance the protection of the privacy of our users, these programs may not conform to any regulations which may be adopted by these agencies. In addition, these regulatory and enforcement efforts may adversely affect our ability to collect demographic and personal information from users, which could have an adverse effect on our ability to provide advertisers with demographic information. The European Union (the “EU”) has adopted a directive that imposes restrictions on the collection and use of personal data. The directive could impose restrictions that are more stringent than current Internet privacy standards in the United States. The directive may adversely affect our activities to the extent that we may seek to collect data from users in EU member countries.

Domain Names. Domain names are the user’s Internet “addresses.” The current system for registering, allocating and managing domain names has been the subject of litigation and of proposed regulatory reform. We own the domain names for travelzoo.com, travelzoo.net, travelzoo.org, travelzoo.ca, travelzoo.co.uk, weekend.com, and weekends.com, and have registered “Travelzoo” and “Weekend.com” as trademarks in the United States. Because of these protections, it is unlikely, yet possible, that third parties may bring claims for infringement against us for the use of our domain name and trademark. In the event such claims are successful, we could lose the ability to use our domain names. There can be no assurance that our domain name will not lose its value, or that we will not have to obtain entirely new domain names in addition to or in lieu of our current domain name if changes in overall Internet domain name rules result in a restructuring in the current system of using domain names which include “.com,” “.net,” “.gov,” “.edu” and other extensions.

Jurisdictions. Due to the global nature of the Internet, it is possible that, although our transmissions over the Internet originate primarily in California, the governments of other states and foreign countries might attempt to regulate our business activities. In addition, because our service is available over the Internet in multiple states and foreign countries, these jurisdictions may require us to qualify to do business as a foreign corporation in each of these states or foreign countries, which could subject us to taxes and other regulations.

Our success depends to a significant degree upon the protection of our brand names, including Travelzoo, Travelzoo Top 20, and Weekend.com. If we were unable to protect the Travelzoo and Travelzoo Top 20 brand

names, our business could be materially adversely affected. We rely upon a combination of copyright, trade secret and trademark laws to protect our intellectual property rights. The steps we have taken to protect our proprietary rights, however, may not be adequate to deter misappropriation of proprietary information.

We may not be able to detect unauthorized use of our proprietary information or take appropriate steps to enforce our intellectual property rights. In addition, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The laws of other countries in which we may market our services in the future are uncertain and may afford little or no effective protection of our intellectual property.

On June 21, 1999, Mr. Bartel, our founder, filed with the United States Patent and Trademark Office (“PTO”) to register the trademark “Travelzoo” for “providing information and news in the field of travel via an on-line global communications network and travel agency services, namely making reservations and booking for transportation,” “providing information and news in the field of travel via an on-line global communications network and travel agency services, namely making reservations and booking for temporary lodging,” and “promoting the goods and services of others through the offer of travel goods and services and shopping club services, namely providing information on travel goods and services to members.” The PTO published that mark for opposition on October 31, 2000. On January 22, 2001, Mr. Bartel, who filed the trademark application as an individual, transferred the ownership of the pending trademark “Travelzoo” to Travelzoo Inc. The mark was registered by the PTO on January 23, 2001.

On November 2, 2000, we filed with the United States Patent and Trademark Office to register the trademark “Weekend.com” for “providing information via websites on global computer networks in the field travel,” “providing information via websites on global computer networks in the fields of entertainment, recreation, and sports,” and “providing information via websites on global computer networks in the fields of fashion, fitness, health and exercise.” The mark was registered by the PTO on November 5, 2002.

On March 18, 2002, we filed with the United States Patent and Trademark Office to register the trademark “Top 20” for “promoting the goods and services of others through the offer of travel goods and services and shopping club services, namely providing information on travel goods and services to members,” “providing information and news in the field of travel via an on-line global communications network and travel agency services namely making reservations and booking for transportation,” and “providing information and news in the field of travel via an on-line global communications network and travel agency services, namely, making reservations and booking for temporary travel lodging.” The mark was registered by the PTO on May 13, 2003.

As of December 31, 2003, we had 39 employees, of whom 11 worked in sales, business development, and marketing, 17 in production, 3 in network operations and 8 were involved in finance, administration, and corporate operations. None of our employees is represented under collective bargaining agreements. We consider our relations with our employees to be good. Because of our anticipated further growth, we expect that the number of our employees will continue to increase for the foreseeable future.

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.

We have only a limited operating history for you to consider in evaluating our business. As a young company, we face risks and uncertainties relating to our ability to successfully implement our business plan. You must consider the risks, expenses and uncertainties which can materially affect the business of a young company like ours. These risks include uncertainty whether we will be able to:


	•	increase awareness of the Travelzoo brand;

	•	attract and retain additional travel companies to list their special offers with us;

	•	attract additional Internet users to the Travelzoo website;

	•	increase the functionality of our products and services;

	•	maintain our current, and develop new, business relationships;

	•	respond effectively to competitive pressures; and

	•	continue to develop and upgrade our technology.

Although we have been profitable in the past, there is no assurance that we will continue to be profitable. We forecast our future expense levels based on our operating plans and our estimates of future revenues. We may find it necessary to accelerate expenditures relating to our sales and marketing efforts or otherwise increase our financial commitment to creating and maintaining brand awareness among travel companies and Internet users. If our revenues grow at a slower rate than we anticipate, or if our spending levels exceed our expectations or cannot be adjusted to reflect slower revenue growth, we may not generate sufficient revenues to sustain profitability. In this case, the value of the shares of Travelzoo could be reduced.

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;

	•	the maintenance and development of our strategic relationships;

	•	the introduction, development, timing, competitive pricing and market acceptance of our products and services and those of our competitors;

	•	our ability to attract and retain key personnel;

	•	our ability to manage our anticipated growth and expansion;

	•	our ability to attract traffic to our website; and

	•	technical difficulties or system downtime affecting the Internet generally or the operation of our products and services specifically.

In addition, we plan to significantly increase our operating expenses to expand our sales and production departments. If revenues fall below our expectations in any quarter and we are unable to quickly reduce our spending in response, our operating results would be lower than expected and our stock price may fall.

In addition, we are required under Generally Accepted Accounting Principles to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We may be required to record a significant expense or charge to earnings in our financial statements in the period any impairment of intangible assets is determined.

In the fiscal year ended December 31, 2003, two clients accounted for 11% and 10% of our revenues, respectively. The loss of one client or both clients may result in a significant decrease in our revenues and results of operations, which could have a material adverse effect on our business.

Our current revenue model depends on advertising fees paid by travel companies. If current clients decide not to continue advertising their sales and specials 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 intend to continue to grow our business, and intend to fund our current operations and our anticipated growth from the cash flow generated from our operations and our retained earnings. However, these sources may not be sufficient to meet our needs. We may not be able to obtain additional financing on commercially reasonable terms, or at all.

If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund our expansion, successfully promote our brand name, develop or enhance our products and services, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our business.

If we choose to raise additional funds through the issuance of equity securities, you may experience significant dilution of your ownership interest, and holders of the additional equity securities may have rights senior to those of the holders of our common stock.

If we obtain additional financing by issuing debt securities, the terms of these securities could restrict or prevent us from paying dividends and could limit our flexibility in making business decisions.

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 spending of travel companies. The last recession decreased consumer travel and caused travel companies to reduce or postpone their marketing spending generally, and their online marketing spending in particular. If the current economic recovery does not continue, our business and financial condition could be materially adversely affected.

Our operations 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.

We are vulnerable to coordinated attempts to overload our systems with data, resulting in denial or reduction of service to some or all of our users for a period of time. We have experienced denial of service attacks in the past, and may experience such attempts in the future. We do not carry business interruption insurance to compensate us for losses that may occur as a result of any of these events. Any such event could reduce our revenue and harm our operating results and financial condition.

The Securities Exchange Act of 1934 requires us to provide paper copies of certain reports to our stockholders who do not consent to receiving electronic delivery. If a significant number of our stockholders do not consent to electronic delivery of stockholder communications or revoke such consent, we may face significant costs related to the printing and mailing of such reports.

The future of our business is dependent on the continuing acceptance by travel companies of the Internet as an effective marketing tool, and on the ongoing acceptance by consumers of the Internet as a source for information on offers from travel companies. The adoption of online marketing by travel companies, particularly among those that have historically relied upon traditional advertising methods, requires the acceptance of a new way of conducting business, marketing and advertising. Many of our potential clients have little or no experience using the Internet as a marketing tool, and not all Internet users have experience using the Internet to book travel. As a result, we cannot be sure that we will be able to effectively compete with traditional advertising methods. If we are unable to compete with traditional advertising methods, our business and results of operations could be materially adversely affected.

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.

Events like the war with Iraq in 2003 or the terrorist attacks on the United States in 2001 have a negative impact on the travel industry. We are not in a position to evaluate the net effect of these circumstances on our business. In the longer term, our business might be negatively affected by financial pressures on the travel

industry. However, our business may also benefit if travel companies increase their efforts to promote special offers or other marketing programs. If the events result in a long-term negative impact on the travel industry, such impact could have a material adverse effect on our business.

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.

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 industry’s changing technological requirements, our business could be materially adversely affected.

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 have recently experienced a period of rapid growth. In order to execute our business plan, we must continue to grow significantly. As of December 31, 2003, we had 39 employees. We expect that the number of our employees will continue to increase for the foreseeable future. This growth has placed, and our anticipated future growth will continue to place, a significant strain on our management, systems and resources. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures. We will also need to continue to expand and maintain close coordination among our sales, production, marketing, IT, and finance departments. We may not succeed in these efforts. Our inability to expand our operations in an efficient manner could cause our expenses to grow disproportionately to revenues, our revenues to decline or grow more slowly than expected and otherwise have a material adverse effect on our business.

We compete with large Internet portal sites, such as About.com, America Online, Lycos, MSN and Yahoo!, that offer listings or other advertising opportunities for travel companies. These companies have significantly greater financial, technical, marketing and other resources and larger client bases. We also compete we search engines like Google or Overture that offer pay-per-click listings. In addition, we compete with newspapers, magazines and other traditional media companies that 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.

Our future success depends to a significant extent on the continued service and coordination of our management team, particularly Ralph Bartel, our Chairman, President, Chief Executive Officer, Chief Financial Officer and Secretary. The loss or departure of any of our officers or key employees could materially adversely affect our ability to implement our business plan. We do not maintain key person life insurance for any member of our management team. In addition, we expect new members to join our management team in the future. These individuals will not previously have worked together and will be required to become integrated into our management team. If our key management personnel are not able to work together effectively or successfully, our business could be materially adversely affected.

We 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.

Ralph Bartel, who founded Travelzoo and who is our Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Secretary, is our largest stockholder, holding approximately 70% of our outstanding shares with options to increase his percentage ownership to 73% on a fully-diluted basis, assuming all former stockholders of Travelzoo Bahamas receive shares of Travelzoo Inc. Through his share ownership, he is in a position to control Travelzoo and to elect our entire board of directors.

If our shares trade at less than five dollars per share, since the shares are not listed on a recognized national exchange or on the NASDAQ National Market, our common stock may be deemed to be a “penny stock” under Rule 3a51-1 under the Securities Exchange Act of 1934. Compliance with the requirements governing penny stocks may make it more difficult for investors in our common stock to resell their shares to third parties or to otherwise dispose of them.

Section 15(g) of the Exchange Act, and Rule 15g-2 under the Exchange Act, require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and

to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 promulgated under the Securities Exchange Act of 1934 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. These requirements significantly increase the time necessary for a broker-dealer to sell a stock and limit the available purchasers for a stock.

The trading price of our common stock has been and may continue to be subject to wide fluctuations. During 2003, the sale prices of our common stock on the OTC Bulletin Board and on the NASDAQ SmallCap Market ranged from $3.50 to $11.00 per share. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results; announcements of technological innovations or new products by us or our competitors; changes in financial estimates and recommendations by securities analysts; the operating and stock price performance of other companies that investors may deem comparable to us; and news reports relating to trends in our markets or general economic conditions.

In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.

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;

	•	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.

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.

The U.S. Patent and Trademark Office registered the trademark for “Travelzoo” on January 23, 2001. If we are unable to protect our rights in the mark, a key element of our strategy of promoting 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 is uncertain and still evolving. The laws of other countries in which we may market our services in the future are uncertain and may afford little or no effective protection of our intellectual property. The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from our technology and brand name without paying us for them. If this were to occur, our business could be materially adversely affected.

We 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.

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.

Our principal offices are located in approximately 3,000 square feet of office space in New York, New York under an operating lease with HQ Global Workplaces, Inc. that expires on December 31, 2005. Our West Coast offices are located in approximately 3,000 square feet of office space in Mountain View, California under an operating lease with HQ Global Workplaces, Inc. that expires on December 31, 2005. Our Chicago offices are located in approximately 2,000 square feet of office space under an operating lease with Regus Business Centre that expires on June 30, 2005. Our Miami offices are located in approximately 1,000 square feet of office space under an operating lease with Regus Business Centre that expires on May 31, 2005. We believe that our leased facilities are adequate to meet our current needs; however, we intend to expand our operations and therefore may require additional facilities in the future. We believe that such additional facilities are available.

From time to time, we are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights and other intellectual property rights, as well as claims by former employees. We are not currently aware of any legal proceedings or claims pending or threatened that we believe will have, individually or in the aggregate, a material adverse effect on Travelzoo’s financial condition or results of operations.

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

Since December 30, 2003, our common stock has been quoted on the NASDAQ SmallCap Market under the symbol “TZOO.” From August 28, 2002 to December 29, 2003, our common stock was quoted on the OTC Bulletin Board. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported by the OTC Bulletin Board and NASDAQ.

On March 26, 2004, the last reported sales price of the common stock on the NASDAQ SmallCap Market was $7.93 per share.

As of December 31, 2003, there were approximately 129,600 holders of record of the common stock.

Travelzoo has not declared or paid any cash dividends since inception and does not expect to pay cash dividends for the foreseeable future. We currently intend to retain future earnings to finance the expansion of our business. The payment of dividends will be at the discretion of our board of directors and will depend upon factors such as future earnings, capital requirements, our financial condition and general business conditions.

The selected consolidated financial data set forth below are derived from audited consolidated financial statements. The following selected consolidated financial data is qualified in its entirety by, and should be read

in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere herein.

The following discussion and analysis of Travelzoo’s financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and the notes thereto appearing elsewhere in this report.

Our revenues are advertising revenues, consisting of listing fees paid by travel companies to advertise their special offers on the Travelzoo website and in the Travelzoo Top 20 e-mail newsletter, the Newsflash e-mail product, the Weekend.com e-mail newsletter, and banner advertising sales. Revenues are principally generated from the sale of advertising on our Travelzoo website and in our Travelzoo Top 20 newsletter. Listing fees are based on placement, number of listings, number of impressions, or number of clickthroughs. Banner advertising rates are based on CPM rates (cost per thousand impressions). Smaller advertising agreements — typically $2,000 or less per month — typically renew automatically each month if they are not terminated by the client. Larger agreements are typically related to advertising campaigns and are not automatically renewed.

When evaluating the financial condition and operating performance of the Company, management focuses on the following financial and non-financial indicators:


	•	Growth of number of subscribers of the Company’s newsletters and page views of selected sections of the Travelzoo website;

	•	Growth in revenues in the absolute and relative to the growth in reach of the Company’s products;

	•	Pre-tax profitability;

	•	Revenue per employee as a measure of productivity.

We believe that there are a number of accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, the allowance for doubtful accounts and recoverability of intangible assets. These policies, and our procedures related to these policies, are described in detail below.

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

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 probable. The Company evaluates each of these criteria as follows:


	•	Evidence of an arrangement. We consider a non-cancelable 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.

	•	Collection is deemed probable. We conduct a credit review for all significant transactions at the time of the arrangement to determine the creditworthiness of the client. Collection is deemed probable 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 probable, then we defer the revenue and recognize the revenue upon cash collection.

Advertising sold to clients through agencies is generally reported at the net amount billed to the agency.

We initially record a provision for doubtful accounts based on our historical experience of write-offs and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, management considers the age of the accounts receivable, our historical write-offs, the creditworthiness of the client, the economic conditions of the client’s industry, and general economic conditions, among other factors.

Should any of these factors change, the estimates made by management will also change, which could impact the level of our future provision for doubtful accounts. Specifically, if the financial condition of our clients were to deteriorate, affecting their ability to make payments, additional provision for doubtful accounts may be required.

As of December 31, 2003, our long-lived assets include intangible assets of $147,000. The intangible assets consist of two Internet domain names which we acquired in 2001: weekend.com and weekends.com. We evaluate the recoverability of our intangible assets in accordance with Statement of Financial Accounting Standards No. 144, “Impairment of Long-Lived Assets,” when events or circumstances indicate a potential impairment by estimating the undiscounted cash flows to be generated from the use of these assets. No impairment losses were recorded related to intangible assets in 2003. Any impairment losses recorded in the future could have a material adverse impact on our financial conditions and results of operations.

The following table sets forth, as a percentage of total revenues, the results of our operations for the years ended December 31, 2003, 2002 and 2001.

For the year ended December 31, 2003, we reported pre-tax income of approximately $3.8 million. As of December 31, 2003, we had retained earnings of approximately $3.8 million. Pre-tax profitability increased to 20.9% for the year ended December 31, 2003 from 14.5% in the previous year. Pre-tax profitability increased because revenues grew faster than operating expenses.

The following table sets forth the number of subscribers of each of our e-mail publications as of December 31, 2003 and 2002 and the total number of page views for selected sections of the Travelzoo website for the years ended December 31, 2003 and 2002. Management considers the Travelzoo homepage and the front pages of destination categories as indicators for the growth of site traffic. Management reviews these non-

financial metrics for two reasons: First, to monitor the progress that the Company is making to increase the reach of its products. Second, to evaluate if the Company is able to convert higher reach into higher revenues.

Management believes that the increase in reach of its products in the year ended December 31, 2003 was in line with its strategy and goals.

The Company’s revenues for the year ended December 31, 2003 increased by 83% from the previous year. Substantially all revenues were generated from the Travelzoo website and the Travelzoo Top 20 newsletter. The number of subscribers of the Travelzoo Top 20 newsletter increased by 76%. Page views of selected sections of the Travelzoo website increased by 68% and 44%. Management believes that the data for the years ended December 31, 2003 and 2002 indicate that the Company was able to generate higher revenues as reach increased.

Our total revenues increased to $18.0 million for the year ended December 31, 2003 from $9.8 million for the year ended December 31, 2002. This represents an increase of 83%. Total revenues for the year ended December 31, 2002 increased to $9.8 million from $6.1 million for the year ended December 31, 2001. This represents an increase of 60%. The increase in both years was primarily due to an increase in the number of advertisers. In addition, the increase was due to an increase in our advertising rates.

Average revenue per employee increased to $461,000 for the year ended December 31, 2003 and to $379,000 for the year ended December 31, 2002 from $324,000 for the year ended December 31, 2001.

Cost of revenues consists of network expenses, including fees we pay for co-location services, depreciation of network equipment and salary expenses associated with network operations staff. Our cost of revenues increased to $399,000 for the year ended December 31, 2003 and to $351,000 for the year ended December 31, 2002 from $304,000 for the year ended December 31, 2001. As a percentage of revenue, cost of revenues decreased to 2% for the year ended December 31, 2003 from 4% for the year ended December 31, 2002 and 5% for the year ended December 31, 2001. The decreases resulted primarily from an increase in revenues that was not offset by an increase in our network operations costs.

Sales and marketing expenses consist primarily of advertising and promotional expenses, public relations expenses, conference expenses, and salary expenses associated with sales and marketing staff. Sales and marketing expenses increased to $9.6 million for the year ended December 31, 2003 and to $5.7 million for the year ended December 31, 2002 from $3.3 million for the year ended December 31, 2001. The increase in sales and marketing expenses in both years was primarily due to increases of our advertising campaigns. The goal of our advertising was to acquire new subscribers for our e-mail products and to increase brand awareness for Travelzoo. For the years ended December 31, 2003, 2002, and 2001, advertising expenses accounted for 71%, 69%, and 69%, respectively, of sales and marketing expenses. Advertising activities during these three year periods consisted primarily of online advertising. The increase in sales and marketing expenses in the years

ended December 31, 2003 and 2002 was also due to an increase of our sales force and our decision to hire more experienced sales personnel.

General and administrative expenses consist primarily of compensation for administrative and executive staff, fees for professional services, rent, bad debt expense, amortization of intangible assets and general office expense. General and administrative expenses increased to $4.3 million for the year ended December 31, 2003 and to $2.3 million for the year ended December 31, 2002 from $1.4 million for the year ended December 31, 2001. General and administrative expenses increased primarily due to increases in expenses for office space and legal and professional services which included non-recurring and non-tax deductible expenses of $328,000 related to the secondary offering that was completed in October 2003. General and administrative expenses for the year ended December 31, 2001 include a credit of $128,000 for a reduction to the bad debt reserve principally due to the collection of a doubtful account.

Merger expenses consist of expenses relating to the registration statement and proxy statement filed with the SEC relating to the merger of Travelzoo.com Corporation into Travelzoo Inc. which was completed in 2002. As a result, merger expenses decreased to $-0- for the year ended December 31, 2003 from $55,000 for the year ended December 31, 2002 and $333,000 for the year ended December 31, 2001. The expenses consisted mostly of fees for professional services, primarily legal and accounting.

For the year ended December 31, 2003, we recorded an income tax provision of $1.7 million. For the years ended December 31, 2002 and 2001, we recorded income tax provisions of $573,000 and $521,000, respectively. Our income is generally taxed in the U.S. and our income tax provisions reflect federal and state statutory rates applicable to our levels of income and the effect of non-deductible offering costs and merger expenses in 2003, 2002, and 2001. The effective tax rates for 2003, 2002, and 2001 were 45%, 40%, and 59%, respectively.

As of December 31, 2003, we had $3.5 million in cash and cash equivalents. Cash and cash equivalents increased from $1.3 million on December 31, 2002 primarily as a result of cash provided by operations explained below. Cash and cash equivalents increased to $1.3 million on December 31, 2002 from $610,000 on December 31, 2001 primarily as a result of cash provided by operations explained below. We expect that cash flows generated from operations will continue to be sufficient to provide for working capital needs for at least the next 12 months.

Net cash provided by operating activities in the year ended December 31, 2003 was $2.4 million. Net cash provided by operating activities in the year ended December 31, 2002 was $769,000. Net cash provided by operating activities in the year ended December 31, 2001 was $771,000. In the year ended December 31, 2003, net cash provided by operating activities resulted primarily from net income and a net increase in income tax payable and accrued expenses offset by an increase in accounts receivable. In the year ended December 31, 2002, net cash provided by operating activities resulted primarily from net income and an increase in accounts payable and accrued expenses offset by income tax payments and an increase in accounts receivable. In the year ended December 31, 2001, net cash provided by operating activities resulted primarily from our net income, adjusted for certain non-cash items, and a decrease in prepaid expenses offset by increase in deposits.

Net cash used in investing activities was $120,000, $121,000 and $156,000 during the years ended December 31, 2003, 2002 and 2001, respectively. In all periods, net cash was used in investing activities for equipment purchases, except for 2001, which included $125,000 for the purchase of a domain name.

There were no cash flows related to financing activities in the years ended December 31, 2003 and 2002. Net cash used in financing activities was $50,000 for the year ended December 31, 2001. In the year ended December 31, 2001, net cash was used in financing activities for repayment of a loan made to Travelzoo by Ralph Bartel, its principal stockholder.

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 the Travelzoo website, the Travelzoo Top 20 newsletter, Newsflash, the Weekend.com newsletter and expansion of our operations and the amount of our resources we devote to promoting awareness of the Travelzoo brand. Consistent with our growth, we have experienced a substantial increase in our sales and marketing expenses and capital expenditures since inception, and we anticipate that these increases will continue for the foreseeable future. We believe cash on hand and generated during those periods will be sufficient to pay such costs. In addition, we will continue to evaluate possible investments in businesses, products and technologies, the consummation of any of which would increase our capital requirements.

Although we currently believe that we have sufficient capital resources to meet our anticipated working capital and capital expenditure requirements beyond the next 12 months, unanticipated events and opportunities may require us to sell additional equity or debt securities or establish new credit facilities to raise capital in order to meet our capital requirements. If we sell additional equity or convertible debt securities, the sale could dilute the ownership of our existing stockholders. If we issue debt securities or establish a new credit facility, our fixed obligations could increase, and we may be required to agree to operating covenants that would restrict our operations. We cannot be sure that any such financing will be available in amounts or on terms acceptable to us.

The following summarizes our principal contractual commitments as of December 31, 2003 (in thousands):

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 became effective for the Company beginning in 2003 and the adoption of this statement did not have a material impact on our consolidated financial statements.

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

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

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 requires us to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in the issuance of the guarantee. The disclosure requirements effective for the year ending December 31, 2002, expand the disclosures required by a guarantor about its obligation under a guarantee. The accounting requirements for the initial recognition of guarantees became applicable for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our consolidated financial statements.

In December 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF Issue 00-21”). ETTF Issue 00-21 mandates how to identify whether goods or services, or both, that are to be delivered separately in a bundled sales arrangement should be accounted for as separate units of accounting. The consensus is effective prospectively for our third quarter of 2003. We evaluated the guidance in EITF Issue 00-21 and concluded that our advertising arrangements should continue to be accounted for as a single unit of accounting. As a result, the adoption of EITF Issue 00-21 did not have a material impact on our revenue recognition policies or consolidated financial statements.

In December 2003, the FASB issued Interpretation No. 46 (“FIN 46R”) (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“ARB 51”), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (“FIN 46”) , which was issued in January 2003. Before concluding that it is appropriate to apply ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity (VIE). As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003, to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after December 15, 2003 and no later than the end of the first reporting period that ends after March 15, 2004 for all other entities. The adoption of FIN 46R is not expected to have an effect on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS 150”) that establishes standards on how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, Financial Accounting Standards Board Staff Position 150-3 was issued, which indefinitely deferred the effective date of SFAS 150 for certain mandatory redeemable non-controlling interests. The adoption of SFAS 150 had no effect on our consolidated financial statements.

The Company adopted the new disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, during the quarter ended March 31, 2003. The adoption of the disclosure requirements of this statement did not have an impact on the Company’s financial position, results of operations or cash flows.

The Company has no outstanding debt, is not a party to any derivatives transactions, and does not have any other material liabilities or assets which are subject to risks relating to interest rates, currency exchange rates, commodity price risks or other market risks.

We have audited the accompanying consolidated balance sheets of Travelzoo Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Travelzoo Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

Travelzoo Inc. is an Internet media company that publishes sales and specials for hundreds of travel companies. The Company’s products include the Travelzoo website, the Travelzoo Top 20 e-mail newsletter, the Newsflash e-mail product, and the Weekend.com e-mail newsletter.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company was formed as a result of a combination and merger of entities founded by the Company’s majority stockholder, Mr. Ralph Bartel. In 1998, Mr. Bartel founded Travelzoo.com Corporation, a Bahamas corporation, which also issued 5,155,874 shares via the Internet to approximately 700,000 stockholders (“the Netsurfer stockholders”) for no cash consideration. In 1998, Mr. Bartel also founded Silicon Channels Corporation, a California corporation, to operate the Travelzoo website. During 2001, Travelzoo Inc. was formed as a subsidiary of Travelzoo.com Corporation, and Mr. Bartel contributed all of the outstanding shares of Silicon Channels to Travelzoo Inc. in exchange for 8,129,273 shares of Travelzoo Inc. and options to acquire an additional 2,158,349 shares at $1.00. The merger was accounted for as a combination of entities under common control using “as-if pooling-of-interests” accounting. Under this method of accounting, the assets and liabilities of Silicon Channels Corporation and Travelzoo Inc. were carried forward to the combined company at their historical costs. In addition, all prior period financial statements of Travelzoo Inc. were restated to include the combined results of operations, financial position and cash flows of Silicon Channels Corporation.

During January 2001, the Board of Directors of Travelzoo.com Corporation proposed that Travelzoo.com Corporation be merged with Travelzoo Inc. whereby Travelzoo Inc. would be the surviving entity. On March 15, 2002, the stockholders of Travelzoo.com Corporation approved the merger with Travelzoo Inc. On April 25, 2002, the certificate of merger was filed in Delaware upon which the merger became effective and Travelzoo.com Corporation 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. Stockholders have a period of two years following the effective date of the merger, April 25, 2002, to receive shares of Travelzoo Inc. Travelzoo.com Corporation had 11,295,874 shares outstanding. As of December 31, 2003, 7,164,760 shares of Travelzoo.com Corporation had been exchanged for shares of Travelzoo Inc. The remaining 4,131,114 shares of Travelzoo Inc. that may be exchanged are included in the issued and outstanding common stock of Travelzoo Inc. and earnings per share calculations. The merger was accounted for as a combination of entities under common control using “as-if pooling-of-interests” accounting. Under this method of accounting, the assets and liabilities of Travelzoo.com Corporation and Travelzoo Inc. were carried forward at their historical costs. In addition, all prior period financial statements of Travelzoo Inc. were restated to include the combined results of operations, financial position and cash flows of Travelzoo.com Corporation. The restated results of operations and cash flows of Travelzoo Inc. are identical to the combined results of Travelzoo.com Corporation and Travelzoo Inc.

Substantially all revenue consists of advertising sales. Advertising revenues are derived principally from the sale of advertising on the Travelzoo website and in the Travelzoo Top 20 e-mail newsletter.

Advertising revenues are recognized in the period in which the advertisement is displayed, provided that evidence of an arrangement exists, the fees are fixed or determinable, no significant obligations remain at the end of the period, and collection of the resulting receivable is deemed probable. Where collectibility is not probable, the revenue will be recognized upon cash collection, provided that the other criteria for revenue

recognition have been met. If fixed-fee advertising is displayed over a term greater than one month, revenues are recognized ratably over the period. To the extent that any minimum guaranteed impressions are not met during the contract period, the Company defers recognition of the corresponding revenues until the guaranteed impressions are achieved. Fees for banner advertising and other variable-fee advertising arrangements are recognized based on the number of impressions displayed or clicks delivered during the period.

The Company had outsourced part of its advertising sales and production activities to DoubleClick, Inc. (“DoubleClick”). Under the terms of the agreement with DoubleClick, the Company received a portion of the revenue received by DoubleClick from customers for the display of advertising on the Travelzoo website. The Company recorded these revenues on a net basis. The gross revenue received by DoubleClick from advertising on the Travelzoo website was $-0-, $82,939 and $600,454 for the years ended December 31, 2003, 2002, and 2001 respectively. The Company’s share of this income, which has been recorded as revenue, was $-0-, $38,354 and $332,736 for the years ended December 31, 2003, 2002, and 2001 respectively. The agreement with DoubleClick was canceled as of August 23, 2002.

Advertising sold to clients through agencies is generally reported at the net amount billed to the agency.

Net income per share has been calculated in accordance with SFAS No. 128, Earnings per Share. Basic net income per share is computed using the weighted-average number of common shares outstanding for the period, including shares reserved for issuance to former shareholders of Travelzoo.com Corporation reported as outstanding. Diluted net income per share is computed by adjusting the weighted-average number of common shares outstanding for the effect of potential common shares outstanding during the period. Potential common shares included in the diluted calculation consist of incremental shares issuable upon the exercise of outstanding stock options calculated using the treasury stock method.

The following table sets forth the calculation of basic and diluted income per share:

For the year ended December 31, 2001, all outstanding stock options were excluded from the calculation of diluted earnings per share because their effect was antidilutive.

Management of the Company have made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 3 years for property and equipment.

Amortization expense was $65,500, $78,518 and $50,714 for the years ended December 31, 2003, 2002 and 2001, respectively.

In October 2001, the Company completed the acquisition of the weekends.com domain name. As consideration for the purchase, the Company paid the seller $125,000 and agreed to provide a minimum number of clicks to the seller’s other websites through advertising placed on the Travelzoo website. The fair value of the advertising services of $89,286 was determined based on the cash price of similar advertising services and recorded as deferred revenue. The revenue was recognized as the clicks were delivered. During the years ended December 31, 2002 and 2001, $3,410 and $16,449, respectively, of revenues related to this arrangement were recognized. The agreement with the seller to provide advertising services expired on September 30, 2002. As such, $69,427 of advertising was not delivered and the carrying amounts of the intangible asset and related deferred revenue were reduced accordingly.

Estimated future amortization expense related to intangible assets at December 31, 2003 is as follows:

Cash equivalents consist of highly liquid investments with remaining maturities of less than three months on the date of purchase. As of December 31, 2003 and 2002, cash equivalents are comprised of $2,540,395 and $527,258, respectively, held in money market accounts.

Advertising costs amounted to $6,745,769, $3,960,464 and $2,264,488 for the years ended December 31, 2003, 2002, and 2001, respectively. During the years ended December 31, 2003, 2002 and 2001, $429,296, $546,214 and $492,672, respectively, of advertising services were purchased from the Company’s clients under non-barter arrangements.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, valuation allowances must be established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Impairment of Long-Lived Assets. SFAS No. 144 requires an impairment loss to be recognized on assets to be held and used if the carrying amount of a long-lived asset group is not recoverable from its undiscounted cash flows. The amount of the impairment loss is measured as the difference between the carrying amount and the fair value of the asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

As allowed under SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for fixed plan stock awards to employees. Deferred stock-based compensation for options granted to employees is determined as the excess of the fair value of the common stock over the exercise price on the date options were granted. Stock-based compensation is amortized over the vesting period of the individual award.

Had all stock-based compensation awards granted to employees and directors been accounted for using the fair value based method, net income and net income per share would have been adjusted to the amounts reported in the following table.

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

The Company accounts for website development costs in accordance with EITF Issue No. 00-02, Accounting for Website Development Costs. No internal website development costs that qualify for capitalization have been incurred in the years ended December 31, 2003, 2002 and 2001.

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 was effective for the Company beginning in 2003 and the adoption of this statement did not have a material impact on the consolidated financial statements.

transactions. SFAS No. 145 was effective for the Company beginning in 2003, and the effect of adoption did not have a material impact on the consolidated financial statements.

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

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 requires us to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in the issuance of the guarantee. The disclosure requirements effective for the year ending December 31, 2002, expand the disclosures required by a guarantor about its obligation under a guarantee. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the consolidated financial statements.

In December 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF Issue 00-21”). ETTF Issue 00-21 mandates how to identify whether goods or services, or both, that are to be delivered separately in a bundled sales arrangement should be accounted for as separate units of accounting. The consensus is effective prospectively for our third quarter of 2003. The Company evaluated the guidance in EITF Issue 00-21 and concluded that our advertising arrangements should continue to be accounted for as a single unit of accounting. As a result, the adoption of EITF Issue 00-21 did not have a material impact on the revenue recognition policies or consolidated financial statements.

The Company adopted the new disclosure requirements of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, during the quarter ended March 31, 2003. The adoption of the disclosure requirements of this statement did not have an impact on the Company’s financial position, results of operations or cash flows.

The Company leases office space in Chicago, Miami, Mountain View (California), and New York, under operating leases which expire on July 31, 2005, May 31, 2005, December 31, 2005 and June 30, 2004 respectively. The future minimum rental payments under these operating leases as of December 31, 2003, total $578,256 and $249,382 for 2004 and 2005, respectively. Rent expense was $885,816, $471,766 and $302,355 for the years ended December 31, 2003, 2002, and 2001, respectively.

Income tax expense (benefit) for the years ended December 31, 2003, 2002, and 2001 consisted of the following:

Income tax expense for the years ended December 31, 2003, 2002, and 2001, differed from the amounts computed by applying the U.S. federal statutory tax rate applicable to the Company’s level of pretax income as a result of the following:

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities as of December 31, 2003, and 2002, are as follows:

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

As of December 31, 2003 the authorized capital stock of Travelzoo Inc. comprised 40,000,000 shares of $.01 par value common stock and 5,000,000 shares of $.01 par value preferred stock. As of December 31, 2003 15,294,033 shares of common stock and no shares of preferred stock were issued and 19,425,147 shares of common stock were reported as outstanding. If all former stockholders of Travelzoo Bahamas accept their shares in Travelzoo Inc., an additional 4,131,114 shares of common stock will be issued. These shares are included in the reported number of shares outstanding in our financial statements. The former stockholders of Travelzoo Bahamas have until April 25, 2002 to receive shares in Travelzoo Inc.

As described in note 1(a), as part of the consideration exchanged for the outstanding shares of Silicon Channels Corporation, the Company also issued to the majority stockholder in January 2001 fully vested and exercisable options to acquire 2,158,349 shares of common stock. The options have an exercise price of $1.00 and expire in January 2011.

In October 2001, the Company granted to each director fully vested and exercisable options to purchase 30,000 shares of common stock with an exercise price of $2.00 for their services as a director in 2000 and 2001. A total of 210,000 options were granted. The options expire in October 2011.

In March 2002, Travelzoo Inc. granted to each director options to purchase 5,000 shares of common stock with an exercise price of $3.00 that vested in connection with their services as a director in 2002. A total of 35,000 options were granted. In October 2002, 1,411 options were forfeited upon the resignation of a director. All other options are vested as of December 31, 2003. The options expire in March 2012.

SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, establishes standards for the reporting by business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within a company for making operational decisions and assessing performance. As of December 31, 2003, the Company had one operating segment: online advertising.

As of December 31, 2003, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President, Chief Executive Officer and Chief Financial Officer along with the Company’s Controller (Chief Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Company’s President, Chief Executive Officer and Chief Financial Officer along with the Company’s Controller (Chief Accounting Officer) concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in our periodic SEC filings as of December 21, 2003.

During the quarter ended December 31, 2003, there was no change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Information regarding our directors is incorporated by reference to the sections entitled “Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” appearing in Travelzoo’s Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (“the Commission”) within 120 days after the end of Travelzoo’s fiscal year ended December 31, 2003.

The following table sets forth certain information with respect to the executive officers of Travelzoo as of March 29, 2004.

Ralph Bartel founded Travelzoo in May 1998 and has served as President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors since inception. Prior to his founding of Travelzoo, from 1996 to 1997, Mr. Bartel served as Managing Assistant at Gruner + Jahr AG, the magazine division of Bertelsmann AG. Mr. Bartel holds a Ph.D. in Communications from the University of Mainz, Germany, an MBA in Finance and Accounting from University of St. Gallen, Switzerland, and a Master’s degree in Journalism from University of Eichstaett, Germany.

Lisa Su has served as Controller (Chief Accounting Officer) since October 1, 2000. From April 1999 to September 2000, Ms. Su was a Treasury Accountant for Webvan Group, Inc. Ms. Su holds a bachelor’s degree in economics/accounting from Claremont McKenna College and an MBA in Finance from California State University, Hayward.

Information regarding executive compensation is incorporated by reference to the information set forth under “Compensation of Executive Officers and Other Matters” in our Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of Travelzoo’s fiscal year ended December 31, 2003.

Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth under the caption “Principal Ownership of Travelzoo Common Stock” in Travelzoo’s Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of Travelzoo’s fiscal year ended December 31, 2003.

Information regarding certain relationships and related transactions is incorporated by reference to the information set forth under the caption “Certain Transactions” in our Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of Travelzoo’s fiscal year ended December 31, 2003.

Information regarding principal auditor fees and services is set forth under “Principal Accounting Fees and Services” in the Proxy Statement relating to our 2004 Annual Meeting of Stockholders and is incorporated herein by reference.


	Independent Auditors’ Report

	Consolidated Balance Sheets

	Consolidated Statements of Operations

	Consolidated Statements of Stockholders’ Equity

	Consolidated Statements of Cash Flows

	Notes to Consolidated Financial Statements


	All schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.


	On October 6, 2003, the Company filed a current report on Form 8-K dated October 6, 2003 which announced the Company’s financial results for the quarter ended September 30, 2003.

	On December 24, 2003, the Company filed a current report on Form 8-K dated December 23, 2003 which announced the Company’s approval for listing on the NASDAQ SmallCap Market.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on March 29, 2004.


	By:	/s/ RALPH BARTEL



	Ralph Bartel
	Chairman of the Board,
	Chief Executive Officer, and
	Chief Financial Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Ralph Bartel as his or her attorney-in-fact, with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Form 10-K, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done.


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


DELAWARE		36-4415727
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

590 Madison Avenue, 21st Floor, New York, New York (Address of Principal Executive Offices)		10022 (Zip Code)


		Page

PART I
Item 1.	Business		2
Item 2.	Properties		15
Item 3.	Legal Proceedings		15
Item 4.	Submission of Matters to a Vote of Security Holders		16
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		16
Item 6.	Selected Consolidated Financial Data		16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		23
Item 8.	Consolidated Financial Statements		24
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		40
Item 9A.	Controls and Procedures		40
PART III
Item 10.	Directors and Executive Officers of the Registrant		40
Item 11.	Executive Compensation		40
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		41
Item 13.	Certain Relationships and Related Transactions		41
Item 14.	Principal Accounting Fees and Services		41
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		41
Signatures			42
List of Subsidiaries
Section 302 Certification
Section 906 Certification




		Publication
Publication	Content	Schedule	Reach*	Advertiser Benefits	Consumer Benefits


Travelzoo website	Website listing thousands of outstanding sales and specials from approximately 300 travel companies	24/7	5.1 million unique visitors per month	Broad reach, sustained exposure, targeted placements by destination and travel segment	24/7 access to deals, ability to search and browse by destination or keyword

Travelzoo Top 20	E-mail newsletter listing 20 of the week’s most outstanding deals from selected travel companies	Weekly	6.1 million subscribers	Mass “push” advertising vehicle to quickly stimulate incremental travel	Weekly access to 20 outstanding, handpicked deals chosen from among thousands

Newsflash	Regionally-targeted e-mail with a single time-sensitive and newsworthy travel offer	Within 2 hours of an offer being identified	2.7 million subscribers	Regional targeting, 100% share of voice for advertiser, flexible publication schedule	Breaking news offers delivered just-in- time

Weekend.com	E-mail listing inspirational ideas for upcoming weekends, from getaways to local events and movies	Weekly	2.0 million subscribers	Upscale editorial and visual content in HTML format, strong share of voice for advertiser	Great ideas to make the weekend count


	High		Low

2003:
Fourth Quarter	$	10.25	$	4.75
Third Quarter	$	11.00	$	3.50
Second Quarter	$	6.50	$	3.55
First Quarter	$	5.00	$	4.00
2002:
Fourth Quarter	$	6.50	$	0.25


American Airlines Apple Vacations ATA Avis Rent A Car British Airways Budget Rent A Car Caesars Entertainment Dollar Rent A Car Expedia Fairmont Hotels and Resorts Funjet Vacations Hawaiian Airlines Hilton Hotels		JetBlue Airways Kimpton Hotels Liberty Travel Lufthansa Marriott Hotels Pleasant Holidays Royal Caribbean Spirit Airlines Starwood Hotels & Resorts Worldwide Travelocity.com United Airlines US Airways Virgin Atlantic


	*Our limited operating history makes our business difficult to evaluate.*


	*We cannot assure you that we will sustain profitability.*


	*Fluctuations in our operating results may negatively impact our stock price.*


	*We depend on two clients for a substantial part of our revenues.*


	*Our business model is unproven and may not be adaptable to a changing market.*


	*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.*


	*Our operations could be significantly hindered by the occurrence of a natural disaster or other catastrophic event.*


	*Technological or other assaults on our service could harm our business.*


	*We may face significant costs with respect to the delivery of paper copies of reports to our stockholders.*


Item 1.	*Business*


	*The Internet is not a proven marketing medium.*


	*We may not be able to develop awareness of our brand name.*


	*Our business may be sensitive to events affecting the travel industry in general.*


	*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.*


	*We may lose business if we fail to keep pace with rapidly changing technologies and clients needs.*


	*Our business and growth will suffer if we are unable to hire and retain highly skilled personnel.*


	*We may not be able to effectively manage our expanding operations.*


	*Intense competition may adversely affect our ability to achieve or maintain market share and operate profitably.*


	*Loss of any of our key management personnel could negatively impact our business.*


	*We may not be able to access third party technology upon which we depend.*


	*Investors may face significant restrictions on the resale of our stock due to federal penny stock regulations.*


	*Our stock price has been volatile historically and may continue to be volatile.*


	*We may become subject to burdensome government regulations and legal uncertainties affecting the Internet which could adversely affect our business.*


	*We may be unable to protect our registered trademark or other proprietary intellectual property rights.*


	*We may face liability from intellectual property litigation that could be costly to prosecute or defend and distract management’s attention with no assurance of success.*


	*We may be liable as a result of information retrieved from or transmitted over the Internet.*


Item 4.	*Submission of Matters to a Vote of Security Holders*


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*



	Year Ended December 31,

	2003		2002		2001		2000		1999


	(In thousands, except per share data)
Revenues	$	17,991	$	9,848	$	6,148	$	3,950	$	954
Net income		2,050		853		364		362		105
Net income per share — basic	$	0.11	$	0.04	$	0.02	$	0.02	$	0.01
Net income per share — diluted	$	0.10	$	0.04	$	0.02	$	0.02	$	0.01
Shares used in per share calculation — basic		19,425		19,425		19,425		19,373		19,323
Shares used in per share calculation — diluted		20,527		19,896		19,425		19,467		19,355



	December 31,

	2003		2002		2001		2000		1999

Cash and cash equivalents	$	3,522	$	1,258	$	610	$	46	$	11
Working capital		3,460		1,340		425		186		171
Total assets		6,726		3,240		2,131		1,556		405
Long-term debt		—		—		—		—		—
Stockholder’s Equity	$	3,841	$	1,791	$	938	$	574	$	194


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*