Rosetta Stone 2013 Annual Report Download

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Table of Contents









(Exact name of registrant as specified in its charter)

(State of incorporation)

(I.R.S. Employer
Identification No.)


(Address of principal executive offices)

(Zip Code)
Registrant's telephone number, including area code:

Securities Registered Pursuant to Section 12(b) of the Act:
 
Common Stock, par value $0.00005 per share New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes No o
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 the 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.
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):
Large accelerated filer o
Accelerated filer
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $281.1 million as of June 30, 2013 (based
on the last sale price of such stock as quoted on the New York Stock Exchange).
As of February 21, 2014, there were 21,110,250 shares of common stock outstanding.

Table of contents

  • Page 1
    ...  The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $281.1 million as of June 30, 2013 (based on the last sale price of such stock as quoted on the New York Stock Exchange). As of February 21, 2014 , there were 21,110,250 shares of common...

  • Page 2
    Doguments ingorporated by referenge: Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the 2014 Annual Meeting of Stockholders to be held on May 20, 2014 are incorporated by reference into Part III.

  • Page 3
    ... Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PTRT III Directors, Executive Officers and Corporate Governance Executive Compensation...

  • Page 4
    ...of new products, the integration and expansion of the products we have acquired through mergers and acquisitions; international expansion in certain markets and contraction in other markets, including our plans to substantially reduce our Japanese and Korean operations; our development of a business...

  • Page 5
    ... Rosetta Stone's Global Enterprise & Education business. Tell Me More is a global language-learning software company with significant presence throughout Europe, as well as sales in the U.S., Latin America and China. Tell Me More offers a robust suite of Software-as-a-Service ("SaaS") based language...

  • Page 6
    ... can use these tools to access real-time dynamic reports and identify areas where learners may require additional attention. Custom Solutions: Rosetta Stone offers tailored solutions to help organizations maximize the success of their learning programs. Our current custom solutions include...

  • Page 7
    ... a mix of our websites, call centers, third party e-commerce websites such as Digital River and Apple iTunes, select retail resellers, such as Amazon.com, Barnes & Noble, Target, Best Buy, Books-a-Million, Staples, Costco, daily deal partners such as Groupon, home shopping networks such as GS...

  • Page 8
    ...Rosetta World, Rosetta, Rosetta Course, The Blue Stone Logo , Adaptive Recall , TOTALe, Livemocha, Lexia Learning, Lexia, Tell Me More, Auralog and Talk to Me. All of these trademarks are the subject of either registrations or pending applications in the U.S., as well as numerous countries worldwide...

  • Page 9
    ... immaterial also may materially adversely affect our business, financial condition and/or operating results. Our actual operating results may differ significantly from our guidance. From time to time, we may release guidance in our quarterly earnings releases, quarterly earnings conference call, or...

  • Page 10
    ... features on a timely basis; provide appealing solutions that engage our customers; anticipate and meet consumer demand for additional languages, learning levels and new platforms for delivery; effectively position and market our products and services; identify and secure cost-effective means of...

  • Page 11
    ... websites such as Digital River and Apple iTunes App Store, third party e-commerce websites, select retail resellers, such as Amazon.com, Barnes & Noble, Target, Best Buy, Books-a-Million, Staples, Costco, daily deal partners such as Groupon and consignment distributors such as Speed Commerce. Sales...

  • Page 12
    ... 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-learning solutions continues to develop, a number of other companies...

  • Page 13
    ... dates at higher prices, which will increase our costs. We also seek new customers through our online marketing efforts, including paid search listings, banner ads, text links and permission-based e-mails, as well as our affiliate and reseller programs. We engage in an active public relations...

  • Page 14
    ... products to suit consumer preferences and capabilities in these markets, such as the potential need to customize English-based language-learning software solutions for local markets; difficulties with establishing successful sales channels; inability to successfully develop relationships...

  • Page 15
    ... for products such as ours would also cause us to lose revenue and could hurt our overall gross margins. Included within our Global Enterprise and Education 2013 bookings is $2.0 million related to a Lexia pilot program with a state school system. Typically, Lexia sales are with single schools or...

  • Page 16
    ... for products designed for children, cost effectively, we may lose market share and revenue and our business could suffer. We offer our software products and services primarily on Windows and Macintosh platforms. To the extent that there is a slowdown of customer purchases of personal computers on...

  • Page 17
    ...Version 4 TOTALe increased our costs as a percentage of revenue, and these and future product introductions may not succeed and may harm our business, financial results and reputation. Rosetta Stone Version 4 TOTALe integrates our existing language-learning software solutions with web-based services...

  • Page 18
    ... attrition of the acquired entities' customers; the risk that cross-selling Rosetta Stone products and services to customers of the acquired entities (and vice versa) may not be successful; the pipeline of the acquired entities' future products under development may take longer than predicted...

  • Page 19
    ... service of our key technical, development, sales, services and management personnel, including key personnel of entities we have acquired or may acquire in the future. We rely on our executive officers and senior management to execute our existing business plans and to identify and pursue new...

  • Page 20
    ...based products and services we offer as well as increase the number of countries where we operate. Further, failure or perceived failure by us to comply with our policies, applicable requirements, or industry self-regulatory principles related to the collection, use, sharing or security of personal...

  • Page 21
    ... provide service at the current levels. We structure our marketing and advertising to drive potential customers to our website and call centers to purchase our solutions. If we experience technical difficulties with our websites or if our call center operators do not convert inquiries into sales at...

  • Page 22
    ... future. Significant errors in our products or services could lead to, among other things: delays in or loss of market acceptance of our products and services; diversion of our resources; a lower rate of license renewals or upgrades for consumer and enterprise and education customers; injury...

  • Page 23
    ...Brains' products to Rosetta Stone customers, our growth prospects could be adversely impacted. As our product and service offerings become more complex, our reported revenue may become less predictable. During 2013, we continued to transition our distribution to more online in the consumer business...

  • Page 24
    ... available on satisfactory terms, or at all, we may be unable to expand our business or to develop new business at the rate desired and our results of operations may suffer. Changes in applicable accounting principles could negatively affect our financial performance. Our financial statements are...

  • Page 25
    ...language learning solutions through the Internet. To the extent that network operators implement usage based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our subscriber acquisition...

  • Page 26
    ... other proprietary rights which may hurt our business. Third parties also may acquire country specific domain names in the form of Country Code Top Level Domains which include our trademarks and which prevent us from operating country specific websites from which customers can view our products and...

  • Page 27
    ... and disrupt our business. We may become subject to material claims of infringement by competitors and other third parties with respect to current or future products, e-commerce and other web-related technologies, online business methods, trademarks or other proprietary rights. Our competitors, some...

  • Page 28
    ... due to Rosetta Stone GmbH's use of the color yellow on its packaging of its language-learning software and the advertising thereof in Germany. In January 2012, the District Court of Cologne ordered an injunction of Rosetta Stone GmbH's use of the color yellow in packaging, on its website and in...

  • Page 29
    ... in the ordinary course of our business. We are not currently involved in any legal proceeding the ultimate outcome of which, in our judgment based on information currently available, would have a material impact on our business, financial condition or results of operations. Item 4. Mine Safety...

  • Page 30
    ... of common shares repurchased by the Company under its stock repurchase program during the three months ended December 31, 2013: Date Total Number of Shares Purghased Tverage Prige Paid Total Number of Shares Purghased as Part of Publigly announged Plans or Programs (1) Tpproximate Dollar...

  • Page 31
    28

  • Page 32
    ... 31, 2013, 2012, 2011, 2010 and 2009 have been derived from Rosetta Stone Inc. audited consolidated financial statements. The selected consolidated financial data should be read in conjunction with the information under "Item 7. Management's Discussion and Analysis of Financial Condition and Results...

  • Page 33
    ... 31, 2013(1) 2012(2) 2011(3) 2010 2009(4) (in thousands, exgept per share data) Statements of Operations Data: Revenue Cost of revenue Gross profit Operating expenses: Sales and marketing Research and development General and administrative Lease abandonment Total operating expenses Income...

  • Page 34
    ... the world. Founded in 1992, Rosetta Stone pioneered the use of interactive software to accelerate language learning. Today we offer courses in 30 languages across a broad range of formats, including online subscriptions, digital downloads, mobile apps, and perpetual CD-Rom packages. Rosetta Stone...

  • Page 35
    ... Applicable online offerings include purchases of subscription-based licenses for Rosetta Stone TOTALe, ReuLEX subscriptions, and purchasers of our product software who subsequently purchase renewals of their short-term online services. • Average revenue per paid online learner. Service revenues...

  • Page 36
    ... operations and mobile applications. Product software Product software revenue includes sales of our Rosetta Stone Version 4 TOTALe product. We anticipate the mix of product units will shift from our traditional CD-ROM product to digital downloads in future periods. There is no difference in price...

  • Page 37
    ... Stone language learning solutions in the North America Consumer market. As a result, we typically defer 10%35% of each of these bundled sales over the term of the subscription license. We sell our solutions directly to individuals, educational institutions, corporations, and government agencies...

  • Page 38
    ... December 31, 2013 , our worldwide effective tax rate was approximately 10%. The income tax benefit in 2013 was primarily attributable to partial valuation releases related to the Livemocha and Lexia acquisitions offset by tax expense related to current year taxable income in Canada, Germany and...

  • Page 39
    ... over the term of the subscription period, assuming all revenue recognition criteria have been met. Rosetta Stone Version 4 TOTALe bundles, which include an online service subscription including conversational coaching and packaged software, allow customers to begin their online services at any...

  • Page 40
    ... the related financial statement line items (in thousands): Year Ended Degember 31, 2013 2012 2011 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...

  • Page 41
    ... review the volatility of our own stock since the initial public offering. We consider the volatility of the comparable companies to be the best estimate of future volatility. For the risk-free interest rate, we use a U.S. Treasury Bond rate consistent with the estimated expected term of the option...

  • Page 42
    ...31, 2013. Intangible Assets Intangible assets consist of acquired technology, including developed and core technology, customer related assets, trade name and trademark and other intangible assets. Those intangible assets with finite lives are recorded at cost and amortized on a straight line basis...

  • Page 43
    ...it provides a single accounting policy, consistent with that used by Lexia, that makes it easier for financial statement users to understand. Furthermore, the adoption of this accounting policy enhances the comparability of our consolidated financial statements by changing to a method that is widely...

  • Page 44
    ... periods indicated. Year Ended Degember 31, 2013 2012 2011 (in thousands, exgept per share data) Statements of Operations Data: Revenue Product Subscription and service Total Revenue Cost of revenue Cost of product revenue Cost of subscription and service revenue $ 156,792 $ 107,853 264,645...

  • Page 45
    ... the Proctor Assisted Learning ("PAL") channel. The increase in revenue and bookings in Germany is due to the increase in sales of downloads of our perpetual software. Global Enterprise & Education revenue was $60.2 million for the years ended December 31, 2013 and December 31, 2012 . Within the...

  • Page 46
    Table of Contents which was acquired on August 1, 2013. International enterprise and education revenues increased $1.6 million driven by increases in the United Kingdom ("U.K.") and Germany. Global Enterprise & Education bookings, calculated as enterprise and education revenue plus the change in ...

  • Page 47
    ... by lower prices on our Rosetta Stone Version 4 TOTALe product software bundle driven by promotional pricing in our North America Consumer segment, increased levels of daily deals and a shift in our sales channel mix. $2.9 million of the decrease in Global Enterprise & Education product revenues is...

  • Page 48
    ..., we could experience a temporary increase in the cost of our product revenue as we scrap existing packaging and develop and set up packaging for new products. Cost of Subscription and Service Revenue Cost of subscription and service revenue for the year ended December 31, 2013 was $13.5 million...

  • Page 49
    ...benefits from the addition of Lexia and Livemocha personnel, severance expenses and the 2013 long-term incentive plan and a $1.1 million increase in amortization due to the intangible assets acquired in the Livemocha and Lexia acquisitions. Research and Development Expenses Research and development...

  • Page 50
    ... North America Consumer bookings, partially offset by a $12.8 decrease in ROW Consumer bookings. Additionally, Global Enterprise & Education bookings increased $2.6 million compared to the prior year period. We reported an operating loss of $5.3 million for the year ended December 31, 2012 compared...

  • Page 51
    ... service revenue. Product revenue includes revenues allocated to the software product from sales of Rosetta Stone Version 4 TOTALe and revenues from the sale of audio practice products. Subscription and service revenue includes revenues allocated to time-based subscription licenses of our web-based...

  • Page 52
    ...increase in consumer online service revenue related to Version 4 TOTALe as well as a growing base of exclusively online subscription sales. Global Enterprise & Education subscription and service revenues also increased $4.6 million related to growth in the enterprise and education customer base with...

  • Page 53
    ... product support activities including personnel-related costs and third-party expenses for coaches, product support, and success agents. We expect our cost of subscription and service revenue will increase in future periods, as a percent of revenue, associated with the launch of our Version 4 TOTALe...

  • Page 54
    ... were no shares issued from the LTIP to any executive prior to its cancellation. Total stock-based compensation by expense line item is as follows: Year Ended Degember 31, 2012 2011 Change % Change (dollars in thousands) Cost of revenue Sales and marketing Research and development General and...

  • Page 55
    ... of our products, the levels of advertising and promotion required to launch additional products and improve our competitive position in the marketplace, the expansion of our sales, support and marketing organizations, the establishment of additional offices in the United States and worldwide and...

  • Page 56
    ... of $1.4 million from the exercise and repurchase of shares from exercised stock options. We believe our current cash and cash equivalents, short term investments and funds generated from our operations will be sufficient to meet our working capital and capital expenditure requirements through the...

  • Page 57
    ... based on the nature and current level of our marketable securities, which are primarily short-term investment grade and government securities and our notes payable, we believe that there is no material risk of exposure. Item 8. Finangial Statements and Supplementary Data Our consolidated financial...

  • Page 58
    .... Based on the evaluation of our disclosure controls and procedures as of December 31, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management's annual report...

  • Page 59
    Table of Contents Item 9B. Other Information None. 56

  • Page 60
    ... Governance -Corporate Governance and Nominating Committee" in our definitive proxy statement for the 2014 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the fiscal year ended December 31, 2013 (the "2014 Proxy Statement"). Code...

  • Page 61
    ...are filed as part of this Annual Report. 2. Consolidated uinancial 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 62
    ...undersigned, thereunto duly authorized. ROSETTA STONE INC. By: /s/ STEPHEN M. SWAD Stephen M. Swad Chief Executive Officer Date: March 3, 2014 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 63
    ... INDEX TO CONSOLIDTTED FINTNCITL STTTEMENTS Page Reports of Independent Registered Public Accounting Firm F-2 F-4 Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Changes in Stockholders' Equity...

  • Page 64
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the...

  • Page 65
    ... 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management...

  • Page 66
    ... revenue Deferred income taxes Other long-term liabilities Total liabilities Commitments and contingencies (Note 14) Stogkholders' equity: Preferred stock, $0.001 par value; 10,000 and 10,000 shares authorized, zero and zero shares issued and outstanding at December 31, 2013 and December 31, 2012...

  • Page 67
    ...31, 2013 2012 2011 (As Adjusted)* (As Adjusted)* Revenue: Product Subscription and service Total revenue Cost of revenue: Cost of product revenue Cost of subscription and service revenue Total cost of revenue Gross profit Operating expenses Sales and marketing Research and development General...

  • Page 68
    ... ROSETTT STONE INC. CONSOLIDTTED STTTEMENTS OF COMPREHENSIVE LOSS (in thousands) Years Ended Degember 31, 2013 2012 2011 (As Adjusted)* (As Adjusted)* Net loss Other comprehensive income, net of tax: Foreign currency translation gain Unrealized gain (loss) on available-for-sale securities...

  • Page 69
    ... income Balance-December 31, 2012 Stock Issued Upon the Exercise of Stock Options Restricted Stock Award Vesting Stock-based Compensation Expense Repurchase of Stock Option Exercised Sale of Shares in Secondary Offering Secondary Offering Costs Purchase of Treasury Stock Net loss Other comprehensive...

  • Page 70
    ...Income tax receivable Other assets 827 (1,680) 6,515 166 (5,812) (25) (447) Accounts payable 3,702 (897) (1,240) Accrued compensation Other current liabilities 5,093 1,200 3,979 4,250 635 Excess tax benefit from stock options exercised Other long term liabilities Deferred revenue - 481...

  • Page 71
    F-8

  • Page 72
    ... ("Rosetta Stone," or the "Company") develop, market and support a suite of language and reading learning solutions consisting of software products, online services, audio practice tools and mobile applications under the Rosetta Stone, Livemocha and Lexia brand names. The Company's software products...

  • Page 73
    ... are based on historical return rates. In connection with packaged software product sales and online software subscriptions, technical support is provided to customers, including customers of resellers, via telephone support at no additional cost for up to six months from the time of purchase. As...

  • Page 74
    ... significant credit risk related to cash. The Company sells products to retailers, resellers, government agencies, and individual consumers and extends credit based on an evaluation of the customer's financial condition, without requiring collateral. Exposure to losses on receivables is principally...

  • Page 75

  • Page 76
    .... Based on its analysis, the Company believes that no impairment of its long-lived assets was indicated as of December 31, 2013 and 2012. Intangible Tssets Intangible assets consist of acquired technology, including developed and core technology, customer related assets, trade name and trademark...

  • Page 77
    ... revenue and cost of subscription and service revenue. Researgh and Development Research and development expenses include employee compensation costs, consulting fees and overhead costs associated with product development. Software products are developed for sale to external customers. The Company...

  • Page 78
    ...-based awards, including employee stock option grants, are recorded at fair value as of the grant date and recognized as expense in the statement of operations on a straight-line basis over the requisite service period, which is the vesting period. Net Loss Per Share Net loss per share is computed...

  • Page 79
    ... per common share: Basic Diluted (0.95) (0.95) Share-based awards to purchase approximately 1.3 million, 1.4 million and1.0 million shares of common stock that had an exercise price in excess of the average market price of the common stock during the years ended December 31, 2013, 2012 and 2011...

  • Page 80
    ... benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for the Company beginning January 1, 2014. The Company believes the adoption of ASU 2013-11 will not have a material impact on the Company's reported...

  • Page 81
    ... Lexia, that makes it easier for financial statement users to understand. Deferred commission amounts are recoverable through the future revenue streams under the non-cancellable arrangements. Short-term deferred commissions are included in prepaid expenses and other current assets, while long-term...

  • Page 82
    ...,158) 148,194 279,446 Consolidated Statements of Operations (in thousands, exgept per share data) Year Ended Degember 31, 2013 Computed under Prior Method Impagt of Commission Tdjustment Ts Reported Sales and marketing Loss from operations Income tax benefit (provision) Net loss Basic net loss...

  • Page 83
    ... Impagt of Commission Ts Previously Reported Tdjustment Ts Tdjusted Sales and marketing Loss from operations Income tax benefit (provision) Net loss Basic net loss per share Diluted net loss per share Shares used in computing basic net loss per share Shares used in computing diluted net loss per...

  • Page 84
    ...) Consolidated Statements of Cash Flows (in thousands) Year Ended Degember 31, 2013 Computed under Prior Method Impagt of Commission Tdjustment Ts Reported Net loss Deferred income tax provision Prepaid expenses and other current assets Other assets Net cash provided by operating activities...

  • Page 85
    ... STONE INC. NOTES TO CONSOLIDTTED FINTNCITL STTTEMENTS (Continued) 5. BUSINESS COMBINTTIONS (Continued) On April 1, 2013, the Company completed its acquisition of Livemocha (the "Livemocha Merger"). Livemocha is one of the world's largest online language-learning communities with over 16 million...

  • Page 86
    ... consolidated results of operations for the period August 1, 2013 through December 31, 2013. The Company has preliminarily allocated the purchase price based on current estimates of the fair values of assets acquired and liabilities assumed in connection with the Lexia acquisition. The table below...

  • Page 87
    ... method of accounting, the total purchase price was allocated to the tangible and intangible assets acquired on the basis of their respective estimated fair values at the date of acquisition. The valuation of the identifiable intangible assets and their useful lives acquired reflects management...

  • Page 88
    ... of $23.8 million , associated with the acquisition of Rosetta Stone Ltd. in January 2006, including our indefinite-live Rosetta Stone trade name. The Company recorded intangible assets of $5.5 million with the acquisition of Livemocha in April 2013, consisting of an online community, enterprise...

  • Page 89
    ... Company recorded intangible assets of $14.5 million with the acquisition of Lexia in August 2013, consisting of enterprise relationships, technology platform and the Lexia trade name. The estimated useful lives of these intangible assets range from five to ten years. Included within the Trade name...

  • Page 90
    ... Degember 31, 2013 2012 2011 Included in cost of revenue: Cost of product revenue Cost of subscription and service revenue $ - $ 244 244 Total included in cost of revenue Included in operating expenses: Sales and marketing Research & development General and administrative Total included in...

  • Page 91
    ... were 2,580,846 shares available for future grant under the 2009 Plan. In accordance with ASC 718, the fair value of stock-based awards to employees is calculated as of the date of grant. Compensation expense is then recognized on a straight-line basis over the requisite service period of the award...

  • Page 92
    ... 31, 2013 2012 2011 Expected stock price volatility Expected term of options Expected dividend yield Risk-free interest rate 64%-67% 6 years - 0.75%-1.65% 64%-66% 6 years - 0.60%-0.88% 57%-64% 6 years - 1.14%-2.59% Prior to the completion of the Company's initial public offering in April...

  • Page 93
    ...based on the market price of the Company's common stock at the date of grant. The Company did not grant any restricted stock units prior to April 2009. Long Term Incentive Program-On February 21, 2013, the Company's board of directors approved the 2013 Rosetta Stone Inc. Long Term Incentive Program...

  • Page 94
    ... Plan. The purpose of the LTIP was to: advance the best interests of the Company; motivate senior management to achieve key financial and strategic business objectives of the Company; offer eligible executives a competitive total compensation package; reward executives in the success of the Company...

  • Page 95
    ...(Continued) Years Ended Degember 31, 2013 2012 2011 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 General and administrative 109 $ 66...

  • Page 96
    ...28, 2006 the Company entered into an agreement to license software from a vendor for incorporation in software products that the 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...

  • Page 97
    ... due to Rosetta Stone GmbH's use of the color yellow on its packaging of its language-learning software and the advertising thereof in Germany. In January 2012, the District Court of Cologne ordered an injunction of Rosetta Stone GmbH's use of the color yellow in packaging, on its website and in...

  • Page 98
    ... recognized during the three months ended June 30, 2013. In connection with the Lexia purchase accounting, the Company recognized net deferred tax liabilities of $4.2 million associated with the book/tax differences on acquired intangible assets and deferred revenue, offset by deferred tax...

  • Page 99
    ... 31, 2013, the Company's recorded income tax benefit of $1.9 million is primarily attributable to a partial valuation allowance release of $5.4 million related to the net deferred tax liabilities acquired with the Livemocha and Lexia acquisitions, offset by income related to current year profits of...

  • Page 100
    ...and transition. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2013 and 2012, the Company had $16,000 and $9,000 accrued for interest and penalties, respectively, in "Other Long Term Liabilities". During the...

  • Page 101
    ...: North America consumer Rest of world consumer Global Enterprise & Education Total segment contribution Unallogated expenses, net: Unallocated cost of sales Unallocated sales and marketing Unallocated research and development Unallocated general and administrative Unallocated non-operating income...

  • Page 102
    ... of distributors and resellers who purchase and resell the Company's products may be different from the geographic locations of end customers. The information below summarizes revenue from customers by geographic area for the years ended December 31, 2013, 2012 and 2011, respectively (in thousands...

  • Page 103
    F-37

  • Page 104
    ... acquired and goodwill resulting from the acquisition. On December 11, 2013, Rosetta Stone Inc. the Company executed a Stock Purchase Agreement (the "Agreement") pursuant to which Rosetta Stone Ltd., a wholly-owned subsidiary of the Company, agreed to purchase all of the outstanding shares of Tell...

  • Page 105
    .... Inventory consists of software products and as the restructuring strategy is to eliminate the sales of products and move to a third party hosted model, such inventory will be destroyed in 2014 based on the date of the final decisions. The Company also announced in the press release an effort to...

  • Page 106
    ... 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 Executive Employment Agreement between Rosetta Stone Ltd...

  • Page 107
    ...Exchange Act of 1934 and otherwise are not subject to liability. (1) Incorporated by reference to exhibit filed with Registrant's registration statement on Form S-1 (File No. 333-153632), as amended. (2) Incorporated by reference to exhibit filed with Rosetta Stone's Current Report on Form 8-K dated...

  • Page 108
    ... Stone Canada Inc. Rosetta Stone Hong Kong Limited Rosetta Stone Ensino de Linguas Ltda. Rosetta Stone France SAS Livemocha LLC Lexia Learning Systems LLC Tell Me More SA Auralog Studios SARL Auralog Inc. Tell Me More GmbH Auralog SL Auralog SA de CV Auralog Software Development (Beijing) Company...

  • Page 109
    ...of our reports, dated March 3, 2014 , relating to the consolidated financial statements of Rosetta htone Inc. and subsidiaries (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the Company's change in its accounting policy for sales commissions related to...

  • Page 110
    ... place and stead, in any and all capacities, to sign the Annual Report on Forg 10-K of Rosetta Stone Inc. (the " Company") and any or all subsequent agendgents and supplegents to the Annual Report on Forg 10-K, and to file the sage, or cause to be filed the sage, with all exhibits thereto, and other...

  • Page 111
    ... M. Swad, certify that: 1. I have reviewed this Annual Report on Form 10-K of Rosetta Stone Inc. (the "Registrant"); 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...

  • Page 112
    ... Pierno, certify that: 1. I have reviewed this Annual Report on Form 10-K of Rosetta Stone Inc. (the "Registrant"); 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...

  • Page 113
    ... In connection with the accompanying Annual Report on Form 10-K for the calendar year ended December 31, 2013 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 114
    ... In connection with the accompanying Annual Report on Form 10-K for the calendar year ended December 31, 2013 filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas M. Pierno, Chief Financial Officer of Rosetta Stone Inc. (the "Company"), hereby certify, to my...

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