Rosetta Stone 2014 Annual Report Download - page 95

Table of Contents
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

The following table summarizes future minimum operating lease payments as of December 31, 2014 and the years thereafter (in thousands):
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
Periods Ending December 31,
2015
$ 4,836
2016
3,977
2017
3,412
2018
2,817
2019
214
Thereafter
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$ 15,291
Total expenses under operating leases were $5.6 million, $7.1 million and $9.5 million during the years ended December 31, 2014, 2013 and 2012
respectively.
The Company accounts for its leases under the provisions of ASC topic 840,  ("ASC 840"), and subsequent amendments, which
require that leases be evaluated and classified as operating leases or capital leases for financial reporting purposes. Certain operating leases contain rent
escalation clauses, which are recorded on a straight-line basis over the initial term of the lease with the difference between the rent paid and the straight-line
rent recorded as either a deferred rent asset or liability depending on the calculation. Lease incentives received from landlords are recorded as deferred rent
liabilities and are amortized on a straight-line basis over the lease term as a reduction to rent expense.
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The Company has entered into agreements to license software from vendors for incorporation in the Company's products. Pursuant to some of these
agreements, the Company is required to pay minimum royalties or license fees over the term of the agreement regardless of actual license sales. In addition,
such agreements typically specify that, in the event the software is incorporated into specified Company products, royalties will be due at a contractual rate
based on actual sales volumes. These agreements are subject to various royalty rates typically calculated based on the level of sales for those products. The
Company expenses these amounts to cost of sales or research and development expense, as appropriate. Royalty expense was $31,000, $0, and $0 for the
years ended December 31 2014, 2013 and 2012, respectively.

The Company has agreements with certain of its executives and key employees which provide guaranteed severance payments upon termination of
their employment without cause.
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In June 2011, 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 the advertising thereof in Germany. Langenscheidt sought relief in the form of monetary damages and injunctive relief; however there has not
been a demand for a specific amount of monetary damages and there has been no specific damage amount awarded to Langenscheidt. In January 2012, the
District Court of Cologne ordered an injunction against specific uses of the color yellow made by Rosetta Stone GmbH in packaging, on its website and in
television commercials and declared Rosetta Stone GmbH liable for damages, attorneys’ fees and costs to Langenscheidt. In its decision, the District Court of
Cologne also ordered the destruction of Rosetta Stone GmbH’s product and packaging which utilized the color yellow and which was deemed to have
infringed Langenscheidt’s trademark. The Court of Appeals in Cologne and the German Federal Supreme Court have affirmed the District Court's decision.
The Company has filed special complaints with the German Federal Supreme Court and the German Constitutional Court directed to constitutional issues in
the German Federal Supreme Court’s decision.
In August 2011, Rosetta Stone GmbH commenced a separate proceeding for the cancellation of Langenscheidt’s German trademark registration of
yellow as an abstract color mark. In June 2012, the German Patent and Trademark Office rendered a decision in the cancellation proceeding denying our
request to cancel Langenscheidt’s German trademark registration. The
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