| Any or all of the risks listed below as well as other variables affecting our operating results could have a material adverse effect on our business, our quarterly and annual operating results or financial condition, which could cause the market price of our stock to decline or cause substantial volatility in our stock price, in which event the value of your common stock could decline |
| You should also keep these risk factors in mind when you read forward-looking statements |
| Risks Related to Our Financial Condition and Business Model We cannot assure you that we will sustain profitability |
| Although we have been profitable in the past, there is no assurance that we will continue to be profitable |
| We forecast our future expense levels based on our operating plans and our estimates of future revenues |
| We may find it necessary to significantly accelerate expenditures relating to our sales and marketing efforts or otherwise increase our financial commitment to creating and maintaining brand awareness among Internet users and travel companies |
| If our revenues grow at a slower rate than we anticipate, or if our spending levels exceed our expectations or cannot be adjusted to reflect slower revenue growth, we may not generate sufficient revenues to sustain profitability |
| If our new UK operations and our expected expansion into other European countries in 2006 incur significant losses, this will result in a significant negative impact on our results of operations |
| In this case, the value of the shares of Travelzoo could be reduced |
| Fluctuations in our operating results may negatively impact our stock price |
| Our quarterly operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular quarter |
| You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance |
| Factors that may affect our quarterly results include: • mismatches between resource allocation and client demand due to difficulties in predicting client demand in a new market; • changes in general economic conditions that could affect marketing efforts generally and online marketing efforts in particular; • the magnitude and timing of marketing initiatives, including our expansion efforts in Europe; • 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; 10 _________________________________________________________________ [59]Table of Contents • our ability to manage our anticipated growth and expansion; • our ability to attract traffic to our Web sites; • technical difficulties or system downtime affecting the Internet generally or the operation of our products and services specifically; and • payments which we may make to previous stockholders of Travelzoo |
| com Corporation who failed to submit requests for shares in Travelzoo Inc |
| In addition, we may significantly increase our operating expenses related to advertising campaigns for Travelzoo for a certain period if we see a unique opportunity for a brand marketing campaign or if we find it necessary to respond to increased brand marketing by a competitor |
| If revenues fall below our expectations in any quarter and we are unable to quickly reduce our operating expenses in response, our operating results would be lower than expected and our stock price may fall |
| We depend on one client for a substantial part of our revenues |
| In the fiscal year ended December 31, 2005, one client accounted for 15prca of our revenues |
| The loss of this client may result in a significant decrease in our revenues, which could have a material adverse effect on our business |
| Copies of the agreements with our largest client in 2005 were previously filed as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2004 |
| The agreements provided that Travelzoo will be paid for the publication of ads on a cost-per-click basis |
| The agreements were cancelable upon 90 days’ written notice, and the payment terms were net 60 days with no discount for early payment |
| The agreements for 2005 expired on December 31, 2005 |
| If current clients decide not to continue advertising their offers with us and we are unable to replace them with new clients, our business may be adversely affected |
| To be successful, we must provide online marketing solutions that achieve broad market acceptance by travel companies |
| In addition, we must attract sufficient Internet users with attractive demographic characteristics to our products |
| It is possible that we will be required to further adapt our business model in response to changes in the online advertising market or if our current business model is not successful |
| If we are not able to anticipate changes in the online advertising market or if our business model is not successful, our business could be materially adversely affected |
| We may not be able to obtain sufficient funds to grow our business and any additional financing may be on terms adverse to your interests |
| We intend to continue to grow our business, and intend to fund our current operations and anticipated growth from the cash flow generated from our operations and our retained earnings |
| However, these sources may not be sufficient to meet our needs |
| We may not be able to obtain 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 |
| 11 _________________________________________________________________ [60]Table of Contents Our business may be sensitive to recessions |
| The demand for online advertising may be linked to the level of economic activity and employment in the US and abroad |
| Specifically, our business is dependent on the demand for online advertising from travel companies |
| The last recession decreased consumer travel and caused travel companies to reduce or postpone their marketing spending generally, and their online marketing spending in particular |
| In case of another recession, our business and financial condition could be materially adversely affected |
| Our operations could be significantly hindered by the occurrence of a natural disaster or other catastrophic event |
| Our operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events |
| In addition, a significant portion of our network infrastructure is located in Northern California, an area susceptible to earthquakes |
| We do not have multiple site capacity in the event of any such occurrence |
| Outages could cause significant interruptions of our service |
| In addition, despite our implementation of network security measures, our servers are vulnerable to computer viruses, physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems |
| We do not carry business interruption insurance to compensate us for losses that may occur as a result of any of these events |
| Technological or other assaults on our service could harm our business |
| We are vulnerable to coordinated attempts to overload our systems with data, which could result in denial or reduction of service to some or all of our users for a period of time |
| We have experienced denial of service attacks in the past, and may experience such attempts in the future |
| Any such event could reduce our revenue and harm our operating results and financial condition |
| We do not carry business interruption insurance to compensate us for losses that may occur as a result of any of these events |
| We believe that continuing to build awareness of the Travelzoo brand name is critical to achieving widespread acceptance of our business |
| Brand recognition is a key differentiating factor among providers of online advertising opportunities, and we believe it could become more important as competition in our industry increases |
| In order to maintain and build brand awareness, we must succeed in our marketing efforts |
| If we fail to successfully promote and maintain our brand, incur significant expenses in promoting our brand and fail to generate a corresponding increase in revenue as a result of our branding efforts, or encounter legal obstacles which prevent our continued use of our brand name, our business could be materially adversely affected |
| Our business may be sensitive to events affecting the travel industry in general |
| Events like the war with Iraq or the terrorist attacks on the US 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 such events result in a long-term negative impact on the travel industry, such impact could have a material adverse effect on our business |
| We will not be able to attract travel companies or Internet users if we do not continually enhance and develop the content and features of our products and services |
| To remain competitive, we must continually improve the responsiveness, functionality and features of our products and services |
| We may not succeed in developing features, functions, products or services that travel companies and Internet users find attractive |
| This could reduce the number of travel companies and Internet users using our products and materially adversely affect our business |
| 12 _________________________________________________________________ [61]Table of Contents We may lose business if we fail to keep pace with rapidly changing technologies and clients needs |
| Our success is dependent on our ability to develop new and enhanced software, services and related products to meet rapidly evolving technological requirements for online advertising |
| Our current technology may not meet the future technical requirements of travel companies |
| Trends that could have a critical impact on our success include: • rapidly changing technology in online advertising; • evolving industry standards, including both formal and de facto standards relating to online advertising; • developments and changes relating to the Internet; • competing products and services that offer increased functionality; and • changes in travel company and Internet user requirements |
| If we are unable to timely and successfully develop and introduce new products and enhancements to existing products in response to our industry’s changing technological requirements, our business could be materially adversely affected |
| Our business and growth will suffer if we are unable to hire and retain highly skilled personnel |
| Our future success depends on our ability to attract, train, motivate and retain highly skilled employees |
| We may be unable to retain our skilled employees, or attract, assimilate and retain other highly skilled employees in the future |
| We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications |
| If we are unable to hire and retain skilled personnel, our growth may be restricted, which could adversely affect our future success |
| We may not be able to effectively manage our expanding operations |
| Since the commencement of our operations, we have experienced a period of rapid growth |
| In order to execute our business plan, we must continue to grow significantly |
| As of December 31, 2005, we had 70 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 |
| Our inability to expand our operations in an efficient manner could cause our expenses to grow disproportionately to revenues, our revenues to decline or grow more slowly than expected and could otherwise have a material adverse effect on our business |
| Our international operations are subject to increased risks which could harm our business, operating results and financial condition |
| In May 2005, we began operations in the UK Our plan is to expand into other European countries in 2006 |
| In addition to uncertainty about our ability to generate net income from our foreign operations and expand our international market position, there are certain risks inherent in doing business internationally, including: • trade barriers and changes in trade regulations; • difficulties in developing, staffing and simultaneously managing foreign operations as a result of distance, language and cultural differences; • stringent local labor laws and regulations; • currency exchange rate fluctuations; 13 _________________________________________________________________ [62]Table of Contents • risks related to government regulation; and • potentially adverse tax consequences |
| Intense competition may adversely affect our ability to achieve or maintain market share and operate profitably |
| We compete for advertising dollars with large Internet portal sites, such as America Online, MSN and Yahoo!, that offer listings or other advertising opportunities for travel companies |
| These companies have significantly greater financial, technical, marketing and other resources and larger client bases |
| We also compete with search engines like Google and Yahoo! |
| 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 |
| Loss of any of our key management personnel could negatively impact our business |
| Our future success depends to a significant extent on the continued service and coordination of our management team, particularly Ralph Bartel, our Chairman, President, Chief Executive Officer and Chief Financial Officer |
| The loss or departure of any of our officers or key employees could materially adversely affect our ability to implement our business plan |
| We do not maintain key person life insurance for any member of our management team |
| In addition, we expect new members to join our management team in the future |
| These individuals will not previously have worked together and will be required to become integrated into our management team |
| If our key management personnel are not able to work together effectively or successfully, our business could be materially adversely affected |
| We may not be able to access third party technology upon which we depend |
| We use technology and software products from third parties including Microsoft |
| Technology from our current or other vendors may not continue to be available to us on commercially reasonable terms, or at all |
| Our business will suffer if we are unable to access this technology, to gain access to additional products or to integrate new technology with our existing systems |
| This could cause delays in our development and introduction of new services and related products or enhancements of existing products until equivalent or replacement technology can be accessed, if available, or developed internally, if feasible |
| If we experience these delays, our business could be materially adversely affected |
| Risks Related to the Market for our Shares Our stock price has been volatile historically and may continue to be volatile |
| The trading price of our common stock has been and may continue to be subject to wide fluctuations |
| During 2005, the sales price of our common stock on the NASDAQ National Market ranged from dlra16dtta61 to dlra99dtta75 |
| 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 |
| 14 _________________________________________________________________ [63]Table of Contents We are controlled by a principal stockholder |
| Ralph Bartel, who founded Travelzoo and who is our Chairman of the Board, President, Chief Executive Officer and Chief Financial Officer, is our largest stockholder, holding beneficially approximately 78prca of our outstanding shares with options to increase his percentage ownership to 80prca on a fully-diluted basis |
| Through his share ownership, he is in a position to control Travelzoo and to elect our entire board of directors |
| Risks Related to Legal Uncertainty We may become subject to burdensome government regulations and legal uncertainties affecting the Internet which could adversely affect our business |
| To date, governmental regulations have not materially restricted use of the Internet in our markets |
| However, the legal and regulatory environment that pertains to the Internet is uncertain and may change |
| Uncertainty and new regulations could increase our costs of doing business, prevent us from delivering our products and services over the Internet or slow the growth of the Internet |
| In addition to new laws and regulations being adopted, existing laws may be applied to the Internet |
| New and existing laws may cover issues which include: • user privacy; • anti-spam legislation; • consumer protection; • copyright, trademark and patent infringement; • pricing controls; • characteristics and quality of products and services; • sales and other taxes; and • other claims based on the nature and content of Internet materials |
| We may be liable as a result of information retrieved from or transmitted over the Internet |
| We may be sued for defamation, negligence, copyright or trademark infringement or other legal claims relating to information that is published or made available in our products |
| These types of claims have been brought, sometimes successfully, against online services in the past |
| The fact that we distribute information via e-mail may subject us to potential risks, such as liabilities or claims resulting from unsolicited e-mail or spamming, lost or misdirected messages, security breaches, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service |
| In addition, we could incur significant costs in investigating and defending such claims, even if we ultimately are not liable |
| If any of these events occur, our business could be materially adversely affected |
| We do not carry general liability insurance |
| Claims may be asserted against us relating to shares not issued in our 2002 merger |
| com Corporation into the Company became effective on April 25, 2002 |
| com Corporation were allowed a period of two years following the effective date to receive shares in the Company |
| After April 25, 2004, two years following the effective date, we ceased issuing shares to the former stockholders of Travelzoo |
| Many of the “Netsurfer stockholders,” who had applied to receive shares of Travelzoo |
| com Corporation in 1998 for no cash consideration, did not elect to receive their shares which were issuable in the merger prior to the end of the two-year period |
| A total of 4cmam115cmam532 of our shares which had been reserved for issuance in the merger were not claimed |
| It is possible that claims may be asserted against us in the future by former stockholders of Travelzoo |
| com Corporation seeking to receive our shares, whether based on a claim that the two-year deadline for exchanging their shares was unenforceable or otherwise |
| In addition, one or more jurisdictions, including the Bahamas or the State of Delaware, may assert rights to unclaimed shares under escheat statutes |
| If such 15 _________________________________________________________________ [64]Table of Contents escheat claims are asserted, we intend to challenge the applicability of escheat rights in that, among other reasons, the identity, residency and eligibility of the holders in question cannot be determined |
| There were certain conditions applicable to the issuance of shares to the Netsurfer stockholders, including requirements that (i) they be at least 18 years of age, (ii) they be residents of the US or Canada and (iii) they not apply for shares more than once |
| The Netsurfer stockholders were required to confirm their compliance with these conditions, and were advised that failure to comply could result in cancellation of their shares in Travelzoo |
| com Corporation was not able to verify that the applicants met the requirements referred to above at the time of their applications for issuance of shares |
| If claims are asserted by persons claiming to be former stockholders of Travelzoo |
| com Corporation, we intend to assert that their rights to receive their shares expired two years following the effective date of the merger, as provided in the merger agreement |
| We also expect to take the position, if escheat or similar claims are asserted in respect of the unissued shares in the future, that we are not required to issue such shares |
| Further, even if it were established that unissued shares were subject to escheat claims, we would assert that the claimant must establish that the original Netsurfer stockholders complied with the conditions to issuance of their shares |
| We are not able to predict the outcome of any future claims which might be asserted relating to the unissued shares |
| If such claims were asserted, and were fully successful, that could result in us being required to issue up to an additional 4cmam079cmam000 shares of common stock for no additional payment, which would result in substantial dilution of the ownership interests of the other stockholders, and in our earnings per share, which could adversely affect the market price of the common stock |
| On October 15, 2004, we announced a program under which we would make cash payments to persons who establish that they were former stockholders of Travelzoo |
| com Corporation, and who failed to submit requests for our shares within the required time period |
| The accompanying consolidated financial statements include a charge in general and administrative expenses of dlra1dtta2 million for these cash payments for the year ended December 31, 2005, of which dlra11cmam000 remains as a liability as of December 31, 2005 |
| The liability is based on the number of actual requests received from former stockholders through December 31, 2005 that remain unpaid |
| The total cost of this program is not reliably estimable because it is based on the ultimate number of valid requests received and future levels of our common stock price |
| Our common stock price affects the liability because the amount of cash payments under the program is based in part on the recent level of the stock price at the date valid requests are received |
| We do not know how many of the requests for shares originally received by Travelzoo |
| com Corporation in 1998 were valid, but we believe that only a portion of such requests were valid |
| As noted above, in order to receive payment under the program, a person is required to establish that such person validly held shares in Travelzoo |
| Assuming 100prca of the requests from 1998 were valid, former stockholders of Travelzoo |
| com Corporation holding approximately 4cmam079cmam000 shares had not submitted claims under the program as of December 31, 2005 |
| Our internal controls over financial reporting may not be effective, and our independent auditors may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business |
| We are obligated to evaluate our internal controls over financial reporting in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which we collectively refer to as Section 404 |
| In our Section 404 evaluation, we have identified areas of internal controls that may need improvement and have instituted remediation efforts where necessary |
| Currently, none of our identified areas that need improvement have been categorized as material weaknesses |
| We may identify conditions that may result in significant deficiencies or material weaknesses in the future |
| We may be unable to protect our registered trademark or other proprietary intellectual property rights |
| Our success depends to a significant degree upon the protection of the Travelzoo brand name |
| We rely upon a combination of copyright, trade secret and trademark laws and non-disclosure and other contractual arrangements to protect our intellectual property rights |
| The steps we have taken to protect our proprietary rights, however, may not be adequate to deter misappropriation of proprietary information |
| 16 _________________________________________________________________ [65]Table of Contents The US Patent and Trademark Office registered the trademark for “Travelzoo” on January 23, 2001 |
| The Office for Harmonization in the Internal Market of the European Community registered the trademark for “Travelzoo” on May 11, 2004 |
| 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 may face liability from intellectual property litigation that could be costly to prosecute or defend and distract management’s attention with no assurance of success |
| We cannot be certain that our products, content and brand names do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties |
| While we have a trademark for “Travelzoo,” many companies in the industry have similar names including the word “travel” |
| We expect that infringement claims in our markets will increase in number as more participants enter the markets |
| We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business |
| We may incur substantial expenses in defending against these third party infringement claims, regardless of their merit, and such claims could result in a significant diversion of the efforts of our management personnel |
| Successful infringement claims against us may result in monetary liability or a material disruption in the conduct of our business |