Pricing of Rosetta Stone 2009 IPO

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Exhibit 1

Exhibit 1
ROSETTA STONE, INC.: PRICING THE 2009 IPO
Rosetta Stone Income Statement (in thousands of dollars)
2004 2005 2006 2007 2008
  
Revenue 25,373 48,402 91,570 137,321 209,380
Cost of revenue 3,968 8,242 12,744 20,687 28,676
Gross profit 21,405 40,160 78,826 116,634 180,704
Operating expenses:
Sales and marketing 11,303 22,432 46,549 65,437 93,384
Research and development 1,833 2,819 8,158 12,893 18,387
Acquired in-process research and development 0 0 12,597 0 0
General and administrative 6,484 8,157 16,732 29,786 39,577
Lease abandonment 0 0 0 0 1,831
Transaction-related expenses 0 0 10,315 0 0
Total operating expenses 19,620 33,408 94,351 108,116 153,179
Income from operations 1,785 6,752 (15,525) 8,518 27,525
Other income and expense:
Interest income 84 38 613 673 454
Interest expense 0 0 (1,560) (1,331) (891)
Other income 120 134 63 154 239
Interest and other income (expense), net 204 172 (884) (504) (198)
Income before income taxes 1,989 6,924 (16,409) 8,014 27,327
Income tax expense (benefit) 66 143 (1,240) 5,435 13,435
Net income 1,923 6,781 (15,169) 2,579 13,892
Preferred stock accretion 0 0 (159) (80) 0
Net income attributable to common stockholders 1,923 6,781 (15,328) 2,499 13,892
Note: For 2006, 2007, 2008, depreciation and amortization expense was reported as $6.5 million, $7.8 million, and $7.1 million, respectively.
Data source: Rosetta Stone preliminary prospectus (Form S-1/A, filed March 17, 2009), U.S. SEC.

Exhibit 2

Exhibit 2
ROSETTA STONE, INC.: PRICING THE 2009 IPO
Rosetta Stone Balance Sheet (in thousands of dollars)
   As of December 31
Assets 2007 2008
Cash and cash equivalents 22,084.00 30,660.00
Acounts receiviable 11,852.00 26,497.00
Inventory, net 3,861.00 4,912.00
Prepaid expenses and other current assets 3,872.00 6,598.00
Deferred income taxes 848.00 2,282.00
Total current assets 42,517.00 70,949.00
Property and equipment, net 13,445.00 15,727.00
Goodwill 34,199.00 34,199.00
Intangible assets, net 13,661.00 10,645.00
Deferred income taxes 6,085.00 6,828.00
Other assets 469.00 470.00
Total assets 110,376.00 138,818.00
Liabilities and stockholders' equity
Accounts payable 4,636.00 3,207.00
Accrued compensation 4,940.00 8,570.00
Other current liabilities 11,421.00 21,353.00
Deferred revenue 12,045.00 14,382.00
Current maturities of long-term debt 3,400.00 4,250.00
Total current liabilities 36,442.00 51,762.00
Long-term debt 9,909.00 5,660.00
Deferred revenue 894.00 1,362.00
Other long-term liabilities 6.00 963.00
Total liabilities 47,251.00 59,747.00
Commitments and contingencies 5,000.00 0.00
Common Stock outstanding 51,038.00 56,038.00
Additional paid-in capital 8,613.00 10,814.00
Accumulated income (loss) (1,470.00) 12,422.00
Accumulated other comprehensive loss (56.00) (203.00)
Total stockholders' equity 58,125.00 79,071.00
Total liabilities and stockholders' equity 110,376.00 138,818.00
Note: Capital expenditures for property and equipment totaled $9.2 million and $7.0 million in 2007 and 2008, respectively.
Data source: Rosetta Stone prospectus.

EX 1 and 2 Combined

2004 2005 2006 2007 2008
Income Statement
Revenue 25,373 48,402 91,570 137,321 209,380
Cost of revenue 3,968 8,242 12,744 20,687 28,676
Gross profit 21,405 40,160 78,826 116,634 180,704
Operating expenses
Sales and marketing 11,303 22,432 46,549 65,437 93,384
Research and development 1,833 2,819 8,158 12,893 18,387
Acquired research and development 0 0 12,597 0 0
General and administrative 6,484 8,157 16,732 29,786 39,577
Lease abandonment 0 0 0 0 1,831
Transaction-related expenses 0 0 10,315 0 0
Total operating expenses 19,620 33,408 94,351 108,116 153,179
Income from operations 1,785 6,752 -15,525 8,518 27,525
Other income and expenses
Interest income 84 38 613 673 454
Interest expense 0 0 -1,560 -1,331 -891
Other income 120 134 63 154 239
Other income and expenses net 204 172 -884 -504 -198
Income before tax 1,989 6,924 -16,409 8,014 27,327
Income tax 66 143 -1,240 5,435 13,435
Net income 1,923 6,781 -15,169 2,579 13,892
Preferred stock accretion 0 0 -159 -80 0
Net income to common stock 1,923 6,781 -15,010 2,659 13,892
Balance Sheet
Assets
Cash and equivalents 22,084 30,660
Accounts receivable 11,852 26,497
Inventory 3,861 4,912
Prepaid expenses and other 3,872 6,598
Deferred income taxes 848 2,282
Total current assets 42,517 70,949
Property and equipment, net 13,445 15,727
Goodwill 34,199 34,199
Intangible assets, net 13,661 10,645
Deferred income taxes 6,085 6,828
Other assets 469 470
Total assets 110,376 138,818
Liabilities and equity
Accounts payable 4,636 3,207
Accrued compensation 4,940 8,570
Other current liabilities 11,421 21,353
Deferred revenue 12,045 14,382
Current portion of long-term debt 3,400 4,250
Total current liabilities 36,442 51,762
Long term debt 9,909 5,660
Deferred revenue 894 1,362
Other long term liabilities 6 963
Total liabilities 47,251 59,747
Commitments and contingencies 5,000 - 0
Common stock outstanding 51,038 56,038
Additional paid-in capital 8,613 10,814
Accumulated income (loss) (1,470) 12,422
Accumulated other loss (56) (203)
Total stockholderrs' equity 63,125 79,071
Total liabilities and equity 110,376 138,818
Notes
Property and Intangible asset amounts in the balance sheet are net of depreciation and amortization
Depreciation and amortization (FN 1) 6,500 7,800 7,100
Deferred income tax and deferred revenue are partly in the current accounting period and partly long-term.
Current portion of long-term debt is not a part of spontaneous financing
Commitments and contingencies in 2007 are stock options that convert to common stock in 2008.

Exhibit 4

Exhibit 4
ROSETTA STONE, INC.: PRICING THE 2009 IPO
U.S. Yield Curve Data
************* Yields **************
Date 3 month 1 year 5 year 10 year 30 year
1/30/09 0.24 0.51 1.85 2.87 3.58
2/27/09 0.26 0.72 1.99 3.02 3.71
3/31/09 0.21 0.57 1.67 2.71 3.56
4/1/09 0.22 0.58 1.65 2.68 3.51
4/2/09 0.22 0.59 1.74 2.77 3.57
4/3/09 0.21 0.60 1.87 2.91 3.70
4/6/09 0.20 0.60 1.90 2.95 3.73
4/7/09 0.20 0.60 1.87 2.93 3.72
4/8/09 0.18 0.59 1.83 2.86 3.66
4/9/09 0.18 0.60 1.90 2.96 3.76
Data source: U.S. Department of the Treasury

Exhibit 6

Exhibit 6
ROSETTA STONE, INC.: PRICING THE 2009 IPO
Rosetta Stone Historical Financial Performance (2006 to 2008, in thousands of dollars except percentages)
2006 2007 2008
Revenue 91,570 137,321 209,380
Revenue growth 89% 50% 52%
EBITDA 1,290 16,318 34,625
EBITDA Margin 1.4% 11.9% 16.5%
Total debt 13,309 9,910
Total equity 58,125 79,071
Total capital 71,434 88,981
Capital turnover 1.92 2.35
Return on capital 11.9% 30.9%
Estimated share value (1) $6.08 $11.19 $17.49
(1) Estimated by Rosetta Stone board of directors based on multiple of EBITDA for industry comparables

Exhibit 7

Exhibit 7
ROSETTA STONE, INC.: PRICING THE 2009 IPO
Financial Forecast for Rosetta Stone (in millions of dollars except percentages)
2008A 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Revenue growth 52.5% 35.0% 35.0% 30.0% 25.0% 23.0% 21.0% 18.0% 13.0% 10.0% 5.0%
Gross margin 86.3% 86.0% 86.0% 85.0% 84.0% 83.0% 82.0% 81.0% 80.0% 79.0% 78.0%
SGA exp / Revenue 63.5% 63.5% 63.5% 63.0% 63.0% 62.5% 62.5% 62.5% 62.5% 62.5% 62.5%
R&D exp / Revenue 8.8% 9.0% 9.0% 8.5% 8.5% 8.5% 8.5% 8.0% 8.0% 8.0% 8.0%
Capital expenditures 7.0 5.0 8.0 9.0 9.5 10.0 11.0 11.0 9.0 8.0 5.0
NPPE turnover 13.5 15.0 15.2 15.4 15.6 15.8 16.0 16.2 16.4 16.8 17.3
NWC turnover 8.9 9.0 9.0 9.0 8.5 8.5 8.0 8.0 8.0 8.0 8.0
Revenue 209.4 282.7 381.6 496.1 620.1 762.7 922.9 1,089.0 1,230.6 1,353.6 1,421.3
Gross profit 180.7 243.1 328.2 421.7 520.9 633.1 756.8 882.1 984.5 1,069.4 1,108.6
SGA expense 133.0 179.5 242.3 312.5 390.7 476.7 576.8 680.6 769.1 846.0 888.3
R&D expense 18.4 25.4 34.3 42.2 52.7 64.8 78.4 87.1 98.4 108.3 113.7
EBIT 29.4 38.2 51.5 67.0 77.5 91.5 101.5 114.3 116.9 115.1 106.6
Net working capital 23.4 31.4 42.4 55.1 73.0 89.7 115.4 136.1 153.8 169.2 177.7
Net PPE 15.7 18.8 25.1 32.2 39.7 48.3 57.7 67.2 75.0 80.6 82.2

Exhibit 7A

Exhibit TN1
ROSETTA STONE: PRICING THE 2009 IPO
Financial Valutaion for Rosetta Stone (in millions of dollars except percent)
2008A 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Revenue growth 52.5% 35.0% 35.0% 30.0% 25.0% 23.0% 21.0% 18.0% 13.0% 10.0% 5.0%
Gross margin 86.3% 86.0% 86.0% 85.0% 84.0% 83.0% 82.0% 81.0% 80.0% 79.0% 78.0%
SGA exp / Revenue 63.5% 63.5% 63.5% 63.0% 63.0% 62.5% 62.5% 62.5% 62.5% 62.5% 62.5%
R&D exp / Revenue 8.8% 9.0% 9.0% 8.5% 8.5% 8.5% 8.5% 8.0% 8.0% 8.0% 8.0%
Capital expenditures 7.0 5.0 8.0 9.0 9.5 10.0 11.0 11.0 9.0 8.0 5.0
NPPE turnover 13.5 15.0 15.2 15.4 15.6 15.8 16.0 16.2 16.4 16.8 17.3
NWC turnover 8.9 9.0 9.0 9.0 8.5 8.5 8.0 8.0 8.0 8.0 8.0
Revenue 209.4 282.7 381.6 496.1 620.1 762.7 922.9 1,089.0 1,230.6 1,353.6 1,421.3
Gross profit 180.7 243.1 328.2 421.7 520.9 633.1 756.8 882.1 984.5 1,069.4 1,108.6
SGA expense 133.0 179.5 242.3 312.5 390.7 476.7 576.8 680.6 769.1 846.0 888.3
R&D expense 18.4 25.4 34.3 42.2 52.7 64.8 78.4 87.1 98.4 108.3 113.7
EBIT 29.4 38.2 51.5 67.0 77.5 91.5 101.5 114.3 116.9 115.1 106.6
Net working capital 23.4 31.4 42.4 55.1 73.0 89.7 115.4 136.1 153.8 169.2 177.7
Net PPE 15.7 18.8 25.1 32.2 39.7 48.3 57.7 67.2 75.0 80.6 82.2
0 1 2 3 4 5 6 7 8 9 10
Net operating profit after tax 23.7 31.9 41.5 48.1 56.7 62.9 70.9 72.5 71.3 66.1
+ Depreciation 1.9 1.7 1.9 2.0 1.5 1.6 1.5 1.2 2.5 3.4
- Capex 5.0 8.0 9.0 9.5 10.0 11.0 11.0 9.0 8.0 5.0
- Change in NWC 8.0 11.0 12.7 17.8 16.8 25.6 20.8 17.7 15.4 8.5
Unlevered free cash flow 12.6 14.7 21.7 22.7 31.4 27.9 40.6 47.0 50.4 56.0

Exhibit 8

Exhibit 8
ROSETTA STONE, INC.: PRICING THE 2009 IPO
Principal and Selling Stockholders
Name of Beneficial Owner Shares owned prior to offering Shares being offered in IPO
(000s) (%) (000s)
Entities affiliated with ABS Capital Partners 7,556.1 44.0% 1,889.6
Norwest Equity Partners VIII 4,940.0 28.7% 1,235.4
Tom Adams (President, CEO) 743.7 4.3%
Eric Eichmann (COO) 146.3 0.9%
Brian Helman (CFO) 91.0 0.5%
Greogory Long (CPO) 106.2 0.6%
Michael Wu (General Counsel) 45.5 0.3%
Patrick Gross (Director) 20.7 0.1%
John Coleman (Director) 16.2 0.1%
Laurence Franklin (Director) 16.2 0.1%
Other owners 3,507.6 20.4%
New IPO shares 3,125.0
Total shares 17,189.5 6,250.0
Data source: Rosetta Stone prospectus.

Exhibit 9

Exhibit 9
ROSETTA STONE, INC.: PRICING THE 2009 IPO
Financial Data for Industry Comparables
Recent Number Debt Revenue Income Price/EPS EV/EBITDA
Price shares (in millions) (in millions) Beta growth growth 2008 2009 2008 2009
For-Profit Education
Apollo Group, Inc. 63.81 160.15 0.0 0.60 15% 491% 19.2 14.5 9.7 7.2
American Public Education Inc. 37.56 18.06 0.0 NA 55% 54% 42.4 29.3 20.5 13.8
Corinthian Colleges, Inc. 16.88 86.45 31.9 0.75 16% 78% 28.7 18.1 11.6 7.8
Career Education Corporation 21.05 90.09 1.7 0.70 (2)% 9% 19.5 20.0 6.8 6.8
Capella Education Company 50.34 16.69 0.0 0.55 20% 32% 31.5 23.4 13.4 10.3
Strayer Education, Inc. 168.01 13.88 0.0 0.55 25% 24% 33.2 25.8 17.8 14.1
DeVry, Inc. 42.47 71.64 20.0 0.55 17% 33% 23.2 17.5 12.5 9.6
ITT Educational Services, Inc. 101.6 38.56 150.0 0.60 17% 45% 19.0 13.6 10.1 7.4
K12 Inc. 15.29 28.86 13.7 NA 61% 44% 18.3 35.4 13.4 8.7
Grand Canyon Education, Inc. 14.72 45.47 32.1 NA 62% 126% NA 24.3 30.2 11.5
New Oriental Education & Technology Group, Inc. 50.33 149.19 0.0 1.20 43% (3)% 32.9 24.5 23.8 17.2
Internet
Activision Blizzard, Inc. 10.03 1359 0.0 NA 124% 340% 18.5× 17.2× 6.9 6.9
Amazon.com, Inc. 74.71 429 74.0 1.10 29% 24% 53.8 47.9 27.1 23.6
Dice Holdings Inc. 3.2 62.21 60.2 NA 9% 2% 12.3 25.7 4.5 6.9
drugstore.com, Inc. 1.3 97.36 2.1 1.65 8% 63% NA NA NA 91.1
eBay Inc. 14.32 1287.81 0.0 1.15 11% (22)% 12.8 17.1 7.0 8.1
Google Inc. 379.5 315.25 0.0 0.90 31% 9% 23.6 20.7 13.2 11.3
GSI Commerce, Inc. 14.93 47.93 195.9 1.15 29% (2)% NA NA 12.2 10.6
TechTarget 2.38 41.75 0.0 1.45 20% (117)% NA NA 8.8 11.3
WebMD Health Corp. 25.58 57.58 0.0 0.85 15% 114% 45.8 46.0 18.1 16.4
Electronic Arts Inc. 19.16 322 0.0 0.90 15% 55% NA 24.1 NA 11.5
Yahoo! Inc. 14.02 1393.35 0.0 1.00 3% (78)% 32.6 37.3 10.2 10.3
Software
Adobe Systems Incorporated 23.64 524.27 350.0 1.20 13% (41)% 14.9× 22.9× 8.6 12.6
ArcSight, Inc. 14.15 31.5 0.0 NA 34% 509% NA 52.8 39.2 21.8
Intuit Inc. 25.35 320.53 998.1 0.90 15% 9% 19.5 16.2 9.2 7.9
Microsoft Corporation 18.83 8891 0.0 0.80 18% (32)% 10.2 12.0 5.9 6.8
Omniture, Inc. 13.54 75.05 13.2 1.30 107% 37% NA NA 16.4 9.6
Salesforce.com, Inc. 37.36 122.43 0.0 1.20 44% 93% NA 57.7 35.0 20.7
Symantec Corporation 16.47 819.92 1766.0 0.90 5% (234)% 9.4 9.5 4.7 4.9
McAfee Inc. 34.49 153.72 0.0 1.00 22% 77% 26.1 24.1 12.3 10.1
VMware Inc. 29.6 389.86 450.0 NA 42% 62% 27.1 33.9 21.0 23.8
Note: The reported multiples are based on 2008 actuals or 2009 expected values, respectively. The numerator is the same for both 2008 and 2009 values.
Data source: SEC filings, Value Line Investment Survey, and other analyst reports.

Exhibit 9 (Cont)

Exhibit 9 (continued)
ROSETTA STONE, INC.: PRICING THE 2009 IPO
Financial Data for Industry Comparables
For-Profit Education
Apollo Group, Inc. Education programs for working adults at the high school, undergraduate, and graduate levels, online and on-campus through subsidiaries.
American Public Education Inc. Online postsecondary education degree programs and certificate programs including national security, military studies, intelligence, homeland security, criminal justice, technology, business administration and liberal arts; primarily serves military and public service communities.
Corinthian Colleges, Inc. Private, for-profit postsecondary education degree programs in healthcare, electronics, and business.
Career Education Corporation North American private, for-profit postsecondary education in information technologies, visual communication and design technologies, business studies, and culinary arts.
Capella Education Company Online post-secondary education services company; doctoral, master's and bachelor's programs through their subsidiary.
Strayer Education, Inc. Holding company of Strayer University, which offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration to working adults.
DeVry, Inc. North American higher education programs, offering associate, bachelor's and master's degree programs in technology; healthcare technology; business, and management; also offers online secondary education to school districts and medical education.
ITT Educational Services, Inc. Technology-based postsecondary degree programs in the United States.
K12 Inc. Technology-based education company; proprietary curriculum, software and educational services created for online delivery to students in kindergarten through 12th grade.
Grand Canyon Education, Inc. Online undergraduate and graduate degree programs in education, business, and healthcare.
New Oriental Education & Technology Group, Inc. Foreign language training and test preparation courses in the United States and the People's Republic of China; development and distribution of primary and secondary educational content and technology.
Internet
Activision Blizzard, Inc. Interactive entertainment software and peripheral products.
Amazon.com, Inc. Diversified online retailer with emphasis on books.
Dice Holdings Inc. Career services and recruiting.
drugstore.com, Inc. Online drugstore.
eBay Inc. Online trading community.
Google Inc. Web-based search engine and global technology company.
GSI Commerce, Inc. E-commerce business developer/operator.
TechTarget Industry-specific portal operator.
WebMD Health Corp. Health information services for consumers, physicians, healthcare professionals, employers, and health plans.
Electronic Arts Inc. Interactive entertainment software and peripheral products.
Yahoo! Inc. Internet media company providing Web navigation, aggregated information content, communication services, and commerce.
Software
Adobe Systems Incorporated Computer software products and technologies.
ArcSight, Inc. Security and compliance management solutions.
Intuit Inc. Business and financial management software solutions.
Microsoft Corporation Operating system software, server application software, business and consumer applications software, software development tools, and Internet/intranet software; also video game consoles and digital music entertainment devices.
Omniture, Inc. Online business optimization software.
Salesforce.com, Inc. Application services that permit sharing of on-demand customer information.
Symantec Corporation Security, storage, and systems management solutions.
McAfee Inc. Computer security solutions.
VMware Inc. Virtual infrastructure solutions.
Data source: Adapted from company sources.