Travelzoo
Annual Report 2012

Plain-text annual report

NASDAQ: TZOO 2012 Annual Report 2013 Proxy Statement This Page Intentionally Left Blank  Travelzoo Inc. 590 Madison Avenue, 37th Floor New York, NY 10022 July 25, 2013 Dear Stockholder: You are cordially invited to attend the 2013 Annual Meeting of Stockholders of Travelzoo Inc. The Annual Meeting will be held on September 12, 2013 at 10:00 a.m. local time, at 590 Madison Avenue, 37th Floor, New York, NY 10022 . In connection with the meeting, we enclose a notice of the meeting, a proxy statement and a proxy card. The expected actions to be taken at the Annual Meeting are described in the attached proxy statement and Notice of Annual Meeting of Stockholders. Our audited financial statements and detailed information relating to Travelzoo's activities and operating performance is contained in our 2012 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 11, 2013 and amended on April 30, 2013, which is also enclosed. We encourage you to read the Form 10-K. Stockholders of record as of July 24, 2013 may vote at the Annual Meeting. This proxy statement is first being mailed or furnished to stockholders on or about July 31, 2013. Your vote is important. Whether or not you plan to attend the Annual Meeting of Stockholders, please vote your shares via mail with the enclosed proxy card. Please note that you can attend the meeting and vote in person, even if you have previously voted by proxy. The attached proxy statement explains more about the proxy voting. Please read it carefully. If you plan to attend the meeting in person, please provide advance notice to Travelzoo by checking the box on your proxy card. In addition, you may provide notice to Travelzoo that you plan to attend in person by delivering written notice to Travelzoo's Corporate Secretary at 800 W. El Camino Real, Suite 275, Mountain View, CA 94040. If you hold your shares in street name or through a bank, broker, or other nominee, please bring identification and proof of ownership, such as an account statement or letter from your bank or broker, for admittance to the meeting. An admission list containing the names of all of those planning to attend will be placed at the registration desk at the entrance to the meeting. You must check in to be admitted. Travelzoo will make available an alphabetical list of stockholders entitled to vote at the meeting for examination by any stockholder during ordinary business hours at Travelzoo's principal executive offices, located at 590 Madison Avenue, 37th Floor, New York, New York 10022, for ten days prior to the meeting. A stockholder may examine the list for any legally valid purpose related to the meeting. On behalf of the entire Board of Directors, we look forward to seeing you at the Annual Meeting. Sincerely, HOLGER BARTEL Chairman of the Board of Directors TRAVELZOO INC. 590 Madison Avenue 37th Floor New York, New York 10022 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held On September 12, 2013 To the Stockholders of Travelzoo Inc.: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Travelzoo Inc., a Delaware corporation ("Travelzoo", the "Company", "we" or "us"), will be held on September 12, 2013, at 10:00 a.m., local time, at 590 Madison Avenue, 37th Floor, New York, NY 10022, for the following purposes: 1. 2. 3. 4. 5. To consider and vote on two amendments to the Company's Certificate of Incorporation to effect a reverse split of the Company's outstanding common stock, par value $0.01 per share (the "Common Stock"), at a ratio of 1-for-25 followed immediately by a forward split of the Company's outstanding Common Stock at a ratio of 25-for-1 ("Proposal 1"); To elect five (5) members of the Company's Board of Directors (the "Board"), each to serve until the 2014 Annual Meeting of Stockholders and until their successors are elected and qualified or until their earlier resignation or removal ("Proposal 2"); To approve, on an advisory basis, the compensation of the executive officers of the Company ("Proposal 3"); To consider and vote on a shareholder proposal regarding the implementation of majority voting for uncontested elections of directors ("Proposal 4"); and To transact such other business as may properly come before the Annual Meeting or any adjournment or postponement of the Annual Meeting. Only stockholders of record at 5:00 p.m. Eastern Time on July 24, 2013 may vote at the Annual Meeting. Your vote is important. Whether you plan to attend the Annual Meeting or not, please cast your vote by completing, dating and signing the enclosed proxy card and returning it via mail to the address indicated. If you attend the meeting and prefer to vote in person, you may do so even if you have previously voted by proxy. By Order of the Board of Directors, TRAVELZOO INC. GLEN CEREMONY Corporate Secretary TABLE OF CONTENTS INFORMATION ABOUT THE ANNUAL MEETING APPROVAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT FOLLOWED BY A FORWARD STOCK SPLIT (PROPOSAL 1) Summary Structure of the Reverse/Forward Split Background and Purpose of the Reverse/Forward Split Effect of the Reverse/Forward Split on Travelzoo Stockholders Effect of the Reverse/Forward Split on Travelzoo Determination of Cash-Out Payment Stock Certificates U.S. Federal Income Tax Consequences Reservation of Rights No Appraisal Rights Required Vote Board of Directors' Recommendation ELECTION OF DIRECTORS (PROPOSAL 2) Nominees for a One-Year Term That Will Expire in 2014 Required Vote Board of Directors' Recommendation CORPORATE GOVERNANCE Board Meetings and Committees The Board's Role in Risk Oversight Code of Ethics Communications with Directors Director Compensation Certain Relationships and Related Party Transactions Family Relationships Involvement in Certain Legal Proceedings INFORMATION ABOUT OUR EXECUTIVE OFFICERS ADVISORY VOTE ON THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS OF THE COMPANY (PROPOSAL 3) Required Vote Board of Directors' Recommendation COMPENSATION DISCUSSION AND ANALYSIS Overview of Compensation Program Compensation Philosophy and Objectives Compensation Determination Process Components of Executive Compensation Other Compensation-Related Matters Compensation Committee Interlocks & Insider Participation Summary Compensation Table Grants of Plan-Based Awards in 2012 Outstanding Equity Awards at December 31, 2012 Option Exercises and Stock Vested Employment Agreements and Potential Payments Upon Termination or Change-in-Control Forward-Looking Statements Compensation Committee Report SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE PRINCIPAL ACCOUNTANT FEES AND SERVICES Independent Public Accountants i Page 1 5 5 7 9 11 13 13 13 14 16 16 16 17 18 18 20 20 21 21 22 22 22 22 23 23 23 24 25 25 25 26 26 26 26 27 30 31 31 33 33 33 34 35 36 37 37 38 38 Principal Accountant Fees and Services Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm AUDIT COMMITTEE REPORT SHAREHOLDER PROPOSAL REGARDING THE IMPLEMENTATION OF MAJORITY VOTING FOR UNCONTESTED DIRECTOR ELECTIONS (PROPOSAL 4) Shareholder Proposal Recommendation of the Board of Directors DOCUMENTS INCORPORATED BY REFERENCE ADDITIONAL INFORMATION INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON OTHER BUSINESS STOCKHOLDER PROPOSALS FOR THE 2014 ANNUAL MEETING HOUSEHOLDING EXPENSES AND SOLICITATION COSTS APPENDIX A: CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF TRAVELZOO INC. APPENDIX B: CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF TRAVELZOO INC. 38 38 39 40 40 40 42 42 42 42 43 43 43 A-1 B-1 ii PROXY STATEMENT FOR THE TRAVELZOO INC. 2013 ANNUAL MEETING OF STOCKHOLDERS INFORMATION ABOUT THE ANNUAL MEETING Why am I receiving these proxy materials? Travelzoo's Board of Directors (the "Board") is soliciting proxies to be voted at the 2013 Annual Meeting of Stockholders (the "Annual Meeting"). This proxy statement includes information about the matters to be voted upon at the meeting. Only stockholders of record of our common stock, par value $0.01 per share (the "Common Stock"), as of 5:00 p.m. Eastern Time on July 24, 2013 (the "record date") will be entitled to notice of, and to vote at, the Annual Meeting. As of the record date, there were 15,361,873 shares of our Common Stock issued and outstanding. Where and when is the Annual Meeting? The Annual Meeting of Stockholders will take place on September 12, 2013 at 590 Madison Avenue, 37th Floor, New York, NY 10022. The meeting will begin at 10:00 a.m. local time. What am I voting on? Stockholders will vote on four items: 1. 2. 3. 4. A proposal to amend the Company's Certificate of Incorporation to effect a reverse split of the Company's outstanding Common Stock, at a ratio of 1-for-25 followed immediately by a forward split of the Company's outstanding Common Stock at a ratio of 25-for- 1 ("Proposal 1"); A proposal to elect five (5) members of the Company's Board, each to serve until the 2014 Annual Meeting of Stockholders and until their successors are elected and qualified or until their earlier resignation or removal ("Proposal 2"); A proposal to approve, on an advisory basis, the compensation of the executive officers of the Company ("Proposal 3"); and A shareholder proposal regarding the implementation of majority voting for uncontested elections of directors ("Proposal 4"). What is the purpose of the reverse/forward stock split? If Proposal 1 is approved and acted upon, it will result in a reduction of the number of our stockholders from over 90,000 to approximately 10,000 by cashing out fractional share interests resulting from the reverse stock split that are held by stockholders owning less than 25 shares of Common Stock immediately prior to the reverse stock split. This reduction in the number of our stockholders will result in significant cost savings to the Company as described in this proxy statement. If you own more than 25 shares of Common Stock, your share ownership will not be affected. How does the Board recommend that you vote on the proposals? The Board recommends that you vote your shares "FOR" Proposal 1, Proposal 2 and Proposal 3. The Company's Board of Directors has considered the shareholder proposal regarding the implementation of majority voting for uncontested elections of directors, and has determined to make no voting recommendation to stockholders with respect to Proposal 4. 1 How many votes do I have? You have one vote for each share of our Common Stock that you held at 5:00 p.m. Eastern Time on July 24, 2013, the record date for the Annual Meeting. These shares include: • • Shares held directly in your name as the "stockholder of record" and Shares held for you as the beneficial owner through a broker, bank, or other nominee in "street name." If I am a stockholder of record, how can I vote my shares? Stockholders can vote by proxy or in person, however, granting a proxy does not in any way affect your right to attend the Annual Meeting and vote in person. How do I vote by proxy? If you are a stockholder of record, you may vote your proxy by mail. If you receive a paper copy of the proxy statement, simply mark the enclosed proxy card, date and sign it, and return it in the postage paid envelope provided. If you receive the proxy statement via e-mail, please print the attached proxy card, date and sign it, and return it via mail to Computershare, P.O. Box 43126, Providence, RI 02940. If you vote by proxy, the persons named on the card (your "proxies") will vote your shares in the manner you indicate. You may specify whether your shares should be voted for all, some or none of the nominees for director or any other proposals properly brought before the Annual Meeting. If you sign your proxy card and do not indicate specific choices, your shares will be voted "FOR" Proposal 1, "FOR" the election of all nominees for director and "FOR" Proposal 3. If any other matter is properly brought before the meeting, your proxies will vote in accordance with their discretion. If you do not specify the manner in which your shares represented by a validly executed proxy are to be voted on Proposal 4, your shares will be counted as abstentions. At the time of submitting this proxy statement for printing, we knew of no matter that will be acted on at the Annual Meeting other than those discussed in this proxy statement. If you wish to give a proxy to someone other than the persons named on the enclosed proxy card, you may strike out the names appearing on the card and write in the name of any other person, sign the proxy, and deliver it to the person whose name has been substituted. May I revoke my proxy? If you give a proxy, you may revoke it in any one of three ways: • • • Submit a valid, later-dated proxy before the Annual Meeting, Notify our Corporate Secretary in writing at Travelzoo Inc., Attention: Corporate Secretary, 800 W. El Camino Real, Suite 275, Mountain View, CA 94040 before the Annual Meeting that you have revoked your proxy, or Vote in person at the Annual Meeting. How do I vote in person? If you are a stockholder of record, you may cast your vote in person by attending the Annual Meeting. If I hold shares in street name, how can I vote my shares? You can submit voting instructions to your broker or nominee. In most instances, you will be able to do this over the Internet or by mail. Please refer to the voting instruction card included in the materials provided by your broker or nominee. 2 What vote is required to approve each proposal? Each share of our Common Stock is entitled to one vote with respect to each matter on which it is entitled to vote. Approval of Proposal 1 requires the affirmative vote of stockholders holding both (A) a majority of the issued and outstanding shares of Common Stock, and (B) a majority of the issued and outstanding shares of Common Stock that are not held or controlled, directly or indirectly, by directors or officers of the Company, including, without limitation, the shares held by Azzurro Capital Inc., our principal stockholder. Pursuant to our bylaws, our directors are elected by a plurality of the votes cast, which means that the nominees who receive the greatest number of votes will be elected. The affirmative vote of a majority of the shares of the Company’s Common Stock present in person or represented by proxy and entitled to vote on the proposal will be considered as the approval, by an advisory vote, of Proposal 3. Approval of Proposal 4 requires the affirmative vote of a majority of the shares present in person or by proxy and entitled to vote on the proposal. As discussed below, such approval would not, by itself, implement majority voting. In order to have a valid stockholder vote, a stockholder quorum must exist at the Annual Meeting. A quorum will exist when stockholders holding a majority of the outstanding shares of Common Stock are present at the meeting, either in person or by proxy. Azzurro Capital Inc., whose beneficial owner is Ralph Bartel, a member of our Board, holds an aggregate of 7,230,538 shares of our Common Stock, representing approximately 47.1% of the outstanding shares, as of June 27, 2013. Azzurro Capital Inc. has indicated that it intends to vote its shares in favor of Proposal 1. All properly executed proxies delivered pursuant to this solicitation and not revoked will be voted at the Annual Meeting as specified in such proxies. As noted above, if no voting instructions are indicated, proxies will be voted as recommended by our Board on all matters, and in the discretion of the proxy holder on any other matters that properly come before the Annual Meeting. What is a broker non-vote and how are broker non-votes and abstentions counted? A broker “non-vote” occurs when a nominee holding shares of Common Stock for the beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner. Brokers that have not received voting instructions from their clients cannot vote on their clients' behalf on "non-routine" proposals. The vote on Proposals 1, 2, 3 and 4 are considered "non-routine". Broker non-votes will not have any effect with respect to Proposals 2, 3 and 4, as shares that constitute broker non-votes are not considered entitled to vote but will be counted for the purposes of obtaining a quorum for the Annual Meeting. Since approval of Proposal 1 requires the affirmative vote of stockholders holding a majority of the issued and outstanding shares of Common Stock, broker-non votes will have the same effect as a vote against Proposal 1. Abstentions are counted as "shares present" at the Annual Meeting for purposes of determining the presence of a quorum and with respect to any matters being voted upon at the Annual Meeting. Abstentions will have no effect on the outcome of the election of directors, but with respect to any other proposal an abstention will have the same effect as a vote against such proposal. Who is soliciting my vote and who is paying the costs of soliciting these proxies? The Board of Directors is soliciting your vote by mail though this proxy statement. We have also engaged Georgeson Inc. to solicit proxies. For its services, we will pay Georgeson Inc. a fee of $8,500 plus out-of-pocket expenses. We are paying the cost of preparing, printing, mailing and otherwise distributing these proxy materials. We will reimburse banks, brokerage firms, and others for their reasonable expenses in forwarding proxy materials to beneficial owners and obtaining their instructions. A few of our officers and employees may also participate in the solicitation, without additional compensation, by telephone, e-mail, other electronic means, or in person. Where can I find the voting results of the meeting? We intend to announce preliminary voting results at the meeting. We will publish the final results in a report on Form 8-K, which we intend to file within four business days following the Annual Meeting. You can 3 obtain a copy of the Form 8-K by logging on to Travelzoo's investor relations website at www.travelzoo.com/ir, by calling the Securities and Exchange Commission (the "SEC") at (800) SEC-0330 for the location of the nearest public reference room, or through the EDGAR system at www.sec.gov. Information on our website does not constitute part of this proxy statement. 4 APPROVAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT FOLLOWED BY A FORWARD STOCK SPLIT (PROPOSAL 1) Summary The Board of Directors has authorized, based on the prior recommendation of a special committee of the Board comprised of independent directors (the "Special Committee"), and recommends for your approval, amendments to Travelzoo's Certificate of Incorporation, as amended (the "Certificate of Incorporation"), to effect a reverse/forward split of Travelzoo's Common Stock. If approved by stockholders, the Certificate of Incorporation would be amended to reclassify the Common Stock by combining the outstanding shares of the Common Stock into a lesser number of shares at the ratio of 1-for-25 (the "Reverse Split"). Immediately after the effectiveness of the Reverse Split, the Certificate of Incorporation would be further amended to reclassify the Common Stock by subdividing the outstanding shares of the Common Stock into a greater number of outstanding shares at the ratio of 25-for-1 (the "Forward Split"). As permitted by Delaware law, each holder of fewer than 25 shares of Common Stock prior to the Reverse Split (also referred to as a "Cashed-Out Stockholder") will not receive fractional shares in the Reverse Split, but in lieu of such fractional share interests shall be entitled to receive a cash payment as described below (we refer to the Reverse Split, the Forward Split and these cash payments, collectively, as the "Reverse/Forward Split"). However, if a stockholder holds 25 or more shares of Common Stock at the effective time of the Reverse Split, any fractional share resulting from the Reverse Split will not be cashed out and the total number of shares held by such holder will not change as a result of the Reverse/Forward Split. If approved by the stockholders, the Reverse/Forward Split will become effective on such date as may be determined by the Special Committee of the Board of Directors upon the filing and effectiveness of the necessary amendments to Travelzoo's Certificate of Incorporation with the Secretary of State of the State of Delaware (which we refer to as the "Effective Date"). Even if approved by stockholders, the Special Committee retains the authority to abandon the Reverse/Forward Split for any reason at any time prior to the Effective Date. The form of the proposed amendment to Travelzoo's Certificate of Incorporation necessary to effect the Reverse Split is attached to this proxy statement as Appendix A and the form of the proposed amendment to Travelzoo's Certificate of Incorporation necessary to effect the Forward Split immediately after the Reverse Split is attached hereto as Appendix B. If our stockholders approve this proposal at the Annual Meeting and the Reverse/Forward Split is completed, Travelzoo will arrange for the disposition of fractional share interests of stockholders who hold fewer than 25 shares immediately prior to the Reverse Split by having the Company's transfer agent aggregate such fractional share interests and sell the shares of Common Stock resulting from such aggregation (the "Aggregated Shares") in open market transactions following the effectiveness of the Forward Split. The Company's transfer agent will pay to each registered stockholder who holds fewer than 25 shares of Common Stock immediately prior to the Reverse Split an amount, for each share of Common Stock held immediately prior to the Reverse Split, equal to the greater of (1) the average per-share price received in the sale of the Aggregated Shares and (2) the average per-share closing price of the Common Stock on the Nasdaq Global Select Market for the ten (10) consecutive trading days ending on the last trading day prior to the Effective Date (the "Cash-Out Payment"). Travelzoo believes that the Reverse/Forward Split will result in significantly reduced stockholder record keeping administration and mailing expenses while providing holders of fewer than 25 shares with an efficient, cost-effective way to cash out their investment. As a result of the Reverse/Forward Split, if you own less than 25 shares immediately prior to the Reverse Split, you will receive cash for those shares, and if you own 25 shares or more immediately prior to the Reverse Split, you will retain those shares after the Reverse/Forward Split. Effect on Stockholders If approved by the stockholders at the Annual Meeting and implemented by the Special Committee, the Reverse/Forward Split will affect Travelzoo stockholders as follows: 5 Stockholder Before Completion of the Reverse/Forward Split Net Effect After Completion of the Reverse/Forward Split Registered stockholders holding 25 or more shares of Common Stock. Registered stockholders holding fewer than 25 shares of Common Stock. Stockholders holding Common Stock in street name or through a nominee (such as a bank or broker). None. No fractional share for such accounts will be cashed out as a result of the Reverse Split and the total number of shares held in such accounts will not change as a result of the Reverse/Forward Split. Shares will be converted into the right to receive a cash payment per share equal to the greater of (1) the average per-share price received in the sale of the Aggregated Shares on the open market and (2) the average per-share closing price of the Common Stock on the Nasdaq Global Select Market for the ten (10) consecutive trading days ending on the last trading day prior to the Effective Date. Travelzoo expects that the Reverse/Forward Split will treat stockholders holding Common Stock in street name or through a nominee (such as a bank or broker), and those persons holding shares of Common Stock as nominees for others, in the same manner as stockholders whose shares are registered in their names on the books of the Company. Nominees will be advised that they may effect the Reverse/Forward Split for their beneficial holders. However, nominees may have different procedures and stockholders holding shares in street name should contact their nominees to be advised of any procedures such holders may need to follow in order to obtain the same treatment as registered stockholders or rights such holders may have to retain beneficial ownership of such shares. Reasons for the Reverse/Forward Split The Board of Directors recommends that stockholders approve the Reverse/Forward Split for the following reasons. These, and other reasons, are described in detail under "Background and Purpose of the Reverse/Forward Split" below. Issue Solution Travelzoo has a large number of stockholders that own relatively few shares. Specifically, as of April 8, 2013, approximately 84,000 stockholders held fewer than 25 shares of Common Stock in their accounts. These stockholders represented only approximately 4% of the total number of outstanding shares of Common Stock. Continuing to maintain accounts for these stockholders, including expenses associated with required stockholder mailings, costs Travelzoo approximately $420,000 per year. The Reverse/Forward Split will reduce the number of stockholders who own relatively few shares, resulting in a cost savings to Travelzoo. In many cases, it is very expensive on a relative basis for stockholders with fewer than 25 shares to sell their shares on the open market, as the commissions would represent a disproportionate share of proceeds from the sale of fewer than 25 shares. The Reverse/Forward Split will cash out stockholders with small accounts without transaction costs such as brokerage fees. However, if these stockholders do not want to cash out their holdings of Common Stock, they may purchase additional shares on the open market to 6 Issue Solution increase the number of shares of Common Stock in their account to at least 25 shares, or, if applicable, consolidate their accounts into an account with at least 25 shares of Common Stock. Any such action should be taken far enough in advance so that it is completed prior to completion of the Reverse/Forward Split. Since we are effecting a 25-for-1 Forward Split immediately after the 1-for-25 Reverse Split, outstanding certificates for shares of our Common Stock will continue to represent the correct number of shares, other than certificates held by Cashed-Out Stockholders whose certificates will represent only the right to receive the Cash-Out Payment. There will be no need for any stockholder to submit outstanding certificates representing 25 shares or more of our Common Stock for new certificates. Cashed-Out Stockholders will need to surrender their certificates in order to receive the Cash-Out Payment. Negative Aspects of the Reverse/Forward Split Stockholders owning less than 25 shares should consider the following negative aspects of the Reverse/Forward Split: ◦ ◦ ◦ You will no longer be entitled to vote as a stockholder of Travelzoo. You will no longer be entitled to share in any earnings or dividends of Travelzoo. You will no longer be entitled to the receipt of proxy statements or other information provided by Travelzoo to its stockholders. Structure of the Reverse/Forward Split The Reverse/Forward Split includes both a reverse stock split and a forward stock split of the Common Stock. If the Reverse/Forward Split is approved by stockholders and implemented by the Special Committee, the Reverse Split is expected to occur immediately prior to the Forward Split. Upon consummation of the Reverse Split (and prior to the Forward Split), every 25 shares of Common Stock held by a stockholder at that time will be combined into one share of Common Stock. Any stockholder who holds fewer than 25 shares of Common Stock immediately prior to the Reverse Split (also referred to as a "Cashed-Out Stockholder") will receive a cash payment instead of fractional shares. The amount of this cash payment will be determined and paid as described below. If a stockholder holds 25 or more shares of Common Stock immediately prior to the Reverse Split, no fractional share will be cashed out as a result of the Reverse Split and the total number of shares held by such holder will not change as a result of the Reverse/Forward Split. If stockholders approve this proposal at the Annual Meeting and the Reverse/Forward Split is completed, Travelzoo will arrange for the disposition of the fractional share interests of Cashed-Out Stockholders resulting from the Reverse Split by having the Company's transfer agent sell the Aggregated Shares in open market transactions following the effectiveness of the Forward Split. The Company's transfer agent will pay to each registered stockholder who holds fewer than 25 shares of Common Stock immediately prior to the Reverse Split an amount, for each share of Common Stock held immediately prior to the Reverse Split, equal to the greater of (1) the average per-share price received in the sale of the Aggregated Shares on the open market and (2) the average per-share closing price of the Common Stock on the Nasdaq Global Select Market for the ten (10) consecutive trading days ending on the last trading day prior to the Effective Date. If a stockholder holding fewer than 25 shares of Common Stock wants to continue to hold Common Stock after the Reverse/Forward Split, such stockholder may do so by taking either of the following actions far enough in advance so that it is completed by the Effective Date of the Reverse/Forward Split: (A) purchase a sufficient number of shares of Common Stock so that such stockholder holds at least 25 of shares of Common Stock, or (B) if applicable, consolidate such stockholder's accounts so that such stockholder holds at least 25 of shares of Common Stock in one account. 7 The Forward Split will be effected immediately following the Reverse Split and all stockholders who are not Cashed-Out Stockholders will receive 25 shares of Common Stock for every one share of Common Stock they hold following the Reverse Split. We expect that the Reverse/Forward Split will treat stockholders holding Common Stock in street name or through a nominee (such as a bank or broker), and those persons holding shares of Common Stock as nominees for others, in the same manner as stockholders whose shares are registered in their names on the books of the Company. Nominees will be advised that they may effect the Reverse/Forward Split for their beneficial holders. Accordingly, we also refer to those street name holders who receive a cash payment instead of fractional shares as "Cashed-Out Stockholders." However, nominees may have different procedures and stockholders holding shares in street name should contact their nominees to be advised of any procedures such holders may need to follow in order to obtain the same treatment as registered stockholders or rights such holders may have to retain beneficial ownership of such shares. In general, the Reverse/Forward Split can be illustrated by the following examples: Hypothetical Scenario Result Mr. Brown is a registered stockholder who holds 20 shares of Common Stock in his account prior to the Reverse/Forward Split. Instead of receiving a fractional share of Common Stock upon completion of the Reverse Split, each of Mr. Brown's shares will be converted into the right to receive the Cash-Out Payment. Ms. Green has two separate record accounts. As of the Effective Date, she holds 15 shares of Common Stock in one account and 20 shares of Common Stock in the other. All of her shares are registered in her name only. Note: If Mr. Brown wants to continue his investment in Travelzoo, he can buy at least 5 more shares of Common Stock and hold them in his account prior to the Effective Date. Mr. Brown would have to act far enough in advance of the Reverse/Forward Split so that the purchase is completed and the additional shares are credited to his account by 5:00 p.m. Eastern Time on the Effective Date. As described in the case of Mr. Brown above, Ms. Green will receive the Cash-Out Payment for each share of Common Stock held in each of her record accounts instead of receiving fractional shares. Note: If Ms. Green wants to continue her investment in Travelzoo, she can consolidate or transfer her two record accounts into one account prior to the Effective Date. Alternatively, Ms. Green could buy at least 10 more shares of Common Stock for the first account and 5 more shares for the second account. In either case, her holdings would not be cashed out in connection with the Reverse/Forward Split because she would hold at least 25 shares in a consolidated account or each of her record accounts, as applicable. She would have to act far enough in advance of the Reverse/Forward Split so that the consolidation or the purchase is completed by 5:00 p.m. Eastern Time on the Effective Date. Mr. Blue is a registered holder who holds 30 shares of Common Stock as of the Effective Date in one record account. After the Reverse/Forward Split, Mr. Blue will continue to hold all 30 shares of Common Stock. Mr. Pink has two separate record accounts. As of the Effective Date, he holds 30 shares of Common Stock in his first account and 20 shares of Common Stock in his second account. All of his shares are registered in his name only. After the Reverse/Forward Split, Mr. Pink will continue to hold 30 shares of our Common Stock in his first account and Mr. Pink will receive the Cash-Out Payment for each share of Common Stock held in his second account instead of receiving fractional shares. 8 Hypothetical Scenario Result Mrs. Orange holds 20 shares of Common Stock in a brokerage account as of the Effective Date. Mr. Purple holds 35 shares of Common Stock in a brokerage account. Note: If Mr. Pink wants to continue his entire investment in Travelzoo, he can consolidate or transfer his two record accounts prior to the Effective Date into an account with at least 25 shares of our Common Stock. Alternatively, he can buy at least 5 more shares of Common Stock for his second account and hold them in that account. He would have to act far enough in advance of the Reverse/Forward Split so that the consolidation or the purchase is completed by 5:00 p.m. Eastern Time on the Effective Date. Travelzoo expects that the Reverse/Forward Split will treat stockholders holding Common Stock in street name or through a nominee (such as a bank or broker) in the same manner as stockholders whose shares are registered in their names. Accordingly, Mrs. Orange would be a Cashed-Out Stockholder and would receive the Cash-Out Payment for each share of Common Stock held in her account. Nominees will be advised that they may effect the Reverse/Forward Split for their beneficial holders. However, nominees may have different procedures and stockholders holding Common Stock in street name should contact their nominees to be informed of any procedures such stockholders may need to follow in order to obtain the same treatment as registered stockholders. Travelzoo expects that the Reverse/Forward Split will treat stockholders holding Common Stock in street name or through a nominee (such as a bank or broker) in the same manner as stockholders whose shares are registered in their names. In such case, after the Reverse/Forward Split, Mr. Purple would continue to hold all 35 shares of Common Stock. However, nominees may have different procedures and stockholders holding Common Stock in street name should contact their nominees to be informed of any procedures such stockholders may need to follow in order to obtain the same treatment as registered stockholders. Background and Purpose of the Reverse/Forward Split Travelzoo has a stockholder base of approximately 92,000 stockholders. As of April 8, 2013, approximately 84,000 holders of our Common Stock owned fewer than 25 shares. At that time, these 84,000 stockholders represented approximately 91% of the total number of holders of Common Stock, but held in the aggregate approximately 655,000 shares, or only about 4% of the total number of outstanding shares of Common Stock. In the ordinary course, management has from time to time updated the Board of Directors on the then current and anticipated costs related to administering the Company's stockholder accounts, including transfer agent and administration fees and printing and postage costs associated with the mailing of proxy materials and annual reports to each stockholder. On April 3, 2013, the Board of Directors established a special committee of independent directors, consisting of David Ehrlich, Donovan Neale-May and Kelly Urso (the "Special Committee"), to evaluate the appropriateness and fairness to the Company's stockholders of a transaction in the form of a reverse 9 stock split followed by a forward stock split, which could create future cost savings for the Company related to the administration of its stockholder accounts. The Special Committee retained Young, Conaway, Stargatt & Taylor, LLP as independent legal counsel regarding, among other things, the requirements of Delaware law in connection with the effectuation of a reverse/forward stock split, relevant legal precedents regarding similar transactions, and the duties of the members of the Special Committee under Delaware law. The Special Committee also engaged Duff & Phelps, LLC as its independent financial advisor in connection with the proposed Reverse/Forward Split. On May 31, 2013 (the “Initial Opinion Date”), Duff & Phelps, LLC rendered its oral opinion, which opinion was subsequently confirmed in a written opinion dated the same date to the Special Committee to the effect that, as of the Initial Opinion Date and based upon and subject to the qualifications, limitations and assumptions stated in its written opinion, including the assumption that the consideration to be paid to the Cashed-Out Stockholders was to be based upon the average closing price for the Company’s Common Stock for the 10 trading days leading up to the Initial Opinion Date, the consideration would be fair, from a financial point of view, to the Cashed-Out Stockholders (the "Initial Fairness Opinion"). At the request of the Special Committee, Duff & Phelps, LLC will provide an updated fairness opinion at or near the Effective Date of the proposed transaction. Travelzoo expects to benefit from substantial cost savings as a result of the Reverse/Forward Split. The cost of administering each registered stockholder's account is the same regardless of the number of shares held in that account. Therefore, Travelzoo's costs to maintain such small accounts are disproportionately high when compared to the total number of shares involved. In fiscal year 2012, we expect that each registered stockholder will cost Travelzoo approximately $5.00 for transfer agent and other administrative fees as well as printing and postage costs to mail proxy materials and the annual report. It is expected that the total cost of administering registered stockholder accounts will be reduced by at least $420,000 per year if the Reverse/Forward Split is completed. In addition to reducing administrative costs, the Reverse/Forward Split will also provide stockholders with fewer than 25 shares of Common Stock with a cost-effective way to cash out their investments, because Travelzoo will pay all transaction costs such as brokerage or service fees in connection with the Reverse Split. Otherwise, stockholders with small holdings would likely incur brokerage fees which are disproportionately high relative to the market value of their shares if they wanted to sell their Common Stock. The Reverse/Forward Split will eliminate these problems for stockholders holding fewer than 25 shares of Common Stock. Consummation of the proposed Reverse/Forward Split will: ◦ ◦ ◦ ◦ ◦ Reduce the number of stockholders of Travelzoo from approximately 92,000 to approximately 10,000. Result in savings of administrative costs of approximately $420,000 per year. Cash out stockholders owning less than 25 shares. Have no effect on stockholders owning 25 shares or more. Treat Azzurro Capital Inc., our principal stockholder, in the same manner as other stockholders owning 25 or more shares. After undertaking a thorough analysis of the advisability of the Reverse/Forward Split and considering the totality of the circumstances, the Special Committee believed that it is fair to the stockholders of the Company, from a financial point of view, and in the best interests of Travelzoo and its stockholders, including stockholders owning less than 25 shares of Common Stock who would be cashed-out in connection with the Reverse Split and stockholders owning 25 or more shares of Common Stock who would continue as owners of the Company, and recommended to the full Board of Directors that they approve the Reverse/Forward Split. Based on the recommendation of the Special Committee and its consideration of all relevant factors discussed above, including the Initial Fairness Opinion described above, the Board of Directors determined that the Reverse/Forward Split would be fair to the stockholders of the Company, from a financial point of view, and in the best interests of the Company and its stockholders, including stockholders owning less than 25 shares of Common Stock who would be 10 cashed-out in connection with the Reverse Split and stockholders owning 25 or more shares of Common Stock who would continue as owners of the Company. Consummation of the Reverse/Forward Split is conditioned on the approval of stockholders of the Company holding both (1) a majority of the issued and outstanding shares of Common Stock and (2) a majority of the issued and outstanding shares of Common Stock that are not held or controlled, directly or indirectly, by directors or officers of the Company, including, without limitation, the shares held by Azzurro Capital Inc., our principal stockholder. In addition, the effectuation of the Reverse/Forward Split is further conditioned on (1) receipt by the Special Committee from Duff & Phelps, LLC of an update of the Initial Fairness Opinion as of the date when (if ever) the Special Committee determines to file the amendments (in its updated opinion, Duff & Phelps would be asked to confirm that, based upon the average closing price for the Company’s Common Stock for the 10 trading days leading up to the Effective Date, the consideration to be paid to the Cashed-Out Stockholders would be fair, from a financial point of view, to those holders), and (2) the Special Committee's consideration of the totality of the circumstances. Effect of the Reverse/Forward Split on Travelzoo Stockholders Set forth below is a summary of the effect of the Reverse/Forward Split on the following categories of holders: • • • • Registered Stockholders with a Record Account of Fewer than 25 Shares Registered Stockholders with 25 or More Shares of Common Stock Street Name Holders of Travelzoo Common Stock (through a nominee such as a bank or broker) Current and Former Travelzoo Employees and Directors (all of which will be treated the same as other stockholders) Stockholders with a Record Account of Fewer than 25 Shares: If we complete the Reverse/Forward Split and you are a Cashed-Out Stockholder (i.e., a stockholder holding fewer than 25 shares of Common Stock immediately prior to the Reverse Split): • • • • • You will not receive fractional shares of stock as a result of the Reverse Split. Instead of receiving fractional shares, you will receive a cash payment in exchange for your shares. See "Determination of Cash-Out Payment" below. After the Reverse Split, you will have no further interest in Travelzoo with respect to your cashed-out shares. These shares will no longer entitle you to the right to vote as a stockholder or share in Travelzoo's earnings or profits, or in any dividends paid after the Reverse Split. In other words, you will no longer hold your cashed-out shares; you will have only the right to receive cash for these shares. In addition, you will not be entitled to receive interest with respect to the period of time between the Effective Date and the date you receive your payment for the cashed-out shares. You will not have to pay any service charges or brokerage commissions in connection with the Reverse/Forward Split. Following the time that we effect the Reverse/Forward Split and sell the cashed-out shares on the open market, you will receive a cash payment for the cashed-out shares you held immediately prior to the Reverse Split in accordance with the procedures described below. If you hold Book-Entry Shares: • Registered stockholders commonly hold their shares in book-entry form under the Direct Registration System for securities. These stockholders do not have stock certificates evidencing their ownership of 11  Common Stock. They are, however, provided with a statement reflecting the number of shares registered in their accounts. • If you are a Cashed-Out Stockholder who holds registered shares in a book-entry account, you do not need to take any action to receive your cash payment. A check will be mailed to you at your registered address as soon as practicable after the Effective Date. By signing and cashing this check, you will warrant that you owned the shares for which you received a cash payment. If you hold Certificated Shares: ▪ If you are a Cashed-Out Stockholder with a stock certificate representing your cashed-out shares, you will receive a letter of transmittal as soon as practicable after the Effective Date. The letter of transmittal will contain instructions on how to surrender your certificate(s) to Travelzoo's transfer agent, Computershare Trust Company, N.A., for your cash payment. You will not receive your cash payment until you surrender your outstanding certificate(s) to the transfer agent, together with a completed and executed copy of the letter of transmittal. Please do not send your certificate(s) until you receive your letter of transmittal. For further information, see "Stock Certificates" below. ▪ All amounts owed to you will be subject to applicable federal and state income tax and state abandoned property laws. For further information, see "U.S. Federal Income Tax Consequences" below. ▪ You will not receive any interest on cash payments owed to you as a result of the Reverse/Forward Split. If you want to continue to hold Common Stock after the Reverse/Forward Split, you may do so by taking either of the following actions far enough in advance so that it is completed by 5:00 p.m. Eastern Time on the Effective Date: (1) purchase a sufficient number of shares of Common Stock on the open market so that you hold at least 25 shares of Common Stock in your account prior to the Reverse Split; or (2) if applicable, consolidate your accounts so that you hold at least 25 shares of Common Stock in one account prior to the Reverse Split. Stockholders with 25 or More Shares of Common Stock: If you are a registered stockholder with 25 or more shares of Common Stock as of 5:00 p.m. Eastern Time on the Effective Date, we will first convert your shares into one-twenty-fifth (1/25) of the number of shares you held immediately prior to the Reverse Split. One minute after the Reverse Split, at 5:01 p.m. Eastern Time on the Effective Date, we will convert your shares in the Forward Split into 25 times the number of shares you held after the Reverse Split, which will result in you holding the same number of shares you held before the Reverse Split. As a result, the Reverse/Forward Split will not affect the number of shares you hold if you hold 25 or more shares of Common Stock immediately prior to the Reverse Split. For example, if you held 30 shares of Common Stock in your account immediately prior to the Reverse Split, your shares would be converted into 1.20 shares in the Reverse Split and then back to 30 shares in the Forward Split. Street Name Holders of Travelzoo Common Stock: Travelzoo expects that the Reverse/Forward Split will treat stockholders holding Common Stock in street name or through a nominee (such as a bank or broker), and those persons holding shares of Common Stock as nominees for others, in the same manner as stockholders whose shares are registered in their names on the books of the Company. Nominees will be advised that they may effect the Reverse/Forward Split for their beneficial holders. However, nominees may have different procedures and stockholders holding shares in street name should contact their nominees to be advised of any procedures such holders may need to follow in order to obtain the same treatment as registered stockholders or rights such holders may have to retain beneficial ownership of such shares. Option Holders: If you hold options to purchase shares of Common Stock, regardless of the number of shares, the Reverse/Forward Split will have no effect on such options or the number of shares issuable upon their exercise. If 12 you hold options to purchase less than 25 shares of Travelzoo stock, you will not receive a cash payment for these options. Effect of the Reverse/Forward Split on Travelzoo The Reverse/Forward Split will not affect the public registration of the Common Stock with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Similarly, we do not expect the Reverse/Forward Split will affect the continued listing of the Common Stock on the Nasdaq Global Select Market. The number of shares of authorized and outstanding Common Stock will not change as a result of the Reverse/Forward Split. As a result of the Reverse/Forward Split, the Company's transfer agent will sell the Aggregated Shares on the open market to permit payment of the Cash-Out Payment to the Cashed-Out Stockholders. Based on the Company's stock records as of April 8, 2013, the Company presently expects that approximately 655,000 of its outstanding shares will be fractionalized as a result of the Reverse Split and subsequently sold by the Company’s transfer agent on the open market to fund the payment of the Cash-Out Payment to the Cashed-Out Stockholders. The Company's transfer agent will be instructed to endeavor to limit the effect of the sales on the market price of the Common Stock by limiting its daily sales to 25% of the trailing 30-day average trading volume preceding the Effective Date or taking such other action as may be specified in or in accordance with the agreement between the Company and the transfer agent as approved by the Special Committee. The effectuation of the Reverse/Forward Split would not, by itself, affect our assets or business prospects. The par value of the Common Stock will remain at $0.01 per share after the Reverse/Forward Split. If implemented, the Reverse/Forward Split would not have any effect on our current dividend policy. Travelzoo has not declared or paid any cash dividends since inception and does not expect to pay cash dividends for the foreseeable future. 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. Determination of Cash-Out Payment Stockholders who hold less than 25 shares of Common Stock immediately prior to the Reverse Split will receive cash payments in respect of such shares. If stockholders approve this proposal at the Annual Meeting and the Reverse/Forward Split is completed, Travelzoo will arrange for the disposition of any fractional share interests of Cashed-Out Stockholders resulting from the Reverse Split by having the Company's transfer agent aggregate such fractional interests and sell the shares resulting from such aggregation (the "Aggregated Shares") in open market transactions following the effectiveness of the Forward Split. The Company's transfer agent will pay to the Cashed-Out Stockholders an amount per share equal to the greater of (1) the average per-share price received in the sale of the Aggregated Shares on the open market and (2) the average per-share closing price of the Common Stock on the Nasdaq Global Select Market for the ten (10) consecutive trading days ending on the last trading day prior to the Effective Date (the higher of (1) and (2) is referred to as the "Cash-Out Payment"). Each Cashed-Out Stockholder will receive the Cash-Out Payment for each share of Common Stock they held immediately prior to the Effective Date in accounts with fewer than 25 shares. The amount of the Cash-Out Payment shall be calculated by the Company in its sole discretion and such calculation shall be final and binding on all parties, including each Cashed-Out Stockholder. Any transaction costs associated with the sale of Aggregated Shares by the Company's transfer agent will not be deducted from the prices received by the transfer agent in connection with such sales for purposes of determining the Cash-Out Payment. The Company shall also instruct its transfer agent to endeavor to limit the effect of the sales of Aggregated Shares on the market price of the Common Stock by limiting its daily sales to 25% of the trailing 30-day average trading volume preceding the Effective Date or taking such other action as may be specified in or in accordance with the agreement between the Company and the transfer agent as approved by the Special Committee. Stock Certificates The Reverse/Forward Split will not affect any certificates representing shares of Common Stock held by registered stockholders owning 25 or more shares of Common Stock immediately prior to the Reverse Split. Current certificates held by any of these stockholders will continue to evidence ownership of the same number of shares as is set forth on the face of the certificate. 13 Any Cashed-Out Stockholder with share certificates will receive a letter of transmittal after the Reverse/Forward Split is completed. In order to receive their cash payments with respect to such shares, these stockholders must complete and sign the letter of transmittal and return it with their stock certificate(s) to Travelzoo's transfer agent, Computershare Trust Company, N.A., before they can receive cash payment for those shares. Even if approved by stockholders, the Special Committee retains the authority to abandon the Reverse/Forward Split for any reason at any time prior to the Effective Date. U.S. Federal Income Tax Consequences The following is a summary of the U.S. federal income tax consequences of the consummation of the Reverse/Forward Split generally applicable to holders of the Common Stock and to us. This summary addresses only those holders of Common Stock that have held, and will hold, their shares as capital assets. This summary does not discuss all aspects of U.S. federal income taxation which may be important to holders of Common Stock in light of their individual circumstances or that are subject to special rules (such as financial institutions, insurance companies, broker-dealers, tax-exempt organizations, regulated investment companies or real estate trusts, partnerships or other flow-through entities for U.S. federal income tax purposes and their partners or members, holders who received Common Stock as compensation for services or pursuant to the exercise of an employee stock option, or stockholders who have held, or will hold, Common Stock as part of a straddle, hedging, or conversion transaction for U.S. federal income tax purposes). The following summary is based upon U.S. federal income tax law, as currently in effect, which is subject to differing interpretations or change, possibly on a retroactive basis. Further, no ruling from the Internal Revenue Service (the "IRS") or opinion of counsel has been obtained in connection with the Reverse/Forward Split. Tax consequences under state, local, foreign, and other laws are not addressed herein. Each holder of Common Stock is advised to consult his or her tax advisor as to the particular facts and circumstances which might be unique to such holder, and also to any state, local, foreign, and other tax consequences of the Reverse/Forward Split, in light of his or her specific circumstances. For purposes of the discussion below, a “U.S. Holder” is a beneficial owner of shares of our Common Stock that for U.S. federal income tax purposes is: (1) an individual citizen or resident of the United States; (2) a corporation (including any entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state or political subdivision thereof; (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (4) a trust, the administration of which is subject to the primary supervision of a U.S. court and as to which one or more U.S. persons have the authority to control all substantial decisions of the trust, or that has a valid election in effect to be treated as a U.S. person. A “Non-U.S. Holder” is a beneficial owner (other than a partnership) of shares of our Common Stock who is not a U.S. Holder. U.S. Federal Income Tax Consequences for the Company We should not recognize any gain or loss as a result of the Reverse/Forward Split. U.S. Holders U.S. Federal Income Tax Consequences to U.S. Holders Who Are Not Cashed Out by the Reverse/Forward Split If you (1) continue to hold Common Stock immediately after the Reverse/Forward Split, and (2) receive no cash as a result of the Reverse/Forward Split, you will not recognize any gain or loss in the Reverse/Forward Split for U.S. federal income tax purposes and you will have the same adjusted tax basis and holding period in your Common Stock as you had in such stock immediately prior to the Reverse/Forward Split. U.S. Federal Income Tax Consequences to U.S. Holders Who are Cashed-Out by the Reverse/Forward Split If you receive cash as a result of the Reverse/Forward Split, the sum of: (1) your allocable portion of the transaction costs, such as brokerage and service fees, paid on your behalf by the Company and incurred in connection with the Reverse/Forward Split, and (2) the number of shares of Common Stock held by you multiplied by the excess, if any, of (i) the average per-share closing price of the Common Stock on the Nasdaq Global Select 14 Market for the ten (10) consecutive trading days ending on the last trading day prior to the Effective Date, over (ii) the average per-share price received in the sale of the Aggregated Shares on the open market (the sum of (1) and (2), the "Dividend Portion"), will be treated, first, as ordinary dividend income to the extent of your ratable share of Travelzoo's current and accumulated earnings and profits, then as a tax-free return of capital to the extent of your aggregate adjusted tax basis in your shares, and any remaining gain will be treated as capital gain. In addition to the foregoing, you will recognize capital gain or loss in respect of any cash received by you in excess of the Dividend Portion (such amount, the "Exchange Portion"). The amount of capital gain or loss you recognize will equal the difference between this excess cash and your aggregate adjusted tax basis in such stock (as determined after adjusting such basis to reflect the receipt of the Dividend Portion). Capital gain or loss recognized by you will be long-term if your holding period with respect to the Common Stock surrendered is more than one year at the time of the Reverse/Forward Split. The deductibility of capital loss is subject to limitations. Non-U.S. Holders U.S. Federal Income Tax Consequences to Non-U.S. Holders Who Are Not Cashed Out by the Reverse/Forward Split If you (1) continue to hold Common Stock immediately after the Reverse/Forward Split, and (2) receive no cash as a result of the Reverse/Forward Split, you will not recognize any gain or loss in the Reverse/Forward Split for U.S. federal income tax purposes and you will have the same adjusted tax basis and holding period in your Common Stock as you had in such stock immediately prior to the Reverse/Forward Split. U.S. Federal Income Tax Consequences to Non-U.S. Holders Who are Cashed-Out by the Reverse/Forward Split The gross amount of the Dividend Portion (as defined above under "U.S. Holders") paid to a Non-U.S. Holder generally will be subject to U.S. federal withholding tax at a rate of 30%, unless (i) an applicable income tax treaty reduces or eliminates such tax, and the Non-U.S. Holder certifies that it is eligible for the benefits of such treaty in the manner described below, or (ii) the dividends are effectively connected with the Non- U.S. Holder's conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment maintained by the Non-U.S. Holder in the U.S.) and the Non-U.S. Holder satisfies certain certification and disclosure requirements. In the latter case, a Non-U.S. Holder generally will be subject to U.S. federal income tax with respect to such dividends on an net income basis at regular graduated U.S. federal income tax rates in the same manner as a U.S. person (as defined under the Internal Revenue Code of 1986, as amended (the "Code")). Additionally, a Non-U.S. Holder that is a corporation may be subject to a branch profits tax equal to 30% (or such lower rate as may be specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. A Non-U.S. Holder that wishes to claim the benefit of an applicable income tax treaty with respect to the Dividend Portion will be required to provide the applicable withholding agent with a valid IRS Form W-8BEN (or other applicable form) and certify under penalties of perjury that such holder (i) is not a U.S. person (as defined under the Code) and (ii) is eligible for the benefits of such treaty, and the withholding agent must not have actual knowledge or reason to know that the certification is incorrect. This certification must be provided to the applicable withholding agent prior to the payment of dividends and may be required to be updated periodically. If our Common Stock is held through a non-U.S. partnership or non-U.S. intermediary, such partnership or intermediary will also be required to comply with additional certification requirements under applicable Treasury regulations. A Non-U.S. Holder eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. In addition, any capital gain realized by a Non-U.S. Holder as a result of the Reverse/Forward Split in respect of the Exchange Portion (as defined above under "U.S. Holders") generally should not be subject to U.S. federal income or withholding tax unless: 15 • the Non-U.S. Holder is an individual who holds our Common Stock as a capital asset, is present in the U.S. for 183 days or more during the taxable year in which the Effective Date occurs and meets certain other conditions; • the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the U.S. (and, if certain income tax treaties apply, is attributable to a Non-U.S. Holder’s permanent establishment in the U.S.); or • we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes at any time within the shorter of the five-year period ending on the Effective Date, or the period that the Non-U.S. Holder held the shares of our Common Stock. We do not believe that we have been, currently are, or will become, a United States real property holding corporation. Individual Non-U.S. Holders who are subject to U.S. federal income tax because they are present in the United States for 183 days or more during the year in which the Effective Date occurs will be taxed on their gain (including gain from the sale of shares of our Common Stock and net of applicable U.S. losses from sales or exchanges of other capital assets recognized during the year) at a flat rate of 30% or such lower rate as may be specified by an applicable income tax treaty. Other Non-U.S. Holders subject to U.S. federal income tax with respect to gain recognized as a result of receiving cash in connection with the Reverse/Forward Split generally will be taxed on such gain in the same manner as if they were U.S. Holders and, in the case of foreign corporations, may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Reservation of Rights We reserve the right to abandon the Reverse/Forward Split without further action by our stockholders at any time before the filing of the necessary amendments to Travelzoo's Certificate of Incorporation with the Delaware Secretary of State, even if the Reverse/Forward Split has been authorized by our stockholders at the Annual Meeting, and by voting in favor of the Reverse/Forward Split, you are expressly also authorizing us to determine not to proceed with the Reverse/Forward Split if the Special Committee should so decide. The Special Committee is further authorized to determine when to file the necessary amendments to Travelzoo's Certificate of Incorporation with the Delaware Secretary of State at any time on or before the twelve-month anniversary of stockholder approval thereof, subject to (1) receipt by the Special Committee from Duff & Phelps, LLC of an update of the Initial Fairness Opinion as of the date when (if ever) the Special Committee determines to file the amendments (in its updated opinion, Duff & Phelps would be asked to confirm that, based upon the average closing price for the Company’s Common Stock for the 10 trading days leading up to the Effective Date, the consideration to be paid to the Cashed-Out Stockholders would be fair, from a financial point of view, to those holders), and (2) the Special Committee's consideration of the totality of the circumstances. No Appraisal Rights Stockholders do not have appraisal rights under Delaware state law or under Travelzoo's Certificate of Incorporation or bylaws in connection with the Reverse/Forward Split. Required Vote Consummation of the Reverse/Forward Split is conditioned on the approval of stockholders of the Company holding both (1) a majority of the issued and outstanding shares of Common Stock and (2) a majority of the issued and outstanding shares of Common Stock that are not held or controlled, directly or indirectly, by directors or officers of the Company, including, without limitation, the shares held by Azzurro Capital Inc., our principal stockholder. Abstentions will have the effect of a vote against the amendments to Travelzoo's Certificate of Incorporation to effect the Reverse Split followed by the Forward Split. Broker non-votes will have the same effect as a vote against the Reverse/Forward Split. Azzurro Capital Inc., whose beneficial owner is Ralph Bartel, a member of our Board, holds an aggregate of 7,230,538 shares of our Common Stock, representing approximately 47.1% of the outstanding shares, as of June 27, 2013. Azzurro Capital Inc. has indicated that it intends to vote its shares in favor of Proposal 1. 16 Board of Directors' Recommendation THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE AMENDMENTS TO TRAVELZOO'S CERTIFICATE OF INCORPORATION TO EFFECT A 1-FOR-25 REVERSE STOCK SPLIT, FOLLOWED IMMEDIATELY BY A 25-FOR-1 FORWARD STOCK SPLIT OF TRAVELZOO'S COMMON STOCK. 17 ELECTION OF DIRECTORS (PROPOSAL 2) Under Travelzoo's bylaws, the number of directors of Travelzoo is fixed, and may be increased or decreased from time to time, by resolution of the Board of Directors. Each director holds office for a term of one year, until the annual meeting of stockholders next succeeding the director's election and until a successor is elected and qualified or until the earlier resignation or removal of the director. The following individuals have been nominated for election to our Board of Directors, each to serve until the 2014 Annual Meeting of Stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Following is information about each nominee, including biographical data for at least the last five years. Should one or more of these nominees become unavailable to accept nomination or election as a director, the individuals named as proxies on the enclosed proxy card will vote the shares that they represent for the election of such other persons as the Board may recommend, unless the Board reduces the number of directors. We have no reason to believe that any nominee will be unable or unwilling to serve if elected as a director. Nominees for a One-Year Term That Will Expire in 2014: The ages, principal occupations, directorships held and other information as of June 13, 2013, with respect to our nominees are shown below. Name Holger Bartel, Ph.D. Ralph Bartel, Ph.D. David J. Ehrlich (1) (2) Donovan Neale-May (1) (3) Mary Reilly (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of the Disclosure Committee Age 46 47 50 61 60 Position Chairman of the Board of Directors Director Director Director Director Each of the director nominees listed above, other than Mary Reilly, is currently a director of Travelzoo and was elected at the Company's Annual Meeting of Stockholders held on May 18, 2012. Our Board of Directors has determined that each of Mr. Ehrlich, Mr. Neale-May and Ms. Reilly meet the independence requirements of the listing standards of the NASDAQ Stock Market (the "NASDAQ"). Kelly M. Urso, who has served as a Director since February 1999, has informed the Company that, following her fourteen years of service on the Board of Directors, she has decided not to stand for re-election to the Board of Directors at the 2013 Annual Meeting. Upon Ms. Urso's departure, David Ehrlich will join the Disclosure Committee and Mary Reilly will serve on the Audit and Compensation Committees. Our Board of Directors also determined that Ms. Urso, who was elected to be a director at the Company's Annual Meeting of the Stockholders held on May 18, 2012, meets the NASDAQ independence requirements. The Board of Directors determined that Mr. Ralph Bartel is not independent because he is a beneficial owner of Azzurro Capital Inc., which holds approximately 47.1% of our outstanding Common Stock as of June 27, 2013, and Mr. Holger Bartel is not independent because he is an employee of the Company and Ralph Bartel's brother. Holger Bartel, Ph.D., has served as a Chairman of the Board of Directors since July 2010 after serving as a Director from June 2005 to June 2010. Mr. Bartel served as a consultant to the Company from July 2010 through September 2011 and became an employee of the Company in October 2011, serving as the Head of Strategy. Mr. Bartel served as Chief Executive Officer from October 2008 to June 2010, after serving as Executive Vice President from September 1999 to November 2007. From 1995 to 1998, Mr. Bartel worked as an Engagement Manager at McKinsey & Company in Los Angeles. From 1992 to 1994, Mr. Bartel was a research fellow at Harvard Business School. Mr. Bartel holds a Ph.D. in Economics and an MBA in Finance and Accounting from the University of St. Gallen, Switzerland. He is the brother of Ralph Bartel. 18 Areas of Holger Bartel's relevant experience: Deep knowledge of Travelzoo's operations, Internet, strategy, management of growth companies, travel, international management. Ralph Bartel, Ph.D., founded Travelzoo in May 1998 and has served as a Director since July 2010 after serving as Chairman of the Board of Directors from May 1998 to June 2010. From May 1998 to September 2008, Mr. Bartel served as Travelzoo's Chief Executive Officer and President. Mr. Bartel is a professionally trained journalist who also holds a Ph.D. in Communications from the University of Mainz, Germany, a Master's degree in Journalism from the University of Eichstaett, Germany, and a Ph.D. in Economics and an MBA in Finance and Accounting from the University of St. Gallen, Switzerland. He is the brother of Holger Bartel. Areas of Ralph Bartel's relevant experience: Media, journalism, Internet, finance, start-up experience. David J. Ehrlich has served as a Director since February 1999. Mr. Ehrlich currently serves as the CEO of Aktana, the leader in actionable analytics for sales force effectiveness. Before Aktana, Mr. Ehrlich was an Executive in Residence with Mohr Davidow Ventures. From March 2007 to January 2010, Mr. Ehrlich served as Chief Executive Officer of ParAccel, Inc., a technology company. From 2003 to 2006, Mr. Ehrlich was Senior Vice President, Marketing and Chief Strategy Officer of NetIQ Corporation. From 1998 to 2002, Mr. Ehrlich was Vice President, Product Management and Strategic Partnering for Visual Networks, Inc. From 1993 to 1998, Mr. Ehrlich worked as a consultant for McKinsey & Company. Mr. Ehrlich holds a bachelor's degree in Sociology with honors and distinction from Stanford University, a Master's degree in Industrial Engineering from Stanford University, and an MBA from Harvard Business School. Areas of Mr. Ehrlich's relevant experience: Technology, corporate development, mergers & acquisitions. Donovan Neale-May has served as a Director since February 1999. Mr. Neale-May is the president and managing partner of GlobalFluency, Inc., a global organization of independent marketing and communication firms with 70 offices in over 40 countries. He is also the managing partner and co-founder of the SABLE Accelerator (South African Business Link to Experts). Since 1987, Mr. Neale-May has been managing and running his own digital marketing and communications agency operating from Silicon Valley and New York. Previously, Mr. Neale-May held senior positions with marketing, promotions and public relations agencies, such as Ogilvy & Mather, in Silicon Valley, New York, London and Los Angeles. During his 30 years as an international marketing and brand strategist, Mr. Neale-May has consulted with over 300 leading multi- nationals, new venture starts and emerging growth companies. Mr. Neale-May is the founder and executive director of the Chief Marketing Officer (CMO) Council, a global affinity network of more than 6,000 senior marketing and branding executives controlling some $300 billion in aggregated annual marketing spend. Mr. Neale-May is a journalism graduate of Rhodes University in South Africa and serves on the University's board of governors. He also chairs the Rhodes University Trust, USA. In addition, Mr. Neale-May serves as an adjunct professor at Seoul National University in South Korea. Areas of Mr. Neale-May's relevant experience: Brand strategy, public relations, marketing, international management. Mary Reilly is a chartered accountant and a retired partner of Deloitte LLP, a large international accounting and consulting firm. From August 2002 to June 2013, Ms. Reilly served as a partner of Deloitte LLP in various capacities including in the Products & Services division of Deloitte working with organizations operating in a wide range of international industries including recruitment, retail businesses, media, business services, manufacturing, professional practices and charities in the United Kingdom (UK), including NSPCC, PDSA and Church Commissioners. Ms. Reilly headed up Deloitte's Outsourcing Unit where she was responsible for the finance function and business advisory projects for a number of UK and international businesses and was a leading partner in Deloitte's Charities and Not for Profit Group; she was also the Corporate Responsibility leader for the London Audit Practice of Deloitte and was a member of the firm's Diversity Leadership Team. Ms. Reilly has also held several non-executive directorships, including Chair of the Audit and Risk Committee for Department of Transport in the UK since June 2013, Chair of the Audit and Risk Committee for Crown Agents LTD since February 2013, board member of London Development Agency from July 2000 to June 2008 and board member of London 2012 LTD, a company established to run London's Olympic bid from March 2003 to November 2006. Ms. Reilly holds a bachelor's degree in history from the University College London, she did a postgraduate course at London Business School and is a Qualified Chartered Accountant in the United Kingdom. 19 Areas of Ms. Reilly's relevant experience: Accounting, finance, international management and non-executive directorships. Required Vote Our Certificate of Incorporation, as amended, does not authorize cumulative voting. Delaware law and our bylaws provide that directors are to be elected by a plurality of the votes of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote on the election of directors. This means that the five (5) candidates receiving the highest number of affirmative votes at the Annual Meeting will be elected as directors. Only shares that are voted in favor of a particular nominee will be counted toward that nominee's achievement of a plurality. Shares present at the Annual Meeting that are not voted for a particular nominee or shares present by proxy where the stockholder properly withheld authority to vote for such nominee will not be counted toward that nominee's achievement of a plurality. Thus, abstentions and broker non-votes will have no effect on the election of directors. Proxies cannot be voted for a greater number of persons than the number of nominees named. Board of Directors' Recommendation THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION OF THE FIVE (5) DIRECTOR NOMINEES NAMED ABOVE. The Board of Directors believes that each director nominee possesses the qualities and experience a member of Travelzoo's Board should possess. The Board of Directors seeks out, and the Board of Directors is comprised of, individuals whose background and experience complement those of other Board members. 20 Board Meetings and Committees CORPORATE GOVERNANCE The Board of Directors has appointed an Audit Committee, a Compensation Committee, and a Disclosure Committee. Below is a table indicating the membership of each of the Audit Committee, Compensation Committee, and Disclosure Committee and how many times the Board of Directors and each such committee met in fiscal year 2012. Each of Mr. Holger Bartel, Mr. Ralph Bartel, Mr. Ehrlich, Mr. Neale-May, and Ms. Urso attended at least 75 percent of the total number of meetings of the Board of Directors and of the committees on which he or she serves. Mr. Holger Bartel Mr. Ralph Bartel Mr. Ehrlich Mr. Neale-May Ms. Urso Number of 2012 Meetings Board Chair Member Member Member Member 4 Audit Compensation Disclosure Chair Member Member 4 Member Chair 1 Member Chair 4 The Company does not require that directors attend the Annual Meeting. Audit Committee The Audit Committee’s primary responsibilities are to oversee and monitor (i) the integrity of Travelzoo’s financial statements, (ii) the qualifications and independence of our independent registered public accounting firm, (iii) the performance of our independent registered public accounting firm and internal audit staff, and (iv) the compliance by Travelzoo with legal and regulatory requirements. A complete description of the committee’s responsibilities is set forth in its written charter. A copy the written charter can be found in Appendix A of our 2008 proxy statement. The Audit Committee is responsible for appointing the independent registered public accounting firm and is directly responsible for the compensation and oversight of the work of our independent registered public accounting firm. The Audit Committee is composed solely of independent directors as defined in the listing standards of the NASDAQ. The Board has determined that Mr. Ehrlich qualifies as an audit committee financial expert within the meaning of the regulations of the Securities and Exchange Commission (“SEC”). Compensation Committee The Compensation Committee reviews and approves the compensation and benefits for the Company’s executive officers and directors, and makes recommendations to the Board of Directors regarding such matters. The Compensation Committee also approves the Company’s non-equity incentive plans. The Compensation Committee further reviews and discusses with management the Compensation Discussion and Analysis section of this proxy statement. The Report of the Compensation Committee is included herein. In 2012, the Company was not required to have a Compensation Committee charter since it is a "Controlled Company" under NASDAQ rule 5615, on account of the stock ownership by Azzurro Capital Inc. Such ownership is now less than 50%, so we will be establishing a Compensation Committee charter during 2013. Disclosure Committee The Disclosure Committee’s primary responsibilities are (i) to design, establish and evaluate controls and other procedures that are designed to ensure the accuracy and timely disclosure of information to the SEC and investment community and (ii) to review and supervise preparation of all SEC filings, press releases and other broadly disseminated correspondence. Nominating Committee Since it was a “Controlled Company” as referred to above during 2012, the Company was not required to have a Nominating Committee. Since the Company is no longer a Controlled Company, it will be establishing a Nominating Committee during 2013. In 2012, through its share ownership, Azzurro Capital Inc. was in a position to 21 control Travelzoo and to elect our entire Board of Directors. Azzurro Capital Inc. considers candidates for director nominees. The Board’s Role in Risk Oversight The full Board oversees enterprise risk as part of its role in reviewing and overseeing the implementation of the Company’s strategic plans and objectives. The risk oversight function is administered both in full Board discussions and in individual committees that are tasked by the Board with oversight of specific risks. On a regular basis, the Board and its committees receive information and reports from management on the status of the Company and the risks associated with the Company’s strategy and business plans. In addition, the Audit Committee reviews the Company’s risk assessment and risk management policies and procedures at least annually, including steps taken to monitor and control such exposures. The Board believes the continuity of Board membership, as well as the independent directors constituting a majority of the Board and separation of the roles of Chairman and Chief Executive Officer, encourage open discussion and assessment of the Company’s ability to manage its risks. Code of Ethics We have adopted a code of ethics that applies to our Chief Executive Officer and our Chief Financial Officer, who also serves as our principal accounting officer. This code of ethics is posted on our website located at corporate.travelzoo.com/governance. A copy of the code of ethics is also available in print to stockholders and interested parties without charge upon written request delivered to our Corporate Secretary at Travelzoo Inc., 800 W. El Camino Real, Suite 275, Mountain View, CA 94040. Communications with Directors The board has established a process to receive communications from stockholders. Stockholders and other interested parties may contact any member (or all members) of the board, or the non-management directors as a group, any board committee or any chair of any such committee by mail. To communicate with the Board of Directors, any individual directors or any group or committee of directors, correspondence should be addressed to the Board of Directors or any such individual directors or group or committee of directors by either name or title. All such correspondence should be sent “c/o Corporate Secretary” at Travelzoo Inc., 800 W. El Camino Real, Suite 275, Mountain View, CA 94040. All communications received as set forth in the preceding paragraph will be opened by the Corporate Secretary for the sole purpose of determining whether the contents represent a message to our directors. Any contents that are not in the nature of advertising, promotions of a product or service, patently offensive material or matters deemed inappropriate for the Board of Directors will be forwarded promptly to the addressee. In the case of communications to the board or any group or committee of directors, the Corporate Secretary will make sufficient copies of the contents to send to each director who is a member of the group or committee to which the correspondence is addressed. Director Compensation Directors of the Company or its subsidiaries are entitled to receive certain retainers and fees. In 2012, there were no adjustments to the director compensation policy. The retainers and meeting fees are as follows: • • • • • • Annual board member retainer — $30,000; Annual Audit Committee chair retainer — $30,000; Fee for attendance of a board meeting — $1,680; Fee for attendance of an Audit Committee meeting — $2,800; Fee for attendance of a Disclosure Committee meeting — $1,680; Fee for attendance of a Compensation Committee meeting — $2,800; and 22  • Fee for attendance of a strategy meeting — $4,480. We reimburse directors for out-of-pocket expenses incurred in connection with attending meetings. Mr. Ralph Bartel chose not to receive any compensation for his services as a director. The following table shows compensation information for Travelzoo’s directors for fiscal year ended December 31, 2012. Name Mr. Holger Bartel Mr. Ralph Bartel Mr. Ehrlich Mr. Neale-May Ms. Urso Fees Earned or Paid in Cash ($) 45,680 — 89,680 66,000 66,400 Total ($) 45,680 — 89,680 66,000 66,400 Certain Relationships and Related Party Transactions The Company maintains policies and procedures to ensure that our directors, executive officers and employees avoid conflicts of interest. Our Chief Executive Officer and Chief Financial Officer are subject to our Code of Ethics and each signs the policy to ensure compliance. Our Code of Ethics requires our leadership to act with honesty and integrity, and to fully disclose to the Audit Committee any material transaction that reasonably could be expected to give rise to an actual or apparent conflict of interest. The Code of Ethics requires that our leadership obtain the prior written approval of the Audit Committee before proceeding with or engaging in any conflict of interest. Our Audit Committee, with the assistance of legal counsel, reviews all related party transactions involving the Company and any of the Company’s principal shareholders or members of our board of directors or senior management or any immediate family member of any of the foregoing. A general statement of this policy is set forth in our audit committee charter, which was attached as Appendix A to our proxy statement for the 2008 Annual Meeting of Stockholders which has been filed with the SEC. However, the Audit Committee does not have detailed written policies and procedures for reviewing related party transactions. Rather, all facts and circumstances surrounding each related party transaction may be considered. If the Audit Committee determines that any such related party transaction creates a conflict of interest situation or would require disclosure under Item 404 of Regulation S-K, as promulgated by the SEC, the transaction must be approved by the Audit Committee prior to the Company entering into such transaction or ratified thereafter. The chair of the Audit Committee is delegated the authority to approve such transactions on behalf of the full committee, provided that such approval is thereafter reviewed by the committee. Transactions or relationships previously approved by the Audit Committee or in existence prior to the formation of the committee do not require approval or ratification. Family Relationships Holger Bartel, the Company's Head of Strategy and Chairman of the Board of Directors, and Ralph Bartel, a member of the Board of Directors, are brothers. Except for Holger Bartel and Ralph Bartel, there are no familial relationships among any of our officers and directors. Involvement in Certain Legal Proceedings To our knowledge, during the last ten years, none of our directors and executive officers has: (i) had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (ii) been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses; (iii) been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (iv) been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been 23 reversed, suspended or vacated; or (v) been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. INFORMATION ABOUT OUR EXECUTIVE OFFICERS The following table sets forth certain information with respect to the named executive officers of Travelzoo as of June 13, 2013. Name Christopher Loughlin Age 39 Chief Executive Officer Position Glen Ceremony Holger Bartel Shirley Tafoya Mark K.Webb 46 Chief Financial Officer 46 Head of Strategy, Chairman of the Board of Directors 50 President, North America 55 President, Local Deals Christopher Loughlin has served as Chief Executive Officer since July 2010 after service as Executive Vice President, Europe from May 2005 to June 2011 and Vice President of Business Development from 2001 to April 2005. From 1999 to 2001, he was Chief Operating Officer of Weekends.com. Mr. Loughlin holds a BSc(Hons) in Technology Management from Staffordshire University and an MBA from Columbia University Graduate School of Business in New York. Glen Ceremony has served as Chief Financial Officer since June 2011. From October 2004 to June 2011, Mr. Ceremony worked at Ebay, Inc. and most recently served as Corporate Controller. In 2004, Mr. Ceremony was Senior Director of Global Finance Audit at Electronic Arts Inc. From 1998 to 2004, Mr. Ceremony worked at PWC LLP and from 1990 to 1998 he was at Coopers & Lybrand LLP. Mr. Ceremony received his B.S. in Business Administration from California State University, Sacramento. Shirley Tafoya has served as President, North America since July 2008 after service as Senior Vice President of Sales from 2001 to June 2008. From 1999 to 2001, Ms. Tafoya was the Director of Western Sales at Walt Disney Internet Group. From 1998 to 1999, Ms. Tafoya was a Sales Manager at IDG/International Data Group. Ms. Tafoya holds a bachelor’s degree in Business Administration from Notre Dame de Namur University. Mark K. Webb has served as President, Local Deals since February 2012. From November 2009 to February 2012, Mr. Webb worked at British Airways as Senior Vice President, Head of Sales, North America. From July 2007 to October 2009, Mr. Webb worked at Citicorp Credit Services as Executive Vice President, Head of Business Development. From 1983 to 2006, Mr. Webb worked at American Express Company and most recently served as Senior Vice President, Head of Global Client Group, of American Express Corporate Services. Mr. Webb holds a bachelor's degree with distinction in Policy Studies from Dartmouth College and an MBA from Columbia Business School. 24 ADVISORY VOTE ON THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS OF THE COMPANY (PROPOSAL 3) Section 14A of the Exchange Act requires that we include in this proxy statement a non-binding stockholder vote on our executive compensation as described herein (commonly referred to as "Say-on-Pay"). We encourage stockholders to review the Compensation Discussion and Analysis included in this proxy statement. Our executive compensation program has been designed to pay for performance and align our executive compensation with business strategies focused on long- term growth and creating value for stockholders while also paying competitively and focusing on the total compensation perspective. We feel this design is evidenced by the following: • • Our goal is to attract, motivate and retain key executives and to reward executives for value creation. We provide a significant portion of our total compensation in the form of performance-based compensation; for example, approximately 6% to 36% of our named executive officers' total compensation for 2012 was in the form of performance-based compensation based on the achievement of quarterly corporate financial measures such as revenue and operating income. • This is not a mechanical process, and our Board of Directors uses its judgment and experience and works with our Compensation Committee to determine the appropriate mix of compensation for each individual. The Board of Directors strongly endorses the Company's executive compensation program and unanimously recommends that stockholders vote in favor of the following resolution: RESOLVED, that the stockholders approve the compensation of our named executive officers, as disclosed pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis and the other tabular and narrative disclosure in the Company's proxy statement for its 2013 Annual Meeting of Stockholders. Required Vote Because the vote is advisory, it will not be binding upon the Board of Directors or the Compensation Committee and neither the Board of Directors nor the Compensation Committee will be required to take any action as a result of the outcome of the vote on this proposal. The Compensation Committee will consider the outcome of the vote when considering future executive compensation arrangements. The affirmative vote of the majority of the shares of the Company’s Common Stock present in person or represented by proxy and entitled to vote on the proposal will be considered as the approval, by an advisory vote, of the compensation of our named executive officers. Board of Directors' Recommendation THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE ADVISORY RESOLUTION RELATING TO THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS. 25 COMPENSATION DISCUSSION AND ANALYSIS We hold annual votes on executive compensation, in accordance with shareholder recommendation made at the 2012 annual meeting. In light of last year’s shareholder approval of the compensation for executives, there were no significant changes in executive compensation. Overview of Compensation Program The following Compensation Discussion and Analysis, or “CD&A,” describes our overall compensation philosophy and the primary components of our compensation program. Furthermore, the CD&A explains the process by which the Compensation Committee, or “Committee”, determined the 2012 compensation for our Chief Executive Officer, Chief Financial Officer and other most highly compensated officers. We refer to these individuals collectively as the “named executives” or the “named executive officers.” Compensation Philosophy and Objectives The fundamental objectives of our executive compensation program are to attract and retain highly qualified executive officers, motivate these executive officers to materially contribute to our long-term business success, and align the interests of our executive officers and stockholders by rewarding our executives for individual and corporate performance based on targets established by the Committee. We believe that achievement of these compensation program objectives enhances long-term profitability and stockholder value. The elements utilized to help achieve the Committee’s objectives include the following: • Accountability for Individual Performance. Compensation should in large part depend on the named executive’s individual performance in order to motivate and acknowledge the key contributors to our success. • Recognition for Business Performance. Compensation should take into consideration our overall financial performance and overall growth. • Attracting and Retaining Talented Executives. Compensation should generally reflect the competitive marketplace and be designed to attract and retain superior employees in key competitive positions. We implement our compensation philosophy through setting base salaries for our executive officers, through the use of our executive bonus plan and through reviewing and approving other terms of employment agreements. Compensation Determination Process Compensation Committee Members. The Committee is responsible for establishing, overseeing and reviewing executive compensation policies and for approving, validating and benchmarking the compensation and benefits for named executive officers. The Committee is also responsible for determining the fees paid to our outside directors. The Committee includes Ms. Kelly M. Urso (Chair) and Mr. David J. Ehrlich. Ms. Urso and Mr. Ehrlich satisfied the independence requirements of the NASDAQ. Role of Management. During 2012, the Committee engaged in its annual review of executive compensation with the goal of ensuring the appropriate combination of fixed and variable compensation linked to individual and corporate performance. In the course of its review, the Committee considered the advice and input of the Company’s CEO and data prepared by management, including a comparison of the current compensation of the named executive officers with publicly available information. Management did rely on a service from Equilar Inc., a compensation research firm, to provide peer executive compensation data from proxies and a compensation survey for comparison purposes. However, management did not receive advice from Equilar in setting our executive compensation. The data utilized by the Committee included salary and total compensation information based on the title, job description, and geographic location of similarly situated executives. The most significant aspects of the CEO’s role in the compensation determination process are evaluating employee performance, establishing business 26 performance targets, goals and objectives and recommending salary and bonus levels. The CEO does not participate in discussions regarding his compensation. The Committee compared the compensation received by the Company’s named executive officers with the levels of compensation received by similarly situated executives in the same geographic location in light of the named executives’ responsibilities, performance, experience and tenure, in order to arrive at the total compensation package for each of the named executive officers. In some cases, the compensation package that the Committee awarded a named executive officer was at or below the median compensation received by executives compared to third-party data, while in other instances the compensation was higher due to the executive’s responsibilities, performance, experience and tenure. The Committee did not engage an outside consulting firm to provide advice on executive compensation. Components of Executive Compensation The Committee has structured an executive compensation program comprised of base salary, cash bonus and non-equity incentive pay. In addition, during 2012, the Committee approved the grant of options to the Company’s Chief Financial Officer and President, North America, each for 50,000 shares of common stock as further described in our 2011 proxy statement and in the Nonqualified Stock Option Agreements between Travelzoo Inc. and both Glen Ceremony and Shirley Tafoya, dated January 23, 2012 (incorporated by reference to our Current Report on Form 8-K (File No. 000-50171), filed March 30, 2012). Base Salary. The Committee considered two types of potential base salary increases for the named executive officers in 2012: (1) “merit increases” based upon each named executive’s individual performance; and/or (2) “market adjustments” based upon the salary range for similarly situated executives. In determining merit increases, the Committee considers the specific responsibilities of the executive and the executive’s overall performance and tenure with the Company. In addition, the Committee also considers the CEO’s evaluation of each named executive officer in making the decision regarding merit increases. The Committee determines any market adjustments based on the Committee’s comparison of the executive’s compensation with statistical information on average compensation for similarly situated executives that is publicly available. The Committee did not make any changes to the salaries of Mr. Christopher Loughlin, Mr. Glen Ceremony, Mr. Holger Bartel, Ms. Shirley Tafoya and Mr. Mark K.Webb in 2012. Incentive Bonus Pay. In 2010, 2011 and 2012, Mr. Christopher Loughlin, Mr. Glen Ceremony, Ms. Shirley Tafoya and Mr. Mark Webb also received incentive bonuses pursuant to the terms of their employment agreements. Pursuant to the terms of Mr. Loughlin’s previous employment agreement dated May 16, 2005, as amended on July 12, 2006 and as amended on July 1, 2007, Mr. Loughlin was eligible to receive quarterly and annual bonuses. Mr. Loughlin’s bonuses were payable in British pounds and have been translated into U.S. dollars (at the rate of £1 = $1.54431) for the purposes of this summary. Mr. Loughlin was eligible to receive the following quarterly bonuses: Criteria Revenue goal as defined in the official budget for Europe is met Net income goal as defined in the official budget for Europe is met Subscriber goal as defined in the official budget for Europe is met Performance evaluation by the Chairman of the Company Total maximum bonus per quarter Quarterly Bonus Payment $ $ 11,582 11,582 11,582 11,582 46,328 Up to Up to Under the terms of the annual bonus plan set forth in Mr. Loughlin’s previous employment agreement, Mr. Loughlin was eligible to receive 10% of Travelzoo Europe’s pro forma operating income generated from operations in the U.K., Germany and France from January 1, 2010 to June 30, 2010. The quarterly net income goal 27 was met for the first quarter of 2010. Mr. Loughlin was paid 100% of his quarterly performance evaluation bonus for the first and second quarters of 2010. In determining the quarterly performance evaluation bonus for the first and second quarters of 2010, the Chairman of the Company considered factors such as the quality of Mr. Loughlin’s strategic management to ensure the long-term success of the Company’s business in Europe, the development of the Company’s talent in Europe, the quality of the content of the Company’s publications in Europe, and the development of the Travelzoo brand in Europe. For the first and second quarters of 2010, Mr. Loughlin received $34,747 and $285,165 pursuant to the quarterly and annual bonus plans, respectively, set forth in his employment agreement. Pursuant to the terms of Mr. Loughlin’s employment agreement dated November 18, 2009 and effective July 1, 2010, Mr. Loughlin is eligible to receive a quarterly Performance Bonus and a quarterly Discretionary Bonus. Mr. Loughlin was eligible to receive a quarterly Performance Bonus and a quarterly Discretionary Bonus for each quarter during 2012. The quarterly Performance Bonus is calculated as follows: Criteria Worldwide revenue target for the quarter met AND there are no more than two Significant Customers AND no Significant Customer accounts for 17% or more of Worldwide consolidated revenue for the quarter Worldwide operating income target for the quarter met Worldwide subscriber target for the quarter met Total maximum Performance Bonus per quarter Quarterly Bonus Payment $ $ 20,000 20,000 20,000 60,000 The quarterly target for worldwide operating income, revenue and worldwide subscribers were not met for 2012. Mr. Loughlin did not receive any Performance Bonuses in 2012. The Company believes that targets set for worldwide revenue, worldwide operating income and worldwide subscribers align with the Company’s desire to continue to grow the business. Since the individual targets are intended to be challenging, and since the separate targets related to different aspects of the Company’s performance, it is expected it will be difficult for all the targets to be achieved for any given year. Mr. Loughlin is also eligible to receive a quarterly Discretionary Bonus of up to $20,000 per quarter. The Discretionary Bonus is to be determined by the Board of Directors at its sole and absolute discretion. In exercising such discretion, the Board of Directors takes into consideration Mr. Loughlin’s individual performance. In evaluating Mr. Loughlin’s individual performance during 2012, the Board of Directors considered factors such as the quality of Mr. Loughlin’s strategic management to ensure the long-term success of the Company, the development of the Company’s leadership talent, the quality of the content of the Company’s publications, and the development of the Travelzoo brand. Mr. Loughlin received Discretionary Bonuses totaling $17,500 for 2012. Pursuant to the terms of Mr. Ceremony’s employment agreement dated May 9, 2011 and effective June 15, 2011, Mr. Ceremony is eligible to receive a quarterly Performance Bonus and a quarterly Discretionary Bonus. Mr. Ceremony was eligible to receive a quarterly Performance Bonus and a quarterly Discretionary Bonus for each quarter during 2012. The quarterly Performance Bonus is calculated as follows: Criteria Worldwide revenue target for the quarter met AND there are no more than two Significant Customers AND no Significant Customer accounts for 17% or more of Worldwide consolidated revenue for the quarter Worldwide operating income target for the quarter met Worldwide subscriber target for the quarter met Total maximum Performance Bonus per quarter Quarterly Bonus Payment $ $ 12,500 12,500 12,500 37,500 28 The quarterly performance target for worldwide operating income, revenue and worldwide subscribers were not met for 2012 except certain targets for the fourth quarter. The quarterly Performance Bonus of $37,500 was guaranteed for the first and second quarters of 2012 under the terms of his employment agreement. Mr. Ceremony received Performance Bonuses totaling $87,500 during 2012. For 2012, Mr. Ceremony received 58% of the maximum Performance Bonus. The Company believes that targets set for worldwide revenue, worldwide operating income and worldwide subscribers align with the Company’s desire to continue to grow the business. Since the individual targets are intended to be challenging, and since the separate targets related to different aspects of the Company’s performance, it is expected it will be difficult for all the targets to be achieved for any given year. Mr. Ceremony was eligible to receive quarterly Discretionary Bonus of up to $12,500 per quarter. The Discretionary Bonus is to be determined by the Chief Executive Officer in his sole and absolute discretion. In exercising such discretion, the Chief Executive Officer takes into consideration Mr. Ceremony’s individual performance. In evaluating Mr. Ceremony’s individual performance, the Chief Financial Officer considered factors such as Mr. Ceremony’s role as an advisor to the CEO on how to improve the Company’s financial performance, his initiatives to improve the Company’s management information systems, his leadership in the areas of corporate governance and business ethics, and the quality of his management of the Company’s relationships with the investment community. Mr. Ceremony received Discretionary Bonuses totaling $50,000 for 2012. Pursuant to the terms of Mr. Holger Bartel’s employment agreement dated September 17, 2008 and effective October 1, 2008, Mr. Bartel was eligible to receive a quarterly Performance Bonus and a quarterly Discretionary Bonus for the first and second quarters of 2010 as his employment terminated on June 30, 2010 as further described in the 2011 proxy statement. Mr. Bartel does not have any Performance Bonus nor Discretionary Bonus pursuant to the terms of his employment agreement for Head of Strategy, which is effective October 1, 2011. Pursuant to the terms of Ms. Tafoya’s employment agreement dated August 4, 2010 and effective July 1, 2010, Ms. Tafoya is eligible to receive a quarterly Performance Bonus and a quarterly Discretionary Bonus. Ms. Tafoya was eligible to receive a quarterly Performance Bonus and a quarterly Discretionary Bonus for each quarter during 2012. The quarterly Performance Bonus is calculated as follows: Criteria North America revenue target for the quarter met AND there are no more than two Significant Customers AND no Significant Customer accounts for 17% or more of North America consolidated revenue for the quarter North America operating income target for the quarter met North America subscriber target for the quarter met Total maximum Performance Bonus per quarter Quarterly Bonus Payment $ $ 30,000 30,000 30,000 90,000 Certain quarterly targets for North America revenue were met for the third and fourth quarters of 2012. Ms. Tafoya received Performance Bonuses totaling $80,000 during 2012. For 2012, Ms. Tafoya received 22% of the maximum Performance Bonus. The Company believes that targets set for North America revenue, North America operating income and North America subscribers align with the Company’s desire to continue to grow the business. Since the individual targets are intended to be challenging, and since the separate targets related to different aspects of the Company’s performance, it is expected it will be difficult for all the targets to be achieved for any given year. Ms. Tafoya is also eligible to receive a quarterly Discretionary Bonus of up to $30,000 per quarter. The Discretionary Bonus is to be determined by the Chief Executive Officer in his sole and absolute discretion. Ms. Tafoya was eligible to receive quarterly Discretionary Bonuses for each quarter of 2011. In exercising such discretion, the Chief Executive Officer takes into consideration Ms. Tafoya’s individual performance. In evaluating Ms. Tafoya’s individual performance during 2012, the Chief Executive Officer considered factors such as the quality of Ms. Tafoya’s strategic management to ensure the long-term success of the Company, the development of the 29 Company’s leadership talent, the quality of the content of the Company’s publications, and the development of the Travelzoo brand. Ms. Tafoya received Discretionary Bonuses totaling $110,000 for 2012. Pursuant to the terms of Mr. Webb’s employment agreement dated January 19, 2012, and effective February 27, 2012, Mr. Webb is eligible to receive a quarterly Performance Bonus, and a quarterly Discretionary Bonus. Mr. Webb was eligible to receive a quarterly Performance Bonus and a quarterly Discretionary Bonus for part of the first quarter, the second, third, and fourth quarters during 2012. Also under the terms of Mr. Webb's employment agreement, a sign on bonus of $20,000 was paid in the first quarter of 2012. The quarterly Performance Bonus is calculated as follows: Criteria Quarterly worldwide Local Deals revenue target met or exceeded, per the official operating budgets Quarterly worldwide Local Deals income target met or exceeded, per the official operating budgets, met or exceeded Total maximum Performance Bonus per quarter Quarterly Bonus Payment $ $ 20,000 20,000 40,000 The quarterly Performance Bonus were guaranteed for the first and second quarters of 2012. Mr. Webb received the first and second quarter Performance Bonuses as well as a sign on bonus, totaling $47,473 for 2012. For 2012 Mr. Webb received 36% of the maximum Performance Bonus. The Performance Bonuses for the first quarter of 2012 was pro-rated based upon Mr. Webb's start date. The Company believes that targets set for worldwide Local Deals revenue, and worldwide Local Deals income align with the Company’s desire to continue to grow Local Deals business. Since the individual targets are intended to be challenging, and since the separate targets related to different aspects of the Company’s performance, it is expected it will be difficult for all the targets to be achieved for any given year. Mr. Webb was also eligible to receive a quarterly Discretionary Bonus of up to $20,000 per quarter. The Discretionary Bonus was to be determined by the Chief Executive Officer in his sole and absolute discretion. In exercising such discretion, the Chief Executive Officer takes into consideration Mr. Webb’s individual performance. In evaluating Mr. Webb’s individual performance during 2012, the Chief Executive Officer considered factors such as Mr. Webb’s leadership role in developing Local Deals worldwide, Mr. Webb’s strategic management to ensure the long-term success of the Company's Local Deals business, the development of the Company’s leadership talent. Mr. Webb received Discretionary Bonuses totaling $67,473 for 2012. Mr. Webb was eligible to receive an Operating Income Share Performance Bonus in addition to the quarterly Performance Bonus, for meeting or exceeding given Local Deals worldwide operating income goals. The Operating Income Share Performance Bonus is subject to achievement of the quarterly Performance Bonus operating income budget and is calculated as 5% of any incremental improvement over the prior year average quarterly worldwide Local Deals operating income up to the current quarter operating income budget and 7.5% of any improvement over the current quarter operating budget, subject to an annual limit of $1.5 million. For 2012, Mr. Webb did not receive any Operating Income Share Performance Bonus as the criteria were not met. Other Compensation-Related Matters Stock Options. The Company grants certain executive officers stock options (which represent the right to purchase a specific number of shares of company common stock at a predetermined price, subject to vesting conditions), to align their incentives with the long-term interests of our stockholders, retain them for the long term, reward them for potential long-term contributions, and provide a total compensation opportunity commensurate with our performance. Perquisites and Additional Benefits. The Company seeks to maintain an open and inclusive culture in its facilities and operations among executives and other Company employees. Accordingly, the Company does not provide executives with reserved parking spaces or separate dining or other facilities, nor does the Company have programs for providing personal-benefit perquisites to executives, such as club dues or defraying the cost of 30 personal entertainment. Named executive officers and employees may seek reimbursement for business related expenses in accordance with our business expense reimbursement policy. Employment Agreements. The Company has entered into employment agreements with the named executive officers, some of which contain severance and change of control provisions. The terms of such employment agreements are described in more detail below in Employment Agreements and Potential Payments Upon Termination or Change-in-Control. The Committee believes these agreements are appropriate for a number of reasons, including the following: • the agreements assist in attracting and retaining executives as we compete for talented employees in a marketplace where such agreements are commonly offered; • • the change in control provisions require terminated executives to execute a release in order to receive severance benefits; and the change in control and severance provisions help retain key personnel during rumored or actual acquisitions or similar corporate changes. Compensation Committee Interlocks & Insider Participation In 2012, Mr. Holger Bartel earned $577,272 in salary serving as an employee of the Company as Head of Strategy. Mr. Holger Bartel was a consultant of the Company from July 2010 to September 2011, and became employed by the Company as Head of Strategy on October 1, 2011. In these roles, he earned $472,500 in salary and consulting fees in 2011. The current members of our compensation committee are Mr. Ehrlich and Ms. Urso. In 2012, none of our executive officers served as a member of the compensation committee of another entity, or as a director of another entity, one of whose executive officers served on our compensation committee. Summary Compensation Table The following summary compensation table sets forth information concerning the compensation to our Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executive officers during the fiscal years ended December 31, 2012, 2011 and 2010. Fiscal Year 2012 2011 2010 2012 Salary ($) 562,000 556,500 435,608 450,000 Bonus ($) 17,500 43,500 20,000 50,000 Option Awards ($)(1) — (7 ) — (7 ) (7 ) — (8 ) 953,800 Non-Equity Incentive Plan Compensation ($)(2) — 40,000 379,912 87,500 All Other Compensation ($) 46,327 46,555 61,886 1,500 (12 ) (12 ) (12 ) (13 ) Total ($) 625,827 (17 ) 686,555 (17 ) (17 ) 897,406 (18 ) 1,542,800 2011 245,455 25,000 (8 ) — 150,000 (13 ) 1,500 (18 ) 421,955 2012 577,272 2011 150,000 — — — — — — 45,680 (19 ) 622,952 366,500 (19 ) 516,500 2010 2012 2011 2010 2012 200,000 40,000 542,000 110,000 536,500 120,000 522,906 200,000 67,473 324,800 (9 ) — (10 ) 953,800 — (10 ) — (10 ) — (11 ) 60,000 80,000 270,000 150,000 47,473 (14 ) (15 ) (15 ) (15 ) (16 ) (19 ) (20 ) (20 ) (20 ) 257,398 3,869 1,500 3,869 — 557,398 1,689,669 928,000 876,775 439,746 Name and Principal Position Christopher Loughlin (3) Chief Executive Officer (effective July 1, 2010) Glen Ceremony (4) Chief Financial Officer (effective June 15, 2011) Holger Bartel (5) Head of Strategy (effective October 1, 2011), consultant and Chairman of the Board of Directors Shirley Tafoya President, North America Mark K. Webb (6) President Local Deals (effective February 27, 2012) Notes: (1) Under SEC rules, the values reported reflect the aggregate grant date fair value of grants of stock options to each of the listed officers in the years shown. We calculate the grant date fair value of stock options using the Black-Scholes option pricing model. For a more detailed discussion on the valuation model and assumptions used to calculate the fair value of our options, refer to note 6 to the consolidated financial statements contained in our 2012 Annual Report on Form 10-K filed on February 11, 2013. 31 (2) The amounts reflected in this column reflect the performance-based cash awards paid to the named executives pursuant to certain employment agreements, as discussed in the CD&A above. (3) Mr. Loughlin became the Chief Executive Officer on July 1, 2010. From January 1, 2010 to June 30, 2010, Mr. Loughlin served as Executive Vice President, Europe. Mr. Loughlin’s compensation from January 1, 2010 to June 30, 2010 is denominated in British pounds and was translated into U.S. dollars using the average 2010 daily exchange rates of £1 = $1.54431 as published on oanda.com. (4) Mr. Ceremony became the Chief Financial Officer on June 15, 2011. (5) Mr. Bartel served as Chief Executive Officer from October 1, 2008 to June 30, 2010. From July 1, 2010 to September 30, 2011, Mr. Bartel served as a consultant to the Company under the terms of an independent contractor agreement. Starting October 1, 2011, Mr. Bartel has been employed as Head of Strategy. (6) Mr. Webb became the President Local Deals on February 27, 2012. (7) For 2012, 2011 and 2010, amount consists of discretionary bonuses earned per the terms of Mr. Loughlin’s employment agreement. (8) For 2012, amount consists of $50,000 discretionary bonuses earned per the terms of Mr. Ceremony’s employment agreement. For 2011, amount consists of $25,000 discretionary bonuses earned per the terms of Mr. Ceremony’s employment agreement. (9) Amount consists of discretionary bonuses earned per the terms of Mr. Holger Bartel’s employment agreement dated September 17, 2008 and effective October 1, 2008, as further described in the 2011 proxy statement. (10) For 2012, amount consists $110,000 of discretionary bonuses earned per the terms of Ms. Tafoya’s employment agreement. For 2011, amount consists of $120,000 of discretionary bonuses earned per the terms of Ms. Tafoya’s employment agreement. For 2010, amount consists of $200,000 of discretionary bonuses earned per the terms of Ms. Tafoya’s employment agreement. (11) For 2012, amount consists of $67,473 of discretionary bonuses earned per the terms of Mr. Webb’s employment agreement. (12) Amount represents quarterly performance bonuses earned per the terms of Mr. Loughlin’s employment agreement. (13) Amount represents quarterly performance bonuses earned per the terms of Mr. Ceremony’s employment agreement. (14) Amount represents quarterly performance bonuses earned per the terms of Mr. Holger Bartel’s employment agreement. (15) Amount represents quarterly performance bonuses earned per the terms of Ms. Tafoya’s employment agreement. (16) Amount represents quarterly performance bonuses earned per the terms of Mr. Webb’s employment agreement and includes a $20,000 sign on bonus. (17) For 2012, amount consists of housing allowance of $46,327 and $1,500 of the Company’s matching contribution under the Company’s 401 (k) Plan. For 2011, amount consists of housing allowance of $45,055 and $1,500 of the Company’s matching contribution under the Company’s 401(k) Plan. For 2010, amount consists of the Company’s contribution of $11,243 to the Company’s UK Employee Pension Contribution Plan, $7,852 for premiums paid for private health insurance for Mr. Loughlin and his family, and housing allowance of $33,232, and $9,559 for relocation assistance. (18) For 2012 and 2011, amount consists of the Company’s matching contribution of $1,500 under the Company’s 401(k) Plan. (19) For 2012, amount consists of $45,680 in director fees for 2012. For 2011, amount consists of $322,500 in fees paid to Mr. Bartel pursuant to the terms of his consulting agreement for the period from January 1, 2011 to September 30, 2011 and $44,000 in director fees for 2011. For 2010 amount consists of $217,500 in fees paid to Mr. Bartel pursuant to the terms of his consulting agreement for the period from July 1, 2010 to 32  December 31, 2010, $18,360 in director fees for the period from July 1, 2010 to December 31, 2010 and $21,538 for the pay-out of accrued vacation. (20) For 2012, 2011 and 2010, amount consists of the Company’s matching contribution of $1,500 under the Company’s 401(k) Plan. In addition, for 2012 and 2010, amount includes $2,369 in bonus payments made to eligible employees. Grants of Plan-Based Awards in 2012 The following table sets forth certain information with respect to non-equity incentive plan awards granted to each of our named executive officers during the fiscal year ended December 31, 2012. Name Christopher Loughlin (1) Glen Ceremony (2) Shirley Tafoya (3) Mark Webb (4) Estimated Possible Payouts Under Non-Equity Incentive Plan Awards Threshold ($) Target ($) — — — — 240,000 150,000 360,000 133,333 (1) Amount represents the potential quarterly Performance Bonus payments under the terms of Mr. Loughlin’s employment agreement. The measurements for determining the Performance Bonus and annual payouts are described in the CD&A. (2) (3) Amount represents the potential quarterly Performance Bonus payments under the terms of Mr. Ceremony’s employment agreement for 2012. The business measurements and performance goals for determining the Performance Bonus payout are described in the CD&A. Amount represents the potential quarterly Performance Bonus payments under the terms of Ms. Tafoya’s employment agreement for 2012. The business measurements and performance goals for determining the Performance Bonus payout are described in the CD&A. (4) Amount represents the potential quarterly Performance Bonus payments under the terms of Mr. Webb’s employment agreement for 2012. The business measurements and performance goals for determining the Performance Bonus payout are described in the CD&A. Outstanding Equity Awards at December 31, 2012 Option Awards Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable 150,000 0 0 150,000 (1) 50,000 (2) 50,000 (2) Option Exercise Price ($) 14.97 28.98 28.98 Option Expiration Date 11/18/2019 1/23/2022 1/23/2022 Name Christopher Loughlin Glen Ceremony(3) Shirley Tafoya(4) (1) The options are exercisable in increments of 25% from and after July 1 of each year from 2011 through 2014, as long as Mr. Loughlin’s employment remains in effect at such dates. (2) The options are exercisable in increments of 25% from and after January 23 of each year from 2013 through 2016, as long as Mr. Ceremony’s and Ms. Tafoya's employment remains in effect at such dates. Option Exercises and Stock Vested For the year ended December 31, 2012, there were no options exercised by any of our named executive officers. For the year ended December 31, 2012, 150,000 shares of Mr. Loughlin's stock options were vested and with respect to stock options held by Mr. Ceremony and Ms. Tafoya's, no shares were vested. 33 Employment Agreements and Potential Payments Upon Termination or Change-in-Control The Company has employment agreements with its named executive officers and certain other employees. The employment agreements as of December 31, 2012 with the Company’s named executive officers are described below. Mr. Loughlin entered into an employment agreement with the Company on November 18, 2009, pursuant to which he became the Company’s Chief Executive Officer on July 1, 2010. The agreement has a four-year term. The Company may terminate the agreement, with or without cause, upon written notice to Mr. Loughlin. However, if Mr. Loughlin’s employment is terminated at any time without cause or if Mr. Loughlin’s employment is terminated at any time due to a change of control (as defined in the agreement) or if he is not offered a position of comparable pay and responsibilities in the same geographic area in which he worked immediately prior to a change of control, Mr. Loughlin will be entitled to receive his base salary and medical benefits for a twelve month period in exchange for executing a general release of claims as to the Company. Assuming that Mr. Loughlin was terminated by the Company as of December 31, 2012 without cause, Mr. Loughlin would have been entitled to receive $562,000 and the Company would incur additional expenses for medical benefits of approximately $19,375. Mr. Loughlin is paid a base salary and is eligible to certain annual and quarterly bonuses. In connection with the agreement, on November 18, 2009 the Company granted Mr. Loughlin options to purchase 300,000 shares of the Company’s common stock. The Company provided relocation assistance and is providing a housing allowance to Mr. Loughlin in connection with his move from London to New York City. Mr. Loughlin is also entitled to participate in or receive such benefits under the Company’s employee benefit plans and policies and such other benefits which may be in effect from time to time and as are provided to similarly situated employees of the Company. Mr. Loughlin agreed that the Company will own any discoveries and work product (as defined in the agreement) made during the term of his employment and to assign all of his interest in any and all such discoveries and work product to the Company. Furthermore, Mr. Loughlin agreed not to, directly or indirectly, perform services for, or engage in, any business competitive with the Company or solicit the Company’s customers or employees during the term of his employment and for a period of one year thereafter. Mr. Ceremony entered into an employment agreement with the Company on June 15, 2011. Pursuant to the terms of the agreement, Mr. Ceremony is an at-will employee and the Company or Mr. Ceremony may terminate the agreement, with or without cause, with or without notice. However, if Mr. Ceremony’s employment is terminated at any time without cause, Mr. Ceremony will be entitled to receive his base salary for a six month period in exchange for executing a general release of claims as to the Company. Assuming that Mr. Ceremony was terminated by the Company as of December 31, 2012 without cause, Mr. Ceremony would have been entitled to receive $225,000. If Mr. Ceremony’s employment is terminated at any time due to a change of control (as defined in the agreement) or if he is not offered a position of comparable pay and responsibilities in the same geographic area in which he worked immediately prior to a change of control, Mr. Ceremony will be entitled to receive his base salary and medical benefits for a six month period in exchange for executing a general release of claims as to the Company. Assuming that Mr. Ceremony was terminated by the Company as of December 31, 2012 following a change of control of the Company, Mr. Ceremony would have been entitled to receive $225,000 and the Company would incur additional expenses for medical benefits of approximately $8,047. Mr. Ceremony agreed that the Company will own any discoveries and work product (as defined in the agreement) made during the term of his employment and to assign all of his interest in any and all such discoveries and work product to the Company. Furthermore, Mr. Ceremony agreed to not, directly or indirectly, solicit the Company’s customers or employees during the term of his employment and for a period of one year thereafter. Mr. Holger Bartel entered into an employment agreement with the Company on October 1, 2011. Pursuant to the terms of the agreement, Mr. Bartel is an at-will employee and the Company or Mr. Bartel may terminate the agreement, with or without cause upon six weeks prior written notice. Mr. Holger Bartel agreed that the Company will own any discoveries and work product (as defined in the agreement) made during the term of his employment and to assign all of his interest in any and all such discoveries 34 and work product to the Company. Furthermore, Mr. Bartel agreed to not, directly or indirectly, solicit the Company’s customers or employees during the term of his employment and for a period of one year thereafter. Ms. Tafoya entered into an employment agreement with the Company on August 4, 2010. Pursuant to the terms of the agreement, Ms. Tafoya is an at-will employee and the Company or Ms. Tafoya may terminate the agreement, with or without cause, with or without notice. However, if Ms. Tafoya’s employment is terminated at any time without cause, Ms. Tafoya will be entitled to receive her base salary for a twelve month period in exchange for executing a general release of claims as to the Company. Assuming that Ms. Tafoya was terminated by the Company as of December 31, 2012 without cause, Ms. Tafoya would have been entitled to receive $542,000. If Ms. Tafoya’s employment is terminated at any time due to a change of control (as defined in the agreement) or if she is not offered a position of comparable pay and responsibilities in the same geographic area in which she worked immediately prior to a change of control, Ms. Tafoya will be entitled to receive her base salary and medical benefits for a twelve month period in exchange for executing a general release of claims as to the Company. Assuming that Ms. Tafoya was terminated by the Company as of December 31, 2012 following a change of control of the Company, Ms. Tafoya would have been entitled to receive $542,000 and the Company would incur additional expenses for medical benefits of approximately $19,350. Ms. Tafoya agreed that the Company will own any discoveries and work product (as defined in the agreement) made during the term of her employment and to assign all of her interest in any and all such discoveries and work product to the Company. Furthermore, Ms. Tafoya agreed to not, directly or indirectly, solicit the Company’s customers or employees during the term of her employment and for a period of one year thereafter. Mr. Webb entered into an employment agreement with the Company on January 26, 2012 as amended on May 22, 2012. Pursuant to the terms of the agreement, Mr. Webb is an at-will employee and the Company or Mr. Webb may terminate the agreement, with or without cause upon six weeks, prior written notice. However, if Mr. Webb’s employment is terminated at any time without cause, Mr. Webb will be entitled to receive his base salary for a six month period in exchange for executing a general release of claims as to the Company. Assuming that Mr. Webb was terminated by the Company as of December 31, 2012 without cause, Mr. Webb would have been entitled to receive $162,400. If Mr. Webb’s employment is terminated at any time due to a change of control (as defined in the agreement) or if he is not offered a position of comparable pay and responsibilities in the same geographic area in which he worked immediately prior to a change of control, Mr. Webb will be entitled to receive his base salary and medical benefits for a six month period and pro rata performance bonus in exchange for executing a general release of claims as to the Company. Assuming that Mr. Webb was terminated by the Company as of December 31, 2012 following a change of control of the Company, Mr. Webb would have been entitled to receive $202,400 and the Company would incur additional expenses for medical benefits of approximately $5,598. Mr. Webb agreed that the Company will own any discoveries and work product (as defined in the agreement) made during the term of his employment and to assign all of his interest in any and all such discoveries and work product to the Company. Furthermore, Mr. Webb agreed to not, directly or indirectly, solicit the Company’s customers or employees during the term of his employment and for a period of one year thereafter. Forward-Looking Statements Disclosures in this Compensation Discussion & Analysis may contain certain forward-looking. Statements that do not relate strictly to historical or current facts are forward-looking and usually identified by the use of words such as “anticipate,” “estimate,” “approximate,” “expect,” “intend,” “plan,” “believe” and other words of similar meaning in connection with any discussion of future operating or financial matters. Without limiting the generality of the foregoing, forward-looking statements contained in this report include the matters discussed regarding the expectation of compensation plans, strategies, objectives, and growth and anticipated financial and operational performance of the Company and its subsidiaries. A variety of factors could cause the Company’s actual results to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance and results of the Company’s business and forward-looking statements include, but are not limited to those set forth herein. Any forward-looking statement speaks only as of the date on which such statement is made and the Company does not intend to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. 35 Compensation Committee Report The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that Travelzoo specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act. The Company’s Compensation Committee has reviewed and discussed the CD&A with management and, based on such review and discussions, the Compensation Committee recommended to the Company’s Board of Directors that the CD&A be included in the proxy statement on Schedule 14A. Compensation Committee Kelly M. Urso (Chair) David J. Ehrlich 36 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows the amount of our common stock beneficially owned as of June 27, 2013 by (a) each director and nominee for election to the Board of Directors, (b) each named executive officer, (c) all executive officers and directors as a group, and (d) each person known by the Company, as of June 27, 2013, to beneficially own more than 5% of the outstanding shares of common stock of the Company. In general, shares “beneficially owned” include those shares a person has or shares the power to vote, or the power to dispose of. Beneficial Owner Directors and Named Executive Officers Holger Bartel Ralph Bartel(3)* David J. Ehrlich Glen Ceremony Christopher Loughlin Donovan Neale-May Shirley Tafoya Kelly M. Urso Mark K. Webb Mary Reilly Directors and executive officers as a group (8 persons) * Persons Owning More Than 5% of Common Stock Beneficial Ownership Number of Shares(1) Percent of Total(2) 200,000 7,230,538 — 12,500 225,000 — 12,500 525 500 — 7,681,563 1.3 % 47.1 % — ** 1.5 % — ** ** ** — 50.0 % ** (1) Less than 1% Represents shares subject to stock options that are exercisable on June 27, 2013 or become exercisable within 60 days of June 27, 2013. Except as otherwise indicated and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all their shares of common stock. (2) For each person and group indicated in this table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of 15,361,873 shares of common stock outstanding as of June 27, 2013, plus the number of shares of common stock that such person or group had the right to acquire within 60 days after June 27, 2013. (3) Ralph Bartel indirectly holds 100% of Azzurro Capital Inc., which is the holder of 7,230,538 shares, through the Ralph Bartel 2005 Trust. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under Section 16(a) of the Securities Exchange Act of 1934, the Company’s directors, executive officers and the beneficial holders of more than 10% of the Company’s common stock are required to file reports of ownership and changes in ownership with the SEC. Such directors, executive officers and beneficial holders of more than 10% of the Company’s common stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely on a review of the copies of such forms furnished to the Company or written representations from reporting persons, during fiscal 2012, all Section 16(a) filing requirements were satisfied on a timely basis, except the Form 3 for Mr. Mark Webb as President, Local Deals hired on February 27, 2012 as the Company has now determined that Mr. Webb should be considered a Section 16 executive officer. Mr. Webb did not purchase or sell the Company's stock during fiscal year 2012. 37 Independent Public Accountants PRINCIPAL ACCOUNTANT FEES AND SERVICES KPMG LLP (“KPMG”) served as Travelzoo’s independent registered public accounting firm for our 2012 fiscal year. KPMG representatives are not expected to be present at the Annual Meeting or to make a formal statement. Consequently, representatives of KPMG will not be available to respond to questions at the meeting. The Audit Committee has not yet selected our independent registered public accounting firm for our 2013 fiscal year. The Audit Committee annually reviews the performance of our independent registered public accounting firm and the fees charged for their services. This review has not yet been completed. Based upon the results of this review, the Audit Committee will determine which independent registered public accounting firm to engage to perform our annual audit. Stockholder approval of our accounting firm is not required by our bylaws or otherwise required to be submitted to the stockholders. Principal Accountant Fees and Services During fiscal year 2012 and 2011, KPMG charged fees for services rendered to Travelzoo as follows: Service Audit fees(1) Audit-related fees Tax fees All other fees Total 2012 Fees 2011 Fees $ $ 909,798 $ — — — 909,798 $ 851,693 — — — 851,693 (1) Audit fees consisted of fees for professional services rendered for the annual audit of Company’s consolidated financial statements and review of the interim consolidated financial statements included in the quarterly reports and audit services rendered in connection with other statutory or regulatory filings. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm The Audit Committee pre-approves all audit and permissible non-audit services provided by the Company’s independent registered public accounting firm. These services may include audit services, audit-related services, tax and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. During 2012 and 2011, all services provided by KPMG were pre-approved by the Audit Committee in accordance with this policy. 38 AUDIT COMMITTEE REPORT The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that Travelzoo specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act. The Audit Committee oversees Travelzoo’s financial reporting process on behalf of the Board of Directors. Management is primarily responsible for the financial statements and reporting processes including the systems of internal controls, while the independent auditors are responsible for performing an independent audit of Travelzoo’s consolidated financial statements in accordance with auditing standards of the Public Company Accounting Oversight Board (“PCAOB”), and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States. In this context, the committee has met and held discussions with management and the independent auditors regarding the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2012. The committee discussed with Travelzoo’s independent auditors the overall scope and plan for their audit. The committee met, at least quarterly, with the independent auditors, with and without management present, and discussed the results of their examinations, their evaluations of Travelzoo’s internal controls, and the overall quality of Travelzoo’s financial reporting. Management represented to the committee that Travelzoo’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. The committee has reviewed and discussed the consolidated financial statements with management and the independent auditors, including their judgments as to the quality, not just the acceptability, of Travelzoo’s accounting principles and such other matters as are required to be discussed with the committee under auditing standards of the PCAOB. Travelzoo’s independent auditors also provided to the committee the written disclosures required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the audit committee concerning independence, and the committee discussed with the independent auditors that firm’s independence, including those matters required to be discussed by Statement on Auditing Standards No. 61, as amended. In reliance on the reviews and discussions referred to above, the committee recommended to the Board of Directors (and the Board of Directors has approved) that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC. The committee has not yet selected Travelzoo’s independent auditors for fiscal year 2013. While the committee has the responsibilities and powers set forth in its charter, it is not the duty of the committee to plan or conduct audits or to determine that Travelzoo’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditors. Nor is it the duty of the committee to conduct investigations or to assure compliance with laws and regulations or Travelzoo’s business conduct policies. Audit Committee David J. Ehrlich (Chair) Donovan Neale-May Kelly M. Urso 39  SHAREHOLDER PROPOSAL REGARDING THE IMPLEMENTATION OF MAJORITY VOTING FOR UNCONTESTED DIRECTOR ELECTIONS (PROPOSAL 4) Travelzoo has received a shareholder proposal by California State Teachers' Retirement System (“CalSTRS”) requesting that our Board of Directors initiate an appropriate process to amend our Certificate of Incorporation and/or bylaws to adopt majority voting for uncontested elections of directors at our annual meeting of stockholders, with a plurality vote standard retained for contested director elections. The Company will provide the address and number of shares held by CalSTRS upon an oral or written request for such information sent to the Corporate Secretary. In accordance with SEC rules, the text of the shareholder proposal and supporting statement are printed below exactly as they were submitted to the Company. The Company is not responsible for the contents of the proposal or supporting statement. If properly presented, this proposal will be voted on at the Annual Meeting. Shareholder Proposal BE IT RESOLVED: That the shareholders of Travelzoo Inc. hereby request that the Board of Directors initiate the appropriate process to amend the Company's articles of incorporation and/or bylaws to provide that director nominees shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders, with a plurality vote standard retained for contested director elections, that is, when the number of director nominees exceeds the number of board seats. SUPPORTING STATEMENT: In order to provide shareholders a meaningful role in director elections, the Company's current director election standard should be changed from a plurality vote standard to a majority vote standard. The majority vote standard is the most appropriate voting standard for director elections where only board nominated candidates are on the ballot, and it will establish a challenging vote standard for board nominees to improve the performance of individual directors and entire boards. Under the Company's current voting system, a nominee for the board can be elected with as little as a single affirmative vote, because "withheld" votes have no legal effect. A majority vote standard would require that a nominee receive a majority of the votes cast in order to be re-elected and continue to serve as a representative for the shareholders. In response to strong shareholder support a substantial number of the nation's leading companies have adopted a majority vote standard in company bylaws or articles of incorporation. In fact, more than 80% of the companies in the S&P 500 have adopted majority voting for uncontested elections. We believe the Company needs to join the growing list of companies that have already adopted this standard. CalSTRS is a long-term shareholder of the Company and we believe that accountability is of utmost importance. We believe the plurality vote standard currently in place at the Company completely disenfranchises shareholders and makes the shareholder's role in director elections meaningless. Majority voting in director elections will empower shareholders with the ability to remove poorly performing directors and increase the directors' accountability to the owners of the Company, its shareholders. In addition, those directors who receive the majority support from shareholders will know they have the backing of the very shareholders they represent. We therefore ask you to join us in requesting that the Board of directors promptly adopt the majority vote standard for director elections. Please vote "FOR" this proposal. Recommendation of the Board of Directors The Company's Board of Directors has considered the proposal set forth above relating to majority voting for uncontested director elections, and has determined to make no voting recommendation to stockholders. The proposal, which is advisory in nature, would constitute a recommendation to the Board if approved by stockholders. The Board recognizes that there are valid arguments in favor of, and in opposition to, majority voting. The Board wants to use this proposal as an opportunity for stockholders to express their views on this subject without being influenced by any recommendation the Board might make. 40 Supporters of plurality voting contend, among other things, that plurality voting is the default standard for director elections under Delaware law, that adopting a majority voting standard would unnecessarily complicate uncontested director elections, and that adoption of majority voting could lead to unintended consequences such as no directors being elected, the Company not being in compliance with applicable NASDAQ or SEC rules regarding independent directors or the potential loss of a person whose service the Board believes would make a valuable contribution to the Board's oversight of the Company's business and affairs. Supporters of a majority voting standard often make arguments such as those set forth above in the proponent's supporting statement. Approval of this proposal requires the affirmative vote of a majority of the shares present in person or by proxy and entitled to vote on the matter at the Annual Meeting once a quorum is present. Such approval would not, by itself, implement majority voting. In order to implement majority voting, the Company's bylaws would need to be amended. If stockholders approve the proposal at this year's Annual Meeting, the Board intends to adopt or present for a vote of stockholders at next year's Annual Meeting an amendment to the bylaws that would implement majority voting in uncontested director elections. If stockholders return a validly executed proxy solicited by the Board of Directors, the shares represented by the proxy will be voted on this proposal in the manner specified by the stockholder. If stockholders do not specify the manner in which their shares represented by a validly executed proxy solicited by the Board are to be voted on this proposal, such shares will be counted as abstentions. Since approval of the proposal requires a majority of the shares present in person or by proxy and entitled to vote on the matter, abstentions will have the same effect as a vote against the proposal. 41 DOCUMENTS INCORPORATED BY REFERENCE The SEC allows us to "incorporate by reference" information into this document. This means that the Company can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be a part of this document, except for any information that is superseded by information that is included directly in this document or in any other subsequently filed document that also is incorporated by reference herein. This document incorporates by reference our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and Amendment No. 1 to our Annual Report on Form 10-K/A (together, the "2012 Annual Report"), which was filed previously with the SEC and contains important information about the Company and its financial condition, including information contained in our 2012 Annual Report under the captions "Financial Statements and Supplementary Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure," and "Quantitative and Qualitative Disclosures about Market Risk." Copies of the 2012 Annual Report accompany this proxy statement. The Company will amend this proxy statement to include or incorporate by reference any additional documents that the Company may file with the Securities and Exchange Commission under Section 13(a), 13(e), 14, or 15(d) of the Exchange Act after the date of this document to the extent required to fulfill our disclosure obligations under the Exchange Act. The Company will provide, without charge, to each person to whom this proxy statement is delivered, upon written or oral request of such person and by first class mail or other equally prompt means within one business day of receipt of such request, a copy of any and all information that has been incorporated by reference in this proxy statement. You may obtain a copy of these documents and any amendments thereto by contacting Investor Relations, Travelzoo Inc., 590 Madison Avenue, 37th Floor, New York, New York 10022 or by telephone at (212) 484- 4900. This proxy statement and the 2012 Annual Report are available on the Internet at corporate.travelzoo.com/annualreport. These documents are also included in our SEC filings, which you can access electronically at the SEC's website at http://www.sec.gov. ADDITIONAL INFORMATION We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, we file periodic reports, documents and other information with the SEC relating to our business, financial statements and other matters. Such reports and other information may be inspected and are available for copying at the offices of the SEC, 100 F Street, N.E., Washington, D.C. 20549 or may be accessed at www.sec.gov. Information regarding the operation of the public reference rooms may be obtained by calling the SEC at 1-800-SEC-0330. You are encouraged to review the annual report on Form 10-K, as amended, mailed along with these proxy materials, together with any subsequent information we filed or will file with the SEC and other publicly available information. A copy of any public filing is also available, at no charge, by contacting Investor Relations, Travelzoo Inc., 590 Madison Avenue, 37th Floor, New York, New York 10022 or by telephone at (212) 484-4900. INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON No director, executive officer, nominee for election as a director or associate of any director, executive officer or nominee has any substantial interest, direct or indirect, by security holdings or otherwise, in the proposed matters to be acted upon, other than director elections, which is not shared by all other stockholders. OTHER BUSINESS The Board of Directors does not presently intend to bring any other business before the meeting, and, so far as is known to the Board of Directors, no matters are to be brought before the meeting except as specified in the Notice of Annual Meeting of Stockholders. As to any business that may properly come before the meeting, however, it is intended that proxies, in the form enclosed, will be voted in respect thereof in accordance with the judgment of the persons voting such proxies. 42 STOCKHOLDER PROPOSALS FOR THE 2014 ANNUAL MEETING It is contemplated that the next annual meeting of stockholders will be held on or about September 12, 2014. Stockholders may submit proposals on matters appropriate for stockholder action at annual meetings in accordance with the rules and regulations adopted by the SEC. For a stockholder proposal to be included in the Company’s proxy statement and identified in its form of proxy in connection with the Company’s annual meeting of stockholders, it must be received by the Company at least 120 calendar days prior to the one-year anniversary of the date that the Company's proxy statement was released to the stockholders in connection with the previous year's annual meeting. As a result, stockholder proposals submitted for consideration at the 2014 annual meeting must be received no later than April 2, 2014, to be included in the 2014 proxy materials. Rule 14a-8 of the Exchange Act provides additional information regarding the content and the procedures applicable to the submission of stockholder proposals to be included in the Company's proxy materials for its next Annual Meeting. If a stockholder wishes to present a proposal at Travelzoo's 2014 Annual Meeting or to nominate one or more directors and the proposal is not intended to be included in Travelzoo's proxy statement relating to that meeting, the stockholder must give advance written notice to Travelzoo by March 15, 2014. These requirements are separate from and in addition to the requirements a stockholder must meet to have a proposal included in our proxy statement. Any such notice must be delivered or mailed to our Corporate Secretary, at Travelzoo Inc., 800 W. El Camino Real, Suite 275, Mountain View, CA 94040. HOUSEHOLDING We have adopted a procedure approved by the SEC called "householding." Under this procedure, a householding notice will be sent to stockholders who have the same address and last name and do not participate in electronic delivery of proxy materials, and they will receive only one copy of our annual report and proxy statement unless one or more of these stockholders notifies us that they wish to not participate in householding and continue receiving individual copies. This procedure reduces our printing costs and postage fees. Each stockholder who participates in householding will continue to receive a separate proxy card. The Company will promptly deliver, upon oral or written request, a separate copy of the proxy statement and annual report to any stockholder participating in householding. Stockholders who share an address with other stockholders and are eligible for householding, but currently receive multiple copies of our annual reports and proxy statements, or who have multiple accounts in their names, can authorize us to discontinue mailings of multiple annual reports and proxy statements. Requests for additional copies, or requests for a single copy to be delivered to a shared address should be directed to Investor Relations, Travelzoo Inc., 590 Madison Avenue, 37th Floor, New York, New York 10022 or by telephone at (212) 484-4900. EXPENSES AND SOLICITATION COSTS We will bear the cost of solicitation of proxies. We have also engaged Georgeson Inc. to solicit proxies. For its services, we will pay Georgeson Inc. a fee of $8,500 plus out-of-pocket expenses. Proxies will be solicited by mail and also may be solicited by our executive officers and other employees personally or by telephone, but such persons will not be specifically compensated for such services. It is contemplated that brokerage houses, custodians, nominees and fiduciaries will be requested to forward the soliciting material to the beneficial owners of stock held of record by such persons and we will reimburse them for their reasonable expenses incurred in connection therewith. 590 Madison Avenue, 37th Floor New York, New York 10022 HOLGER BARTEL Chairman of the Board of Directors 43 TRAVELZOO INC. ANNUAL MEETING OF STOCKHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Glen Ceremony as his/her Proxy, with full power of substitution, to represent him/her at the Annual Meeting of Stockholders of Travelzoo Inc. (the "Company") on September 12, 2013, or any adjournments or postponements thereof. If you do not indicate how you wish to vote, the proxy card will be voted for Proposal 1, for the election of all nominees to the Board of Directors under Proposal 2 and for Proposal 3, and as the Proxy may determine, in his discretion, with regard to any other matter properly presented at the meeting, or any adjournments or postponements thereof. If you do not indicate how you wish to vote on Proposal 4, your shares will be counted as abstentions. This proxy, when properly executed, will be voted as directed by the stockholder. (Continued, and to be marked, dated and signed, on the other side) TRAVELZOO INC. Mailing Instructions If you receive this proxy card via mail, please date and sign it, and return it in the postage paid envelope provided. If you receive this proxy card via e-mail, please print the proxy card, date and sign it, and return it to: Computershare P.O. Box 43126 Providence, RI 02940 o DETACH PROXY CARD HERE: o PROPOSALS – The Board of Directors recommends a vote "FOR" Proposals 1 and 3 and "FOR" all the listed nominees. 1. APPROVAL OF TWO AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE SPLIT OF THE COMPANY'S OUTSTANDING COMMON STOCK AT A RATIO OF 1-FOR-25 FOLLOWED IMMEDIATELY BY A FORWARD SPLIT OF THE COMPANY'S OUTSTANDING COMMON STOCK AT A RATIO OF 25-FOR-1 o FOR o AGAINST oABSTAIN 2. ELECTION OF DIRECTORS o FOR all o WITHHOLD AUTHORITY to vote for all nominees listed below nominees listed below (except as marked to the contrary, if any, below) Nominees: 01 Holger Bartel, 02 Ralph Bartel, 03 David Ehrlich, 04 Donovan Neale-May, 05 Mary Reilly. (To withhold authority to vote for an individual, write that nominee's name in the space provided below.) 3. ADVISORY VOTE ON THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS OF THE COMPANY o FOR o AGAINST oABSTAIN 4. SHAREHOLDER PROPOSAL REGARDING THE IMPLEMENTATION OF MAJORITY VOTING FOR UNCONTESTED DIRECTOR ELECTIONS o FOR o AGAINST o ABSTAIN 5. SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE SAID MEETING AND ANY POSTPONEMENT OR ADJOURNMENT THEREOF The undersigned hereby acknowledges receipt of the proxy statement and 2012 Annual Report of Travelzoo Inc. Date , 2013 (signature) (signature, if jointly held) Please sign exactly as name appears at left. If stock is jointly held each owner should sign. Executors, Administrators, Trustees, Guardians and Corporate Officers should indicate their fiduciary capacity or full title when signing. MARK HERE IF YOU o INTEND TO ATTEND THE MEETING APPENDIX A CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF TRAVELZOO INC. TRAVELZOO INC., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows: FIRST: The name of the Corporation is Travelzoo Inc. SECOND: The Corporation's original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on January 19, 2001. THIRD: Section A of Article FOURTH of the Certificate of Incorporation of the Corporation shall be amended to read in its entirety as follows: "A. Classes and Number of Shares. Upon the filing and effectiveness (the "Effective Time") pursuant to the General Corporation Law of the State of Delaware (the "DGCL") of this Amendment to the Corporation's Certificate of Incorporation, each twenty-five (25) shares of the Corporation's Common Stock, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time, shall automatically be reclassified, combined, and converted into one (1) validly issued, fully paid, and non-assessable share of Common Stock, par value $0.01 per share, of the Corporation, without any action by any holder thereof; provided that no fractional share interests shall be issued as a result of the foregoing reclassification, combination, and conversion to any stockholder that holds, of record, fewer than twenty-five (25) shares of Common Stock immediately prior to the Effective Time, and, in lieu of such fractional share interests (collectively, "Converted Fractionalized Interests"), any such stockholder shall be entitled, upon the Effective Time, to receive a cash payment equal to the Share Value (as defined below) of each share of Common Stock held by such stockholder immediately prior to the Effective Time. As used herein, "Share Value" shall mean the higher of (i) the average closing price of the Common Stock on the Nasdaq Global Select Market ("Nasdaq") for the ten (10) consecutive trading days ending on the last trading day prior to the date of the Effective Time and (ii) the average sale price received by the transfer agent of the Common Stock in its sale in open market transactions on Nasdaq of the shares of Common Stock resulting from its aggregation of all Converted Fractionalized Interests without the deduction of any costs associated with such sales. From and after the Effective Time, (i) certificates that, immediately prior to the Effective Time, represent shares of Common Stock that are held by any stockholder that holds more than twenty-five (25) shares of Common Stock immediately prior to the Effective Time shall thereafter represent the number of shares of Common Stock into which such shares shall have been reclassified, combined, and converted at the Effective Time pursuant to this Certificate of Amendment, and (ii) certificates that, immediately prior to the Effective Time, represent shares of Common Stock that are held by any stockholder that holds fewer than twenty-five (25) shares of Common Stock immediately prior to the Effective Time shall thereafter represent only the right to receive a payment in cash equal to the Share Value for each share of Common Stock previously represented by such certificate. The total number of shares of stock which the Corporation shall have the authority to issue is 40,000,000 shares of common stock of the par value of $0.01 each, amounting in the aggregate to Four Hundred Thousand Dollars ($400,000) ("Common Stock"), and 5,000,000 shares of preferred stock of the par value of $0.01 each , amounting in the aggregate to $50,000 ("Preferred Stock")." A-1 FOURTH: This Certificate of Amendment shall become effective as of ______, 2013 at 5:00 p.m. FIFTH: This Certificate of Amendment was duly adopted in accordance with Section 242 of the DGCL. The Board of Directors duly adopted resolutions setting forth and declaring advisable this Certificate of Amendment and directed that the proposed amendment be considered by the stockholders of the Corporation. A meeting of stockholders was duly called upon notice in accordance with Section 222 of the DGCL and held on September 12, 2013 at which meeting the necessary number of shares required by applicable law were voted in favor of the proposed amendment. The stockholders of the Corporation duly adopted this Certificate of Amendment. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be duly executed in its corporate name as of the __ day of _____, 2013. TRAVELZOO INC. By: Name: Title: A-2 APPENDIX B CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF TRAVELZOO INC. TRAVELZOO INC., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows: FIRST: The name of the Corporation is Travelzoo Inc. SECOND: The Corporation's original Certificate of Incorporation was filed with the Secretary of State on January 19, 2001. THIRD: Section A of Article FOURTH of the Certificate of Incorporation of the Corporation shall be amended to read in its entirety as follows: "A. Classes and Number of Shares. Upon the filing and effectiveness (the "Effective Time") pursuant to the General Corporation Law of the State of Delaware (the "DGCL") of this Amendment to the Corporation's Certificate of Incorporation, each one (1) issued and outstanding share of the Corporation's Common Stock, par value $0.01 per share, immediately prior to the Effective Time, and (i) any fractional share of Common Stock held by any stockholder that holds, of record, in excess of one (1) share of Common Stock immediately prior to the Effective Time, and (ii) any fractional interest held by the Company's transfer agent pending disposition thereof on behalf of the former holders thereof, in each case shall automatically be reclassified, changed, and converted into twenty-five (25) validly issued, fully paid, and non-assessable shares of Common Stock, par value $0.01 per share (or, with respect to fractional share interests, such lesser number of shares and fractional shares as may be applicable based upon such 25 for-1 ratio), without any action by any holder thereof. From and after the Effective Time, certificates that, immediately prior to the Effective Time, represent Common Stock shall thereafter represent the number of shares of Common Stock into which such shares shall have been reclassified, changed, and converted at the Effective Time pursuant to this Certificate of Amendment. The total number of shares of stock which the Corporation shall have the authority to issue is 40,000,000 shares of common stock of the par value of $0.01 each, amounting in the aggregate to Four Hundred Thousand Dollars ($400,000) ("Common Stock"), and 5,000,000 shares of preferred stock of the par value of $0.01 each , amounting in the aggregate to $50,000 ("Preferred Stock")." FOURTH: This Certificate of Amendment shall become effective as of ______, 2013 at 5:01 p.m. FIFTH: This Certificate of Amendment was duly adopted in accordance with Section 242 of the DGCL. The Board of Directors duly adopted resolutions setting forth and declaring advisable this Certificate of Amendment and directed that the proposed amendment be considered by the stockholders of the Corporation. A meeting of stockholders was duly called upon notice in accordance with Section 222 of the DGCL and held on September 12, 2013 at which meeting the necessary number of shares required by applicable law were voted in favor of the proposed amendment. The stockholders of the Corporation duly adopted this Certificate of Amendment. B-1 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be duly executed in its corporate name as of the __ day of ____, 2013. TRAVELZOO INC. By: _______________________ Name: Title: B-2  UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________________________________________________________________ Form 10-K ______________________________________________________________________________ (Mark One) For the fiscal year ended December 31, 2012 or For the transition period from to . Commission File No.: 000-50171 _______________________________________________________________________________ TRAVELZOO INC. (Exact name of registrant as specified in its charter) ________________________________________________________________________________ Registrant’s telephone number, including area code: (212) 484-4900 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.01 Par Value (Title of Class) _________________________________________________________________________________ indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No  Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:1) No  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No (cid:1) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No (cid:1) 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.   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (cid:1) 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, 37th Floor New York, New York 10022 (Address of principal executive offices) (Zip code) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:1) No  As of June 29, 2012, the aggregate market value of voting stock held by non-affiliates of the Registrant, based upon the closing sales price for the Registrant's Common Stock, as reported on the NASDAQ Global Select Market, was $ 169,514,556 . The number of shares of Travelzoo common stock outstanding as of February 8, 2013 was 15,361,873 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 2013 Annual Meeting of Stockholders are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13, and 14. 1 Large accelerated filer (cid:1) Accelerated filer  Non-accelerated filer (cid:1) (Do not check if a smaller reporting company) Smaller reporting company (cid:1) Table of Contents TRAVELZOO INC. Table of Contents 2 PART I Page Item 1. Business 3 Item 1A.Risk Factors 11 Item 1B.Unresolved Staff Comments 24 Item 2. Properties 24 Item 3. Legal Proceedings 24 Item 4. (Removed and Reserved) 24 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24 Item 6. Selected Consolidated Financial Data 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 27 Item 7A.Quantitative and Qualitative Disclosures About Market Risk 41 Item 8. Financial Statements and Supplementary Data 42 Consolidated Balance Sheets 44 Consolidated Statements of Income 45 Consolidated Statements of Comprehensive Income 46 Consolidated Statements of Stockholders' Equity 47 Consolidated Statements of Cash Flows 48 Notes to Consolidated Financial Statements 49 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 67 Item 9A. Controls and Procedures 67 Item 9B. Other Information 68 PART III Item 10. Directors, Executive Officers and Corporate Governance of the Registrant 69 Item 11. Executive Compensation 69 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 69 Item 13. Certain Relationships and Related Transactions, and Director Independence 69 Item 14. Principal Accountant Fees and Services 70 PART IV Item 15. Exhibits and Financial Statement Schedules 70  PART I Forward-Looking Statements 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 in this Report in Part I Item 1A 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. Item 1. Business Overview Travelzoo Inc. (the “Company” or “Travelzoo”) is a global Internet media company. We inform over 26 million subscribers in North America, Europe and Asia Pacific, as well as millions of website users, about the best travel, entertainment and local deals available from thousands of companies. Our deal experts source, research and test-book offers, recommending only those that meet Travelzoo's rigorous quality standards. We provide travel, entertainment, and local businesses with a fast, flexible, and cost effective way to reach millions of consumers. Our revenues are generated primarily from advertising fees. In Asia Pacific, the Travelzoo business is operated by Travelzoo (Asia) Limited and Travelzoo Japan K.K. under a license agreement with Travelzoo Inc. and is not owned by the Company. Our publications and products include the Travelzoo websites (www.travelzoo.com, www.travelzoo.ca, www.travelzoo.co.uk, www.travelzoo.de, www.travelzoo.es, www.travelzoo.fr, among others), the Travelzoo iPhone and Android applications, the Travelzoo Top 20 e-mail newsletter, and the Newsflash e-mail alert service. We operate SuperSearch , a pay-per-click travel search tool, and the Travelzoo Network , a network of third-party websites that list deals published by Travelzoo. We also operate Fly.com , a travel search engine that allows users to quickly and easily find the best prices on flights from hundreds of airlines and online travel agencies. In addition, we operate Local Deals and Getaway services, which allow our subscribers to purchase vouchers for deals from local businesses such as spas, hotels and restaurants through the Travelzoo website and mobile applications. Voucher promotional offers are redeemable at the local businesses during the promotional period. We receive a percentage of the face value of the voucher from the local businesses. In 2009, we sold our Asia Pacific operating segment to Azzurro Capital Inc. and its wholly-owned subsidiaries, Travelzoo (Asia) Limited and Travelzoo Japan K.K. The results of operations of the Asia Pacific operating segment have been classified as discontinued operations for all periods presented. We have not had significant ongoing involvement with the operations of the Asia Pacific operating segment and have not had material economic interests in the Asia Pacific operating segment since the completion of the sale. Starting November 1, 2009, the Travelzoo websites in Asia Pacific (cn.travelzoo.com, www.travelzoo.co.jp, www.travelzoo.com.au, www.travelzoo.com.hk, www.travelzoo.com.tw, among others), the Travelzoo iPhone and Android applications in Asia Pacific, the Travelzoo Top 20 e-mail newsletters in Asia Pacific and the Newsflash e-mail alert service in Asia Pacific have been published by Travelzoo (Asia) Limited and Travelzoo Japan K.K., under a license agreement with the Company. There is a reciprocal revenue-sharing agreement among the entities operating the Travelzoo business in Asia Pacific and the Company related to cross-selling audiences, channels and offers. More than 2,000 companies use our services, including Air New Zealand, Apple Vacations, British Airways, Harrah's Entertainment, Expedia, Fairmont Hotels and Resorts, Hilton Hotels, Interstate Hotels & Resorts, Key Tours International, Liberty Travel, Marriott Hotels, Royal Caribbean, Spirit Airlines, Starwood Hotels & Resorts Worldwide, Travelocity, United Airlines, and Virgin Atlantic. 3  Our revenues are advertising revenues, consisting primarily of listing fees paid by travel, entertainment and local businesses to advertise their offers on Travelzoo's media properties. Listing fees are based on audience reach, placement, number of listings, number of impressions, number of click-throughs, number of referrals, or percentage of the face value of vouchers sold. Insertion orders are typically for periods between one month and twelve months and are not automatically renewed. Merchant agreements for Local Deals and Getaway advertisers are typically for twelve months and are not automatically renewed. Our revenues have grown on an annual basis since we began operations in 1998. Our revenues increased from approximately $84,000 for the period from May 21, 1998 (inception) to December 31, 1998, to approximately $151 million for the year ended December 31, 2012 . We have two operating segments based on geographic regions: North America and Europe. North America consists of our operations in Canada and the U.S. Europe consists of our operations in France, Germany, Spain, and the U.K. For the year ended December 31, 2012, European operations were 28% of revenues. Financial information with respect to our business segments and certain financial information about geographic areas appears in Note 8 to the accompanying consolidated financial statements. Our principal business office is located at 590 Madison Avenue, 37th Floor, New York, New York 10022. Travelzoo is controlled by Ralph Bartel, who held beneficially approximately 50.5% of the outstanding shares as of December 31, 2012 . The Company was formed as a result of a combination and merger of entities founded by the Company's majority stockholder, Ralph Bartel. In 1998, Mr. Bartel founded Travelzoo.com Corporation, a Bahamas corporation, which issued 5,155,874 shares via the Internet to approximately 700,000 “Netsurfer stockholders” for no cash consideration, but subject to certain conditions as referred to below. 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 Corporation to Travelzoo Inc. in exchange for 8,129,273 shares of Travelzoo Inc. and options to acquire an additional 2,158,349 shares at $1.00. Mr. Bartel exercised these options in January 2009. In April 2002, Travelzoo.com Corporation was merged into Travelzoo Inc. Under and subject to the terms of the merger agreement, stockholders were allowed a period of two years following the effective date of the merger to receive one share of Travelzoo Inc. in exchange for each outstanding share of common stock of Travelzoo.com Corporation. The records of Travelzoo.com Corporation showed that, assuming all of the shares applied for by the Netsurfer stockholders were validly issued, there were 11,295,874 shares of Travelzoo.com Corporation outstanding. As of April 25, 2004, two years following the effective date of the merger, 7,180,342 shares of Travelzoo.com Corporation had been exchanged for shares of Travelzoo Inc. Prior to that date, the remaining shares which were available for issuance pursuant to the merger agreement were included in the issued and outstanding common stock of Travelzoo Inc. and included in the calculation of basic and diluted earnings per share. After April 25, 2004, the Company ceased issuing shares to the former stockholders of Travelzoo.com Corporation, and no additional shares are reserved for issuance to any former stockholders, because their right to receive shares has now expired. On April 25, 2004, the number of shares reported as outstanding was reduced from 19,425,147 to 15,309,615 to reflect actual shares issued as of the expiration date. Earnings per share calculations reflect this reduction of the number of shares reported as outstanding. As of December 31, 2012 , there were 15,361,873 shares of common stock outstanding. On April 21, 2011, the Company entered into an agreement with the State of Delaware resolving all claims relating to an unclaimed property review which began in 2010. The primary issue raised in the preliminary findings from the review, received by the Company on April 12, 2011, concerned the shares of Travelzoo which have not been claimed by former Netsurfer stockholders of Travelzoo.com as discussed in the preceding paragraph. In the preliminary findings under the unclaimed property review, up to 3.0 million shares were identified as “demandable” under Delaware escheat laws. While the Company continues to take the position that such shares were a promotional incentive and were issuable only to persons who establish their eligibility as stockholders, the Company determined that it was in its best interest to promptly resolve all claims relating to the unclaimed property review. The Company made a $20.0 million cash payment to the State of Delaware on April 27, 2011 and received a complete release of those claims. Since March 2012, similar claims have been asserted by other states. See Note 1 to the accompanying consolidated financial statements for further information on the unexchanged promotional merger shares contingency. Travelzoo is listed on the NASDAQ Global Select Market under the symbol “TZOO.” 4  Our Industry While our mission is to provide our subscribers and users the highest quality information about the best travel, entertainment and local deals, our revenues are generated from advertising fees. According to Kantar Media, travel companies in the U.S. spent $3.3 billion in 2012 on advertising (source: Kantar Media, 2012). According to BIA Advisory Services and The Kelsey Group's U.S. Local Media Annual Forecast (2008-2013), U.S. local advertising revenues will be $144.4 billion in 2013 (source: BIA Advisory Services/The Kelsey Group, 2009). We believe that traditional media outlets such as newspapers, television and radio continue to be another medium for travel, entertainment and local businesses to advertise their offers, though the percentage spent on advertising in these traditional media outlets is decreasing. In addition, the continued rise in smart phones, has changed the ground rules for online marketing, with the consumption of online advertising rapidly moving to mobile devices. eMarketer anticipates that overall spending on mobile advertising in the United States, including display, search and messaging-based ads served to mobile phones and tablets, will rise to $4 billion in 2012 (a 180% increase over 2011), $7.19 billion in 2013, and nearly $21 billion by 2016. We believe that several factors are causing and will continue to cause travel, entertainment and local businesses to increase their spending on Internet and mobile advertising of offers: The Internet Is Consumers' Preferred Information Source. Market research shows that the Internet has become consumers' preferred information source for travel (source: Forrester's North American Technographics Travel Online Survey, Q1 2008). Benefits of Internet Advertising vs. Print, TV and Radio Advertising. Internet advertising provides advertisers advantages compared to traditional advertising. These advantages include real-time listings, real-time updates, and performance tracking. See “- Benefits to Travel, Entertainment and Local Businesses” below. New Advertising Opportunities. The Internet allows advertisers 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. Mobile advertising extends our products and services by providing mobile-specific features to mobile device users. Mobile advertising is still in its early stage, though mobile devices are quickly becoming the world's newest gateway for information. We are focused on developing easy-to-use mobile applications to help advertisers extend their reach, help create revenue opportunities for our customers, and deliver relevant and useful ads to users on the go. We continue to invest in improving users' access to our services through such devices. Problems Travel, Entertainment and Local Businesses Face and Limitations of Newspaper, TV and Radio Advertising We believe that travel, entertainment and local businesses often face the challenge of being able to effectively and quickly market and sell their excess inventory (i.e. airline seats, hotel rooms, cruise cabins, theater seats, spa appointments or restaurant seats that are likely to be unfilled). The success of marketing excess inventory can have a substantial impact on a company's profitability. Almost all costs of these services are fixed. That is, the costs do not vary significantly with sales. A relatively small amount of unsold inventory can have a significant impact on the profitability of a company. We believe that travel, entertainment and local businesses need a fast, flexible, and cost-effective solution for marketing excess inventory. The solution must be fast, because 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 service has become worthless is very short. The solution must be flexible, because the demand for excess inventory is difficult to forecast. It is difficult for travel, entertainment and local businesses to price excess inventory and 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. We believe that newspaper, TV and radio advertising, with respect to advertising excess inventory, suffers from a number of limitations which do not apply to the Internet: 5 • typically, ads must be submitted 2 to 5 days prior to the publication or airing 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 company cannot change a price or offer; • in many markets, the small number of newspapers, television companies, radio stations and other print media reduces competition, resulting in high rates for traditional advertising; and  Our Products and Services We provide airlines, hotels, cruise lines, vacation packagers, other travel suppliers, entertainment and local businesses with a fast, flexible, and cost-effective way to reach millions of Internet users. Our publications include the Travelzoo websites, the Travelzoo Top 20 e-mail newsletter, the Newsflash e-mail alert service, and the Local Deals and Getaway e-mail alert services. We operate SuperSearch, a pay-per-click travel search tool and the Travelzoo Network , a network of third-party websites that list deals published by Travelzoo. We also operate Fly.com , a travel search engine that enables users to find and compare the best flight options from multiple sources, including airline and online travel agency websites. While our products provide advertising opportunities for travel, entertainment and local businesses, they also provide Internet users with a free source of information on current sales and specials from thousands of travel, entertainment and local businesses. As travel, entertainment and local businesses increasingly utilize the Internet to promote their 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 our advertisers to add, update, and delete special offer listings on a real-time basis. Our software also provides our advertisers with real-time performance tracking, enabling them to optimize their marketing campaigns. Mobile advertising extends our products and services by providing mobile-specific features to mobile device users. We are focused on developing easy-to-use mobile applications to help advertisers extend their reach, help create revenue opportunities for our customers, and deliver relevant and useful ads to users on the go. We continue to invest in improving users' access to our services through such devices. In addition, we are beginning to develop a hotel booking platform that will facilitate our users to more easily book stays at hotel deals we present on our website and mobile devices. 6 • offline advertising does not allow for detailed performance tracking; • creative can be very expensive to develop.  The following table presents an overview of our products: In 2012, 72% of our total revenues were generated from our North America operations, and 28% of our total revenues were generated from our European operations. See Note 8 to the accompanying consolidated financial statements. 7 Product Content Publication Schedule Reach/Usage* Advertiser Benefits Consumer Benefits Travelzoo websites Websites in the U.S., Canada, France, Germany, Spain, and the U.K. listing thousands of outstanding sales and specials from more than 2,000 travel, entertainment and local businesses 24/7 13.2 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 Popular e-mail newsletter listing 20 of the week's most outstanding deals Weekly 22.5 million subscribers Mass “push” advertising vehicle to quickly stimulate incremental travel and entertainment purchases Weekly access to 20 outstanding, handpicked deals chosen from among thousands Newsflash Regionally-targeted e-mail alert service with a single time-sensitive and newsworthy travel and entertainment offer Within two hours of an offer being identified 20.1 million subscribers Regional targeting, 100% share of voice for advertiser, flexible publication schedule Breaking news offers delivered just-in-time Local Deals and Getaway Locally-targeted e-mail alert service with a single time-sensitive and newsworthy offer from local merchants such as spas and restaurants Twice per week in active markets Over 155 markets Local targeting by zip code,100% share of voice for the local businesses, flexible publication schedule Breaking news offers delivered just-in-time Travelzoo Network A network of third-party websites that list outstanding deals published by Travelzoo 24/7 Over 351 third-party websites Drives qualified users with substantial distribution beyond the Travelzoo audience Contextually relevant travel deals that have been handpicked and professionally reviewed SuperSearch Travel search tool using a proprietary algorithm to recommend sites and enable one-click searching On-demand 5.1 million monthly searches Drives qualified traffic directly to advertiser site on a pay-per-click basis Saves time and money by recommending the sites most likely to have great rates for a specific itinerary Fly.com Travel search engine that enables users to find and compare the best flight, hotel and rental car options from multiple sources On-demand 3.5 million monthly searches Provides advertisers a low cost distribution channel and retention of the user engagement on the advertiser's website Free access to real-time price comparisons from airlines and online travel agencies * For Travelzoo websites, reach information is based on data from Google Analytics. For Top 20, Newsflash, Local Deals and Getaway, Travelzoo Network, SuperSearch, and Fly.com , reach/usage information is based on internal Travelzoo statistics as of December 31, 2012.  Benefits to Travel, Entertainment and local businesses Key features of our solution for travel and entertainment companies include: Key features of our solution for local businesses include: Benefits to Consumers Our Travelzoo websites (www.travelzoo.com, www.travelzoo.ca, ww.travelzoo.co.uk, www.travelzoo.de, www.travelzoo.es, www.travelzoo.fr, among others), Travelzoo Top 20 e-mail newsletter, Newsflash, Local Deals, Getaway, the Travelzoo Network, SuperSearch search tool, and Fly.com search engine provide consumers information on current offers at no cost to the consumer. Key features of our products include: Growth Strategy Key elements of our strategy include: 8 • Real-Time Listings of Special Offers. Our technology allows travel and entertainment companies to advertise special offers on a real-time basis. • Real-Time Updates. Our technology allows travel and entertainment companies to update their listings on a real-time basis. • Real-Time Performance Reports. We provide travel and entertainment companies with real-time tracking of the performance of their advertising campaigns. Our solution enables travel and entertainment companies to optimize their campaigns by removing or updating unsuccessful listings and further promote successful listings. • Access to Millions of Consumers. We provide travel and entertainment companies fast access to over 26 million travel shoppers. • Global Reach. We offer access to Internet users across the U.S., Canada, France, Germany, Spain, and the U.K. • Real-Time Listings of Special Offers. Our technology allows local businesses to advertise special offers on a real-time basis. • Real-Time Performance Reports. We provide local businesses with real-time tracking of the performance of their advertising campaigns. • Access to Local Consumers. Travelzoo subscribers submit their zip code to Travelzoo when they join Travelzoo. As a result, we are able to send Local Deals to subscribers who live or work near the local businesses. • Aggregation of Offers from Many Companies. Our Travelzoo websites and our Travelzoo Top 20 e-mail newsletter aggregate information on current offers from more than 2,000 travel, entertainment and local businesses. This saves the consumer time when searching for travel, entertainment and local deals, sales and specials. • Current Information. Compared to newspaper, TV or radio advertisements, we provide consumers more current information, since our technology enables travel, entertainment and local businesses to update their listings on a real-time basis. • Reliable Information. We operate a Test Booking Center ® to check the availability of travel, entertainment and local deals included in the Travelzoo Top 20 before publishing. • Search Tools. We provide consumers with the ability to search for specific offers. • Build Strong Brand Awareness. We believe that it is essential to establish a strong brand with Internet users and within the travel industry, entertainment industry and with local businesses. We currently utilize online marketing and direct marketing to promote our brand to consumers. We utilize sponsorships at industry conferences and public relations to promote our brand. In addition, we believe that we build brand awareness through product excellence which leads to word-of-mouth referrals. We believe it is important that we develop new products that keep pace with changes in consumer preference and technology, such as the trend towards mobile usage by consumers, as well as facilitating hotel booking for consumers. • 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 through 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 Advertisers: We intend to continue to grow our advertiser base by expanding the size of our sales force and by entering into new content categories such as restaurants and spas. See “- Sales and Marketing” below.  Advertisers As of December 31, 2012, our advertiser base included more than 2,000 travel, entertainment and local businesses, including airlines, hotels, cruise lines, vacations packagers, tour operators, destinations, car rental companies, travel agents, theater and performing arts groups, restaurants, spas, and activity companies. Some of our advertisers are: As discussed in Note 8 to the accompanying consolidated financial statements, we did not have any advertisers that accounted for 10% or more of our total revenues during the years ended December 31, 2012, 2011 and 2010. The agreements with these advertisers are in the form of multiple insertion orders and merchant agreements from groups of entities under common control. It is possible that we may have an advertiser or advertisers that account for 10% or more of our total revenues in future years because management believes there is a high concentration in the online travel agency industry. Sales and Marketing As of December 31, 2012, our advertising sales force and sales support staff consisted of 151 employees worldwide. We intend to grow our advertiser base by expanding the size of our sales force. We currently utilize online marketing and direct marketing to promote our brand to consumers. In addition, we utilize an online marketing program to acquire new subscribers for our e-mail publications. 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. Technology We have designed our technology to serve a large volume of Web traffic and send a large volume of e-mails in an efficient and scalable manner. We co-locate our production servers with Equinix, Inc. (“Equinix”), a global provider of hosting, network, and application services. Equinix's facilities include 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 Equinix 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 websites, our users are not required to download or upload large files from or to our websites, 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. 9 • Excellent Service. We believe that it is important to provide our advertisers and users with excellent service. • Replicate Business Model in Foreign Markets. We have replicated our business model in foreign markets including Canada, the U.K., Germany, France and Spain. We believe that there is an opportunity to replicate our business model in additional foreign markets. In addition, we believe that we can strengthen our strategic position if we offer global advertising solutions to existing and new advertisers. Air New Zealand Interstate Hotels & Resort Atlantis Jet Luxury Resorts Apple Vacations Key Tours International British Airways Liberty Travel CheapTickets Lufthansa Cirque du Soleil Marriott Hotels Delta Air Lines Orbitz Worldwide Expedia Royal Caribbean Fairmont Hotels and Resorts Spirit Airlines Fareportal Starwood Hotels & Resorts Worldwide Harrah's Entertainment Travelocity Hawaiian Airlines United Airlines Hilton Hotels Virgin America Hotwire Virgin Atlantic InterContinental Hotels Group Walt Disney Parks & Resorts  Our software is written using widely used standards, such as Visual Basic Script, and HTML, and interfaces with products from Microsoft and ITA software. We have generally standardized our hardware platform on HP servers and Cisco switches. Competition We compete for advertising dollars with large Internet portal sites such as MSN and Yahoo! that offer listings or other advertising opportunities to travel, entertainment and local businesses. We compete with search engines like Google and Bing that offer pay-per-click listings. We compete with travel meta-search engines like Kayak and online travel and entertainment deal publishers. We compete with large online travel agencies like Expedia and Priceline that also offer advertising placements and capture consumer interest. We compete with companies like Groupon and LivingSocial that sell vouchers for deals from local businesses such as spas, hotels, restaurants and activity companies. We expect to face increased competition from other Internet and technology-based businesses such as Google and Microsoft, each of which has launched initiatives which are directly competitive to our Local Deals and Getaway products. 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. We believe that the primary competitive factors are price, performance and audience quality. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger advertiser 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 our advertisers 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. Government Regulation and Legal Uncertainties 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, 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 U.S. The directive may adversely affect our operations in Europe. Anti-Spam Legislation. The CAN-SPAM Act, a federal anti-spam law, pre-empts various state anti-spam laws and establishes a single standard for e-mail marketing and customer communications. We believe that this law, on an overall basis, benefits our business as we do not use spam techniques or practices and may benefit now that others are prohibited from doing so. 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 have registered travelzoo.com, travelzoo.ca, travelzoo.co.jp, travelzoo.com.au, travelzoo.com.tw, travelzoo.co.uk, travelzoo.de, travelzoo.fr, travelzoo.org, travelzoo.net, weekend.com, and weekends.com, among other domain names, and have registered “Travelzoo” as a trademark in the United States, Canada, the EU, and in various countries in Asia Pacific. In January 2009, we purchased the domain name Fly.com . 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 names will not lose their value, or that we will not have to obtain entirely new domain names in addition to or in lieu of our current domain names 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. 10  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 additional taxes and other regulations. Intellectual Property Our success depends to a significant degree upon the protection of our brand names, including Travelzoo ® and Top 20 ® . If we were unable to protect the Travelzoo and 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. We have registered the Travelzoo and Top 20 trademarks, among others, with the United States Patent and Trademark Office. We have registered the Travelzoo and Travelzoo Top 20 trademarks with the Office for Harmonization in the Internal Market of the European Community. We have registered the Travelzoo trademark in Australia, Canada, China, Hong Kong, Japan, South Korea, and Taiwan. 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 are 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. Employees As of December 31, 2012, we had 417 employees in Europe and North America. None of our employees are represented under collective bargaining agreements. We consider our relations with our employees to be good. Because of our anticipated continued growth, we expect that the number of our employees will continue to increase for the foreseeable future. Internet Access to Other Information We make available free of charge, on or through our website (www.travelzoo.com), annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information included on our website does not constitute part of this Report. Item 1A. Risk Factors Investing in our common stock involves a high degree of risk. Any or all of the risks listed below as well as other variables affecting our operating results could have a material adverse effect on our business, our quarterly and annual operating results or financial condition, which could cause the market price of our stock to decline or cause substantial volatility in our stock price, in which event the value of your common stock could decline. You should also keep these risk factors in mind when you read forward-looking statements. Risks Related to Our Financial Condition and Business Model We cannot assure you that we will be profitable. In the years ended December 31, 2012, 2011 and 2010, we generated a net income of $18.2 million, $3.3 million and $13.2 million. Although we were profitable in 2012, 2011 and 2010, there is no assurance that we will continue to be profitable in the future. 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 advertisers. If our revenues grow at a slower rate than we anticipate, or if our spending levels exceed our expectations or cannot be adjusted to reflect slower revenue growth, we may not generate sufficient revenues to be profitable. Any of these developments could result in a significant decrease in the trading price of our common stock. Fluctuations in our operating results may negatively impact our stock price. Our quarterly and annual 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 period. 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: 11  We may significantly increase our operating expenses related to advertising campaigns for the Travelzoo and Fly.com brands for a certain period if we see a unique opportunity for a brand marketing campaign, if we find it necessary to respond to increased brand marketing by a competitor, or if we decide to accelerate our acquisition of new subscribers. If revenues fall below our expectations in any quarter and we are unable to quickly reduce our operating expenses in response, our operating results would be lower than expected and our stock price may fall. Our expansion of our product offering to include Local Deals and Getaway formats and the addition of a hotel booking platform may result in additional costs that exceed revenue and may trigger additional stock volatility. During the third quarter of 2010, we launched our Local Deals format of advertising and during the second quarter of 2011, we launched our Getaway format of advertising, under which we sell vouchers directly to consumers to advertise promotional deals provided by merchants. For example, a consumer could buy a voucher for $99 for a dinner for two at a merchant’s restaurant that would normally be valued at $199, representing a promotional value of $100 to the consumer. This format involves several aspects that are new to us, and will require investments to maintain and grow the business including additional sales force hiring, building a customer service organization, marketing, technology tracking systems and payment processing. This format, introduced to the market in recent years, has resulted in many competitors entering the marketplace, thereby creating a very competitive marketplace. This competitive landscape along with the required investments to start, maintain and grow this format create a risk that our costs may exceed our revenues in the short and long term, which may materially impact our results of operation and financial condition. Operating this format may introduce additional volatility to our stock price due to the performance of this format by the Company and/or the overall market valuations that are being determined by the market for companies operating this format of advertising. In addition, our plan to add a hotel booking platform which may result in an increase in costs to develop the platform in the near-term and an increase in cost structure in the long-term, which may be in excess of incremental revenue. We may have exposure to additional tax liabilities . As an international company providing online advertising services, we are subject to income taxes as well as non-income based taxes, in both the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, there is no assurance that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals. Changes in tax laws or tax rulings may have a significantly adverse impact on our effective tax rate. 12 • mismatches between resource allocation and client demand due to difficulties in predicting client demand in a new market; • changes in general economic conditions that could affect marketing efforts generally and online marketing efforts in particular; • the magnitude and timing of marketing initiatives, including our acquisition of new subscribers and our expansion efforts in other regions; • 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 websites; • technical difficulties or system downtime affecting the Internet generally or the operation of our products and services specifically; • payments which we may make to previous stockholders of Travelzoo.com Corporation who failed to submit requests for shares in Travelzoo Inc. within the required time period, or escheat claims related to shares not issued in the Company’s merger with Travelzoo.com Corporation; and • volatility of our operating results in new markets.  We are also subject to non-income based taxes, such as value-added, payroll, sales, use, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions. From time to time, we are under audit by tax authorities with respect to these non-income based taxes and may have exposure to additional non-income based tax liabilities. Adverse application of state and local tax laws could have an adverse effect on our business and results of operation. Our expansion of our product offering to include a hotel booking platform may subject us to state and local tax laws and result in additional tax liabilities. A number of jurisdictions in the United States have initiated lawsuits against other on-line travel companies, related to, among other things, the payment of hotel occupancy and other taxes (i.e., state and local sales tax). In addition, a number of municipalities have initiated audit proceedings, issued proposed tax assessments or started inquiries relating to the payment of hotel occupancy and other taxes. To the extent that any tax authority succeeds in asserting that we have a tax collection responsibility, or we determine that we have one, with respect to future transactions, we may collect any such additional tax obligation from our customers, which would have the effect of increasing the cost of hotel room reservations to our customers and, consequently, could make our hotel service less competitive (i.e., versus the websites of other online travel companies or hotel company websites) and reduce hotel reservation transactions; alternatively, we could choose to reduce the compensation for our services on "merchant" hotel transactions. Either step could have a material adverse effect on our business and results of operations. We will continue to assess the risks of the potential financial impact of additional tax exposure, and to the extent appropriate, we will reserve for those estimates of liabilities. Our business model may not be adaptable to a changing market. Our current revenue model depends primarily on advertising fees paid by travel and entertainment companies. If current clients decide not to continue advertising their offers with us and we are unable to replace them with new clients, our business may be adversely affected. To be successful, we must provide online marketing solutions that achieve broad market acceptance by travel and entertainment 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 and products in response to changes in the online advertising market or if our current business model is not successful. For example, the trend toward mobile online traffic will require us to adapt our product offering to facilitate consumers use of our products. If we do not adapt to this trend fully or quickly enough, we may lose advertising revenue as consumer usage may decline from our non-mobile traffic. 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. If we fail to retain existing advertisers or add new advertisers, our revenue and business will be harmed. We depend on our ability to attract and retain advertisers (hotels, spas, restaurants, vacation packagers, airlines, etc.) that are prepared to offer products or services on compelling terms to our subscribers. We do not have long-term arrangements to guarantee the availability of deals that offer attractive quality, value and variety to consumers or favorable payment terms to us. We must continue to attract and retain advertisers in order to increase revenue and maintain profitability. If new advertisers do not find our marketing and promotional services effective, or if existing advertisers do not believe that utilizing our products provides them with a long-term increase in customers, revenue or profit, they may stop making offers through our marketplace. In addition, we may experience attrition in our advertisers in the ordinary course of business resulting from several factors, including losses to competitors and advertiser closures or bankruptcies. If we are unable to attract new advertisers in numbers sufficient to grow our business, or if too many advertisers are unwilling to offer products or services with compelling terms to our subscribers or offer favorable payment terms to us, we may sell less advertising, and our operating results will be adversely affected. For example, we may lose advertisers due to market conditions or performance, such as our recent loss of revenue from certain online booking engines, airlines and vacation packagers. We may not add enough additional revenue, such as hotel revenue from Getaway or the planned hotel booking platform, in order to replace the lost revenue. Furthermore, the new revenue may cost more to generate compared to the costs that the lost revenue required to generate, thereby adversely impacting our operating results. Our existing advertisers may shift from one advertising service to another, which may adversely affect our revenue. Existing advertisers may shift from one advertising service (e.g. Top 20 ) to another (e.g. Local Deals and Getaway ). These shifts between advertising services by advertisers could result in no incremental revenue or less revenue than in previous periods depending on the amount purchased by the advertisers, and in particular with Local Deals and Getaway , depending on how many vouchers are purchased by subscribers. In addition, we are anticipating a shift from our existing hotel revenue to commission-based revenue as we obtain the hotel booking platform capabilities, which may result in lower revenue depending on volume of hotel bookings. 13  An increase in our refund rates related to our Local Deals and Getaway could reduce our liquidity and profitability. We provide refunds related to our Local Deals and Getaway voucher sales. As we increase our revenue, our refund rates may exceed our historical levels. A downturn in general economic conditions may also increase our refund rates. An increase in our refund rates could significantly reduce our liquidity and profitability. As we do not have control over our merchants and the quality of products or services they deliver, we rely on a combination of our historical experience with our merchants over time and the type of refunds provided for development of our estimate for refund claims. Our actual level of refund claims could prove to be greater than the level of refund claims we estimate. If our refund reserves are not adequate to cover future refund claims, this inadequacy could have a material adverse effect on our liquidity and profitability. Our standard agreements with our merchants generally limit the time period during which we may seek reimbursement for subscriber refunds or claims. Our subscribers may make claims for refunds with respect to which we are unable to seek reimbursement from our merchants. Our inability to seek reimbursement from our merchants for refund claims could have an adverse effect on our liquidity and profitability. If our advertisers do not meet the needs and expectations of our subscribers, our business could suffer. Our business depends on our reputation for providing high-quality deals, and our brand and reputation may be harmed by actions taken by advertisers that are outside our control. In particular, this is the case with our Local Deals and Getaway merchants, since we are selling vouchers on behalf of the merchants directly to our subscribers as opposed to the remainder of our business in which we are only collecting the advertising fee from the advertiser and the subscribers are booking the deal directly with the advertiser. Any shortcomings of one or more of our merchants, particularly with respect to an issue affecting the quality of the deal offered or the products or services sold, may be attributed by our subscribers to us, thus damaging our reputation, brand value and potentially affecting our results of operations. In addition, negative publicity and subscriber sentiment generated as a result of fraudulent or deceptive conduct by our merchants could damage our reputation, reduce our ability to attract new subscribers or retain our current subscribers, and diminish the value of our brand. Our business relies heavily on e-mail and other messaging services, and any restrictions on the sending of e-mails or messages or a decrease in subscriber willingness to receive messages could adversely affect our revenue and business. Our business is highly dependent upon e-mail and other messaging services. Deals offered through e-mails and other messages sent by us, or on our behalf by our affiliates, generate a substantial portion of our revenue. Because of the importance of e-mail and other messaging services to our businesses, if we are unable to successfully deliver e-mails or messages to our subscribers or potential subscribers, or if subscribers decline to open our e-mails or messages, our revenue and profitability would be adversely affected. Actions by third parties to block, impose restrictions on, or charge for the delivery of, e-mails or other messages could also materially and adversely impact our business. From time to time, Internet service providers block bulk e-mail transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver e-mails or other messages to third parties. In addition, our use of e-mail and other messaging services to send communications about our website or other matters may result in legal claims against us, which if successful might limit or prohibit our ability to send e-mails or other messages. Any disruption or restriction on the distribution of e-mails or other messages or any increase in the associated costs would materially and adversely affect our revenue and profitability. Our reported total number of subscribers may be higher than the number of our actual individual subscribers and may not be representative of the number of persons who are active potential customers. The total number of subscribers we report may be higher than the number of our actual individual subscribers because some subscribers have multiple registrations, other subscribers have died or become incapacitated and others may have registered under fictitious names. Given the challenges inherent in identifying these subscribers, we do not have a reliable system to accurately identify the number of actual individual subscribers, and thus we rely on the number of total subscribers shown on our records as our measure of the size of our subscriber base. In addition, the number of subscribers we report includes the total number of individuals that have completed registration through a specific date, less individuals who have unsubscribed. Those numbers may include individuals who do not receive our e-mails because our e-mails have been blocked or are otherwise undeliverable. As a result, the reported number of subscribers should not be considered as representative of the number of persons who continue to actively consider our deals by reviewing our e-mail offers. 14  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. For the year ended December 31, 2012 , our cash and cash equivalents increased by $22.4 million to $61.2 million. We intend to continue to grow our business and fund our current operations using cash on hand. However, this may not be sufficient to meet our needs. We may not be able to obtain financing on commercially reasonable terms, or at all. If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund our expansion, successfully promote our brand name, develop or enhance our products and services, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our business. 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 or bank borrowings, the terms of these arrangements could restrict or prevent us from paying dividends and could limit our flexibility in making business decisions. Our business may be sensitive to recessions. The demand for online advertising may be linked to the level of economic activity and employment in the U.S. and abroad. Specifically, our business is primarily dependent on the demand for online advertising from travel and entertainment companies. The recent recession decreased consumer travel and caused travel and entertainment companies to reduce or postpone their marketing spending generally, and their online marketing spending in particular. Continued or future recessions could have a material adverse effect on our business and financial condition. Our operations could be significantly hindered by the occurrence of a natural disaster or other catastrophic event. Our operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, unexpected technical problems in the systems that power our websites and distribute our e-mail newsletters, 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 to protect us against 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 are subject to payments-related risks. We accept payments for the sale of vouchers using a variety of methods, including credit cards and debit cards. We pay interchange and other fees, which may increase over time and raise our operating expenses and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards and debit cards, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. Moreover, under payment card rules and our contracts with our card processors, if there is a security breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments, process electronic funds transfers, or facilitate other types of online payments, and our business and results of operations could be adversely affected. If one or more of these contracts are terminated and we are unable to replace them on similar terms, or at all, it could adversely affect our results of operations. 15  Risks Related to Our Markets and Strategy Our international expansion may result in operating losses, and is subject to other material risks. In May 2005, we began operations in the U.K. In 2006, we began operations in Canada, Germany, and Spain. In 2007, we began operations in France. Although our revenues in Europe increased 6.5% in 2012 compared to 2011 and our operations in Europe generated a profit of $7.0 million in 2012 and a profit of $4.9 million in 2011, our operations in Europe incurred a loss of $1.8 million during the 2010 fiscal year, primarily as a result of significant expenses related to subscriber acquisition and the launch of Fly.com . We intend to continue adding a significant number of subscribers in selected countries in which we operate as we believe this is one of the factors that will allow us to increase our advertising rates and increase our revenues in Europe. If we incur losses from our operations in Europe in the future, these losses may not have any recognizable tax benefit. We expect that this would have a material negative impact on our net income and cash flows. Any of these developments could result in a significant decrease in the trading price of our common stock. In addition to uncertainty about our ability to generate net income from our foreign operations and expand our international market position, there are certain risks inherent in doing business internationally, including: If current economic conditions in Europe do not improve or deteriorate further due to the adverse effects of the ongoing sovereign debt crisis, advertisers may delay or reduce advertising or marketing spending. This could result in reductions in sales of our services, longer sales cycles, and increased price competition. We may not be able to continue developing awareness of our brand names. We believe that continuing to build awareness of the Travelzoo and Fly.com brand names 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 brands, incur significant expenses in promoting our brands 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 names, our business could be materially adversely affected. If we fail to retain our existing subscribers or acquire new subscribers, our revenue and business will be harmed. We spent $5.4 million, $7.6 million and $10.7 million on online marketing initiatives relating to subscriber acquisition for years ended December 31, 2012, 2011 and 2010 and expect to continue to spend significant amounts to acquire additional subscribers. We must continue to retain and acquire subscribers in order to maintain or increase revenue. We cannot assure you that the revenue from subscribers we acquire will ultimately exceed the cost of acquiring new subscribers. If subscribers do not perceive our offers to be of high value and quality or if we fail to introduce new and more relevant deals, we may not be able to acquire or retain subscribers. If we reduce our subscriber acquisition costs, we cannot assure you that this will not adversely impact our ability to acquire new subscribers. If we are unable to acquire new subscribers who purchase our deals directly or indirectly in numbers sufficient to grow our business, or if subscribers cease to purchase our deals directly or indirectly through our advertisers, the revenue we generate may decrease and our operating results will be adversely affected. If the level of usage by our subscriber base declines or does not grow as expected, we may suffer a decline in subscriber growth or revenue. A significant decrease in the level of usage or subscriber growth would have an adverse effect on our business, financial condition and results of operations. 16 • trade barriers and changes in trade regulations; • difficulties in developing, staffing and simultaneously managing foreign operations as a result of distance, language and cultural differences; • stringent local labor laws and regulations; • currency exchange rate fluctuations; • risks related to government regulation; and • potentially adverse tax consequences.  Our business may be sensitive to events affecting the travel industry in general. Events like the Middle East conflicts or the terrorist attacks on the U.S. in 2001 or the recent global financial crisis have a negative impact on the travel industry. We are not in a position to evaluate the net effect of these circumstances on our business. In the longer term, our business might be negatively affected by financial pressures on the travel industry. However, our business may also benefit if travel companies increase their efforts to promote special offers or other marketing programs. If such events result in a long-term negative impact on the travel industry, such impact could have a material adverse effect on our business. We may not be able to attract travel and entertainment 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 and entertainment companies and Internet users find attractive. This could reduce the number of travel and entertainment companies and Internet users using our products and materially adversely affect our business. We may lose business if we fail to keep pace with rapidly changing technologies and client 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 and entertainment companies. Trends that could have a critical impact on our success include: 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, 2012 , we had 417 employees, up from 350 employees as of December 31, 2011 . 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 could otherwise have a material adverse effect on our business. For example, during the three months ended December 31, 2012 , we experienced a decline in our revenue disproportionate to our expenses. 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 MSN and Yahoo!, that offer listings or other advertising opportunities to travel, entertainment and local businesses. These companies have significantly greater financial, technical, marketing and other resources and larger advertiser bases. We compete with search engines like Google and Bing that offer pay-per-click listings. We compete with travel Metasearch engines like Kayak and online travel and entertainment deal 17 • 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, entertainment company, and Internet user requirements.  publishers. We compete with large online travel agencies like Expedia and Priceline that also offer advertising placements and capture consumer interest. We compete with companies like Groupon and LivingSocial that sell vouchers for deals from local businesses such as spas, hotels and restaurants. We expect to face increased competition from other Internet and technology-based businesses such as Google and Microsoft, each of which has launched initiatives which are directly competitive to our Local Deals and G etaway products. Google has introduced their hotel search product which negatively impacted our ability to efficiently purchase Google hotel search traffic to drive our Search product revenues. We also have seen that some competitors will accept lower margins, or negative margins, to attract attention and acquire new subscribers. If competitors engage in group buying initiatives in which merchants receive a higher percentage of the face value than we currently offer, we may be forced to pay a higher percentage of the face value than we currently offer, which may reduce our revenue. In addition, we compete with newspapers, magazines and other traditional media companies that operate websites which provide online advertising opportunities. We expect to face additional competition as other established and emerging companies, including print media companies, enter the online advertising market. Competition could result in reduced margins on our services, loss of market share or less use of Travelzoo by advertisers 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 Christopher Loughlin, our Chief Executive Officer. The loss or departure of any of our officers or key employees could materially adversely affect our ability to implement our business plan. We do not maintain key person life insurance for any member of our management team. In addition, we expect new members to join our management team in the future. These individuals will not previously have worked together and will be required to become integrated into our management team. If our key management personnel are not able to work together effectively or successfully, our business could be materially adversely affected. We may not be able to access third party technology upon which we depend. We use technology and software products from third parties including Microsoft and ITA Software. 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. Acquisitions, investments and joint ventures could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations. We may evaluate and consider a wide array of potential strategic transactions as part of our overall business strategy, including business combinations, acquisitions and dispositions of businesses, technologies, services, and other assets, as well as strategic investments and joint ventures. At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions. Any of these transactions could be material to our financial condition and results of operations. These transactions involve significant challenges and risks. Some of the areas where we may face risks or difficulties include: 18 • Diversion of management time and focus from operating our business to acquisition integration challenges. • Implementation or remediation of controls, procedures, and policies at the acquired company. • Integration of the acquired company's accounting, human resources, and other administrative systems, and coordination of product, engineering, and sales and marketing functions. • Transition of operations, users, and customers onto our existing platforms.  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 the twelve months ended February 6, 2013, the closing price of our common stock on the NASDAQ Global Select Market ranged from $16.74 to $30.85. 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 19 • Failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition. • In the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries. • Failure to successfully further develop the acquired business or technology. • Cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire. • Liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities. • Litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties. • Challenges relating to the structure of an investment, such as governance, accountability and decision-making conflicts that may arise in the context of a joint venture. • Expected and unexpected costs incurred in pursuing acquisitions, including identifying and performing due diligence on potential acquisition targets that may or may not be successful. • Entrance into markets in which we have no direct prior experience and increased complexity in our business. • Inability to sell excess assets. • Impairment of goodwill and other assets acquired. • Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally. • Future acquisitions may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), liabilities and amortization expenses related to intangible assets or write-offs of goodwill, which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders. Also, the anticipated benefit of many of our acquisitions may not materialize.  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. We are controlled by a principal stockholder. Ralph Bartel, who founded Travelzoo and who is a Director of Travelzoo, is our largest stockholder, holding beneficially, as of December 31, 2012 , approximately 50.5% of our outstanding shares. 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 shareholder lawsuits over securities violations due to volatile stock price and this can be burdensome to management and costly to defend. Shareholder lawsuits for securities violations are often launched against companies whose stock price is volatile. Such lawsuits involving the Company would require management’s attention to defend, which may distract attention from operating the Company. In addition, the Company may incur substantial costs to defend itself and/or settle such claims, which may be considered advisable to minimize the distraction and costs of defense. Such lawsuits would result in judgments against the Company requiring substantial payments to claimants. Such costs may materially impact our results of operations and financial condition. Between August 2011 and January 2012, numerous class action and derivative lawsuits were filed against the Company. See further disclosure in Note 3 to the Consolidated Financial Statements included in this report. 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: 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. 20 • 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.  The implementation of the CARD Act and similar state and foreign laws may harm our Local Deals business. Vouchers which are issued under our Local Deals and Getaway may be considered gift cards, gift certificates, stored value cards or prepaid cards and therefore governed by, among other laws, the Credit Card Act of 2009 (the "CARD Act"), and state laws governing gift cards, stored value cards and coupons. Other foreign jurisdictions have similar laws in place, in particular European jurisdictions where the European E-Money Directive regulates the business of electronic money institutions. Many of these laws contain provisions governing the use of gift cards, gift certificates, stored value cards or prepaid cards, including specific disclosure requirements and prohibitions or limitations on the use of expiration dates and the imposition of certain fees. For example, if the vouchers are subject to the CARD Act and are not included in the exemption for promotional programs, it is possible that the purchase value, which is the amount equal to the price paid for the voucher, or the promotional value, which is the add-on value of the voucher in excess of the price paid, or both, may not expire before the later of (i) five years after the date on which the voucher was issued; (ii) the voucher’s stated expiration date (if any); or (iii) a later date provided by applicable state law. Purported class actions against other companies have been filed in federal and state court claiming that coupons similar to the vouchers are subject to the CARD Act and various state laws governing gift cards and that the defendants have violated these laws by issuing the coupons with expiration dates and other restrictions. In addition, investigations by certain state attorney general offices have been launched against other companies with regards to similar issues. If similar claims are asserted against the Company in respect of the Local Deals and Getaway vouchers and are successful, we may become subject to fines and penalties and incur additional costs. In addition, if federal or state laws require that the face value of our vouchers have a minimum expiration period beyond the period desired by a merchant for its promotional program, or no expiration period, this may affect the willingness of merchants to issue vouchers in jurisdictions where these laws apply. For unredeemed vouchers, similar laws in other jurisdictions require us or merchants to honor the face value of vouchers sold, after the redemption period. For example, in Germany, certain consumer protection laws require us to refund consumers for almost four years after the purchase date for the amount of the face value of purchased vouchers which remains unredeemed at the end of the redemption period. Therefore, we do not recognize the unredeemed amounts as revenue until after we are not subject to these laws. There may be similar laws in other countries or provinces that require similar practices. Such developments may materially and adversely affect the profitability or viability of our Local Deals and Getaway . If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed Local Deals and Getaway vouchers due to application of certain gift card laws, our net income could be materially and adversely affected. In certain states and foreign jurisdictions, our Local Deals and Getaway vouchers may be considered a gift card. Some of these states and foreign jurisdictions include gift cards under their unclaimed and abandoned property laws which require companies to remit to the government the value of the unredeemed balance on the gift cards after a specified period of time (generally between one and five years) and impose certain reporting and recordkeeping obligations. We do not remit any amounts relating to unredeemed vouchers we sell based on our assessment of applicable laws. The analysis of the potential application of the unclaimed and abandoned property laws to our vouchers is complex, involving an analysis of constitutional and statutory provisions and factual issues, including our relationship with subscribers and merchants and our role as it relates to the issuance and delivery of a voucher. In the event that one or more states or foreign jurisdictions successfully challenges our position on the application of its unclaimed and abandoned property laws to vouchers, or if the estimates that we use in projecting the likelihood of vouchers being redeemed prove to be inaccurate, our liabilities with respect to unredeemed vouchers may be materially higher than the amounts shown in our financial statements. If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed gift cards, our net income could be materially and adversely affected. Moreover, a successful challenge to our position could subject us to penalties or interest on unreported and unremitted sums, and any such penalties or interest would have a further material adverse impact on our net income. New tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our services and our financial results. Due to the global nature of the Internet, it is possible that various states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce. New or revised international, federal, state or local tax regulations may subject us or our subscribers to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations. 21  We may suffer liability as a result of information retrieved from or transmitted over the Internet and claims related to our service offerings. We may be sued for defamation, civil rights infringement, negligence, patent, copyright or trademark infringement, invasion of privacy, personal injury, product liability, breach of contract, unfair competition, discrimination, antitrust or other legal claims relating to information that is published or made available on our websites or service offerings we make available (including provision of an application programming interface platform for third parties to access our website, mobile device services and geolocation applications). This risk is enhanced in certain jurisdictions outside the United States, where our liability for such third-party actions may be less clear and we may be less protected. In addition, we could incur significant costs in investigating and defending such claims, even if we ultimately are not found liable. If any of these events occurs, our net income could be materially and adversely affected. We are subject to risks associated with information disseminated through our websites and applications, including consumer data, content that is produced by our editorial staff and errors or omissions related to our product offerings. Such information, whether accurate or inaccurate, may result in our being sued by our advertisers, merchants, subscribers or third parties and as a result our revenue and goodwill could be materially and adversely affected. Claims have been asserted against us relating to shares not issued in our 2002 merger. The merger of Travelzoo.com Corporation into the Company became effective on April 25, 2002. Holders of promotional shares of Travelzoo.com Corporation who established they had satisfied certain prerequisite qualifications were allowed a period of two years following the effective date to receive one share of Travelzoo Inc. in exchange for each share of common stock of Travelzoo.com Corporation. After April 25, 2004, two years following the effective date, we ceased issuing shares to the former stockholders of Travelzoo.com Corporation. Many of the “Netsurfer stockholders,” who had applied to receive shares of Travelzoo.com Corporation in 1998 for no cash consideration, did not elect to receive their shares which were issuable in the merger prior to the end of the two-year period. A total of 4,115,532 of our shares which had been reserved for issuance in the merger were not claimed. As discussed under Note 1 to the accompanying consolidated financial statements, on April 21, 2011, we settled all claims by the State of Delaware relating to a previously-announced unclaimed property review relating to shares of Travelzoo which have not been claimed by former Netsurfers stockholders of Travelzoo.com Corporation as discussed in the preceding paragraph. Unclaimed shares which were properly issuable would have been subject to escheat to the State of Delaware because the Company is organized under Delaware law. Under applicable law, unclaimed property held by a corporation is subject to escheat to the jurisdiction of incorporation if the address of the owner is unknown. Since March 2012, the Company has become subject to unclaimed property reviews by most of the other states in the U.S. that relate primarily to the unexchanged promotional merger shares, which were not covered by the settlement and release by the State of Delaware. During the three months ended March 31, 2012, the Company recorded a $3.0 million charge related to this unexchanged promotional merger shares contingency. While the company believes it has meritorious defenses regarding the applicability of escheat rights related to this unexchanged promotional merger shares contingency, the ultimate resolution of this matter may take longer than one year. If the claims for all of the additional shares referred to in the preliminary findings were upheld in full, based on the closing price of the Company’s shares at the end of December 2012, the cost to the Company would be approximately $ 18.1 million in excess of the amount accrued, plus any interest and penalties which might be applicable. In addition, the total amount of exposure of this contingency is dependent upon the manner in which each state applies its unclaimed property laws. The Company is not able to predict the ultimate amount or outcome of any current or future claims which have been or might be asserted relating to the unissued shares. The Company is continuing its program under which it makes cash payments to people who establish that they satisfy the conditions to receive shares of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo Inc. within the required time period. The accompanying consolidated financial statements include a charge in general and administrative expenses of $ 33,000 for the year ended December 31, 2012 . The total cost of this program is not reliably estimable because it is based on the ultimate number of valid requests received and future levels of the Company’s common stock price, and would be affected by any settlement of the pending reviews referred to above. The Company’s 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. As noted above, in order to receive payment under the program, a person is required to establish that such person validly held shares in Travelzoo.com Corporation. Federal laws and regulations, such as the Bank Secrecy Act and the USA PATRIOT Act and similar foreign laws, could be expanded to include Local Deals and Getaway vouchers. 22  Various federal laws, such as the Bank Secrecy Act and the USA PATRIOT Act and foreign laws and regulations, such as the European Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, impose certain anti-money laundering requirements on companies that are financial institutions or that provide financial products and services. For these purposes, financial institutions are broadly defined to include money services businesses such as money transmitters, check cashers and providers of prepaid access cards. Examples of anti-money laundering requirements imposed on financial institutions include customer identification and verification programs, suspicious activity monitoring and reporting, record retention policies and procedures and transaction reporting. We do not believe that we are a financial institution subject to these laws and regulations based, in part, upon the closed loop nature and other characteristics of vouchers and our role with respect to the distribution of vouchers to subscribers. However, the Financial Crimes Enforcement Network, a division of the U.S. Department of the Treasury tasked with implementing the requirements of the Bank Secrecy Act, recently issued final rules regarding the scope and requirements for non-bank parties involved in stored value or prepaid access cards, including obligations on sellers or providers of “prepaid access”. Under the final rule, providers or sellers of closed loop vouchers, such as those offered through the Local Deals program, would only be subject to registration if the voucher exceed $2,000 in total value or if they are sold in aggregate amounts exceeding $10,000 to any single person in one day. Should the $2,000 limit be exceeded or should more than $10,000 in aggregate vouchers be sold to any individual person (sales to businesses for resale or distribution are excluded) then we may be deemed either a seller or provider of prepaid access subject to regulation. In the event that we become subject to the requirements of the Bank Secrecy Act or any other anti-money laundering law or regulation imposing obligations on us as a money services business, our regulatory compliance costs to meet these obligations would likely increase which could reduce our net income. In addition, the costs for third parties to sell vouchers would increase, which may restrict our ability to enlist third parties to issue vouchers. Our internal control over financial reporting may not be effective, and our independent auditors may not be able to certify as to the effectiveness of such internal controls, which could have a significant and adverse effect on our business. We are obligated to evaluate our internal control over financial reporting in order to allow management to report on, and our independent auditors to opine on, our internal control 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 has 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, as well as 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 always succeed in deterring misappropriation of proprietary information. We have registered the Travelzoo trademark in the U.S., Australia, Canada, China, Hong Kong, Japan, South Korea, Taiwan, the EU and the U.K. If we are unable to protect our rights in the mark in North America, Europe, and Asia Pacific, where we have licensed the trademark as described above under “overview”, 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 always be able to detect unauthorized use of our proprietary information or take appropriate steps to enforce our intellectual property rights. In addition, the validity, enforceability, and scope of protection of intellectual property in Internet-related industries are uncertain and still evolving. The laws of countries in which we may market our services in the future are uncertain and may afford little or no effective protection of our intellectual property. The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from our technology and brand name without paying us for them. If this were to occur, our business could be materially adversely affected. We may face liability from intellectual property litigation that could be costly to prosecute or defend and distract 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. As discussed under Note 3 to the consolidated financial statements included 23  in this report, a lawsuit was recently filed against us by a non-practicing entity, commonly referred to as a "patent troll", claiming that the trip-planning Metasearch service available on Fly.com infringes one or more claims of certain asserted patents. The plaintiff has asserted similar claims against other Metasearch websites, including Expedia, Orbitz, Travelocity, Priceline, Yahoo! Inc., American Express, KAYAK and BookIt. Item 1B. Unresolved Staff Comments None. Item 2. Properties We are headquartered in New York, New York, where we occupy approximately 10,600 square feet of leased office space. In addition to our New York office, we have several leased offices throughout the U.S. and Canada for our North America operations, including offices in Chicago, Illinois, Austin, Texas, Dallas, Texas, Las Vegas, Nevada, Los Angeles, California, Miami, Florida, Mountain View, California, San Francisco, California, Toronto, Ontario and Vancouver, British Columbia. We also have leased offices for our Europe operations in France, Germany, Spain, and the U.K., including offices in Barcelona, Hamburg, London, Manchester, Munich, and Paris. 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. I tem 3. Legal Proceedings The information set forth under “Note 3 - Commitments and Contingencies” to the consolidated financial statements included in Part II, Item 8 of this report is incorporated herein by reference. Item 4. (Removed and Reserved) PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Since August 18, 2004, our common stock has been trading on the NASDAQ Global Select Market under the symbol “TZOO.” From December 30, 2003 to August 17, 2004, our common stock was traded on the NASDAQ SmallCap Market under the symbol “TZOO.” The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported by NASDAQ. On February 6, 2013, the last reported sales price of our common stock on the NASDAQ Global Select Market was $21.17 per share. As of February 6, 2013, there were approximately 85,000 stockholders of record of our shares. 24 High Low 2012: Fourth Quarter $23.95 $16.74 Third Quarter $24.25 $19.55 Second Quarter $27.46 $21.06 First Quarter $30.85 $23.00 2011: Fourth Quarter $33.28 $21.02 Third Quarter $87.79 $21.99 Second Quarter $101.00 $55.64 First Quarter $68.48 $37.70  Dividend Policy Travelzoo has not declared or paid any cash dividends since inception and does not expect to pay cash dividends for the foreseeable future. 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. Sales of Unregistered Securities There were no unregistered sales of equity securities during fiscal year 2012. Repurchases of Equity Securities Stock repurchase activity during the three months ended December 31, 2012 was as follows: 25 Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Programs Maximum Shares that May Yet be Purchased Under the Programs (1) October 1, 2012 - October 31, 2012 — — — 839,000 November 1, 2012 - November 30, 2012 231,000 $ 17.34 231,000 608,000 December 1, 2012 - December 31, 2012 208,000 $ 18.73 208,000 400,000 439,000 439,000 (1) In July 2012, our Board authorized a stock repurchase program that provided for the repurchase of up to 1,000,000 shares of our common stock. As of December 31, 2012 , 600,000 shares were repurchased and therefore there were 400,000 shares remaining to be repurchased under this program.  Performance Graph The following graph compares, for the dates specified, the cumulative total stockholder return for Travelzoo, the NASDAQ Stock Market (U.S. companies) Index (the “NASDAQ Market Index”), and the Standard & Poor's 500 Publishing Index (the “S&P 500 Publishing”). Measurement points are the last trading day of each of the Company's fiscal years ended December 31, 2007, December 31, 2008, December 31, 2009, December 31, 2010, December 31, 2011, and December 31, 2012. The graph assumes that $100 was invested on December 31, 2007 in the Common Stock of the Company, the NASDAQ Market Index and the S&P 500 Publishing and assumes reinvestment of any dividends. The stock price performance on the following graph is not indicative of future stock price performance. 26 Measurement Point 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 Travelzoo Inc. $ 100 $ 40.64 $ 89.84 $ 302.49 $ 179.68 $ 138.82 NASDAQ Market Index $ 100 $ 59.46 $ 85.55 $ 100.02 $ 98.22 $ 113.85 S&P 500 Publishing $ 100 $ 37.18 $ 56.61 $ 60.46 $ 67.24 $ 84.35  Item 6. Selected Consolidated Financial Data The selected consolidated financial data set forth below are derived from our 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. Consolidated Statement of Operations Data: Consolidated Balance Sheet Data: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations, assumptions, estimates and projections about Travelzoo and our industry. These forward-looking statements are subject to the many risks and uncertainties that exist in our operations and business environment that may cause actual results, performance or achievements of Travelzoo to be different from those expected or anticipated in the forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may”, “will”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”, “believes”, “anticipates”, “plans”, “expects”, “intends”, and similar expressions are intended to identify forward-looking statements. 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 SEC filings. The forward-looking statements included in this report reflect the beliefs of our management on the date of this report. Travelzoo undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other circumstances occur in the future. Overview Year Ended December 31, 2012 2011 2010 2009 2008 (In thousands, except per share data) Revenues $ 151,168 $ 148,342 $ 112,784 $ 93,973 $ 80,817 Income from continuing operations 25,489 15,022 23,512 13,708 13,312 Income from continuing operations, net of taxes 18,198 3,319 13,157 6,418 5,913 Loss from discontinued operations, net of taxes — — — (1,233 ) (10,029 ) Net income (loss) 18,198 3,319 13,157 5,185 (4,116 ) Basic net income (loss) per share from: Continuing operations $ 1.15 $ 0.20 $ 0.80 $ 0.39 $ 0.41 Discontinued operations $ — $ — $ — $ (0.08 ) $ (0.70 ) Net income (loss) per share $ 1.15 $ 0.20 $ 0.80 $ 0.32 $ (0.29 ) Diluted net income (loss) per share from: Continuing operations $ 1.14 $ 0.20 $ 0.80 $ 0.39 $ 0.37 Discontinued operations $ — $ — $ — $ (0.08 ) $ (0.62 ) Net income (loss) per share $ 1.14 $ 0.20 $ 0.80 $ 0.32 $ (0.25 ) Shares used in per share calculation — basic 15,866 16,315 16,444 16,408 14,273 Shares used in per share calculation — diluted 15,901 16,414 16,453 16,416 16,190 Year Ended December 31, 2012 2011 2010 2009 2008 (In thousands, except per share data) Cash and cash equivalents $ 61,169 $ 38,744 $ 41,184 $ 19,776 $ 14,179 Working capital $ 42,654 $ 28,411 $ 39,563 $ 27,250 $ 17,642 Total assets $ 97,833 $ 68,348 $ 66,002 $ 46,132 $ 35,322 Stockholders' equity $ 43,339 $ 34,759 $ 45,889 $ 30,771 $ 20,763  27  Travelzoo Inc. (the “Company”, or “Travelzoo”) is a global Internet media company. We inform over 26 million subscribers in North America, Europe and Asia Pacific, as well as millions of website users, about the best travel and entertainment deals available from thousands of companies. Our deal experts source, research and test-book offers, recommending only those that meet Travelzoo’s rigorous quality standards. We provide travel, entertainment and local businesses with a fast, flexible, and cost-effective way to reach millions of consumers. Our revenues are generated primarily from advertising fees. In Asia Pacific, the Travelzoo business is operated by Travelzoo (Asia) Limited and Travelzoo Japan K.K. under a License agreement with Travelzoo Inc. Our publications and products include the Travelzoo websites (www.travelzoo.com, www.travelzoo.ca, www.travelzoo.co.uk, www.travelzoo.de, www.travelzoo.es, www.travelzoo.fr, among others), the Travelzoo Top 20 e-mail newsletter, and the Newsflash e-mail alert service. We operate SuperSearch, a pay-per-click travel search tool, and the Travelzoo Network , a network of third-party websites that list deals published by Travelzoo. We also operate Fly.com , a travel search engine that allows users to quickly and easily find the best prices on flights from hundreds of airlines and online travel agencies. In addition, we operate Local Deals and Getaway services, which allow our subscribers to purchase vouchers for deals from local businesses such as spas, hotels and restaurants through the Travelzoo website. Vouchers are redeemable at the local businesses during the promotional period. We receive a percentage of the face value of the voucher from the local businesses. In 2009, we sold of our Asia Pacific operating segment, including our wholly-owned subsidiaries, Travelzoo (Asia) Limited and Travelzoo Japan K.K., to Azzurro Capital Inc. We have not had significant ongoing involvement with the operations of the Asia Pacific operating segment and have not had material economic interests in the Asia Pacific operating segment since the completion of the sale. Starting November 1, 2009, the Travelzoo websites in Asia Pacific (cn.travelzoo.com, www.travelzoo.co.jp, www.travelzoo.com.au, www.travelzoo.com.hk, www.travelzoo.com.tw, among others), the Travelzoo Top 20 e-mail newsletters in Asia Pacific and the Newsflash e-mail alert service in Asia Pacific have been published by Travelzoo (Asia) Limited and Travelzoo Japan K.K., under a license agreement with the Company. There is a reciprocal revenue-sharing agreement among the entities operating the Travelzoo business in Asia Pacific and the Company related to cross-selling audiences, channels and offers. More than 2,000 companies use our services, including Air New Zealand, Apple Vacation, British Airways, Harrah’s Entertainment, Expedia, Fairmont Hotels and Resorts, Hilton Hotels, Interstate Hotels & Resorts, JetBlue Airways, Key Tours International, Liberty Travel, Marriott Hotels, Royal Caribbean, Spirit Airlines, Starwood Hotels & Resorts Worldwide, Travelocity, United Airlines, and Virgin Atlantic. We have two operating segments based on geographic regions: North America and Europe. North America consists of our operations in Canada and the U.S. Europe consists of our operations in France, Germany, Spain, and the U.K. For the year ended December 31, 2012, European operations were 28% of revenues. Financial information with respect to our business segments and certain financial information about geographic areas appears in Note 8 to the accompanying consolidated financial statements. When evaluating the financial condition and operating performance of the Company, management focuses on financial and non-financial indicators such as growth in the number of subscribers to the Company’s newsletters and page views of the homepages of the Travelzoo websites, operating margin, growth in revenues in the absolute and relative to the growth in reach of the Company’s publications measured as revenue per subscriber and revenue per employee as a measure of productivity. How We Generate Revenue Our revenues are advertising revenues, consisting primarily of listing fees paid by travel, entertainment and local businesses to advertise their offers on Travelzoo’s media properties. Listing fees are based on audience reach, placement, number of listings, number of impressions, number of clicks, number of referrals, or percentage of the face value of vouchers sold. Insertion orders are typically for periods between one month and twelve months and are not automatically renewed. Merchant agreements for Local Deals and Getaway advertisers are typically for twelve months and are not automatically renewed. We have three separate groups of our advertising products: Travel, Search and Local. Our Travel category of revenue includes the publishing revenue for negotiated high-quality deals from travel companies, such as hotels, airlines, cruises or car rentals and includes products such as Top 20 , Website, Newsflash, Travelzoo Network as well as Getaway vouchers. The revenues generated from these products are based upon a fee for number of e-mails delivered to our audience, a fee for clicks delivered to the advertisers, a fee for placement of the advertising on our website or a fee based on a percentage of the face value of vouchers sold or other items sold. We recognize revenue upon delivery of the e-mails, delivery of the clicks, over the period of placement of the advertising and upon the sale of the vouchers or other items sold. 28  Our Search category of revenue includes comparison shopping tools for consumers to quickly and easily compare airfares, hotel and car rental prices and includes SuperSearch and Fly.com products. The revenues generated from these products are based upon a fee for clicks delivered to the advertisers or a fee for clicks delivered to advertisers that resulted in revenue for advertisers (i.e. successful clicks). We recognize revenue upon delivery of the clicks or successful clicks. Our Local category of revenue includes the publishing revenue for negotiated high-quality deals from local businesses, such as restaurants, spas, shows, and other activities and includes Local Deals vouchers and entertainment offers (vouchers and direct bookings). The revenues generated from these products are based upon a percentage of the face value of vouchers or items sold or a fee for clicks delivered to the advertisers. We recognize revenue upon the sale of the vouchers, when we receive notification of the direct bookings or upon delivery of the clicks. The Company earns a fee for acting as an agent in these transactions, which is recorded on a net basis and is included in revenue upon completion of the voucher sale. Certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon expiration, which we recognize as revenue after the expiration of the redemption period and after there are no further obligations to provide funds to merchants, subscribers or others. Trends in Our Business Our ability to generate revenues in the future depends on numerous factors such as our ability to sell more advertising to existing and new advertisers, our ability to increase our audience reach and advertising rates and our ability to develop and launch new products. Our current revenue model depends on advertising fees paid primarily by travel, entertainment and local businesses. A number of factors can influence whether current and new advertisers decide to advertise their offers with us. We have been impacted and expect to continue to be impacted by external factors such as the shift from offline to online advertising, the relative health of the economy, competition and the introduction of new methods of advertising. For example, the consolidation of the airline industry reduced our revenues generated from this sector; the reduction of capacity in the airline industry reduced demand to advertise for excess capacity; the introduction of new voucher-based products offered by competitive companies impacted our ability to sell our existing advertising products; the reduction in spending by travel intermediaries due to their focus on improving profitability, the trend towards mobile usage by consumers, the willingness of consumers to purchase the deals we advertise, the willingness of certain competitors to grow their business unprofitably and the economic uncertainty in Europe impacted advertiser’s willingness to purchase our advertising. In addition, we have been impacted and expect to continue to be impacted by internal factors such as introduction of new advertising products, hiring and relying on key employees for the continued maintenance and growth of our business and ensuring our advertising products continue to attract the audience that advertisers desire. Existing advertisers may shift from one advertising service (e.g. Top 20 ) to another (e.g. Local Deals and Getaway ). These shifts between advertising services by advertisers could result in no incremental revenue or less revenue than in previous periods depending on the amount purchased by the advertisers, and in particular, with Local Deals and Getaway , depending on how many vouchers are purchased by subscribers. Since the introduction of Local Deals in 2010 and Getaway in 2011, we have seen a decline in the number of average vouchers sold per deal. Our ability to continue to generate advertising revenue depends heavily upon our ability to maintain and grow an attractive audience to reach with our advertising publications. We monitor our subscribers and page views of our websites to assess our efforts to maintain and grow our audience reach. We obtain additional subscribers and activity on our websites by acquiring traffic from Internet search companies. The costs to grow our audience have had, and we expect will continue to have, a significant impact on our financial results and can vary from period to period. We may have to increase our expenditures on acquiring traffic to continue to grow or maintain our reach of our publications due to competition. We believe that we can increase our advertising rates only if the reach of our publications increases. We do not know if we will be able to increase the reach of our publications. If we are able to increase the reach of our publications, we still may not be able to or want to increase rates given market conditions such as intense competition in our industry. We have not had any significant rate increase in recent years due to intense competition in our industry. Even if we increase our rates, based upon the increased price this may reduce the amount of advertisers willing to advertise for the increased rates and therefore decrease our revenue. We do not know what our cost of revenues as a percentage of revenues will be in future periods. Our cost of revenues will increase if the number of searches performed on Fly.com increases because we pay a fee based on the number of searches performed on Fly.com . Our cost of revenues will increase if the face value of vouchers that we sell for Local Deals and Getaway increases or the total number of vouchers sold increases because we have credit card fees based upon face value of vouchers sold, customer service costs related to vouchers sold and subscriber refunds on vouchers sold. We expect fluctuations 29  of cost of revenues as a percentage of revenues from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations. We do not know what our sales and marketing expenses as a percentage of revenue will be in future periods. Increased competition in our industry may require us to increase advertising for our brand and for our products. In order to increase the reach of our publications, we have to acquire a significant number of new subscribers in every quarter and continue to promote our brand. One significant factor that impacts our advertising expenses is the average cost per acquisition of a new subscriber. Increases in the average cost of acquiring new subscribers may result in an increase of sales and marketing expenses as a percentage of revenue. We believe that the average cost per acquisition depends mainly on the advertising rates which we pay for media buys, our ability to manage our subscriber acquisition efforts successfully, and the degree of competition in our industry. We may decide to accelerate our subscriber acquisition for various strategic and tactical reasons and, as a result, increase our marketing expenses. We may see a unique opportunity for a brand marketing campaign that will result in an increase of marketing expenses. Further, we expect our strategy to replicate our business model in selected foreign markets to result in a significant increase in our sales and marketing expenses and have a material adverse impact on our results of operations. Due to the continued desire to grow our business both in the North America and Europe we expect relatively high level of sales and marketing expenses in the foreseeable future. We expect fluctuations of sales and marketing expenses as a percentage of revenue from year to year and from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations. We expect increased marketing expense to spur continued growth in subscribers and revenue in future periods; however, we cannot be assured of this due to the many factors that impact our growth in subscribers and revenue. We expect to adjust the level of such incremental spending during any given quarter based upon market conditions as well as our performance in each quarter. We do not know what our general and administrative expenses as a percentage of revenue will be in future periods. There may be fluctuations that have a material impact on our results of operations. We expect our headcount to continue to increase in the future. The Company’s headcount is one of the main drivers of general and administrative expenses. Therefore, we expect our absolute general and administrative expenses to continue to increase. We expect our continued expansion into foreign markets and development of new advertising formats to result in a significant additional increase in our general and administrative expenses. Our general and administrative expenses as a percentage of revenue may also fluctuate depending on the number of requests received related to a program under which the Company intends to make cash payments to people who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit requests to convert shares into Travelzoo Inc. within the required time period. We expect an increase in legal and professional fees due primarily to our defense of legal proceedings and claims and compliance efforts. In addition, we expect to incur additional costs related to the development of our hotel booking platform capabilities. We do not know what our income taxes will be in future periods. There may be fluctuations that have a material impact on our results of operations. Our income taxes are dependent on numerous factors such as the geographic mix of our taxable income, federal and state and foreign country tax law and regulations and changes thereto, the amount of accumulated net operating loss we have to offset current taxable income, the determination of whether valuation allowances for certain tax assets are required or not, including our valuation allowance on our European loss carryforwards, audits of prior years' tax returns resulting in adjustments, resolution of uncertain tax positions and different treatment for certain items for tax versus books such as the disposition of our Asia business in 2009 or our State of Delaware settlement during 2011. We expect fluctuations in our income taxes from year to year and from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations. The key elements of our growth strategy include building strong brand awareness, increasing reach, maintaining a high-quality user base, increasing the number of advertisers, providing advertisers with excellent service and replicating our business model in foreign markets, as well as developing new products that keep pace with changes in consumer preferences and technology, such as the trend toward mobile usage by consumers. We expect to continue our efforts to grow; however, we may not grow or we may experience slower growth. Some examples of our efforts to expand our business internationally since our inception from the U.S. have been expansion to the U.K. in 2005, Canada in 2006, Germany in 2006, France in 2007 and Spain in 2008. We also have launched new products to grow our revenue such as the introduction of Fly.com in 2009, Local Deals in 2010, Getaway in 2011 as well as our mobile application launches in 2011 and 2012. We bought an online hotel booking platform to serve hotels and to facilitate a hotel commission-based offering. We believe that we can sell more advertising only if the market for online advertising continues to grow and if we can maintain or increase our market share. We believe that the market for advertising continues to shift from offline to online. We do not know if we will be able to maintain or increase our market share. We do not know if we will be able to increase the number of advertisers in the future. We do not know if we will have market acceptance of our new products or whether the market will continue to accept our existing products. 30  Results of Operations The following table sets forth, as a percentage of total revenues, the results from our operations for the periods indicated. 31 Year Ended December 31, 2012 2011 2010 Revenues 100.0 % 100.0 % 100.0 % Cost of revenues 10.4 9.0 6.4 Gross profit 89.6 91.0 93.6 Operating expenses: Sales and marketing 45.1 44.1 48.3 General and administrative 25.6 23.3 24.4 Unexchanged promotional merger shares 2.0 13.5 — Total operating expenses 72.7 80.9 72.7 Income from operations 16.9 10.1 20.9 Other income and expenses, net 0.2 0.2 (0.1 ) Income before income taxes 17.1 10.3 20.8 Income taxes 5.0 8.1 9.2 Net income 12.1 % 2.2 % 11.6 %  Operating Metrics The following table sets forth operating metrics in North America and Europe for the years ended December 31, 2012, 2011 and 2010 : 32 Years Ended December 31, 2012 2011 2010 North America Total Subscribers 16,087,000 15,660,000 14,274,000 Average cost per acquisition of a new subscriber $ 1.23 $ 1.15 $ 1.62 Revenue per employee (2) $ 445 $ 510 $ 636 Revenue per subscriber (3) $ 6.95 $ 7.61 $ 6.62 Europe Total Subscribers 6,371,000 5,806,000 4,614,000 Average cost per acquisition of a new subscriber $ 2.54 $ 2.86 $ 3.55 Revenue per employee (2) $ 291 $ 322 $ 291 Revenue per subscriber (3) $ 7.30 $ 8.62 $ 6.98 Consolidated Total Subscribers (1) 22,458,000 21,466,000 18,888,000 Average cost per acquisition of a new subscriber $ 1.70 $ 1.76 $ 2.28 Revenue per employee (2) $ 388 $ 441 $ 504 Revenue per subscriber (3) $ 7.04 $ 7.85 $ 6.69 (1) In Asia Pacific, the Travelzoo business is operated by Travelzoo (Asia) Limited and Travelzoo Japan K.K. under a license agreement with Travelzoo Inc. and is not owned by the Company. These total subscriber amounts exclude Asia Pacific subscribers of 3,700,000, 3,600,000 and 3,100,000 for the years ended December 31, 2012, 2011 and 2010, respectively. (2) Annualized revenue divided by number of employees at the end of the year. (3) Annualized revenue divided by number of subscribers at the beginning of the year.  Revenues The following table sets forth the breakdown of revenues by type and segment for the years ended December 31, 2012 , 2011 and 2010. Travel revenue includes travel publications ( Top 20 , Website , Newsflash , Travelzoo Network ) and Getaway vouchers. Search revenue includes SuperSearch and Fly.com . Local revenue includes Local Deals vouchers and Entertainment. North America North America revenues increased $238,000 in 2012 compared to 2011. This increase was primarily due to an increase in Local revenues, offset by a decrease in Search and Travel revenues. The increase in Local revenue of $2.3 million was primarily due to the increased number of Local Deals vouchers sold. The decrease in Travel revenue of $1.2 million was primarily due to lower Top 20 and Newsflash revenue related to certain online booking engines, hotels and airlines, offset by an increase from Getaway due to increased number of Getaway vouchers sold. The decrease in Search revenue of $879,000 was primarily due to the reduced number of clicks that generate revenue as a result from our reduced spending on traffic acquisition. North America revenues increased $20.9 million in 2011 compared to 2010. This increase was primarily due to growth of Travel and Local revenues offset by a decrease in Search revenue. The increase in Travel revenue of $4.1 million was primarily due to the introduction of Getaway offset by lower Top 20 and Newsflash revenue related to airline consolidation and increased competition. The decrease in Search revenue of $934,000 was primarily due to the reduced number of clicks that generate revenue as a result from our reduced spending on traffic acquisition as well as lower average cost-per-click paid by our advertisers. The increase in Local revenue of $17.7 million was primarily due to the increased number of Local Deals sold. Europe Europe revenues increased $2.6 million in 2012 compared to 2011. This increase was primarily due to growth of Travel and Local revenues offset by a decrease in Search revenue. The increase in Travel revenue of $2.4 million was primarily due to an increase from Getaway due to increased number of Getaway vouchers sold. The increase in Local revenue of $1.1 million was primarily due to the increased number of Local Deals sold. The decrease in Search revenue of $940,000 was primarily due to the decreased number of clicks that generate revenue as a result from decreased spending on traffic acquisition. 33 Years Ended December 31, (In thousands) 2012 2011 2010 North America Travel $ 56,636 $ 57,795 $ 53,693 Search 23,101 23,980 24,914 Local 29,050 26,774 9,054 Total North America revenues $ 108,787 $ 108,549 $ 87,661 Europe Travel $ 29,844 $ 27,434 $ 21,786 Search 4,149 5,089 2,404 Local 8,388 7,270 933 Total Europe revenues $ 42,381 $ 39,793 $ 25,123 Consolidated Travel $ 86,480 $ 85,229 $ 75,479 Search 27,250 29,069 27,318 Local 37,438 34,044 9,987 Total revenues $ 151,168 $ 148,342 $ 112,784  Europe revenues increased $14.7 million in 2011 compared to 2010. This increase was due to growth of Travel, Search and Local revenues. The increase in Travel revenue of $5.6 million was primarily due to the introduction of Getaway , increase in Top 20 and Newsflash revenue from the increased number of emails delivered to our audience driven by advertiser demand and relatively stable average cost-per-email offset by some decrease due to increased competition and the economic uncertainty in Europe. The increase in Search revenue of $2.7 million was primarily due to the increased number of clicks that generate revenue as a result of increased spending on traffic acquisition as well as higher average cost-per-click paid by our advertisers. The increase in Local revenue of $6.3 million was primarily due to the launch of our Local Deals in late 2010. For the years ended December 31, 2012, 2011 and 2010, none of our customers accounted for 10% or more of our revenue. Foreign currency movements relative to the U.S. dollar negatively impacted our revenues from our operations in Europe by approximately $1.4 million, $1.7 million and $703,000 for years ended December 31, 2012, 2011 and 2010, respectively. Cost of Revenues Cost of revenues consists primarily of network expenses, including fees we pay for co-location services and depreciation and maintenance of network equipment, payments made to third-party partners of the Travelzoo Network , fees we pay related to user searches on Fly.com , amortization of capitalized website development costs, credit card fees, certain estimated subscriber refunds and customer service costs associated with vouchers we sell, and salary expenses associated with network operations and customer service staff. Cost of revenues was $15.7 million, $13.3 million and $7.3 million for the years ended December 31, 2012, 2011 and 2010 , respectively. Cost of revenue increased $2.5 million in 2012 compared to 2011. This increase was primarily due to an increase of $657,000 in payments made to third-party partners of the Travelzoo Network, an increase in Local Deals and Getaway costs including a $643,000 in credit card fees and a $521,000 increase in salary and employee related expenses due primarily to an increase in customer service headcount. Cost of revenue increased $6.1 million in 2011 compared to 2010. This increase was primarily due to an increase in Local Deals and Getaway costs including $2.0 million in credit card fees, $1.6 million in subscriber refunds and $1.2 million of customer service and professional services costs. In addition, there was an increase of $625,000 in payments made to third-party partners of the Travelzoo Network . Operating Expenses Sales and Marketing Sales and marketing expenses consist primarily of advertising and promotional expenses, salary expenses associated with sales, marketing and production staff, expenses related to our participation in industry conferences, and public relations expenses. Sales and marketing expenses were $68.2 million, $65.5 million and $54.5 million for 2012, 2011 and 2010, respectively. Advertising expenses accounted for 41%, 49% and 58%, respectively, of total sales and marketing expenses and consisted primarily of online advertising which we refer to as traffic acquisition cost and subscriber acquisition costs. The goal of our advertising was to acquire new subscribers for our e-mail products, increase the traffic to our websites, and increase brand awareness. Sales and marketing expenses increased $2.7 million in 2012 compared to 2011. The increase was primarily due to a $6.3 million increase in salary and employee related expenses due primarily to an increase in headcount, a $1.0 million increase in Search traffic acquisition costs, offset by a $2.0 million dollar decrease in television advertising expense and a $2.6 million decrease in subscriber acquisition costs. Sales and marketing expenses increased $11.0 million in 2011 compared to 2010. This increase was primarily due to a $10.2 million increase in salary and employee related expenses due in part to an increase in headcount, a $2.0 million dollar increase in television brand advertising expense, a $1.3 million increase in Search traffic acquisition costs, offset by a $2.8 million decrease in subscriber acquisition costs. Despite reduced subscriber acquisition spending, we believe we continued to add new subscribers due to factors such as our website requiring visitors to subscribe to view most deals and the traffic associated with the introduction of Local Deals and Getaway . 34  General and Administrative General and administrative expenses consist primarily of compensation for administrative, executive, and software development staff, fees for professional services, rent, bad debt expense, amortization of intangible assets, and general office expense. General and administrative expenses were $38.7 million, $34.5 million and $27.6 million for 2012, 2011 and 2010, respectively. General and administrative expenses increased $4.1 million in 2012 compared to 2011. The increase was primarily due to a $2.2 million increase in salary and employee related expenses due primarily to an increase in headcount, and a $1.3 million increase in professional services and other expenses and a $453,000 increase in rent, office and insurance expense due to the continuing expansion of our business. General and administrative expenses increased $7.0 million in 2011 compared to 2010. The increase was primarily due to a $3.2 million increase in salary and employee related expenses due in part to an increase in headcount, a $2.3 million increase in rent, office and insurance expense due to the continuing expansion of our business, and a $1.1 million increase in professional services expense. Unexchanged Promotional Merger Shares On April 21, 2011, the Company entered into an agreement with the State of Delaware resolving all claims relating to a previously-announced unclaimed property review. The primary issue raised in the preliminary findings from the review, received by the Company on April 12, 2011, concerned the shares of Travelzoo which have not been claimed by former shareholders of Travelzoo.com Corporation following a 2002 merger, as previously disclosed in the company’s report on Form 10-K. In the preliminary findings under the unclaimed property review, up to 3.0 million shares were identified as “demandable” under Delaware escheat laws. While the Company continues to take the position that such shares were a promotional incentive and were issuable only to persons who establish their eligibility as shareholders, the Company determined that it was in its best interest to promptly resolve all claims relating to the unclaimed property review. Under the terms of the agreement, the Company made a $20.0 million cash payment to the State of Delaware on April 27, 2011 and received a complete release of those claims. The $20.0 million payment was recorded as an expense in the three months ended March 31, 2011. Since March 2012, the Company has become subject to unclaimed property reviews by most of the other states in the U.S. that relate primarily to the unexchanged promotional merger shares, which were not covered by the settlement and release by the State of Delaware. During the three months ended March 31, 2012, the Company recorded a $3.0 million charge related to this unexchanged promotional merger shares contingency. While the Company believes it has meritorious defenses regarding the applicability of escheat rights related to this unexchanged promotional merger shares contingency, the ultimate resolution of this matter may take longer than one year. If the claims for all of the additional shares referred to in the preliminary findings were upheld in full, based on the closing price of the Company’s shares at the end of December 31, 2012 , the cost to the Company would be approximately $ 18.1 million in excess of the amount accrued, plus any interest or penalties, which might be applicable. In addition, the total amount of exposure of this contingency is dependent upon the manner in which each state applies its unclaimed property laws. The Company is not able to predict the ultimate amount or outcome of any current or future claims which have been or might be asserted relating to the unissued shares. See Note 1 to the consolidated financial statements for further information on the unexchanged promotional merger shares contingency. Interest Income and Other Interest income and other consisted primarily of interest earned on cash, cash equivalents and restricted cash as well as income from Travelzoo Asia Pacific. Interest income and other was $305,000, $383,000 and $166,000 for 2012, 2011 and 2010, respectively. Interest income and other decreased $78,000 from 2011 to 2012. This decrease was primarily due to lower income related to Travelzoo Asia Pacific offset by increased interest income due to higher cash balances. Interest income and other increased $217,000 from 2010 to 2011. This increase was primarily due to income related to Travelzoo Asia Pacific offset by decreased interest income from lower cash balances. Income Taxes Our income is generally taxed in the U.S. and Canada and our income tax provision reflect federal, state and country statutory rates applicable to our levels of income, adjusted to take into account expenses that are treated as having no 35  recognizable tax benefit. Income tax expense was $7.6 million, $12.0 million and $10.3 million for 2012, 2011 and 2010, respectively. Our effective tax rate was 29%, 78% and 44% for 2012, 2011 and 2010, respectively. Our effective tax rate decreased in 2012 compared to 2011 due primarily to the $20.0 million expense for the settlement with the State of Delaware that was treated as having no recognizable tax benefits in the year ended December 31, 2011. In the year ended December 31, 2012, the $3.0 million accrued expense for unexchanged promotional merger shares was treated as having no recognizable tax benefit. We expect that our effective tax rate in future periods may fluctuate depending on the geographic mix of our worldwide taxable income, total amount of expenses representing payments to former stockholders, losses or gains incurred by our operations in Canada and Europe, the use of accumulated losses to offset current taxable income and need for valuation allowances on certain tax assets, if any. The Company has a valuation allowance of approximately $1.1 million as of December 31, 2012 related to foreign net operating loss carryforwards of approximately $8.3 million for which it is more likely than not that the tax benefit will not be realized. These net operating loss carryforwards do not expire. At December 31, 2012, the Company determined that approximately $ 800,000 of the total foreign net operating loss carryforward deferred tax assets will more likely than not be realized in future periods. Therefore, the Company recognized $ 800,000 of deferred tax assets associated with the foreign net operating loss carryforwards, as a reduction in the valuation allowance at December 31, 2012. United States income and foreign withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries. The undistributed earnings on a book basis for the non-U.S. subsidiaries are approximately $ 2.0 million . The Company intends to reinvest these earnings indefinitely in its operations outside the U.S. If the undistributed earnings are remitted to the U.S. these amounts would be taxable in the U.S at the current federal and state tax rates net of foreign tax credits. Also, depending on the jurisdiction any distribution may be subject to withholding taxes at rates applicable for that jurisdiction. We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are subject to U.S. federal and certain state tax examinations for years after 2008 and are subject to California tax examinations for years after 2004. We are under examination by federal and state taxing authorities. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, although we cannot assure you that this will be the case given the inherent uncertainties in these examinations. Due to the ongoing tax examinations, we believe it is impractical to determine the amount and timing of these adjustments. Segment Information North America North America revenues increased $238,000 in 2012 compared to 2011 (see “Revenues” above). North America expenses increased $9.1 million from 2011 to 2012. This increase was primarily due to a $6.6 million increase in salary and employee related expenses due in part to a headcount increase, a $2.0 million increase in cost of revenue primarily related to an increase in payments made to third-party partners of the Travelzoo Network, Local Deals and Getaway credit card fees, customer service and certain subscriber refunds, a $1.8 million increase in search traffic acquisition costs, offset by a $2.0 million decrease in television advertising expense and a $794,000 decrease in subscriber acquisition cost. North America revenues increased $20.9 million in 2011 compared to 2010 (see “Revenues” above). North America expenses increased $16.0 million from 2010 to 2011. This increase was primarily due to a $5.3 million increase in cost of revenue primarily related to Local Deals and Getaway credit card fees, customer service and certain subscriber refunds, a $2.0 million dollar increase in television brand advertising expense and an $8.3 million salary and employee related expense due in part to a headcount increase, offset by a $403,000 decrease in search traffic acquisition costs and $1.7 million decrease in subscriber acquisition cost. 36 Year Ended December 31, 2012 2011 2010 ( In thousands) Revenues $ 108,787 $ 108,549 $ 87,661 Income from operations $ 21,481 $ 30,110 $ 24,998 Income from operations as a % of revenues 20 % 28 % 29 %  Europe Europe revenues increased $2.6 million in 2012 compared to 2011 (see “Revenues” above). Europe expenses increased $500,000 from 2011 to 2012. This increase was primarily due to a $451,000 increase in cost of revenue primarily related to an increase in Local Deals and Getaway credit card fees, customer service and certain subscriber refunds, a $2.1 million increase in salary and employee related expense due in part to a headcount increase, offset by a $1.8 million decrease in subscriber acquisition cost. Europe revenues increased $14.7 million in 2011 compared to 2010 (see “Revenues” above). Europe expenses increased $8.3 million from 2010 to 2011. This increase was primarily due to a $1.3 million increase in cost of revenue primarily related to Local Deals and Getaway credit card fees, customer service and certain subscriber refunds, a $1.7 million increase in Search traffic acquisition costs and a $5.1 million increase in salary and employee related expense due in part to a headcount increase, offset by a $1.1 million decrease in subscriber acquisition cost. Foreign currency movements relative to the U.S. dollar negatively impacted our income from our operations in Europe by approximately $16,000, $119,000 and $71,000 for 2012, 2011 and 2010, respectively. Liquidity and Capital Resources As of December 31, 2012 , we had $61.2 million in cash and cash equivalents, of which $25.0 million was held outside the U.S. in certain of our foreign operations. If these assets are distributed to the U.S., we may be subject to additional U.S. taxes in certain circumstances. Cash and cash equivalents increased from $38.7 million as of December 31, 2011 primarily as a result of cash provided by operating activities, offset by cash used in investing and financing activities as explained below. We expect that cash on hand will be sufficient to provide for working capital needs for at least the next 12 months. Net cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Net cash provided by operating activities increased $21.1 million in 2012 compared to 2011. The $21.1 million increase in cash provided by operating activities was due primarily to a $14.9 million increase in net income, an $8.3 million increase in income tax receivable, offset by a $1.8 million decrease in deferred income taxes. The $14.9 million increase in net income was primarily due to a $17.0 million decrease in expenses related to unexchanged promotional merger shares. The increase in the unrecognized tax benefit is related to a deduction taken on the Company's 2011 U.S. federal and state income tax returns for the $ 20.0 million settlement with the State of Delaware. Net cash provided by operating activities decreased $8.3 million in 2011 compared to 2010. This decrease in cash provided by operating activities was primarily due to a $9.8 million decrease in net income, resulting primarily from a $20.0 million settlement to the State of Delaware related to an unclaimed property review, and a $8.9 million decrease in our income tax receivable; offset by a $7.3 million increase in accounts payable and accrued expenses and a $2.2 million increase in accounts receivable. 37 Year Ended December 31, 2012 2011 2010 ( In thousands) Revenues $ 42,381 $ 39,793 $ 25,123 Income from operations $ 7,008 $ 4,912 $ (1,489 ) Income from operations as a % of revenues 17 % 12 % (6 )% Year Ended December 31, 2012 2011 2010 ( In thousands) Net cash provided by operating activities $ 36,700 $ 15,631 $ 23,925 Net cash used in investing activities (3,693 ) (2,460 ) (3,527 ) Net cash used in financing activities (11,509 ) (14,815 ) 1,076 Effect of exchange rate changes on cash and cash equivalents 927 (796 ) (66 ) Net increase (decrease) in cash and cash equivalents $ 22,425 $ (2,440 ) $ 21,408  Net cash used in investing activities increased $1.2 million in 2012 compared to 2011. The $1.2 million increase in cash used in investing activities was due primarily to a $677,000 increase in purchase of intangible assets, a $284,000 increase in purchases of property and equipment and a $272,000 increase in restricted cash. Net cash used in investing activities decreased by $1.0 million in 2011 compared to 2010. This decrease in net cash used in investing activities was primarily due to a $2.2 million decrease in restricted cash, offset by a $1.2 million increase in purchases of property and equipment. Net cash used by financing activities was $11.5 million in 2012 and $14.8 million 2011. Net cash provided by financing activities was $1.1 million for 2010. Net cash used by financing activities in 2012 was due to a $11.5 million repurchase of our common stock. Net cash used by financing activities in 2011 was due to a $15.1 million repurchase of our common stock offset by proceeds from the exercise of stock options and the excess tax benefit from exercise of stock options. The net cash provided by financing activities in 2010 resulted from the cash received from the sale of our Asia Pacific business segment. On April 21, 2011, the Company entered into an agreement which required a $20.0 million cash payment to the State of Delaware resolving all claims relating to the State of Delaware’s unclaimed property review, which related primarily to unexchanged promotional merger shares contingency. Since March 2012, the Company has become subject to unclaimed property reviews by most of the other states in the U.S. that relate primarily to the unexchanged promotional merger shares, which were not covered by the settlement and release by the State of Delaware. During the three months ended March 31, 2012 , the Company recorded a $3.0 million charge related to this unexchanged promotional merger shares contingency. While the Company believes it has meritorious defenses regarding the applicability of escheat rights related to this unexchanged promotional merger shares contingency, the ultimate resolution of this matter may take longer than one year to resolve. If the claims for all of the additional shares referred to in the preliminary findings were upheld in full, based on the closing price of the Company’s shares at the end of December 2012, the cost to the Company would be approximately $ 18.1 million in excess of the amount accrued, plus any interest or penalties which might be applicable. In addition, the total amount of exposure of this contingency is dependent upon the manner in which each state applies its unclaimed property laws. The Company is not able to predict the ultimate amount or outcome of any current or future claims which have been or might be asserted relating to the unissued shares. The Company is continuing its program under which it makes cash payments to people who establish that they satisfy the condition to receive shares of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo Inc. within the required time period. See Note 1 to the accompanying consolidated financial statements for further details. In July 2012, the Company announced a stock repurchase program authorizing the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock. As of December 31, 2012 , the Company repurchased 600,000 shares of common stock for an aggregate purchase price of $ 11.5 million . There are 400,000 shares remaining to be repurchased under this program. 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 development of new products, cash payments to former stockholders of Travelzoo.com Corporation, expansion of our operations, and the amount of resources we devote to promoting awareness of our Travelzoo and Fly.com brands. Since the inception of the program under which we make cash payments to people who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo Inc. within the required time period, we have incurred expenses of $2.9 million. While future payments for this program are expected to decrease, the total cost of this program is still undeterminable because it is dependent on our stock price and on the number of valid requests ultimately received. In addition, we do not know if the current unclaimed property audits that are focused on the unexchanged promotional merger shares will result in additional payments to states or former stockholders of Travelzoo.com Corporation. Consistent with our growth, we have experienced substantial increases in our cost of revenues, sales and marketing expenses and our general and administrative expenses, including increases in product development costs, and we anticipate that these increases will continue for the foreseeable future. We believe cash on hand will be sufficient to pay such costs for at least the next twelve months. In addition, we will continue to evaluate possible investments in businesses, products and technologies, the consummation of any of which would increase our capital requirements. Although we currently believe that we have sufficient capital resources to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months, unanticipated events and opportunities or a less favorable than expected development of our business in Europe with one or more of advertising formats 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. 38  If we sell additional equity or convertible debt securities, the sale could dilute the ownership of our existing stockholders. If we issue debt securities or establish a new credit facility, our fixed obligations could increase, and we may be required to agree to operating covenants that would restrict our operations. We cannot be sure that any such financing will be available in amounts or on terms acceptable to us. If the development of our business is less favorable than expected, we may decide to significantly reduce the size of our operations and marketing expenses in certain markets with the objective of reducing cash outflow. The information set forth under “Note 3 — Commitments and Contingencies” to the consolidated financial statements included in Part II, Item 8 of this report is incorporated herein by reference. Litigation and claims against the Company may result in legal defense costs, settlements or judgments that could have a material impact on our financial condition. The following summarizes our principal contractual commitments as of December 31, 2012 (in thousands): We also have contingencies related to net unrecognized tax benefits of approximately $10.0 million as of December 31, 2012 . We are unable to make reasonably reliable estimates on the timing of the cash settlements with the respective taxing authorities. Critical Accounting Policies We believe that there are a number of accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, reserve for subscriber refunds, allowance for doubtful accounts, income tax and loss contingencies. These policies, and our procedures related to these policies, are described in detail below. Revenue Recognition We recognize revenue on arrangements in accordance with the SEC Staff Accounting Bulletin for revenue recognition. We recognize advertising revenues in the period in which the advertisement is displayed, provided that evidence of an arrangement exists, the fees are fixed or determinable and collection of the resulting receivable is reasonably assured. Effective January 1, 2011, we adopted ASU 2009-13. The adoption of this new accounting standard had no material impact on the Company’s consolidated results of operations. If fixed-fee advertising is displayed over a term greater than one month, revenues are recognized ratably over the period as described below. The majority of insertion orders have terms that begin and end in a quarterly reporting period. In the cases where at the end of a quarterly reporting period the term of an insertion order is not complete, the Company allocates the total arrangement fee to each element based on the relative estimated selling price of each element. The Company uses prices stated on its internal rate card, which represents stand-alone sales prices, to establish estimated selling prices. The stand-alone price is the price that would be charged if the advertiser purchased only the individual insertion. Fees for variable-fee advertising arrangements are recognized based on the number of impressions displayed, number of clicks delivered, or number of referrals generated during the period. Under these policies, no revenue is recognized unless persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is deemed reasonably assured. The Company evaluates each of these criteria as follows: 39 2013 2014 2015 2016 2017 Thereafter Total Operating leases $ 5,049 $ 2,669 $ 2,507 $ 1,969 $ 975 $ 2,370 $ 15,539 Purchase obligations 1,182 688 205 17 — — 2,092 Total commitments $ 6,231 $ 3,357 $ 2,712 $ 1,986 $ 975 $ 2,370 $ 17,631 • Evidence of an arrangement. We consider an insertion order signed by the advertiser or its agency to be evidence of an arrangement. • Delivery. Delivery is considered to occur when the advertising has been displayed and, if applicable, the click-throughs have been delivered. • Fixed or determinable fee. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard.  Revenues from advertising sold to advertisers through agencies are reported at the net amount billed to the agency. The Company started selling vouchers for Local Deals in third quarter 2010 and Getaway in second quarter 2011, from local businesses such as spas, hotels and restaurants. The Company earns a fee for acting as an agent in these transactions which is recorded on a net basis and is included in revenue upon completion of the voucher sale. Certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon expiration, which we recognize as revenue after the expiration of the redemption period and after there are no further obligations to provide funds to merchants, subscribers or others. Reserve for Subscriber Refunds We record an estimated reserve for subscriber refunds based on our historical experience at the time revenue is recorded for Local Deals and Getaway voucher sales. We accrue costs associated with refunds in accrued expenses on the consolidated balance sheets. We consider many key factors such as the historical refunds based upon the time lag since the sale, historical reasons for refunds, time period that remains until the deal expiration date, any changes in refund procedures and estimates of redemptions and breakage. Should any of these factors change, the estimates made by management will also change, which could impact the level of our future reserves for subscriber refunds. Specifically, if the financial condition of our advertisers, the business that is providing the vouchered service, were to deteriorate, affecting their ability to provide the services to our subscribers, additional reserves for subscriber refunds may be required. Estimated subscriber refunds that are determined to be recoverable from the merchant are recorded in the consolidated statements of operations as a reduction to revenue. Estimated subscriber refunds that are determined not to be recoverable from the merchant are presented as a cost of revenue. If our judgments regarding estimated subscriber refunds are inaccurate, reported results of operations could differ from the amount we previously accrued. Allowance for Doubtful Accounts We record a provision for doubtful accounts based on our historical experience of write-offs and a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, management considers the age of the accounts receivable, our historical write-offs, the creditworthiness of the advertiser, the economic conditions of the advertiser’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 advertisers were to deteriorate, affecting their ability to make payments, additional provision for doubtful accounts may be required. Income Taxes We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest. 40 • Collection is deemed reasonably assured. We conduct a credit review for all transactions at the time of the arrangement to determine the creditworthiness of the advertiser. Collection is deemed reasonably assured if we expect that the advertiser will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not reasonably assured, then we defer the revenue and recognize the revenue upon cash collection. Collection is deemed not reasonably assured when an advertiser is perceived to be in financial distress, which may be evidenced by weak industry conditions, a bankruptcy filing, or previously billed amounts that are past due.  Our effective tax rates have differed from the statutory rate primarily due to the tax impact of foreign operations, state taxes, certain benefits realized related to stock option activities, research and experimentation tax credits, the extent that our earnings are indefinitely reinvested outside the U.S. and tax asset valuation allowance determinations, including on certain loss carryforwards. For the years ended December 31, 2012 and 2011, our effective tax rates were 29% and 78%, respectively. Our future effective tax rates could be materially impacted by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, changes in the deferred tax assets or liabilities, changes in tax asset valuation allowance determinations including our valuation allowance on our European loss carryforwards, changes in our judgment about whether certain foreign earnings are indefinitely reinvested outside the U.S., or changes in tax laws, regulations, and accounting principles. In addition, we are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Loss Contingencies We are involved in claims, suits, and proceedings arising from the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. Such claim proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows. We have several known loss contingencies such as our liability to former stockholders of Travelzoo.com Corporation that may be realized as a result of our cash program for these claimants, State unclaimed property claims or otherwise and several lawsuits, both class actions and derivative lawsuits, as well as a patent infringement lawsuit. Please refer to Note 3 to the consolidated financial statements for further details about our loss contingencies. Recent Accounting Pronouncements See “Note 1 — Summary of Significant Accounting Policies” to the consolidated financial statements included in this report, regarding the impact of certain recent accounting pronouncements on our consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We believe that our potential exposure to changes in market interest rates is not material. The Company has no outstanding debt and is not a party to any derivative transactions. We invest in highly liquid investments with short maturities. Accordingly, we do not expect any material loss from these investments. Our operations in Canada expose us to foreign currency risk associated with agreements being denominated in Canadian Dollars. Our operations in Europe expose us to foreign currency risk associated with agreements being denominated in British Pound Sterling and Euros. We are exposed to foreign currency risk associated with fluctuations of these currencies as the financial position and operating results of our operations in Canada and Europe are translated into U.S. Dollars for consolidation purposes. We do not use derivative instruments to hedge these exposures. We are a net receiver of U.S. Dollars from our foreign subsidiaries and therefore benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to the foreign currency used by the foreign subsidiary as its functional currency. We have performed a sensitivity analysis as of December 31, 2012 , using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar with all other variables held constant. The foreign currency exchange rates we used were based on market rates in effect at December 31, 2012 . The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in an incremental $86,000 foreign exchange loss for the year ended December 31, 2012 . 41  Item 8. Financial Statements and Supplementary Data TRAVELZOO INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Travelzoo Inc.: We have audited the accompanying consolidated balance sheets of Travelzoo Inc. and subsidiaries (Travelzoo) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012. We also have audited Travelzoo's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Travelzoo's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management's report. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on Travelzoo's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 42 Page Report of Independent Registered Public Accounting Firm 42 Consolidated Balance Sheets 43 Consolidated Statements of Operations 44 Consolidated Statements of Comprehensive Income 45 Consolidated Statements of Stockholders’ Equity 46 Consolidated Statements of Cash Flows 47 Notes to Consolidated Financial Statements 48  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, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Travelzoo maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by COSO. /s/ KPMG LLP Santa Clara, California February 8, 2013 43  TRAVELZOO INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value) See accompanying notes to consolidated financial statements. 44 December 31, 2012 December 31, 2011 ASSETS Current assets: Cash and cash equivalents $ 61,169 $ 38,744 Accounts receivable, less allowance for doubtful accounts of $498 and $400 as of December 31, 2012 and 2011, respectively 13,626 13,340 Income tax receivable 6,682 3,625 Deposits 389 278 Prepaid expenses and other current assets 2,260 2,123 Deferred tax assets 2,194 1,754 Total current assets 86,320 59,864 Deposits, less current portion 1,107 776 Deferred tax assets, less current portion 1,710 344 Restricted cash 3,396 3,103 Property and equipment, net 4,314 3,557 Intangible assets, net 986 704 Total assets $ 97,833 $ 68,348 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 28,695 $ 21,731 Accrued expenses 11,993 6,311 Deferred revenue 2,698 2,168 Income tax payable — 279 Deferred rent 280 114 Total current liabilities 43,666 30,603 Long-term tax liabilities 10,030 2,225 Deferred rent, less current portion 798 761 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.01 par value per share (5,000 shares authorized; none issued) — — Common stock, $0.01 par value (40,000 shares authorized; 15,801 shares issued and 15,362 outstanding as of December 31, 2012 and 16,462 shares issued and 15,962 shares outstanding as of December 31, 2011) 163 164 Treasury stock (at cost, 438 and 500 shares at December 31, 2012 and 2011, respectively) (7,898 ) (15,123 ) Additional paid-in capital 8,863 7,656 Retained earnings 42,948 43,484 Accumulated other comprehensive loss (737 ) (1,422 ) Total stockholders’ equity 43,339 34,759 Total liabilities and stockholders’ equity $ 97,833 $ 68,348  TRAVELZOO INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) See accompanying notes to consolidated financial statements. 45 2012 2011 2010 Revenues $ 151,168 $ 148,342 $ 112,784 Cost of revenues 15,745 13,283 7,253 Gross profit 135,423 135,059 105,531 Operating expenses: Sales and marketing 68,242 65,490 54,454 General and administrative 38,692 34,547 27,565 Unexchanged promotional merger shares 3,000 20,000 — Total operating expenses 109,934 120,037 82,019 Income from operations 25,489 15,022 23,512 Interest income and other income 305 383 166 Gain (loss) on foreign currency 4 (81 ) (197 ) Income before income taxes 25,798 15,324 23,481 Income taxes 7,600 12,005 10,324 Net income $ 18,198 $ 3,319 $ 13,157 Basic net income per share $ 1.15 $ 0.20 $ 0.80 Diluted net income per share $ 1.14 $ 0.20 $ 0.80 Shares used in computing basic net income per share 15,866 16,315 16,444 Shares used in computing diluted net income per share 15,901 16,414 16,453  TRAVELZOO INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) See accompanying notes to consolidated financial statements. 46 2012 2011 2010 Net income $ 18,198 $ 3,319 $ 13,157 Other comprehensive income (loss): Foreign currency translation adjustment 685 (384 ) 135 Total comprehensive income $ 18,883 $ 2,935 $ 13,292  TRAVELZOO INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except per share amounts) See accompanying notes to consolidated financial statements. 47 Common Stock Treasury Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balances, December 31, 2009 16,444 164 — 4,772 27,008 (1,173 ) 30,771 Stock-based compensation expense — — — 750 — — 750 Capital contribution from majority shareholder — — — 1,076 — — 1,076 Comprehensive income: — Foreign currency translation adjustment — — — — 135 135 Net income — — — — 13,157 — 13,157 Total comprehensive income — — — — — — 13,292 Balances, December 31, 2010 16,444 164 — 6,598 40,165 (1,038 ) 45,889 Stock-based compensation expense — — — 750 — — 750 Proceeds from exercise of stock options 18 — — 40 — — 40 Repurchase of common stock (500 ) — (15,123 ) — — — (15,123 ) Tax benefit from stock option exercise — — — 268 — — 268 Comprehensive income: Foreign currency translation adjustment — — — — — (384 ) (384 ) Net income — — — — 3,319 — 3,319 Total comprehensive income — — — — — — 2,935 Balances, December 31, 2011 15,962 164 (15,123 ) 7,656 43,484 (1,422 ) 34,759 Stock-based compensation expense — — — 1,207 — — 1,207 Retirement of treasury stock (161 ) (1 ) 18,735 (18,734 ) — Repurchase of common stock (439 ) — (11,510 ) — — — (11,510 ) Comprehensive income: Foreign currency translation adjustment — — — — — 685 685 Net income — — — — 18,198 — 18,198 Total comprehensive income — — — — — — 18,883 Balances, December 31, 2012 15,362 $ 163 $ (7,898 ) $ 8,863 $ 42,948 $ (737 ) $ 43,339  TRAVELZOO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) See accompanying notes to consolidated financial statements. 48 Year Ended December 31, 2012 2011 2010 Cash flows from operating activities: Net income $ 18,198 $ 3,319 $ 13,157 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,539 2,725 2,389 Deferred income tax (2,178 ) (337 ) (1,276 ) Stock-based compensation 1,207 750 750 Provision for losses on accounts receivable 162 52 199 Tax benefit of stock option exercise — (268 ) — Net foreign currency effect (4 ) 81 197 Changes in operating assets and liabilities: Accounts receivable (285 ) (146 ) (2,323 ) Deposits (406 ) (667 ) 20 Income tax receivable 5,171 (3,093 ) 5,797 Prepaid expenses and other current assets 87 (584 ) (413 ) Accounts payable 6,403 12,074 3,232 Accrued expenses 5,568 256 1,830 Deferred revenue 513 853 498 Deferred rent 45 209 (72 ) Income tax payable (285 ) (369 ) 630 Other non-current liabilities (35 ) 776 (690 ) Net cash provided by operating activities 36,700 15,631 23,925 Cash flows from investing activities: Purchases of property and equipment (2,744 ) (2,460 ) (1,279 ) Purchases of intangible asset (677 ) — — Purchases of restricted cash (272 ) — (2,248 ) Net cash used in investing activities (3,693 ) (2,460 ) (3,527 ) Cash flows from financing activities: Repurchase of common stock (11,510 ) (15,123 ) — Proceeds from sale of Asia Pacific business segment, net of cash provided — — 1,076 Proceeds from exercise of stock options — 40 — Tax benefit of stock option exercise — 268 — Net cash provided by (used in) financing activities (11,510 ) (14,815 ) 1,076 Effect of exchange rate changes on cash and cash equivalents 928 (796 ) (66 ) Net increase (decrease) in cash and cash equivalents 22,425 (2,440 ) 21,408 Cash and cash equivalents at beginning of period 38,744 41,184 19,776 Cash and cash equivalents at end of period $ 61,169 $ 38,744 $ 41,184 Supplemental disclosure of cash flow information: Cash paid for income taxes, net of refunds received $ 4,937 $ 15,025 $ 5,857  TRAVELZOO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Summary of Significant Accounting Policies (a) The Company and Basis of Presentation Travelzoo Inc. (the “Company” or “Travelzoo”) is a global Internet media company. We inform over 26 million subscribers in North America, Europe and Asia Pacific, as well as millions of website users, about the best travel, entertainment and local deals available from thousands of companies. Our deal experts source, research and test-book offers, recommending only those that meet Travelzoo’s rigorous quality standards. We provide travel, entertainment, and local businesses with a fast, flexible, and cost effective way to reach millions of consumers. Our revenues are generated primarily from advertising fees. In Asia Pacific, the Travelzoo business is operated by Travelzoo (Asia) Limited and Travelzoo Japan K.K. under a license agreement with Travelzoo Inc. and is not owned by the Company. Our publications and products include the Travelzoo websites (www.travelzoo.com, www.travelzoo.ca, www.travelzoo.co.uk, www.travelzoo.de, www.travelzoo.es, www.travelzoo.fr, among others), the Travelzoo Top 20 e-mail newsletter, the Newsflash e-mail alert service, the SuperSearch pay-per-click travel search tool, and the Travelzoo Network , a network of third-party websites that list travel deals published by Travelzoo. We also operate Fly.com , a travel search engine that allows users to quickly and easily find the best prices on flights from hundreds of airlines and online travel agencies. In addition, we operate Local Deals and Getaway , services that allow our subscribers to purchase vouchers for deals from local businesses such as spas, hotels and restaurants through the Travelzoo website. Vouchers are redeemable at the local businesses during the promotional period. We receive a percentage of the face value of the voucher from the local businesses. Since November 1, 2009, the Travelzoo websites in Asia Pacific (cn.travelzoo.com, www.travelzoo.co.jp, www.travelzoo.com.au, www.travelzoo.com.hk, www.travelzoo.com.tw, among others), the Travelzoo Top 20 e-mail newsletters in Asia Pacific and the Newsflash e-mail alert service in Asia Pacific have been published by Travelzoo (Asia) Limited and Travelzoo Japan K.K., wholly owned subsidiaries of Azzurro Capital Inc., under a license agreement with the Company. There is a reciprocal revenue-sharing agreement among the entities operating the Travelzoo business in Asia Pacific and the Company related to cross-selling audiences, channels and offers. Travelzoo is controlled by Ralph Bartel, who held beneficially approximately 50.5% of the outstanding shares as of December 31, 2012 . 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. All foreign subsidiaries use the local currency of their respective countries as their functional currency. Assets and liabilities are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Revenues, costs and expenses are translated into U.S. dollars at average exchange rates for the period. Certain prior period amounts have been reclassified to conform to current year presentation. The Company was formed as a result of a combination and merger of entities founded by the Company’s majority stockholder, Ralph Bartel. In 1998, Mr. Bartel founded Travelzoo.com Corporation, a Bahamas corporation, which issued 5,155,874 shares via the Internet to approximately 700,000 “Netsurfer stockholders” for no cash consideration, but subject to certain conditions as referred to below. 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 Corporation to Travelzoo Inc. in exchange for 8,129,273 shares of Travelzoo Inc. and options to acquire an additional 2,158,349 shares at $1.00 . Mr. Bartel exercised these options in January 2009 . 49  In April 2002, Travelzoo.com Corporation was merged into Travelzoo Inc. Under and subject to the terms of the merger agreement, holders of promotional shares of Travelzoo.com Corporation (“Netsurfers”) who established that they had satisfied certain prerequisite qualifications were allowed a period of 2 years following the effective date of the merger to receive 1 share of Travelzoo Inc. in exchange for each share of common stock of Travelzoo.com Corporation. The records of Travelzoo.com Corporation showed that, assuming all of the shares applied for by the Netsurfer stockholders were validly issued, there were 11,295,874 shares of Travelzoo.com Corporation outstanding. As of April 25, 2004, two years following the effective date of the merger, 7,180,342 shares of Travelzoo.com Corporation had been exchanged for shares of Travelzoo Inc. Prior to that date, the remaining shares which were available for issuance pursuant to the merger agreement were also included in the issued and outstanding common stock of Travelzoo Inc. and included in the calculation of basic and diluted earnings per share. After April 25, 2004, the Company ceased issuing shares to the former stockholders of Travelzoo.com Corporation, and no additional shares are reserved for issuance to any former stockholders, because their right to receive shares has now expired. On April 25, 2004, the number of shares reported as outstanding was reduced from 19,425,147 to 15,309,615 to reflect actual shares issued as of the expiration date. Earnings per share calculations reflect this reduction of the number of shares reported as outstanding. As of December 31, 2012 , there were 15,361,873 shares of common stock outstanding. On April 21, 2011, the Company entered into an agreement with the State of Delaware resolving all claims relating to an unclaimed property review which began in 2010. The primary issue raised in the preliminary findings from the review, received by the Company on April 12, 2011, concerned the shares of Travelzoo which have not been claimed by former Netsurfer stockholders of Travelzoo.com as discussed in the preceding paragraph. In the preliminary findings under the unclaimed property review, up to 3.0 million shares were identified as “demandable” under Delaware escheat laws. While the Company continues to take the position that such shares were a promotional incentive and were issuable only to persons who establish their eligibility as stockholders, the Company determined that it was in its best interest to promptly resolve all claims relating to the unclaimed property review. The Company made a $20.0 million cash payment to the State of Delaware on April 27, 2011 and received a complete release of those claims. Since March 2012, the Company has become subject to unclaimed property reviews by most of the other states in the U.S. The auditing firm representing these states in the reviews has presented to the Company preliminary findings, which relate primarily to the unexchanged promotional merger shares that were not covered by the settlement and release by the State of Delaware. During the three months ended March 31, 2012, the Company recorded a $3.0 million charge related to this unexchanged promotional merger shares contingency. While the Company believes it has meritorious defenses regarding the applicability of escheat rights related to this unexchanged promotional merger shares contingency, the ultimate resolution of this matter may take longer than one year. If the claims for all of the additional shares referred to in the preliminary findings were upheld in full, based on the closing price of the Company’s shares at the end of December 31, 2012 , the cost to the Company would be approximately $18.1 million in excess of the amount accrued, plus any interest or penalty which might be applicable. In addition, the total amount of exposure of this contingency is dependent upon the manner in which each state applies its unclaimed property laws. The Company is not able to predict the ultimate amount or outcome of any current or future claims which have been or might be asserted relating to the unissued shares. The Company intends to continue to challenge the applicability of escheat rights, in that, among other reasons, the shares of the predecessor Bahamas corporation were offered for free as part of a promotional incentive program to qualified individuals. There were certain conditions applicable to the issuance of shares to the Netsurfer stockholders, including requirements that (i) they be at least 18 years of age, (ii) they be residents of the U.S. or Canada, and (iii) they not apply for shares more than once. The Netsurfer stockholders were advised that failure to comply could result in cancellation of their shares in Travelzoo.com Corporation. Travelzoo.com Corporation was not able to verify that the applicants met the requirements referred to above at the time of their applications for issuance of shares, and the remaining Netsurfer stockholders who have not qualified to receive shares in the Company, or who have not participated in the cash payments program referred to below, have not demonstrated their actual compliance with the conditions to the issuance of shares by Travelzoo.com Corporation. The Company does not know how many of the requests for shares originally received by Travelzoo.com Corporation in 1998 were valid, but the Company believes that only a portion of such requests were valid. In response to the pending reviews referred to above, and in response to other persons claiming to be former stockholders of Travelzoo.com Corporation, the Company intends to assert that the claimant must establish that the original Netsurfer stockholders complied with the conditions to issuance of their shares. The Company is continuing its program under which it makes cash payments to people who establish that they satisfy the conditions to receive shares of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo Inc. within the required time period. The accompanying consolidated financial statements include a charge in general and administrative expenses of $33,000 for these cash payments for the year ended December 31, 2012 . The total cost of this program is not reliably estimable because it is based on the ultimate number of valid requests received and future levels of the Company’s common stock price, and would be affected by any settlement of the pending 50  reviews referred to above. The Company’s 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. As noted above, in order to receive payment under the program, a person is required to establish that such person validly held shares in Travelzoo.com Corporation. In July 2012, the Company announced a stock repurchase program authorizing the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock. As of December 31, 2012 , the Company has purchased 600,000 shares of common stock for an aggregate purchase price of $11.5 million under the stock repurchase program. (b) Revenue Recognition The Company’s revenue consists primarily of advertising sales. Advertising revenues are principally derived from the sale of advertising in North America and Europe on the Travelzoo website, in the Travelzoo Top 20 e-mail newsletter, in Newsflash , from SuperSearch , from the Travelzoo Network , and from Fly.com . The Company also generates revenue from the sale of vouchers through our Local Deals and Getaway e-mail alert services. The Company recognizes revenues in accordance with the SEC Staff Accounting Bulletin for revenue recognition. Advertising revenues are recognized in the period in which the advertisement is displayed, provided that evidence of an arrangement exists, the fees are fixed or determinable and collection of the resulting receivable is reasonably assured. Effective January 1, 2011, we adopted ASU 2009-13. The adoption of this new accounting standard had no material impact on the Company’s consolidated results of operations. Where collectibility is not reasonably assured, the revenue will be recognized upon cash collection, provided that the other criteria for revenue recognition have been met. The Company recognizes revenue for fixed-fee advertising arrangements ratably over the term of the insertion order as described below, with the exception of Travelzoo Top 20 or Newsflash insertions, which are recognized upon delivery. The majority of insertion orders have terms that begin and end in a quarterly reporting period. In the cases where at the end of a quarterly reporting period the term of an insertion order is not complete, the Company allocates the total arrangement fee to each element based on the relative estimated selling price of each element. The Company recognizes revenue for the period based on elements delivered during the period. The Company uses prices stated on its internal rate card, which represents stand-alone sales prices, to establish estimated selling prices. The stand-alone price is the price that would be charged if the advertiser purchased only the individual insertion. Fees for variable-fee advertising arrangements are recognized based on the number of impressions displayed, number of clicks delivered, or number of referrals generated during the period. Under these policies, no revenue is recognized unless persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is deemed reasonably assured. The Company evaluates each of these criteria as follows: Insertion orders that include fixed-fee advertising are invoiced upon acceptance of the insertion order and on the first day of each month over the term of the insertion order, with the exception of Travelzoo Top 20 or Newsflash listings, which are invoiced upon delivery. Insertion orders that include variable-fee advertising are invoiced at the end of the month. The Company’s standard terms state that in the event that Travelzoo fails to publish advertisements as specified in the insertion order, the liability of Travelzoo to the advertiser shall be limited to, at Travelzoo’s sole discretion, a pro rata refund of the advertising fee, the placement of the advertisements at a later time in a comparable position, or the extension of the term of the insertion order until the advertising is fully delivered. The Company believes that no significant obligations exist after the full delivery of advertising. Revenues from advertising sold to advertisers through agencies are reported at the net amount billed to the agency. 51 • Evidence of an arrangement. The Company considers an insertion order signed by the advertiser or its agency to be evidence of an arrangement. • Delivery. Delivery is considered to occur when the advertising has been displayed and, if applicable, the click-throughs have been delivered. • Fixed or determinable fee. The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard. • Collection is deemed reasonably assured . The Company conducts a credit review for all transactions at the time of the arrangement to determine the creditworthiness of the advertiser. Collection is deemed reasonably assured if it is expected that the advertiser will be able to pay amounts under the arrangement as payments become due. If it is determined that collection is not reasonably assured, then revenue is deferred and recognized upon cash collection. Collection is deemed not reasonably assured when an advertiser is perceived to be in financial distress, which may be evidenced by weak industry condition, bankruptcy filing, or previously billed amounts that are past due.  The Company started selling vouchers for Local Deals in third quarter 2010 and Getaway in second quarter 2011, from local businesses such as spas, hotels and restaurants. The Company earns a fee for acting as an agent in these transactions which is recorded on a net basis and is included in revenue upon completion of the voucher sale. Certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not redeemed by purchasers upon expiration, which we recognize as revenue after the expiration of the redemption period and after there are no further obligations to provide funds to merchants, subscribers or others. (c) Reserve for Subscriber Refunds We record an estimated reserve for subscriber refunds based on our historical experience at the time revenue is recorded for Local Deals and Getaway voucher sales. We accrue costs associated with refunds in accrued expenses on the consolidated balance sheets. We consider many key factors such as the historical refunds based upon the time lag since the sale, historical reasons for refunds, time period that remains until the deal expiration date, any changes in refund procedures and estimates of redemptions and breakage. Should any of these factors change, the estimates made by management will also change, which could impact the level of our future reserves for subscriber refunds. Specifically, if the financial condition of our advertisers, the business that is providing the vouchered service, were to deteriorate, affecting their ability to provide the services to our subscribers, additional reserves for subscriber refunds may be required. Estimated subscriber refunds that are determined to be recoverable from the merchant are recorded in the consolidated statements of operations as a reduction to revenue. Estimated subscriber refunds that are determined not to be recoverable from the merchant, are presented as a cost of revenue. If our judgments regarding estimated subscriber refunds are inaccurate, reported results of operations could differ from the amount we previously accrued. (d) Allowance for Doubtful Accounts We record a provision for doubtful accounts based on our historical experience of write-offs and a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, management considers the age of the accounts receivable, our historical write-offs, the creditworthiness of the advertiser, the economic conditions of the advertiser’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 advertisers were to deteriorate, affecting their ability to make payments, additional provision for doubtful accounts may be required. (e) Net Income Per Share Basic net income per share is computed using the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed by adjusting the weighted-average number of common shares outstanding for the effect of dilutive potential common shares outstanding during the period. Potential common shares included in the diluted calculation consist of incremental shares issuable upon the exercise of outstanding stock options calculated using the treasury stock method. The following table sets forth the calculation of basic and diluted net income per share (in thousands, except per share amounts): 52 Year Ended December 31, 2012 2011 2010 Basic net income per share: Net income $ 18,198 $ 3,319 $ 13,157 Weighted average common shares 15,866 16,315 16,444 Basic net income per share $ 1.15 $ 0.20 $ 0.80 Diluted net income per share: Net income $ 18,198 $ 3,319 $ 13,157 Weighted average common shares 15,866 16,315 16,444 Effect of dilutive securities: stock options 35 99 9 Diluted weighted average common shares 15,901 16,414 16,453 Diluted net income per share $ 1.14 $ 0.20 $ 0.80  For the year ended December 31, 2012 , options to purchase 100,000 shares of common stock were not included in the computation of diluted net income per share because the effect would have been anti-dilutive. For the year ended December 31, 2011 , all options outstanding were included in the computation of diluted net income per share. For the year ended December 31, 2010 , options to purchase 75,000 shares of common stock were not included in the computation of diluted net income per share because the effect would have been anti-dilutive. (f) Use of Estimates Management of the Company has 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 materially from those estimates. (g) Property and Equipment 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. The Company also includes in fixed assets the capitalized cost of internal-use software and website development, including software used to upgrade and enhance its website and processes supporting the Company’s business in accordance with the framework established by the FASB accounting guidance for accounting for the cost of computer software developed or obtained for internal use and accounting for website development costs. Costs incurred in the planning stage and operating stage are expensed as incurred while costs incurred in the application development stage and infrastructure development stage are capitalized, assuming such costs are deemed to be recoverable. Property and equipment consisted of the following (in thousands): Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 3 to 5 years for computer hardware and software, capitalized internal-use software and website development costs, and office equipment and office furniture. The Company depreciates leasehold improvements over the term of the lease or the estimated useful life of the asset, whichever is shorter. Depreciation expense was $2.1 million , $2.4 million , and $2.0 million for the years ended December 31, 2012, 2011 and 2010 , respectively. As of December 31, 2012, 2011 and 2010, our capitalized internal-use software and website development costs, net of accumulated amortization, were zero , $31,000 and $465,000 , respectively. For the years ended December 31, 2012, 2011 and 2010, we recorded amortization of capitalized internal-use software and website development costs of $31,000 , $434,000 and $440,000 , respectively. 53 December 31, 2012 2011 Computer hardware and software $ 3,294 $ 2,952 Office equipment and office furniture 6,732 4,760 Capitalized internal-use software and website development 1,319 1,319 Leasehold improvements 1,841 1,301 13,186 10,332 Less accumulated depreciation and amortization (8,872 ) (6,775 ) Total $ 4,314 $ 3,557  (h) Intangible Assets Intangible assets consist of the following (in thousands): Intangible assets have a useful life of 3 to 5 years . For the years ended December 31, 2012 , 2011 and 2010 , amortization expense was $406,000 , 354,000 , and $ 354,000 , respectively. Future expected amortization expense related to intangible assets at December 31, 2012 is as follows (in thousands): The expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets and other events. (i) Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with remaining maturities of less than three months on the date of purchase. (j) Advertising Costs Advertising production costs are expensed as incurred. Online advertising is expensed as incurred over the period the advertising is displayed. Advertising costs amounted to $28.3 million , $32.0 million and $31.6 million for years ended December 31, 2012, 2011 and 2010 , respectively. In the years ended December 31, 2012, 2011 and 2010 , approximately $19.6 million , $19.5 million , and $16.1 million , respectively, of advertising services was purchased from the Company’s advertisers under non-barter agreements and recorded in sales and marketing expense. (k) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. (l) Impairment of Long-Lived Assets The Company accounts for long-lived assets in accordance with the provisions of the FASB accounting standard relating to impairment of long-lived assets, which 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. The Company evaluates long-lived assets for 54 December 31, 2012 December 31, 2011 Internet domain names and technology $ 2,805 $ 2,117 Accumulated amortization (1,819 ) (1,413 ) Total $ 986 $ 704 2013 $ 475 2014 $ 198 2015 $ 123 2016 $ 123 2017 $ 67 Total $ 986  impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. No impairment loss was recognized during years ended December 31, 2012, 2011 and 2010 . (m) Stock-Based Compensation The Company accounts for its employee stock options under the fair value method, which requires stock-based compensation to be estimated using the fair value on the date of grant using an option-pricing model. The value of the portion of the award that is expected to vest is recognized as expense over the related employees’ requisite service periods in the Company’s consolidated statements of operations. Total stock-based compensation for the years ended December 31, 2012, 2011 and 2010 was $1.2 million , $750,000 and $750,000 , respectively. See Note 6 for a further discussion on stock-based compensation. (n) Foreign Currency All foreign subsidiaries use the local currency of their respective countries as their functional currency. Assets and liabilities are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Revenues, costs and expenses are translated into U.S. dollars at average exchange rates for the period. Gains and losses resulting from translation are recorded as a component of accumulated other comprehensive income (loss). Realized gains and losses from foreign currency transactions are recognized as gain or loss on foreign currency in the consolidated statements of operations. (o) Certain Risks and Uncertainties The Company’s cash, cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents are placed with financial institutions that management believes are of high credit quality. The accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. As of December 31, 2012 and 2011, the Company did not have any customers that accounted for 10% or more of its accounts receivable. (p) Recent Accounting Pronouncements In May 2011, the FASB issued ASU 2010-06, a new accounting standard, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this new accounting standard on January 1, 2012 and the adoption of this new accounting standard did not have a material impact on the Company’s consolidated results of operations and financial condition. In June 2011, the FASB issued ASU 2011-05, a new accounting standard update, which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this new standard effective January 1, 2012 and the adoption of this new accounting standard did not have a material impact on the Company’s consolidated results of operations and financial condition. Note 2: Financial Instruments At December 31, 2012 , restricted cash consisted primarily of a certificate of deposit for $875,000 serving as collateral for a standby letter of credit for the security deposit under the lease of our corporate headquarters and a $2.5 million deposit with our bank in the U.K. for our merchant account. Cash equivalents consist of highly liquid investments with remaining maturities of 3 months or less on the date of purchase held in money market funds. The Company believes that the carrying amounts of these financial assets are a reasonable estimate of their fair value and are categorized as Level 1. 55  The fair value of these financial assets was determined using the following inputs at December 31, 2012 and 2011 (in thousands): At December 31, 2012 , accounts receivable and accounts payable are not measured at fair value; however, the Company believes that the carrying amounts of these assets and liabilities are a reasonable estimate of their fair value. Accounts receivable and accounts payable are categorized as Level 2. There have been no changes in Level 1, Level 2 and Level 3 and no changes in valuation techniques for these assets or liabilities for the period ended December 31, 2012 . Note 3: Commitments and Contingencies Beginning on August 9, 2011, two purported class action lawsuits were commenced in the United States District Court for the Southern District of New York. On January 6, 2012, a Consolidated and Amended Class Action Complaint was filed. The complaint asserts claims under Section 10(b) and 20(a) pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) alleging that between March 16, 2011 and July 21, 2011, the Company and/or the individual defendants purportedly issued materially false and misleading statements. In particular, the complaint asserts, among other things, allegations challenging certain statements relating to the Company’s growth. The complaint also makes allegations regarding the Company’s Getaway business and asserts that certain officers and directors sold stock while in possession of materially adverse non-public information. The action seeks unspecified damages and the Company is not able to estimate the possible loss or range of losses that could potentially result from the action. The Company believes that the action is without merit and intends to defend the suits vigorously. In addition, five shareholder derivative lawsuits, Wang v. Bartel, et al ., Wirth v. Bartel, et al ., Kitt v. Bartel, et al ., Blatt v. Bartel, et al. , and Turansky v. Bartel, et al ., were filed in the Southern District of New York based on similar allegations that seek to assert claims under state law derivatively on behalf of Travelzoo against certain officers and directors of the Company. These derivative actions were consolidated and on January 6, 2012, a Verified Consolidated Shareholder Derivative Complaint was filed purportedly on behalf of nominal defendant Travelzoo. The complaint asserts claims for breaches of fiduciary duties, unjust enrichment, abuse of control and gross mismanagement against current and former directors and officers of the Company. The complaint also asserts a breach of fiduciary duty claim for insider trading against certain officers and directors, as well as Azzurro Capital Inc. The derivative action makes allegations regarding the Company’s Getaway business and asserts that certain officers and directors sold stock while in possession of materially adverse non-public information. Since derivative claims are an attempt by a plaintiff shareholder to assert claims on behalf of the Company, we do not anticipate any potential loss to the Company from these actions. On January 27, 2012, a purported shareholder of Travelzoo commenced a suit in the Supreme Court of New York that allegedly asserts claims derivatively on behalf of Travelzoo Inc. for breaches of fiduciary duty against Travelzoo’s board of directors. The complaint also asserts claims for breaches of fiduciary duty and unjust enrichment against Ralph Bartel and Azzurro Capital Inc. The complaint challenges Travelzoo’s sale of its Asia Pacific division for $3.6 million to Azzurro and alleges that the transaction was not entirely fair to the Company. Since derivative claims are an attempt by a plaintiff shareholder to assert claims on behalf of the Company, we do not anticipate any potential loss to the Company from these actions. 56 Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total (Level 1) (Level 2) (Level 3) Balance at December 31, 2012: Money market funds $ 13,866 $ 13,866 $ — $ — Total $ 13,866 $ 13,866 $ — $ — Balance at December 31, 2011: Money market funds $ 5,665 $ 5,665 $ — $ — Total $ 5,665 $ 5,665 $ — $ —  On September 28, 2012, Metasearch Systems, LLC filed a lawsuit in the United States District Court for the Eastern District of Delaware against Travelzoo Inc. d/b/a Fly.com alleging infringement of several U.S. patents. Metasearch Systems alleges that the trip-planning metasearch service available on Fly.com infringes one or more claims of the asserted patents. During September 2012, Metasearch Systems filed similar lawsuits against several of Travelzoo's competitors including Expedia, Inc., Orbitz Worldwide, Inc., Travelocity.com, LP, Priceline.com, Inc., Yahoo! Inc., American Express Company, KAYAK Software Corp., and BookIt.com. The action seeks unspecified damages and we are unable to estimate the possible loss or range of losses that could potentially result from the action. Travelzoo is assessing its obligations and liability, if any, in respect of this litigation and intends to vigorously defend itself in the litigation. The Company is not able to estimate the possible loss or range of losses that could potentially result from the action. The Company believes that the action is without merit and intends to defend the suits vigorously. On April 21, 2011, the Company entered into an agreement with the State of Delaware resolving all claims relating to an unclaimed property review which began in 2010. The primary issue raised in the preliminary findings from the review, received by the Company on April 12, 2011, concerned the shares of Travelzoo, which have not been claimed by former Netsurfer stockholders of Travelzoo.com (unexchanged promotional merger shares) as discussed further in Note 1. In the preliminary findings under the unclaimed property review, up to 3.0 million shares were identified as “demandable” under Delaware escheat laws. While the Company continues to take the position that such shares were a promotional incentive and were issuable only to persons who established their eligibility as stockholders, the Company determined that it was in its best interest to promptly resolve all claims relating to the unclaimed property review. The Company made a $20.0 million cash payment to the State of Delaware on April 27, 2011 and received a complete release of those claims. As discussed in Note 1 above, since March 2012, the Company has become subject to unclaimed property reviews by most of the other states in the U.S. that relate primarily to the unexchanged promotional merger shares, which were not covered by the settlement and release by the State of Delaware. During the three months ended March 31, 2012, the Company recorded a $3.0 million charge related to this unexchanged promotional merger shares contingency. While the Company believes it has meritorious defenses regarding the applicability of escheat rights related to this unexchanged promotional merger shares contingency, the ultimate resolution of this matter may take longer than one year. If the claims for all of the additional shares referred to in the preliminary findings were upheld in full, based on the closing price of the Company’s shares at the end of December 31, 2012 , the cost to the Company would be approximately $18.1 million in excess of the amount accrued, plus any interest or penalties which might be applicable. In addition, the total amount of exposure of this contingency is dependent upon the manner in which each state applies its unclaimed property laws. The Company is not able to predict the ultimate amount or outcome of any current or future claims which have been or might be asserted relating to the unissued shares. The Company is continuing its program under which it makes cash payments to people who establish that they satisfy the conditions to receive shares of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo Inc. within the required time period. The accompanying consolidated financial statements include a charge in general and administrative expenses of $33,000 for these cash payments for the twelve months ended December 31, 2012 . The total cost of this program is not reliably estimable because it is based on the ultimate number of valid requests received and future levels of the Company’s common stock price, and would be affected by any settlement of the pending unclaimed property reviews referred to above. The Company’s common stock price affects the liability because the amount of cash payments under the program is based in part on the recent level of the stock price at the date valid requests are received. The Company leases office space in Canada, France, Germany, Spain, the U.K., and the U.S. under operating leases which expire between January 31, 2013 and March 15, 2022. Rent expense was $5.0 million , $4.7 million and $4.0 million for years ended December 31, 2012, 2011 and 2010 , respectively. We are committed to pay a portion of the related operating expenses under certain of these lease agreements. These operating expenses are not included in the table below. Some of these lease agreements have free or escalating rent payment provisions. We recognize rent expense under such arrangements on a straight line basis. The future minimum lease payments under these operating leases as of December 31, 2012 were as following (in thousands): 57 2013 2014 2015 2016 2017 Thereafter Total Minimum rental payments 5,049 2,669 2,507 1,969 975 2,370 15,539  Note 4: Other Balance Sheet Items The details of prepaid expenses and other current assets as of December 31, 2012 and 2011 were as follows (in thousands): The details of changes to the allowance for doubtful accounts and reserve for subscriber refunds are as follows (in thousands): Local Deals and Getaway merchant payable included in accounts payable was $23.4 million and $16.0 million , as of December 31, 2012 and 2011 , respectively. The details of accrued expenses as of December 31, 2012 and 2011 were as follows (in thousands): 58 December 31, 2012 2011 Prepaid expenses $ 1,741 $ 1,642 Other current assets 519 481 Total prepaid expenses and other current assets $ 2,260 $ 2,123 Allowance for doubtful accounts Reserve for subscriber refunds Balance at December 31, 2009 $ 501 $ — Additions — charged to costs and expenses, or contra revenue, net 139 70 Deductions — recoveries of amounts previously charged-off 60 — Deductions — write-offs (314 ) — Balance at December 31, 2010 386 70 Additions — charged to costs and expenses, or contra revenue, net 173 1,931 Deductions — recoveries of amounts previously charged-off (123 ) — Deductions — write-offs (36 ) (1,108 ) Balance at December 31, 2011 400 893 Additions — charged to costs and expenses, or contra revenue, net 304 1,269 Deductions — recoveries of amounts previously charged-off — — Deductions — write-offs (206 ) (1,172 ) Balance at December 31, 2012 $ 498 $ 990 December 31, 2012 2011 Accrued advertising expense $ 2,059 $ 1,148 Accrued compensation expense 3,879 2,923 Unexchanged promotional merger shares 3,000 — Accrued payments to merchants 101 244 Other accrued expenses 2,038 1,103 Reserve for subscriber refunds 916 893 Total accrued expenses $ 11,993 $ 6,311  Note 5: Income Taxes The components of income before income tax expense for the years ended December 31, 2012, 2011 and 2010 were as follows (in thousands): Income tax expense (benefit) for years ended December 31, 2012, 2011 and 2010 consisted of current and deferred components categorized by federal, state and foreign jurisdictions, as shown below. The current provision is generally that portion of income tax expense that is currently payable to the taxing authorities. The Company makes estimated payments of these amounts during the year. The deferred tax provision results from changes in the Company’s deferred tax assets (future deductible amounts) and tax liabilities (future taxable amounts), which are presented in the table below: During 2011, an income tax benefit of $268,000 was recorded in stockholders’ equity for the tax benefit of stock option exercises. During 2012, an income tax benefit of $ 800,000 was recorded to recognize the foreign net operating loss carryforward deferred tax assets due to a partial release of valuation allowance. 59 2012 2011 2010 U.S. $ 16,682 $ 7,252 $ 23,108 Foreign 9,116 8,072 373 $ 25,798 $ 15,324 $ 23,481 Current Deferred Total (In thousands) 2012: Federal $ 7,692 $ (640 ) $ 7,052 State 952 (204 ) 748 Foreign 610 (810 ) (200 ) $ 9,254 $ (1,654 ) $ 7,600 2011: Federal $ 10,820 $ (357 ) $ 10,463 State 591 1 592 Foreign 950 — 950 $ 12,361 $ (356 ) $ 12,005 2010: Federal $ 8,512 $ (1,102 ) $ 7,410 State 2,458 (174 ) 2,284 Foreign 630 — 630 $ 11,600 $ (1,276 ) $ 10,324  Income tax expense for years ended December 31, 2012, 2011 and 2010 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 (in thousands): Operating losses incurred in the foreign subsidiaries for the year ended December 31, 2010 were treated as having no recognizable tax benefit. 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, 2012 and 2011 are as follows (in thousands): The Company has a valuation allowance of approximately $1.1 million as of December 31, 2012 related to foreign net operating loss carryforwards of approximately $8.3 million for which it is more likely than not that the tax benefit will not be realized. These net operating loss carryforwards do not expire. The Company also has a valuation allowance of $1.8 million as of December 31, 2012 related to the capital loss carryforward of $4.5 million for which it is more likely than not that the tax benefit will not be realized. If not utilized, the capital loss carryforward will expire in 2014. The total amount of the valuation allowance at December 31, 2012 decreased from the amount recorded as of December 31, 2011 , primarily due to the utilization of foreign net operating loss carryforwards and a partial release of valuation allowance recorded against the net operating loss carryforwards in 2012 . At December 31, 2012, the Company determined that approximately $800,000 of the total foreign net operating loss carryforward deferred tax assets will more likely than not be realized in future periods. Therefore, the Company recognized $800,000 of deferred tax assets associated with the foreign net operating loss carryforwards, as a reduction in the valuation allowance at December 31, 2012. United States income and foreign withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries. The undistributed earnings on a book basis for the non-U.S. subsidiaries are approximately $ 2.0 million . The 60 2012 2011 2010 Federal tax at statutory rates $ 9,029 $ 5,363 $ 8,218 State taxes, net of federal income tax benefit 489 385 1,488 Foreign losses not benefited — — 500 Change of valuation allowance (2,453 ) (1,235 ) — Unexchanged promotional merger shares 1,050 7,000 — Non-deductible expenses and other (515 ) 492 118 Total income tax expense $ 7,600 $ 12,005 $ 10,324 2012 2011 Deferred tax assets: Foreign net operating loss carryforwards $ 1,936 $ 4,762 State income taxes 565 651 Accruals and allowances 697 500 Stock based compensation 1,094 618 Capital loss 1,754 1,754 Deferred revenue 790 631 Deferred rent 302 219 Property, equipment and intangible assets 7 — Total deferred tax assets 7,145 9,135 Valuation allowance (2,886 ) (6,516 ) Total deferred tax assets net of valuation allowance 4,259 2,619 Deferred tax liabilities: US tax on undistributed earnings (355 ) (251 ) Property, equipment and intangible assets — (270 ) Total deferred tax liabilities (355 ) (521 ) Net deferred tax assets $ 3,904 $ 2,098  Company intends to reinvest these earnings indefinitely in its operations outside the U.S. If the undistributed earnings are remitted to the U.S. these amounts would be taxable in the U.S at the current federal and state tax rates net of foreign tax credits. Also, depending on the jurisdiction any distribution may be subject to withholding taxes at rates applicable for that jurisdiction. The Company maintains liabilities for uncertain tax positions. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in the overall income tax provision in the period that such determination is made. At December 31, 2012, the Company had approximately $ 9.4 million in total unrecognized tax benefits, approximately $584,000 in accrued interest, of which $365,000 accrued in 2012, and approximately $80,000 in accrued penalties, of which $10,000 accrued in 2012. Unrecognized tax benefits of approximately $ 8.0 million which, if recognized, would favorably affect the Company’s effective income tax rate, and unrecognized tax benefits of approximately $ 1.4 million which if recognized, would be recorded in discontinued operations. The increase in the unrecognized tax benefit for the twelve months ended December 31, 2012 is related to a deduction taken on the Company's 2011 U.S. federal and state income tax returns for the $20.0 million settlement with the State of Delaware. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): The Company is in various stages of multiple year examinations by federal and state taxing authorities. Although the timing of resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of the gross unrecognized tax benefits related to the method of computing income taxes in certain jurisdiction and losses reported on certain income tax returns could significantly change in the next 12 months. These changes may occur through settlement with the taxing authorities or the expiration of the statute of limitations on the returns filed. The Company is unable to estimate the range of possible adjustments to the balance of the gross unrecognized tax benefits. The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is subject to U.S. federal and certain state tax examinations for years after 2008 and is subject to California tax examinations for years after 2004. Note 6: Stock-Based Compensation and Stock Options 61 Unrecognized tax benefits balance at January 1, 2010 $ 2,003 Increase related to prior year tax positions — Decrease related to prior year tax positions (224 ) Increase related to current year tax positions — Settlements (413 ) Lapse of statute of limitations — Unrecognized tax benefits balance at December 31, 2010 1,366 Increase related to prior year tax positions 510 Decrease related to prior year tax positions — Increase related to current year tax positions — Settlements (42 ) Lapse of statute of limitations — Unrecognized tax benefits balance at December 31, 2011 1,834 Increase related to prior year tax positions 47 Decrease related to prior year tax positions (9 ) Increase related to current year tax positions 7,851 Settlements (251 ) Lapse of statute of limitations (107 ) Unrecognized tax benefits balance at December 31, 2012 $ 9,365  The Company accounts for its employee stock options under the fair value method, which requires stock-based compensation to be estimated using the fair value on the date of grant using an option-pricing model. The value of the portion of the award that is expected to vest is recognized as expense over the related employees’ requisite service periods in the Company’s consolidated statements of income. Cash flows resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as financing cash flows. For fiscal year 2011, the Company recorded $268,000 of excess tax benefit. In October 2001, the Company granted to each director fully vested and exercisable options to purchase 30,000 shares of common stock with an exercise price of $2.00 per share for their services as a director in 2000 and 2001. A total of 210,000 options were granted. The options expired in October 2011. During the years ended December 31, 2004, 2005, 2008 and 2011, 150,000 options, 17,275 options, 30,000 options and 12,725 options, respectively, were exercised. In March 2002, Travelzoo Inc. granted to each director options to purchase 5,000 shares of common stock with an exercise price of $3.00 per share that vested in connection with their services as a director in 2002. A total of 35,000 options were granted. In October 2002, 1,411 options were cancelled upon the resignation of a director. The options expired in March 2012. During the years ended December 31, 2011, 2008 and 2004, 5,000 options, 5,000 options and 23,589 options, respectively, were exercised. In January 2009, 2,158,349 options were exercised at $1.00 per share. As described in Note 1, these options were granted in 2001 as part of the combination and merger of entities founded by the Company’s majority stockholder, Ralph Bartel. In November 2009, the Company granted to one of its employees options to purchase 300,000 shares of common stock with an exercise price of $14.97 , of which 75,000 options vest and become exercisable annually starting on July 1, 2011. The options expire in November 2019. As of December 31, 2012 , 150,000 of the options are vested and 300,000 options are outstanding. In January 2012, the Company granted, subject to shareholder approval, certain employees options to purchase 100,000 shares of common stock with an exercise price of $28.98 , of which 25,000 options vest and become exercisable annually starting on January 23, 2013. The options expire in January 2022. Total stock-based compensation for fiscal years 2012, 2011 and 2010 was $1.2 million , $750,000 and $750,000 , respectively. The Company utilized the Black-Scholes option pricing model to value the stock options granted in 2009 and 2012. The Company does not have enough historical exercise data to estimate the expected life of the options and therefore used an expected life of 6.25 years , as defined under the simplified method, which is using an average of the contractual term and vesting period of the stock options. The risk-free interest rate used for the award is based on the U.S. Treasury yield curve in effect at the time of grant. The Company used a forfeiture rate of 0% as the Company does not have enough historical forfeiture data to estimate the forfeiture rate. To the extent the actual forfeiture rate is different from what we have anticipated, stock-based compensation related to these options will be different from our expectations. The fair value of 2009 and 2012 stock options was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: As of December 31, 2012, there was approximately $1.1 million of unrecognized stock-based compensation expense related to outstanding 2009 stock options. This amount is expected to be recognized over 1.5 years . To the extent the actual forfeiture rate is different from what we have anticipated, stock-based compensation related to these options will be different from our expectations. As of December 31, 2012, there was approximately $1.5 million of unrecognized stock-based compensation expense related to outstanding 2012 stock options. This amount is expected to be recognized over 3.1 years . To the extent the actual 62 2009 2012 Weighted-average fair value of options granted per share $ 11.56 $ 19.08 Historical volatility 93 % 74 % Risk-free interest rate 2.56 % 1.11 % Dividend yield — — Expected life in years 6.25 6.25  forfeiture rate is different from what we have anticipated, stock-based compensation related to these options will be different from our expectations. Option activity as of December 31, 2012 and changes during the years ended December 31, 2010, 2011, and 2012 were as follows: The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal year 2012, 2011, and 2010 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2012, 2011, and 2010. This amount changes based on the fair market value of the Company’s stock. The Company’s policy is to issue shares from the authorized shares to fulfill stock option exercises. The total intrinsic value of options exercised in the year ended December 31, 2011 was $628,000 . Outstanding options at December 31, 2012 were as follows: Note 7: Stock Repurchase Program In July 2012, the Company announced a stock repurchase program authorizing the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock. The repurchase program assists in offsetting the impact of dilution from employee equity compensation and for capital allocation purposes. Management is allowed discretion in the execution of the repurchase program based upon market conditions and consideration of capital allocation. During the three months ended September 30, 2012 , the Company purchased 161,000 shares of common stock for an aggregate purchase price of $3.6 million . The 161,000 shares repurchased were retired as of September 30, 2012 . During the three months ended December 31, 2012 , the Company purchased 439,000 shares of common stock for an aggregate purchase price of $ 7.9 million . The 439,000 shares repurchased shares were recorded as part of treasury stock as of December 31, 2012 . 63 Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life Aggregate Intrinsic Value (In thousands) Outstanding at January 1, 2010 317,725 $ 14.26 2.09 years $ 9,900 Outstanding at December 31, 2010 317,725 $ 14.26 8.44 years $ 8,616 Exercisable and fully vested at December 31, 2010 17,725 $ 2.28 0.95 years $ 693 Outstanding at January 1, 2011 317,725 $ 14.26 Exercised (17,725 ) $ 2.28 Outstanding at December 31, 2011 300,000 $ 14.97 7.89 years $ 2,883 Exercisable and fully vested at December 31, 2011 75,000 $ 14.97 7.89 years $ 721 Outstanding at January 1, 2012 300,000 $ 14.97 Options granted 100,000 $ 28.98 Outstanding at December 31, 2012 400,000 $ 18.47 7.43 years $ 1,206 Exercisable and fully vested at December 31, 2012 150,000 $ 14.97 6.89 years $ 603 Exercise Price Shares Outstanding Options Outstanding Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Shares Outstanding and Exercisable Options Exercisable Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price $ 14.97 300,000 6.89 years $ 14.97 150,000 6.89 years $ 14.97 $ 28.98 100,000 9.07 years $ 28.98 — 9.07 years $ 28.98  In August 2011, the Company announced a share repurchase program authorizing the repurchase of up to 500,000 shares of common stock. The repurchase program assists in offsetting the impact of dilution from employee equity compensation and for capital allocation purposes. During the three months ended September 30, 2011, the Company purchased 500,000 shares of common stock for an aggregate purchase price of 15.1 million and completed the share repurchases under this program. The 500,000 repurchased shares were recorded as part of treasury stock as of December 31, 2011 and were retired as of December 31, 2012 . Note 8: Segment Reporting and Significant Customer Information The Company manages its business geographically and has two reportable operating segments: North America and Europe. North America consists of the Company’s operations in Canada and the U.S. Europe consists of the Company’s operations in France, Germany, Spain, and the U.K. The Company began operations in Europe in May 2005. Management relies on an internal management reporting process that provides revenue and segment operating income (loss) for making financial decisions and allocating resources. Management believes that segment revenues and operating income (loss) are appropriate measures of evaluating the operational performance of the Company’s segments. The following is a summary of operating results and assets (in thousands) by business segment: 64 Year Ended December 31, 2012 North America Europe Elimination and Other (a) Consolidated Revenues from unaffiliated customers $ 108,787 $ 42,381 $ — $ 151,168 Intersegment revenues 728 143 (871 ) — Total net revenues 109,515 42,524 (871 ) 151,168 Operating income $ 21,481 $ 7,008 $ (3,000 ) $ 25,489 Year Ended December 31, 2011 North America Europe Elimination and Other (a) Consolidated Revenues from unaffiliated customers $ 108,549 $ 39,793 $ — $ 148,342 Intersegment revenues 466 134 (600 ) — Total net revenues 109,015 39,927 (600 ) 148,342 Operating income $ 30,110 $ 4,912 $ (20,000 ) $ 15,022 Year Ended December 31, 2010 North America Europe Elimination Consolidated Revenues from unaffiliated customers $ 87,661 $ 25,123 $ — $ 112,784 Intersegment revenues 197 107 (304 ) — Total net revenues 87,858 25,230 (304 ) 112,784 Operating income $ 24,998 $ (1,489 ) $ 3 $ 23,512 (a) Amount represents a charge related to unexchanged promotional merger shares of $3.0 million and $20.0 million for the years ended December 31, 2012 and 2011 , respectively. As of December 31, 2012 North America Europe Elimination Consolidated Long-lived assets $ 3,389 $ 1,911 $ — $ 5,300 Total assets $ 92,139 $ 36,595 $ (30,901 ) $ 97,833  Revenue for each segment is recognized based on the customer location within a designated geographic region. Property and equipment are attributed to the geographic region in which the assets are located. For the years ended December 31, 2012, 2011 and 2010 , the Company did not have any customers that accounted for 10% or more of revenue. As of December 31, 2012 and December 31, 2011 , the Company did not have any customers that accounted for 10% or more of accounts receivable. The following table sets forth the breakdown of revenues by type and segment for the years ended December 31, 2012, 2011 and 2010 . Travel revenue includes travel publications ( Top 20 , Website , Newsflash , Travelzoo Network) and Getaway vouchers. Search revenue includes SuperSearch and Fly.com . Local revenue includes Local Deals vouchers and Entertainment. Note 9: Employee Benefit Plan The Company maintains a 401(k) Profit Sharing Plan & Trust (the “401(k) Plan”) for its employees in the United States. The 401(k) Plan allows employees of the Company to contribute up to 80% of their eligible compensation, subject to certain limitations. Since 2006, the Company matches employee contributions up to $1,500 per year. Employee contributions are fully vested upon contribution, whereas the Company’s matching contributions are fully vested after the first year of service. The Company also has various defined contribution plans for our international employees. The Company’s contributions to these benefit plans were approximately $1.2 million , $1.2 million and $902,000 for the years ended December 31, 2012, 2011 and 2010 , respectively. Note 10: Related Party Transactions In July 2010, the Company entered into an independent contractor agreement with Holger Bartel, the Company’s former Chief Executive Officer, the Company’s Chairman and brother of Ralph Bartel, who controls the Company, to provide consulting services. Fees for these services rendered during the nine months ended September 30, 2011 totaled approximately $380,000 . No consulting services were rendered after September 30, 2011 as effective October 1, 2011, Holger Bartel became a full time employee of Travelzoo Inc. pursuant to an employment agreement. 65 As of December 31, 2011 North America Europe Elimination Consolidated Long-lived assets $ 3,668 $ 593 $ — $ 4,261 Total assets $ 75,238 $ 26,210 $ (33,100 ) $ 68,348 Years Ended December 31, (In thousands) 2012 2011 2010 North America Travel $ 56,636 $ 57,795 $ 53,693 Search 23,101 23,980 24,914 Local 29,050 26,774 9,054 Total North America revenues $ 108,787 $ 108,549 $ 87,661 Europe Travel $ 29,844 $ 27,434 $ 21,786 Search 4,149 5,089 2,404 Local 8,388 7,270 933 Total Europe revenues $ 42,381 $ 39,793 $ 25,123 Consolidated Travel $ 86,480 $ 85,229 $ 75,479 Search 27,250 29,069 27,318 Local 37,438 34,044 9,987 Total revenues $ 151,168 $ 148,342 $ 112,784  In 2009, the Company sold its Asia Pacific operating segment, including the Company's wholly owned subsidiaries, Travelzoo (Asia) Limited and Travelzoo Japan K.K., to Azzurro Capital Inc., which is owned and controlled by the Ralph Bartel 2005 Trust. Ralph Bartel is the sole beneficiary of the Ralph Bartel 2005 Trust. Mr. Bartel, the Company’s principal shareholder, is a Director of the Company and through September 30, 2010 was the Company’s Chairman. The Company’s receivables from Travelzoo (Asia) Limited and Travelzoo Japan K.K. totaled $355,000 and $422,000 as of December 31, 2012 and December 31, 2011 , respectively, and were related primarily to fees under a Hosting Agreement and a Referral Agreement entered into in connection with the sale transaction. The $355,000 and $422,000 are part of prepaid expenses and other current assets in the accompanying consolidated balance sheets. 66  Note 11: Unaudited Quarterly Information The following represents unaudited quarterly financial data for 2012 and 2011: Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures As of December 31, 2012, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial 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 Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2012 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act, including this report, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed in such reports is accumulated and communicated to management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, to allow timely decisions regarding required disclosure. For these purposes, “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. “Disclosure controls and procedures” include, without limitation, controls and 67 Quarters Ended Mar 31, 2012 Jun 30, 2012 Sep 30, 2012 Dec 31, 2012 Mar 31, 2011 Jun 30, 2011 Sep 30, 2011 Dec 31, 2011 (In thousands, except per share amounts) Revenues 39,333 $ 39,360 $ 35,447 $ 37,028 $ 36,960 $ 37,565 $ 38,661 $ 35,156 Cost of revenues 4,054 3,630 3,989 4,072 2,442 2,940 4,221 3,680 Gross profit 35,279 35,730 31,458 32,956 34,518 34,625 34,440 31,476 Operating expenses: Sales and marketing 16,265 16,061 17,427 18,489 16,131 18,701 16,737 13,921 General and administrative 9,444 9,303 9,836 10,109 8,394 8,295 8,478 9,380 Unexchanged promotional merger share 3,000 — — — 20,000 — — — Total operating expenses 28,709 25,364 27,263 28,598 44,525 26,996 25,215 23,301 Operating income(loss) 6,570 10,366 4,195 4,358 (10,007 ) 7,629 9,225 8,175 Interest income and other income 64 59 89 92 32 43 52 255 Gain (loss) on foreign currency 35 (75 ) 46 (1 ) 31 (1 ) (52 ) (58 ) Income (loss) from operations before income tax expense 6,669 10,350 4,330 4,449 (9,944 ) 7,671 9,225 8,372 Income tax expense 2,922 3,090 896 692 4,011 2,752 3,298 1,944 Net income (loss) $ 3,747 $ 7,260 $ 3,434 $ 3,757 $ (13,955 ) $ 4,919 $ 5,927 $ 6,428 Basic Net income (loss) per share 0.23 0.45 0.22 0.24 (0.85 ) 0.30 0.36 0.40 Diluted Net income (loss) per share $ 0.23 $ 0.45 $ 0.22 $ 0.25 $ (0.85 ) $ 0.30 $ 0.36 $ 0.40  procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. During the quarter ended December 31, 2012 , 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. Management’s Report on Internal Control Over Financial Reporting Travelzoo’s management is responsible for establishing and maintaining adequate internal control over financial reporting for Travelzoo Inc. Travelzoo’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Travelzoo’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Travelzoo; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Travelzoo are being made only in accordance with authorizations of management and directors of Travelzoo; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Travelzoo’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Travelzoo’s management assessed the effectiveness of Travelzoo’s internal control over financial reporting as of December 31, 2012, utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on the assessment by Travelzoo’s management, we determined that Travelzoo’s internal control over financial reporting was effective as of December 31, 2012 . The effectiveness of Travelzoo’s internal control over financial reporting as of December 31, 2012 has been audited by KPMG LLP, Travelzoo’s independent registered public accounting firm, as stated in their report which appears in Part II, Item 8 of this Annual Report on Form 10-K. /s/ CHRISTOPHER LOUGHLIN Christopher Loughlin Chief Executive Officer /s/ GLEN CEREMONY Glen Ceremony Chief Financial Officer February 7, 2013 Item 9B. Other Information Not applicable. 68  PART III Item 10. Directors, Executive Officers and Corporate Governance of the Registrant Information required by this item is incorporated by reference to Travelzoo’s Definitive Proxy Statement for the 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of Travelzoo’s fiscal year ended December 31, 2012 and is incorporated herein by reference. The following table sets forth certain information with respect to the executive officers of Travelzoo as of February 1, 2013. Christopher Loughlin has served as Chief Executive Officer since July 2010 after service as Executive Vice President, Europe from May 2005 to June 2011 and Vice President of Business Development from 2001 to April 2005. From 1999 to 2001, he was Chief Operating Officer of Weekends.com. Mr. Loughlin holds a BSc(Hons) in Technology Management from Staffordshire University and an MBA from Columbia University Graduate School of Business in New York. Glen Ceremony has served as Chief Financial Officer since June 2011. From October 2004 to June 2011, Mr. Ceremony worked at Ebay, Inc. and most recently served as Corporate Controller. In 2004, Mr. Ceremony was Senior Director of Global Finance Audit at Electronic Arts Inc. From 1998 to 2004, Mr. Ceremony worked at PWC LLP and from 1990 to 1998 he was at Coopers & Lybrand LLP. Mr. Ceremony received his B.S. in Business Administration from California State University, Sacramento. Shirley Tafoya has served as President, North America since July 2008 after service as Senior Vice President of Sales from 2001 to June 2008. From 1999 to 2001, Ms. Tafoya was the Director of Western Sales at Walt Disney Internet Group. From 1998 to 1999, Ms. Tafoya was a Sales Manager at IDG/International Data Group. Ms. Tafoya holds a bachelor’s degree in Business Administration from Notre Dame de Namur University. Item 11. Executive Compensation Information regarding executive compensation and compensation committee interlocks is incorporated by reference to the information in the definitive Proxy Statement relating to our 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2012 , which is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference to the information in the definitive Proxy Statement relating to our 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2012 , which is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence is incorporated by reference to the information set forth in the definitive Proxy Statement relating to our 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2012 , which is incorporated herein by reference. 69 Name Age Position Christopher Loughlin 39 Chief Executive Officer Glen Ceremony 45 Chief Financial Officer Shirley Tafoya 49 President, North America  Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is set forth in the definitive Proxy Statement relating to our 2013 Annual Meeting of Stockholders, which is incorporated herein by reference. PART IV Item 15. Exhibits and Financial Statement Schedules The following documents are filed as part of this report: (1) Our Consolidated Financial Statements are included in Part II, Item 8: (2) Supplementary Consolidated Financial Statement Schedules: 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. (3) Exhibits: See attached Exhibit Index 70 Page Report of Independent Registered Public Accounting Firm 42 Consolidated Balance Sheets 43 Consolidated Statements of Operations 44 Consolidated Statements of Comprehensive Income 45 Consolidated Statements of Stockholders’ Equity 46 Consolidated Statements of Cash Flows 47 Notes to Consolidated Financial Statements 48  SIGNATURES 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. Date: February 8, 2013 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Glen Ceremony 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. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 71 TRAVELZOO INC. By: /s/ GLEN CEREMONY Glen Ceremony Chief Financial Officer Signatures Title(s) Date /s/ HOLGER BARTEL Chairman of the Board of Directors February 8, 2013 Holger Bartel /s/ CHRISTOPHER LOUGHLIN Chief Executive Officer February 8, 2013 Christopher Loughlin /s/ GLEN CEREMONY Chief Financial Officer and Principal February 8, 2013 Glen Ceremony Accounting Officer /s/ RALPH BARTEL Director February 8, 2013 Ralph Bartel /s/ DAVID J. EHRLICH Director February 8, 2013 David J. Ehrlich /s/ DONOVAN NEALE-MAY Director February 8, 2013 Donovan Neale-May /s/ KELLY M. URSO Director February 8, 2013 Kelly M. Urso  EXHIBIT INDEX 72 Exhibit Number Description 3.1 — Certificate of Incorporation of Travelzoo Inc. (Incorporated by reference to our Pre-Effective Amendment No. 6 to our Registration Statement on Form S-4 (File No. 333-55026), filed February 14, 2002) 3.2 — By-laws of Travelzoo Inc. (Incorporated by reference to our Pre-Effective Amendment No. 6 to our Registration Statement on Form S-4 (File No. 333-55026), filed February 14, 2002) 10.1 — Form of Director and Officer Indemnification Agreement (Incorporated by reference to Exhibit 10.1 on Form 10-Q (File No. 000-50171), filed November 9, 2007) 10.2* — Travelzoo Inc. North America Executive Bonus Plan as Amended and Restated Effective January 1, 2007. (Incorporated by reference to Exhibit 10.1 on Form 8-K (File No. 000-50171), filed April 11, 2007) 10.3 — Agreement of Lease, effective as of February 1, 2008, between Travelzoo Inc. and 590 Madison Avenue, LLC (Incorporated by reference to Exhibit 10.1 on Form 8-K (File No. 000-50171), filed February 7, 2008) 10.4 — Asset Purchase Agreement, dated September 30, 2009, by and among Travelzoo Inc., Travelzoo K.K., Azzurro Capital Inc. and a buyer entity to be designated by Azzurro Capital Inc., with Exhibits (Incorporated by reference to Exhibit 10.1 on Form 8-K (File No. 000-50171), filed October 5, 2009) 10.5 — Asset Purchase Agreement, dated September 30, 2009, by and among Travelzoo Inc., Travelzoo (Asia Pacific) Limited, Azzurro Capital Inc. and a buyer entity to be designated by Azzurro Capital Inc., with Exhibits (Incorporated by reference to Exhibit 10.2 on Form 8-K (File No. 000-50171), filed October 5, 2009) 10.6 — Option Agreement, dated September 30, 2009, between Travelzoo Inc. and Azzurro Capital Inc. (Incorporated by reference to Exhibit 10.3 on Form 8-K (File No. 000-50171), filed October 5, 2009) 10.7* — Employment Agreement between Travelzoo Inc. and Christopher Loughlin dated November 18, 2009 (Incorporated by reference to Exhibit 10.1 on Form 8-K (File No. 000-50171), filed November 23, 2009) 10.8* — Nonqualified Stock Option Agreement between Travelzoo Inc. and Christopher Loughlin dated November 18, 2009 (Incorporated by reference to Exhibit 10.2 on Form 8-K (File No. 000-50171), filed November 23, 2009) 10.9* — Nonqualified Stock Option Agreement between Travelzoo Inc. and Glen Ceremony dated January 23,2012 (Incorporated by reference to Exhibits 10.1 on Form 8-K (File No. 000-50171), filed March 30, 2012) 10.10* — Nonqualified Stock Option Agreement between Travelzoo Inc. and Shirley Tafoya dated January 23,2012 (Incorporated by reference to Exhibits 10.1 on Form 8-K (File No. 000-50171), filed March 30, 2012)  * This exhibit is a management contract or a compensatory plan or arrangement. ‡ Filed herewith † Furnished herewith 10.11* — Employment Agreement, dated August 4, 2011 between Shirley Tafoya and Travelzoo Inc. (Incorporated by reference to Exhibit 10.1 on Form 10-Q (File No. 000-50171), filed November 9, 2010) 10.12* — Employment Agreement, dated May 9, 2011 between Glen Ceremony and Travelzoo Inc. Form 8-K (File No. 000-50171), filed May 20, 2011) 10.13* — Employment Agreement, dated October 1, 2011 between Holger Bartel and Travelzoo Inc. (Incorporated by reference to Exhibit 10.1 on Form 10-Q (File No. 000-50171), filed October 28, 2011) 21.1‡ — Subsidiaries of Travelzoo Inc. 23.1‡ — Consent of Independent Registered Public Accounting Firm 24.1 — Power of Attorney (included on signature page) 31.1‡ — Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2‡ — Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1† — Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2† — Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS† XBRL Instance Document 101.SCH† XBRL Taxonomy Extension Schema Document 101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF† XBRL Taxonomy Extension Definition Linkbase Document 101.LAB† XBRL Taxonomy Extension Label Linkbase Document 101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document  73  EXHIBIT 21.1 SUBSIDIARIES OF TRAVELZOO INC. Subsidiaries Jurisdiction Travelzoo (Canada) Inc. Canada Travelzoo (Europe) Limited United Kingdom Travelzoo Local Inc. Delaware  EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm The Board of Directors Travelzoo Inc.: We consent to the incorporation by reference in the registration statements on Form S-3 (No. 333-121076 and No. 333-119700) and on Form S-8 (No. 333-116093, No. 333-173175, and 333-182934) of Travelzoo Inc. and subsidiaries (Travelzoo Inc.) of our report dated February 8, 2013, with respect to the consolidated balance sheets of Travelzoo Inc. as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and the effectiveness of internal control over financial reporting as of December 31, 2012, which report appears herein. /s/ KPMG LLP Santa Clara, California February 8, 2013  Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Christopher Loughlin, certify that: 1. I have reviewed this annual report on Form 10-K of Travelzoo Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 8, 2013 /s/ C HRISTOPHER L OUGHLIN Christopher Loughlin Chief Executive Officer  Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Glen Ceremony, certify that: 1. I have reviewed this annual report on Form 10-K of Travelzoo Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 8, 2013 /s/ GLEN CEREMONY Glen Ceremony Chief Financial Officer  Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report on Form 10-K (the “Report”) of Travelzoo Inc. for the period ended December 31, 2012, the undersigned certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that (1) this Report complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and (2) the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of this Report or as a separate disclosure document. Date: February 8, 2013 By: /s/ C HRISTOPHER L OUGHLIN Christopher Loughlin Chief Executive Officer  Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report on Form 10-K (the “Report”) of Travelzoo Inc. for the period ended December 31, 2012, the undersigned certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that (1) this Report complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and (2) the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of this Report or as a separate disclosure document. Date: February 8, 2013 By: /s/ GLEN CEREMONY Glen Ceremony Chief Financial Officer This Page Intentionally Left Blank Investors Relations: Travelzoo Inc. ATTN: Investor Relations 590 Madison Avenue 37th Floor New York, NY 10022 Web site: www.travelzoo.com/ir 

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