Exhibit
10.14


 


CONFORMED COPY


 


CREDIT
AGREEMENT


 


THIS
CREDIT AGREEMENT (this “Agreement”) is entered into as of January 16, 2009
by and between ROSETTA STONE LTD., a Virginia corporation (“Borrower”), and
WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”).


 


RECITALS


 


Borrower has requested that Bank extend credit to Borrower as described
below, and Bank has agreed to provide such credit to Borrower on the terms and
conditions contained herein.


 


NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:


 


ARTICLE I


CREDIT TERMS


 


SECTION 1.1.                       LINE OF CREDIT.


 


(a)                        Line of Credit. 
Subject to the terms and conditions of this Agreement, Bank hereby
agrees to make advances to Borrower from time to time, not to exceed at any
time the aggregate principal amount of TWELVE MILLION FIVE HUNDRED THOUSAND AND
NO/100 DOLLARS ($12,500,000.00) (“Line of Credit”), the proceeds of which shall
be used to repay existing indebtedness of Borrower and for working capital and
general business purposes.  Borrower’s
obligation to repay advances under the Line of Credit shall be evidenced by a
Revolving Line of Credit Note dated of even date herewith (“Line of Credit Note”),
all terms of which are incorporated herein by this reference.


 


(b)                       Borrowing and Repayment. 
Borrower may from time to time during the term of the Line of Credit
borrow, partially or wholly repay its outstanding borrowings, and reborrow,
subject to all of the limitations, terms and conditions contained herein or in
the Line of Credit Note; provided however, that the total outstanding
borrowings under the Line of Credit shall not at any time exceed the maximum
principal amount available thereunder, as set forth above.


 


SECTION 1.2.                       INTEREST/FEES.


 


(a)                        Interest.  The outstanding principal
balance of the Line of Credit shall bear interest at a rate per annum of two
and one-half percent (2.50%) above the Daily One Month LIBOR in effect from
time to time.


 


(b)                       Computation and Payment.  Interest
shall be computed on the basis of a 360-day year, actual days elapsed.  Interest shall be payable at the times and
place set forth in each promissory note or other instrument or document
required hereby.


 


(c)                        Unused Commitment Fee. 
Borrower shall pay to Bank a fee equal to one-quarter percent (0.25%)
per annum (computed on the basis of a 360-day year, actual days elapsed) on the
average daily unused amount of the Line of Credit, which fee shall be
calculated on a quarterly basis by Bank and shall be due and payable by
Borrower in arrears.


 





 


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SECTION 1.3.                       COLLATERAL.


 


As security for all indebtedness and other obligations of Borrower to
Bank, Borrower hereby grants to Bank the security interest in all Borrower’s
Collateral as defined in and as more particularly described in that certain
Security Agreement dated of even date herewith, as the same may have been
modified or amended from time to time (“Security Agreement”).


 


All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements, and other documents as Bank
shall reasonably require, all in form and substance satisfactory to Bank.  Borrower shall pay to Bank immediately upon
demand the full amount of all reasonable out-of-pocket charges, costs and
expenses (to include reasonable fees paid to third parties and exclude all
allocated costs of Bank personnel), expended or incurred by Bank in connection
with any of the foregoing security, including without limitation, filing and
recording fees and costs of appraisals, audits and title insurance.


 


SECTION 1.4.                       GUARANTIES. 
The payment and performance of all indebtedness and other obligations of
Borrower to Bank under the Loan Documents (as hereinafter defined) shall be
guaranteed jointly and severally by each of Rosetta Stone Inc., a Delaware
corporation, and Rosetta Stone Holdings Inc., a Delaware corporation
(individually and collectively, whether one or more in number, the “Guarantor”
or “Guarantors”) as evidenced by and subject to the terms of guaranty
agreements in form and substance reasonably satisfactory to Bank, as the same
may have been modified or amended from time to time.


 


ARTICLE II


REPRESENTATIONS AND WARRANTIES


 


Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to Bank
subject to this Agreement.


 


SECTION 2.1.                       LEGAL STATUS. 
Borrower is a corporation, duly organized and existing and in good
standing under the laws of the Commonwealth of Virginia, and is qualified or
licensed to do business (and is in good standing as a foreign corporation, if
applicable) in all other jurisdictions
in which the failure to so qualify
or to be so licensed could have a material adverse effect on Borrower.


 


SECTION 2.2.                       AUTHORIZATION AND VALIDITY.  This Agreement and each promissory note,
contract, instrument and other document required hereby or at any time
hereafter delivered to Bank in connection herewith (collectively, the “Loan
Documents”) have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or the party which executes the same,
enforceable in accordance with their respective terms, except to the extent
enforceability may be limited by the effect of applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors’ rights
generally and by equitable principles relating to enforceability.


 


SECTION 2.3.                       NO VIOLATION. 
The execution, delivery and performance by Borrower of each of the Loan
Documents do not violate any provision of any law or regulation, or contravene
any provision of the Articles of Incorporation or By-Laws of Borrower, or
result in any breach of or default under any material contract, obligation,
indenture or other material instrument to which Borrower is a party or by which
Borrower may be bound.


 


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SECTION 2.4.                       LITIGATION. 
As of the date hereof, there are no pending, or to the best of Borrower’s
knowledge threatened, actions, claims, investigations, suits or proceedings by
or before any governmental authority, arbitrator, court or administrative
agency which could have a material adverse effect on the financial condition or
operation of Borrower other than those disclosed by Borrower to Bank in writing
on Schedule 2.4 attached hereto.


 


SECTION 2.5.                       CORRECTNESS OF FINANCIAL STATEMENT.  The annual financial statement of Borrower
dated December 31, 2007 and all interim financial statements delivered to
Bank since said date, true copies of which have been delivered by Borrower to
Bank prior to the date hereof, (a) are complete and correct and present
fairly the financial condition of Borrower as of the date of such financial
statements, (b) disclose all liabilities of Borrower as of the date of
such financial statements that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) have been prepared in
accordance with generally accepted accounting principles consistently
applied.  Since the dates of such
financial statements there has been no material adverse change in the financial
condition of Borrower, nor has Borrower mortgaged, pledged, granted a security
interest in or otherwise encumbered any of its assets or properties except in
favor of Bank or as otherwise permitted by the Loan Documents or Bank in
writing.


 


SECTION 2.6.                       INCOME TAX RETURNS.  Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.


 


SECTION 2.7.                       NO SUBORDINATION.  There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower’s obligations
subject to this Agreement to any other obligation of Borrower.


 


SECTION 2.8.                       PERMITS, FRANCHISES.  Borrower possesses, and will hereafter
possess, all material permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and fictitious
names, if any, necessary to enable it to conduct the business in which it is
now engaged in compliance with applicable law.


 


SECTION 2.9.                       ERISA. 
Borrower is in compliance in all material respects with all applicable
provisions of the Employee Retirement Income Security Act of 1974, as amended
or recodified from time to time (“ERISA”); Borrower has not violated any
provision of any defined employee pension benefit plan (as defined in ERISA)
maintained or contributed to by Borrower (each, a “Plan”); no Reportable Event
as defined in ERISA has occurred and is continuing with respect to any Plan
initiated by Borrower; Borrower has met its minimum funding requirements under
ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.


 


SECTION 2.10.                 OTHER OBLIGATIONS.  As of the date hereof, Borrower is not in
default on any obligation for borrowed money, any purchase money obligation or
any other material lease, commitment, contract, instrument or obligation.


 


SECTION 2.11.                 ENVIRONMENTAL MATTERS.  Except as disclosed by Borrower to Bank in
writing prior to the date hereof in Schedule 2.11 attached hereto, as of
the date hereof, Borrower is in compliance in all material respects with all
applicable federal or state environmental, hazardous waste, health and safety
statutes, and any rules or regulations


 


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adopted
pursuant thereto, which govern or affect any of Borrower’s operations and/or
properties, including without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may
be amended, modified or supplemented from time to time.  None of the operations of Borrower is the
subject of any federal or state investigation evaluating whether any remedial
action involving a material expenditure is needed to respond to a release of
any toxic or hazardous waste or substance into the environment.  Borrower has no material contingent liability
in connection with any release of any toxic or hazardous waste or substance
into the environment.


 


ARTICLE III


CONDITIONS


 


SECTION 3.1.                       CONDITIONS OF INITIAL EXTENSION OF
CREDIT.  The obligation of Bank to extend
any credit contemplated by this Agreement is subject to the fulfillment to Bank’s
satisfaction of all of the following conditions:


 


(a)                        Approval of Bank Counsel.  All
legal matters incidental to the extension of credit by Bank shall be reasonably
satisfactory to Bank’s counsel.


 


(b)                       Documentation.  Bank
shall have received, in form and substance reasonably satisfactory to Bank,
each of the following, duly executed:


 


(i)                          This Agreement and each promissory note or
other instrument or document required hereby, including, without limitation,
the Line of Credit Note and Security Agreement;


 


(ii)                       A Certificate of Incumbency;


 


(iii)                    Corporate borrowing resolutions; and


 


(ii)                       Such other documents as Bank may require
under any other Section of this Agreement.


 


(c)                        Financial Condition. 
There shall have been no material adverse change, as reasonably
determined by Bank, in the financial condition or business of Borrower or any
Guarantor hereunder, nor any material decline, as reasonably determined by
Bank, in the market value of any collateral required hereunder or a substantial
or material portion of the assets of Borrower or any such Guarantor.


 


(d)                       Insurance.  Borrower shall have delivered
to Bank evidence of insurance coverage on all Borrower’s property, in form,
substance, amounts, covering risks and issued by companies reasonably
satisfactory to Bank, and where required by Bank, with loss payable
endorsements in favor of Bank.


 


(e)                        Budget.  Borrower shall have delivered
to Bank Borrower’s budget for the 2009 fiscal year.


 


(f)                          Due Diligence.  Bank
shall have received all due diligence, as requested by Bank, and all such
diligence matters shall have been deemed satisfactory in form and detail to
Bank in its sole discretion.


 


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SECTION 3.2.                       CONDITIONS OF EACH EXTENSION OF CREDIT.  The obligation of Bank to make each extension
of credit requested by Borrower hereunder shall be subject to the fulfillment
to Bank’s satisfaction of each of the following conditions:


 


(a)                        Compliance.  The representations and
warranties contained herein and in each of the other Loan Documents shall be
true on and as of the date of the signing of this Agreement and on the date of
each extension of credit by Bank pursuant hereto, with the same effect as
though such representations and warranties had been made on and as of each such
date (except for representations and warranties that specifically relate
to a prior date, in which case, such representation or warranty shall be true
as of such prior date), and on each
such date, no Event of Default as defined herein, and no condition, event or
act which with the giving of notice or the passage of time or both would
constitute such an Event of Default, shall have occurred and be continuing or
shall exist.


 


(b)                       Documentation.  Bank
shall have received all additional documents which may be required in
connection with such extension of credit.


 


ARTICLE IV


AFFIRMATIVE COVENANTS


 


Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall and, as applicable, the Guarantors
shall, unless Bank otherwise consents in writing:


 


SECTION 4.1.                       PUNCTUAL PAYMENTS.  Punctually pay all principal, interest, fees
or other liabilities due under any of the Loan Documents at the times and place
and in the manner specified therein, and immediately upon demand by Bank, the
amount by which the outstanding principal balance of any credit subject hereto
at any time exceeds any limitation on borrowings applicable thereto.


 


SECTION 4.2.                       ACCOUNTING RECORDS.  Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time and upon
reasonable prior notice, to inspect, audit and examine such books and records,
to make copies of the same, and to inspect the properties of Borrower.


 


SECTION 4.3.                       FINANCIAL STATEMENTS.  Provide to Bank all of the following, in form
and detail reasonably satisfactory to Bank:


 


(a)                        not later than 120 days after and as of the
end of each fiscal year, a financial statement of Rosetta Stone Inc., a
Delaware corporation (the “Parent”), prepared by Borrower or Parent and in
accordance with generally accepted accounting principles consistently applied,
to include all annual audited consolidated
balance sheets and audited consolidated
statements of income, retained earnings, and cash flow, with an unqualified
opinion from a recognized independent accounting firm (with respect to
such audited statements), together with
calculations confirming compliance with all financial covenants;


 


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(b)                       not later than 45 days after and as of the
end of each of the first three fiscal quarters of each fiscal year of Parent, a
financial statement of Parent, prepared by Borrower or Parent and in accordance
with generally accepted accounting principles consistently applied, to include
all quarterly consolidated and consolidating balance sheets and consolidated
and consolidating statements of income, together with calculations confirming
compliance with all financial covenants;


 


(c)                        contemporaneously with each annual and
quarterly financial statements required hereby, a certificate of senior
financial officers of Parent and Borrower that said financial statements are
accurate, that there exists no Event of Default nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
an Event of Default, which certificate shall include, without limitation, such
calculations and supporting documentation as Bank may request confirming
compliance with the requirements of Sections 4.9, 5.2, 5.3, 5.4 and 5.5 hereof;


 


(d)                       from time to time such other information as
Bank may reasonably request.


 


SECTION 4.4.                       COMPLIANCE. 
Preserve and maintain all material licenses, permits, governmental
approvals, rights, privileges and franchises necessary for the conduct of its
business; and comply with the provisions of all documents pursuant to which
Borrower is organized and/or which govern Borrower’s continued existence and
with the requirements of all laws, rules, regulations and orders of any
governmental authority applicable to Borrower and/or its business.


 


SECTION 4.5.                       INSURANCE. 
Maintain and keep in force, for each business in which Borrower is
engaged, insurance of the types and in amounts customarily carried in similar
lines of business, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers’ compensation, with all such
insurance carried with companies and in amounts reasonably satisfactory to
Bank, and deliver to Bank from time to time at Bank’s request schedules setting
forth all insurance then in effect.


 


SECTION 4.6.                       FACILITIES. 
Keep all properties useful or necessary to Borrower’s business in good
repair and condition, and from time to time make necessary repairs, renewals
and replacements thereto so that such properties shall be fully and efficiently
preserved and maintained.


 


SECTION 4.7.                       TAXES AND OTHER LIABILITIES.  Pay and discharge when due any and all
indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except (a) such as Borrower may in good
faith contest or as to which a bona fide dispute may arise, and (b) for
which Borrower has made provision, to Bank’s satisfaction, for eventual payment
thereof in the event Borrower is obligated to make such payment.


 


SECTION 4.8.                       LITIGATION. 
Promptly give notice in writing to Bank of any litigation pending or
threatened in writing against Borrower with a claim in excess of $100,000 per
claim or $250,000 in the aggregate.


 


SECTION 4.9.                       FINANCIAL CONDITION.  Maintain or cause to be maintained financial
condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to the
extent modified by the definitions herein):


 


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(a)        Net
Operating Income of Parent after taxes not less than $1.00 on a quarterly
basis, determined as of each quarter year end. 
As used herein, the term “Net Operating Income” shall mean gross profit,
minus (i) total operating expenses, including any charge for product
returns above reserved limits or from any write down of inventory not already
included in total operating expenses, and minus (ii) non-cash, stock
compensation expenses, with all of the foregoing calculated on a consolidated
basis.


 


(b)       At all times, Minimum
Liquidity of Borrower which is not less than the greater of (i) Eight
Million and No/100 Dollars ($8,000,000.00), or (ii) an amount equal to the
Indebtedness of Borrower (the “Minimum Liquidity Requirement”).  As used herein, (A) the term “Minimum
Liquidity” shall mean unencumbered domestic cash and cash equivalents, plus the
fair market value (as determined by the Bank in its reasonable discretion) of
all marketable securities, with all of the foregoing calculated on a
consolidated basis, and (B) the term “Indebtedness” shall mean the sum of (1) the
then-outstanding balances of all obligations, liabilities and indebtedness owed
to the Bank or to any other party for borrowed money, (2) the face amount
of all letters of credit issued on the account of Borrower, except for letters
of credit which are fully secured by cash or cash equivalents, (3) all
obligations or liabilities created or arising under any capital lease, and (4) obligations
which in any manner directly or indirectly guarantee or assure, or in effect
guarantee or assure, the payment or performance of any indebtedness, dividend
or other obligation of any other party or assure or in effect assure the holder
of any such obligations against loss in respect thereof.


 


SECTION 4.10.      NOTICE TO
BANK.  Promptly (but in no event more
than five (5) business days after the occurrence of each such event or
matter) give written notice to Bank in reasonable detail of:  (a) the occurrence of any Event of
Default, or any condition, event or act which with the giving of notice or the
passage of time or both would constitute an Event of Default; (b) any
change in the name or the organizational structure of Borrower or any
Guarantor; (c) the occurrence and nature of any Reportable Event or
Prohibited Transaction, each as defined in ERISA, or any funding deficiency
with respect to any Plan; or (d) any termination or cancellation of any
insurance policy which Borrower is required to maintain, or any uninsured or
partially uninsured loss through liability or property damage, or through fire,
theft or any other cause affecting Borrower’s property in excess of an
aggregate of $250,000.00.


 


SECTION 4.11.      DEPOSITORY
ACCOUNT.  Borrower shall maintain with
Bank, and Borrower hereby grants to Bank a security interest in, an operating
deposit account to be held by Bank.


 


ARTICLE V


NEGATIVE COVENANTS


 


Borrower further covenants that so long as Bank remains committed to
extend credit pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
subject hereto, Borrower will not and, as appropriate, Parent will not without
Bank’s prior written consent:


 


SECTION 5.1.        USE OF
FUNDS.  Use any of the proceeds of any
credit extended hereunder except for the purposes stated in Article I
hereof.


 


SECTION 5.2.        OTHER
INDEBTEDNESS.  Create, incur, assume or
permit to exist any indebtedness or liabilities resulting from borrowings, loans
or advances, whether secured or


 


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unsecured,
matured or unmatured, liquidated or unliquidated, joint or several, except (a) the
liabilities of Borrower to Bank, (b) any other liabilities of Borrower or
Parent existing as of, and disclosed to Bank in writing on Schedule 5.2
attached hereto prior to, the date hereof, (c) indebtedness of Borrower
owing to Parent or any of its subsidiaries, (d) indebtedness of any
subsidiary of Parent owing to Parent, and (e) other indebtedness of
Borrower or Parent in a combined, aggregate principal amount not to exceed the
Applicable Threshold (as such term is defined on Exhibit A attached
hereto and made a part hereof) at any time outstanding.


 


SECTION 5.3.        MERGER,
CONSOLIDATION, TRANSFER OF ASSETS.  Merge
into or consolidate with any other entity; make any substantial change in the
nature of Borrower’s or Parent’s business as conducted as of the date hereof;
acquire all or substantially all of the assets of any other entity in an
aggregate amount in excess of,
over the life of the Line of Credit, the Applicable Threshold (as such term is
defined on Exhibit A attached hereto and made a part hereof); nor
sell, lease, transfer or otherwise dispose of all or a substantial or material
portion of Borrower’s or Parent’s assets except in the ordinary course of its
business.


 


SECTION 5.4.        GUARANTIES.  Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets as security for, any
liabilities or obligations for borrowed money of any other person or entity, except (a) any of the
foregoing in favor of Bank, and (b) any of the foregoing in an aggregate
principal amount of liability not to exceed the Applicable Threshold (as such
term is defined on Exhibit A attached hereto and made a part
hereof) at any time outstanding.


 


SECTION 5.5.        LOANS,
ADVANCES, INVESTMENTS.  Make any loans or
advances to or investments in any person or entity, except (a) any of the
foregoing existing as of, and disclosed to Bank in writing on Schedule 5.5
attached hereto prior to, the date hereof, (b) any loans or advances to or
investments in Parent or any subsidiary of Parent by Borrower, (c) any
loans or advances to or investments in any subsidiary of Parent by Parent, and (d) any
other such loans, advances or investments by Borrower or Parent in a combined,
aggregate principal amount not to exceed the Applicable Threshold (as such term
is defined on Exhibit A attached hereto and made a part hereof) at
any time outstanding.


 


SECTION 5.6.        DIVIDENDS,
DISTRIBUTIONS.  Declare or pay (a) any
dividend or distribution either in cash, stock or any other property on
Borrower’s stock now or hereafter outstanding, nor redeem, retire, repurchase
or otherwise acquire any shares of any class of Borrower’s stock now or
hereafter outstanding; provided however, that Borrower may pay cash
dividends or distributions to its shareholders in any year to cover its
shareholders’ federal and state income tax liability for the immediately
preceding year arising as a direct result of Borrower’s reported income for
said year, but not to exceed the minimum amount so required, and Borrower shall
provide to Bank, upon request, any documentation required by Bank to
substantiate the appropriateness of amounts paid or to be paid, (b) any dividend or distribution either in cash,
stock or any other property on the stock of Rosetta Stone Holdings, Inc.,
a Delaware corporation (“Holdings”) now or hereafter outstanding, nor redeem,
retire, repurchase or otherwise acquire any shares of any class of Holdings’
stock now or hereafter outstanding; provided however, that Holdings may pay cash dividends or
distributions to its shareholders in any year to cover its shareholders’
federal and state income tax liability for the immediately preceding year
arising as a direct result of Holdings’
reported income for said year, but not to exceed the minimum amount so
required, and Borrower or Holdings
shall provide to Bank, upon request, any documentation required by Bank to
substantiate the appropriateness of amounts


 


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paid or to be paid, and (c) any dividend or distribution either in cash,
stock or any other property on Parent’s stock now or hereafter outstanding, nor
redeem, retire, repurchase or otherwise acquire any shares of any class of
Parent’s stock now or hereafter outstanding, provided, however, that the
conversion of preferred stock of Parent to common stock of Parent in connection
with any initial public offering shall be permitted.


 


SECTION 5.7.        PLEDGE OF
ASSETS.  Mortgage, pledge, grant or
permit to exist a security interest in, or lien upon, all or any portion of
Borrower’s or Parent’s assets now owned or hereafter acquired, except (a) any
of the foregoing in favor of Bank, (b) any of the foregoing which is
existing as of, and disclosed to Bank in writing on Schedule 5.7 attached
hereto prior to, the date hereof, and (c) Permitted Liens (as defined in
the Security Agreement).


 


SECTION 5.8.        CHANGE OF
CONTROL.  Permit (a) any change in
ownership of the Borrower, (b) any change in ownership of Rosetta Stone
Holdings, Inc., a Delaware corporation, or (c) any change in
ownership of an aggregate of thirty-five percent (35%) or more of the common
stock of Parent, excluding any initial public offerings of the common stock of
Parent and any subsequent offerings of common stock occurring after such
initial public offering by either of Norwest Equity Partners or ABS Capital
Partners.


 


ARTICLE VI


EVENTS OF DEFAULT


 


SECTION 6.1.        The
occurrence of any of the following shall constitute an “Event of Default” under
this Agreement:


 


(a)        Borrower shall fail to
pay any principal, interest, fees or other amounts payable under any of the
Loan Documents within three (3) days of the due date for such payment.


 


(b)        Any financial statement
or certificate furnished to Bank in connection with, or any representation or
warranty made by Borrower or any other party under this Agreement or any other
Loan Document shall prove to be incorrect, false or misleading in any material
respect when furnished or made.


 


(c)        Any default in the
performance of or compliance with any obligation, agreement or other provision
contained herein or in any other Loan Document (other than those referred to in
subsections (a) and (b) above), and with respect to any such default
which the Bank deems capable of cure in its sole discretion, such default shall
continue for a period of thirty (30) days from its occurrence.


 


(d)        Any one or more
defaults in the payment or performance of any one or more obligations
for borrowed money, or any one
or more defined events of default, under the terms of any contract or
instrument (other than any of the Loan Documents) governing any one or
more obligations for borrowed money pursuant
to which Borrower or any Guarantor (with each such entity referred to herein as
a “Third Party Obligor”) has incurred any debt or other liability to any third
person or entity, including Bank, in an
aggregate amount in excess of $1,000,000.


 


(e)        The filing of one or
more notices of judgment liens against Borrower or any Third Party Obligor in
an aggregate amount in excess of $1,000,000; or the recording of any one or more
abstracts of judgment in an aggregate amount in excess of $1,000,000 against Borrower or any Third Party Obligor
in any county in which Borrower or such Third Party Obligor has an interest in
real property; or the service of one or more notices of levy and/or of writs of


 


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attachment
or execution, or other like processes, against the assets of Borrower or any
Third Party Obligor in an aggregate amount in excess of $1,000,000; or the entry of one or more judgments
against Borrower or any Third Party Obligor in an aggregate amount in excess of
$1,000,000.


 


(f)         Borrower or any Third
Party Obligor shall become insolvent, or shall suffer or consent to or apply for
the appointment of a receiver, trustee, custodian or liquidator of itself or
any of its property, or shall generally fail to pay its debts as they become
due, or shall make a general assignment for the benefit of creditors; Borrower
or any Third Party Obligor shall file a voluntary petition in bankruptcy, or
seeking reorganization, in order to effect a plan or other arrangement with
creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the
United States Code, as amended or recodified from time to time (“Bankruptcy
Code”), or under any state or federal law granting relief to debtors, whether
now or hereafter in effect; or any involuntary petition or proceeding pursuant
to the Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors is filed or commenced
against Borrower or any Third Party Obligor, or Borrower or any Third Party
Obligor shall file an answer admitting the jurisdiction of the court and the
material allegations of any involuntary petition; or Borrower or any Third
Party Obligor shall be adjudicated a bankrupt, or an order for relief shall be
entered against Borrower or any Third Party Obligor by any court of competent
jurisdiction under the Bankruptcy Code or any other applicable state or federal
law relating to bankruptcy, reorganization or other relief for debtors.


 


(g)        There shall exist or occur any event or condition which Bank
in good faith believes to be an adverse change in, or an adverse effect on, the
business, operations, financial condition, assets or liabilities of Borrower
which materially and negatively impacts the ability of Borrower to perform any
of its obligations under any of the Loan Documents.


 


(h)        The dissolution or
liquidation of Borrower or any Third Party Obligor; or Borrower or any such
Third Party Obligor, or any of its directors, stockholders or members, shall
take action seeking to effect the dissolution or liquidation of Borrower or
such Third Party Obligor.


 


(i)         Any
change in control described in Section 5.8 above.


 


SECTION 6.2.        REMEDIES.  Upon the occurrence of any Event of
Default:  (a) all indebtedness of
Borrower under each of the Loan Documents, any term thereof to the contrary
notwithstanding, shall at Bank’s option and without notice become immediately
due and payable without presentment, demand, protest or notice of dishonor, all
of which are hereby expressly waived by Borrower; (b) the obligation, if
any, of Bank to extend any further credit under any of the Loan Documents shall
immediately cease and terminate; and (c) Bank shall have all rights,
powers and remedies available under each of the Loan Documents, or accorded by
law, including without limitation the right to resort to any or all security
for any credit subject hereto and to exercise any or all of the rights of a
beneficiary or secured party pursuant to applicable law.  All rights, powers and remedies of Bank may
be exercised at any time by Bank and from time to time after the occurrence of
an Event of Default, are cumulative and not exclusive, and shall be in addition
to any other rights, powers or remedies provided by law or equity.


 


ARTICLE VII


MISCELLANEOUS


 


SECTION 7.1.        NO
WAIVER.  No delay, failure or
discontinuance of Bank in exercising any right, power or remedy under any of
the Loan Documents shall affect or operate as a waiver


 


10

















 


of
such right, power or remedy; nor shall any single or partial exercise of any
such right, power or remedy preclude, waive or otherwise affect any other or
further exercise thereof or the exercise of any other right, power or
remedy.  Any waiver, permit, consent or
approval of any kind by Bank of any breach of or default under any of the Loan
Documents must be in writing and shall be effective only to the extent set
forth in such writing.


 


SECTION 7.2.        NOTICES.  All notices, requests and demands which any
party is required or may desire to give to any other party under any provision
of this Agreement must be in writing delivered to each party at the following
address:


 


	
   

  	
  BORROWER:

  	
  Rosetta
  Stone Ltd.

  
	
   

  	
   

  	
  135
  W Market Street

  
	
   

  	
   

  	
  Harrisonburg,
  Virginia 22801

  
	
   

  	
   

  	
  Attention:
  Mike Rodihan

  
	
   

  	
   

  	
   

  
	
   

  	
  BANK:

  	
  Wells
  Fargo Bank, National Association

  
	
   

  	
   

  	
  1001
  Haxall Point, Suite 706

  
	
   

  	
   

  	
  Richmond,
  Virginia 23219

  
	
   

  	
   

  	
  Attention:
  Todd Eagle

  



 


or
to such other address as any party may designate by written notice to all other
parties.  Each such notice, request and
demand shall be deemed given or made as follows:  (a) if sent by hand delivery, upon
delivery; (b) if sent by mail, upon the earlier of the date of receipt or
three (3) days after deposit in the U.S. mail, first class and postage
prepaid; and (c) if sent by telecopy, upon receipt.


 


SECTION 7.3.        COSTS,
EXPENSES AND ATTORNEYS’ FEES.  Borrower
shall pay to Bank immediately upon demand the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys’ fees (to
include outside counsel fees and exclude all allocated costs of Bank’s in-house
counsel), expended or incurred by Bank in connection with (a) the
negotiation and preparation of this Agreement and the other Loan Documents,
Bank’s continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) the enforcement of Bank’s
rights and/or the collection of any amounts which become due to Bank under any
of the Loan Documents, and (c) the prosecution or defense of any action in
any way related to any of the Loan Documents, including without limitation, any
action for declaratory relief, whether incurred at the trial or appellate
level, in an arbitration proceeding or otherwise, and including any of the
foregoing incurred in connection with any bankruptcy proceeding (including
without limitation, any adversary proceeding, contested matter or motion
brought by Bank or any other person) relating to Borrower or any other person
or entity.


 


SECTION 7.4.        SUCCESSORS,
ASSIGNMENT.  This Agreement shall be
binding upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interests or rights hereunder without
Bank’s prior written consent.  Bank
reserves the right to sell, assign, transfer, negotiate or grant participations
in all or any part of, or any interest in, Bank’s rights and benefits under
each of the Loan Documents upon prior written notice to Borrower (provided,
however, that such shall not be required following an Event of Default).  In connection therewith, Bank may disclose
all documents and information which Bank now has or may hereafter acquire
relating to any credit subject hereto, Borrower or its business, any Guarantor
hereunder or the business of such Guarantor, or any collateral required
hereunder,


 


11

















 


so
long as any party receiving such documentation or information has executed a
written confidentiality agreement in advance of receipt.


 


SECTION 7.5.        ENTIRE
AGREEMENT; AMENDMENT.  This Agreement and
the other Loan Documents constitute the entire agreement between Borrower and
Bank with respect to each credit subject hereto and supersede all prior
negotiations, communications, discussions and correspondence concerning the
subject matter hereof.  This Agreement
may be amended or modified only in writing signed by each party hereto.


 


SECTION 7.6.        NO THIRD
PARTY BENEFICIARIES.  This Agreement is
made and entered into for the sole protection and benefit of the parties hereto
and their respective permitted successors and assigns, and no other person or
entity shall be a third party beneficiary of, or have any direct or indirect
cause of action or claim in connection with, this Agreement or any other of the
Loan Documents to which it is not a party.


 


SECTION 7.7.        TIME.  Time is of the essence of each and every
provision of this Agreement and each other of the Loan Documents.


 


SECTION 7.8.        SEVERABILITY
OF PROVISIONS.  If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or any
remaining provisions of this Agreement.


 


SECTION 7.9.        COUNTERPARTS.  This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to
be an original, and all of which when taken together shall constitute one and
the same Agreement.


 


SECTION 7.10.      GOVERNING
LAW.  This Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Virginia.


 


SECTION 7.11.      BUSINESS
PURPOSE.  Borrower represents and
warrants that each credit subject hereto is for a business, commercial,
investment, or other similar purpose and not primarily for a personal, family
or household use.


 


SECTION 7.12.      GUARANTOR
JOINDER.  Each Guarantor joins in the
execution of this Agreement as evidence of its knowledge of the provisions
hereof and its consent to the terms, provisions and undertakings herein.


 


SECTION 7.13.      ARBITRATION.


 


(a)        Arbitration.  The parties hereto agree, upon demand by any
party, to submit to binding arbitration all claims, disputes and controversies
between or among them (and their respective employees, officers, directors,
attorneys, and other agents), whether in tort, contract or otherwise in any way
arising out of or relating to (i) any credit subject hereto, or any of the
Loan Documents, and their negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination; or (ii) requests for
additional credit.


 


(b)        Governing Rules.  Any arbitration proceeding will (i) proceed
in a location in Virginia selected by the American Arbitration Association (“AAA”);
(ii) be governed by the Federal Arbitration Act (Title 9 of the United
States Code), notwithstanding any conflicting choice of law


 


12

















 


provision
in any of the documents between the parties; and (iii) be conducted by the
AAA, or such other administrator as the parties shall mutually agree upon, in
accordance with the AAA’s commercial dispute resolution procedures, unless the
claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to herein, as
applicable, as the “Rules”).  If there is
any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. 
Any party who fails or refuses to submit to arbitration following a
demand by any other party shall bear all costs and expenses incurred by such
other party in compelling arbitration of any dispute.  Nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. §91 or any similar applicable state law.


 


(c)        No Waiver of Provisional Remedies, Self-Help and
Foreclosure.  The arbitration
requirement does not limit the right of any party to (i) foreclose against
real or personal property collateral; (ii) exercise self-help remedies
relating to collateral or proceeds of collateral such as setoff or
repossession; or (iii) obtain provisional or ancillary remedies such as
replevin, injunctive relief, attachment or the appointment of a receiver,
before during or after the pendency of any arbitration proceeding.  This exclusion does not constitute a waiver
of the right or obligation of any party to submit any dispute to arbitration or
reference hereunder, including those arising from the exercise of the actions
detailed in sections (i), (ii) and (iii) of this paragraph.


 


(d)        Arbitrator Qualifications and Powers.  Any arbitration proceeding in which the
amount in controversy is $5,000,000.00 or less will be decided by a single
arbitrator selected according to the Rules, and who shall not render an award
of greater than $5,000,000.00.  Any
dispute in which the amount in controversy exceeds $5,000,000.00 shall be
decided by majority vote of a panel of three arbitrators; provided however,
that all three arbitrators must actively participate in all hearings and
deliberations.  The arbitrator will be a
neutral attorney licensed in the Commonwealth of Virginia or a neutral retired
judge of the state or federal judiciary of Virginia, in either case with a
minimum of ten years experience in the substantive law applicable to the
subject matter of the dispute to be arbitrated. 
The arbitrator will determine whether or not an issue is arbitratable
and will give effect to the statutes of limitation in determining any
claim.  In any arbitration proceeding the
arbitrator will decide (by documents only or with a hearing at the arbitrator’s
discretion) any pre-hearing motions which are similar to motions to dismiss for
failure to state a claim or motions for summary adjudication.  The arbitrator shall resolve all disputes in
accordance with the substantive law of Virginia and may grant any remedy or
relief that a court of such state could order or grant within the scope hereof
and such ancillary relief as is necessary to make effective any award.  The arbitrator shall also have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other action as the arbitrator deems necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the Virginia Rules of
Civil Procedure or other applicable law. 
Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction.  The
institution and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief.


 


(e)        Discovery.  In any arbitration proceeding, discovery will
be permitted in accordance with the Rules. 
All discovery shall be expressly limited to matters directly relevant to
the dispute being arbitrated and must be completed no later than 20 days before
the hearing date.  Any 


 


13

















 


requests
for an extension of the discovery periods, or any discovery disputes, will be
subject to final determination by the arbitrator upon a showing that the
request for discovery is essential for the party’s presentation and that no
alternative means for obtaining information is available.


 


(f)         Class Proceedings and
Consolidations.  No party hereto
shall be entitled to join or consolidate disputes by or against others in any
arbitration, except parties who have executed any Loan Document, or to include
in any arbitration any dispute as a representative or member of a class, or to
act in any arbitration in the interest of the general public or in a private
attorney general capacity.


 


(g)        Payment Of Arbitration Costs And Fees.  The arbitrator
shall award all costs and expenses of the arbitration proceeding.


 


(h)        Miscellaneous.  To the maximum extent practicable, the AAA,
the arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA.  No arbitrator or other party to an
arbitration proceeding may disclose the existence, content or results thereof,
except for disclosures of information by a party required in the ordinary
course of its business or by applicable law or regulation.  If more than one agreement for arbitration by
or between the parties potentially applies to a dispute, the arbitration provision
most directly related to the Loan Documents or the subject matter of the
dispute shall control.  This arbitration
provision shall survive termination, amendment or expiration of any of the Loan
Documents or any relationship between the parties.


 


[SIGNATURE PAGES FOLLOW]


 


14

















 


CREDIT AGREEMENT


 


[SIGNATURE PAGE]


 


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.


 


BORROWER:


 


ROSETTA
STONE LTD.,


a
Virginia corporation


 


 


	
  By:

  	
  /s/
  Brian D. Helman (SEAL)

  	
   

  
	
  Name:

  	
  Brian
  D. Helman

  
	
  Title:

  	
  Chief
  Financial Officer

  



 


 


Each
Guarantor joins in the execution of this Agreement as evidence of its knowledge
of the provisions hereof and its consent to the terms, provisions and
undertakings herein.


 


GUARANTORS:


 


ROSETTA
STONE INC.,


a
Virginia corporation


 


 


	
  By:

  	
  /s/
  Brian D. Helman (SEAL)

  	
   

  
	
  Name:

  	
  Brian
  D. Helman

  
	
  Title:

  	
  Chief
  Financial Officer

  



 


 


ROSETTA
STONE HOLDINGS INC.,


a
Virginia corporation


 


 


	
  By:

  	
  /s/
  Brian D. Helman (SEAL)

  	
   

  
	
  Name:

  	
  Brian
  D. Helman

  
	
  Title:

  	
  Chief
  Financial Officer

  



 


15

















 


CREDIT AGREEMENT


 


[SIGNATURE PAGE]


 


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.


 


BANK:


 


WELLS FARGO BANK,


NATIONAL ASSOCIATION


 


	
  By:

  	
   

  	
  (SEAL)

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  



 


 


1688376v11


 


16