Rosetta Stone 2011 Annual Report Download - page 49

Table of Contents
Operating Expenses
We classify our operating expenses into three categories: sales and marketing, research and development and general and administrative.
Our operating expenses primarily consist of personnel costs, direct advertising and marketing expenses and professional 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 direct advertising expenses related to television, print, radio, online and
other direct marketing activities, personnel costs for our sales and marketing staff, rental payments for our kiosks and commissions paid to our sales
personnel. Sales and marketing expenses also include amortization expense of intangible assets related to customer relationships associated with the 2006
acquisition of Fairfield & Sons, Ltd. These intangible assets were fully amortized by January 2009. In 2007, we began to make significant investments to
expand our sales and marketing operations in Europe and Japan. In 2009, we began to make significant investments to expand our sales and marketing
operations in South Korea. In 2010 we established an office in Germany, and in 2011 we established an office in Brazil. In each case we established local
sales offices, added employees and launched marketing and public relations campaigns within the region. In 2011, we also established a representative office
in China. We intend to continue to invest within strategic regions around the world.
Research and Development. Research and development expenses consist primarily of personnel costs and contract development fees associated with
the development of our solutions. Our development efforts are primarily based in the United States and are devoted to expanding our product portfolio
through the addition of new content and new complimentary products and services to our language-learning solutions.
General and Administrative. General and administrative expenses consist primarily of personnel costs of our executive, finance, legal, human resources
and other administrative personnel, as well as accounting and legal professional services fees and other corporate expenses. In 2011, there were increases to
certain general and administrative expenses to support our expansion into new international markets. During 2012, we plan on taking steps to reduce certain
general and administrative expenses as we realign our cost structure to help fund investment in areas of growth.
Stock Compensation Charge. Included in the respective operating expense lines for 2009 is an aggregate $18.8 million expense, consisting of
$18.5 million in stock-based compensation expense and $0.3 million in payroll tax expense, related to common stock grants awarded to key employees equal
to a total of 591,491 shares in April 2009. This grant was net of the number of shares required to be withheld to satisfy the federal, state and local tax
withholding obligations. The aggregate grant date fair value of the awards was $18.5 million, which we recognized as stock-based compensation expense on
the grant date, as the awards were immediately vested. We allocated this $18.8 million aggregate expense among the operating expense line items in
accordance with the functions performed by the respective employees who received the grants. No such grant was made in 2011 or 2010.
Other Income (Expense)
Other income (expense) primarily consists of interest income and interest expense. Interest expense is related to our long-term debt, the outstanding
balance of which was zero as of December 31, 2011. Interest income represents interest received on our cash and cash equivalents.
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