Rosetta Stone 2010 Annual Report Download - page 22

Table of Contents
and promotional activities that retailers undertake can affect the sales of our products. The fact that we also sell our products directly could cause retailers or
distributors to reduce their efforts to promote our products or stop selling our products altogether. As evidenced by the Borders Chapter 11 bankruptcy
reorganization and plan to close approximately 200 stores, book stores are experiencing diminished foot traffic and sales. Reduced customer foot traffic in
these stores is likely to reduce their sales of our products. In addition, if one or more these bookstores or other retailers or distributors are unable to meet their
obligations with respect to accounts payable to us, we could be forced to write off such accounts. Any bankruptcy, liquidation, insolvency or other failure of
any of these retailers or distributors could result in significant financial loss and cause us to lose revenue in future periods.
Product returns and pricing concessions could exceed our estimates, which would diminish our reported revenue.
We offer consumers who purchase our packaged software and audio practice products directly from us an unconditional full money-back six-month
guarantee. We also permit some of our retailers and distributors to return packaged products, subject to limitations. For example, as of December 31, 2010, we
recorded reserves for product returns in the first quarter of approximately $2 million, primarily associated with lower than expected sales of Version 4
TOTALeduring the holiday season. We establish revenue reserves for packaged product returns based on historical experience, estimated channel inventory
levels and the timing of new product introductions and other factors. If packaged product returns exceed our reserve estimates, the excess would offset
reported revenue, which could hurt our reported financial results.
We are in the process of testing changes to the pricing of our products. If we reduce our prices as a result of successful tests in an effort to increase sales
volume and overall market penetration we may provide our retailers and distributors with price protection on existing inventories, which would allow these
retailers and distributors a credit against amounts owed with respect to unsold packaged product under certain conditions. These price protection reserves
could be material in future periods.
Intense competition in our industry may hinder our ability to generate revenue and may diminish our margins.
The market for foreign language learning solutions is rapidly evolving, highly fragmented and intensely competitive, and we expect both product and
pricing competition to persist and intensify. Increased competition could cause reduced revenue, price reductions, reduced gross margins and loss of market
share. Our competitors include Berlitz International Inc., Simon & Schuster, Inc. (Pimsleur), a subsidiary of CBS Corporation, Random House Ventures LLC
(Living Language), Disney Publishing Worldwide, a subsidiary of Walt Disney Company, and McGraw-Hill Education, a subsidiary of The McGraw-Hill
Companies. Many of our current and potential competitors have longer operating histories and substantially greater financial, technical, sales, marketing and
other resources than we do, as well as greater name recognition worldwide. The resources of these competitors also may enable them to respond more rapidly
to new or emerging technologies and changes in customer requirements, reduce prices to win new customers and offer free language learning software or
online services. We may not be able to compete successfully against current or future competitors.
As the market for foreign language solutions continues to develop, a number of other companies with greater resources than ours could attempt to enter
the market or increase their presence by acquiring or forming strategic alliances with our competitors or our distributors or by introducing their own
competing products. These companies and their products may be superior to any of our current competition. We also expect to see increased competition from
imitation products which are lower priced, lower quality products that attempt to capitalize on the popularity of our products by utilizing similar packaging
and marketing materials. We may not have the financial resources, technical
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