Rosetta Stone 2014 Annual Report Download

Download and view the complete annual report

Please find the complete 2014 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 210

  • 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

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 ý
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 ý
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 ý 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 ý 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. o
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 ý
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 ý
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $191.5 million as of June 30, 2014 (based
on the last sale price of such stock as quoted on the New York Stock Exchange). All executive officers and directors of the registrant and all persons filing a
Schedule 13D with the Securities and Exchange Commission in respect of registrant's common stock have been deemed, solely for the purpose of the
foregoing calculation, to be "affiliates" of the registrant.
As of March 11, 2015, there were 21,601,219 shares of common stock outstanding.

Table of contents

  • Page 1
    ... 31, 2014 Commission file number: 1-34283 Rosetta Stone Ing. (Exact name of registrant as specified in its charter) Delaware (State of incorporation) 1919 North Lynn St., 7th Fl. Trlington, Virginia (Address of principal executive offices) Registrant's telephone number, including area code: 703...

  • Page 2
    Doguments ingorporated by referenge: Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the 2015 Annual Meeting of Stockholders to be held on May 21, 2015 are incorporated by reference into Part III.

  • Page 3
    ...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 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...

  • Page 4
    ... "Risk uactors" and Part II, Item 7. "Management's Discussion and Analysis of uinancial Condition and Results of Operations," those described elsewhere in this Annual Report on uorm 10-K, and those described from time to time in our future reports filed with the Securities and Exchange Commission. 3

  • Page 5
    ... web-based software subscriptions, digital downloads, mobile applications, and perpetual CD packages. Rosetta Stone has continued to invest in language learning and expanded beyond language learning and deeper into education-technology with its acquisitions of Livemocha Inc. ("Livemocha") and Lexia...

  • Page 6
    ... app aimed to teach children aged 3-7 how to read using engaging self-paced interactive games and activities that introduce and reinforce core reading skills. Global Enterprise & Edugation: Rosetta Stone also offers a series of technology-based interactive language-learning solutions for schools...

  • Page 7
    ... specific needs. Custom Solutions: Rosetta Stone offers tailored solutions to help organizations maximize the success of their learning programs. Our current custom solutions include curriculum development, global collaboration programs that combine language education with business culture training...

  • Page 8
    ...; immersion-based classroom instruction; self-study books, audio recordings and software that rely primarily on grammar and translation; and free online and mobile offerings that provide content and opportunities to practice writing and speaking. Within consumer-focused language learning, our...

  • Page 9
    ... pending that cover various aspects of our language teaching methods and literacy assessment methodologies. We have registered a variety of trademarks, including our primary or house marks, Rosetta Stone, The Blue Stone Logo , Livemocha, Lexia Learning, and Lexia. These trademarks are the subject of...

  • Page 10
    ...to new or emerging technologies and changes in customer requirements and preferences and to offer lower prices than ours or to offer free language-learning software or online services. We may not be able to compete successfully against current or future competitors. There are a number of free online...

  • Page 11
    ..., these companies can offer products at significantly lower prices or for free. As free online translation services improve and become more widely available and used, people may become less interested in language learning generally. Although we also offer free products such as mobile apps, if...

  • Page 12
    ...direct sales force, to sell our products. Our sales to retailers and distributors are highly concentrated on a small group that comprises a mix of websites, such as Digital River and Apple iTunes App Store, select retail resellers such as Amazon.com, Barnes & Noble, Target, Best Buy, Books-a-Million...

  • Page 13
    ... may be forced to purchase time slots and publication dates at higher prices, which will increase our costs. We engage in an active public relations program, including through social media sites such as Facebook and Twitter. We also seek new customers through our online marketing efforts, including...

  • Page 14
    ... from local language-learning software providers and preferences for local products in some regions; expenses associated with customizing products, support services and websites for foreign countries; inability to register domain names in Country Code Top Level Domains in order to operate country...

  • Page 15
    ... described above could reduce our future revenue from our international operations and could harm our overall business, revenue and financial results. If we are unable to continually adapt our products and services to mobile devices and technologies other than personal computers and laptops, and to...

  • Page 16
    ... timing of customers' approval processes. As we move our consumer business online and sell our solutions as a subscription, rather than for an upfront fee, our revenue, results of operations and cash flow could be negatively impacted. Historically, we have predominantly sold our packaged software...

  • Page 17
    Table of Contents services for only a short time after purchase, online subscription customers could be less likely to continue their subscriptions past the initial term with the effect that we could earn less revenue over time from each customer than historically. Our revenue is subject to seasonal...

  • Page 18
    ..., could cause us to lose sales and disrupt our ability to process orders and deliver our solutions in a timely manner. We rely on our website, an in-house call center and third-party call centers to sell our solutions, respond to customer service and technical support requests and process orders...

  • Page 19
    ... rate of license renewals or upgrades for consumer and enterprise and education customers; injury to our reputation; increased service expenses or payment of damages; or costly litigation. If we fail to effectively upgrade our information technology systems, we may not be able to accurately report...

  • Page 20
    ... include a decline in stock price and market capitalization, future cash flows and slower growth rates in our industry. In the first quarter of 2014, we recorded a goodwill impairment loss of $2.2 million, which represents a full impairment of the ROW Consumer reporting unit's goodwill and in the...

  • Page 21
    ... how network operators handle and charge for access to data that travel across their networks could adversely impact our business. We rely upon the ability of customers to access many of our products through the internet. To the extent that network operators implement usage based pricing, including...

  • Page 22
    ... lose significant revenue due to illegal use of our software and from counterfeit copies of our software. If piracy activities increase, it could further harm our business. We also expect that competitors might try to illegally use our proprietary information and develop products that are similar...

  • Page 23
    ...relating to the open source software or if the open source software is defective in any manner. As our product and service offerings become more complex, our reported revenue may become less predictable. During 2014, we continued to transition our consumer distribution to more online. The accounting...

  • Page 24
    ...online services have 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. Our consumer language-learning packages integrate our language-learning software solutions with online services...

  • Page 25
    ..., Rosetta Stone GmbH, a subsidiary of the Company, was served with a writ filed by Langenscheidt KG ("Langenscheidt") in the District Court of Cologne, Germany alleging trademark infringement due to Rosetta Stone GmbH's use of the color yellow on its packaging of its language-learning software and...

  • Page 26
    ...We have not paid any cash dividends on our common stock and do not intend to do so in the foreseeable future. We currently intend to retain all available funds and any future earnings to support the operation of and to finance the growth and development of our business. Further, our revolving credit...

  • Page 27
    ... read in conjunction with the information under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements, the related notes and the accompanying independent registered public accounting firm's report, which are included in...

  • Page 28
    ... stock-based compensation expense Intangible amortization included in: Cost of revenue Sales and marketing Research and development General and administrative Total intangible amortization expense $ 261,853 53,054 208,799 173,208 33,176 57,120 20,333 3,812 287,649 (78,850) 17 (233) (1,129) (1,345...

  • Page 29
    ... including online subscriptions, digital downloads, mobile apps, and perpetual CD packages. Rosetta Stone has invested more in language learning and expanded beyond language learning and deeper into education-technology with its acquisitions of Livemocha Inc. ("Livemocha") and Lexia Learning Systems...

  • Page 30
    ... Enterprise & Education segment nor does management currently have a business metric to measure success of our Rosetta Stone Fit Brains and Rosetta Stone Kids offerings. These business metrics do not include product software units, revenues, or learners gained from acquisitions. • • Product...

  • Page 31
    ... unit and online learner metrics relate to the results for our global consumer language-learning offerings and do not include revenue and learners from Rosetta Stone uit Brains, Rosetta Stone Kids, mobile applications and other offerings gained through acquisitions. Product software revenue, units...

  • Page 32
    ... online services. As a result, we typically defer 10%-35% of the revenue of each of these bundled sales to be recognized over the term of the service period. The content of our perpetual product software and our web-based language-learning subscription offerings are the same. We offer our customers...

  • Page 33
    ... our offering portfolio through the addition of new content and new paid and complementary products and services to our language-learning, literacy, and brain fitness solutions. We expect our investment in research and development expenses to increase in future years as we fund product initiatives...

  • Page 34
    ... of consumer revenue from the CD and digital download formats of the Rosetta Stone language-learning packaged software product which is a multiple-element arrangement that contains two deliverables: perpetual software, which is delivered at the time of sale, and a short-term online service, which...

  • Page 35
    ... and web-based subscriptions is recognized ratably over the term of the service or subscription period, assuming all revenue recognition criteria have been met. Our CD and digital download formats of Rosetta Stone language-learning product are bundled with a short-term online service where customers...

  • Page 36
    ... restricted stock included in the related financial statement line items (in thousands): Year Ended Degember 31, 2014 2013 2012 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...

  • Page 37
    ...Livemocha and Lexia in 2013 and the acquisitions of Vivity and Tell Me More in January 2014. Our reporting units are: North America Consumer Language, North America Consumer Fit Brains, Rest of World Consumer ("ROW Consumer"), Global Enterprise & Education Language, and Global Enterprise & Education...

  • Page 38
    ... than for the North America Consumer Language reporting unit as of December 31, 2014, discussed below. As described above, in March 2015, we announced a plan to realign and reorganize the Company to focus on profitable growth in the Global Enterprise & Education segment. The accelerated focus on...

  • Page 39
    ... is not needed. Our valuation allowance analysis considers a number of factors, including our cumulative losses in recent years, our expectation of future taxable income and the time frame over which our net operating losses expire. As of December 31, 2014, a full valuation allowance exists for the...

  • Page 40
    ...31, 2014 2013 2012 (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 Total cost of revenue Gross profit Operating expenses: Sales and marketing...

  • Page 41
    ... 31, 2013. The increase was due to increases of $36.9 million and $1.2 million in worldwide Global Enterprise & Education bookings and North America Consumer, respectively, offset by a decrease in ROW Consumer bookings of $7.2 million compared to the prior year. We reported an operating loss of $78...

  • Page 42
    ... language-learning product software, revenues from the sale of audio practice products, and sales of certain mobile applications. Subscription and service revenue includes web-based software subscriptions, online services for our conversational coaching and language-learning community access...

  • Page 43
    ... the support of additional companies and a transition to cloud-based platforms. An increase in depreciation and amortization on acquired intangible assets also contributed to the overall increase in cost of subscription and service revenue. Operating Expenses Year ended Degember 31, 2014 2013 2014...

  • Page 44
    ...18.0 million goodwill impairment charge related to North America Consumer Language reporting unit taken in the fourth quarter of 2014. The goodwill impairment charges were primarily a result of the decline in demand for consumer language-learning products and services at their current pricing levels...

  • Page 45
    ... taken during the fourth quarter of 2014 related to the North America Consumer Language reporting unit, and current year losses in Canada and France. The goodwill that was written off related to acquisitions from prior years, a portion of which resulted in a tax benefit as a result of writing off...

  • Page 46
    ...retail and homeschool sales channels, respectively, partially offset by an increase of $8.1 million in our direct-to-consumer channel. During 2013 we focused on driving customers to purchase through our direct-to-consumer channel, particularly through our website. Lower pricing is one tactic we used...

  • Page 47
    ... product software packages as well as a growing base of exclusively online web-based software subscription sales. Enterprise and education subscription and service revenues also increased $4.5 million related to growth in the enterprise and education customer base with renewing online subscriptions...

  • Page 48
    ... by a $2.1 million increase in payroll and 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...

  • Page 49
    ... benefits and other personnel related costs, as well as direct advertising expenses, costs of office facilities and costs of information technology systems. We fund these requirements through cash flow from our operations. We expect that our future growth may continue to require additional working...

  • Page 50
    ... in working capital, primarily deferred revenue of $48.9 million which is principally due to the sales of subscription services in our Global Enterprise & Education language and literacy sales channels and Fit Brains. Net Cash Used in Investing Activities Net cash used in investing activities was...

  • Page 51
    ... to provide related footnote disclosures. Management's evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. ASU 2014-15 will be effective for the first interim period within annual reporting periods...

  • Page 52
    ... accounts to date and we believe we are not exposed to any significant credit risk related to cash. We sell products to retailers, resellers, government agencies, and individual consumers and extend credit based on an evaluation of the customer's financial condition, without requiring collateral...

  • Page 53
    ...may deteriorate. Based on using the COSO criteria, management believes our internal control over financial reporting as of December 31, 2014 was effective. Our independent registered public accounting firm, Deloitte & Touche LLP, has audited the financial statements included in this Annual Report on...

  • Page 54
    ... 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 2015 Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after...

  • Page 55
    ...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 56
    ...undersigned, thereunto duly authorized. ROSETTA STONE INC. By: /s/ STEPHEN M. SWAD Stephen M. Swad Chief Executive Officer Date: March 16, 2015 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 57
    Table of Contents INDEX TO CONSOLIDTTED FINTNCITL STTTEMENTS Page Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Loss Consolidated Statements of Changes in Stockholders' Equity ...

  • Page 58
    ... and Stockholders of Rosetta Stone Inc. Arlington, Virginia We have audited the accompanying consolidated balance sheets of Rosetta Stone Inc. and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, changes...

  • Page 59
    ...Contents REPORT OF INDEPENDENT REGISTERED PUBLIC TCCOUNTING FIRM To the Board of Directors and Stockholders of Rosetta Stone Inc. Arlington, Virginia We have audited the internal control over financial reporting of Rosetta Stone Inc. and subsidiaries (the "Company") as of December 31, 2014, based on...

  • Page 60
    ... capital lease Other current liabilities Deferred revenue Total current liabilities Deferred revenue Deferred income taxes Obligations under capital lease Other long-term liabilities Total liabilities Commitments and contingencies (Note 16) Stogkholders' equity: Preferred stock, $0.001 par value...

  • Page 61
    ...share amounts) Year Ended Degember 31, 2014 2013 2012 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 62
    ... STTTEMENTS OF COMPREHENSIVE LOSS (in thousands) Years Ended Degember 31, 2014 2013 2012 Net loss Other comprehensive income, net of tax: Foreign currency translation (loss) gain Unrealized gain on available-for-sale securities Other comprehensive (loss) income Comprehensive loss $ (73,706...

  • Page 63
    ... 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 income...

  • Page 64
    ...revenue Net cash provided by operating activities CTSH FLOWS FROM INVESTING TCTIVITIES: Purchases of property and equipment Proceeds from sales of available-for-sale securities Decrease (increase) in restricted cash related to Vivity Labs acquisition Acquisitions, net of cash acquired Net cash (used...

  • Page 65
    See accompanying notes to consolidated financial statements F-8

  • Page 66
    ...") develop, market and support a suite of language-learning, literacy, and brain fitness solutions consisting of perpetual software products, web-based software subscriptions, online and professional services, audio practice tools and mobile applications. The Company's software products are sold on...

  • Page 67
    ... and web-based subscriptions is recognized ratably over the term of the service or subscription period, assuming all revenue recognition criteria have been met. Our CD and digital download formats of Rosetta Stone language-learning product are bundled with a short-term online service where customers...

  • Page 68
    ... POLICIES (Continued) Sales commissions from non-cancellable web-based software subscription contracts are deferred and amortized in proportion to the revenue recognized from the related contract. Business Combinations The Company recognizes all of the assets acquired, liabilities assumed and...

  • Page 69
    ... 2014, the Company recorded a $0.2 million impairment expense related to the abandonment of a previously capitalized internal-use software project. There were no impairments of its long-lived assets during the year ended December 31, 2013. Intangible Tssets Intangible assets consist of acquired...

  • Page 70
    ... costs associated with product development. The Company develops the majority of its language-learning software products for perpetual sale to external customers. The Company considers technological feasibility to be established when all planning, designing, coding, and testing has been completed...

  • Page 71
    ... million, and $2.2 million in internal-use software, respectively. For the years ended December 31, 2014, 2013 and 2012, the Company recorded amortization expense relating to internal-use software of $3.4 million, $1.8 million, and $0.9 million, respectively. Ingome Taxes The Company accounts for...

  • Page 72
    ... 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 under the provisions of ASC topic 260, Earnings Per Share. Basic loss per share is computed using net loss and the weighted average number of...

  • Page 73
    ...consolidated foreign subsidiaries, whose functional currency is the local currency, are translated to U.S. dollars using average exchange rates for the period. The Company reports the effect of exchange rate changes on cash balances held in foreign currencies as a separate item in the reconciliation...

  • Page 74
    ... to provide related footnote disclosures. Management's evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. ASU 2014-15 will be effective for the first interim period within annual reporting periods...

  • Page 75
    ...(the "Livemocha Merger" and "Livemocha"). Livemocha is one of the world's largest online language-learning communities with over 16 million registered members. The acquisition of Livemocha's technology platform has accelerated the Company's transition to cloud-based learning solutions and reinforced...

  • Page 76
    ...assets acquired Goodwill Amortizable intangible assets Purchase Price The acquired amortizable intangible assets and the related estimated useful lives consist of the following (in thousands): Estimated Useful Lives Online community Enterprise relationships Technology platform Tradename Total assets...

  • Page 77
    ... activity, awareness and motivation through its flagship product, Fit Brains. The applications are designed for use on mobile, web and social platforms. Vivity's emphasis on mobile solutions is especially compatible with Rosetta Stone's focus on cloud-based technology to enable on-the-go learning...

  • Page 78
    ... online language-learning subscriptions and learning services primarily to corporate and educational organizations. Tell Me More offers a robust suite of SaaS-based language-learning products and services that provide intermediate, advanced and business language solutions in nine languages. The Tell...

  • Page 79
    ...): Estimated Useful Lives Customer relationships Technology platform Tradename Total assets Pro Forma Adjusted Summary The results of Livemocha, Lexia, Vivity and Tell Me More's operations have been included in the consolidated financial statements subsequent to the acquisition date. The following...

  • Page 80
    ... for the Company's reporting units and operating segments for the years ended December 31, 2014 and 2013 (in thousands): North Tmeriga Consumer Language Fit Brains Rest of World Consumer Global Enterprise & Edugation Language Literagy Total Balance as of January 1, 2013 Acquisition of Livemocha...

  • Page 81
    ... its products and services at its current pricing levels. In an attempt to increase demand, the Company lowered prices in its direct-to-consumer and retail sales channels. This strategy resulted in 293,808 units sold and $47.3 million in revenue for the North America Consumer Language reporting unit...

  • Page 82
    ... its indefinite-lived 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 relationships, technology platform and the Livemocha trade name. The estimated useful lives of these...

  • Page 83
    ... following (in thousands): Years Ended Degember 31, 2014 2013 2012 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...

  • Page 84
    ... are located. The fair value of the lease liability at the date of acquisition was $4.0 million. During the year ended December 31, 2014, no equipment or software was acquired through the issuance of capital leases. During the year ended December 31, 2013 the Company acquired $0.7 million in...

  • Page 85
    ... under capital lease, long-term 10. STOCK-BTSED COMPENSTTION 2006 Stock Incentive Plan $ 754 551 551 545 545 1,495 4,441 693 3,748 594 3,154 $ $ $ On January 4, 2006, the Company established the Rosetta Stone Inc. 2006 Stock Incentive Plan (the "2006 Plan") under which the Company's Board of...

  • Page 86
    ... 31, 2014 2013 2012 Expected stock price volatility Expected term of options Expected dividend yield Risk-free interest rate 63%-65% 6 years - 1.46%-1.80% 64%-67% 6 years - 0.75%-1.65% 64%-66% 6 years - 0.60%-0.88% Prior to the completion of the Company's initial public offering in April...

  • Page 87
    ...date fair value is 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...

  • Page 88
    ... restricted stock included in the related financial statement line items (in thousands): Years Ended Degember 31, 2014 2013 2012 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...

  • Page 89
    ... space related to the 6th floor was abandoned and ceased to be used by the Company on January 31, 2014. In March 2013 Rosetta Stone Japan Inc. partially abandoned its Japan office as a result of excess office space due to reduction in staff along with overall local operations business performance...

  • Page 90
    ... fee of $0.4 million. The Company has been released from all obligations under the lease arrangement as of December 31, 2014. In the fourth quarter of 2014, Rosetta Stone Korea Inc. implemented a plan to consolidate office locations. The Company closed its two existing office spaces and moved...

  • Page 91
    ...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 assets associated with acquired net operating loss carryforwards. The...

  • Page 92
    ... tax liabilities of $0.9 million associated with the book/tax differences on acquired intangible assets and deferred revenue, offset by deferred tax assets associated with acquired net operating loss carryforwards. In connection with the Tell Me More purchase accounting, the Company recognized net...

  • Page 93
    ... Degember 31, 2014 2013 2012 Income tax benefit at statutory federal rate State income tax expense, net of federal income tax effect Domestic production activities deduction Acquired intangibles Other nondeductible expenses Tax rate differential on foreign operations Increase in valuation allowance...

  • Page 94
    ... foreign earnings. The Company made income tax payments of $1.7 million, $3.3 million, and $4.0 million in 2014, 2013 and 2012, respectively. 16. COMMITMENTS TND CONTINGENCIES Operating Leases The Company leases copiers, parking spaces, buildings, a warehouse and office space under operating lease...

  • Page 95
    ..., Rosetta Stone GmbH, a subsidiary of the Company, was served with a writ filed by Langenscheidt KG ("Langenscheidt") in the District Court of Cologne, Germany alleging trademark infringement due to Rosetta Stone GmbH's use of the color yellow on its packaging of its language-learning software and...

  • Page 96
    ... has concluded that Rosetta Stone GmbH will be required to pay court costs and opposing counsel fees and Langenscheidt has filed a Motion for Attorneys' Fees to which Rosetta Stone GmbH has objected. The Company has recorded a liability of $0.3 million as of December 31, 2014 related to the court...

  • Page 97
    ... 31, 2014 2013 2012 Revenue: North America consumer Rest of world consumer Global Enterprise & Education Total revenue Segment gontribution: North America consumer Rest of world consumer Global Enterprise & Education Total segment contribution Unallogated expenses, net: Unallocated cost of sales...

  • Page 98
    ... 17. SEGMENT INFORMTTION (Continued) Revenue by Product and Service The Company earns revenue from the sale of language-learning, literacy and brain fitness products and services. The information below summarizes revenue by type for the years ended December 31, 2014, 2013 and 2012, respectively (in...

  • Page 99
    ... The following table includes the Company's valuation and qualifying accounts for the respective periods (in thousands): Year Ended Degember 31, 2014 2013 2012 Allowance for doubtful accounts: Beginning balance Charged to costs and expenses Deductions-accounts written off Ending balance Inventory...

  • Page 100
    ... its plan to prioritize the Global Enterprise & Education segment. Specifically, the Company will focus on addressing the needs of educators and corporations, where the most profitable growth potential is anticipated. Simultaneously, the Company is implementing a program to reduce costs as...

  • Page 101
    ... Sub Inc., LiveMocha, Inc., and Shareholder Representative Services LLC., dated April 1, 2013. Loan and Security Agreement between Rosetta Stone Ltd. and Silicon Valley Bank, executed on October 28, 2014. 2014 Executive Bonus Plan. 2013 Rosetta Stone Inc. Long Term Incentive Program (pursuant to...

  • Page 102
    ... 2.1 filed with Rosetta Stone's Current Report on Form 8-K filed on April 2, 2013. (8) Incorporated by reference to Exhibit 99.3 filed with Rosetta Stone's Current Report on Form 8-K filed on October 29, 2014. (9) Incorporated by reference to Exhibit 10.1 filed with Rosetta Stone's Current Report on...

  • Page 103
    ... Employee Identification Number: Number of Shares Covered by Option: Option Price per Share: Vesting Start Date: Recipient understands and agrees that this Non-Qualified Stock Option Award is granted subject to and in accordance with the terms of the Rosetta Stone, Inc. _____ (the "Plan"). Recipient...

  • Page 104
    ... terms of the Plan, this Agreement and the Cover Sheet, on the Grant Date set forth on the Cover Sheet (the "Grant Date"), the Company granted to Optionee 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...

  • Page 105
    ...Price and satisfaction of all applicable tax obligations, and subject to the applicable terms and conditions of the Plan and the terms and conditions of this Agreement, the Company shall cause certificates for the shares purchased hereunder to be delivered to Optionee or cause an uncertificated book...

  • Page 106
    ... misappropriation of funds or assets of the Company for personal use or willful violation of Company policies or standards of business conduct as determined in good faith by the Board. (c) If Optionee ceases to be an employee of the Company or a Subsidiary Corporation for any reason other than death...

  • Page 107
    ... shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the Company's principal business office address to the attention of the...

  • Page 108
    ... such surviving or 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...

  • Page 109
    ...Employee Identification Number: Number of Shares Covered by Option: Option Price per Share: Vesting Start Date: Recipient understands and agrees that this Non-Qualified Stock Option Award is granted subject to and in accordance with the terms of the Rosetta Stone, Inc. _____ (the "Plan"). Recipient...

  • Page 110
    ... of the three-month period beginning on the Vesting Start Date (as set forth on the Cover Sheet), and on the last day of each succeeding three-month period, the Option will vest with respect to, and may be exercised for up to, one-fourth (1/4th) of the total number of shares of Stock subject to the...

  • Page 111
    ...the Option Shares to be acquired on exercise of the Option. (c) Upon full payment of the Option Price and subject to the applicable terms and conditions of the Plan and the terms and conditions of this Agreement, the Company shall cause certificates for the shares purchased hereunder to be delivered...

  • Page 112
    ... shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the Company's principal business office address to the attention of the...

  • Page 113
    ... such word or phrase appears reasonably requires a broader, narrower or different meaning. (a) "Change in Control " means (i) the liquidation, dissolution or winding-up of the Company, (ii) the sale, license or lease of all or substantially all of the assets of the Company, or (iii) a share exchange...

  • Page 114
    ... such surviving or 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...

  • Page 115
    ... below. The terms and conditions of the award are set forth in the Restricted Stock Unit Award Agreement and in the Rosetta Stone Inc. 2009 Omnibus Incentive Plan (the "Plan "). Grant Date: Name of Recipient: Recipient's Identification Number: Number of Units of Restricted Stock Granted: Recipient...

  • Page 116
    ... not otherwise defined in this Agreement shall have the meanings given to such terms in the Plan. 2. Grant of Restricted Stock Units. Effective as of the Grant Date, the Company hereby grants to Director the number of Restricted Stock Units set forth on the Cover Sheet. In accepting the award of...

  • Page 117
    ... restrictions, limitations and conditions applicable to the Restricted Stock Units for which such Cash Dividend Restricted Stock Unit was awarded and will be exchanged for shares of the Common Stock at the same time and on the same basis as such Restricted Stock Units. (b) Stock Dividends. If during...

  • Page 118
    ... shall be delivered either by personal delivery, by telegram, telex, telecopy or similar facsimile means, by certified or registered mail, return receipt requested, or by courier or delivery service, addressed to the Company at the Company's principal business office address to the attention of the...

  • Page 119
    ..., this Agreement shall bind, be enforceable by and inure to the benefit of the Company and its successors and assigns, and to Director, Director's permitted assigns, executors, administrators, agents, legal and personal representatives. 16. Counterparts. This Agreement may be executed in two or...

  • Page 120
    ... the 2014 Rosetta Stone Executive Bonus Plan (the "Plan") is to motivate senior management to achieve key financial and strategic business objectives of Rosetta Stone Inc. and its subsidiaries ("Rosetta Stone" or the "Company"). II. Plan Participants, Administration and Effective Date The following...

  • Page 121
    ... costs associated with meroers and acquisitions as well as all adjustments related to recordino the non-cash tax valuation allowance for deferred tax assets. (3) "Percentaoe Global Dioital Sales" means the percentaoe of all new unit sales of Global Consumer that are downloaded (e.o., TOTALe), online...

  • Page 122
    ... in the Plan (the "Corporate Strategic Goals Bonus"). These combined factors will determine the total target potential bonus award on an individual basis. Line of Business Executive Bonus Targets Job Title President, Global Enterprise & Education SVP, Consumer CPO Line of Business Financial Goals...

  • Page 123
    ... all Line of Business Executivesx the award of the Corporate Strategic Goals Bonus (20% of the total target potential bonus award) will be determined as follows. • 33.3% - E&E Cross Selling of approximately $28M (non-TOTALe sales) • Advanced English • Tell Me More • Lexia • Custom Content

  • Page 124
    • • 33.3% - Consumer Cross Selling of approximately $12M • Brain fitness (Fit Brains) • Tell Me More • Lexia • Consumer Kids • Project X 33.3% - Launch of Consumer Kids literacy product(s) with bookings of approximately $3M IV. Achievement of Plan Targets Financial Bonus Goals ...

  • Page 125
    ... with Good Reasonx then the Company shall pay to Executivex at the times specified in their contractx the pro rata portionx if anyx of the Executive's Annual Bonus earned up until such Termination Date in accordance with the terms of the then-current Company bonus policy. "Good Reason" shall mean...

  • Page 126
    ... shall have no special or priority right to any assets of the Company. Nothing in the Plan shall require the Company to segregate or set aside any funds or other property for the purpose of paying any portion of an award. No Participantx beneficiary or other person shall have any rightx title or...

  • Page 127
    Plan is not a promise, guarantee, announcement, contract or agreement that a bonus will be paid, nor is it a contract of employment.

  • Page 128
    ... Stone Inc. Long Term Incentive Program (the "LTIP") is to: Motivate senior management to achieve key financial and strategic business objectives of Rosetta Stone Inc., and its Subsidiary Corporations (individually and/or collectively, as applicable, "Rosetta Stone" or the "Company"); Offer...

  • Page 129
    ..., amortization, and stock-based compensation expenses, plus the change in deferred revenues. "Percentage Digital Sales" means the percentage of all new unit sales of Global Consumer which are downloaded (e.g., TOTALe), online (e.g., OSUB, TOSUB, ReFLEX), renewals and paid Apps. Unless specified...

  • Page 130
    ...Stock Awards and cash shall vest and become payable. Subject to the other requirements... After the completion of the Program Period but prior to any...level of achievement, if any, of each Performance Goal. The Committee shall not increase any amount of payment, whether in cash and/or Performance Stock...

  • Page 131
    ... in compliance with the requirements of Code Section 162(m). Any payment of cash or granting of Performance Stock Awards under this LTIP will be distributed or granted to Executives within 45 days of the end of the Program Period, upon approval from the Committee of the Company's achievement of the...

  • Page 132
    ... This LTIP may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Committee. The Company has caused this LTIP to be executed by its duly authorized corporate officer effective as of January 1, 2013. ROSETTA STONE INC. By: Name: Title...

  • Page 133

  • Page 134
    Exhibit 10.25 ROSETTA STONE INC. 2009 OMNIBUS INCENTIVE PLAN 2013 ROSETTA STONE INC. LONG-TERM INCENTIVE PROGRAM AWARD AGREEMENT Rosetta Stone Inc. (the "Company") hereby grants you the eligibility to receive cash and shares of the Company's Stock, subject to certain restrictions and the ...

  • Page 135
    Date: _____

  • Page 136
    ... and Company stock, or otherwise) of incentive compensation based on the performance of the Company (including any business unit), any product, any service, any individual or any other performance metric; provided, however, earned and approved grants under the Company's 2013 Long Term Incentive Plan...

  • Page 137
    ... from time to time. V. Executives Subject to Policy For purposes of the Policy, "Executive" means the Company's current and former Chief Executive Officer and any other current or former "Executive Officer", as that term is defined in the Committee's Charter. VI. Preservation of Other Rights and...

  • Page 138
    ...the building located at 1919 North Lynn Street, Arlington, Virginia, (the "Building"), at the rent and subject to the terms and conditions set forth in the Prime Lease; and B. Tenant (as "Sublandlord") and Rosetta Stone Ltd. (as "Subtenant") are parties to that certain Sublease Agreement dated as of...

  • Page 139
    ... have the right to use the Walls/Partitions and Systems Furniture as part of the Sub-Subleased Premises at no additional charge, subject to the conditions hereof. As of the date hereof, Walls/Partitions and Systems Furniture in excess of those set forth in Exhibit B-1 are being stored within the...

  • Page 140
    ... of either the termination date of the Sub-Sublease or ten (10) business days after the parties have agreed upon the revised configuration as aforesaid. In no event shall Sub-Subtenant be required to perform more reconfiguration work than would be required to return the configuration of the Walls...

  • Page 141
    ... Sub-Subtenant in the condition required by Section 2(a) hereof, which date shall be not later than June 1, 2014 (the "Sub-Sublease Commencement Date"). Sub-Subtenant's obligation to pay Annual Base Sub-Subrent shall commence on the date (the "Sub-Sublease Rent Commencement Date") that is the later...

  • Page 142
    ..., which Annual Base Sub-Subrent shall increase as set forth below. For all purposes of this Sub-Sublease, the term "Sub-Sublease Year" shall mean, with respect to the first Sub-Sublease Year, the period commencing on the Sub-Sublease Rent Commencement Date and ending at midnight on the last day of...

  • Page 143
    ...-Subleased Premises. "Rent" as used herein shall mean Annual Base Sub-Subrent and Additional Sub-Subrent. 5. Permitted Use; Access. The Sub-Subleased Premises shall be used by Sub-Subtenant only for general office use and uses ancillary thereto in accordance with all applicable Laws and for no other

  • Page 144
    ... of the Sublease relating to "Rent" shall be deemed to refer to Annual Base Sub-Subrent and Additional Sub-Subrent (unless, in any of the foregoing cases, the context otherwise requires). The foregoing notwithstanding, the following provisions of the Sublease shall not be applicable to this Sub...

  • Page 145
    ... for consent within ten (10) days after Sub-Subtenant's delivery of such written request to Sub-Sublandlord). Any alterations shall be made at Sub-Subtenant's expense, in a good and workmanlike manner by contractors and subcontractors approved by Sublandlord, and, if required by the Prime Lease, by...

  • Page 146
    ... or its employees, agents, invitees, guests, or other persons caused by conditions or activities on the Sub-Subleased Premises or the Building (including, without limitation, the Cafeteria, Fitness Center, Bike Room or Shower Facilities), or activities of Sub-Subtenant in or upon the Building...

  • Page 147
    ...(10) days' prior written notice thereof to Sub-Sublandlord, which notice shall include the proposed effective date of such...purchases all or substantially all of Sub-Subtenant's stock or assets (a "Successor") without Sub-Sublandlord's prior written approval. The term "Permitted Transferee" shall mean...

  • Page 148
    ... to the Sub-Subleased Premises, Sub-Subtenant shall pay its share of such maintenance costs to Sub-Sublandlord as Additional Sub-subrent from time to time. 11. Default. (a) In the event that Sub-Subtenant shall be in default beyond any applicable notice and cure period of any covenant or obligation...

  • Page 149
    ...'s other rights and remedies, Sub-Subtenant shall pay Monthly Base Sub-Subrent to Sub-Sublandlord in an amount equal to 150% of the Monthly Base Sub-Subrent in effect during the last month of the Sub-Sublease Term, prorated for the number of days of holdover past the Vacation Date. No holding...

  • Page 150
    ... shall not be required to keep the Security Deposit separate from other funds or accounts of Sub-Sublandord and the Security Deposit shall not bear interest. If Sub-Subtenant defaults in the observance or performance of any of such terms and conditions (beyond any applicable notice and cure...

  • Page 151
    Sub-Sublandlord: Rosetta Stone Ltd. 135 West Market Street Harrisonburg, VA 22801 Attention: General Counsel Sub-Subtenant: CEB 1919 North Lynn Street Arlington, Virginia 22209 Attention: Barron Anschutz, Controller With a copy to: CEB 1919 North Lynn Street Arlington, Virginia 22209 Attention: ...

  • Page 152
    ... of Sublandlord letter agreement in the form attached hereto as Exhibit A on or about the date hereof the ("Consent"). If Sublandlord fails to execute the Consent within ten (10) business days after written request therefor, following full execution and delivery by both parties of this Sub-Sublease...

  • Page 153
    ... shall not do or permit any activity or condition that might cause Sublandlord to be in default under any contract relating to the Building or the operation thereof. (l) Quiet Enjoyment. Sub-Sublandlord covenants and agrees with Sub-Subtenant that so long as no default by Sub-Subtenant exists...

  • Page 154
    ... CORPORATE EXECUTIVE BOARD COMPANY d/b/a CEB By: Name: Title: WITNESS/ATTEST: SUB-SUBLANDLORD: ROSETTA STONE LTD. By: Name: Title: WITNESS/ATTEST: Exhibits to be attached: Exhibit A: Form of Consent of Sublandlord Exhibit B-1: Walls/Partitions and Systems Furniture Exhibit B-2: Personal Property...

  • Page 155
    ... to time. The initial Annual Base Salary shall be at the rate of $325,000 per annum paid in accordance with the Company's customary payroll practices (minus all applicable withholdings and deductions). Executive's Annual Base Salary for any partial year will be prorated based upon the number of days...

  • Page 156
    ...the value, vesting over four (4) years, on the date of grant subject to the terms of the 2009 Rosetta Stone Inc. Omnibus Incentive Plan, as amended, and the applicable form of award agreement. Executive shall be eligible to receive annual grants of stock options and other equity awards in accordance...

  • Page 157
    ...and applicable withholdings, payable on the first payroll following hire date. If Executive voluntarily terminates employment with Rosetta Stone, without Good Reason, or if the Executive is terminated by the Company for Cause, as defined below, within twelve (12) months of receiving the cash signing...

  • Page 158
    ... business days of its receipt of such written notice and termination occurs within one hundred (100) days of the event. 6. Rights on Termination. (a) If during the Service Term Executive's employment is terminated under Section 5 above (x) by the Company without Cause or (y) by Executive with Good...

  • Page 159
    ... Annual Bonus earned up until such Termination Date in accordance with the terms of the then-current Company bonus policy. (iii) The Company shall provide professional outplacement and counseling services through an outplacement firm chosen by the Company for six (6) months from the Termination Date...

  • Page 160
    ...Accrued Obligation within sixty (60) days after the Termination Date or earlier if required by law, and (ii) the pro rata portion of any Annual Bonus that may have been earned by the Executive through the retirement date in accordance with the terms of the then-current Company bonus policy. No other...

  • Page 161
    ..., 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...

  • Page 162
    ... his own time without using the equipment, supplies or facilities of the Company or Affiliates or any Proprietary Information (including trade secrets), except that the Company's ownership of Work Product does include those inventions that: (i) relate to the business of the Company or its Affiliates...

  • Page 163
    ... 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 164
    ... applicable authority. "Code" means the Internal Revenue Code of 1986, as amended and the regulations and guidance issued thereunder. "Person" means any individual or corporation, association, partnership, limited liability company, joint venture, joint stock or other company, business trust...

  • Page 165
    ..., personally delivered or sent by reputable overnight 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...

  • Page 166
    ...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 167
    ... 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 after...

  • Page 168
    ... 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 169
    ... Release (" Release") is between Rosetta Stone Ltd. (the "Company") and Christian Na ("Executive") (each a "Party," and together, the " Parties"). For purposes of this Release "Effective Date" shall mean the date that is the eighth day after the date on which Executive signs this Release, provided...

  • Page 170
    ...of action, claims, demands, costs and expenses, including attorneys' fees, of every kind and nature whatsoever, in law 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...

  • Page 171
    ...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 revokes this Release, he shall have no right to...

  • 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
    ... tolled for the period between the Effective Date and 10 days after the date on which Section 2(a) is declared unenforceable. (g) agreements. (h) This Release shall not be modified except in a writing signed by the parties. (i) No term or condition of this Release shall be deemed to have been waived...

  • Page 174
    ...copies transmitted by telecopier, all of which shall be given the same force and effect as the original. [SIGNATURES FOLLOW] NOTE: DO NOT SIGN THIS SUPPLEMENTAL LEGAL RELEASE UNTIL AFTER EXECUTIVE'S FINAL DAY OF EMPLOYMENT. ROSETTA STONE LTD. EXECUTIVE By: Stephen M. Swad, President and CEO Date...

  • Page 175
    ... AN ATTORNEY PRIOR TO SIGNING THIS AGREEMENT AND GENERAL RELEASE. BY SIGNING THIS AGREEMENT AND GENERAL RELEASE YOU GIVE UP AND WAIVE IMPORTANT LEGAL RIGHTS. Agreement and General Release This Agrssmsnt and Gsnsral Rslsass (" Release") is bstwssn Rosstta Stons Ltd. (ths "Company") and Christian Na...

  • Page 176
    ... forth in this Ssction shall not sxtsnd to: (i) any rights arising undsr this Rslsass; (ii) any vsstsd rights undsr any psnsion, rstirsmsnt, profit sharing or similar plan; (iii) any rights Exscutivs has undsr any grants of stock options, rsstrictsd stock, or othsr forms of squity that may havs bssn...

  • Page 177
    ... sntitlsd for his work up to his last day of smploymsnt with ths Company, and that hs is not sntitlsd to any furthsr pay or bsnsfit of ...futurs ths Company smployss, officsr or dirsctor. 9. Exscutivs acknowlsdgss that bscauss of Exscutivs's position with ths Company, Exscutivs may posssss information...

  • Page 178
    ...Company acknowlsdgs that thsir rslationship prscludss any affirmativs obligation of disclosurs, and sxprsssly disclaim all rsliancs upon information... bstwssn ths Effsctivs Dats and 10 days aftsr ths dats on which Ssction ...by ths partiss. (i) No tsrm or condition of this Rslsass shall bs dssmsd to ...

  • Page 179
    ...matsrial information, ... msaning of ths languags ussd. (o) Evsry...costs and rsasonabls attornsys' fsss. If Exscutivs is ths substantially prsvailing party, ths Company shall pay such sxpsnsss within 60 days...SIGN THIS SUPPLEMENTAL LEGAL RELEASE UNTIL AFTER EXECUTIVE'S FINAL DAY OF EMPLOYMENT.

  • Page 180
    ROSETTA STONE LTD. EXECUTIVE By: /s/ Stsphsn M. Swad Stsphsn M. Swad, Prssidsnt and CEO Dats: Novsmbsr 24, 2014 /s/ Christian Na Christian Na, Chisf Lsgal Officsr and Sscrstary Dats: Novsmbsr 24, 2014

  • Page 181
    ... 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 182
    ... the current stock plan in place at time of grant. (d) (i) Benefits. Executive and, to the extent eligible, his dependents, shall be entitled to participate in and receive all benefits under any welfare or pension benefit plans and programs made available to the Company's senior level executives...

  • Page 183
    ...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 184
    ... business days of its receipt of such written notice and termination occurs within one hundred (100) days of the event. 6. Rights on Termination. (a) If during the Service Term Executive's employment is terminated under Section 5 above (x) by the Company without Cause or (y) by Executive with Good...

  • Page 185
    ... Annual Bonus earned up until such Termination Date in accordance with the terms of the then-current Company bonus policy. (iii) The Company shall provide professional outplacement and counseling services through an outplacement firm chosen by the Company for six (6) months from the Termination Date...

  • Page 186
    ...Accrued Obligation within sixty (60) days after the Termination Date or earlier if required by law, and (ii) the pro rata portion of any Annual Bonus that may have been earned by the Executive through the retirement date in accordance with the terms of the then-current Company bonus policy. No other...

  • Page 187
    ..., 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...

  • Page 188
    ... 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 189
    ... 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 190
    ... applicable authority. "Code" means the Internal Revenue Code of 1986, as amended and the regulations and guidance issued thereunder. "Person" means any individual or corporation, association, partnership, limited liability company, joint venture, joint stock or other company, business trust...

  • Page 191
    ..., personally delivered or sent by reputable overnight 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...

  • Page 192
    ...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 193
    ... required hereunder shall be made by nationally recognized accounting firm that is (i) not be serving as accountant or auditor for the person who acquires ownership or effective control or ownership of a substantial portion of the Company's assets (within the meaning of Section 280G of the Code...

  • Page 194
    ... 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 195
    ... Release (" Release") is between Rosetta Stone Ltd. (the "Company") and Eric Ludwig ("Executive") (each a "Party," and together, the " Parties"). For purposes of this Release "Effective Date" shall mean the date that is the eighth day after the date on which Executive signs this Release, provided...

  • Page 196
    ...of action, claims, demands, costs and expenses, including attorneys' fees, of every kind and nature whatsoever, in law 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...

  • Page 197
    ...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 revokes this Release, he shall have no right to...

  • Page 198
    ... 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 Company, nor shall Executive at any time harass or behave unprofessionally toward any past, present or future the Company employee, officer or director. 9. Executive...

  • Page 199
    ... tolled for the period between the Effective Date and 10 days after the date on which Section 2(a) is declared unenforceable. (g) agreements. (h) This Release shall not be modified except in a writing signed by the parties. (i) No term or condition of this Release shall be deemed to have been waived...

  • Page 200
    NOTE: DO NOT SIGN THIS SUPPLEMENTAL LEGAL RELEASE UNTIL AFTER EXECUTIVE'S FINAL DAY OF EMPLOYMENT. ROSETTA STONE LTD. EXECUTIVE By: Stephen M. Swad, President and CEO Date: Date: Eric Ludwig, SVP, North America and EMEA Consumer

  • Page 201
    ...: the terms "Affiliate" and "Associate" shall have the meanings set forth in Rule 12b-2 promulgated by the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the terms "person" or "persons" shall mean any individual, corporation...

  • Page 202
    ... he obtains about the Corporation, its subsidiaries and its and their officers, directors and employees unless such information is already generally available to the public other than as a result of a breach of this provision by the undersigned or his Affiliates or Associates or he is specifically...

  • Page 203
    ... SAS Livemocha LLC (formerly Livemocha Inc.) Lexia Learning Systems LLC (formerly Lexia Learning Systems Inc.) Rosetta Stone S.A. (formerly Tell Me More S.A.) Auralog Studios SARL Auralog SL Rosetta Stone Mexico SA de CV (formerly Auralog SA de CV) Auralog Software Development (Beijing) Company Ltd...

  • Page 204
    ... of our reports dated March 16, 2015, relating to the consolidated financial statements of Rosetta htone Inc. and subsidiaries, and the effectiveness of Rosetta htone Inc. and subsidiaries' internal control over financial reporting, appearing in this Annual Report on Form 10-K of Rosetta htone Inc...

  • Page 205
    ... for each person whose signature appears below and in his or her 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...

  • Page 206
    ... OFFICER OF ROSETTA STONE INC. PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Stephen M. Swad, certify that: 1. I have reviewed this Annual Report on Form 10-K of Rosetta Stone Inc. (the "Registrant"); 2. Based...

  • Page 207
    ... OFFICER OF ROSETTA STONE INC. PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas M. Pierno, certify that: 1. I have reviewed this Annual Report on Form 10-K of Rosetta Stone Inc. (the "Registrant"); 2. Based...

  • Page 208
    ... 2002 In connection with the accompanying Annual Report on Form 10-K for the year ended December 31, 2014, as 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 209
    ... 2002 In connection with the accompanying Annual Report on Form 10-K for the year ended December 31, 2014, as 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...

  • Page 210