rst-def14a_20200611.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 29, 2020

Dear Fellow Stockholders:

You are cordially invited to attend the 2020 Annual Meeting of Stockholders (the “Annual Meeting”) of Rosetta Stone Inc. (the “Company” or “Rosetta Stone”), which will be held at our offices located at 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209, on Thursday, June 11, 2020, at 2:00 p.m., local time. Details about the meeting, nominees for the Board of Directors and other matters to be acted on are included in the notice of the Annual Meeting and proxy statement that follow.

We hope you plan to attend the Annual Meeting, but even if you cannot, it is important that your shares be represented and voted promptly. 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. Your proxy may be revoked at any time before it is exercised as explained in our proxy statement.

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 TAKE THE TIME TO VOTE AS PROMPTLY AS POSSIBLE.

 


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NOTICE OF 2020 ANNUAL MEETING OF STOCKHOLDERS

To our Stockholders:

You are cordially invited to attend our 2020 Annual Meeting, which will be held at 2:00 p.m. local time on Thursday, June 11, 2020 at our offices located at 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209 for the following purposes:

 

1.

To elect three Class II directors to hold office until our 2023 annual meeting of stockholders, or until their respective successors are duly elected and qualified;

 

2.

Ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2020;

 

3.

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

 

4.

Approve an amendment to the Company’s Second Amended and Restated Certificate of Incorporation (the “Charter”) in connection with the declassification of the Board of Directors;

 

5.

Consider any other matters that may properly be brought before the meeting or any adjournment or postponement of the meeting.

The Board of Directors recommends that you vote FOR the election of each of the Class II nominees and FOR Proposals 2, 3 and 4. The close of business on April 20, 2020 has been established as the record date for determining those stockholders entitled to receive notice of and to vote at the Annual Meeting, or at any adjournment or postponement thereof.

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,

 

 

Sean J. Klein

General Counsel and Secretary

 

Arlington, Virginia

April 29, 2020


 


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IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE

ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 11, 2020

 

The Company’s notice and proxy statement for the Annual Meeting and the annual report on Form 10-K for the fiscal year ended December 31, 2019 are available online at www.proxyvote.com .

 


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TABLE OF CONTENTS

 

INFORMATION ABOUT THE ANNUAL MEETING, VOTING AND PROXIES

1

BOARD OF DIRECTORS AND NOMINEES

4

EXECUTIVE OFFICERS

10

CORPORATE SOCIAL RESPONSIBILITY

12

CORPORATE GOVERNANCE

17

Code of Ethics and Business Conduct

17

Composition of our Board of Directors; Board Declassification

17

Director Independence

18

Board Leadership Structure and Role in Risk Oversight

19

Committees of our Board of Directors

20

Compensation Committee Interlocks and Insider Participation

21

Attendance at Meetings

23

Policy Governing Director Qualifications and Nominations

23

DIRECTOR COMPENSATION

25

Non-Employee Director Compensation Policy

25

Non-Employee Director Compensation Table

26

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

27

COMPENSATION COMMITTEE REPORT

29

COMPENSATION DISCUSSION AND ANALYSIS

30

EXECUTIVE COMPENSATION

53

2019 Summary Compensation Table

53

All Other Compensation Table for Fiscal Year 2019

54

Grants of Plan-Based Awards in Fiscal Year 2019

55

Outstanding Equity Awards at December 31, 2019

57

Option Exercises and Stock Vested for Fiscal Year 2019

59

Employment Arrangements with Named Executive Officers

59

Potential Payments Upon Termination or Change in Control as of December 31, 2019

60

Equity Compensation Plan Information     

63

CEO PAY RATIO

64

TRANSACTIONS WITH RELATED PERSONS

66

PROPOSAL 1.   ELECTION OF DIRECTORS

67

PROPOSAL 2.   RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

68

Fees Paid to Independent Registered Public Accounting Firm

68

Report of the Audit Committee

70

PROPOSAL 3.   ADVISORY VOTE ON THE COMPENSATION OF NAMED EXECUTIVE OFFICERS

71

PROPOSAL 4.   APPROVAL OF AMENDMENT TO ARTICLE VI OF THE COMPANY’S CHARTER  

72

STOCKHOLDER MATTERS

75

Stockholder Communications with our Board of Directors

75

Stockholder Recommendations of Director Candidates

75

Stockholder Proposals and Nominations for the 2021 Annual Meeting of Stockholders

75

OTHER MATTERS

79

APPENDIX A – NON-GAAP FINANCIAL MEASURES AND STATISTICAL MEASURES

A-1

APPENDIX B – AMENDMENT TO ARTICLE VI OF THE COMPANY’S CHARTER

B-1

 

 


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ROSETTA STONE INC.

1621 North Kent Street, Suite 1200

Arlington, Virginia 22209

 

 

PROXY STATEMENT

2020 ANNUAL MEETING OF STOCKHOLDERS

 

 

INFORMATION ABOUT THE ANNUAL MEETING, VOTING AND PROXIES

Date, Time and Place of Meeting

This proxy statement and the accompanying proxy card are being furnished to you by the Board of Directors of Rosetta Stone Inc. (the "Board" or "Board of Directors") to solicit your proxy to vote your shares at the Rosetta Stone Inc. 2020 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 Annual Meeting on Thursday, June 11, 2020 at 2:00 p.m., local time, at our offices at 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209.

We intend to hold our Annual Meeting in person. However, we are sensitive to the public health and travel concerns our stockholders may have and recommendations that public health officials may issue in light of the evolving coronavirus (“COVID-19”) situation. As a result, we may impose additional procedures or limitations on meeting attendees (beyond those described in this proxy statement) or may decide to hold the meeting in a different location or solely by means of remote communication (i.e., a virtual-only meeting). We plan to announce any such updates in a press release filed with the U.S. Securities and Exchange Commission (the “SEC”), which will also appear in the investor relations section of our website ( https://investors.rosettastone.com ) and we encourage you to check this website prior to the meeting if you plan to attend.

Internet Availability of Proxy Materials

Under rules adopted by 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 April 20, 2020 (the “Record Date”) will be entitled to vote at the Annual Meeting. On the Record Date, we had approximately 24,575,403 shares outstanding and entitled to vote. In order to take action at the 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 Annual Meeting, either in person or represented by proxy.

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If by the date of the 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 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 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.

Voting and Revoking Proxies

We are soliciting proxies to vote your shares at the Annual Meeting. If you attend the 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 Annual Meeting.

If you properly submit your proxy, and do not revoke it prior to the 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 Proposals 1, 2, 3 and 4.  As far as we know, no other matters will be presented at the 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 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 by email to corporatesecretary@rosettastone.com. You may also revoke a proxy by submitting a later-dated proxy or by voting in person at the 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 Annual Meeting, you must bring to the 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 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. Proposals 1 (election of directors), 3 (advisory vote on

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executive compensation) and 4 (approval of an amendment to the Charter) 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 d iscretionary 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.

Soliciting Proxies

We will pay all expenses of soliciting proxies to be voted at the 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 in writing to our General Counsel and Secretary at corporatesecretary@rosettastone.com 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 email address above if you received multiple copies of materials for the 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, please send a written request to the General Counsel and Secretary at the above email address.

Annual Report on Form 10-K and Additional Materials

The Notice, Annual Report on Form 10-K and proxy materials have been made available to all stockholders entitled to vote at the Annual Meeting and who received the Notice. The Annual Report on Form 10-K can also be viewed at https://materials.proxyvote.com .

 

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BOARD OF DIREC TORS AND NOMINEES

 

Board of Directors

Class

Age

Position

Year Elected

Term Expires

Director Nominees

 

 

 

 

 

Laurence Franklin

II

67

 

Director

2006

2020

A. John Hass III

II

54

Chief Executive Officer and Chairman of the Board of Directors

2014

2020

Aedhmar Hynes

II

53

 

Director

2019

2020

Continuing Directors

 

 

 

 

 

Patrick Gross

III

75

 

Director

2006

2021

George Logue

III

69

 

Director

2018

2021

David Nierenberg

I

66

 

Director

2015

2022

Kathryn Eberle Walker

I

43

 

Director

2019

2022

Jessie Woolley-Wilson

III

57

 

Director

2017

2021

Steven Yankovich

I

58

 

Director; Lead Independent Director

2014

2022

 

Our business and affairs are managed under the direction of the Board in accordance with the Delaware General Corporation Law (the “DGCL”), our Charter and our bylaws. Our bylaws provide that the number of directors shall be fixed by resolution adopted by a majority of the Board. Our Board of Directors currently consists of nine directors. Pursuant to the Company’s bylaws, the Board is currently divided into three classes, with one class elected at each annual meeting of stockholders, to hold office for a three-year term beginning on the date of election. On the date of the Annual Meeting, only the terms of our Class II directors are scheduled to expire. The Corporate Governance and Nominating Committee has therefore recommended that our three current Class II directors, Mr. Franklin, Mr. Hass and Ms. Hynes, be nominated for election to the Board by the stockholders at the Annual Meeting. If elected, the nominees will serve as directors until the 2023 annual meeting of stockholders and until their successors are elected and qualified, subject to their earlier death, resignation or removal (see Proposal 1).

In February 2020, after careful consideration, the Board determined that it would be in the best interests of our stockholders to declassify the Board to allow our stockholders to vote on the election of the entire Board annually, rather than on a staggered basis. As such, the Board conditionally approved amendments to our bylaws to declassify the Board, subject to stockholder approval of the proposed amendment to our Charter at the Annual Meeting (see Proposal 4). As a result of the Board’s decision, if Proposal 4 is approved by our stockholders, we would begin transitioning the current staggered director terms to annual terms beginning with director elections at the 2021 annual meeting of the stockholders. It will take three successive years to complete the transition to annual terms for the entire Board with all members of our Board standing for annual election beginning with the 2023 annual meeting of stockholders. If Proposal 4 is not approved by our stockholders, our Board will remain classified with three-year terms. For more information on the proposed amendment, please see Proposal 4.

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Set forth below is b iographical information disclosing each director’s and director nominee’s age, business experience and other directorships held during the past five years. It also includes the experiences, qualifications, attributes or skills that led the Board of Directo rs to determine that the individual should serve as a director of the Company. Unless otherwise specified, each director has held his or her position for at least five years. There are no family relationships among any of our directors or executive officer s.

DIRECTOR NOMINEES (CLASS II)

 

 

  

Laurence Franklin

Director

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.

 

Director since 2006

Age: 67

 

 

 

 

 

  

A. John Hass III

Chief Executive Officer and Chairman of the Board of Directors

A. John Hass III has served as a director since 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 2015 to April 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.

 

Director since 2014

Age: 54

 

 

 

 

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Aedhmar Hynes

Director

Aedhmar Hynes was appointed to serve as a director in August 2019 and is a member of the Compensation Committee. Ms. Hynes is ranked among the top 50 most powerful communications professionals in the world. From 2000 until September 2018, she served as the Chief Executive Officer of Text100, a digital communications agency, with 22 offices and over 600 consultants across Europe, North America and Asia. Through her consulting work she has advised and supported many of the world’s most important brands through digital transformation and technology disruption. She has worked closely with client executives, coaching them on company brand reputation, purpose and cultural change driving stakeholder value, customer engagement and brand loyalty.

Today, Ms. Hynes is Chairman of the Board of Trustees of The Page Society, the preeminent industry body for Chief Communications Officers of Fortune 500 companies. She serves on the boards of IP Group plc (LSE:IPO) and Tupperware Brands Corporation (NYSE: TUP), as well as serving on the advisory board of MIT Media Lab. Ms. Hynes was selected to become a Henry Crown Fellow of The Aspen Institute in 2008 and is currently a member of the Aspen Global Leadership Network. She was named Global Professional of the Year in 2018 by PR Week. A native of Ireland, Ms. Hynes holds degrees from The National University of Ireland - Galway and The Galway-Mayo Institute of Technology.

Our Board of Directors believes that Ms. Hynes is particularly qualified to serve as a director based on her significant business, leadership and management roles, her wealth of experience as a marketing and communications professional, and her background in advising and supporting technology businesses.

 

Director since 2019

Age: 53

 

 

 


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CONTINUING DIRECTORS (CLASSES I AND III)

 

 

  

Patrick Gross

Director

Patrick 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 from April 2016 to August 2019. Mr. Gross currently 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.

 

Director since 2006

Age: 75

 

 

 

 

 

  

George Logue

Director

George Logue has served as a director since March 2018 and is a member of 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.

 

Director since 2018

Age: 69

 

 

 

 

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David Nierenberg

Director

David Nierenberg has served as a director since 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, Houston Wire & Cable Company (Nasdaq: HWCC), 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 & Co. provides significant insight into the Company’s corporate governance.

 

Director since 2015

Age: 66

 

 

 

 

 

  

Kathryn (Kate) Eberle Walker

Director

Kate Eberle Walker was appointed to serve as a director in November 2019 and is a member of the Audit Committee. Ms. Walker has more than 20 years of experience leading, advising, acquiring and investing in education companies. She currently serves as the Chief Executive Officer of Presence Learning, a leading provider of live online special education therapy and assessment services for K-12 districts supporting children with special needs. Prior to this, from December 2017 to December 2018, she served as an advisor to the executive teams of various education companies seeking expertise in building sales and growth strategies in the education market. From September 2014 to November 2017, Ms. Walker served in leadership positions with The Princeton Review and its subsidiary Tutor.com, including serving as Chief Executive Officer from December 2015 to November 2017, Chief Financial Officer from September 2014 to November 2015 and Senior Vice President, Strategy and Corporate Development from January 2014 to September 2014, where she built a scaled organization that leveraged technology to deliver high-quality educational outcomes for students. Prior to that, Ms. Walker managed M&A and venture investments for Kaplan, Inc., a large and diversified global education company. She supports and advises several early stage education ventures and serves on the boards of Brooklyn Prospect Charter School and the International School of Brooklyn. Ms. Walker began her career as an investment banker at Goldman Sachs and received her MBA from Harvard Business School.

Our Board of Directors believes that Ms. Walker is particularly qualified to serve as a director based on her demonstrated leadership abilities, her significant background in financial and other operational leadership roles, and her years of experience leading, advising, acquiring and investing in education technology companies.

 

Director since 2019

Age: 43

 

 

 

 

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Jessie Woolley-Wilson

Director

Jessie Woolley-Wilson has served as a director since October 2017 and is a member of the Compensation and Corporate Governance and Nominating Committees.  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 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 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.

 

Director since 2017

Age: 57

 

 

 

 

 

  

Steven Yankovich

Director; Lead Independent Director

Steven Yankovich has served as a director since October 2014 and is our Lead Independent Director. Mr. Yankovich also serves as Chair of the Corporate Governance and Nominating Committee and as a member of the Audit Committee.  Mr. Yankovich is an active startup investor, advises a number of startups and venture capital firms and serves on a philanthropic board. Previously, until March 2019, Mr. Yankovich spent 10 years in various executive product and technology roles at eBay Inc. including creating eBay’s mobile strategy and footprint in 2009 and assisting with the spin out of Magento Commerce. He subsequently became CTO of Magento in November 2015 after its sale to private equity, and then returned to eBay as Chief Product Architect in November 2016 to lead buyer growth and a transformational buyer experience on its global marketplace. Mr. Yankovich has extensive experience working in the technology, e-commerce, consumer and enterprise software and mobile sectors resulting in a patent portfolio of 100+ patents, of which 62 are granted.

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.

 

Director since 2014

Age: 58

 

 

 

 


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EXECUTIVE OFFICERS

Set forth below is information regarding the position(s), ages and business experience held by each of our current executive officers.

 

Name

 

 

Age

 

 

 

Position(s) Held with the Company

 

A. John Hass III

 

 

54

 

 

Chief Executive Officer and Chairman of the Board of Directors

Thomas Pierno

 

 

58

 

 

Chief Financial Officer

Nicholas Gaehde

 

 

59

 

 

Co-President and President of Literacy

Mathew Hulett

 

 

49

 

 

Co-President and President of Language

Sean Klein

 

 

49

 

 

General Counsel and Secretary

 

A. John Hass III. For more information about Mr. Hass, please see his biography above under the caption “Our Board of Directors and Nominees—Director Nominees (Class II).”  

 

 

  

Nicholas Gaehde

Co-President and President of Literacy

Nicholas 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 Hulett

Co-President and President of Language

Mathew 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 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.

 

 

 

 

 

 

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Thomas Pierno

Chief Financial Officer

Thomas 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.

 

 

 

 

 

 

 

  

Sean Klein

General Counsel and Secretary

Sean Klein was appointed General Counsel and Secretary of Rosetta Stone in July 2019.  Prior to serving in this role, Mr. Klein had been Vice President and Deputy General Counsel of Rosetta Stone since February 2019 and was Vice President and Senior Associate General Counsel of Rosetta Stone from February 2018 to February 2019.  Mr. Klein has over 20 years of legal experience gained through positions with in-house legal departments, law firms and the Federal government.  Prior to joining Rosetta Stone, he served as Chief Compliance Officer and Assistant General Counsel for U.S. Silica Holdings, Inc. from July 2012 to February 2018.  Previously, he served as Senior Counsel and Assistant Secretary for Constellation Energy Group, Inc., and held attorney positions with international law firms and the U.S. Securities and Exchange Commission.  He earned his law degree from Northwestern University School of Law and his B.S. in Accounting from Georgetown University.

 

 

 

 

 

 


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CORPORATE SOCIAL RESPONSIBILITY

 

At Rosetta Stone, we recognize that operating our Company in an environmentally and socially conscious manner, while implementing good governance practices, will help drive the long-term growth and success of our business for our employees, customers, and investors. We work hard towards fulfilling our environmental, social, and governance responsibilities in the many ways described below. These initiatives are an integral part of how we operate and are intended to foster a culture where our employees are proud of the company for which they work.

Mission

Our Company is passionate about our social mission to change people’s lives through the power of language and literacy education. We believe that we enrich the lives of others by delivering best-in-class learning products and services that enable learners to speak confidently, read proficiently, communicate effectively, and boost their life and career prospects. With approximately two-thirds of U.S. students reading below grade level, our literacy products address an important societal need by providing personalized instruction to learners and empowering teachers with the data and information they need to help students reach grade level reading standards and improve their chances of meeting academic requirements and graduating.  In addition, we are especially proud of our custom language products, which have helped to preserve endangered languages, including Native American languages, for future generations.

With this mission, we are committed to cultivating a corporate culture that provides an engaging work environment for employees that encourages respect, collaboration, empowerment, integrity and innovation, as further supported by the initiatives below.

Diversity, Equity and Inclusion

We believe that encouraging diversity within our Company is a natural extension of our appreciation for the diverse identities and needs of the language and literacy learners found at the heart of our mission and vision. To support this belief, we put great effort into cultivating a diverse and inclusive company culture. In 2018, we established our internal Diversity, Equity and Inclusion Committee (the “DE&I Committee”) to formalize our commitment to building a more diverse, equitable and inclusive workplace. The DE&I Committee collaborates with businesses and education leaders in the DE&I space to bring expertise and best practices to the Company and to open doors for historically underrepresented or marginalized identities in the workplace. The DE&I Committee conducts regular employee surveys and collects insights on diversity, equity and inclusion topics across the Company, and has implemented guiding principles for all employees to encourage “diversity by design” in the Company’s daily activities and practices.   The DE&I Committee established a charter in 2019 that is used to govern their work and the participation of employees on the committee.

 

In addition to the DE&I Committee, our People Experience team is focused on sourcing potential hires from a diverse pool of candidates and ensuring appropriate hiring practices in order to build a team that represents the communities in which we work and the learners and customers we serve in order to best fulfill our mission.  People Experience also provides companywide training to support managers and employees as they seek to build an inclusive and equitable workplace.

 

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We hire talented employees with diverse backgrounds and perspectives, and have a long-standing commitment to being an equal opportunity employer. In additi on, our Board of Directors includes three female Board members, which represents 1/3 of the members of our Board of Directors.

Corporate Citizenship Initiatives

We believe that we have a responsibility to the communities in which we operate and where our employees live and work. The Company and its employees have taken an active role in supporting communities through civic involvement with nonprofit organizations, corporate donations and volunteerism.  Our nonprofit activities resulted in approximately 1,360 Company-sponsored employee volunteer hours in 2019. We are proud of the efforts we have made to date and look forward to continuing to strengthen our impact in 2020. Our current initiatives include:

 

PARTNERSHIP WITH YEAR UP

A nonprofit workforce development organization that prepares underserved young adults for successful careers and higher education. Our partnership includes 150 licenses to our Enterprise language learning product to assist young adults with English-language proficiency and confidence in speaking. In addition, employees of Rosetta Stone act as mentors to certain young adults participating in the program.

 

PARTNERSHIP WITH INTERNATIONAL REFUGEE ASSISTANCE PROJECT (IRAP)

A project of the Urban Justice Center in New York City that provides legal advocacy for refugees and displaced people in need of a safe place to call home.  Our partnership includes 51 licenses to our Enterprise language learning product to help IRAP representatives improve direct communications with clients from all over the world in their native languages. Our partnership also includes 150 12-month subscriptions to our language learning product for clients of IRAP who are in the process of resettlement and need to learn the language of their new country.

 

PARTNERSHIP WITH HIAS

An organization which partners with local refugee assistance organizations around the world to assist newly arriving refugees. Our partnership includes 1500 licenses to our Enterprise language learning product to help resettled refugees learn the language of their new country.

 

TENT PARTNERSHIP FOR REFUGEES

A global network of businesses making efforts to support refugees. Under the partnership, we have committed to employing refugees when possible and providing language learning to organizations that assist refugees.  

 

COMPANY-WIDE DAY OF SERVICE

Our teams volunteer each year with local organizations focused on supporting learners, the underprivileged and humane causes. In 2019, over 340 staff volunteered their time with over 40 different organizations globally.

 

PRODUCT DONATIONS

We believe in supporting local organizations whose missions align with our own through product donations. Additionally, eligible employees are able to donate two language products per year to a nonprofit or organization of their choice.

 

 

 

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Initiatives Related to COVID-19

We recognize that COVID-19 is changing the way our employees work with each other and our customers, and are committed to ensuring these changes cause the least disruption to our learners. In response to recent school closures around the world and the growing need to adopt distance-learning solutions, Rosetta Stone has implemented the following:

 

 

communications to districts and schools regarding best practices for remote learning;

 

expanded access to our products for all of our existing K-12 customers through the end of the year, with no additional charge, to help them move to remote learning;

 

Lexia Academy, which provides online implementation and training support for teachers, has been provisioned to help teachers implement our products with their students;

 

three months of free language learning subscriptions for all elementary, middle and high school students worldwide;

 

free unlimited language tutoring for all consumer subscribers through June 30, 2020; and

 

upgrades, free of charge, for our “bronze” access level Enterprise customers to a “silver” access level to provide access to online tutoring.

For more information on these initiatives, please see the Investor Relations section of our website at https://investors.rosettastone.com.

Human Capital Initiatives

We recognize that our employees are our best asset and, as such, strive to implement policies, procedures and programs that will attract, motivate and retain highly skilled employees. Rosetta Stone offers a comprehensive and generous benefits program, which includes, depending on eligibility, the following:

 

MEDICAL

DENTAL

VISION

SUPPLEMENTAL MEDICAL

LIFE, DISABILITY & AD&D

FSA/HSA ACCOUNTS

EDUCATIONAL ASSISTANCE

LEGAL INSURANCE

GENEROUS LEAVE & TIME OFF

RETIREMENT 401(K)

 

COMMUTER BENEFITS

ADOPTION ASSISTANCE

PRODUCT ACCESS, DISCOUNTS & DONATIONS

EMPLOYEE ASSISTANCE PROGRAM

WELLNESS AND DISCOUNT PROGRAMS

CAREGIVER SUPPORT

PET INSURANCE

 

 

Our employees are awarded compensation that is in line with those of our peers and the overall technology market. We have also developed various incentive programs to reward and recognize top talent across the Company. In addition to the Annual Incentive Program discussed under “Compensation Discussion and Analysis,” such programs include our annual Circle of Excellence program for top sales performers within the Lexia Learning and E&E sales divisions, as well as monetary awards under our Stela program (awa rded annually) and Rock Star Recognition program (awarded anytime). Performance-based equity compensation is also awarded pursuant to our 2019 Omnibus Incentive Plan for director-level employees and above to encourage stock ownership in the Company.

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We in vest time and resources in our employees’ development and training by providing access to online learning resources, development seminars and by encouraging the incorporation of personal development goals into our annual goal setting process. We have speci fically invested in programs for management effectiveness through structured mandatory training. We also annually review succession planning with the Board of Directors to identify potential successors, and any potential development needs, for each member of our executive team.

GOVERNANCE AND RISK

As a global provider of language and literacy products for consumers, corporations, and public and private educational institutions and organizations, we place a high priority on good governance practices to mitigate risk and potential harms and costs to our users, clients, employees and the Company. In addition to the governance practices discussed elsewhere in this proxy statement, we have established the following:

Data Privacy and Security (“DP&S”) Program

 

 

 

 

Rosetta Stone is committed to protecting the privacy rights of our users, clients and employees and safeguarding the data we collect while providing personalized and valuable services. As such, we are committed to processing the personal data we receive in accordance with the EU-U.S. and Swiss-U.S. Privacy Shield Frameworks and the requirements under various data privacy laws applicable to our products and services, including the General Data Protection Regulation, the Family Educational Rights and Privacy Act, and the California Consumer Protection Act. Our comprehensive DP&S program includes:

adoption of our Privacy Policy, including related policies and procedures, which applies to all directors, officers and employees;

appointment of a data protection officer to lead our compliance efforts and who reports to the executive level;

a robust information security program that is regularly reviewed by management and subject to audit (e.g., SOC2, SOX) on an annual basis;

mandatory DP&S awareness trainings for all employees; and

implementation of procedures to intake, track and address requests from data subjects for access, correction, export or deletion of their personal information, in accordance with legal requirements.

Our DP&S initiatives, policies and procedures are regularly discussed with management, the Board of Directors and the Audit Committee.  

Enterprise Risk Management Program

The Company’s enterprise risk management program is overseen by the Audit Committee.  Annually, management conducts a risk assessment process to identify the most significant risks facing the Company, the results of which are reported to the Audit Committee.  Mitigation plans are prepared to address the risks identified in the annual assessment and are monitored and revised throughout the year.  Management updates the Audit Committee quarterly on the status of its risk management efforts and consideration of the Company’s most significant risks are incorporated into quarterly business updates provided to the Board of Directors.

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Ethical Standards

We have established policies and procedures to guide employee conduct and behavior, including those listed below.

 

CODE OF ETHICS AND BUSINESS CONDUCT

CONFIDENTIAL ETHICS HOTLINE

INSIDER TRADING POLICY

RELATED PARTY TRANSACTIONS POLICY

ANTI-BRIBERY AND ANTI-PIRACY POLICIES

GUIDELINES ON TRADEMARK USAGE

GUIDELINES FOR SOCIAL MEDIA USE

DISSEMINATION OF COMPANY INFORMATION POLICY

 

We generally require employees to acknowledge our policies, as applicable, on an annual basis. In addition, we administer online trainings across various legal and compliance topics on an annual basis as necessary depending on an employee’s role and/or responsibilities.  

As part of our Code of Ethics and Business Conduct, we have established a confidential ethics hotline, which may be accessed by telephone or through the web, for our employees to report violations or suspected violations of Company policies or applicable laws or regulations. Reports received through the ethics hotline are provided to the Audit Committee as appropriate.  

 

SUSTAINABILITY INITIATIVES

 

 

  

Over the last several years, and as our Company has evolved, we have transitioned our consumer language segment away from providing our products through CD packages to online subscriptions under a SaaS-based delivery model, which provides access to our products across the web and through applications. Similarly, our literacy and E&E language segments provide literacy and language solutions to educational institutions, corporations and government agencies worldwide, as applicable, under a SaaS model. We believe that this delivery model reduces our carbon footprint and provides a more economical, efficient and relevant way for us to deliver our products to customers, in addition to providing customers with a better overall experience. We also believe that our delivery model provides greater opportunities for long-term value creation as the demand for e-learning language and literacy solutions grows across the globe.

In addition to our product delivery efforts, we are focused on sustainability initiatives within our offices that reduce energy, waste and materials consumption and strive to find cost-effective and environmentally friendly office solutions.

 

 

 

 

 

 

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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, https://investors.rosettastone.com/corporate-governance. Alternatively, you can request a copy of any of these documents by writing to the General Counsel and Secretary at corporatesecretary@rosettastone.com.

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 https://investors.rosettastone.com/corporate-governance .  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 .

Policy Against 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 that are designed to hedge or offset any decrease in the market value of our common stock.  Directors, officers and employees also are prohibited from holding our stock in a margin account or pledging our stock as collateral for a loan.

Composition of Our Board of Directors; Board Declassification

Our bylaws permit our Board of Directors to establish by resolution the authorized number of directors. Our Board of Directors currently consists of nine members, eight 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 until his or her earlier death, resignation or removal. Currently, our bylaws provide for a classified board structure with our Board members divided into three classes. One class is elected at each annual meeting of stockholders to hold office for a three-year term beginning on the date of the election.

In February 2020, after careful consideration, the Board determined that it would be in the best interests of our stockholders to declassify the Board to allow our stockholders to vote on the election of the entire Board annually, rather than on a staggered basis. As such, the Board conditionally approved amendments to our bylaws to declassify the Board, subject to stockholder approval of the proposed amendment to our Charter at the Annual Meeting (see Proposal 4). As a result of the Board’s decision, if Proposal 4 is approved by our stockholders, we would begin transitioning the current staggered director terms to annual terms beginning with director elections at the 2021 annual meeting of the stockholders. It will take three successive years to complete the transition to annual terms for the entire Board with all members of our Board standing for annual election beginning with the 2023 annual meeting of stockholders.  If Proposal 4 is not approved by our stockholders, our Board will remain classified with three-year terms. For more information on the proposed amendment, please see Proposal 4.

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Our Board is currently classi fied as follows:

 

Laurence Franklin, A. John Hass III, and Aedhmar Hynes are designated Class II Directors whose terms will expire at our Annual Meeting; if re-elected, these directors will have terms that expire at our 2023 annual meeting of stockholders;

 

Patrick Gross, George Logue and Jessie Woolley-Wilson are designated Class III Directors whose terms will expire at our 2021 annual meeting of stockholders; if re-elected, and subject to the approval of Proposal 4, these directors will have a one-year term that expires at our 2022 annual meeting of stockholders. If Proposal 4 is not approved, these directors will have terms that expire at our 2024 annual meeting of stockholders, if re-elected; and

 

David Nierenberg, Kathryn Eberle Walker, and Steven Yankovich are designated Class I Directors whose terms will expire at our 2022 annual meeting of stockholders; if re-elected, and subject to the approval of Proposal 4, these directors will have a one-year term that will expire at our 2023 annual meeting of stockholders. If Proposal 4 is not approved, these directors will have terms that expire at our 2025 annual meeting of stockholders, if re-elected.

Our bylaws further 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 also 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 determined upon the happening of an event or events. Furthermore, in the event Proposal 4 is approved, our corporate governance guidelines would also require a director who receives a greater number of votes “against” his or her election than votes “for” such election to promptly, following certification of the stockholder vote, tender his or her resignation to the Board for consideration. As detailed in Proposal 4, our classified board structure and the DGCL historically required that our Charter provide 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. In the event Proposal 4 is approved by our stockholders at the Annual Meeting, our Charter would be amended to allow removal of a director with or without cause (see Proposal 4).  

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 Mr. Hass, our Chief Executive Officer and Chairman of the Board of Directors, are “independent directors” and meet the independence requirements under the listing standards of the NYSE and the rules and regulations of the SEC.  

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, 2019, our non-management directors met in regularly scheduled executive sessions at which only non-management directors were present. Mr. Gross presided over these sessions as Lead Independent Director until August 2019 when Mr. Yankovich was appointed by the Board as Lead Independent Director.  Both Mr. Gross and Mr. Yankovich are “independent directors” and meet the independence requirements under the listing standards of the NYSE.

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Board Le adership 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 in time. As such, and as further provided in our corporate governance guidelines, our Board does not have a policy on whether the role of the Chief Executive Officer and Chairman of the Board should be separate, or, if it is to be separate, whether the Chairman should be selected from the non-management directors or be an employee. We currently operate with one individual, Mr. Hass, serving as Chief Executive Officer and Chairman of the Board. 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. The Board believes that combining the Chief Executive Officer and Chairman of the Board positions is the right corporate governance structure for us at this time because it most effectively utilizes Mr. Hass’s extensive experience and knowledge of the Company, places him in the best position to focus the independent directors’ attention on the issues of greatest importance to the Company and its stockholders, and provides us with unified leadership. 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.

Under the rules of the NYSE, and to protect the role of the independent directors under a combined leadership structure, any time that the Chairman of the Board is not an individual who is independent, 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. Because Mr. Hass is not an independent director, our independent directors, based on the recommendation of the Corporate Governance and Nominating Committee, appointed Mr. Yankovich to replace Mr. Gross as the Lead Independent Director in August 2019. As Lead Independent Director, Mr. Yankovich 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.

As part of the Board’s annual assessment process, the Board evaluates our Board leadership structure to ensure that it remains appropriate. The Board recognizes that there may be circumstances in the future that would lead it to separate the roles of Chief Executive Officer and Chairman of the Board, but believes that the absence of a policy requiring either the separation or combination of these roles provides the Board with the greatest flexibility to determine the best leadership structure.

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

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management, particularly through periodic conferences bet ween 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 strategy and ope rations 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. Our Board of Directors receives periodic reports from each of these committees on their activities. Each standing committee operates under a written charter that has been approved by our Board. Current copies of the charters for each standing committee of the Board are available on the investor relations section under the corporate governance page of our corporate website, https://investors.rosettastone.com/corporate-governance. Alternatively, you can request a printed copy of any of these documents free of charge by writing to the General Counsel and Secretary at corporatesecretary@rosettastone.com.

Audit Committee

During 2019, our Audit Committee met eight times. Currently, our Audit Committee consists of Laurence Franklin, who serves as the Chair, Patrick Gross, George Logue, David Nierenberg, Kathryn Eberle Walker and Steven 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 and Ms. Walker serve as our audit committee financial experts, as defined under SEC rules. Each member of the Audit Committee is independent as such term is defined in Rule 10A-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.

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.

 

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;

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monitoring the integrity of our financial statements and our compliance with legal and r egulatory 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.

Compensation Committee

During 2019, our Compensation Committee met five times. Our Compensation Committee consists of David Nierenberg, who serves as the Chair, Patrick Gross, Aedhmar Hynes, George Logue and Jessie Woolley-Wilson, each of whom is a non-employee member of our Board of Directors. Our Board of Directors has determined that each member of our Compensation Committee meets the requirements for independence under the requirements of the NYSE.

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 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.

 

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.

The Compensation Committee is also authorized to retain experts, consultants and other advisors to aid in the discharge of its duties. For 2019, the Compensation Committee engaged its existing independent compensation firm, Exequity.  However, management consulted Exequity only on a very limited basis in 2019, primarily to provide our Compensation Committee with updates on regulatory developments and certain research and analysis relating to executive compensation.

Compensation Committee Interlocks and Insider Participation

The following directors were members of the Compensation Committee for some or all of 2019: David Nierenberg, Patrick Gross, Aedhmar Hynes, George Logue, and Jessie Woolley-Wilson.  None of the members of the Compensation

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Committee during 2019 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 2019 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 directo rs or compensation 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

During 2019, our Corporate Governance and Nominating Committee met four times. Our Corporate Governance and Nominating Committee consists of Steven Yankovich, who serves as the Chair, Patrick Gross, Laurence Franklin, and David Nierenberg, each of whom is a non-employee member of our Board of Directors. 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.

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.

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; 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 in the investor relations section under the corporate governance page at https://investors.rosettastone.com/corporate-governance.

Business Advisory Committee

As a special ad hoc advisory committee, the Business Advisory Committee provides operational and strategic thought-partnership to the Language business leadership. The Business Advisory Committee consists of Laurence Franklin, who serves as the Chair, Patrick Gross, George Logue, David Nierenberg and Steven 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

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Committee held no meetings during fiscal year 2019 as the responsibilities of this Committee have been addressed by the full Board of Directors.

Transactions Committee

As a special ad hoc advisory committee, the Transactions Committee reviews strategic transactions and operational alternatives for the Company. The Transactions Committee consists of Laurence Franklin, Patrick Gross, George Logue, David Nierenberg and Steven 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 five meetings during fiscal year 2019.

Attendance at Meetings

Our Board of Directors held six meetings during the year ended December 31, 2019. 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 2019 and the membership of each committee as of December 31, 2019.

 

Name

 

 

Audit

 

 

Compensation

 

 

Corporate Governance

and Nominating

 

 

Business Advisory

 

 

Transactions

 

Laurence Franklin

 

C

 

 

 

M

 

M

 

M

Patrick Gross

 

M

 

M

 

M

 

M

 

M

Aedhmar Hynes (1)

 

 

 

M

 

 

 

 

 

 

George Logue

 

M

 

M

 

 

 

M

 

M

David Nierenberg

 

M

 

C

 

M

 

M

 

M

Kathryn Eberle Walker (2)

 

M

 

 

 

 

 

 

 

 

Jessie Woolley-Wilson

 

 

 

M

 

M

 

 

 

 

Steven Yankovich

 

M

 

 

 

 

 

C

 

 

M

 

 

M

 

Meetings Held in 2019

 

8

 

5

 

4

 

0

 

5

 

C  = Chair

M = Member

 

 

(1)

Ms. Hynes was appointed to the Board of Directors and the Compensation Committee in August 2019.

 

(2)

Ms. Walker was appointed to the Board of Directors and the Audit Committee in November 2019.

Directors are encouraged, but not required, to attend our annual meeting of stockholders. Four of the seven then-serving members of our Board of Directors attended the 2019 annual meeting of stockholders.

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.

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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;

 

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.


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DIRECTOR COMPENSATION

 

Non-Employee Director Compensation Policy

The compensation of our non-employee directors is reviewed and established by our Compensation Committee. This compensation is annually reviewed by the committee based on market practice information and peer data to ensure continued alignment with company goals and stockholder interest. In 2019, after reviewing the market and peer data, the Compensation Committee determined not to make any changes to our existing non-employee director compensation policy. Under this policy, our non-employee directors receive the compensation set forth in the table below. We also reimburse our non-employee directors for reasonable out-of-pocket expenses incurred in connection with Board service.

 

 

 

Element of Compensation

 

Compensation Amount

 

Annual Retainer (1)

$40,000

Annual Lead Independent Director Retainer (1)

$15,000

Annual Non-Executive Chair of Board Retainer (1)

$40,000

Annual Committee Chair Retainers (1)(2)

$20,000 (Audit)

$10,000 (Compensation)

$  5,000 (Corporate Governance and Nominating)

Annual Committee Member Meeting Fees (3)

$10,000

Annual Equity Grant

$50,000 fixed value NQSOs (4)

$50,000 fixed value RSUs (5)

(1)

Non-employee directors may choose to receive the value of their retainer in cash, restricted stock units (“RSUs”) or nonqualified stock options (“NQSO”), valued at the fair market value at the time of issuance. We do not issue, nor do we pay cash for, fractional shares. Annual retainer fees are payable upon Board approval, with one-fourth of the total paid quarterly in arrears. Common stock shares for RSUs are delivered following the director’s separation from service from the Company.

(2)

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.

(3)

Non-employee directors serving on one or more Board committees receive a flat retainer in the amount above, regardless of the number of committees served or the number of meetings held.

(4)

All non-employee directors are entitled to an annual grant of NQSOs to purchase shares of common stock (with an exercise price equal to the fair market value on the date of grant), which vest quarterly over one year, subject to continued Board service.

(5)

All non-employee directors are entitled to an annual grant of RSUs, which vest quarterly over one year, subject to continued Board service. Common stock shares for vested RSUs are delivered following the director’s separation from service from the Company.

 

 

Non-Employee Director Stock Ownership Policy. 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.

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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, 2019:

 

Name (1)

 

 

Fees Earned

or Paid in Cash ($)(3)

 

 

 

Option Awards

($)(4, 6)

 

 

 

Stock

Awards

($)(5, 6)

 

 

 

Total ($)

 

 

Laurence Franklin (2)

 

 

70,000

 

 

 

50,000

 

 

 

50,000

 

 

 

170,000

 

Patrick Gross

 

 

65,000

 

 

 

50,000

 

 

 

50,000

 

 

 

165,000

 

Aedhmar Hynes

 

 

18,132

 

 

 

37,534

 

 

 

37,534

 

 

 

93,200

 

George Logue

 

 

50,000

 

 

 

50,000

 

 

 

50,000

 

 

 

150,000

 

David Nierenberg

 

 

60,000

 

 

 

50,000

 

 

 

50,000

 

 

 

160,000

 

Kathryn Eberle Walker

 

 

15,968

 

 

 

25,205

 

 

 

25,205

 

 

 

66,378

 

Jessie Woolley-Wilson

 

 

50,000

 

 

 

50,000

 

 

 

50,000

 

 

 

150,000

 

Steven Yankovich

 

 

60,398

 

 

 

50,000

 

 

 

50,000

 

 

 

160,398

 

 

 

(1)

A. John Hass III, our Chief Executive Officer and Chairman of the Board of Directors, is not included in this table. As an employee of the Company, Mr. Hass receives no compensation for service as a director. The compensation received by Mr. Hass is shown in the Summary Compensation Table on page 53.

 

(2)

Cash payments were made directly to LF Enterprises LLC.

 

(3)

Our directors may elect to receive any portion of their annual retainer fees in NQSOs or RSUs instead of cash. For 2019, our directors elected the following:

 

Name

 

Cash ($)

 

Options ($)

 

RSUs ($)

 

Total Fees Earned ($)

 

Laurence Franklin

30,000

--

40,000

70,000

Patrick Gross

--

--

65,000

65,000

Aedhmar Hynes

18,132

--

--

18,132

George Logue

15,000

--

35,000

50,000

David Nierenberg

--

40,000

20,000

60,000

Kathryn Eberle Walker

--

--

15,968

15,968

Jessie Woolley-Wilson

--

40,000

10,000

50,000

Steven Yankovich

5,398

--

55,000

60,398

 

 

(4)

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 May 20, 2019 at an exercise price of $25.66 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 Ms. Hynes, who joined the Board of Directors effective August 21, 2019, the amount includes the grant date fair value of a grant of options she received on August 21, 2019, at an exercise price of $17.74 per share, which was the closing price per share of our common stock on the NYSE on the grant date; such options vest at a rate of one third per quarter and become fully vested May 20, 2020.  In the case of Ms. Walker, who joined the Board of Directors effective November 13, 2019, the amount includes the grant date fair value of a grant of options she received on November 13, 2019, at an exercise price of $14.60 per share, which was the closing price per share of our common stock on the NYSE on the grant date; such options vest at a rate of half per quarter and become fully vested May 20, 2020. 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, 2019, filed with the SEC on March 11, 2020.

 

(5)

Amount represents the aggregate grant date fair value of RSUs granted on May 20, 2019. 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 Ms. Hynes, the amount includes the grant date fair value of RSUs granted to Ms. Hynes on August 21, 2019 and which vest at a rate of one third per quarter to become fully vested May 20, 2020.  In the case of Ms. Walker, the amount includes the grant date fair value of RSUs granted to Ms. Walker on November 13, 2019 and which vest at a rate of half per quarter to become fully vested May 20, 2020.  The RSUs will be paid out in shares of our common stock when a director retires or terminates service on our Board of Directors.

 

(6)

The following table provides information regarding the aggregate outstanding equity awards held by each non-employee director as of December 31, 2019:

 

 

RSUs

 

Stock Options

 

Name

 

Outstanding (#)

 

Unvested (#)

 

Outstanding (#)

 

Unvested (#)

 

Laurence Franklin

58,586

1,754

41,722

2,538

Patrick Gross

79,989

2,242

91,906

2,538

Aedhmar Hynes

2,115

1,410

5,687

3,791

George Logue

9,808

1,657

14,132

2,538

David Nierenberg

38,859

2,144

65,587

2,538

Kathryn Eberle Walker

2,588

2,588

4,437

4,437

Jessie Woolley-Wilson

13,503

1,949

25,111

2,538

Steven Yankovich

43,514

2,047

22,206

2,538

 

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SECURITY OWNERSHIP OF CERTAIN BE NEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information regarding beneficial ownership of our share capital as of March 31, 2020 by (1) each of our NEOs, (2) each of our directors, (3) all of our directors and executive officers as a group and (4) each person, or group of affiliated persons, known by us to beneficially own more than five percent of our shares of common stock.

The percentage ownership information is based on an aggregate 24,580,107 shares of common stock outstanding as of March 31, 2020.

Except as otherwise noted below, the address for each person or entity listed in the table is c/o Rosetta Stone Inc., 1621 North Kent Street, Suite 1200, Arlington, Virginia 22209.

 

 

 

 

 

 

Name of Beneficial Owner

 

Outstanding Shares
Beneficially Owned (1)

 

Right to Acquire
Beneficial
Ownership (2)

 

Total Shares
Beneficially Owned

 

Percentage of Shares
Beneficially Owned

 

Named Executive Officers

A. John Hass III

   491,383

911,060   (3)

1,402,443

5.5%

Thomas Pierno

   144,479   (4)

143,106

  287,585

1.2%

Nicholas Gaehde

     94,148   (5)

  55,412

  149,560

*

Sonia Galindo   (6)

     55,862

  64,979

  120,841

*

Mathew Hulett

     79,020   (7)

            --

   79,020

*

Sean Klein

     20,845   (8)

            --

   20,845

*

 

 

 

 

 

Directors

Laurence Franklin

     38,057

100,308   (9)

  138,365

*

Patrick Gross

       2,658

171,447   (10)

  174,105

*

Aedhmar Hynes

            --

    7,802   (11)

     7,802

*

George Logue

       3,600

  23,940   (12)

   27,540

*

David Nierenberg

   514,493

104,446

       618,939   (13)

2.5%

Kathryn Eberle Walker

            --

    7,025   (14)

     7,025

*

Jessie Woolley-Wilson

            --

  38,614   (15)

   38,614

*

Steven Yankovich

            --

  65,720   (16)

   65,720

*

Current executive officers and directors as a group (13 persons)

1,388,683

1,628,880

3,017,563

12.3%

 

 

 

 

 

Greater than 5% Stockholders

BlackRock, Inc.   (17)

 

1,563,052

            --

1,563,052

6.4%

Osmium Partners, LLC   (18)

 

1,493,515

            --

1,493,515

6.1%

Renaissance Technologies LLC   (19)

1,488,523

            --

1,488,523

6.1%

T. Rowe Price Associates, Inc.   (20)

2,197,274

            --

2,197,274

8.9%

TimesSquare Capital Management, LLC   (21)

1,617,965

            --

1,617,965

6.6%

Voss Capital, LLC   (22)

1,282,103

            --

1,282,103

5.2%

*

Represents beneficial ownership of less than one percent of our outstanding shares of common stock.

(1)

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes sole or shared voting or investment power with respect to shares of our common stock. The information set forth in the table above is not necessarily indicative of beneficial ownership for any other purpose, and the inclusion of any shares deemed beneficially owned in this table does not constitute an admission of beneficial ownership of those shares. Except as otherwise noted, to our knowledge, the persons and entities named in the table above have sole voting and investment power with respect to all of the shares of common stock beneficially owned by them, subject to community property laws, where applicable.

(2)

Consists of (i) shares of common stock subject to stock options exercisable as of, or within 60 days of March 31, 2020, and (ii) shares of common stock issuable under restricted stock or restricted stock unit awards that vest within 60 days of March 31, 2020. Such shares are deemed to be outstanding and beneficially owned by the person holding the option or the restricted stock or restricted stock unit for the purpose of calculating the percentage ownership of that person, but are not deemed outstanding for the purpose of calculating the percentage ownership of any other person.

(3)

Includes 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.

(4)

Includes 42,576 shares of restricted stock that continue to be subject to forfeiture restrictions.

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(5)

Includes 49,753 shares of restricted stock that continue to be subject to forfeiture restrictions.

(6)

Amounts for Ms. Galindo reflect beneficial ownership as of July 1, 2019, the date of her separation from the Company.

(7)

Includes 59,044 shares of restricted stock that continue to be subject to forfeiture restrictions.

(8)

Includes 18,910 shares of restricted stock that continue to be subject to forfeiture restrictions.

(9)

Includes 58,586 shares of common stock underlying vested RSUs that will be issued to Mr. Franklin upon the termination of his service on the Board.

(10)

Includes 79,989 shares of common stock underlying vested RSUs that will be issued to Mr. Gross upon the termination of his service on the Board. In addition, Mr. Gross disclaims beneficial ownership as to 73,501 shares owned by Mr. Gross’s spouse and 32,368 shares owned by his daughter under the Stephanie Lovell Irrevocable Trust.

(11)

Includes 2,115 shares of common stock underlying vested RSUs that will be issued to Ms. Hynes upon the termination of her service on the Board.

(12)

Includes 9,808 shares of common stock underlying vested RSUs that will be issued to Mr. Logue upon the termination of his service on the Board.

(13)

Includes 38,859 shares of common stock underlying vested 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 Mr. Nierenberg’s NQSOs and RSUs, is required to be assigned to the funds.  Accordingly, Mr. Nierenberg’s NQSOs and 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.

(14)

Includes 2,588 shares of common stock underlying vested RSUs that will be issued to Ms. Walker upon the termination of her service on the Board.

(15)

Includes 13,503 shares of common stock underlying vested RSUs that will be issued to Ms. Woolley-Wilson upon the termination of her service on the Board.

(16)

Includes 43,514 shares of common stock underlying vested RSUs that will be issued to Mr. Yankovich upon the termination of his service on the Board.

(17)

Information is based on the Schedule 13G/A that was filed with the SEC on February 6, 2020 by BlackRock, Inc, whose address is 55 East 52 nd Street, New York, New York 10055.  

(18)

Information is based on the Schedule 13G/A that was jointly filed with the SEC on February 14, 2020 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 70,397 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.

(19)

Information is based on the Schedule 13G/A that was filed with the SEC on February 13, 2020 by Renaissance Technologies, LLC, whose address is 800 Third Avenue, New York, New York 10022.  

(20)

Information is based on the Schedule 13G/A that was filed with the SEC on February 14, 2020 by T. Rowe Price Associates, Inc., whose address is 100 East Pratt Street, Baltimore, Maryland 21202.  

(21)

Information is based on the Schedule 13G/A that was filed with the SEC on February 14, 2020 by TimesSquare Capital Management, LLC, whose address is 7 Times Square, 42 nd Floor, New York, New York 10036.  

(22)

Information is based on the Schedule 13D that was filed with the SEC on January 6, 2020 by Voss Capital, LLC, whose address is 3773 Richmond Avenue, Suite 500, Houston, Texas 77046.


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COMPENSATION COMMITTEE REPORT

 

The information contained in this report shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference into a document filed under the Securities Act of 1933, or the Exchange Act.

 

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, 2019.

 

MEMBERS OF THE COMPENSATION COMMITTEE

 

 

 

David Nierenberg (Chair)

 

George Logue

 

 

 

Patrick Gross

 

Jessie Woolley-Wilson

 

 

 

Aedhmar Hynes

 

 

 

 

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COMPENSATION DISCU SSION AND ANALYSIS

 

This Compensation Discussion and Analysis (“CD&A”) section provides a detailed description of the key practices and philosophies underlying our executive compensation programs, policies and decisions.  It provides qualitative information regarding the manner and context in which compensation is earned by, and awarded to, our named executive officers (our “NEOs”) and is intended to place in perspective the quantitative data presented in the compensation tables included in this proxy statement. The discussion and analysis of our executive compensation program for our NEOs should be read in conjunction with the tables and text elsewhere in this proxy statement that describe the compensation awarded to, earned by or paid to our NEOs.

Our Compensation Committee, with the assistance of management, oversees our executive compensation program. In this role, the Compensation Committee reviews and approves all compensation decisions relating to our NEOs.  

For 2019, our NEOs, and their current positions with the Company, are as follows:

 

Named Executive Officer

 

 

Title

 

A. John Hass III

 

Chief Executive Officer and Chairman of the Board

Thomas M. Pierno

 

Chief Financial Officer

Nicholas Gaehde

 

Co-President and President, Literacy

Sonia Galindo (1)

 

Former General Counsel and Secretary

Mathew Hulett

 

Co-President and President, Language

Sean Klein (2)

 

General Counsel and Secretary

 

 

(1)

Ms. Galindo resigned from the Company effective July 1, 2019.

 

(2)

Mr. Klein was appointed to General Counsel and Secretary of the Company effective July 1, 2019.

Business Highlights

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, including several endangered languages.  Lexia Learning (“Lexia”), 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. Over the last several years, the Company transformed its business from one dominated by a transactional consumer language business to a subscription-based language and literacy education company.

Fiscal 2019 Business Highlights.   Rosetta Stone focused on a number of strategic initiatives in 2019 to continue transformation of the company into a global leader in digital learning solutions, including:

 

 

growing our K-12 Literacy and Language businesses through products such as our lifetime language subscriptions and Lexia® PowerUp Literacy® for grades 6 through 12 and by developing Rosetta Stone® English, a new product focused on English literacy for emerging bilingual students in grades K-6;

 

leveraging our iconic Rosetta Stone brand;

 

positioning ourselves as a leader in adaptive 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 customize the learning experience for each such learner; and

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accelerating growth and increasing intrinsic value.

In executing on these initiatives, we accomplished the following in 2019:

Corporate

 

grew full year consolidated revenue by 5% to $182.7 million on bookings growth of 9% (to $196.9 million) over 2018, the first year of consolidated revenue growth since before 2014;

 

grew consolidated Adjusted EBITDA to $6.9 million compared to $0.2 million in 2018;

 

held total operating expenses essentially flat as compared to 2018;

 

maintained an adequate cash balance, which was $43 million as of December 31, 2019, with no outstanding debt;  

 

appointed two women to the Board of Directors, Kathryn Eberle Walker, who has a background in education technology, and Aedhmar Hynes, who has a background in marketing and communications;

 

promoted Nicholas Gaehde, head of our Literacy business, and Mathew Hulett, head of our Language businesses, to Co-Presidents of Rosetta Stone;

Literacy

 

increased Literacy business revenues by 19% over 2018 to $62.6 million;

 

increased Literacy bookings by 17% over 2018, with a dollar renewal rate consistent with 2018;

 

continued investment in the expansion of the Literacy business sales force by adding a national strategic sales team in 2019 to penetrate large accounts;

 

received a rating of “strong” for PowerUp, which is the highest rating under the guidelines of the federal government’s Every Student Succeeds Act (“ESSA”) and PowerUp is now listed as the most effective secondary literacy intervention product by Evidence for ESSA among those products reviewed;

 

continued development of Rosetta Stone English, which entered its beta period in early February 2020;

 

with the launch of PowerUp, we have achieved product portfolio momentum by increasing the number of customers using more than one Literacy business product by nearly ten times since the first quarter of 2018, with a 127% increase attributed to 2019 alone;

Language

 

grew Consumer Language bookings and revenue each by approximately 5%, as compared to 2018, marking the first year Consumer Language bookings and revenue have grown since 2014;  

 

completed a three-city brand marketing test in 2019 which revealed opportunities to leverage our iconic brand;

 

began development of adaptive, blended learning features in the Consumer Language product such as in-app video tutoring;

 

as a result of the promotion of our lifetime subscription offering, grew long-term subscribers to the Consumer Language product by 24% during 2019, while short-term subscribers grew by 2%;

 

increased bookings in the Enterprise & Education Language business by $2.8 million over 2018 due to a large custom content deal and improved performance in the corporate vertical; and

 

introduced a new product, Rosetta Stone Enterprise, that consolidated multiple product platforms to better serve business customers of the Enterprise & Education Language business.

“Bookings” is a non-GAAP financial measure and “Renewal” is a statistical measure.  We provide definitions of these terms in Appendix A .

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Total Stockholder Return (“TSR”). As a result of our ability to execute on our strategic initiatives and priorities, our stoc kholders have recognized TSR over the last three years, which is the measurement period of our long-term incentive program, favorable to those achieved by the Russell 2000 Index and the Russell MicroCap Index (comprised of companies with a median market ca pitalization of approximately $204 million) as follows:

 

 

 

Benchmark

 

3-Year TSR

1/3/17-12/31/19

Rosetta Stone Inc.

 

100%

Russell 2000 Index

 

22.19%

Russell MicroCap Index

 

19.62%

 

2019 Advisory Vote on Executive Compensation. Our Board of Directors and Compensation Committee recognize the importance of receiving regular input from our stockholders on important issues such as executive compensation. Accordingly , we provide our stockholders the opportunity to vote each year to approve, on an advisory basis, the compensation of our NEOs as disclosed in our proxy statement (“say-on-pay”). As an advisory vote, the vote on executive compensation is non-binding on the Board. However, the Board and the Compensation Committee value the opinions of our stockholders and consider our stockholders’ views when making executive compensation decisions, as they deem appropriate. At our 2019 annual meeting of stockholders, over 96% of the votes cast on the say-on-pay proposal were in favor of our say-on-pay resolution. In response to this vote, and in light of our stockholders’ overwhelming support of our executive compensation program, our Compensation Committee did not make any significant changes in our compensation policies and programs for 2019. We will continue to consider the outcome of the say-on-pay vote for future compensation decisions for our executive officers.

Our Compensation Philosophy

Our compensation philosophy is guided by the principle of pay-for-performance. We have structured our executive compensation program to provide a comprehensive package that is sufficient to attract, motivate and retain key talent and to achieve accountability for performance by linking compensation to the achievement of measurable performance objectives, without causing excessive risk.  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 as it exercises its independent business judgement. 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.


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Key Compensation Corporate Governance Practices

Our executive compensation program contains the following notable good corporate governance features:

 

 

WHAT WE DO

 

 

WHAT WE DO NOT DO

We pay for performance

 

×

We do not allow hedging or pledging of Company stock

We consider a peer group in establishing compensation

 

×

We do not provide tax gross-ups in employment agreements

We hold an annual “say-on-pay” vote

 

×

We do not provide excessive perquisites

We have double-trigger equity vesting in the event of a change-in-control

 

×

We do not permit repricing or replacing of stock options without stockholder approval

We have a recoupment (clawback) policy

 

×

We do not provide excessive severance benefits

The majority of total compensation is variable

 

×

We do not guarantee performance-based bonus payments

We have an executive stock ownership policy

 

 

 

 

 

Developments in Executive Compensation for Fiscal Year 2019

The Compensation Committee attempts to set reasonable but rigorous goals and objectives for each of our executive officers. We regularly review our executive compensation practices to ensure that our plans and practices are supportive of our goals, competitive and in keeping with the best interests of our stockholders, business strategies and operating environment. As a result of that review, the Compensation Committee did not make any significant changes to our executive compensation program during 2019. We will continue to review and adapt our compensation plans to the changing needs of our business and the long-term interests of our stockholders as necessary including in response to the ongoing COVID-19 pandemic and resulting economic impacts.

Elements of our Executive Compensation Program

The Compensation Committee has a mix of compensation components that it utilizes within the executive compensation program, with the intent to make our total direct compensation package sufficiently competitive to attract and retain key personnel, while also linking compensation to individual and corporate performance and encouraging stock ownership by our executive officers. 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 2019:

 

 

base salary;

 

annual performance-based cash incentive;

 

annual performance-based equity incentive; and

 

long-term performance-based equity incentive.

 

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The table below describes each compensation component in our program and briefly explains how it promotes our objectives. We believe the combination of these components provides an appropriate balance of rewards, incentives and benefits to our executives and enables us to meet our desired compensation objectives, strengthen our ability to attract and retain hi ghly qualified individuals and appropriately link pay to performance.

 

 

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.

 

In 2019, we provided 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.

 

In addition to the above, 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.

Stock Ownership Guidelines.   The Board believes it is important for our executives to hold significant equity ownership positions in the Company to help align their interests with those of our stockholders. Under our stock ownership guidelines, executive officers must directly or indirectly hold common shares or restricted stock (including outstanding and unvested awards) in the Company with a value equal to the amounts set forth in the table below. The value of stock options and performance shares units, whether vested or unvested, will not count towards the satisfaction of the requirement.  

 

Position

 

Requirement

 

Chief Executive Officer

Five times the market equivalent level of annual base salary

Co-Presidents

Three times annual base salary

Other Executives

Two times annual base salary

 

Executive officers have five years to attain the equity ownership levels, measured from the date one becomes an executive officer (or an increase in the applicable ownership level is approved). Compliance with the requirement is reviewed on an annual basis each year by the Compensation Committee using a 90-day average of the price of our common stock. The Compensation Committee has full discretion in establishing and applying the guidelines. In the event an executive is not compliant or has not demonstrated progress towards achieving the ownership guidelines within the five-year grace period, the Compensation Committee may consider taking additional actions including, but not limited to, restriction of all or a percentage of allowable shares that may be sold upon vesting or exercise.  

 

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Process for Determining the Amount of Each Element of Executive Compensation

 

Role of the Compensation Committee and Management. Oversight of our executive compensation program is the responsibility of our Compensation Committee, which consists solely of independent directors. Together with management, our Compensation Committee considers 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 takes into account 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 and business judgment.

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.

For 2019, 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. No NEO is present when the Compensation Committee evaluates or makes decisions regarding his or her own compensation.

Role of Compensation Consultants. The Compensation Committee is authorized to retain consultants, independent legal counsel, and other advisors to aid in the discharge of its duties. Although Exequity, an independent compensation consultant, was retained by the Compensation Committee in 2019, management only consulted with Exequity on a very limited basis to provide our Compensation Committee with updates on regulatory developments and certain research and analysis relating to executive compensation. In retaining Exequity, the Compensation Committee separately considered the six factors set forth in Section 10C-1(b)(4)(i) through (vi) of the Exchange Act and, based on such consideration, determined that the engagement of Exequity did not raise any conflicts of interest.

Comparable Market Compensation Data. 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;

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

 

software and technology companies with most recent annual revenues ranging between $100 million to $399 million.

 

Our Compensation Committee performs a formal review of our peer group annually and makes what it considers appropriate changes. In August 2018, our Chief Human Resources Officer reviewed the 2018 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.  

 

Based on this assessment, and the recommendations of management, the Compensation Committee determined to retain twelve (12) existing peers  that met the criteria, remove one (1) peer company that had been privately acquired and remove one (1) peer company that had dissolved. Based on the recommendations of management, the Compensation Committee then evaluated potential peer replacement companies and determined it was appropriate to add two (2) replacement peers to maintain a total of fourteen (14) peer companies, which the Compensation Committee approved as the “2019 Peer Group". The 2019 Peer Group consisted of:

 

2019 Peer Group

American Public Education, Inc.

 

K12 Inc.

Brightcove, Inc.

 

Liquidity Services, Inc.

Cambium Learning Group, Inc.

 

LivePerson, Inc.

Capella Education Company

 

QAD Inc.

Carbonite Inc.

 

RealNetworks, Inc

DHI Group, Inc,

 

Strayer Education Inc.

GluMobile, Inc.

 

 

 

For 2019, our NEOs’ base salaries and target annual cash and equity incentive opportunities were benchmarked against the median levels of the 2019 Peer Group and the Radford Survey.  The Long Term Incentive Program compensation opportunity is intended to deliver compensation targeted between the 50 th and 75 th  percentile of our market data set if we achieve our long term strategic growth objectives.

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Compensation of our Na med Executive Officers

For 2019, as detailed in the chart that follows, an average of approximately 69% 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.

 

Compensation of our Chief Executive Officer

As previously disclosed, Mr. Hass’s target total direct compensation was reduced in 2018, at his request, by $250,000 as compared to 2017.  For 2019, Mr. Hass requested that his total direct compensation be further reduced by $500,000 as compared to 2018 in recognition of the promotions of Mr. Gaehde and Mr. Hulett to Co-Presidents of the Company and their greater and more prominent roles in leading our corporate initiatives and strategies. For 2019, Mr. Hass received:

 

 

an annual base salary of only $200,000, which remained at the same level as 2018 and below market as compared to peers 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, which vested in equal installments over twelve months from February 21, 2019;

 

an annual performance-based equity award with a target value of $750,000 (reduced from $1,000,000 in 2018) aligned to 2019 Company financial and non-financial goals.  Shares of our stock received upon achievement of those goals vest over three years on each grant date anniversary at a rate of 50%, 25% and 25%, respectively, beginning on February 21, 2020; and

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a long-term performance-based equity award with a target value of $750,000 (reduced from $1,000,000 in 2018) aligned to the achievement of sa les and profitability between January 2019 and December 2021. Shares of our stock received upon achievement of those goals will be fully vested.  

 

As detailed in the chart below, approximately 90% of the 2019 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 10% 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.

 

Overview of Our Executive Compensation Program for Fiscal Year 2019

Base Salaries

General . 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 addition, the Compensation Committee may consider executive compensation market data and peer group proxy data. 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.

 

2019 Base Salary Adjustments . In February 2019, our Compensation Committee completed its review of 2018 base salaries for each of the then current NEOs.  In relation to Mr. Hass, and as part of the annual CEO assessment process, the Committee discussed and finalized Mr. Hass’s 2018 performance and compensation recommendations for 2019.  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. In assessing our remaining NEOs, the Compensation Committee determined to not make any changes to base salaries for 2019. The Committee noted that Messrs. Gaehde and Hulett had received an increase in their base salaries in connection with their promotions to Co-President of the Company on January 1,

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2019. Subsequently, in July 2019, the Compensation Committee appointed Mr. Klein to General Counsel and Secretary of the Company in connection with Ms. Galindo’s resignation, both of which w ere effective July 1, 2019. As part of this appointment, Mr. Klein’s base salary was increased to $275,000.

 

Name

 

 

2018 Annualized

Base Salary ($)

 

 

 

2019 Annualized

Base Salary ($)

 

 

 

% Change

 

A. John Hass III

 

 

200,000

 

 

 

200,000 (1)

 

 

--

Thomas Pierno

 

 

340,000

 

 

 

340,000

 

 

--

Nicholas Gaehde (2)

 

 

315,000

 

 

 

375,000

 

 

19.0%

Sonia Galindo

 

 

325,000

 

 

 

325,000 (3)

 

 

--

Mathew Hulett (2)

 

 

350,000

 

 

 

375,000

 

 

7.1%

Sean Klein (4)

 

 

--

 

 

 

275,000

 

 

--

 

 

(1)

Mr. Hass also received an equity award of $300,000 in restricted stock which vested in equal installments over twelve months through February 21, 2020.

 

(2)

Effective January 1, 2019, the Board appointed Mr. Gaehde and Mr. Hulett to Co-Presidents of the Company. In connection with these appointments, the annual base salaries for Mr. Gaehde and Mr. Hulett increased to $375,000.

 

(3)

Ms. Galindo resigned from the Company effective July 1, 2019.

 

(4)

Base salary information for Mr. Klein is provided only for fiscal year 2019 because, as Mr. Klein was not a named executive officer until 2019, salary information for previous years is not required to be disclosed. Mr. Klein was appointed as General Counsel and Secretary of the Company effective July 1, 2019 and, in connection with this appointment, Mr. Klein’s base salary increased to $275,000.

Annual Performance-Based Incentive

For 2019, management recommended, and our Compensation Committee approved, annual performance-based incentive targets under the 2019 AIP as set forth in the following table.

 

Name

 

 

2019

Annualized

Base Salary ($)

 

 

 

2019

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

 

 

200,000

 

 

 

750,000

 

 

375%

 

 

 

637,500

 

 

112,500

 

Thomas Pierno

 

 

340,000

 

 

 

255,000

 

 

75%

 

 

 

216,750

 

 

 

38,250

 

Nicholas Gaehde

 

 

375,000

 

 

 

281,250

 

 

75%

 

 

 

239,062

 

 

 

42,187

 

Sonia Galindo

 

 

325,000

 

 

 

96,699 (1)

 

 

60%

 

 

 

165,750

 

 

 

29,250

 

Mathew Hulett

 

 

375,000

 

 

 

281,250

 

 

75%

 

 

 

239,062

 

 

 

42,187

 

Sean Klein

 

 

275,000

 

 

 

89,484 (2)

 

 

35%

 

 

 

76,061

 

 

13,423

 

 

 

(1)

Represents the prorated value of Ms. Galindo’s target annual incentive opportunity under the 2019 AIP through July 1, 2019, the date of her departure from the Company.

 

(2)

Mr. Klein’s target annual incentive opportunity was calculated using his base salary amounts before and after his appointment to General Counsel and Secretary.

 

Each executive's target annual incentive opportunity was based 85% on financial goals and 15% on non-financial strategic goals. The specific goals for each executive officer are discussed in greater detail in the tables below. 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 performance share units.  

With respect to each of the 2019 financial goals under the 2019 AIP, amounts would be earned as set forth in the table below.

 

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Level of Achievement & Percentage Funded

Below Threshold

Threshold (or Minimum)

Target

Maximum

0%

25%

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 2019 resulted in funding equal to 80% of the target award with a target award 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 2019 AIP.  The following tables set forth the financial goals for each NEO and 2019 actual results as compared to established targets. Financial goals comprised 85% of the 2019 AIP target opportunity for each executive officer.

 

A. John Hass III

AIP Financial Goals  ($M)

Percentage

 

Threshold

 

Target

 

Maximum

 

2019 

Actual

Result

 

Level of Achievement

2019 Company Weighted Sum Bookings *

35%

 

 

322.5

 

 

357.4

 

 

373.7

 

 

327.3

 

91.6%

2019 Language & Literacy Division Adjusted

EBITDA Less Capex

20%

 

13.6

 

16.0

 

19.6

 

17.4

 

108.8%

2019 Company Adjusted EBITDA Less Capex

30%

 

(5.1)

 

(2.3)

 

1.3

 

(0.84)

 

163%

*calculated by applying a three times multiple to the Literacy business unit’s bookings.

 

Thomas Pierno

Sonia Galindo

Sean Klein

AIP Financial Goals ($M)

Percentage

 

Threshold

 

Target

Maximum

 

2019 

Actual

Result

Level of Achievement

2019 Company Bookings

35%

 

 

187.5

 

206.30

 

213.5

 

190.6

92.4%

2019 Language & Literacy Division EBITDA

Less Capex

20%

 

13.6

 

16.0

19.6

 

17.4

108.8%

2019 Company Bookings Based Adjusted

EBITDA Less Capex

30%

 

(5.1)

 

(2.3)

1.3

 

(0.84)

163%

 

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Nicholas Gaehde

AIP Financial Goals  ($M)

Percentage

 

Threshold

 

Target

 

Maximum

 

2019 

Actual

Result

 

Level of Achievement

2019 Literacy Bookings

40%

 

 

67.5

 

 

76.1

 

 

80.1

 

68.4

 

89.9%

2019 Literacy Bookings Based Adjusted

EBITDA Less Capex

15%

 

 

4.4

 

 

5.5

 

 

7.1

 

 

4.43

 

78.2%

2019 Company Bookings Based Adjusted

EBITDA Less Capex

30%

 

 

(5.1)

 

 

(2.3)

 

 

1.3

 

 

(0.84)

 

163%

 

Mathew Hulett

AIP Financial Goals  ($M)

Percentage

 

Threshold

 

Target

 

Maximum

 

2019 

Actual

Result

 

Level of Achievement

2019 Language Bookings

30%