DEF 14A 1 rst-def14a_20190516.htm DEF 14A rst-def14a_20190516.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 (Amendment No.          )

 

Filed by the Registrant

Filed by a Party other than the Registrant

Check the appropriate box:

 

Preliminary Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material under §240.14a-12

 

ROSETTA STONE INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

No fee required.

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)

Title of each class of securities to which transaction applies:

 

 

(2)

Aggregate number of securities to which transaction applies:

 

 

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

(4)

Proposed maximum aggregate value of transaction:

 

 

(5)

Total fee paid:

 

 

Fee paid previously with preliminary materials.

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

(1)

Amount Previously Paid:

 

 

(2)

Form, Schedule or Registration Statement No.:

 

 

(3)

Filing Party:

 

 

(4)

Date Filed:

 

 


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April 5, 2019

Dear Stockholder:

You are cordially invited to attend the 2019 Annual Meeting of Stockholders of Rosetta Stone Inc. (the “Company” or “Rosetta Stone”), which will be held at our offices located at 300 Baker Avenue, Suite 320, Concord, Massachusetts 01742, on Thursday, May 16, 2019, at 3:00 p.m., local time.

Whether or not you plan to attend the 2019 Annual Meeting, it is important that your shares be represented and voted at the 2019 Annual Meeting. We encourage you to vote your shares according to the instructions on the enclosed proxy card or on the Notice of Internet Availability of Proxy Materials. If you decide to attend the 2019 Annual Meeting and vote in person, you may withdraw your proxy at that time.

On behalf of the Board of Directors and employees of Rosetta Stone, we thank you for your continued interest in and support of the Company.

Sincerely,

A. John Hass III

Chief Executive Officer and Chairman of the Board

Your vote is important. Please vote promptly.

You may vote according to the instructions

on the enclosed proxy card or

Notice of Internet Availability of Proxy Materials.

 


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NOTICE OF 2019 ANNUAL MEETING OF STOCKHOLDERS

Dear Stockholder:

You are cordially invited to attend our 2019 Annual Meeting of Stockholders, which will be held at 3:00 p.m. local time on May 16, 2019 at our offices located at 300 Baker Avenue, Suite 320, Concord, Massachusetts 01742 for the following purposes:

 

1.

Elect two Class I directors nominated by our Board of Directors to hold office until our Annual Meeting of Stockholders in 2022, or until their respective successors have been elected;

 

2.

Ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2019;

 

3.

Approve the Rosetta Stone Inc. 2019 Omnibus Incentive Plan;

 

4.

Conduct an advisory vote on the compensation of the named executive officers; and

 

5.

Consider any other matters that may properly be brought before the meeting.

A proxy statement describing the matters to be considered at the 2019 Annual Meeting is attached to this notice. Only stockholders who owned our stock at the close of business on March 18, 2019 may vote at the meeting, or at any adjournment or postponement of the meeting.

Your vote is important. Whether or not you plan to attend the meeting, please cast your vote, as instructed in the Notice of Internet Availability of Proxy Materials and/or the Proxy Card sent to you, as promptly as possible.

By order of our Board of Directors,

Sonia Galindo

General Counsel and Secretary

Arlington, Virginia

April 5, 2019

Important Notice Regarding the Availability of Proxy Materials for the

Annual Meeting of Stockholders to be held on May 16, 2019 at 3:00 p.m. local time

at 300 Baker Avenue, Suite 320, Concord, Massachusetts 01742

 

The proxy statement and annual report are available at proxyvote.com.

The Board of Directors recommends that you vote FOR each of the proposals identified above.

 


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TABLE OF CONTENTS

INFORMATION ABOUT THE MEETING, VOTING AND PROXIES

1

Date, Time and Place of Meeting

1

Internet Availability of Proxy Materials

1

Record Date, Outstanding Shares and Quorum

1

Voting Rights

1

Voting and Revoking Proxies

2

Abstentions and Broker Non-Votes

2

Soliciting Proxies

3

Delivery of Voting Materials to Stockholders Sharing an Address

3

How to Obtain a Separate Set of Voting Materials

3

Annual Report on Form 10-K and Additional Materials

3

OUR BOARD OF DIRECTORS AND NOMINEES

4

Nominees for Class I Directors

4

Directors Standing for Election

4

Directors Not Standing for Election

5

EXECUTIVE OFFICERS

8

CORPORATE GOVERNANCE

10

Code of Ethics and Business Conduct

10

Composition of our Board of Directors; Classified Board

10

Director Independence

11

Board Leadership Structure and Role in Risk Oversight

11

Committees of our Board of Directors

12

Attendance at Meetings

13

Audit Committee

13

Report of the Audit Committee of the Board of Directors

14

Compensation Committee

15

Compensation Committee Interlocks and Insider Participation

15

Corporate Governance and Nominating Committee

16

Ad Hoc Special Advisory Committees

16

Policy Governing Director Qualifications and Nominations

17

DIRECTOR COMPENSATION

18

Non-Employee Director Compensation Policy

18

Non-Employee Director Compensation Table

19

Outstanding Option and RSU Awards for Non-Employee Directors at December 31, 2018

20

STOCKHOLDER MATTERS

20

Stockholder Communications with our Board of Directors

20

Stockholder Recommendations of Director Candidates

20

Stockholder Proposals and Nominations for the 2020 Annual Meeting of Stockholders

20

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

24

Security Ownership Table

24

Section 16(a) Beneficial Ownership Reporting Compliance

26

COMPENSATION COMMITTEE REPORT

26

COMPENSATION DISCUSSION AND ANALYSIS

27

Introduction

27

Executive Summary

27

Elements of our Executive Compensation Program for Fiscal Year 2018

32

Compensation of our Named Executive Officers

33

Compensation of our President and Chief Executive Officer

34

 


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Determining the Amount of Each Element of Compensation

35

Overview of our Executive Compensation Program for Fiscal Year 2018

37

Compensation Policies and Practices as They Relate to Risk Management

46

EXECUTIVE COMPENSATION

48

2018 Summary Compensation Table

48

Grants of Plan-Based Awards in Fiscal Year 2018

49

Outstanding Equity Awards at December 31, 2018

50

Option Exercises and Stock Vested for Fiscal Year 2018

51

Pension Benefits

52

Non-qualified Deferred Compensation

52

Employment Arrangements with Named Executive Officers

52

Potential Payments Upon Termination of Employment or Upon Change in Control as of December 31, 2018

53

CEO Pay Ratio

55

TRANSACTIONS WITH RELATED PERSONS

56

Procedures for Related-Party Transactions

56

PROPOSAL NO. 1 - ELECTION OF DIRECTORS

57

Vote Required for Election

57

PROPOSAL NO. 2 - RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

58

Fees Paid to Independent Registered Public Accounting Firm

58

Vote Required for Approval

59

PROPOSAL NO. 3 – APPROVAL OF ROSETTA STONE INC. 2019 OMNIBUS INCENTIVE PLAN

60

Vote Required for Approval

60

PROPOSAL NO. 4 - ADVISORY VOTE ON THE COMPENSATION OF NAMED EXECUTIVE OFFICERS

74

Vote Required for Approval

74

OTHER MATTERS

75

APPENDIX A – NON-GAAP FINANCIAL MEASURES AND STATISTICAL MEASURES

A-1

APPENDIX B – ROSETTA STONE INC. 2019 OMNIBUS INCENTIVE PLAN

B-1

 

 

 

 


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ROSETTA STONE INC.

 

1621 North Kent Street, Suite 1200

Arlington, Virginia 22209

PROXY STATEMENT FOR THE

2019 ANNUAL MEETING OF STOCKHOLDERS

INFORMATION ABOUT THE MEETING, VOTING AND PROXIES

Date, Time and Place of Meeting

Our Board of Directors (the “Board”) is asking for your proxy for use at the Rosetta Stone Inc. 2019 Annual Meeting of Stockholders (the “2019 Annual Meeting”) and at any adjournment or postponement thereof for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. We are holding the 2019 Annual Meeting on Thursday, May 16, 2019 at 3:00 p.m., local time, at our offices at 300 Baker Avenue, Suite 320, Concord, Massachusetts 01742. Directions to the 2019 Annual Meeting may be found at https://www.lexialearning.com/about/offices. We have first released this proxy statement to our stockholders beginning on or about April 5, 2019.

Internet Availability of Proxy Materials

Under rules adopted by the U.S. Securities and Exchange Commission (the “SEC”), we furnish our proxy materials on the Internet.  Instructions on how to access and review the proxy materials on the Internet can be found on the proxy card sent to stockholders of record and on the Notice of Internet Availability of Proxy Materials (the “Notice”) sent to stockholders who hold their shares through a brokerage firm or bank, also referred to as holding shares in street name. The Notice will also include instructions for stockholders who hold their shares in street name on how to vote over the Internet.

Record Date, Outstanding Shares and Quorum

Only holders of record of our common stock on March 18, 2019 (the “Record Date”) will be entitled to vote at the 2019 Annual Meeting. On the Record Date, we had approximately 23,128,277 shares outstanding and entitled to vote. In order to take action at the 2019 Annual Meeting, a quorum is required. We will have a quorum if a majority of the shares outstanding and entitled to vote on the Record Date are present at the 2019 Annual Meeting, either in person or represented by proxy.

If by the date of the 2019 Annual Meeting we do not receive sufficient proxies to constitute a quorum or approve one or more of the proposals, the Chairman of the Annual Meeting, or the persons named as proxies, may propose one or more adjournments of the 2019 Annual Meeting to permit further solicitation of proxies. The persons named as proxies would typically exercise their authority to vote in favor of adjournment.

Voting Rights

Holders of our common stock are entitled to one vote for each share they own on the Record Date. Cumulative voting for directors is not permitted. The Inspector of Elections appointed for the 2019 Annual Meeting will tabulate all votes. The Inspector will separately tabulate for and against votes, withhold votes, abstentions and broker non-votes for each proposal, as applicable.

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Voting and Revoking Proxies

We are soliciting proxies to vote your shares at the 2019 Annual Meeting. If you attend the 2019 Annual Meeting, you may submit your vote in person, and any proxy that you previously submitted may be revoked and superseded by the vote that you cast at the 2019 Annual Meeting.

If you properly submit your proxy, and do not revoke it prior to the 2019 Annual Meeting, your shares will be voted in the manner described in this proxy statement or as you may otherwise direct.  If you sign and return your proxy card, but do not give any voting instructions, your shares will be voted in favor of the election of each of the director nominees listed in Proposal No. 1 and in favor of Proposal Nos. 2, 3 and 4.  As far as we know, no other matters will be presented at the 2019 Annual Meeting. However, if any other matters of business are properly presented, the proxy holders named on the proxy card are authorized to vote the shares represented by proxies according to their judgment.

Whether you submit your proxy via the Internet or by mail, you may revoke it at any time before voting takes place at the 2019 Annual Meeting. If you are the record holder of your shares and you wish to revoke your proxy, you must deliver instructions to our General Counsel and Secretary at our headquarters and principal executive office: Rosetta Stone Inc., 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209. You may also revoke a proxy by submitting a later-dated proxy or by voting in person at the 2019 Annual Meeting. Please note that if a broker, bank or other nominee is the record holder of your shares and you wish to vote at the 2019 Annual Meeting, you must bring to the 2019 Annual Meeting a letter from the record holder confirming your beneficial ownership of the shares. If a broker, bank or other nominee is the record holder of your shares and you wish to revoke your proxy, you must contact the record holder of your shares directly.

Abstentions and Broker Non-Votes

Any shares represented by proxies that are marked to abstain from voting on a proposal will be counted as present in determining whether we have a quorum. They will also be counted in determining the total number of shares entitled to vote on a proposal.

If your shares are held in street name and you do not instruct your broker on how to vote your shares, your broker, in its discretion, may either leave your shares un-voted or vote your shares on certain routine matters. However, the New York Stock Exchange (the “NYSE”) precludes brokers from exercising voting discretion on certain proposals without specific instructions from the beneficial owner. Importantly, NYSE rules expressly prohibit brokers holding shares in street name for their beneficial holder clients from voting in uncontested director elections or executive compensation matters, including say-on-pay proposals, without receiving specific voting instructions from those clients. Under NYSE rules, only Proposal No. 2 (ratifying the selection of our independent registered public accounting firm) will be treated as a routine matter on which a broker can exercise its discretion and vote your shares without specific instructions. If your broker votes on your behalf on this proposal, your shares also will be counted as present for the purpose of determining a quorum. Proposal Nos. 1 (election if directors), 3 (approval of 2019 Omnibus Incentive Plan) and 4 (advisory vote on executive compensation) are not considered routine matters, and, without your instruction, your broker cannot vote your shares with respect to these proposals. If a broker, bank, custodian, nominee or other record holder of Rosetta Stone stock indicates on a proxy that it does not have discretionary authority to vote certain shares on a particular matter, these shares (called “broker non-votes”) will be counted as present in determining whether we have a quorum.

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Soliciting Proxies

We will pay all expenses of soliciting proxies to be voted at the 2019 Annual Meeting. After the proxies are initially distributed, we and/or our directors, officers and regular employees may also solicit proxies by mail, electronic mail, telephone or in person. We will ask brokers, custodians, nominees and other record holders to prepare and send the Notice to people or entities for which they hold shares and forward copies of the proxy materials to beneficial owners who request paper copies, and we may reimburse them for their expense in doing so.

Delivery of Voting Materials to Stockholders Sharing an Address

To reduce the expense of delivering duplicate materials to stockholders sharing the same address, we have adopted a procedure approved by the SEC called “householding.” Under this procedure, certain stockholders of record who have the same address and last name and do not participate in electronic delivery of proxy materials will receive only one copy of the Notice, Annual Report on Form 10-K and proxy materials, as applicable, sent to stockholders until such time as one or more of these stockholders notifies us that they wish to receive individual copies. In addition, your broker or bank may also follow this procedure. This procedure will reduce duplicate mailings and save printing costs and postage fees, as well as natural resources.

How to Obtain a Separate Set of Voting Materials

If you would like to have additional copies of our Notice, Annual Report on Form 10-K and proxy materials, as applicable, mailed to you, please submit your request to our General Counsel and Secretary at our headquarters and principal executive office: Rosetta Stone Inc., 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209, or call the General Counsel and Secretary at (703) 387-5800 and we will promptly deliver these materials to you.  Copies of our Annual Report on Form 10-K do not include exhibits unless exhibits are specifically requested in writing.  You may also contact us at the address or phone number above if you received multiple copies of materials for the 2019 Annual Meeting and would prefer to receive a single copy in the future. If you would like to opt out of householding for future mailings, call the General Counsel and Secretary at (703) 387-5800 or send a written request to the General Counsel and Secretary at the above address.

Annual Report on Form 10-K and Additional Materials

The Notice of Annual Meeting, this Proxy Statement and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 have been made available to all stockholders entitled to vote at the 2019 Annual Meeting and who received the Notice. The Annual Report on Form 10-K can also be viewed at proxyvote.com.

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OUR BOARD OF DIRECTORS AND NOMINEES

Our Board of Directors currently consists of seven directors and is divided into three classes, with the nominees for one class to be elected at each annual meeting of stockholders, to hold office for a three-year term and until successors of the members of such class have been elected and qualified, subject to their earlier death, resignation or removal.  Our Board of Directors believes that the board’s composition and size is sufficient to provide all required oversight, governance, and related board duties.

Only the terms of the Class I directors are scheduled to expire on the date of the upcoming 2019 Annual Meeting.  Based on the recommendation of the Corporate Governance and Nominating Committee of our Board of Directors, the nominees for election to the Board of Directors by the stockholders are the two current Class I members of our Board, David Nierenberg and Steven P. Yankovich. If elected, the nominees will serve as directors until the Annual Meeting of Stockholders in 2022 and until their successors are elected and qualified, subject to their earlier death, resignation or removal.

The names and certain information about the nominee directors and the continuing directors in each of the other two classes of our Board are set forth below. There are no family relationships among any of our directors or executive officers.

It is intended that the proxy will be voted, unless otherwise indicated, for the election of the nominees as Class I directors to our Board of Directors. If any of the nominees should for any reason be unable or unwilling to serve at any time prior to the 2019 Annual Meeting, the proxies may be voted for the election of a substitute nominee that our Board may designate in place of such nominee.

Because the upcoming 2019 Annual Meeting will trigger the expiration of the terms of only the Class I directors, proxies cannot be voted for more than two director nominees. The two candidates receiving the highest number of affirmative votes of the shares of our common stock entitled to vote at the 2019 Annual Meeting will be elected Class I directors to serve for a three-year term and until their successors have been duly elected and qualified, subject to their earlier death, resignation or removal.

Nominees for Class I Directors

The name and age as of March 18, 2019 of each nominee director, his position with us, the year in which he first became a director and certain biographical information are set forth below:

 

Name

 

Age

 

Positions and Offices Held with the Company

 

Director Since

David Nierenberg

 

65

 

Director

 

2015

Steven P. Yankovich

 

57

 

Director

 

2014

 

Directors Standing for Election

Incumbent Nominees

Each of the incumbent directors listed below was nominated for election by our Board of Directors upon recommendation by the Corporate Governance and Nominating Committee and has agreed to stand for re-election to a three-year term. Information concerning the incumbent nominees for director is provided below.

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David Nierenberg was appointed to serve as a director in April 2015.  He currently serves as the Chair of the Compensation Committee and as a member of the Audit and Corporate Governance and Nominating Committees.  Mr. Nierenberg serves as the President of Nierenberg Investment Management Company, Inc. (“NIMCO”), which manages the D3 Family Funds.  Several of the D3 Family Funds, NIMCO and Mr. Nierenberg are stockholders of the Company.  Before founding NIMCO in 1996, Mr. Nierenberg was a General Partner at Trinity Ventures, a venture capital fund.  Mr. Nierenberg began his career at Bain & Company Inc., where he was a Partner, managing strategy, acquisition, and cost reduction projects.  He serves as Chair of the Advisory Board of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School. Mr. Nierenberg chairs the Research Advisory Council of Glass, Lewis & Co.  He is also a member of the board of the Washington State Investment Board, Riverview Bancorp (NYSE: RVSB) and Flotek Industries (NYSE: FTK), as well as a member of the Board of Trustees of The National WWII Museum.  Mr. Nierenberg received his Juris Doctor from Yale Law School and his B.A. in History, summa cum laude, from Yale College.

Our Board of Directors believes that Mr. Nierenberg is particularly qualified to serve as a director based on his significant expertise in strategic planning and corporate governance, along with his broad-based business knowledge. In addition, Mr. Nierenberg’s finance and operations experience qualify him as an audit committee financial expert, and his service on other public company boards and with the Ira M. Millstein Center and Glass, Lewis provides significant insight into the Company’s corporate governance.

Steven P. Yankovich was appointed to serve as a director in October 2014.  He is the Chair of the Corporate Governance and Nominating Committee and serves on the Audit Committee.  Mr. Yankovich is currently Chief Product Architect at eBay Inc. and is responsible for ensuring a transformational customer and product experience across eBay’s global platform. From November 2015 to November 2016, Mr. Yankovich was Chief Technical Officer of Magento Commerce. From February 2015 to November 2015, he was Vice President, Product and Technology at eBay Enterprise where he helped sell to private equity and spin out Magento Commerce, which he then joined. From December 2012 to January 2015, Mr. Yankovich was Vice President of Innovation and New Ventures at eBay Inc., a group he created to bring technology and product innovation across eBay’s portfolio including PayPal, StubHub and the classifieds business. From March 2009 to December 2012 he was Vice President of Mobile at eBay Inc., where he worked to build eBay, PayPal and StubHub into the world’s largest mobile e-commerce player. From September 2007 to December 2008, Mr. Yankovich was an Entrepreneur In Residence at Adobe. From April 1998 to June 2007, Mr. Yankovich was the founder and CTO of Movaris Inc., a business process management company that pioneered cloud (ASP) to browser BPM for Fortune 500 companies. Prior to his career in internet-based business and consumer businesses, Mr. Yankovich spent 15 years in CAE/CAD and as a computer design engineer. Mr. Yankovich currently advises a number of startup companies, venture capital firms and serves on the board of a privately-held company and a philanthropic board. As a technologist, Mr. Yankovich has a patent portfolio of over 100 patents (62 issued).

Our Board of Directors believes that Mr. Yankovich is particularly qualified to serve as a director based on his expertise in technology, e-commerce, consumer and enterprise software and mobile. Mr. Yankovich also brings a unique entrepreneurial and innovation experience to the Board.

Directors Not Standing for Election

The names and certain biographical information as of March 18, 2019 of the other members of our Board of Directors who are not standing for election at the 2019 Annual Meeting are set forth below:

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Name

 

Age

 

 

Positions and Offices Held with the Company

 

Director Since

Laurence Franklin

 

 

66

 

 

Director

 

2006

A. John Hass III

 

 

53

 

 

Chairman of the Board and Chief Executive Officer

 

2014

Patrick W. Gross

 

 

74

 

 

Director

 

2006

George A. Logue

 

 

68

 

 

Director

 

2018

Class II Directors Serving Until the 2020 Annual Meeting of Stockholders

Laurence Franklin has served as a director since May 2006 and as the Chair of the Audit Committee since February 2012.  Mr. Franklin also serves on the Corporate Governance and Nominating Committee.  He previously served as the Chairman of the Board of Directors from February 2011 to February 2012.  Since April 2014, he has served as managing partner of LF Enterprises, LLC, a private investment and business advisory firm.  Mr. Franklin previously served as the Chief Executive Officer of Frette Srl, a leading manufacturer and retailer of luxury linens and home furnishings, from July 2011 until January 2014. Mr. Franklin served as President and Chief Executive Officer of Tumi Inc. (“Tumi”), a manufacturer and retailer of luxury travel, business and lifestyle accessories, from 2002 until 2009, and was a board member of Tumi until 2011. Prior to joining Tumi, Mr. Franklin served as President of Coach Leatherware Company, Inc. and General Manager of Elizabeth Arden Inc. Mr. Franklin began his career at Peat Marwick Mitchell and Co., in audit, and then worked in the Management Consulting Services group at Price Waterhouse & Co. He also serves on the boards of a number of privately held for-profit businesses. Mr. Franklin earned his B.A. from Colgate University and his M.S. from the New York University Graduate School of Business.  Mr. Franklin is a qualified (non-practicing) Certified Public Accountant.

Our Board of Directors believes that Mr. Franklin is particularly qualified to serve as a director based on his business, leadership and management experience, including expertise in wholesale distribution, retail development, corporate management, operations and supply chain management and building international brands.  In addition, Mr. Franklin’s public finance, accounting and operations experience qualify him as an audit committee financial expert.

A. John Hass III was appointed to serve as a director in November 2014 and has served as Chairman of the Board and Chief Executive Officer since April 2016. Previously, Mr. Hass served as President from April 2016 until January 2019 and as Interim President and Chief Executive Officer from April 1, 2015 to April 1, 2016.  From September 2012 until November 2014, he was a senior advisor to Osmium Partners, LLC, an alternative asset management firm and a stockholder of the Company. Mr. Hass was a partner at PEAK6 Investments, L.P., a financial services company, from October 2008 through September 2012 and was the Senior Financial Officer of PEAK6 Investments, L.P. from February 2009 through June 2010. Mr. Hass was the Chief Executive Officer of OptionsHouse, a brokerage company and subsidiary of PEAK6 Investments, L.P., from October 2006 until September 2008. From 1988 to October 2006, he was employed at Goldman, Sachs & Co., a subsidiary of the financial services company, The Goldman Sachs Group, Inc., most recently as a Managing Director in the Investment Banking Division. In addition, Mr. Hass serves on the board of directors of WITNESS, Inc., a global-human rights nonprofit, and The University of Chicago Laboratory Schools, serves as member of the Photography Committee of the Art Institute of Chicago and serves as a trustee of The Museum of Contemporary Photography.  Mr. Hass received his Bachelor of Science in Finance from the University of Illinois at Urbana-Champaign.

Our Board of Directors believes that Mr. Hass is particularly qualified to serve as a director based on his familiarity with Rosetta Stone’s business and strategies, along with his broad experience in the banking and financial services industry.

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Class III Directors Serving Until the 2021 Annual Meeting of Stockholders

Patrick W. Gross has served as a director since February 2006, including serving as Chairman of the Board of Directors from May 2013 to March 2016.  He previously served as Lead Independent Director of the Board from February 2012 to May 2013 and was reelected as Lead Independent Director on April 1, 2016. Mr. Gross serves on the Audit, Compensation and Corporate Governance and Nominating Committees.  Since 2002, Mr. Gross has served as Chairman of The Lovell Group, a private business and technology advisory and investment firm that he founded. Prior to founding The Lovell Group, Mr. Gross was a founder, and served as a principal executive officer from 1970 to 2002, of American Management Systems, Inc., then a publicly traded information technology, consulting, software development and systems integration firm. Mr. Gross is a director of Career Education Corporation (NASDAQ: CECO), Liquidity Services, Inc. (NASDAQ: LQDT) and Waste Management, Inc. (NYSE: WM).  Mr. Gross also currently serves on the boards of several private technology-based companies. Mr. Gross previously served on the boards of Capital One Financial Corporation (NYSE: COF) from 1995 to 2017, Computer Network Technology Corporation from 1997 to 2006, Mobius Management System, Inc. from 2002 to 2007 and Taleo Corporation from 2006 to 2012. He holds a B.S.E. from Rensselaer Polytechnic Institute, an M.S.E. from the University of Michigan and an M.B.A. from the Stanford Graduate School of Business.

Mr. Gross currently serves, or has served, on the boards of several educational organizations including Sidwell Friends School since 2016 (having previously served from 1980-1988 and 1992-2000) and D.C. Preparatory Academy, a Washington, D.C. charter school system with 1,800 preK-8th grade students.  He also serves on the boards of Stanford Institute for Economic Policy Research, the Committee for Economic Development, the Foreign Policy Association and the World Affairs Council of Washington, D.C. (which he co-founded).

Our Board of Directors believes that Mr. Gross is particularly qualified to serve as a director based on his demonstrated leadership abilities, business judgment, and extensive experience in management, information technology, software, and his education. Mr. Gross’ finance and operations experience qualify him as an audit committee financial expert, and his long-tenured service on other public company boards provides significant insight into the Company’s corporate governance.

George A. Logue was elected to serve as a director on our Board in March 2018.  He serves on the Compensation and Audit Committees. Mr. Logue has served as the President of Logue Educational Consulting since January 2016.  Before becoming an independent consultant, he served in a number of executive roles with Cambium Learning Group, Inc., including as President of the Voyager Sopris Learning business segment from March 2013 to January 2016 and President of the Sopris Learning business unit from January 2009 to March 2013. Mr. Logue has also served in leadership positions with Houghton Mifflin Company, including President of the School Division and Senior Vice President for Sales and Marketing. He holds a B.S. in Education from Boston University and a Master's in Education from Bridgewater State University.

Our Board of Directors believes that Mr. Logue is particularly qualified to serve as a director based on his extensive experience in education, technology, sale and marketing and management gained throughout his career with Cambium and Houghton Mifflin as well as his consulting engagements.  He also has a deep familiarity with Rosetta Stone's business and industry, particularly its Literacy business segment.

Jessie Woolley-Wilson has served as a director on our Board since October 2017. She serves on the Compensation Committee.  Ms. Woolley-Wilson is currently Chair, President and CEO of DreamBox Learning, a provider of innovative educational math solutions. From May 2007 until August 2010, Ms. Woolley-Wilson served as president of Blackboard Inc.’s K-12 Group. From 2002 to 2006, she served in various positions with LeapFrog Enterprises, including as President of

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LeapFrog School House, the K-12 division of LeapFrog. Ms. Woolley-Wilson has also served in positions of leadership at collegeboard.com, the interactive division of the College Board, and at Kaplan, a leading test preparation company in the U.S. Ms. Woolley-Wilson currently serves on the boards of several educational organizations, including Newsela, Western Governors University Board of Trustees and Ursuline Academy. She is also on the board of Boeing Employees Credit Union. Ms. Woolley-Wilson has been a featured speaker at international events including TEDx Rainer, SXSWedu, and DENT, as well as a moderator for the Aspen Institute. Ms. Woolley-Wilson holds an MBA from Harvard Business School and a B.A. from the University of Virginia. She is also a 2007 Henry Crown Fellow.

Our Board of Directors believes that Ms. Woolley-Wilson is particularly qualified to serve as a director based on her deep familiarity with Rosetta Stone's business and industry, particularly in the educational technology space. She has extensive experience in technology and management gained throughout her career with DreamBox and LeapFrog, and brings unique perspectives to the Board with regard to addressing strategic and operational issues.

 

EXECUTIVE OFFICERS

The name, age and position(s) held by each of our executive officers, as of March 18, 2019, are set forth in the table below.

 

Name

 

Age

 

 

Position(s) Held with the Company

A. John Hass III

 

 

53

 

 

Chairman of the Board and Chief Executive Officer

Nicholas C. Gaehde

 

 

58

 

 

Co-President and President of Literacy

Mathew N. Hulett

 

 

48

 

 

Co-President and President of Language

Thomas M. Pierno

 

 

57

 

 

Chief Financial Officer

Sonia Galindo

 

 

50

 

 

General Counsel and Secretary

 

Biographical information for Mr. Hass is set forth above under “Our Board of Directors and Nominees—Directors Not Standing for Election.” Biographical information for each of our other executive officers is set forth below.

Nicholas C. Gaehde was appointed Co-President of Rosetta Stone effective January 1, 2019 and has served as President of Literacy since August 2017.  Mr. Gaehde has been with Lexia Learning, or Lexia, a subsidiary of Rosetta Stone since 2005 and became a member of Rosetta Stone’s leadership team in 2013.  Mr. Gaehde has deep industry experience in literacy, software development and K–12 educational publishing. Having guided Lexia through several transformations, he has maintained a keen focus on Lexia’s mission to help improve student literacy in schools and districts throughout the United States. Prior to joining Lexia, Mr. Gaehde served as President of Educators Publishing Service, Inc., a publisher of literacy solutions for the K–8 market. Before that, he held product management and marketing positions at Vertigo Development Group, Lotus Development Corporation, and New England Business Service. Mr. Gaehde received his B.A. in Psychology from Pitzer College and a Master's from Boston University's School of Management.

Mathew N. Hulett was appointed Co-President of Rosetta Stone effective January 1, 2019 and has been President of Language at Rosetta Stone since August 2017.  Mr. Hulett joined Rosetta Stone from Pioneer Square Labs, a Seattle-based startup studio where he served as Entrepreneur in Residence from May to July 2017. Prior to that, from October 2015 to March 2018, he served as Entrepreneur in Residence at Voyager Capital, an information technology venture capital firm.  From December 2015 to April 2017, Mr. Hulett served as the Chief Product Officer at TINYpulse, a privately held SaaS-based Human Resources technology provider, where he was responsible for driving product strategy, design and development. From May 2013 to September 2015, Mr. Hulett served as the Chief Executive Officer of Click Sales, Inc. (dba ClickBank), a privately held, top-100 internet retailer that provides digital lifestyle products to customers in 190 countries. Prior to

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ClickBank, Mr. Hulett served as Senior Vice President of RealNetwork’s games division from August 2010 to May 2013, where he led the right-sizing effort of the traditional gaming business and led the business’ turnaround strategy pivot into social and mobile gaming. He has also held the CEO role at AdXpose and was President of the corporate travel division of Expedia.  He received his B.S. in Marketing and Information Systems from the University of Washington.

Thomas M. Pierno has served as our Chief Financial Officer since May 2012. Prior to joining Rosetta Stone, Mr. Pierno was Chief Financial Officer at Vertis Communications, Inc. (“Vertis”), a marketing communications firm from May 2011 to April 2012, and while there, also directed supply chain and information technology operations. Prior to joining Vertis, Mr. Pierno held the position of Vice President, Financial Planning and Treasury at Comverse, a global provider of software and systems, from February 2010 to April 2011, where he was responsible for worldwide budgets, forecasts and treasury operations. Before joining Comverse, Mr. Pierno served in several executive positions at AOL from 1998 to 2009, notably Senior Vice President and Controller. Prior to joining AOL, Mr. Pierno was Chief Financial Officer at World Color Press, Inc., a publicly traded company that prints magazines, catalogs, direct mail and books, from 1994 to 1998. He began his career at Ernst & Young as a Certified Public Accountant. Mr. Pierno holds a B.B.A. in Accounting and an M.B.A. from Pace University.

Sonia Galindo was appointed General Counsel and Secretary of Rosetta Stone in January 2015.  Prior to joining Rosetta Stone, Ms. Galindo served as Vice President, Associate General Counsel - Corporate and Corporate Secretary at Keurig Green Mountain, Inc. from 2012 to 2014.  Ms. Galindo has over 20 years of legal experience in government, law firm and in-house counsel roles, including Ethics and Employment Counsel at the Bill & Melinda Gates Foundation from 2008 to 2011 and Assistant General Counsel and Assistant Corporate Secretary at McCormick & Co., Inc., from 2005 to 2008. Earlier in her legal career, Ms. Galindo held positions with Blank Rome LLP, Whiteford, Taylor & Preston LLP, and the U.S. Securities and Exchange Commission, Division of Corporation Finance.  Prior to her practice of law she was a financial analyst at Citicorp.  She received her B.A. in Finance and B.S. in Economics from Hood College in Frederick, Maryland and her Juris Doctor from John Marshall Law School in Chicago, Illinois.

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CORPORATE GOVERNANCE

Our Board of Directors believes that good corporate governance is important to ensure that Rosetta Stone is managed for the long-term benefit of our stockholders. This section describes key corporate governance guidelines and practices that our Board has adopted. Complete copies of our corporate governance guidelines, committee charters and Code of Ethics and Business Conduct are available on the investor relations section under the corporate governance page of our corporate website, www.rosettastone.com. Alternatively, you can request a copy of any of these documents by writing to the General Counsel and Secretary at: Rosetta Stone Inc., 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209.

Code of Ethics and Business Conduct

We have adopted a Code of Ethics and Business Conduct applicable to directors and all employees, including our principal executive, financial and accounting officers and all persons performing similar functions. A copy of that code is available on our corporate website at www.rosettastone.com.  We intend to satisfy the disclosure requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regarding an amendment to, or waiver concerning a material departure of a provision of our Code of Ethics and Business Conduct involving our principal executive, financial or accounting officer or controller by posting such information on our website.

Director, Officer and Employee Hedging

To ensure that the interests of our directors, officers and employees are fully aligned with those of stockholders in general, our Insider Trading Compliance Policy prohibits our directors, officers and employees from engaging in short-term or speculative transactions including selling our stock “short” and transacting in publicly-traded options, warrants, puts and calls or similar instruments on our securities that are designed to hedge or offset any decrease in the market value of our common stock.  

Composition of Our Board of Directors; Classified Board

Our Board of Directors currently consists of seven members, six of whom are non-employee members and are considered independent under NYSE rules.  Each director holds office until the election and qualification of his or her successor, or his or her earlier death, resignation or removal. Our bylaws permit our Board of Directors to establish by resolution the authorized number of directors. Our bylaws provide that our Board of Directors is divided into three classes of directors, each serving a staggered three-year term. As a result, one class of our Board of Directors will be elected at each annual meeting for three-year terms.

Our Board of Directors is classified as follows:

 

David Nierenberg and Steven P. Yankovich are designated Class I Directors whose terms will expire at our upcoming Annual Meeting; if re-elected at our upcoming 2019 Annual Meeting, these directors will have terms that expire at our 2022 Annual Meeting of Stockholders;

 

A. John Hass III and Laurence Franklin are designated Class II Directors whose terms will expire at our 2020 Annual Meeting of Stockholders; and

 

Patrick W. Gross, George A. Logue and Jessie Woolley-Wilson are designated Class III Directors whose terms will expire at our 2021 Annual Meeting of Stockholders.

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Our bylaws provide that any vacancy created by a resignation of a director shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by the sole remaining director.  Any director may resign at any time upon notice to the Company and such resignation is effective upon the delivery of the resignation, unless the resignation specifies a later effective date or an effective date determine upon the happening of an event or events.  Any additional directorships resulting from an increase in the number of authorized directors will be distributed among the three classes so that, as nearly as reasonably possible, each class will consist of one-third of the directors. The classification of our Board of Directors may have the effect of delaying or preventing changes in control of our Company. Our certificate of incorporation further provides for the removal of a director only for cause and by the affirmative vote of the holders of at least a majority of the shares then entitled to vote at an election of our directors.

Director Independence

Our Board of Directors has reviewed the independence of each director and considered whether any director had or has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities.  As a result of this review, our Board of Directors has determined that all of our directors, other than our Chairman and Chief Executive Officer, A. John Hass III, are “independent directors” and meet the independence requirements under the listing standards of the NYSE and rules and regulations of the SEC.  The Board of Directors also has determined that Caroline Tsay, who served as a member of the Board of Directors until June 2018, had no material relationships with us during her period of Board service and was independent under NYSE listing standards. 

Our Corporate Governance Guidelines provide that the non-management directors will regularly meet in executive session, without management present. As required under applicable NYSE listing standards, in the year ended December 31, 2018, our non-management directors met in regularly scheduled executive sessions at which only non-management directors were present.  As Lead Director, Mr. Gross presided over these sessions. Mr. Gross is an “independent director” and meets the independence requirements under the listing standards of the NYSE.

Board Leadership Structure and Role in Risk Oversight

Our Board of Directors believes it is important to retain its flexibility to allocate the responsibilities of the offices of the Chairman of the Board and the Chief Executive Officer in a way that is in the best interest of the Company at any given point of time. The Board of Directors may make a determination as to the appropriateness of its current policies in connection with the recruitment and succession of the Chairman of the Board and/or the Chief Executive Officer.

Our Board of Directors appointed Mr. Hass to serve as Chief Executive Officer and Chairman of the Board effective April 1, 2016.  Mr. Hass previously served as a director since November 2014.  We believe that as Chief Executive Officer, Mr. Hass is in the best position to focus the independent directors’ attention on the issues of greatest importance to the Company and its stockholders. At any time that the Chairman of the Board is not an individual who is independent under the rules of the NYSE, the Board of Directors will appoint a Lead Independent Director elected by the independent directors, with broad authority and responsibility over Board governance and operations. This structure allows one person to speak for and lead both the Company and the Board of Directors, while also providing for effective independent board oversight through a Lead Independent Director.

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The Lead Independent Director has the following authority, as detailed in the Company’s Corporate Governance Guidelines:

 

preside at all meeting of the Board at which the Chairman of the Board is not present, including executive sessions of the independent directors;

 

serve as a liaison between the Chairman of the Board and the independent directors;

 

approve information sent to the Board;

 

approve meeting agendas for the Board;

 

approve meeting schedules to assure that there is sufficient time for discussion of all agenda items; and

 

call meetings of the independent directors.

Mr. Gross acted as Lead Independent Director from February 2012 to May 2013 until he was appointed Chairman of the Board in May 2013. Mr. Gross served as Chairman of the Board until Mr. Hass was appointed as Chairman of the Board, effective April 1, 2016. In light of Mr. Gross’ experience, the independent directors re-elected Mr. Gross as Lead Independent Director on April 1, 2016. Mr. Gross also serves as a member of our Audit, Compensation, Corporate Governance and Nominating, Business Advisory and Transactions Committees.

The Board of Directors oversees risk by actively reviewing management decisions and financial controls at both the full Board and Board committee levels. The Board of Directors takes a hands-on role in risk management practices in such areas as credit risk, liquidity risk, and operational risk by obtaining detailed reports from management, maintaining continuous dialogue with management, and providing extensive input on material corporate decisions. The Board of Directors extensively oversees management, particularly through periodic conferences between the Chief Executive Officer and certain members of the Board of Directors. The extent of the Board of Directors’ oversight function has the effect of solidifying the Board’s leadership structure by providing excellent knowledge of the day-to-day workings of the Company to the Board of Directors.

Committees of our Board of Directors

Our Board of Directors has established the following standing committees: the Audit Committee; the Compensation Committee; and the Corporate Governance and Nominating Committee. In addition to the standing committees, our Board of Directors also established the following ad hoc special advisory committees: the Business Advisory Committee and the Transactions Committee.

The Audit Committee assists our Board of Directors in risk oversight by reviewing and discussing policies with management and the independent auditor regarding our major financial risk exposures and the steps management has taken to monitor and control such exposures. The Audit Committee, as part of its independent auditor and internal audit oversight, also reviews and discusses the effectiveness of our disclosure controls and internal control over financial reporting and the performance of the internal audit function. The Audit Committee also directs and monitors our implementation of our corporate-wide compliance program, and oversees the periodic review and assessment of the effectiveness of our compliance program.

The Compensation Committee oversees the design and administration of the Company’s executive compensation programs to promote an environment that does not encourage unnecessary and excessive risk-taking, including with respect to

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the Policy on Recoupment of Performance Based Compensation (“Clawback Policy”). The Compensation Committee also reviews our compensation practices against best practices with respect to “say on pay” philosophies and guidelines.

The Corporate Governance and Nominating Committee identifies individuals qualified to become members of the Board, consistent with criteria approved by the Board, and evaluates the Board of Directors’ corporate governance guidelines and other Board and committee processes.

The Business Advisory Committee, a special ad hoc advisory committee, provides operational and strategic thought-partnership to business leadership.

The Transactions Committee is a special ad hoc advisory committee formed to review strategic transactions and operational alternatives for the Company.

Our Board of Directors receives periodic reports from each of these committees on their activities.

Attendance at Meetings

Our Board of Directors held nine meetings during the year ended December 31, 2018. Each incumbent director attended at least 75% of the aggregate of the total number of meetings held by our Board of Directors and the total number of meetings held by all committees of the Board of Directors on which he or she served, during the period for which he or she served.  The following table sets forth the committees of our Board of Directors, the number of meetings held by each committee in 2018 and the membership of each committee as of December 31, 2018.

 

Name

 

Audit

 

Compensation

 

Corporate Governance

and Nominating

 

Business Advisory

 

Transactions

Laurence Franklin

 

C

 

 

 

M

 

M

 

M

Patrick W. Gross

 

M

 

M

 

M

 

M

 

M

George Logue (1)(2)

 

M

 

M

 

 

 

M

 

M

David Nierenberg

 

M

 

C

 

M

 

M

 

M

Jessie Woolley-Wilson

 

 

 

M

 

 

 

 

 

 

Steven P. Yankovich (2)

 

M

 

 

 

C

 

M

 

M

Total Number of Meetings Held in 2018

 

7

 

4

 

5

 

None

 

4

 

C  = Chair

M = Member

 

 

(1)

Mr. Logue was appointed to the Board of Directors and the Compensation Committee in March 2018.

 

(2)

Messrs. Logue and Yankovich were appointed to the Audit Committee in November 2018.

Directors are encouraged, but not required, to attend our annual meeting of stockholders. Three of the eight then-serving members of our Board of Directors attended the 2018 Annual Meeting of Stockholders.

Audit Committee

Currently, our Audit Committee consists of Laurence Franklin, who serves as the Chair, Patrick W. Gross, George A. Logue, David Nierenberg and Steven P. Yankovich, each of whom is a non-employee member of our Board of Directors. Our Board of Directors has determined that each member of our Audit Committee meets the requirements of financial literacy under the rules of the NYSE. Messrs. Franklin, Gross and Nierenberg serve as our audit committee financial experts, as defined under SEC rules. Messrs. Franklin, Gross, Logue, Nierenberg and Yankovich are independent as such term is defined in Rule 10A-

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3(b)(1) under the Exchange Act.  No member of the Audit Committee simultaneously serves on the audit committees of more than three public companies, including that of Rosetta Stone.

Under its charter, our Audit Committee is responsible for, among other things:

 

approving the appointment, retention and termination of our independent auditors, and approving the audit and non-audit services to be performed by our independent auditors;

 

evaluating the qualifications, performance and independence of our independent auditors;

 

monitoring, and discussing with management, the guidelines and policies governing the process by which the Company assesses and handles major financial risk exposures and the steps management has taken to monitor and control risk management;

 

monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

 

reviewing the adequacy and effectiveness of our internal control policies and procedures;

 

discussing the scope and results of the audit with the independent auditors and reviewing with management and the independent auditors our interim and year-end operating results; and

 

preparing the Audit Committee report required by the SEC to be included in our annual proxy statement.

Our Board of Directors has adopted a written charter, reviewed annually, for the Audit Committee, which is available on our website at www.rosettastone.com.

Report of the Audit Committee of the Board of Directors

During the fiscal year ended December 31, 2018, our Audit Committee met seven times. In the exercise of the Audit Committee’s duties and responsibilities, the Audit Committee has reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2018 with management. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees, as currently in effect and as adopted by the Public Company Accounting Oversight Board (“PCAOB”). The Audit Committee has also received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the PCAOB regarding the independent accounting firm’s communications with the Audit Committee regarding independence and has discussed with the independent registered public accounting firm the independent registered public accounting firm’s independence. Based on the foregoing, including its review and discussions, and subject to the limitations on the role and responsibilities of the Audit Committee in its charter, the Audit Committee recommended to the Board of Directors that our audited financial statements for fiscal year 2018 be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Members of the Audit Committee

Laurence Franklin (Chair)David Nierenberg

Patrick W. GrossSteven P. Yankovich

George A. Logue

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The Audit Committee Report does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate the Audit Committee Report by reference therein.

Compensation Committee

Our Compensation Committee consists of David Nierenberg, who serves as the Chair, Patrick W. Gross, George A. Logue and Jessie Woolley-Wilson, each of whom is a non-employee member of our Board of Directors. During the fiscal year ended December 31, 2018, our Compensation Committee met four times. Our Board of Directors has determined that each member of our Compensation Committee meets the requirements for independence under the requirements of the NYSE.

Under its charter, our Compensation Committee is responsible for, among other things:

 

reviewing and approving compensation of our executive officers including annual base salary, annual incentive bonuses, specific goals, equity-based awards, executive employment agreements, severance and change in control arrangements, and any other special benefits, compensation or arrangements;

 

reviewing and approving annual goals and objectives, bonus criteria and equity guidelines for our executive officers;

 

reviewing and discussing annually with management our “Compensation Discussion and Analysis” disclosure required by SEC rules and regulations;

 

preparing the Compensation Committee report required by the SEC to be included in our annual proxy statement;

 

administering, reviewing and making recommendations with respect to our equity-based compensation plans; and

 

appointing, compensating and overseeing compensation consultants and other advisors.

The Compensation Committee may form and delegate authority to one or more subcommittees as it deems necessary or advisable from time to time, provided, that any such subcommittee shall report any actions taken by it to the full Compensation Committee at its next regularly scheduled meeting.

For 2018, the Compensation Committee engaged its existing outside independent compensation consultant, Exequity.  However, management consulted Exequity only on a very limited basis in 2018, primarily to provide the Compensation Committee with an update on regulatory developments.

Our Board of Directors has adopted a written charter, reviewed annually, for the Compensation Committee, which is available on our website at www.rosettastone.com.

Compensation Committee Interlocks and Insider Participation

The following directors were members of the Compensation Committee for some or all of 2018: David Nierenberg, Patrick W. Gross, George A. Logue, Caroline J. Tsay and Jessie Woolley-Wilson.  None of the members of the Compensation Committee during 2018 was an officer or employee of the Company or any of its subsidiaries, during the period he or she served, and none has had a relationship with the Company or any of its subsidiaries since the beginning of 2018 that would be required to be disclosed as a transaction with a related person.  No member of the Compensation Committee was formerly an officer of the Company.  None of our executive officers has served as a member of the board of directors or compensation

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committee of any entity at any time during which an executive officer of such other company served on our Board of Directors or Compensation Committee.

Corporate Governance and Nominating Committee

Our Corporate Governance and Nominating Committee consists of Steven P. Yankovich, who serves as the Chair, Patrick W. Gross, Laurence Franklin, and David Nierenberg, each of whom is a non-employee member of our Board of Directors. During the fiscal year ended December 31, 2018, our Corporate Governance and Nominating Committee met five times.

Our Board of Directors has determined that each member of the Corporate Governance and Nominating Committee satisfies the requirements for independence under the NYSE rules.

Under its charter, our Corporate Governance and Nominating Committee is responsible for, among other things:

 

assisting our Board of Directors in identifying prospective director nominees and recommending director nominees for each annual meeting of stockholders to our Board of Directors;

 

reviewing developments in corporate governance practices and developing and recommending governance principles applicable to our Board of Directors;

 

reviewing succession planning for our Chief Executive Officer;

 

overseeing the evaluation of our Board of Directors;

 

determining the compensation of our directors; and

 

recommending members for each committee of our Board of Directors.

Our Corporate Governance and Nominating Committee determines qualification criteria and procedures for the identification and recruitment of candidates for election to serve as directors of Rosetta Stone. The Corporate Governance and Nominating Committee relies on its knowledge and relationships and the knowledge and relationships of our officers and other directors, as well as third parties when it deems appropriate, to identify and evaluate nominees for director, including nominees recommended by stockholders. With respect to nominees recommended by stockholders, our Corporate Governance and Nominating Committee will consider such nominees in the same manner as it evaluates other potential director nominees, as set forth in the Company’s Policy Governing Director Qualifications and Nominations, which is available on our website at www.rosettastone.com.

Our Board of Directors has adopted a written charter, reviewed annually, for the Corporate Governance and Nominating Committee, which is available on our website at www.rosettastone.com.

Ad Hoc Special Advisory Committees

Business Advisory Committee

In May 2016, the Board of Directors formed the Business Advisory Committee to provide operational and strategic thought-partnership to the Language business leadership.

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The Business Advisory Committee consists of Laurence Franklin, who serves as the Chair, Patrick W. Gross, George A. Logue, David Nierenberg and Steven P. Yankovich, each of whom is a non-employee member of our Board of Directors. The directors are not compensated separately for serving on this Committee. The Business Advisory Committee held no meetings during fiscal year 2018 as the responsibilities of this Committee have been addressed by the full Board of Directors.

Transactions Committee

In June 2015, the Board of Directors formed a special ad hoc advisory committee to review strategic transactions and operational alternatives for the Company.

The Transactions Committee consists of Laurence Franklin, Patrick W. Gross, George A. Logue, David Nierenberg and Steven P. Yankovich, each of whom is a non-employee member of our Board of Directors. The directors are not compensated separately for serving on this Committee. The Transactions Committee held four meetings during fiscal year 2018.

Policy Governing Director Qualifications and Nominations

We seek directors who possess, at a minimum, the qualifications and skills described below as set forth in our Policy Governing Director Qualifications and Nominations. We consider diversity in our nomination of directors, which may include, but is not limited to, diversity with respect to race, gender and areas of expertise.  In considering diversity, we evaluate each director candidate in the context of the overall composition and needs of our Board of Directors, with the objective of recommending a group that can best manage the business and affairs of the Company and represent stockholder interests using its diversity of backgrounds and experience. Our Corporate Governance and Nominating Committee will consider these and other qualifications, skills, and attributes when recommending candidates to our Board of Directors.  The Board of Directors assesses its effectiveness in this regard as part of its annual Board of Directors evaluation process.

Our Corporate Governance and Nominating Committee must be satisfied that each Committee-recommended nominee meets the following minimum qualifications:

 

the candidate shall exhibit high standards of integrity, commitment, and independence of thought and judgment;

 

the candidate shall be committed to representing the long-term interests of our stockholders;

 

the candidate shall have sufficient time and availability to devote to the affairs of the Company, particularly in light of the number of boards on which the nominee may serve;

 

to the extent the candidate serves or has previously served on other boards, the candidate shall have a demonstrated history of contributing at board meetings; and

 

the candidate meets any other minimum qualifications and other criteria for board membership approved by our Board of Directors from time to time.

In addition to the minimum qualifications for each candidate set forth above, our Corporate Governance and Nominating Committee shall recommend that our Board of Directors select persons for nomination to help ensure that:

 

a majority of the Board of Directors is “independent” in accordance with the standards, if any, promulgated by the SEC, or any exchange upon which securities of the Company are traded, and any governmental or regulatory body exercising authority over the Company;

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each of our Audit Committee, Compensation Committee, and Corporate Governance and Nominating Committee is comprised entirely of independent directors; and

 

at least one member of our Audit Committee shall have such experience, education and other qualifications necessary to qualify as an “audit committee financial expert” as defined by the rules of the SEC and financial sophistication requirements under NYSE rules.

In addition to any other standards our Corporate Governance and Nominating Committee may deem appropriate from time to time for the overall structure and composition of our Board of Directors, the Committee may consider the following factors when selecting and recommending that our Board of Directors select persons for nomination:

 

whether the candidate has direct experience in our industry or in the markets in which we operate;

 

whether the candidate, if elected, assists in achieving a mix of Board members that represents a diversity of background and experience;

 

whether the candidate has experience at a strategic or policymaking level in a business, government, non-profit or academic organization of high standing;

 

whether the candidate is accomplished in his or her respective field, with strong credentials and recognition; and/or

 

whether the candidate is well-regarded in the community.

 

DIRECTOR COMPENSATION

Non-Employee Director Compensation Policy

The Compensation Committee is responsible for the review and oversight of non-employee director compensation of our Board of Directors in relation to the market and our peer data. We have adopted a compensation policy under which our non-employee directors receive an annual retainer for Board and committee membership, as well as an annual equity award.  An additional retainer is also provided to individuals who serve as chair of a committee or the Board. After reviewing non-employee director compensation market data, the Compensation Committee determined not to make changes to the non-employee director compensation policy in 2018.  

The current non-employee director compensation policy provides that each non-employee director will receive the following compensation for Board and Committee services:

 

an annual retainer for Board membership of $40,000 paid in cash, nonqualified stock options (“NQSOs”) or restricted stock units (“RSUs”) at the choice of the director;

 

an annual retainer of $40,000 for chairing the Board of Directors, paid in cash, NQSOs or RSUs at the election of a non-employee Chairman of the Board;

 

an annual retainer of $15,000 for acting as Lead Director of the Board of Directors, paid in cash, NQSOs or RSUs at the choice of the Lead Director;

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an annual retainer of $20,000 for chairing the Audit Committee, $10,000 for chairing the Compensation Committee, and $5,000 for chairing the Corporate Governance and Nominating Committee, each paid in cash, NQSOs or RSUs at the choice of the director;

 

an annual retainer of $10,000 for serving as a member of one or more Board committees (regardless of the number of committees served), paid in cash, NQSOs or RSUs at the choice of the director; and

 

an annual grant of equity with a fair market value as of the date of grant of $100,000 comprised of:

 

50% NQSOs vesting quarterly over one year conditioned upon the director’s continued service on our Board of Directors during that year; and

 

50% RSUs vesting quarterly over one year conditioned upon the director’s continued service on our Board of Directors during that year and which will be paid out in shares of our common stock following the recipient director’s separation from service from the Company.

All cash retainers will be paid annually upon the approval of the Board of Directors, with one-fourth of the total paid quarterly in arrears. Additionally, in the event of a change to the designated chair for a Board committee, the annual retainer for chairing the committee will be prorated based on the number of days the chair held the position. Non-employee directors are also encouraged to accumulate stock ownership, including ownership of RSUs, equal in value to three times the annual retainer for Board membership within three years of their appointment to the Board of Directors. All of our directors have achieved or are on course to achieve this threshold based on their applicable tenure and equity elections.

Non-Employee Director Compensation Table

The following table summarizes the compensation of each non-employee member of our Board of Directors for the fiscal year ended December 31, 2018:

 

Name

 

Fees Earned

or Paid in Cash ($)

 

 

Option Awards

($)(1)

 

 

Stock

Awards

($)(2)

 

 

Total ($)

 

Laurence Franklin (3)

 

 

30,000

 

 

 

50,000

 

 

 

90,000

 

 

 

170,000

 

Patrick W. Gross

 

 

 

 

 

50,000

 

 

 

115,000

 

 

 

165,000

 

George A. Logue

 

 

11,250

 

 

 

59,863

 

 

 

101,767

 

 

 

172,880

 

David Nierenberg

 

 

 

 

 

110,000

 

 

 

50,000

 

 

 

160,000

 

Caroline J. Tsay (4)

 

 

12,500

 

 

 

 

 

 

 

 

 

12,500

 

Jessie Woolley-Wilson

 

 

 

 

 

90,000

 

 

 

60,000

 

 

 

150,000

 

Steven P. Yankovich

 

 

7,679

 

 

 

50,000

 

 

 

95,000

 

 

 

152,679

 

 

 

(1)

Amount represents the aggregate grant date fair value, computed in accordance with Accounting Standards Codification Topic 718, Compensation—Stock Compensation (“ASC 718”), of the options to acquire shares of common stock granted on June 18, 2018 at an exercise price of $16.12 per share, which was the closing price per share of our common stock on the NYSE on the grant date. These options vest in four equal quarterly installments from the date of grant. In the case of Mr. Logue, who joined the Board of Directors effective March 5, 2018, the amount also includes the grant date fair value of a grant of options he received on March 5, 2018, at an exercise price of $13.72 per share, which was the closing price per share of our common stock on the NYSE on the grant date; such options vested on May 19, 2018.  Information about the assumptions used to value these awards can be found in Note 9 to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 6, 2019.

 

(2)

Amount represents the aggregate grant date fair value of RSUs granted on June 18, 2018. The RSUs vest in four equal quarterly installments from the date of grant and will be paid out in shares of our common stock when the recipient director retires or terminates his or her service on our Board of Directors. In the case of Mr. Logue, the amount also includes the grant date fair value of RSUs granted to Mr. Logue on March 5, 2018 and which

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vested on May 19, 2018; the RSUs will be paid out in shares of our common stock when Mr. Logue retires or terminates his service on our Board of Directors.

 

(3)

Cash payments were made directly to LF Enterprises LLC.

 

(4)

Ms. Tsay resigned from the Board of Directors effective June 18, 2018.

Outstanding Option and RSU Awards for Non-Employee Directors at December 31, 2018

The following table provides information on the outstanding stock options and RSUs held by our non-employee directors as of December 31, 2018.

 

Name

 

Aggregate Number of

Shares Subject to

Outstanding Options (#)

 

 

Aggregate Number of

Shares Subject to

Outstanding RSUs (#)

 

Laurence Franklin

 

 

76,529

 

 

 

55,078

 

Patrick W. Gross

 

 

89,517

 

 

 

75,506

 

George A. Logue

 

 

9,056

 

 

 

6,495

 

David Nierenberg

 

 

60,511

 

 

 

34,571

 

Jessie Woolley-Wilson

 

 

20,035

 

 

 

9,605

 

Steven P. Yankovich

 

 

50,901

 

 

 

39,421

 

 

STOCKHOLDER MATTERS

Stockholder Communications with our Board of Directors

Stockholders and other interested parties may communicate with our full Board of Directors, our Chairman of the Board of Directors or the independent directors as a group.  To do so, an interested party may address any inquiries, items for discussion or other materials to a particular director or to our Board in care of our General Counsel and Secretary at the following address: Rosetta Stone Inc., 1621 North Kent Street, Suite 1200, Arlington, VA 22209. Our General Counsel and Secretary, or designated staff members in the office of the General Counsel, will review these submissions and forward messages to the intended recipient members of our Board, as appropriate. Responses to any such submissions will be at the discretion of the relevant Board members or our General Counsel. Communications may also be referred to other departments within our Company. We generally will not forward to our Board communications that we determine to be primarily commercial in nature or related to an improper or irrelevant topic, or that request general information about our Company.

Stockholder Recommendations of Director Candidates

Our Corporate Governance and Nominating Committee will consider director candidates recommended by our stockholders. A stockholder seeking to recommend a candidate for the Corporate Governance and Nominating Committee’s consideration should submit such candidate’s name and qualifications to: Corporate Governance and Nominating Committee, c/o General Counsel and Secretary, Rosetta Stone Inc., 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209.

Stockholder Proposals and Nominations for the 2020 Annual Meeting of Stockholders

Any stockholder who intends to present a proposal to be included in our 2020 proxy statement must submit the proposal, in writing, so that our General Counsel and Secretary receives it at our principal executive offices, located at 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209, by the close of business on December 7, 2019, which is 120 calendar days prior to the one year anniversary of the date this proxy statement is being sent to our stockholders.  In addition, our stockholders must comply with other  requirements of the SEC related to stockholder proposals that are to be included in proxy statements as set forth in Rule 14a-8 of the Securities Exchange Act of 1934, as amended.

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Any stockholder who wishes to bring a proposal or nominate a person for election to our Board of Directors at our annual meeting of stockholders must provide timely written notice of the proposal or nomination to our General Counsel and Secretary, at our principal executive offices.  To be timely for our 2020 Annual Meeting of Stockholders, the stockholder’s notice must be received between January 17, 2020 and February 16, 2020, which is 120 to 90 days prior to the one year anniversary of the upcoming 2019 Annual Meeting. In addition, our stockholders must comply with the procedural requirements in our bylaws, which stockholders can obtain from us upon request and which are also on file with the SEC.

Our bylaws provide that if a stockholder wishes to nominate a person for election as director or to propose other business to be considered at an annual meeting of stockholders, that the stockholder must follow the procedures contained in our bylaws. The stockholder proposing such business or making such nomination must be a stockholder of record of our Company on the date the nomination is delivered to our General Counsel and Secretary and at the time of our annual meeting, and be entitled to vote at the annual meeting. The proposal or nomination must be received by our General Counsel and Secretary at our principal executive offices not earlier than the close of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting and not later than the close of business on the 90th day prior to such anniversary, except that if the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder must be delivered not earlier than the close of business on the 120th day prior to the annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day of our first public announcement of the date of the annual meeting. In addition, if the number of directors to be elected to our Board of Directors at an annual meeting is increased and there is no public announcement by us naming all of the nominees for director or specifying the size of the increased Board at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s nomination shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to our General Counsel and Secretary at our principal executive offices not later than the close of business on the 10th day following the day on which we first make such public announcement. These time periods are designed to allow us time to adequately consider all proposals and nominees.

To be considered, each nomination must include the following information:

 

all information relating to the nominee that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to and in accordance with Section 14 of the Exchange Act and the rules and regulations promulgated thereunder;

 

the nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected;

 

a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among the nominating stockholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert with them, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert with him, on the other hand, including all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K of the Exchange Act if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any of their respective affiliates or associates or persons acting in concert with any such person, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant;

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a completed questionnaire with respect to the background and qualification of the nominee and the background of any other person or entity on whose behalf the nomination is being made, the form of which questionnaire will be provided by our General Counsel and Secretary upon written request; and

 

a written representation and agreement, in the form provided by our General Counsel and Secretary upon written request, that the nominee is not and will not become a party to any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how the nominee, if elected as a director, will act or vote on any issue or question that has not been disclosed to us or that could limit or interfere with the nominee’s ability to comply, if elected as a director, with the nominee’s fiduciary duties under applicable law, is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than us with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as our director that has not been disclosed to us, and in the nominee’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as our director, and will comply with all of our applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock trading policies and guidelines.

The proposing stockholder must also include such other information as we may reasonably require or that is otherwise reasonably necessary to determine the eligibility of such proposed nominee to serve as a director of our Company, to determine whether such nominee qualifies as an “independent director” or “audit committee financial expert” under applicable law, securities exchange rule or regulation, or any of our publicly-disclosed corporate governance guidelines or committee charters, including our Corporate Governance Guidelines, and that could be material to a reasonable stockholder’s understanding of the independence and qualifications, or lack thereof, of such nominee.

To be considered, proposals for business to be considered by our stockholders at an annual meeting, other than the nomination of persons for election as directors, must include the following information:

 

a brief description of the business desired to be brought before the annual meeting;

 

the reasons for conducting such business at the annual meeting;

 

the text of the proposal or business, including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend our bylaws, the language of the proposed amendment;

 

any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made;

 

a description of all agreements, arrangements and understandings between such stockholder and beneficial owner, if any, and any other person or persons, including their names, in connection with the proposal of such business by such stockholder; and

 

as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made:

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the name and address of such stockholder, as they appear on our books, and of such beneficial owner, if any;

 

the class or series and number of shares of our capital stock that are, directly or indirectly, owned beneficially and of record by such stockholder and by such beneficial owner;

 

any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of our capital stock, whether or not such instrument or right shall be subject to settlement in the underlying class or series of our capital stock or otherwise directly or indirectly owned beneficially by such stockholder and by such beneficial owner, if any;

 

any other direct or indirect opportunity held or owned beneficially by such stockholder and by such beneficial owner, if any, to profit or share in any profit derived from any increase or decrease in the value of our shares;

 

any proxy, contract, arrangement, understanding, or relationship pursuant to which such stockholder or beneficial owner, if any, has a right to vote any shares of any of our securities;

 

any short interest in any of our securities of the stockholder or beneficial owner;

 

any right to dividends on our shares of capital stock owned beneficially by such stockholder or such beneficial owner, if any, which right is separated or separable from the underlying shares;

 

any proportionate interest in shares of our capital stock or derivative instrument held, directly or indirectly, by a general or limited partnership in which such stockholder or such beneficial owner, if any, is a general partner or with respect to which such stockholder or such beneficial owner, if any, directly or indirectly, beneficially owns an interest in a general partner; and

 

any performance-related fees, other than an asset-based fee, to which such stockholder or such beneficial owner, if any, is entitled to based on any increase or decrease in the value of our shares or derivative instruments, if any, in each case with respect to the information required to be included in the notice.

Such information must include any such interests held by members of such stockholder’s or such beneficial owner’s immediate family sharing the same household. All such information must be supplemented by such stockholder and such beneficial owner, if any, not later than 10 days after the record date for the annual meeting to disclose such ownership as of the record date, 10 days before the annual meeting date, and immediately prior to the commencement of the annual meeting, by delivery of such supplemented information to our General Counsel and Secretary. Such information shall also include any other information relating to such stockholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitation of proxies for election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder, a representation that the stockholder is a holder of record of our stock entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group that intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of our outstanding capital stock required to approve or adopt the proposal or elect the nominee or otherwise to solicit proxies from stockholders in support of such proposal or nomination.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership Table

The following table shows shares of our common stock that, to our knowledge, are owned as of the Record Date, March 18, 2019, by:

 

each of our named executive officers (as defined in “Compensation Discussion and Analysis”);

 

each director and nominee;

 

all current directors, nominees and executive officers as a group; and

 

each stockholder beneficially owning more than five percent of our common stock.

Unless indicated in the notes to the table, to our knowledge each stockholder has sole voting and investment power for all shares shown, subject to community property laws that may apply to create shared voting and investment power. Unless indicated in the notes, the address of each beneficial owner is c/o Rosetta Stone Inc., 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209.

We calculated the percentage of shares outstanding based on shares of common stock outstanding on March 18, 2019. In accordance with SEC regulations, we also include (1) shares subject to options that are currently exercisable or will become exercisable within 60 days after March 18, 2019, and (2) shares issuable upon settlement of RSUs that are vested, or will become vested within 60 days after March 18, 2019. Those shares are deemed to be outstanding and beneficially owned by the person holding such options or RSUs for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

Name of Beneficial Owner

 

Amount and Nature

of Beneficial

Ownership

 

 

Percent

of

Class

Named Executive Officers:

 

 

 

 

 

 

A. John Hass III (1)

 

 

1,323,310

 

 

5.5%

Nicholas C. Gaehde (2)

 

 

126,000

 

 

*

Mathew N. Hulett (3)

 

 

53,604

 

 

*

Thomas M. Pierno (4)

 

 

361,783

 

 

1.5%

Sonia Galindo (5)

 

 

137,778

 

 

*

Directors:

 

 

 

 

 

 

Laurence Franklin (6)

 

 

149,001

 

 

*

Patrick W. Gross (7)

 

 

267,267

 

 

1.1%

George A. Logue (8)

 

 

14,491

 

 

*

David Nierenberg (9)

 

 

804,749

 

 

3.5%

Jessie Woolley-Wilson (10)

 

 

25,395

 

 

*

Steven P. Yankovich (11)

 

 

87,007

 

 

*

All current directors, nominees and executive officers as a group (11 people)

 

 

3,350,385

 

 

13.5%

Other 5% Stockholders:

 

 

 

 

 

 

T. Rowe Price Associates, Inc. (12)

 

 

2,882,775

 

 

12.5%

Renaissance Technologies LLC (13)

 

 

1,782,300

 

 

7.7%

Osmium Partners, LLC (14)

 

 

1,647,475

 

 

7.1%

TimesSquare Capital Management, LLC (15)

 

 

1,610,725

 

 

7%

BlackRock, Inc. (16)

 

 

1,356,571

 

 

5.9%

 

* Indicates ownership of 1% or less.

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(1)

Includes 803,172 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019.  Also includes 129,930 shares of restricted stock that continue to be subject to forfeiture restrictions and 3,067 shares of common stock underlying vested RSUs that will be issued to Mr. Hass upon the termination of his service on the Board.

 

(2)

Includes 45,315 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019.  Also includes 40,461 shares of restricted stock that continue to be subject to forfeiture restrictions.

 

(3)

Includes 47,645 shares of restricted stock that continue to be subject to forfeiture restrictions.

 

(4)

Includes 236,293 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019.  Also includes 43,001 shares of restricted stock that continue to be subject to forfeiture restrictions.

 

(5)

Includes 60,953 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019.  Also includes 39,477 shares of restricted stock that continue to be subject to forfeiture restrictions.

 

(6)

Includes 72,030 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019 and 53,682 shares of common stock underlying vested RSUs that will be issued to Mr. Franklin upon the termination of his service on the Board.

 

(7)

Includes 87,676 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019 and 73,722 shares of common stock underlying vested RSUs that will be issued to Mr. Gross upon the termination of his service on the Board.  Also includes 73,501 shares owned by Mr. Gross’s spouse and 32,368 shares owned by the Stephanie Gross Trust as to which Mr. Gross disclaims beneficial ownership.

 

(8)

Includes 7,215 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019 and 5,176 shares of common stock underlying vested RSUs that will be issued to Mr. Logue upon the termination of his service on the Board.

 

(9)

Includes 56,461 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019 (the “Nierenberg NQSOs”) and 33,795 shares of common stock underlying vested RSUs (the “Nierenberg RSUs”) that will be issued to Mr. Nierenberg upon the termination of his service on the Board.  Also includes shares of common stock owned by The D3 Family Fund, L.P. (“Family Fund”), The D3 Family Bulldog Fund, L.P. (“Bulldog Fund”), and Haredale, Ltd. (“Haredale”), for which the Nierenberg Investment Management Company, Inc. (“NIMCO”) and the Nierenberg Investment Management Offshore, Inc. (“NIMO”) serve as general partners.  Mr. Nierenberg serves as the President of NIMCO and NIMO.  Under the partnership agreements governing the funds, all compensation payable to Mr. Nierenberg for his Board service, including the Nierenberg NQSOs and Nierenberg RSUs, is required to be assigned to the funds.  Accordingly, the Nierenberg NQSOs and Nierenberg RSUs are deemed to be owned indirectly by the Family Fund and the Bulldog Fund.  Mr. Nierenberg has shared voting and investment power over all the shares reported.  The address of the Family Fund, the Bulldog Fund, Haredale, NIMCO, NIMO and Mr. Nierenberg is The D3 Family Funds, 19605 N.E. 8th Street, Camas, Washington 98607.

 

(10)

Includes 16,721 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019 and 8,674 shares of common stock underlying vested RSUs that will be issued to Ms. Woolley-Wilson upon the termination of her service on the Board.

 

(11)

Includes 49,060 shares of our common stock subject to options which are exercisable within 60 days after March 18, 2019 and 37,947 shares of common stock underlying vested RSUs that will be issued to Mr. Yankovich upon the termination of his service on the Board.

 

(12)

Ownership information is based on Schedule 13G filed with the SEC on February 14, 2019 by T. Rowe Price Associates, Inc., whose address is 100 East Pratt Street, Baltimore, Maryland 21202.

 

(13)

Ownership information is based on Schedule 13G/A filed with the SEC on February 13, 2019 by Renaissance Technologies LLC, whose address is 800 Third Avenue, New York, New York 10022.

 

(14)

Ownership information is based on the Schedule 13G/A filed with the SEC on February 14, 2019 by Osmium Partners, LLC, Osmium Capital, LP, Osmium Capital II, LP, Osmium Spartan, LP, Osmium Diamond, LP, Osmium Special Opportunity Fund, LP and John H. Lewis, whose address is Osmium Partners, LLC, 300 Drakes Landing Road, Suite 172, Greenbrae, California 94904, Attention:  John H. Lewis. Includes 92,020 shares of our common stock that are beneficially owned by John H. Lewis, over which he has sole voting power as Principal of Osmium Partners, LLC.

 

(15)

Ownership information is based on Schedule 13G filed with the SEC on February 14, 2019 by TimesSquare Capital Management, LLC, whose address is 7 Times Square, 42nd Floor, New York, New York 10036.

 

(16)

Ownership information is based on the Schedule 13G filed with the SEC on February 8, 2019 by BlackRock Inc., whose address is 55 East 52nd Street, New York, New York 10055.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers, as well as beneficial owners of more than ten percent of our common stock, to file with the SEC an initial report of ownership of our stock on Form 3 and reports of changes in ownership on Form 4 or Form 5. Persons subject to Section 16 are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file. As a matter of practice, our staff assists our executive officers and directors in preparing initial ownership reports and reporting ownership changes and typically files those reports on their behalf. Based solely on a review of the copies of such forms in our possession and on written representations from reporting persons, we believe that during the fiscal year ended December 31, 2018, all required filings were timely made.

 

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this Proxy Statement with the Company’s management and, based on such review and discussion, recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Members of the Compensation Committee:

David Nierenberg (Chair)

Patrick W. Gross

George A. Logue

Jessie Woolley-Wilson

The Compensation Committee Report does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate the Compensation Committee Report by reference therein.

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COMPENSATION DISCUSSION AND ANALYSIS

Introduction

This Compensation Discussion and Analysis (CD&A) provides a detailed description of the key practices and philosophies of our executive compensation program.  We believe our executive compensation program demonstrates our ongoing commitment to align executive compensation with Company and individual performance, the interests of our stockholders and evolving best practices. In particular, the CD&A focuses on the 2018 compensation of the following executive officers, our "named executive officers" or “NEOs,” whose compensation information is presented in this proxy statement.

 

Named Executive Officer

 

Title

A. John Hass III

 

Chief Executive Officer

Nicholas C. Gaehde (1)

 

Co-President and President, Literacy

Mathew N. Hulett (2)

 

Co-President and President, Language

Thomas M. Pierno

 

Chief Financial Officer

Sonia Galindo

 

General Counsel and Secretary

 

 

(1)

Mr. Gaehde was promoted to President, Literacy as of August 21, 2017 and was appointed Co-President of the Company as of January 1, 2019.

 

(2)

Mr. Hulett was appointed as President, Language as of August 4, 2017 and as Co-President of the Company as of January 1, 2019.

The CD&A is divided into the following sections:

 

Executive Summary

 

Elements of our Executive Compensation Program for Fiscal Year 2018

 

Compensation of our Named Executive Officers

 

Compensation of our Chief Executive Officer

 

Determining the Amount of Each Element of Executive Compensation

 

Overview of our Executive Compensation Program for Fiscal Year 2018

 

Compensation Policies and Practices as They Relate to Risk Management

Executive Summary

Rosetta Stone is dedicated to changing people’s lives through the power of language and literacy education. Our innovative solutions drive learning outcomes for learners around the world. Our Language business uses cloud-based solutions to help all types of learners read, write and speak more than 30 languages.  Lexia Learning, Rosetta Stone’s literacy education division, helps students build fundamental reading skills through its rigorously researched, independently evaluated, and widely respected instruction and assessment programs.

Our executive compensation program is designed to attract, motivate and retain key talent and to achieve accountability for performance by linking compensation to the achievement of measurable performance objectives, without assuming excessive risks.  The program is administered under a thoughtful, deliberate, and iterative process.  It includes reviews of our peer group and executive compensation market practices, the recommendations of our Chief Executive Officer, and our Compensation Committee’s assessment of the effectiveness of our compensation program.

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Transforming the Business

Since 2013, the Company has undertaken a number of initiatives to transform its business from one dominated by a transactional consumer language business to a subscription-based language and literacy education company.  Our accomplishments include the following:

Literacy Business

 

acquired Lexia Learning in August 2013

 

grew bookings at a 26% compound annual growth rate (“CAGR”) from 2014-2018

 

achieved license growth at the school level at a 44% CAGR from 2013-2018

 

developed a robust portfolio of digital instruction and assessment products serving the literacy needs of schools and districts from kindergarten through 12th grade, beyond its original focus on grades K-5

 

restructured the sales and implementation services teams, including transitioning from a reseller sales structure to a direct, national sales team, supported by a robust field service network

 

increased the total number of students served by over 120% from approximately 1.7 million in December 2013 to approximately 3.8 million in December 2018, which, as of December 2018, represents approximately 17,000 schools

Language Business

 

completed the transition of the Consumer Language business to a subscription-based model from a one-time CD- and digital download-based sales model, with 487,000 subscribers at December 31, 2018

 

developed mobile apps for iOS and Android while adding new features and functionality

 

introduced new products in our Enterprise & Education Language business including our Catalyst product for corporate customers

 

repositioned our Enterprise & Education Language business by focusing direct sales in key geographies and customer segments and partnering with resellers in other geographies

 

reduced costs in the Language business as it transitioned to be able to focus investment in the Literacy business

Corporate

 

appointed members of the management team and Board of Directors with experience in, among other things, K-12 education, consumer products, marketing and finance and corporate turnarounds

 

leveraged our content, tools, technology, pedagogy and brand through relationships with partners in markets around the world including Japan and South Korea

 

reduced total operating expenses, net of our investments in our Literacy business, by over $120 million from 2014 through 2017

 

solidified our balance sheet and achieved our accomplishments without incurring debt

Fiscal Year 2018

In 2018, Rosetta Stone focused on a number of strategic initiatives to continue transforming the company into a global leader in digital learning solutions, including:

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growing our K-12 Literacy and Language businesses;

 

positioning ourselves as a leader in virtual blended learning, which brings together independent, learner-driven activities using software products, with professional, live instruction from a teacher or tutor, and uses the information and data generated from these activities and instruction to optimize the learning experience for each learner; and

 

accelerating growth and increasing intrinsic value.

In executing on these initiatives, we were able to accomplish the following in 2018:

 

achieved a more balanced company, with approximately one-third of our bookings being derived from each of Literacy, Consumer Language and Enterprise & Education Language, focused on leveraging our K-12 US presence and iconic Rosetta Stone brand;

 

increased Literacy business revenues by 21% over 2017;

 

continued the expansion of the Literacy business sales force by adding a national strategic sales team to penetrate large accounts;

 

expanded the K-12 literacy product portfolio through the introduction of our Lexia® PowerUp Literacy™ curriculum product for grades 6 through 12;

 

began development of a new product focused on English literacy for emerging bilingual students in grades K-6;

 

achieved product portfolio momentum during the year by increasing the number of customers using more than one Literacy business product by 785%;

 

completed the transition to subscription sales in all Consumer Language channels;

 

introduced new features and functionality to our Consumer Language apps including our Seek & Speak™ feature for iOS, which uses object-recognition technology to enable users to point their iPhone cameras at an object and receive a translation in the language they are learning, and Your Plan feature for Android, which enables users to select a goal and track their progress toward that goal;

 

began development of adaptive, blended learning features in the Consumer Language product such as in-app video tutoring, which was launched as a beta version in South Korea;

 

achieved gross lifetime value growth in the Consumer Language business of 6%, thereby creating value to be realized in part in future years;

 

grew subscribers to the Consumer Language product by over 30% from the end of 2017 to the end of 2018;

 

performed work to de-flash and consolidate product platforms in the Enterprise & Education Language business, which should be complete by the end of 2019;

 

in the fourth quarter of 2018, stabilized consolidated revenues for the first time since 2014;

 

held total operating expenses essentially flat over 2017 (1% growth);

 

maintained an adequate cash balance, which was $38.1 million as of December 31, 2018, with no outstanding debt.  

As a result of our ability to execute on our strategic initiatives and priorities, our shareholders have recognized total shareholder returns (“TSR”) over the last one and three years favorable to those achieved by the Russell 2000 and the Russell MicroCap Index (comprised of companies with a median market capitalization of approximately $212 million) as follows:

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Benchmark

 

1-Year TSR

12/29/17-12/31/18

 

3-Year TSR

12/31/15-12/31/18

Rosetta Stone Inc.

 

31.5%

 

145.1%

Russell 2000

 

(12.2)%

 

18.7%

Russell MicroCap Index

 

(14)%

 

14.4%

In 2018, we aligned our compensation program to drive our strategic initiatives and business priorities and to enhance alignment with the long-term interests of stockholders by:

 

adopting performance goals in our Annual Incentive Program (“AIP”) that emphasized the importance of increasing sales, earnings growth, and growth in customer lifetime value; and

 

incentivizing the creation of shareholder value and the retention of critical senior talent through our Long-Term Performance-Based Equity Incentive Program (“LTIP”).

Our 2018 AIP and LTIP were based on the achievement of the goals detailed below.  Under the LTIP, we have placed an emphasis on achieving longer-term sales and profit targets, which complement the goals of the AIP.

Similar to prior years, to conserve cash and to demonstrate our CEO's commitment to our long-term success, Mr. Hass requested a reduced cash annual base salary, which was $200,000 in 2018.  The remainder of his 2018 target compensation was based in equity.  Short and long-term performance share units ("PSUs") comprised 80% of Mr. Hass's 2018 target compensation.  The other NEOs typically receive their AIP payout in cash.  For 2018, each received 25% of the 2018 AIP payout in shares of our common stock.  Their LTIP grants were made using PSUs and will be paid out in shares of our common stock only if performance targets are achieved.  In addition, all members of the Board of Directors elected to take most, if not all, of their compensation in equity in 2018.

For 2018, while the Board and Compensation Committee recognized the accomplishments achieved by the Company in 2018, as described above, they also recognized that the Company did not achieve the financial targets established under the 2018 AIP at the beginning of 2018.  After taking into consideration the actual 2018 financial results and the Company’s 2018 accomplishments, the Compensation Committee approved payments under the 2018 AIP equal to 50% of the target award for each of Messrs. Hass, Hulett, Pierno and Ms. Galindo and 72% for Mr. Gaehde.  Additional detail about the Committee’s decisions is set forth below under “Overview of Our Executive Compensation Program for Fiscal Year 2018 – Annual Performance-Based Incentive.”

We will continue to adapt our compensation plans to the changing needs of our business and the long-term interests of our stockholders.

Advisory Vote on Executive Compensation

At our 2018 Annual Meeting of Stockholders, over 98% of the votes cast on the proposal were in favor of our NEO compensation as disclosed in our Current Report on Form 8-K filed with the SEC on June 19, 2018. The results of this vote led our Compensation Committee to conclude that our executive compensation program was endorsed by stockholders. Further, we believe our overall compensation philosophy and pay practices demonstrate an ongoing commitment to align executive compensation with the long-term interests of our stockholders and reflect evolving best practices.

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Current Executive Compensation Best Practices

We employ the following executive compensation best practices.

 

Clawback Policy. We have a Policy on Recoupment of Performance Based Compensation (“Clawback Policy”). Under the Clawback Policy, in the event of a restatement of our financial results, other than a restatement caused by a change in applicable accounting principles, we may review the circumstances that caused the restatement and recover certain performance-based incentive compensation wrongly awarded to an executive officer as a result of misconduct. The Clawback Policy applies to certain performance-based incentive compensation granted on or after January 1, 2014.

 

No Tax Gross-ups in Employment Agreements.  We do not have any contract or agreement with our NEOs that obligates us to make a payment to assist with the tax liability related to any amounts we pay our NEOs.

 

No Excessive Severance Payments.  Our termination arrangements with our NEOs do not contain excessive severance payments in cases of their termination.

 

No Guaranteed Bonuses.  We believe that performance-based bonuses should reflect actual performance of the Company and/or individual.  Therefore, we do not guarantee performance-based bonus payments to our NEOs.

 

Double Trigger Vesting for Equity Awards.  Our equity awards do not vest upon consummation of a change in control, unless there is also a termination of service without cause or a voluntary resignation for good reason.

 

No Repricing or Replacing Outstanding Stock Options.  We do not permit the exercise price of an outstanding stock option to be changed without stockholder approval.  We have never repriced or replaced any of our outstanding stock options.

 

Limited Use of Perquisites.  We do not believe in granting perquisites to our NEOs that are excessive in value or substantially different from the perquisites available to all our employees generally.

 

No Hedging or Pledging.  To ensure that the interests of our directors, officers and employees are fully aligned with those of stockholders in general, our Insider Trading Compliance Policy prohibits our directors, officers and employees from engaging in short-term or speculative transactions including selling our stock “short” and transacting in publicly-traded options, warrants, puts and calls or similar instruments on our securities.  Directors, officers and employees also are prohibited from holding our stock in a margin account or pledging our stock as collateral for a loan.

 

Stock Ownership Guidelines.  Executives are required to hold a significant equity interest in the Company.  Our stock ownership guidelines are as follows:

 

o

Chief Executive Officer - equal in value to five times (5x) the market equivalent level of annual base salary;

 

o

Co-Presidents – equal in value to three times (3x) their annual base salary.  This ownership level was effective as of January 1, 2019 in connection with the promotion of our business units presidents to the Co-President role, they previously had an ownership guideline of twice (2x) their annual base salary; and

 

o

Other Executives - equal in value to twice (2x) their annual base salary.

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Executive officers have five years from the date one becomes an executive officer (or an increase in the applicable ownership level) to attain the equity ownership levels.

Elements of our Executive Compensation Program for Fiscal Year 2018

Our objective is to provide a competitive total compensation package to attract and retain key personnel and drive performance. To achieve this objective, the Compensation Committee has implemented and maintains compensation plans that are performance-based and tie a substantial portion of the executives’ overall compensation to strategic performance goals.  Our executive compensation program consisted of four principal components in 2018:

 

base salary;

 

annual performance-based cash incentive;

 

annual performance-based equity incentive; and

 

long-term performance-based equity incentive.

 

Annual Compensation

Compensation Component

Objectives

Key Features

Base Salary

Provide a competitive annual fixed level of cash compensation compared to peer and market data.

 

Attract and retain executives.

Compensate executives for their daily efforts as management of the Company.

 

Adjustments are made from time-to-time based on individual performance, internal pay equity and pay relative to the peer group and relevant market data.

Annual Performance-Based Cash Incentive

Motivate participants to achieve short-term strategic and financial goals in order to support the long-term strategy and creation of value.

 

Tie financial rewards to measurable achievements, reinforcing pay-for-performance.

 

Provide a competitive variable award opportunity that attracts and retains our executives.

Typically cash incentive payments based on a fixed incentive target percentage of base salary and attainment of certain financial and non-financial strategic goals.

 

No guaranteed payouts; minimum thresholds must be met for an incentive to be earned.

Annual Performance-Based Equity Incentive

Motivate participants to achieve short-term strategic and financial goals in order to support the long-term strategy and creation of value.

 

Tie financial rewards to measurable achievements, reinforcing pay-for-performance.

 

The number of shares of restricted stock awarded is based on annual Company and individual performance.

 

The restricted stock award vests annually in four (4) equal installments on the first, second, third and fourth anniversaries of the date of employment, provided that the executive remains employed with the Company on such vesting date.

 

The grants will have such other terms as are determined by the Board in accordance with the current stock plan in place at time of grant.

 

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Long-Term Incentives

Long-Term Performance-Based Equity Incentive

Align the interests of management with those of our stockholders through stock-based awards by facilitating and encouraging ownership of our common stock.

  
Retain the services of our executive team for a multi-year period.

Reward achievement of our strategic objectives that drive long-term stockholder value.

Long-term incentives are provided via annual grants of performance share units with payouts made in shares of common stock.

Target value is intended to provide competitive compensation opportunities based on performance over a multi-year period with realizable value directly tied to stock price performance.

 

Other Benefits

401(k) Retirement Plan

Provide retirement income for employees.

Allows participants to defer up to 100% of their annual compensation, subject to any applicable caps set by the Internal Revenue Code.

 

We currently provide matching contributions equal to 100% of an employee’s individual contribution, up to a maximum of 4% of the participant’s annual salary, subject to regulatory limits.

Health, welfare and other non-cash benefits

Provide health and welfare coverage for employees, generally.

Executives generally participate in the same benefits programs offered to all employees.

Compensation of our Named Executive Officers

For 2018, as detailed in the chart that follows, an average of approximately 70% of the target total direct compensation for our NEOs other than our CEO was at-risk, variable compensation.  This compensation included the annual performance-based cash incentive, the annual performance-based equity incentive and the long-term performance-based equity incentive. All equity grants were valued based on the fair market value on the date of grant.

 

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Compensation of our Chief Executive Officer

At his request, Mr. Hass’s 2018 target total direct compensation was reduced by $250,000 as compared to 2017.  For 2018, Mr. Hass received

 

an annual base salary of only $200,000 in order to promote the conservation of cash and to align his compensation closely with annual and long-term value creation and share price appreciation;

 

an annual equity award of $300,000 of restricted stock (reduced from $350,000 in 2017), which vested in equal installments over twelve months through March 22, 2019;

 

an annual performance-based equity award with a target value of $1,000,000 (reduced from $1,100,000 in 2017) aligned to 2018 Company financial and non-financial goals.  Shares of our stock received upon achievement of those goals vest over three years on each anniversary date at a rate of 50%, 25% and 25%, respectively, beginning on February 21, 2020; and

 

a long-term performance-based equity award with a target value of $1,000,000 (reduced from $1,100,000 in 2017) aligned to the achievement of sales and profitability between January 2018 and December 2020.  Shares of our stock received upon achievement of those goals will be fully vested.

As detailed in the chart below, approximately 80% of the 2018 target total direct compensation for our Chief Executive Officer, Mr. Hass, was at-risk, variable compensation.  This compensation included the annual equity award, the annual performance-based equity incentive and the long-term performance-based equity incentive. Only 8% of Mr. Hass’s total target compensation was in cash.  All equity grants were valued based on the fair market value on the date of grant.

 

 

 

 

 

 

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Determining the Amount of Each Element of Executive Compensation

Overview

Management is responsible for the compensation program for our executive officers, including NEOs, with our Compensation Committee’s oversight.  Management and our Compensation Committee consider several factors in determining the design and elements of our executive compensation program. In general, the weight of each element of our executive compensation program is recommended by management to our Compensation Committee on an annual basis and considers the following factors, among others:

 

Company and individual performance;

 

pay practices among competitive companies;

 

the Company’s desire to attract and retain key talent;

 

broad economic factors; and

 

the discretion of our Compensation Committee members based on their relevant experience.

In designing our executive compensation program, management and our Compensation Committee seek to achieve the appropriate balance between immediate cash rewards and performance-driven annual and long-term equity and cash incentives. In doing so, they reference both publicly-disclosed peer group compensation information and broad-based compensation survey data, as described below.

During 2018, management, on behalf of our Compensation Committee, engaged Exequity, an independent compensation consultant, on a very limited basis to provide our Compensation Committee with an update on regulatory developments relating to executive compensation.

Comparable Market Compensation

In analyzing the competitiveness of our executive compensation program, our Chief Human Resources Officer and our Compensation Committee reviewed pay practices from two primary sources. The market data for our NEOs and other senior management team members was collected from peer group proxy data (as described below) and the Radford Global Technology Compensation Survey data (the “Radford Survey”). It is generally our policy to target compensation levels, both in aggregate and by element, to median compensation levels from each of these sources.  The Radford Survey includes compensation market data from more than 2,000 companies and provides a holistic perspective on total compensation levels, practices and emerging trends. We reviewed the following types of companies in the Radford Survey to derive the overall data and medians against which we benchmarked our executive compensation levels:

 

companies in the Internet/E-Commerce/Online Community industries;

 

companies located in the mid-Atlantic states or in locations where we source our executive talent, such as in Seattle and Boston; and

 

software and technology companies with most recent annual revenues ranging between $50 million to $399 million.

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Our Compensation Committee performs a formal review of our peer group annually and makes what it considers appropriate changes. In the third quarter of 2017, our Vice President of Human Resources reviewed the 2017 Peer Group to determine whether it remained an appropriate peer group for executive compensation benchmarking purposes, based on the following guiding principles and criteria:

 

companies that compete with Rosetta Stone for key executive talent;

 

similar or complementary industries;

 

organizational structure;

 

relative peer as indicated by the proxy advisory services;

 

common operational or business challenges;

 

investor feedback; and

 

similar size in terms of revenue, market capitalization, and number of employees.  

After reviewing the 2017 Peer Group and other relevant companies, management recommended to our Compensation Committee that our 2017 Peer Group be revised by removing two peer companies and adding two new peer companies for a total of 14 peer companies, which the Compensation Committee approved (the “2018 Peer Group"). The 2018 Peer Group consisted of:

 

2018 Peer Group

Actua Corporation

 

GluMobile, Inc.

American Public Education, Inc.

 

K12 Inc.

Bazaarvoice, Inc.

 

Liquidity Services, Inc.

Brightcove, Inc.

 

LivePerson, Inc.

Cambium Learning Group, Inc.

 

QAD Inc.

Capella Education Company

 

RealNetworks, Inc

Career Education Corp.

 

Strayer Education Inc.

 

For 2018, our NEOs’ base salaries and target annual cash and equity incentive opportunities were benchmarked against the median levels of the 2018 Peer Group and the Radford Survey.  The Long Term Incentive Program compensation opportunity is intended to deliver compensation targeted at the 75th percentile of our market data set if we achieve our long term strategic growth objectives

Role of Chief Executive Officer and Other Executives in Executive Compensation Decisions

Our Compensation Committee received recommendations from our Chief Executive Officer and our Chief Human Resources Officer on the appropriate compensation levels for our NEOs, other than the Chief Executive Officer. The Chief Executive Officer provided information about the other NEOs’ performance to assist our Compensation Committee with its evaluations and decisions.

 

 

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Overview of Our Executive Compensation Program for Fiscal Year 2018

Base Salaries

Management reviews and recommends to our Compensation Committee our executives’ base salaries on an annual basis taking into consideration the factors described above as well as changes in position or responsibilities and time and experience in the position. In the event of material changes in position, responsibilities or other factors, management may recommend and our Compensation Committee may approve changes in base pay during the year.

In February 2018, our Compensation Committee completed its annual CEO assessment process, which included our Committee discussing and finalizing Mr. Hass’s 2017 performance and compensation recommendations for 2018.  It agreed to maintain the base salary for Mr. Hass while maintaining a similar proportion of performance-based equity subject to the achievement of annual and long-term performance objectives. Our Compensation Committee also completed an annual assessment process for the other NEOs in February 2018 and did not make any changes to base salaries as a result of these assessments other than for Mr. Gaehde.  As detailed in the footnotes to the table below, Messrs. Gaehde and Hulett received an increase in their base salaries in connection with their promotions to Co-President of the Company on January 1, 2019.

 

Name

 

2017

Base Salary ($)

 

 

Annualized Base Salary after

2018

Adjustments ($)

 

 

% Change

A. John Hass III (1)

 

 

200,000

 

 

 

200,000

 

 

--%

Nicholas C. Gaehde (2)

 

 

300,000

 

 

 

315,000

 

 

5%

Mathew N. Hulett (3)

 

 

350,000

 

 

 

350,000

 

 

--%

Thomas M. Pierno

 

 

340,000

 

 

 

340,000

 

 

--%

Sonia Galindo

 

 

325,000

 

 

 

325,000

 

 

--%

 

 

(1)

Mr. Hass also received an equity award of $300,000 of restricted stock which vested in equal installments over twelve months through March 22, 2019.

 

(2)

Mr. Gaehde was promoted to President, Lexia Learning in August 2017.  In November 2018, the Board appointed Mr. Gaehde as Co-President of the Company effective January 1, 2019.  In connection with this appointment, his annual base salary increased to $375,000 effective January 1, 2019.

 

(3)

Mr. Hulett was appointed as President, Language in August 2017.  In November 2018, the Board appointed Mr. Hulett as Co-President of the Company effective January 1, 2019.  In connection with this appointment, his annual base salary increased to $375,000 effective January 1, 2019.

Annual Performance-Based Incentive

For 2018, management recommended, and our Compensation Committee approved, annual performance-based incentive targets under the 2018 AIP as set forth in the following table.

 

Name

 

2018

Annualized

Base Salary ($)

 

 

2018

Target Annual

Incentive

Opportunity ($)

 

 

Target

Annual Incentive

as a Percentage

of Base Salary

 

 

Financial

Goals Target

Annual

Incentive ($)

 

 

Non-financial

Strategic Goals

Target Annual

Incentive ($)

 

A. John Hass III (1)

 

 

200,000

 

 

 

1,000,000

 

 

500%

 

 

 

1,000,000

 

 

--

 

Nicholas Gaehde (2)

 

 

315,000

 

 

 

189,000

 

 

60%

 

 

 

160,650

 

 

 

28,350

 

Mathew N. Hulett (3)

 

 

350,000

 

 

 

210,000

 

 

60%

 

 

 

178,500

 

 

 

31,500

 

Thomas M. Pierno (4)

 

 

340,000

 

 

 

255,000

 

 

75%

 

 

 

255,000

 

 

--

 

Sonia Galindo (5)

 

 

325,000

 

 

 

195,000

 

 

60%

 

 

 

195,000

 

 

--

 

 

 

(1)

Mr. Hass's target annual incentive opportunity (100% PSUs) was based 100% on financial goals.  

 

(2)

Mr. Gaehde's target cash incentive opportunity was based 85% on financial goals and 15% on non-financial strategic goals.

 

(3)

Mr. Hulett's target cash incentive opportunity was based 85% on financial goals and 15% on non-financial strategic goals.

 

(4)

Mr. Pierno’s target cash incentive opportunity was based 100% on financial goals.

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(5)

Ms. Galindo’s target cash incentive opportunity was based 100% on financial goals.

Each executive's annual incentive opportunity was based on financial goals, and in the case of Messrs. Gaehde and Hulett, non-financial strategic goals as well. Our Compensation Committee believes that the weightings of financial and non-financial strategic goals best align the financial interests of our executives with the financial interests of our stockholders. Mr. Hass’s target annual performance-based incentive opportunity was comprised entirely of equity.  

With respect to each of the 2018 financial goals under the 2018 AIP, amounts would be earned as set forth in the table below.

 

Level of Achievement & Percentage Funded

 

Below Threshold

Threshold

(or Minimum)

 

Budget

 

Target

 

Maximum

 

0%

25%

 

80%

 

100%

 

150%

 

 

With respect to any one of the financial goals, failure to achieve the threshold level of performance generally means no amount would be earned.  Achievement at 100% of the budget approved by the Board at the beginning of 2018 resulted in funding equal to 80% of the target award with target award and above funding requiring above budget performance.  To the extent that actual performance is between achievement levels, the amount earned would be determined on a pro rata basis using straight line interpolation.

The financial goals and non-financial strategic goals are evaluated separately in determining the amount each independent goal contributes to the level of award.  As a result, amounts could be earned if one goal was met but another goal was not.

Financial Goals

The financial goals varied among the NEOs under the 2018 AIP.  The following tables set forth the financial goals for each NEO and 2018 actual results as compared to established targets.

 

Annual Incentive Program Financial Goals -

Mr. Hass (1)

Percentage

 

Threshold

 

Target

 

Maximum

 

2018 Actual

Result

 

Level of Achievement

2018 Company Weighted Sum Bookings ($M)

50%

 

 

303.1

 

 

320.7

 

 

360.8

 

 

299.2

 

Below Threshold

2018 Company Bookings-based Adjusted EBITDA Less

Capital Expenditures ($M)

50%

 

0.69

 

2.94

 

7.46

 

(9.9)

 

Below Threshold

 

Annual Incentive Program Financial Goals -

Mr. Gaehde (2)

Percentage

 

Threshold

 

Target

 

Maximum

 

2018 Actual

Result

 

Level of Achievement

2018 Company Bookings Adjusted EBITDA Less Capital

Expenditures ($M)

25%

 

 

0.69

 

 

2.94

 

 

7.46

 

(9.9)

 

Below Threshold

2018 Literacy Bookings ($M)

45%

 

 

57

 

 

60.1

 

 

67.6

 

 

58.6

 

98% of Target

2018 Literacy Bookings-based Adjusted EBITDA ($M)

15%

 

 

10.5

 

 

13.1

 

 

16.4

 

 

12.8

 

98% of Target

 

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Annual Incentive Program Financial Goals -

Mr. Hulett (3)

Percentage

 

Threshold

 

Target

Maximum

 

2018 Actual

Result

Level of Achievement

2018 Company Bookings-based Adjusted EBITDA Less Capital

Expenditures ($M)

25%

 

0.69

 

2.94

7.46

 

(9.9)

Below Threshold

2018 Language Bookings ($M)

35%

 

132.5

 

140.4

 

158

 

122.9

Below Threshold

2018 Language Bookings-based Adjusted EBITDA ($M)

25%

 

 

19.6

 

23

 

28.8

 

12.7

Below Threshold

 

Annual Incentive Program Financial Goals -

Mr. Pierno & Ms. Galindo (4)

Percentage

 

Threshold

 

Target

Maximum

 

2018 Actual

Result

Level of Achievement

2018 Company Bookings ($M)

50%

 

 

190

 

200.5

 

225.6

 

181.9

Below Threshold

2018 Company Bookings-based Adjusted EBITDA Less Capital

Expenditures ($M)

50%

 

0.69

 

2.94

7.46

 

(9.9)

Below Threshold

 

 

(1)

Financial goals comprised 100% of Mr. Hass's annual incentive opportunity.

 

(2)

Financial goals comprised 85% of Mr. Gaehde's annual incentive opportunity.

 

(3)

Financial goals comprised 85% of Mr. Hulett's annual incentive opportunity.

 

(4)

Financial goals comprised 100% of Mr. Pierno's and Ms. Galindo's annual incentive opportunity.

Bookings, Bookings-based Adjusted EBITDA and Bookings-based Adjusted EBITDA Less Capital Expenditures are non-GAAAP financial measures.  We provide definitions of these terms, along with Company Weighted Sum Bookings, in Appendix A.

Non-Financial Goals

With respect to the 2018 non-financial goals portion of the annual incentive program, no minimum threshold level of performance was established except for Mr. Hulett’s “net lifetime bookings added” goal. Management recommended, and our Compensation Committee approved, a percentage of overall achievement based on an evaluation of our performance in meeting these goals during the year, as set forth in the following table.

 

 

Description

Target Percentage

 

2018 Actual Result

 

Level of Achievement

Mr. Hass

 

 

 

 

 

 

 

 

 

Not applicable

--

 

--

 

--

Mr. Gaehde

 

 

 

 

 

 

 

 

Product License Renewal Performance

Drive customer lifetime bookings by maintaining customer renewal rates for product licenses of at least 90% (trailing 12 month renewal rate measured quarterly)

7.5%

 

100%

 

Above Target

Portfolio Sales Momentum

Drive portfolio momentum by installing more than one Literacy product per customer with a target of 400 customers active with more than one product by December 31, 2018

7.5%

 

 

1,118

 

Above Target

Mr. Hulett

 

 

 

 

 

 

 

 

Consumer

Achieve net lifetime bookings added (Net LTV added) as set forth in the table below (1)

7.5%

 

 

28.4

 

Above Target

E&E

Achieve lifetime bookings to customer acquisition cost ratio of at least 2.1 to 1

7.5%

 

 

2.0

 

Threshold

Mr. Pierno & Ms. Galindo

 

 

 

 

 

 

 

 

 

Not applicable

--

 

--

 

--

 

 

(1)

When the Compensation Committee initially approved the 2018 AIP in February 2018, it approved a non-financial goal for Mr. Hulett to achieve a specified lifetime bookings to customer acquisition cost ratio.  After discussion with management, the Committee subsequently determined that a

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more appropriate measure for the Consumer Language business is “net lifetime bookings added” or “Net LTV added” and it approved a change to Mr. Hulett’s non-financial goals and the metrics below in May 2018.

 

Net LTV Added ($M)

Incremental to Budget ($M)

 

 

Above Target

>28.3

>.55

 

Above Target Payout

2% Growth

28.3

 

1

 

Target Incentive Zone

Budget

27.7

--

 

Target Incentive Zone

(2.2)% Growth (Threshold)

26.9

(0.83)

 

Below Target Payout

Below Threshold

<26.9

<(0.83)

 

No Payout

 

 

 

 

 

 

Net LTV added and lifetime bookings to customer acquisition cost ratio are defined in Appendix A.

 

Based on the assessments discussed above, the calculated funding of the financial goals and non-financial goals under the 2018 AIP as a percentage of each NEO's total annual target incentive opportunity were as follows:

 

Name

Financial Goal Calculated Funding

 

Non-Financial Goal Calculated Funding

 

Aggregate Calculated 2018 AIP Funding

 

A. John Hass III

0%

 

--

 

0%

 

Nicholas C. Gaehde

42.5%

 

22.5%

 

65%

 

Mathew N. Hulett

0%