Rosetta Stone 2011 Annual Report Download

Download and view the complete annual report

Please find the complete 2011 Rosetta Stone annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 241

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176
  • 177
  • 178
  • 179
  • 180
  • 181
  • 182
  • 183
  • 184
  • 185
  • 186
  • 187
  • 188
  • 189
  • 190
  • 191
  • 192
  • 193
  • 194
  • 195
  • 196
  • 197
  • 198
  • 199
  • 200
  • 201
  • 202
  • 203
  • 204
  • 205
  • 206
  • 207
  • 208
  • 209
  • 210
  • 211
  • 212
  • 213
  • 214
  • 215
  • 216
  • 217
  • 218
  • 219
  • 220
  • 221
  • 222
  • 223
  • 224
  • 225
  • 226
  • 227
  • 228
  • 229
  • 230
  • 231
  • 232
  • 233
  • 234
  • 235
  • 236
  • 237
  • 238
  • 239
  • 240
  • 241

ROSETTA STONE INC (RST)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/14/2012
Filed Period 12/31/2011

Table of contents

  • Page 1
    ROSETTA STONE INC (RST) 10-K Annual report pursuant to section 13 and 15(d) Filed on 03/14/2012 Filed Period 12/31/2011

  • Page 2
    ... Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 Commission file number: 1-34283 Rosetta Stone Inc. (Exact name of...

  • Page 3
    The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $191 million as of June 30, 2011 (based on the last sale price of such stock as quoted on the New York Stock Exchange). As of February 27, 2012, there were 20,940,891 shares of common stock ...

  • Page 4
    ... Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...

  • Page 5
    .... PART I Item 1. Business Overview We are a leading provider of technology-based language-learning solutions. We develop, market, and sell language-learning solutions consisting of software, online services, mobile applications and audio practice tools primarily under our Rosetta Stone brand. Our...

  • Page 6
    ...and software tools to help learning in both consumer and institutional markets, supported by the rapid increase in computing technologies and internet use. Given busy lifestyles, adult language learners seek solutions that work flexibly and do not require physical classroom attendance. Educators are...

  • Page 7
    ...-learning solution that integrates our online courses with online services, including coach-led practice sessions, language games, interaction with native speakers and live support from customer service agents. Rosetta Stone Version 4 TOTALe, which was released in September 2010, combines packaged...

  • Page 8
    ...the Best Multi-Level Foreign Language Website category for Rosetta Stone Classroom Version 3, iParenting Media Excellent Product of 2009 award in the software category for Rosetta Stone Personal Edition Version 3, the 2009 Children's Technology Review Editor's Choice Award for Rosetta Stone Personal...

  • Page 9
    ...product leadership. We currently are working on a variety of product development initiatives. For example, Rosetta Stone Version 4 TOTALe, which was released in September 2010, combines packaged software with opportunities to practice with dedicated conversational coaches and other language learners...

  • Page 10
    ... In addition to the Version 3 languages listed above, Rosetta Stone continues to sell Version 4 languages using our Version 3 software in select markets and to institutional customers. In June 2011, we released (i) levels 4 & 5 for Chinese (Mandarin) and Russian and (ii) TOTALe Companion HD on the...

  • Page 11
    .... These tools deliver easy-to-read reports and graphs that track learner activity, progress and scores, thereby providing organizations with key information they need to measure return on their language-learning investment. Classroom Edition-This edition is targeted to language programs in primary...

  • Page 12
    ... a class management tool in the classroom edition; offering our solutions online through a commercial learning management system for our enterprise customers; and providing localized interfaces and help files in the user's native language, which are currently available in nine languages. In each...

  • Page 13
    ... available for all of our languages on those versions and runs on all widely available operating systems and on local and online applications. Our speech recognition models include languages traditionally not supported by general-purpose speech recognition software, such as Irish. We have developed...

  • Page 14
    ... marketing and distribution strategy. Channel Customer Type Representative Customers Consumer Individual Based on our internal studies, 57% annually earn more than $75,000 and 40% earn more than $100,000 Retailers* Amazon.com, Barnes & Noble, Best Buy, Books-a-Million, Staples and Costco Home...

  • Page 15
    ... 77% of our revenue for the year ended December 31, 2011. Our consumer distribution model comprises a mix of our call centers, websites, network of kiosks, select retail resellers, such as Amazon.com, Barnes & Noble, Best Buy, Books-a-Million, Staples and Costco, home shopping networks such as GS...

  • Page 16
    ...of our revenue for the year ended December 31, 2011. Our institutional distribution model is focused on targeted sales activity primarily through a direct sales force in four markets: schools, colleges and universities; the U.S. armed forces and federal government agencies; corporations; and not-for...

  • Page 17
    ... from a wide variety of companies providing language learning solutions including language learning center operators; audio CD and MP3 download providers; pre-packaged software producers; textbook publishers; online tutoring service providers; and online community practice providers. Our...

  • Page 18
    ...December 31, 2011, we had 1,888 total employees, consisting of 1,013 full-time and 875 part-time employees. Our personnel consisted of 334 employees in sales and marketing, 210 employees in research and development, 209 in general and administrative, 544 in coaching, customer and product support, 40...

  • Page 19
    Table of Contents information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's website at www.sec.gov. Item 1A. Risk Factors In addition to the other information set forth in this annual report on Form 10-K, you should ...

  • Page 20
    ... Rosetta Stone Version 4 TOTALe sells at a higher price per unit than our Version 3 software solutions and customers may not choose to engage with conversation coaches or pay higher prices to do so. Rosetta Stone Version 4 TOTALe and ReFLEX have also presented new management and marketing challenges...

  • Page 21
    ... closed 23 kiosk locations in the fourth quarter of 2011 and plan to significantly reduce the size of our worldwide kiosk program based on our evaluation of historical and forecasted kiosk sales performance. We may be unable to develop new solutions or solution enhancements in time to capture market...

  • Page 22
    ... filed for Chapter 11 bankruptcy reorganization and we recorded a charge of $0.9 million during the three months ended December 31, 2010 associated with the potential loss of our accounts receivable from Borders. In July 2011, Borders announced plans to close down all of the Company's retail stores...

  • Page 23
    ... 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...

  • Page 24
    ... to technological advances, to develop more advanced products more rapidly and less expensively than our competitors, to continue to develop an international sales network, to adapt to changing consumer preferences and to educate potential customers about the benefits of using our solutions rather...

  • Page 25
    ...may be forced to purchase time slots and publication dates at higher prices, which will increase our costs. Our business depends on our Rosetta Stone brand, and if we are not able to maintain and enhance our brand, our business and operating results may be harmed. We believe that market awareness of...

  • Page 26
    ... acquisition costs; inability to drive traffic to our websites, call centers, kiosks and distribution channels; inability to register domain names for "rosetta stone" in Country Code Top Level Domains in order to operate country specific websites to permit consumers to easily locate our products in...

  • Page 27
    ...changes and customer needs, including the emergence of new computing devices and more sophisticated online services, we may lose market share and revenue and our business could suffer. We need to anticipate, develop and introduce new products, services and applications on a timely and cost-effective...

  • Page 28
    ..., support and maintenance of such versions. If we fail to develop or sell products and services that respond to these or other technological developments and changing customer needs cost effectively, we may lose market share and revenue and our business could suffer. We offer our software products...

  • Page 29
    ... of our key technical, development, sales, services and management personnel. We rely on our executive officers and senior management to execute our existing business plans and to identify and pursue new opportunities. We rely on our technical and development personnel for product innovation. We...

  • Page 30
    ... and third-party providers to process customer orders, handle customer service requests, and host and deliver our internet-based language-learning solutions, including our online language courses and Rosetta Stone TOTALe, and our SharedTalk online peer-to-peer collaborative and interactive community...

  • Page 31
    ...for new web-based online services. Rosetta Stone TOTALe enables individuals to exchange information and engage in various online activities on a domestic and an international basis. The law relating to the liability of providers of online services for activities of their users is currently unsettled...

  • Page 32
    ... or those call centers may not continue to provide service at the current levels. We structure our marketing and advertising to drive potential customers to our call centers and websites to purchase our solutions. If our call center operators do not convert inquiries into sales at expected rates...

  • Page 33
    ... market's perception of us and our products and services. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms, or at all, we could face significant financial losses. Our sales to U.S. government agencies and armed forces...

  • Page 34
    ... in operating systems, the technologies we incorporate into our products or the computer systems our customers use may damage our business. As our product and service offerings become more complex, our reported revenue may become less predictable. Our planned expansion of products and services will...

  • Page 35
    ...for the capital expenditures required to finance working capital requirements, continue our expansion, develop new products and services or make acquisitions or other investments. In addition, if our business plans change, general economic, financial or political conditions in our markets change, or...

  • Page 36
    ... illegal use of our software and from counterfeit copies of our software. If piracy activities increase, it may further harm our business. We also expect that the more successful we are, the more likely that competitors will try to illegally use our proprietary information and develop products that...

  • Page 37
    ... names. In June 2011, ICANN (the Internet Corporation for Assigned Names and Numbers), the international authority over top-level domain names, gave final approval of the expansion of generic Top Level Domains ("TLDs") which will allow companies and organizations to create additional Web addresses...

  • Page 38
    ... of our voice recognition software, which we license from the University of Colorado. From time to time we may be required to renegotiate with these third parties or negotiate with new third parties to include their technology or content in our existing products, in new versions of our existing...

  • Page 39
    ... analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline. The trading market for our common stock depends in part on the research and reports that industry or financial analysts publish about us...

  • Page 40
    ... research and development location while our Tokyo, Seoul, Sao Paulo and London offices serve as regional sales offices. Our Shanghai, China office is representative. As of December 31, 2011, we also had site licenses for 174 kiosks. Most of our kiosk site licenses have terms of one to 89 months and...

  • Page 41
    .... On June 23, 2011, Rosetta Stone GmbH was served with a writ filed by Langenscheidt KG ("Langenscheidt") in the District Court of Cologne, Germany alleging trademark infringement due to Rosetta Stone's use of the color yellow on its packaging of its language-learning software and the advertising...

  • Page 42
    ... Market for Common Stock Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol "RST." The following table sets forth, for each of the periods indicated, the high and low reported sales price of our common stock on the NYSE. High Low Year ended December 31, 2011...

  • Page 43
    ... (the first day our stock began trading on the NYSE) through December 31, 2011, with the cumulative total return on the NYSE Composite Index and the SIC Code Index that includes all U.S. public companies in the Standard Industrial Classification (SIC) Code 7372-Prepackaged Software. The comparison...

  • Page 44
    ...in any future period. Year Ended December 31, 2011 2010 2009 2008 (in thousands, except per share data) 2007 Statements of Operations Data: Revenue Cost of revenue Gross profit Operating expenses: Sales and marketing Research and development Acquired in-process research and development General and...

  • Page 45

  • Page 46
    ...and elsewhere in this Annual Report on Form 10-K. Overview We are a leading provider of technology-based language-learning solutions. We develop, market, and sell language-learning solutions consisting of software, online services and audio practice tools primarily under our Rosetta Stone brand. Our...

  • Page 47
    ...-time expenses associated with transition to our new strategy. Components of Our Statement of Operations Revenue We derive revenue from sales of language-learning solutions consisting of packaged software and audio practice products and online software subscriptions. Revenue is presented as product...

  • Page 48
    ... We simply offer our customers the ability to choose which format they prefer without differentiating the learning experience. We began bundling time-based subscription licenses of our web-based TOTALe services with perpetual licenses of our Rosetta Stone Version 3 language-learning solutions in the...

  • Page 49
    ... fees associated with contract product development, legal, accounting and consulting. Personnel costs for each category of operating expenses include salaries, bonuses, stock-based compensation and employee benefit costs. Sales and Marketing. Our sales and marketing expenses consist primarily of...

  • Page 50
    ...Rosetta Stone Version 4 TOTALe, which was released in September 2010, combines packaged software and dedicated conversational coaching. We recognize revenue for software products and related services in accordance with Accounting Standards Codification subtopic 985-605, Software: Revenue Recognition...

  • Page 51
    ... and the subscription services are made available to the customer. In connection with packaged software product sales and online software subscriptions, technical support is provided to customers, including customers of resellers, at no additional cost for one year from date of purchase. As the...

  • Page 52
    ...contained in Rosetta Stone Version 4 TOTALe software arrangements. The first deliverable is the packaged software, which is delivered at the time of sale, and the second deliverable is the dedicated conversational coaching online services. We allocate revenue between these two deliverables using the...

  • Page 53
    ... financial statement line items (in thousands): Years Ended December 31, 2011 2010 2009 Included in cost of revenue: Cost of product revenue Cost of subscription and service revenue Total included in cost of revenue Included in operating expenses: Sales and marketing Research and development...

  • Page 54
    Table of Contents The following table sets forth a summary of stock option grants since the date of plan inception, through the date of this Annual Report on Form 10-K: Common Stock Fair Value Per Share at Grant Date Grant Date Number of Options Granted Exercise Price 1,704,950 $3.85 - $3.85 $4....

  • Page 55
    ... based on internal business plans, which include consideration of industry trends, competitive actions, technology changes and changes in underlying cost structure, we applied only the guideline public company method in estimating the fair value of our reporting units as of December 31, 2011. Based...

  • Page 56
    ... of events that have been recognized in our financial statements or tax returns. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. Changes in existing tax laws or rates...

  • Page 57
    ... Contents Results of Operations The following table sets forth our consolidated statement of operations for the periods indicated. Year Ended December 31, 2011 2010 2009 (in thousands, except per share data) Statements of Operations Data: Revenue Product Subscription and service Total Revenue Cost...

  • Page 58
    ... our web-based services offering Version 4 TOTALe that include higher direct costs to deliver to customers than our previous software solutions. The increase in operating expenses was primarily due to $16.2 million in personnel-related costs, $20.2 million in increased media and marketing activities...

  • Page 59
    ...of total consumer revenue for the year ended December 31, 2011, with the balance attributable to subscription and service revenue. We began bundling time-based subscription licenses of our web-based TOTALe services with perpetual licenses of our Rosetta Stone Version 3 language-learning solutions in...

  • Page 60
    ... million increase in retail deferred revenue during the year ended December 31, 2011 compared to the prior year period, which was primarily related to the launch of Version 4 TOTALe online services in our international markets. We are actively working to reduce our business and financial exposures...

  • Page 61
    ... time-based subscription licenses of our web-based TOTALe Studio and Rosetta World services with perpetual licenses of Rosetta Course, the product feature which previously comprised our Rosetta Stone Version 3 language-learning solutions. Approximately 10% - 25% of each of these bundled sales...

  • Page 62
    ...to our web-based service offerings in our Version 4 TOTALe and ReFLEX products that include a component of dedicated online language conversation coaching and higher direct costs to deliver to customers than our previous software solutions. We expect our cost of subscription and service revenue will...

  • Page 63
    ... amortization due to increased capitalized software costs in 2011, $1.0 million increase in IT related product development and improvement projects, $0.6 million in recruitment expenses due to our entry into new international markets, as well as $0.3 million increase in trade shows driven by Korea...

  • Page 64
    ... operating expense lines for the year ended December 31, 2011 as follows, $0.8 million in sales and marketing, $1.1 million in research and development, and $4.0 million in general and administrative. There were no shares issued from the LTIP to any executive prior to its cancellation. Total stock...

  • Page 65
    ...) Income tax benefit for the year ended December 31, 2011 was $8.0 million, an increase of $7.6 million, compared to the year ended December 31, 2010. The increase was the result of a decrease of $40.8 million in pre-tax income for the year ended December 31, 2011 and a higher effective tax rate...

  • Page 66
    ...of our web-based services offering Version 4 TOTALe in the third quarter of 2010 that included higher direct costs to deliver to customers than our previous software solutions. The increase in operating expenses was primarily due to $6.0 million in increased media and marketing activities, primarily...

  • Page 67
    ... attributable to subscription and service revenue. We began bundling time-based subscription licenses of our web-based TOTALe Studio and Rosetta World services with perpetual licenses of the Rosetta Course, which previously comprised our Rosetta Stone Version 3 language-learning solutions, in the...

  • Page 68
    ...time-based subscription licenses of our web-based TOTALe services with perpetual licenses of our Rosetta Stone Version 3 languagelearning solutions. Approximately 10% - 25% of the revenues from each of these bundled sales is allocated to online services and recognized over the life of these services...

  • Page 69
    ... the year ended December 31, 2009. The increase in cost was primarily attributable to our web-based service offering in our Version 4 TOTALe product that includes a component of dedicated online language conversation coaching and higher direct costs to deliver to customers than our previous software...

  • Page 70
    ... and marketing and sales support activities increased by $6.2 million over the prior year period. Advertising and marketing expenses grew by $5.9 million and were primarily related to television and radio media and retail visual displays associated with our launch of Rosetta Stone Version 4 TOTALe...

  • Page 71
    ....8 million charge related to the total of 591,491 shares of common stock awarded to 10 of our key employees in April 2009. The following table presents the stock-based compensation charge by operating expense line item: Year Ended December 31, 2010 2009 Change (dollars in thousands) % Change Sales...

  • Page 72
    ... 17, 2011, we allowed our $12.5 million revolving line of credit with Wells Fargo to expire. We expect that our future growth will continue to require additional working capital. Our future capital requirements will depend on many factors, including development of new products, market acceptance of...

  • Page 73
    ... installment sales in the fourth quarter of 2011 compared to an increase of $12.3 million for the year ended December 31, 2010. We have been providing customers with the option of purchasing our product over time in 3 or 5 month installments in order to increase the number of customers who purchase...

  • Page 74
    ... 5 Years Long-term debt Operating lease obligations Total $ $ - 13,086 13,086 $ $ - 6,616 6,616 $ $ - 6,084 6,084 $ $ - 386 386 $ $ - - - The operating lease obligations reflected in the table above include our corporate office leases and site licenses for our kiosks. Recent Accounting...

  • Page 75
    ... by a 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, as appropriate to allow timely decisions regarding required disclosure. Management recognizes...

  • Page 76
    ... may deteriorate. Based on using the COSO criteria, we believe our internal control over financial reporting as of December 31, 2011 was effective. Our independent registered public accounting firm, Deloitte & Touche LLP, has audited the financial statements included in this Annual Report on Form 10...

  • Page 77
    Table of Contents PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K as we intend to file our definitive Proxy Statement for the 2011 Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not ...

  • Page 78
    ..." are filed as part of this Annual Report. Consolidated Financial Statement Schedules. Schedules have been omitted because they are not applicable or are not required or the information required to be set forth in those schedules is included in the consolidated financial statements or related notes...

  • Page 79
    ...undersigned, thereunto duly authorized. ROSETTA STONE INC. By: /s/ STEPHEN M. SWAD STEPHEN M. SWAD Chief Executive Officer Date: March 13, 2012 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...

  • Page 80
    Table of Contents Signature Title /s/ THEODORE J. LEONSIS Theodore J. Leonsis /s/ JOHN E. LINDAHL John E. Lindahl /s/ LAURA L. WITT Laura L. Witt 77 Director Director Director

  • Page 81
    Table of Contents INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to ...

  • Page 82
    ...sheets of Rosetta Stone Inc. and subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the...

  • Page 83
    ... of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Rosetta Stone Inc. Arlington, VA We have audited the internal control over financial reporting of Rosetta Stone Inc. and subsidiaries (the "Company") as of December 31, 2011, based on...

  • Page 84
    ... We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2011 of the Company and our report dated March 13, 2012 expressed an unqualified opinion on those...

  • Page 85
    Table of Contents ROSETTA STONE INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) As of December 31, 2011 2010 Assets Current assets: Cash and cash equivalents Restricted cash Short term investments Accounts receivable (net of allowance for doubtful accounts of $1,951 and ...

  • Page 86
    ...of Contents ROSETTA STONE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) Year Ended December 31, 2011 2010 2009 Revenue : Product Subscription and service Total revenue Cost of revenue: Cost of product revenue Cost of subscription and service revenue Total cost...

  • Page 87
    ... Exercise of Stock Options Restricted Stock Award Vesting tock-based Compensation Expense Tax Benefit on Stock Option Exercised Comprehensive income (loss): Net loss Foreign currency translation gain, net of tax of $46 Unrealized gain/loss on available-for-sale securities Total comprehensive income...

  • Page 88
    Table of Contents ROSETTA STONE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2011 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income Adjustments to reconcile net income (loss) to cash provided by operating activities: Stock-based compensation expense Bad ...

  • Page 89
    Equipment acquired under capital lease Contingent liability for acquisition $ $ 16 $ - $ - $ - $ 14 850 See accompanying notes to consolidated financial statements. F-8

  • Page 90
    ... FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Rosetta Stone Inc. and its subsidiaries ("Rosetta Stone," the "Company" or the "Successor") develops, markets and supports a suite of language-learning solutions consisting of software products, online services and audio practice tools under the Rosetta...

  • Page 91
    ...ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition Revenue is primarily derived from the sale of packaged software and audio practice products, online software subscriptions and professional services...

  • Page 92
    ... months to 15 months. Rosetta Stone Version 4 TOTALe bundles, which include dedicated conversational coaching online services and packaged software, allow customers to begin their online services at any point during a registration window, which is 6 months from the date of purchase from the Company...

  • Page 93
    ...in Rosetta Stone Version 4 TOTALe software arrangements. The first deliverable is the packaged software, which is delivered at the time of sale, and the second deliverable is the dedicated conversational coaching online services. The Company allocates revenue between these two deliverables using the...

  • Page 94
    ...-in first-out basis, or market. The Company reviews inventory for excess quantities and obsolescence based on its best estimates of future demand, product lifecycle status and product development plans. The Company uses historical information along with these future estimates to reserve for obsolete...

  • Page 95
    ... of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, accounts payable...

  • Page 96
    ...from the acquisition of Rosetta Stone Ltd. (formerly known as Fairfield & Sons, Ltd.) in January 2006 and the acquisition of certain assets of SGLC in November 2009. The Company tests goodwill for impairment annually on June 30 of each year at the reporting unit level using a fair value approach, in...

  • Page 97
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company will continue to review indicators and it is possible an impairment charge may need to be recorded if trends do not reverse. For income ...

  • Page 98
    ... costs, professional services fees and overhead costs associated with product development. Software products are developed for sale to external customers. The Company considers technological feasibility to be established when all planning, designing, coding, and testing has been completed...

  • Page 99
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ASC 740 requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on available evidence, it is more ...

  • Page 100
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Net Income Per Share Net income (loss) per share is computed under the provisions of Accounting Standards Codification topic 260, Earnings Per Share....

  • Page 101
    ... of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Share-based awards to purchase approximately 540,000, 470,000 and 15,000 shares of common stock that had an exercise price in excess of the average market...

  • Page 102
    ... have a material impact on the Company's reported results of operations and financial position, but there will be a qualitative impact of adding an additional statement to the Company's consolidated financial statements. In September 2011, the FASB issued new guidance on goodwill impairment testing...

  • Page 103
    ... of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. ACQUISITIONS (Continued) $100,000, the total purchase price was $950,000. In 2011 and 2010, we made additional payments of $350,000 and $400,000 respectively in accordance with the terms of the purchase. Under...

  • Page 104
    ...from the acquisition of Rosetta Stone Ltd. (formerly known as Fairfield & Sons, Ltd.) in January 2006 and the acquisition of certain assets of SGLC in November 2009. The Company tests goodwill for impairment annually on June 30 of each year at the reporting unit level using a fair value approach, in...

  • Page 105
    ...) development of new products in the amount of $0.3 million. The estimated lives of the acquired core technology and customer relationships are between 18 to 36 months. The intangible asset associated with the trade name and trademark has an indefinite useful life. The estimated life of the website...

  • Page 106
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. OTHER CURRENT LIABILITIES The following table summarizes other current liabilities (in thousands): December 31, 2011 2010 Marketing expenses Professional and consulting fees Sales return reserve Taxes ...

  • Page 107
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. STOCK-BASED COMPENSATION (Continued) 2009 Omnibus Incentive Plan On February 27, 2009, the Company's Board of Directors approved a new Stock Incentive and Award Plan (the "2009 Plan") that provides for ...

  • Page 108
    ... TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. STOCK-BASED COMPENSATION (Continued) Stock Options-The following table summarizes the Company's stock option activity from January 1, 2011 to December 31, 2011: Weighted Average Exercise Price Weighted Average Contractual Life (years) Options...

  • Page 109
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. STOCK-BASED COMPENSATION (Continued) The following table summarizes the Company's restricted stock activity for the years ended December 31, 2011 and 2010, respectively: Weighted Average Grant Date Fair ...

  • Page 110
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. STOCK-BASED COMPENSATION (Continued) terminates upon completion of an initial public offering. In April 2009, the Company's Board of Directors awarded 10 of the Company's key employees a total of 591,491...

  • Page 111
    ... related financial statement line items (in thousands): Years Ended December 31, 2011 2010 2009 Included in cost of revenue: Cost of product revenue Cost of subscription and service revenue Total included in cost of revenue Included in operating expenses: Sales and marketing Research & development...

  • Page 112
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. COMMITMENTS AND CONTINGENCIES (Continued) kiosk's sales in excess of stipulated amounts. Kiosk site licenses range from a period of one month to 89 months. Building, warehouse and office space leases ...

  • Page 113
    ... Company is developing. The agreement required a one-time, non-refundable payment of $0.3 million, which was expensed in full as research and development costs during 2006 because the products in which the licensed software were to be incorporated into had not yet reached technological feasibility...

  • Page 114
    .... On June 23, 2011, Rosetta Stone GmbH was served with a writ filed by Langenscheidt KG ("Langenscheidt") in the District Court of Cologne, Germany alleging trademark infringement due to Rosetta Stone's use of the color yellow on its packaging of its language-learning software and the advertising...

  • Page 115
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. INCOME TAXES The following table summarizes the significant components of the Company's deferred tax assets and liabilities as of December 31, 2011 and 2010 (in thousands): As of December 31, 2011 2010...

  • Page 116
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. INCOME TAXES (Continued) credit carryforwards which if unutilized, would expire between 2031 and 2032, foreign tax credit carryforwards of $1.2 million which if unutilized, would expire in 2022, and a ...

  • Page 117
    ... of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. INCOME TAXES (Continued) Reconciliation of income tax provision (benefit) computed at the U.S. federal statutory rate to income tax expense is as follows (in thousands): Year Ended December 31, 2011 2010...

  • Page 118
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. INCOME TAXES (Continued) The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company's tax years 2010, 2009, 2008 and 2007 are subject to examination...

  • Page 119
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. SEGMENT INFORMATION (Continued) Operating results by segment for the years ended December 31, 2011, 2010 and 2009, respectively were as follows (in thousands): Years Ended December 31, 2011 2010 2009 ...

  • Page 120
    ...of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. SEGMENT INFORMATION (Continued) The information below summarizes long-lived assets by geographic area for the years ended December 31, 2011, 2010 and 2009, respectively (in thousands): As of December 31, 2011...

  • Page 121
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (Unaudited) Summarized quarterly supplemental consolidated financial information for 2011 and 2010 are as follows (in thousands, except per share amounts): ...

  • Page 122
    Table of Contents ROSETTA STONE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. SUBSEQUENT EVENTS (Continued) and services to, the Company. The executive officers of the Company who will receive the retention awards are Michael S. Fulkerson, Chief Technology Officer, Pragnesh N. ...

  • Page 123
    ...between The Corporate Executive Board Company and Rosetta Stone Ltd. Software License Agreement by and between The Regents of the University of Colorado and Fairfield & Sons, Ltd. dated as of December 22, 2006*** Form of Restricted Stock Award under the 2009 Plan Credit Agreement dated as of January...

  • Page 124
    ...Rosetta Stone's Current Report on Form 8-K dated October 13, 2010. Incorporated by reference to exhibit filed with Rosetta Stone Form 10-K for the fiscal year ended December 31, 2010. Incorporated by reference to exhibit filed with Rosetta Stone Form 10-Q for the quarterly period ended June 30, 2011...

  • Page 125

  • Page 126
    ... delegated from time to time by the Board or the Chief Executive Officer of the Company ("Chief Executive Officer") in their sole discretion. Executive will report to the Chief Executive Officer. Executive will devote her best efforts and substantially all of her business time and attention (except...

  • Page 127
    ... applicable withholdings and deductions). Executive's Annual Base Salary for any partial year will be prorated based upon the number of days elapsed in such year. The Annual Base Salary may be increased (but not decreased) from time to time during the Service Term by the Board based upon the Company...

  • Page 128
    ...than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Company. A determination of disability may be made by a physician selected or approved by the Chief Executive Officer and, in this...

  • Page 129
    ... to maintain full-time employment with the Company in the United States in compliance with all applicable immigration law, or (j) discloses trade secrets of the Company or an Affiliate. (e) Executive's voluntary resignation by the delivery to the Chief Executive Officer of a written notice from...

  • Page 130
    ...lump sum in cash equal to the product of (x) the monthly basic life insurance premium applicable to Executive's basic life insurance coverage immediately prior to the Termination Date and (y) 12. To the extent then available under the life insurance program, Executive may, at her option, convert her...

  • Page 131
    ... Date and the Company shall pay to Executive the Accrued Obligation within thirty (30) days following the Termination Date. Following such payments, the Company shall have no further obligations to Executive other than as may be required by law or the terms of an employee benefit plan of the Company...

  • Page 132
    ... their respective business for any reason whatsoever without the Chief Executive Officer's consent, unless and to the extent that (except as otherwise provided in the definition of Proprietary Information) the aforementioned matters become generally known to and available for use by the public other...

  • Page 133
    ... methods, processes, programs, designs, analyses, drawings, reports and all similar or related information (whether or not patentable) that relate to the Company's or any of its Affiliates' actual or anticipated business, research and development, or existing or future products or services and that...

  • Page 134
    ... Service or Product. "Competing Service or Product" means producing or selling software or services used for learning foreign languages, including English as a foreign language, and any other business carried on by the Company during Executive's employment. A "Prospective Customer" means any Person...

  • Page 135
    ... and their current and prospective employees, vendors, customers, clients and other business relations, and that, accordingly, the geographical restriction contained in this Section 9 is reasonable in all respects and necessary to protect the goodwill and Proprietary Information of the Company and...

  • Page 136
    ... of operation, their plans, processes, figures, sales figures, projections, estimates, tax records, personnel history, accounting procedures, promotions, supply sources, contracts, knowhow, trade secrets, information relating to research, development, inventions, technology, manufacture, purchasing...

  • Page 137
    ... courier service (charges prepaid) to the recipient at the address below indicated: If to the Company: Rosetta Stone Ltd. 1919 North Lynn Street 7th Floor Arlington, VA 22209 Attention: Chief Executive Officer With a copy to: Rosetta Stone Ltd. 1919 North Lynn Street 7th Floor Arlington, VA 22209...

  • Page 138
    ...to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any...

  • Page 139
    ... with the prior (g) written consent of the Company and Executive. (h) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or holiday in the state in which the Company's chief executive office is located, the time period shall be...

  • Page 140
    ... with detailed supporting documentation, to the Company and Eligible Employee within fifteen (15) business days after the date on which right to a Payment is triggered (if requested at that time by the Company or Executive) or such other time as requested by the Company or Executive. Any good faith...

  • Page 141
    ...action arising from or out of Executive's performance as an officer, director or employee of the Company or any of its Affiliates or in any other capacity,... Executive serves at the request of Company to the maximum extent permitted by applicable law and the Company's By-Laws. Expenses incurred in ...

  • Page 142
    IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. EXECUTIVE By: /s/ Judy Verses Judy Verses ROSETTA STONE LTD. By: /s/ Tom Adams Title: Chief Executive Officer 17

  • Page 143
    EXHIBIT A Form of Release 18

  • Page 144
    ... or in equity, whether now known or unknown, that Executive Releasers, or any person acting under any of them, may now have, or claim at any future time to have, based in whole or in part upon any act or omission occurring on or before the Effective Date, without regard to present actual knowledge...

  • Page 145
    ... (EEOC) or any other governmental agency, provided Executive does not seek any personal relief for any claims released herein; (vii) any claims arising after the date of Executive's execution of this Release; (viii) any obligations of the Company under the Employment Agreement which survive...

  • Page 146
    ... Executive has given the Company written notice, within three business days following service of the subpoena or court order. 8. Executive covenants never to disparage or speak ill of the Company or any the Company product or service, or of any past or present employee, officer or director of the...

  • Page 147
    ...shall be immediately refunded to the Company); provided that in such circumstances this Release and the facts and circumstances relating to its execution shall be inadmissible in any later proceeding between the parties, and the statutes of limitations applicable to claims asserted in the proceeding...

  • Page 148
    ... between the Effective Date and 10 days after the date on which Section 2(a) is declared unenforceable. (g) and agreements. (h) This Release shall not be modified except in a writing signed by the parties. This Release constitutes the entire agreement of the parties and a complete merger of prior...

  • Page 149
    (q) This Release may be executed in counterparts, or by copies transmitted by telecopier, all of which shall be given the same force and effect as the original. [SIGNATURES FOLLOW] 24

  • Page 150
    NOTE: DO NOT SIGN THIS SUPPLEMENTAL LEGAL RELEASE UNTIL AFTER EXECUTIVE'S FINAL DAY OF EMPLOYMENT. ROSETTA STONE LTD. By: [name, title] Date: 25 EXECUTIVE Judy Verses Date:

  • Page 151
    ... delegated from time to time by the Board or the Chief Executive Officer of the Company ("Chief Executive Officer") in their sole discretion. Executive will report to the Chief Executive Officer. Executive will devote his best efforts and substantially all of his business time and attention (except...

  • Page 152
    ... applicable withholdings and deductions). Executive's Annual Base Salary for any partial year will be prorated based upon the number of days elapsed in such year. The Annual Base Salary may be increased (but not decreased) from time to time during the Service Term by the Board based upon the Company...

  • Page 153
    ..., disability, family and other leave in accordance with Company policies as in effect from time to time for senior executives. Paid vacation and sick days not used by calendar year end shall be forfeited unless otherwise provided in the Company's vacation and sick leave policy. (iv) Notwithstanding...

  • Page 154
    ... to maintain full-time employment with the Company in the United States in compliance with all applicable immigration law, or (j) discloses trade secrets of the Company or an Affiliate. (e) Executive's voluntary resignation by the delivery to the Chief Executive Officer of a written notice from...

  • Page 155
    ...lump sum in cash equal to the product of (x) the monthly basic life insurance premium applicable to Executive's basic life insurance coverage immediately prior to the Termination Date and (y) 12. To the extent then available under the life insurance program, Executive may, at his option, convert his...

  • Page 156
    ... Date and the Company shall pay to Executive the Accrued Obligation within thirty (30) days following the Termination Date. Following such payments, the Company shall have no further obligations to Executive other than as may be required by law or the terms of an employee benefit plan of the Company...

  • Page 157
    ... to any Person or, directly or indirectly, utilize for his own account or permit to be utilized by any Person any Proprietary Information or records pertaining to the Company, its Affiliates and their respective business for any reason whatsoever without the Chief Executive Officer's consent...

  • Page 158
    ... methods, processes, programs, designs, analyses, drawings, reports and all similar or related information (whether or not patentable) that relate to the Company's or any of its Affiliates' actual or anticipated business, research and development, or existing or future products or services and that...

  • Page 159
    ... Service or Product. "Competing Service or Product" means producing or selling software or services used for learning foreign languages, including English as a foreign language, and any other business carried on by the Company during Executive's employment. A "Prospective Customer" means any Person...

  • Page 160
    ... and their current and prospective employees, vendors, customers, clients and other business relations, and that, accordingly, the geographical restriction contained in this Section 9 is reasonable in all respects and necessary to protect the goodwill and Proprietary Information of the Company and...

  • Page 161
    ... of operation, their plans, processes, figures, sales figures, projections, estimates, tax records, personnel history, accounting procedures, promotions, supply sources, contracts, knowhow, trade secrets, information relating to research, development, inventions, technology, manufacture, purchasing...

  • Page 162
    Rosetta Stone Ltd. 1919 North Lynn Street 7th Floor Arlington, VA 22209 Attention: General Counsel If to Executive: Pragnesh Shah 7279 Evans Mill Rd McLean,VA 22101 With a Copy to: Venable LLP 12

  • Page 163
    ... 20004 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when delivered or, if mailed, five (5) business days after deposit in the...

  • Page 164
    ...only with the prior written consent of the Company and Executive. (h) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or holiday in the state in which the Company's chief executive office is located, the time period shall be...

  • Page 165
    ...(y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Executive's receipt, on an...

  • Page 166
    ... by the Accounting Firm required to be made hereunder. (c) The Accounting Firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Eligible Employee within fifteen (15) business days after the date on which...

  • Page 167
    IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. Rosetta Stone Ltd. By: /s/ Stephen Swad Stephen Swad, President and CEO EXECUTIVE By: /s/ Pragnesh Shah Pragnesh Shah 17

  • Page 168
    EXHIBIT A Form of Release 18

  • Page 169
    ... or in equity, whether now known or unknown, that Executive Releasers, or any person acting under any of them, may now have, or claim at any future time to have, based in whole or in part upon any act or omission occurring on or before the Effective Date, without regard to present actual knowledge...

  • Page 170
    ... (EEOC) or any other governmental agency, provided Executive does not seek any personal relief for any claims released herein; (vii) any claims arising after the date of Executive's execution of this Release; (viii) any obligations of the Company under the Employment Agreement which survive...

  • Page 171
    ...do so in writing, and that such revocation must be signed by Executive and received by the Company in care of the Chief Executive Officer no later than 5 p.m. (Eastern Time) on the seventh (7th) day after Executive has signed this Release. Executive acknowledges and agrees that, in the event that he...

  • Page 172
    ... Executive has given the Company written notice, within three business days following service of the subpoena or court order. 8. Executive covenants never to disparage or speak ill of the Company or any the Company product or service, or of any past or present employee, officer or director of the...

  • Page 173
    ... limitations applicable to claims asserted in the proceeding shall be deemed to have been tolled for the period between the Effective Date and 10 days after the date on which Section 2(a) is declared unenforceable. (g) and agreements. (h) This Release shall not be modified except in a writing signed...

  • Page 174
    ... to the fair meaning of the language used. (o) Every dispute arising from or relating to this Release shall be tried only in the ...costs and reasonable attorneys' fees. (q) This Release may be executed in counterparts, or by copies transmitted by telecopier, all of which shall be given the same force...

  • Page 175
    NOTE: DO NOT SIGN THIS SUPPLEMENTAL LEGAL RELEASE UNTIL AFTER EXECUTIVE'S FINAL DAY OF EMPLOYMENT. ROSETTA STONE LTD. By: Stephen Swad, President & CEO Date: 25 EXECUTIVE Pragnesh Shah Date:

  • Page 176
    ...("Amendment") made effective on December 22, 2011 to the Executive Employment Agreement, dated as of May 31, 2011 (the "Employment Agreement"), among Rosetta Stone Ltd., a Delaware corporation (together with its successors and assigns, the "Company"), and Michael Fulkerson (the "Executive"). WHEREAS...

  • Page 177
    ... by the Accounting Firm required to be made hereunder. (c) The Accounting Firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Eligible Executive within fifteen (15) business days after the date on which...

  • Page 178
    IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date set forth below. EXECUTIVE By: /s/ Michael Fulkerson Michael Fulkerson Date: 12/22/2012 ROSETTA STONE LTD. By: /s/ Tom Adams Tom Adams Title: Chief Executive Officer Date: 12/22/2012

  • Page 179
    ... ("Amendment") made effective on December 22, 2011 to the Executive Employment Agreement, dated as of February 20, 2009 (the "Employment Agreement"), among Rosetta Stone Ltd., a Delaware corporation (together with its successors and assigns, the "Company"), and Michael Wu (the "Executive"). WHEREAS...

  • Page 180
    ... by the Accounting Firm required to be made hereunder. (c) The Accounting Firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Eligible Executive within fifteen (15) business days after the date on which...

  • Page 181
    IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date set forth below. EXECUTIVE By: /s/ Michael Wu Michael Wu Date: 12/22/2011 ROSETTA STONE LTD. By: /s/ Tom Adams Tom Adams Title: Chief Executive Officer Date: 12/22/2011

  • Page 182
    ... ("Amendment") made effective on December 22, 2011 to the Executive Employment Agreement, dated as of November 9, 2010 (the "Employment Agreement"), among Rosetta Stone Ltd., a Delaware corporation (together with its successors and assigns, the "Company"), and Stephen Swad (the "Executive"). WHEREAS...

  • Page 183
    ... by the Accounting Firm required to be made hereunder. (c) The Accounting Firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Eligible Executive within fifteen (15) business days after the date on which...

  • Page 184
    IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date set forth below. EXECUTIVE By: Date: /s/ Stephen Swad Stephen Swad 12/22/2011 ROSETTA STONE LTD. By: /s/ Tom Adams Tom Adams Title: Chief Executive Officer Date: 12/22/2011

  • Page 185
    ...chief executive officers of companies of similar size and nature and such other duties and responsibilities as may be delegated from time to time by the Board in its sole discretion. Executive will report to the Board. Executive will devote his best efforts and substantially all of his business time...

  • Page 186
    ... is amended by deleting the following sentences: "The grants shall have such terms as are determined by the Board in accordance with the current stock plan in place at time of grant. Executive will be eligible to participate in a pending executive long-term performance plan that will be approved by...

  • Page 187
    ... effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date set forth below. EXECUTIVE By: /s/ Stephen Swad Stephen Swad Title: President and Chief Executive Officer Date: 2/22/2012 ROSETTA STONE LTD. By: /s/ Tom P.H. Adams Tom P.H. Adams Title: Chairman of the Board of...

  • Page 188
    Exhibit 10.24 October 12, 2011 Dear Tom: This will confirm our discussions about a leadership change at Rosetta Stone. After review and discussions, the BOD together with you has agreed on the following: 1. The company will hire a search firm to undertake the search for the new CEO. The BOD will ...

  • Page 189
    ... PLAN, AS AMENDED NONQUALIFIED STOCK OPTION AWARD AGREEMENT Rosetta Stone Inc., a Delaware corporation (the "Company"), hereby grants an option to purchase shares of its Class B Common Stock, $.00005 par value, (the "Stock") to the optionee named below. The terms and conditions of the Option are set...

  • Page 190
    ... an option (the "Option") to purchase that number of shares of the Company's common stock, $.00005 par value (the "Stock"), at the Option Price per Share of Stock set forth on the Cover Sheet (the "Option Price"), subject to adjustment as provided in the Plan. 2. Type of Option. The Option is...

  • Page 191
    ... null and void at the close of business at the Company's principal business office on the day before the date of the tenth anniversary of the Grant Date (the "Option General Expiration Date"). If Optionee ceases to be an employee of the Company or any Subsidiary Corporation for any reason the Option...

  • Page 192
    ...the close of business at the Company's principal business office on the later of (x) the day that is sixty (60) days after the date of such cessation, or (y) the day that is thirty (30) after any blackout period(s) under the Company's Insider Trading Compliance Policy (as in effect from time to time...

  • Page 193
    ... or delivery service, addressed to the Company at the Company's principal business office address to the attention of the Company's General Counsel and to Optionee at Optionee's residential address as it appears on the books and records of the Company, or at such other address and number as a party...

  • Page 194
    ... involving fraud, embezzlement or any other act of dishonesty in the course of his employment by the Company or an Affiliate which conduct damaged the Company or an Affiliate; (ii) substantially and repeatedly failed to perform duties of the office held by him or her as reasonably directed by the...

  • Page 195
    ... resulting corporation (or other form of business entity) or (z) a successor entity holding a majority of the assets of the Company. In addition, a Change in Control shall not include a bona fide, firm commitment underwritten public offering of the Stock pursuant to a registration statement declared...

  • Page 196
    condition described in (i) and/or (ii) and the Company has not within such thirty (30) day period remedied the condition. 8

  • Page 197
    Exhibit 10.26 ROSETTA STONE INC. 2009 OMNIBUS INCENTIVE PLAN, AS AMENDED COVER SHEET TO RESTRICTED STOCK AWARD AGREEMENT Rosetta Stone Inc., a Delaware corporation (the "Company"), has granted to the individual whose name is set forth below on the "Name of Executive" line ("Executive") the shares of...

  • Page 198
    ... Rosetta Stone Inc., a Delaware corporation (the "Company"), and Executive (as that term is defined in the Covered Sheet), effective as of the Grant Date set forth on the Cover Sheet (the "Grant Date"), pursuant to the Rosetta Stone Inc. 2009 Omnibus Incentive Plan, as amended, (the "Plan"), a copy...

  • Page 199
    ... resulting corporation (or other form of business entity) or (z) a successor entity holding a majority of the assets of the Company. In addition, a Change in Control shall not include a bona fide, firm commitment underwritten public offering of the Stock pursuant to a registration statement declared...

  • Page 200
    ... or an Affiliate in the United States in compliance with all applicable immigration law; or (x) disclosed trade secrets of the Company or an Affiliate. (f) "Disability" shall have the meaning ascribed to such term in the Plan, as it may be amended from time to time. (g) "Good Reason" shall have the...

  • Page 201
    ...give related instructions to the transfer agent, if any, to stop registration of the transfer of the Shares. The Shares are registered with the Securities and Exchange Commission under a Registration Statement on Form S-8. A Prospectus describing the Plan and the Shares is available from the Company...

  • Page 202
    (d) If Executive ceases to be employed by the Company or a subsidiary for any reason before the applicable lapse date, the Forfeiture Restrictions then applicable to the Restricted Shares shall not lapse and all the Restricted Shares shall be forfeited to the Company. 5

  • Page 203
    ... Executive is the General Counsel of the Company, Executive must seek the prior written approval of the Chief Financial Officer or the Chief Executive Officer). If the election is permitted as provided in the prior sentence, Executive shall timely pay the Company the amount necessary to satisfy the...

  • Page 204
    ...or delivery service, addressed to the Company at the Company's principal business office address to the attention of the Company's General Counsel and to Executive at Executive's residential address as it appears on the books and records of the Company, or at such other address and number as a party...

  • Page 205
    ... presents does bargain, sell, assign and transfer unto Rosetta Stone Inc., a Delaware corporation (the "Company"), the Shares transferred pursuant to the Restricted Stock Award Agreement dated effective %%OPTION_DATE,MM/DD/ YYYY'%-%, between the Company and the undersigned; and subject to and in...

  • Page 206
    ... PLAN, AS AMENDED NONQUALIFIED STOCK OPTION AWARD AGREEMENT Rosetta Stone Inc., a Delaware corporation (the "Company"), hereby grants an option to purchase shares of its Class B Common Stock, $.00005 par value, (the "Stock") to the optionee named below. The terms and conditions of the Option are set...

  • Page 207
    ... an option (the "Option") to purchase that number of shares of the Company's common stock, $.00005 par value (the "Stock"), at the Option Price per Share of Stock set forth on the Cover Sheet (the "Option Price"), subject to adjustment as provided in the Plan. 2. Type of Option. The Option is...

  • Page 208
    ... the Option that was exercisable on the date of such cessation shall remain exercisable for, and shall otherwise terminate and become null and void at the close of business at the Company's principal business office on the day that is six (6) months after the date of such death or Disability, but in...

  • Page 209
    ...the close of business at the Company's principal business office on the later of (x) the day that is sixty (60) days after the date of such cessation, or (y) the day that is thirty (30) days after any blackout period(s) under the Company's Insider Trading Compliance Policy (as in effect from time to...

  • Page 210
    ... or delivery service, addressed to the Company at the Company's principal business office address to the attention of the Company's General Counsel and to Optionee at Optionee's residential address as it appears on the books and records of the Company, or at such other address and number as a party...

  • Page 211
    ... Option Shares to be registered on the applicable stock transfer records if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (b) that the Company may give related instructions to the transfer agent, if any...

  • Page 212
    ...'s employees, customers or vendors in violation of the Company's policies with respect to such matters; (viii) misappropriated funds or assets of the Company or an Affiliate for personal use or willfully violated the Company policies or standards of business conduct as determined in good faith by...

  • Page 213
    Exhibit 10.28 ROSETTA STONE INC. 2009 OMNIBUS INCENTIVE PLAN, AS AMENDED COVER SHEET TO RESTRICTED STOCK AWARD AGREEMENT Rosetta Stone Inc., a Delaware corporation (the "Company"), has granted to the individual whose name is set forth below on the "Name of Employee" line ("Employee") the shares of ...

  • Page 214
    ... Rosetta Stone Inc., a Delaware corporation (the "Company"), and Employee (as that term is defined in the Covered Sheet), effective as of the Grant Date set forth on the Cover Sheet (the "Grant Date"), pursuant to the Rosetta Stone Inc. 2009 Omnibus Incentive Plan, as amended, (the "Plan"), a copy...

  • Page 215
    ... of the Shares to be registered on the applicable stock transfer records of the Company if such proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of any applicable securities law and (b) give related instructions to the transfer agent, if any, to...

  • Page 216
    ..., lease, exchange or otherwise dispose of all or any part of its assets or business, or engage in any other corporate act or ...Company at the time of such receipt or lapse, as the case may be, such amount of money as the Company or any Affiliate may require to meet such obligation under applicable...

  • Page 217
    ... or delivery service, addressed to the Company at the Company's principal business office address to the attention of the Company's General Counsel and to Employee at Employee's residential address as it appears on the books and records of the Company, or at such other address and number as a party...

  • Page 218
    ...meaning or effect of the Plan or this Agreement, such ...force and effect. 16. Successors and Assigns. Subject to the limitations which this Agreement imposes upon the transferability of the Shares granted hereby, this Agreement shall bind, be enforceable by and inure to the benefit of the Company...

  • Page 219
    ...and by these presents does bargain, sell, assign and transfer unto Rosetta Stone Inc., a Delaware corporation (the "Company"), the Shares transferred pursuant to the Restricted Stock Award Agreement dated effective , 20 , between the Company and the undersigned; and subject to and in accordance with...

  • Page 220
    ...September 16, 2011 REVISED October 3, 2011 Helena Wong 1800 N Oak Street Apt. 907 Arlington, VA 22209 Dear Helena, This letter will serve as confirmation that your employment with Rosetta Stone Ltd. (the "Company") is being terminated. Set forth in this letter and the attached Legal Release (Exhibit...

  • Page 221
    ... badge, keys, computers, corporate credit cards, telephones, parking permits and the original and all copies of any written, recorded, or computer readable information about Company practices, procedures, trade secrets, customer lists or product marketing associated with the Company's business and...

  • Page 222
    ... required by the Company for this purpose. The Company will pay, when due and payable under the Annual Bonus plan, the pro rata portion, if any, of your Annual Bonus earned up until such Separation Date within 30 days of the date the Company pays annual bonuses, if any, under the 2011 Rosetta Stone...

  • Page 223
    ...separation you will have the opportunity to continue your current health benefits coverage under Company's group health plans through COBRA. If you timely elect to enroll to continue such coverage under COBRA, the Company shall pay for up to twelve (12) months, on an after tax basis, for the portion...

  • Page 224
    ...after your Separation Date (but no later than the deadlines stated above) and return one entire copy to: Laurie Iannamico 135 W. Market St. Harrisonburg, Virginia 22801 (An extra copy for your files is enclosed.) This letter constitutes the entire agreement between you and Rosetta Stone with respect...

  • Page 225
    ... or in equity, whether now known or unknown, that Executive Releasers, or any person acting under any of them, may now have, or claim at any future time to have, based in whole or in part upon any act or omission occurring on or before the Effective Date, without regard to present actual knowledge...

  • Page 226
    ... or in equity, whether now known or unknown, that the Company Releasers, or any person acting under any of them, may now have, or claim at any future time to have, based in whole or in part upon any act or omission relating to Employee's employment with the Company or separation therefrom, without...

  • Page 227
    ...unless Executive has given the Company written notice, within three business days following service of the subpoena or court order. Executive covenants never to disparage or speak ill of the Company or any the Company product or service, or of any past or present employee, officer or director of the...

  • Page 228
    ...governmental entity, or self-regulatory organization, that relates to or arises from matters with which Executive was involved during Executive's employment with the Company, or that concern matters of which Executive has information or knowledge (collectively, a "Proceeding"). Executive agrees that...

  • Page 229
    ... and circumstances relating to its execution shall be inadmissible in any later proceeding between the parties, and the statutes of limitations applicable to claims asserted in the proceeding shall be deemed to have been tolled for the period between the Effective Date and 10 days after the date on...

  • Page 230
    ROSETTA STONE LTD. By: /s/ Michaela Oliver Michaela Oliver, SVP Human Resources Date: 11/3/2011 EXECUTIVE /s/ Helena Wong Helena Wong Date: 11/3/2011 11

  • Page 231
    ... Fairfield Language Technologies) Rosetta Stone (UK) Limited (Formerly Fairfield & Sons Limited) Rosetta Stone Japan Inc. (Formerly Rosetta World K.K.) Rosetta Stone International Inc. Rosetta Stone GmbH Rosetta Stone Korea Ltd. Rosetta Stone Canada Inc. Rosetta Stone Hong Kong Limited Rosetta Stone...

  • Page 232
    QuickLinks Exhibit 21.1 ROSETTA STONE INC. SUBSIDIARIES

  • Page 233
    ... S-8 of our reports dated March 13, 2012, relating to the consolidated financial statements of Rosetta Stone Inc. and subsidiaries (the "Company"), and the effectiveness of the Company's internal control over financial reporting, appearing in this Annual Report on Form 10-K of Rosetta Stone Inc. and...

  • Page 234
    QuickLinks Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  • Page 235
    ... and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Rosetta Stone Inc. (the "Company") and any or all subsequent amendments and supplements to the Annual Report on Form 10-K, and to file the same, or cause to be...

  • Page 236
    /s/ LAURA L. WITT Laura L. Witt Director

  • Page 237
    QuickLinks Exhibit 24.1 ROSETTA STONE INC. POWER OF ATTORNEY

  • Page 238
    ...AND PRINCIPAL FINANCIAL OFFICER OF ROSETTA STONE INC. PURSUANT TO 15 U.S.C. SECTION 7241, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Stephen M. Swad, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of Rosetta Stone Inc. (the "Registrant"); Based on my...

  • Page 239
    QuickLinks Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER OF ROSETTA STONE INC. PURSUANT TO 15 U.S.C. SECTION 7241, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 240
    ... In connection with the accompanying Annual Report on Form 10-K for the calendar year ended December 31, 2011 filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen M. Swad, Chief Executive Officer of Rosetta Stone Inc. (the "Company"), hereby certify, to my...

  • Page 241
    QuickLinks Exhibit 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER OF ROSETTA STONE INC. PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002