Monotype Imaging Holdings Inc. (Form: 10-Q, Received: 07/28/2014 16:12:46)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33612

MONOTYPE IMAGING HOLDINGS INC.

(Exact name of registrant as specified in its charter)


Delaware		20-3289482
(State of incorporation)		(I.R.S. Employer Identification No.)

500 Unicorn Park Drive Woburn, Massachusetts		01801
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (781) 970-6000

(Former Name, Former Address and Former Fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock as of July 22, 2014 was 39,174,381.

MONOTYPE IMAGING HOLDINGS INC.

INDEX


			Page
Part I. Financial Information				2

Item 1.	Consolidated Financial Statements (Unaudited)			2

	•	Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013		2

	•	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013		3

	•	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013		4

	•	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013		5

	•	Notes to Condensed Consolidated Financial Statements		6

Item 2 .	Management’s Discussion and Analysis of Financial Condition and Results of Operations			15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			26

Item 4.	Controls and Procedures			27

Part II. Other Information				28

Item 1.	Legal Proceedings			28

Item 1A.	Risk Factors			28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			28

Item 3.	Defaults Upon Senior Securities			28

Item 4.	Mine Safety Disclosures			29

Item 5.	Other Information			29

Item 6.	Exhibits			29

Signatures				30

Exhibit Index				31

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

MONOTYPE IMAGING HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share and per share data)


	June 30, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	80,804		$	78,411
Accounts receivable, net of allowance for doubtful accounts of $167 at June 30, 2014 and $171 at December 31, 2013		9,455			8,317
Income tax refunds receivable		799			3,334
Deferred income taxes		3,558			3,557
Prepaid expenses and other current assets		3,201			3,394

Total current assets		97,817			97,013
Property and equipment, net		5,731			3,568
Goodwill		176,927			176,350
Intangible assets, net		71,525			76,684
Other assets		2,598			2,744

Total assets	$	354,598		$	356,359

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,520		$	1,112
Accrued expenses and other current liabilities		18,431			20,439
Deferred revenue		8,935			6,767

Total current liabilities		28,886			28,318
Deferred revenue		750			972
Deferred income taxes		34,158			32,600
Reserve for income taxes, net of current portion		2,795			2,496
Accrued pension benefits		5,212			5,098
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.001 par value, Authorized shares: 10,000,000; Issued and outstanding: none		—			—
Common stock, $0.001 par value, Authorized shares: 250,000,000; Issued: 39,162,101 at June 30, 2014 and 39,277,713 at December 31, 2013		39			39
Additional paid-in capital		219,517			209,376
Treasury stock, at cost, 1,075,375 shares at June 30, 2014 and 204,830 shares at December 31, 2013		(26,160	)		(2,279	)
Retained earnings		88,564			78,741
Accumulated other comprehensive loss		837			998

Total stockholders’ equity		282,797			286,875

Total liabilities and stockholders’ equity	$	354,598		$	356,359

The accompanying notes are an integral part of these condensed consolidated financial statements.

MONOTYPE IMAGING HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited and in thousands, except share and per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenue	$	44,963		$	41,085		$	91,035		$	83,124
Cost of revenue		7,322			6,016			13,830			12,025
Cost of revenue—amortization of acquired technology		1,146			1,139			2,291			2,277

Total cost of revenue		8,468			7,155			16,121			14,302

Gross profit		36,495			33,930			74,914			68,822
Operating expenses:
Marketing and selling		11,987			10,392			23,105			20,311
Research and development		4,910			4,891			10,663			9,863
General and administrative		5,386			4,980			11,584			9,685
Amortization of other intangible assets		1,431			1,487			2,863			2,977

Total operating expenses		23,714			21,750			48,215			42,836
Income from operations		12,781			12,180			26,699			25,986
Other (income) expense:
Interest expense		256			313			534			731
Interest income		(6	)		(5	)		(8	)		(5	)
Loss on foreign exchange		136			263			170			840
Loss on derivatives		158			—			214			—
Other income, net		(3	)		(1	)		(4	)		(37	)

Total other expense		541			570			906			1,529
Income before provision for income taxes		12,240			11,610			25,793			24,457
Provision for income taxes		4,549			4,299			9,657			8,530

Net income	$	7,691		$	7,311		$	16,136		$	15,927

Net income available to common stockholders—basic	$	7,532		$	7,182		$	15,847		$	15,658

Net income available to common stockholders—diluted	$	7,534		$	7,185		$	15,847		$	15,665

Net income per common share:
Basic	$	0.19		$	0.19		$	0.41		$	0.42

Diluted	$	0.19		$	0.18		$	0.40		$	0.40

Weighted average number of shares:
Basic		38,714,178			37,725,082			38,713,432			37,415,514
Diluted		39,623,517			39,029,653			39,865,906			38,758,807
Dividends declared per common share	$	0.08		$	0.06		$	0.16		$	0.12

The accompanying notes are an integral part of these condensed consolidated financial statements.

MONOTYPE IMAGING HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)


	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
Net income	$	7,691		$	7,311	$	16,136		$	15,927
Other comprehensive income (loss), net of tax:
Unrecognized actuarial gain		—			11		—			11
Foreign currency translation adjustments		(166	)		363		(161	)		(680	)

Comprehensive income	$	7,525		$	7,685	$	15,975		$	15,258

The accompanying notes are an integral part of these condensed consolidated financial statements.

MONOTYPE IMAGING HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)


	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities
Net income	$	16,136		$	15,927
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,970			6,019
Loss on retirement of fixed assets		9			4
Amortization of deferred financing costs and accretion of interest		227			151
Adjustment to contingent consideration		(552	)		—
Share based compensation		5,016			3,835
Excess tax benefit on stock options		(1,951	)		(4,110	)
Provision for doubtful accounts		—			35
Deferred income taxes		1,772			3,246
Unrealized currency (gain) loss on foreign denominated intercompany transactions		(140	)		5
Changes in operating assets and liabilities:
Accounts receivable		(1,039	)		(944	)
Prepaid expenses and other assets		353			3
Accounts payable		405			139
Accrued income taxes		4,614			(55	)
Accrued expenses and other liabilities		(2,540	)		(1,353	)
Deferred revenue		1,920			1,726

Net cash provided by operating activities		30,200			24,628

Cash flows from investing activities
Purchases of property and equipment		(2,472	)		(632	)
Acquisition of business, net of cash acquired		(1,015	)		(72	)

Net cash used in investing activities		(3,487	)		(704	)

Cash flows from financing activities
Payments on line of credit		—			(22,321	)
Excess tax benefit on stock options		1,951			4,110
Common stock dividends paid		(5,528	)		(3,788	)
Purchase of treasury stock		(23,881	)		—
Proceeds from exercises of common stock options		3,111			10,570

Net cash used in financing activities		(24,347	)		(11,429	)
Effect of exchange rates on cash and cash equivalents		27			(166	)

Increase in cash and cash equivalents		2,393			12,329
Cash and cash equivalents at beginning of period		78,411			39,340

Cash and cash equivalents at end of period	$	80,804		$	51,669

The accompanying notes are an integral part of these condensed consolidated financial statements.

MONOTYPE IMAGING HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

1. Nature of the Business

Monotype Imaging Holdings Inc. (the “Company” or “we”) is a leading provider of type, technology and expertise for creative applications and consumer electronics, or CE, devices. Our end-user and embedded solutions for print, web and mobile environments enable people to create and consume dynamic content on any and every device. Our technologies and fonts enable the display and printing of high quality digital text. Our technologies and fonts have been widely deployed across, and embedded in, a range of CE devices including laser printers, digital copiers, mobile phones, e-book readers, tablets, automotive displays, digital cameras, navigation devices, digital televisions, set-top boxes and consumer appliances, as well as in numerous software applications and operating systems. We also provide printer drivers, page description language interpreters, printer user interface technology and color imaging solutions to printer manufacturers and OEMs (original equipment manufacturers). We license our fonts and technologies to CE device manufacturers, independent software vendors and creative and business professionals and we are headquartered in Woburn, Massachusetts. We operate in one business segment: the development, marketing and licensing of technologies and fonts. We also maintain various offices worldwide for selling and marketing, research and development and administration. We conduct our operations through three domestic operating subsidiaries, Monotype Imaging Inc., Monotype ITC Inc. and MyFonts Inc., and five foreign operating subsidiaries, Monotype Ltd., Monotype GmbH, Monotype Solutions India Pvt. Ltd., Monotype Hong Kong Ltd. and Monotype KK.

2. Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. The results for interim periods are not necessarily indicative of results to be expected for the year or for any future periods.

In management’s opinion, these unaudited condensed consolidated interim financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented.

These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2013 as reported in the Company’s Annual Report on Form 10-K.

The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the condensed consolidated financial statements. As of June 30, 2014, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 have not changed.

3. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2014-9, Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. This guidance is effective for annual reporting and interim periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective application, with early adoption not permitted. Accordingly, the standard is effective for the Company on January 1, 2017. The Company is currently evaluating the adoption method it will apply and the impact that this guidance will have on its financial statements and related disclosures.

4. Acquisition

Mark Boulton Design

On April 7, 2014, the Company purchased all of the outstanding stock of Mark Boulton Design Limited, a privately-held Web design studio located in Cardiff, Wales, United Kingdom, for approximately $0.8 million in cash. The Company issued approximately $1.0 million in restricted stock awards in connection with the acquisition, which vest based upon continued employment over four years. In preliminary purchase accounting, the majority of the purchase price, or approximately $0.7 million, has been allocated to goodwill. Following the acquisition, Mark Boulton Design Limited became a wholly owned subsidiary of the Company. Seven former employees of Mark Boulton Design Limited joined the Company in connection with the acquisition.

5. Derivative Financial Instruments

From time to time, we may incur foreign currency exchange gains and losses related to certain customers that are invoiced in U.S. dollars, but who have the option to make an equivalent payment in their own functional currencies at a specified exchange rate as of a specified date. In the period from that date until payment in the customer’s functional currency is received and converted into U.S. dollars, we can incur realized gains and losses. At June 30, 2014 there were no currency contracts outstanding. At December 31, 2013 there was one currency contract outstanding, which was entered into on that date, and accordingly, the fair value was materially equivalent to its book value.

We also incur foreign currency exchange gains and losses on certain intercompany assets and liabilities denominated in foreign currencies. We are currently utilizing 30-day forward contracts to mitigate our exposure on these currency fluctuations. These contracts are generally set to expire and are settled at month end. The instruments are not designated as hedging instruments, and accordingly, the gain or loss is recognized upon cash settlement and is included in loss on derivatives in the accompanying consolidated statements of income. At June 30, 2014 and December 31, 2013 there was one contract outstanding, to purchase and sell two different currencies forward, which was entered into on those dates. See Note 6 for details regarding the fair value of these instruments.

The following table presents the losses on our derivative financial instruments which are included in loss on derivatives in our accompanying condensed consolidated statements of income (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Currency swaps	$	158	$	—	$	214	$	—

Total	$	158	$	—	$	214	$	—

6. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the Financial Accounting Standards Codification established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.

Level 3: Unobservable inputs are used when little or no market data is available and requires the company to develop its own assumptions about how market participants would price the assets or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs to the extent possible as well as considers counterparty and our own credit risk in its assessment of fair value.

The following table presents our financial assets and liabilities that are carried at fair value, classified according to the three categories described above (in thousands):


	Fair Value Measurement at June 30, 2014
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents—money market funds	$	3,180	$	3,180	$	—	$	—
Cash equivalents—commercial paper		9,948		—		9,948		—
Cash equivalents—corporate bonds		5,384		—		5,384		—

Total assets	$	18,512	$	3,180	$	15,332	$	—


	Fair Value Measurement at June 30, 2014
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities:
Contingent acquisition consideration	$	1,444	$	—	$	—	$	1,444

Total liabilities	$	1,444	$	—	$	—	$	1,444


	Fair Value Measurement at December 31, 2013
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents—money market funds	$	832	$	832	$	—	$	—
Cash equivalents—commercial paper		8,998		—		8,998		—
Cash equivalents—corporate bonds		8,585		—		8,585		—

Total assets	$	18,415	$	832	$	17,583	$	—

Liabilities:
Contingent acquisition consideration	$	2,302	$	—	$	—	$	2,302

Total liabilities	$	2,302	$	—	$	—	$	2,302

The Company’s recurring fair value measures relate to short-term investments, which are classified as cash equivalents, derivative instruments and contingent consideration. The fair value of our cash equivalents are either based on quoted prices for similar assets or other observable inputs such as yield curves at commonly quoted intervals and other market corroborated inputs. The fair value of our derivative instruments is based on quoted market prices from various banking institutions or an independent third party provider for similar instruments. In determining the fair value, we consider our non-performance risk and that of our counterparties. At June 30, 2014, we had one 30-day forward contract to sell 3.5 million British pounds sterling and purchase $6.0 million that together, had an immaterial fair value. At December 31, 2013, we had one 30-day forward contract outstanding to sell 3.0 million British pounds sterling and purchase $5.0 million that together, had an immaterial fair value.

For the contingent acquisition consideration, the Company estimated the fair value of the liability by probability weighting the range of possible achievement of the criteria upon which the contingent consideration to be paid will be determined. The resulting estimated amount was then adjusted to its estimated net present value based upon a present value factor that was derived by applying a risk adjusted discount rate over the applicable contingency period. The contingent acquisition consideration decreased by $0.6 million in the second quarter of 2014, as the estimated liability was revised based on changes in performance estimates. In the first quarter of 2014, the liability decreased due to the payment of $0.4 million in accordance with the terms of the underlying agreement. These decreases were partially offset by the accretion of the net present value of the liability.

The Company’s non-financial assets and non-financial liabilities subject to non-recurring measurements include goodwill and intangible assets.

7. Property and Equipment

Property and equipment consists of the following (in thousands):


	June 30, 2014			December 31, 2013
Computer equipment and software	$	14,297		$	11,371
Furniture and fixtures		1,214			1,170
Leasehold improvements		881			866

Total cost		16,392			13,407
Less accumulated depreciation and amortization		(10,661	)		(9,839	)

Property and equipment, net	$	5,731		$	3,568

At June 30, 2014, computer equipment and software includes $2.6 million of unamortized software costs related to internal use software projects in process.

8. Intangible Assets

Intangible assets consist of the following (dollar amounts in thousands):


		June 30, 2014							December 31, 2013
	Weighted- Average Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization			Net Balance		Gross Carrying Amount		Accumulated Amortization			Net Balance
Customer relationships	10	$	57,293	$	(45,290	)	$	12,003	$	57,319	$	(42,482	)	$	14,837
Acquired technology	12		51,258		(32,029	)		19,229		51,206		(29,734	)		21,472
Non-compete agreements	4		12,068		(11,939	)		129		12,077		(11,903	)		174
Indefinite-lived intangible assets:
Trademarks			35,764		—			35,764		35,801		—			35,801
Domain names			4,400		—			4,400		4,400		—			4,400

Total		$	160,783	$	(89,258	)	$	71,525	$	160,803	$	(84,119	)	$	76,684

9. Debt

On July 13, 2011, the Company entered into a credit agreement with Wells Fargo Capital Finance, LLC, or the Credit Facility, which provides the Company with a five-year, $120.0 million secured revolving credit facility. Borrowings under the Credit Facility bear interest at a variable rate based upon, at the Company’s option, either LIBOR or the base rate (which is the highest of (i) the prime rate, (ii) 0.5% plus the overnight federal funds rate, or (iii) 1.0% in excess of the three-month LIBOR rate), plus in each case, an applicable margin. The applicable margin for LIBOR loans, based on the applicable leverage ratio, is either 2.25% or 2.50% per annum, and the applicable margin for base rate loans, based on the applicable leverage ratio, is either 1.25% or 1.50% per annum. At June 30, 2014 our rate, inclusive of applicable margins, was 3.75% for prime. At June 30, 2014, the Company had no outstanding debt under the Credit Facility. The Company, in accordance with the Credit Facility, is permitted to request that the Lenders, at their election, increase the secured credit facility to a maximum of $140.0 million. The Company is required to pay an unused line fee equal to 0.375% per annum on the undrawn portion available under the revolving credit facility and variable per annum fees in respect of outstanding letters of credit, if any. Such fees are included in interest expense in the accompanying condensed consolidated statements of income. The Credit Facility contains financial covenants which include (i) a maximum ratio of consolidated total debt to consolidated adjusted EBITDA of 3.00:1.00, and (ii) a minimum consolidated fixed charge coverage ratio of 1.25:1.00. Adjusted EBITDA, under the Credit Facility, is defined as consolidated net earnings (or loss), plus net interest expense, income taxes, depreciation and amortization and share based compensation expense, plus acquisition expenses not to exceed $2.0 million, plus restructuring, issuance costs, cash non-operating costs and other expenses or losses minus cash non-operating gains and other non-cash gains; provided however that the aggregate of all cash non-operating expense shall not exceed $250 thousand and all such fees, costs and expenses shall not exceed $1.5 million on a trailing twelve months basis. Failure to comply with these covenants, or the occurrence of an event of default, could permit the Lenders under the Credit Facility to declare all amounts borrowed under the Credit Facility, together with accrued interest and fees, to be immediately due and payable. In addition, the Credit Facility is secured by substantially all of our assets and places limits on the Company’s and its subsidiaries’ ability to incur debt or liens and engage in sale-leaseback transactions, make loans and investments, incur additional indebtedness, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its business. We were in compliance with all covenants under our Credit Facility as of June 30, 2014.

10. Defined Benefit Pension Plan

Our German subsidiary maintains an unfunded defined benefit pension plan which covers substantially all employees who joined the company prior to the plan’s closure to new participants in 2006. Participants are entitled to benefits in the form of retirement, disability and surviving dependent pensions. Benefits generally depend on years of service and the salary of the employees.

The components of net periodic benefit cost included in the accompanying condensed consolidated statements of income were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Service cost	$	29	$	30	$	59	$	59
Interest cost		44		40		88		79

Net periodic benefit cost	$	73	$	70	$	147	$	138

11. Income Taxes

A reconciliation of income taxes computed at federal statutory rates to income tax expense is as follows (dollar amounts in thousands):


	Three Months Ended June 30,
	2014					2013
Provision for income taxes at statutory rate	$	4,284		35.0	%	$	4,063		35.0	%
State and local income taxes, net of federal tax benefit		225		1.8	%		178		1.5	%
Stock compensation		78		0.6	%		70		0.6	%
Research credits		—		—			(51	)	(0.4	)%
Disqualifying dispositions of incentive stock options		(25	)	(0.2	)%		(32	)	(0.3	)%
Other, net		(13	)	—			71		0.6	%

Reported income tax provision	$	4,549		37.2	%	$	4,299		37.0	%


	Six Months Ended June 30,
	2014					2013
Provision for income taxes at statutory rate	$	9,028		35.0	%	$	8,560		35.0	%
State and local income taxes, net of federal tax benefit		481		1.9	%		369		1.5	%
Stock compensation		165		0.6	%		140		0.6	%
Research credits		—		—			(376	)	(1.5	)%
Disqualifying dispositions of incentive stock options		(42	)	(0.2	)%		(181	)	(0.8	)%
Other, net		25		0.1	%		18		0.1	%

Reported income tax provision	$	9,657		37.4	%	$	8,530		34.9	%

At June 30, 2014, the reserve for uncertain tax positions was approximately $6.5 million. Of this amount, $3.7 million is recorded as a reduction of deferred tax assets and $2.8 million is classified as long term liabilities.

12. Net Income Per Share

Basic and diluted earnings per share are computed pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating security according to their respective participation rights in undistributed earnings. Unvested restricted stock awards granted to employees are considered participating securities as they receive non-forfeitable rights to cash dividends at the same rate as common stock. In accordance with ASC Topic No. 260, diluted net income per share is calculated using the more dilutive of the following two approaches:

Assume exercise of stock options and vesting of restricted stock using the treasury stock method.

Assume exercise of stock options using the treasury stock method, but assume participating securities (unvested restricted stock) are not vested and allocate earnings to common shares and participating securities using the two-class method.

For the three months ended June 30, 2014 and the three and six months ended June 30, 2013, the two-class method was used in the computation of diluted net income per share as this approach was more dilutive. For the six months ended June 30, 2014, the treasury stock method was used in the computation of diluted net income per share, as this approach was more dilutive. The following presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share (in thousands, except share and per share data):


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Numerator:
Net income, as reported	$	7,691		$	7,311		$	16,136		$	15,927
Less: net income attributable to participating securities		(159	)		(129	)		(289	)		(269	)

Net income available to common shareholders—basic	$	7,532		$	7,182		$	15,847		$	15,658

Denominator:
Basic:
Weighted-average shares of common stock outstanding		39,555,875			38,420,617			39,438,705			38,070,822
Less: weighted-average shares of unvested restricted common stock outstanding		(841,697	)		(695,535	)		(725,273	)		(655,308	)

Weighted-average number of common shares used in computing basic net income per common share		38,714,178			37,725,082			38,713,432			37,415,514

Net income per share applicable to common shareholders—basic	$	0.19		$	0.19		$	0.41		$	0.42


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Numerator:
Net income available to common shareholders—basic	$	7,532		$	7,182		$	15,847		$	15,658
Add-back: undistributed earnings allocated to unvested shareholders ⁽¹⁾		96			91			N/A			195
Less: undistributed earnings reallocated to unvested shareholders ⁽¹⁾		(94	)		(88	)		N/A			(188	)

Net income available to common shareholders—diluted	$	7,534		$	7,185		$	15,847		$	15,665

Denominator:
Diluted:
Weighted-average shares of common stock outstanding		39,555,875			38,420,617			39,438,705			38,070,822
Less: weighted-average shares of unvested restricted common stock outstanding		(841,697	)		(695,535	)		(725,273	)		(655,308	)
Weighted-average number of common shares issuable upon exercise of outstanding stock options, based on the treasury stock method		909,339			1,304,571			973,470			1,343,293
Weighted-average number of restricted stock, based on the treasury stock method ⁽²⁾		N/A			N/A			179,004			N/A

Weighted-average number of common shares used in computing diluted net income per common share		39,623,517			39,029,653			39,865,906			38,758,807

Net income per share applicable to common shareholders—diluted	$	0.19		$	0.18		$	0.40		$	0.40

(1)	Adjustments to net income relate to net income per share calculations under the two class method; therefore, it is not applicable, or N/A, to all periods presented.

(2)	Adjustments pertain to net income per share calculations under the treasury stock method; therefore, it is not applicable, or N/A, for all periods presented.

The following common share equivalents have been excluded from the computation of diluted weighted-average shares outstanding, as their effect would have been anti-dilutive:


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Options		689,410		441,924		417,058		316,393
Unvested restricted stock		395,520		89		233,813		33,752
Unvested restricted stock units		5,700		—		3,420		—

13. Stockholders’ Equity

Share repurchases

On October 23, 2013, the Company’s Board of Directors approved a share repurchase program of up to $50.0 million of the Company’s outstanding shares of common shares over the next two years. Intended to offset shareholder dilution, the Company expects purchases under the program will be made periodically, on the open market as business and market conditions warrant. The share repurchase program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or discontinued at management’s and/or the Board of Director’s discretion. As of June 30, 2014, the Company has repurchased a total of 941,269 shares of its common stock for an aggregate purchase price of $26.1 million, including brokers’ fees. As of December 31, 2013, the Company purchased 75,000 shares of common stock for an aggregate purchase price of $2.2 million, including brokers’ fees.

Share Based Compensation

We account for share based compensation in accordance with ASC Topic No. 718, Compensation – Stock Compensation, which requires the measurement of compensation costs at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. The following presents the impact of share based compensation expense on our condensed consolidated statements of income (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Marketing and selling	$	1,250	$	973	$	2,296	$	1,750
Research and development		613		488		1,127		904
General and administrative		893		625		1,593		1,181

Total expensed	$	2,756	$	2,086	$	5,016	$	3,835
Property and equipment		40		—		63		—

Total share based compensation	$	2,796	$	2,086	$	5,079	$	3,835

In the three months and six months ended June 30, 2014, approximately $40 thousand and $63 thousand, respectively, of share based compensation was capitalized as part of an internal software project, and this amount is included in property and equipment, net in our condensed consolidated balance sheet. As of June 30, 2014, the Company had $24.4 million of unrecognized compensation expense related to employees and directors unvested stock option awards and restricted stock awards that are expected to be recognized over a weighted average period of 2.0 years.

14. Segment Reporting

We view our operations and manage our business as one segment: the development, marketing and licensing of technologies and fonts. Factors used to identify our single segment include the financial information available for evaluation by our chief operating decision maker in making decisions about how to allocate resources and assess performance. While our technologies and services are sold into two principal markets, Creative Professional and OEM, expenses and assets are not formally allocated to these market segments, and operating results are assessed on an aggregate basis to make decisions about the allocation of resources. The following table presents revenue for these two major markets (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Creative Professional	$	18,266	$	14,654	$	35,985	$	29,986
OEM		26,697		26,431		55,050		53,138

Total	$	44,963	$	41,085	$	91,035	$	83,124

Geographic segment information

The Company attributes revenues to geographic areas based on the location of our subsidiary receiving such revenue. For example, licenses may be sold to large international companies which may be headquartered in South Korea, but the sales are received and recorded by our subsidiary located in the United States. In this example, the revenue would be reflected in the United States totals in the table below. We market our products and services through offices in the United States, United Kingdom, Germany, Hong Kong, South Korea and Japan. The following summarizes revenue by location:


	Three Months Ended June 30,
	2014					2013
	Sales		% of Total			Sales		% of Total
	(In thousands, except percentages)
United States	$	24,602		54.7	%	$	23,359		56.8	%
United Kingdom		2,636		5.9			1,562		3.8
Germany		4,210		9.4			4,500		11.0
Japan		13,367		29.7			11,582		28.2
Other Asia		148		0.3			82		0.2

Total	$	44,963		100.0	%	$	41,085		100.0	%


	Six Months Ended June 30,
	2014					2013
	Sales		% of Total			Sales		% of Total
	(In thousands, except percentages)
United States	$	48,538		53.3	%	$	47,506		57.2	%
United Kingdom		5,329		5.9			2,945		3.5
Germany		8,687		9.5			8,120		9.8
Japan		28,081		30.9			24,307		29.2
Other Asia		400		0.4			246		0.3

Total	$	91,035		100.0	%	$	83,124		100.0	%

Long-lived assets, which include property and equipment, goodwill and intangible assets, but exclude other assets, long-term investments and deferred tax assets, are attributed to geographic areas in which Company assets reside and is shown below (in thousands):


	June 30, 2014		December 31, 2013
Long-lived assets:
United States	$	189,388	$	192,066
United Kingdom		5,791		4,926
Germany		55,459		56,140
Asia (including Japan)		3,545		3,470

Total	$	254,183	$	256,602

15. Commitments and Contingencies

Operating Leases

We conduct operations in facilities under operating leases expiring through 2022. In accordance with the lease terms, we pay real estate taxes and other operating costs. Our leases in California, New York, Massachusetts, Germany, India and Japan contain renewal options. The Company’s future minimum payments under non-cancelable operating leases as of June 30, 2014, are approximately as follows (in thousands):


Years ending June 30:
2015	$	2,902
2016		2,778
2017		2,101
2018		1,816
2019		1,578
Thereafter		4,097

Total	$	15,272

Legal Proceedings

From time to time, we may be a party to various claims, suits and complaints. We are not currently a party to any legal proceedings that, if determined adversely to us, would have a material adverse effect on our business, results of operations or financial condition.

Licensing Warranty

Under our standard license agreement with our OEM customers, we warrant that the licensed technologies are free of infringement claims of intellectual property rights and will meet the specifications as defined in the licensing agreement for a specified period, typically one year. Under the licensing agreements, liability for such indemnity obligations is limited generally to the total arrangement fee; however, exceptions have been made on a case-by-case basis, increasing the maximum potential liability to agreed upon amounts at the time the contract is entered into. We have never incurred costs payable to a customer or business partner to defend lawsuits or settle claims related to these warranties, and as a result, management believes the estimated fair value of these warranties is minimal. Accordingly, there are no liabilities recorded for these warranties as of June 30, 2014 and December 31, 2013.

16. Subsequent Events

Acquisition

On July 14, 2014 the Company purchased all of the outstanding stock of FontShop International GmbH, a privately-held font distributor located in Berlin, Germany, its wholly-owned subsidiary FontShop International, Inc. based in San Francisco, California, the FontFont typeface library, FontShop AG of Berlin, the largest distributor of the FontFont library, and certain other typeface families for an aggregate purchase price of approximately $13.0 million in cash on hand.

Dividend Declaration

On July 25, 2014 the Company’s Board of Directors declared an $0.08 per share quarterly cash dividend on our outstanding common stock. The record date is set for October 1, 2014 and the dividend is payable to shareholders of record on October 21, 2014. Dividends are declared at the discretion of the Company’s Board of Directors and depend on actual cash from operations, the Company’s financial condition and capital requirements and any other factors the Company’s Board of Directors may consider relevant. Future dividend declarations, as well as the record and payment dates for such dividends, will be determined by the Company’s Board of Directors on a quarterly basis.

Share Repurchase Program

Subsequent to June 30, 2014, the Company repurchased 11,920 shares of common stock for $0.3 million, at an average price per share of $28.14. The Company purchased these shares on the open market at prevailing market prices and in accordance with its previously announced share repurchase program (“Plan”). At July 22, 2014, $23.6 million remains for future purchase under the Plan.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements and Projections

This Quarterly Report on Form 10-Q contains forward looking statements. Forward looking statements relate to future events or our future financial performance. We generally identify forward looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of operations and financial condition. The outcome of the events described in these forward looking statements is subject to risks, uncertainties and other factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Accordingly, you should not rely upon forward looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward looking statements will be achieved or occur, and actual results could differ materially from those projected in the forward looking statements. The forward looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Overview

We are a leading provider of type, technology and expertise for creative applications and consumer electronics, or CE, devices. Our software technologies have been widely deployed across, and embedded in a range of CE devices, including laser printers, digital copiers, mobile phones, e-book readers, tablets, automotive displays, digital cameras, navigation devices, digital televisions, set-top boxes and consumer appliances, as well as in numerous software applications and operating systems. In the laser printer market, we have worked together with industry leaders for over 20 years to provide critical components embedded in printing standards. The Company also provides printer drivers, page description language interpreters, printer user interface technology and color imaging solutions to printer manufacturers and OEMs (original equipment manufacturers). Our scaling, compression, text layout, printer driver and color technologies solve critical text imaging issues for CE device manufacturers by rendering high quality text on low resolution and memory constrained CE devices. We offer more than 19,000 typeface designs, and include some of the world’s most widely used designs, such as the Times New Roman ^® , Helvetica ^® , ITC Franklin Gothic™ and Droid™ typefaces, and support more than 250 Latin and non-Latin languages. Our e-commerce websites, including myfonts.com, fonts.com and linotype.com, which attracted more than 68 million visits in 2013 from over 200 countries and territories, offer thousands of high-quality font products, in some cases more than 162,000, including our own fonts from the Monotype Libraries as well as fonts from third parties.

Sources of Revenue

We derive revenue from two principal sources: licensing our fonts to creative and business professionals, which we refer to as our Creative Professional revenue, and licensing our text imaging solutions to CE device manufacturers and independent software vendors, which we refer to as our OEM revenue. We derive our Creative Professional revenue primarily from multinational corporations, graphic designers, media organizations, advertisers, printers and publishers. We derive our OEM revenue primarily from CE device manufacturers. Some of our revenue streams, particularly custom revenue, have historically been and we expect them to continue to be in the future, susceptible to weakening economic conditions.

Geographic revenue, which is based on the location of our subsidiary receiving such revenue, is in the table below:


	Three Months Ended June 30,
	2014					2013
	Sales		% of Total			Sales		% of Total
	(In thousands, except percentages)
United States	$	24,602		54.7	%	$	23,359		56.8	%
United Kingdom		2,636		5.9			1,562		3.8
Germany		4,210		9.4			4,500		11.0
Japan		13,367		29.7			11,582		28.2
Other Asia		148		0.3			82		0.2

Total	$	44,963		100.0	%	$	41,085		100.0	%


	Six Months Ended June 30,
	2014					2013
	Sales		% of Total			Sales		% of Total
	(In thousands, except percentages)
United States	$	48,538		53.3	%	$	47,506		57.2	%
United Kingdom		5,329		5.9			2,945		3.5
Germany		8,687		9.5			8,120		9.8
Japan		28,081		30.9			24,307		29.2
Other Asia		400		0.4			246		0.3

Total	$	91,035		100.0	%	$	83,124		100.0	%

For the three months ended June 30, 2014 and 2013, sales by our subsidiaries located outside the United States comprised 45.3% and 43.2%, respectively, of our total revenue. For the six months ended June 30, 2014 and 2013, sales by our subsidiaries located outside the United States comprised 46.7% and 42.8%, respectively, of our total revenue. We expect that sales by our international subsidiaries will continue to represent a substantial portion of our revenue for the foreseeable future. Future international revenue will depend on the continued use and expansion of our text imaging solutions worldwide.

We derive a significant portion of our OEM revenue from a limited number of customers, in particular manufacturers of laser printers and consumer electronics. For the three months ended June 30, 2014 and 2013, our top ten licensees by revenue, all of which are with OEM customers, accounted for approximately 36.1% and 39.7% of our total revenue, respectively. For the six months ended June 30, 2014 and 2013, our top ten licensees by revenue, all of which are with OEM customers, accounted for approximately 37.4% and 39.2% of our total revenue, respectively. Although no one customer accounted for more than 10% of our total revenue for the three or six months ended June 30, 2014 or 2013, if we are unable to maintain relationships with major customers or establish relationships with new customers, our licensing revenue will be adversely affected.

Creative Professional Revenue

Our Creative Professional revenue is derived from font licenses, font related services and from custom font design services. We license fonts directly to end-users through our e-commerce websites, via telephone, email and indirectly through third-party resellers. Font related services refer to our web font services and the web design tools from our acquisition of Design by Front. We also license fonts and provide custom font design services to graphic designers, advertising agencies, media organizations and corporations. We refer to direct, indirect and custom revenue, as non-web revenue, and refer to revenue that is derived from our websites, as web revenue.

Revenue from font licenses to our e-commerce customers is recognized upon payment by the customer and electronic shipment of the software embodying the font. Revenue from font licenses to other customers is recognized upon shipment of the software embodying the font and when all other revenue recognition criteria have been met. Revenue from resellers is recognized upon notification from the reseller that our font product has been licensed and when all other revenue recognition criteria have been met. Custom font design services revenue is generally recognized upon delivery. Font related service revenue is mainly subscription based and, from time to time, it may contain software as a service. The subscription revenue is recognized ratably over the subscription

period. Web server and commercial rights to online fonts is recurring revenue and it is recognized upon invoicing and proof of font delivery, when all other revenue recognition criteria have been met. Contract accounting is used where services are deemed essential to the software.

OEM Revenue

Our OEM revenue is derived substantially from per-unit royalties received for printer imaging and printer driver, or printer products, and display imaging products. Under our licensing arrangements we typically receive a royalty for each product unit incorporating our text imaging solutions that is shipped by our OEM customers. We also receive OEM revenue from fixed fee licenses with certain of our OEM customers. Fixed fee licensing arrangements are not based on units the customer ships, but instead, customers pay us on a periodic basis for use of our typefaces and technology. Although significantly less than royalties from per-unit shipments and fixed fees from OEM customers, we also receive revenue from software application and operating systems vendors, who include our typefaces and technology in their products, and for font development. Many of our per-unit royalty licenses continue for the duration that our OEM customers ship products that include our technology, unless terminated for breach. Other licenses have terms that typically range from three to five years, and usually provide for automatic or optional renewals. We recognize revenue from per-unit royalties in the period during which we receive a royalty report from a customer, typically one quarter after royalty-bearing units are shipped, as we do not have the ability to estimate the number of units shipped by our customers. Revenue from fixed fee licenses is generally recognized when it is billed to the customer, so long as the product has been delivered, the license fee is fixed and non-refundable and collection is probable. OEM revenue also includes project-related agreements for which contract accounting may be used.

Cost of Revenue

Our cost of revenue consists of font license fees that we pay on certain fonts that are owned by third parties, allocated internal engineering expense and overhead costs directly related to custom design services. License fees that we pay to third parties are typically based on a percentage of our Creative Professional and OEM revenue and do not involve minimum fees. Our cost of OEM revenue is typically lower than our cost of Creative Professional revenue because we own a higher percentage of the fonts licensed to our OEM customers, provide value-added technology and have negotiated lower royalty rates on the fonts we license from third parties because of volume. The cost of our custom design service revenue is substantially higher than the cost of our other revenue and, as a result, our gross margin varies from period-to-period depending on the level of custom design revenue recorded.

Cost of revenue also includes amortization of acquired technology, which we amortize over 8 to 15 years. For purposes of amortizing acquired technology we estimate the remaining useful life of the technology based upon various considerations, including our knowledge of the technology and the way our customers use it. We use the straight-line method to amortize our acquired technology. There is no reliable evidence to suggest that we should expect any other pattern of amortization than an even pattern, and we believe this best reflects the expected pattern of economic usage.

Gross Profit

Our gross profit percentage is influenced by a number of factors including product mix, pricing and volume at any particular time. However, our cost of OEM revenue is typically lower than our cost of Creative Professional revenue because we own a higher percentage of the fonts licensed to our OEM customers, provide value-added technology and have negotiated lower royalty rates on the fonts we license from third parties because of volume. Within our Creative Professional business, the cost of our custom design service revenue is substantially higher than the cost of our other revenue. As a result, our gross profit varies from period-to-period depending on the mix between, and within, Creative Professional and OEM revenue.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial condition and results of operations requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

There has been no material change in our critical accounting policies since December 31, 2013. Information about our critical accounting policies may be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies,” of our Annual Report on Form 10-K for the year ended December 31, 2013.

Results of Operations for the Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table sets forth items in the condensed consolidated quarterly statements of income as a percentage of sales for the periods indicated:


	Three Months Ended June 30,
	2014			2013
Revenue:
Creative Professional		40.6	%		35.7	%
OEM		59.4			64.3

Total revenue		100.0			100.0
Cost of revenue		16.3			14.6
Cost of revenue—amortization of acquired technology		2.5			2.8

Total cost of revenue		18.8			17.4

Gross profit		81.2			82.6
Marketing and selling		26.7			25.3
Research and development		10.9			11.9
General and administrative		12.0			12.1
Amortization of other intangible assets		3.2			3.7

Total operating expenses		52.8			53.0

Income from operations		28.4			29.6
Interest expense, net		0.6			0.8
Loss on foreign exchange		0.3			0.6
Loss on derivatives		0.3			—
Other income, net		—			—

Total other expense		1.2			1.4
Income before provision for income taxes		27.2			28.2
Provision for income taxes		10.1			10.4

Net income		17.1	%		17.8	%

The following discussion compares the three months ended June 30, 2014 with the three months ended June 30, 2013.

Sales by Segment. We view our operations and manage our business as one segment: the development, marketing and licensing of technologies and fonts. Factors used to identify our single segment include the financial information available for evaluation by our chief operating decision maker in making decisions about how to allocate resources and assess performance. While our technologies and services are sold to customers in two principal markets (Creative Professional and CE device manufacturers and independent software vendors, together OEM), expenses and assets are not formally allocated to these markets, and operating results are assessed on an aggregate basis to make decisions about the allocation of resources.

The following table presents revenue for these two principal markets (in thousands):


	Three Months Ended June 30,				Increase
	2014		2013		Increase
Creative Professional	$	18,266	$	14,654	$	3,612
OEM		26,697		26,431		266

Total revenue	$	44,963	$	41,085	$	3,878

Revenue

Revenue was $45.0 million and $41.1 million for the three months ended June 30, 2014 and 2013, respectively, an increase of $3.9 million, or 9.4%.

Creative Professional revenue increased $3.6 million, or 24.7%, to $18.3 million for the three months ended June 30, 2014, as compared to $14.7 million for the three months ended June 30, 2013, mainly from increased direct and web revenue. Non-web revenue increased, partially the result of recurring royalty and license web server applications and increased direct revenue for font licenses to our corporate customers. Web revenue increased in the three months ended June 30, 2014, as compared to the same period in 2013, mainly due to increased font license revenue, together with increased sales of our web font services and licenses of fonts for servers and other applications.

OEM revenue was $26.7 million and $26.4 million for the three months ended June 30, 2014 and 2013, respectively, an increase of $0.3 million, or 1.0%. Increased revenue from per unit royalty arrangements with our printer and display imaging consumer electronic OEM customers was partially offset by decreased revenue from our independent software vendor customers, mainly due to timing.

Cost of Revenue and Gross Profit

Cost of revenue, excluding amortization of acquired technology, was $7.3 million and $6.0 million for the three months ended June 30, 2014 and 2013, respectively, an increase of $1.3 million, or 21.7%. As a percentage of total revenue, cost of revenue, excluding amortization of acquired technology, was 16.3% and 14.6% in the three months ended June 30, 2014 and 2013, respectively. The increases in both, in dollars and as a percentage of revenue, are predominantly due to product mix. The increase in dollars is partially a result of increased sales volume and partially the result of a product mix change, period over period. Our creative professional revenue typically has a higher associated cost than our OEM revenue. In the three months ended June 30, 2014, creative professional revenue was 40.6% of total revenue, as compared to 35.7% of total revenue in the same period in 2013. In addition a portion of our display imaging revenue had a higher associated cost in the three months ended June 30, 2014, as compared to the same period in 2013.

The portion of cost of revenue consisting of amortization of acquired technology was unchanged at $1.1 million for the three months ended June 30, 2014 and 2013, respectively.

Gross profit decreased 1.4% to 81.2% of sales in the three months ended June 30, 2014, as compared to 82.6% in the three months ended June 30, 2013, due to variations in product mix. In the three months ended June 30, 2014, there was a higher percentage of creative professional revenue, which generally has a higher associated cost, as compared to the same period in 2013. In addition, in the three months ended June 30, 2014, certain of our display imaging revenue had a higher associated cost.

Operating Expenses

Marketing and Selling. Marketing and selling expense increased $1.6 million, or 15.4%, to $12.0 million in the three months ended June 30, 2014, as compared to $10.4 million in the three months ended June 30, 2013. Personnel expenses increased $1.0 million due to a headcount increase, annual salary increases, increased variable and share based compensation in the three months ended June 30, 2014, as compared to the same period in 2013. Targeted marketing spending, such as trade shows, online advertising and professional service expenses, increased $0.5 million in the three months ended June 30, 2014, as compared to the same period in 2013.

Research and Development. Research and development expense was consistent at $4.9 million in the three months ended June 30, 2014 and 2013.

General and Administrative. General and administrative expense was $5.4 million and $5.0 million in the three months ended June 30, 2014 and 2013, respectively, an increase of $0.4 million, or 8.2%. Personnel and personnel related expenses increased $0.4 million in the three months ended June 30, 2014, as compared to the same period in 2013, mainly due to increases in share based compensation. Legal expenses increased $0.4 million in the second quarter of 2014, as compared to the same period in 2013, primarily the result of acquisition related expense. These increases were partially offset by a $0.6 million reduction in expense recognized due to an estimate revision for contingent acquisition consideration.

Amortization of Other Intangible Assets. Amortization of other intangible assets was $1.4 million and $1.5 million in the three months ended June 30, 2014 and 2013, respectively.

Interest Expense, Net

Interest expense, net of interest income was consistent at $0.3 million for the three months ended June 30, 2014 and 2013. There was no debt outstanding during the three months ended June 30, 2014. Interest expense in the second quarter of 2014 consists mainly of unused line fees in connection with our Credit Facility. Interest expense in the same period in 2013 primarily related to outstanding debt. The average debt balance in the three months ended June 30, 2013 was $1.4 million.

Loss on Foreign Exchange

Loss on foreign exchange was $0.1 million and $0.3 million in the three months ended June 30, 2014 and 2013, respectively, a decrease of approximately $0.2 million, primarily due to the revaluation of liabilities incurred in the acquisition of Design by Front.

Loss on Derivatives

Loss on derivatives was $0.2 million in the three months ended June 30, 2014, primarily due to our 30-day forward currency contracts. There was no similar item in the three months ended June 30, 2013, as there were no outstanding derivative contracts.

Provision for Income Taxes

For the three months ended June 30, 2014 and 2013, our effective tax rate was 37.2% and 37.0%, respectively. The effective tax rate for the three months ended June 30, 2013 included a 0.4% benefit related to federal research tax credits. The federal research tax credit expired as of December 31, 2013, and as of June 30, 2014, the legislation extending the credit had not been passed and as such this benefit did not exist at June 30, 2014.

Results of Operations for the Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table sets forth items in the condensed consolidated year-to-date statement of income as a percentage of sales for the periods indicated:


	Six Months Ended June 30,
	2014			2013
Revenue:
Creative Professional		39.5	%		36.1	%
OEM		60.5			63.9

Total revenue		100.0			100.0
Cost of revenue		15.2			14.5
Cost of revenue—amortization of acquired technology		2.5			2.7

Total cost of revenue		17.7			17.2

Gross profit		82.3			82.8
Marketing and selling		25.5			24.4
Research and development		11.7			11.9
General and administrative		12.7			11.7
Amortization of other intangible assets		3.1			3.5

Total operating expenses		53.0			51.5

Income from operations		29.3			31.3
Interest expense, net		0.6			0.9
Loss on foreign exchange		0.2			1.0
Loss on derivatives		0.2			—
Other income, net		—			—

Total other expense		1.0			1.9
Income before provision for income taxes		28.3			29.4
Provision for income taxes		10.6			10.2

Net income		17.7	%		19.2	%

The following discussion compares the six months ended June 30, 2014 with the six months ended June 30, 2013.

Sales by Segment. The following table presents revenue for these two principal markets (in thousands):


	Six Months Ended June 30,				Increase
	2014		2013		Increase
Creative Professional	$	35,985	$	29,986	$	5,999
OEM		55,050		53,138		1,912

Total revenue	$	91,035	$	83,124	$	7,911

Revenue

Revenue was $91.0 million and $83.1 million for the six months ended June 30, 2014 and 2013, respectively, an increase of $7.9 million, or 9.5%.

Creative Professional revenue increased $6.0 million, or 20.0%, to $36.0 million for the six months ended June 30, 2014, as compared to $30.0 million for the six months ended June 30, 2013. Web revenue increased in the six months ended June 30, 2014, as compared to the same period in 2013, mainly due to increased font license revenue, together with increased sales of our web font services and licenses of fonts for servers and other applications. Non-web revenue increased, partially the result of recurring royalty and license web server applications and increased sales of our web font services.

OEM revenue was $55.0 million and $53.1 million for the six months ended June 30, 2014 and 2013, respectively, an increase $1.9 million, or 3.6%. Increased revenue from per unit royalty arrangements with our printer and display imaging consumer electronic OEM customers was partially offset by decreased revenue from our independent software vendor customers, mainly due to timing.

Cost of Revenue and Gross Profit

Cost of revenue excluding amortization of acquired technology was $13.8 million and $12.0 million for the six months ended June 30, 2014 and 2013, respectively, an increase of $1.8 million, or 15.0%. As a percentage of total revenue, cost of revenue excluding amortization was 15.2% and 14.5% in the six months ended June 30, 2014 and 2013, respectively. The increases in both, in dollars and as a percentage of revenue, are predominantly due to variations in product mix. Our creative professional revenue typically has a higher associated cost than our OEM revenue. In the six months ended June 30, 2014, creative professional revenue was 39.5% of total revenue, as compared to 36.1% of total revenue in the same period in 2013. The increase in dollars is partially a result of increased sales volume and partially the result of a product mix change, period over period.

Amortization of acquired technology was unchanged at $2.3 million for the six months ended June 30, 2014 and 2013, respectively.

Gross profit decreased 0.5% to 82.3% in the six months ended June 30, 2014, as compared to 82.8% in the six months ended June 30, 2013, due to variations in product mix, as detailed above.

Operating Expenses

Marketing and Selling. Marketing and selling expense increased $2.8 million, or 13.8%, to $23.1 million in the six months ended June 30, 2014, as compared to $20.3 million in the six months ended June 30, 2013. Personnel expenses increased $1.7 million due to additional headcount, annual salary increases, increased variable and share based compensation in the six months ended June 30, 2014, as compared to the same period in 2013. Targeted marketing spending, such as trade shows, online advertising and professional service expenses increased $1.0 million period over period.

Research and Development. Research and development expense was $10.7 million and $9.9 million in the six months ended June 30, 2014 and 2013, respectively, an increase of $0.8 million, or 8.1%, mainly due to increased personnel expenses. Personnel and personnel related expenses increased $0.6 million in the first half of 2014, as compared to the same period in 2013, a result of increased headcount, annual salary increases, increased variable compensation and share based compensation.

General and Administrative. General and administrative expense increased $1.9 million, or 19.6% to $11.6 million in the six months ended June 30, 2014, as compared to $9.7 million in the same period in 2013. Legal expenses increased $1.3 million in the first six months of 2014, as compared to the same period in 2013, primarily the result of acquisition related expense and non-recurring legal and administrative expense. Personnel and personnel related expenses increased $0.6 million in the six months ended June 30, 2014, as compared to the same period in 2013, primarily the result of increased share based compensation.

Amortization of Other Intangible Assets. Amortization of other intangible assets was $2.9 million and $3.0 million in the six months ended June 30, 2014 and 2013, respectively, a decrease of $0.1 million.

Interest Expense, Net

Interest expense, net of interest income decreased $0.2 million, or 27.6%, to $0.5 million for the six months ended June 30, 2014, as compared to $0.7 million for the six months ended June 30, 2013. There was no debt outstanding during the six months ended June 30, 2014. Interest expense in the first half of 2014 consists mainly of unused line fees in connection with our Credit Facility. By contrast, interest expense in the same period in 2013 primarily related to outstanding debt. The average debt balance in the six months ended June 30, 2013 was $9.2 million.

Loss on Foreign Exchange

Loss on foreign exchange decreased $0.6 million, or 79.8%, to $0.2 million for the six months ended June 30, 2014, as compared to $0.8 million for the six months ended June 30, 2013, primarily due to the revaluation of liabilities incurred in the acquisition of Design by Front.

Loss on Derivatives

Loss on derivatives was $0.2 million in the six months ended June 30, 2014, primarily due to our 30-day forward currency contracts. There was no similar item in the six months ended June 30, 2013, as there were no outstanding derivative contracts.

Provision for Income Taxes

For the six months ended June 30, 2014 and 2013, our effective tax rate was 37.4% and 34.9%, respectively. The effective tax rate for the six months ended June 30, 2013 included a 1.5% benefit related to federal research tax credits. The federal research tax credit expired as of December 31, 2013, and as of June 30, 2014, the legislation extending the credit had not been passed, and as such, this benefit did not exist at June 30, 2014. The effective tax rate for the six months ended June 30, 2013 also included a benefit of 0.8% for disqualifying dispositions on incentive stock options, as compared to a benefit of 0.2% in the same period in 2014. In addition, an increase in state and local income taxes, net of federal benefit resulted in a 0.4% increase in the effective tax rate for the six months ended June 30, 2014, as compared to 2013.

Liquidity and Capital Resources

Cash Flows for the Six Months Ended June 30, 2014 and 2013

Since our inception, we have financed our operations primarily through cash from operations, private and public stock sales and long-term debt arrangements, as described below. We believe our existing cash and cash equivalents, our cash flow from operating activities and available bank borrowings will be sufficient to meet our anticipated cash needs for at least the next twelve months. At June 30, 2014, our principal sources of liquidity were cash and cash equivalents totaling $80.8 million and a $120.0 million revolving credit facility, of which there were no outstanding borrowings at June 30, 2014. Our future working capital requirements will depend on many factors, including the operations of our existing business, our potential strategic expansion and future acquisitions we might undertake.

The following table presents our cash flows from operating activities, investing activities and financing activities for the periods presented (in thousands):


	Six Months Ended June 30,
	2014			2013
Net cash provided by operating activities	$	30,200		$	24,628
Net cash used in investing activities		(3,487	)		(704	)
Net cash used in financing activities		(24,347	)		(11,429	)
Effect of exchange rates on cash and cash equivalents		27			(166	)

Total increase in cash and cash equivalents	$	2,393		$	12,329

Operating Activities

Significant variations in operating cash flows may occur because, from time-to-time, our customers make prepayments against future royalties. Prepayments may be required under the terms of our license agreements and are occasionally made on an elective basis and often cause large fluctuations in accounts receivable and deferred revenue. The timing and extent of such prepayments significantly impacts our cash balances.

We generated $30.2 million in cash from operations during the six months ended June 30, 2014. Net income, after adjusting for depreciation and amortization, adjustment to contingent consideration, loss on retirement of fixed assets, amortization of deferred financing costs and accretion of interest, share based compensation, excess tax benefit on stock options, deferred income taxes and unrealized currency gain on foreign denominated intercompany transactions generated $26.5 million in cash. Deferred revenue generated $1.9 million in cash, mainly due to the timing of customer payments. A decrease in accrued expenses and other liabilities used $2.5 million, primarily a result of the payment of 2013 accrued variable compensation. Accrued income taxes generated $4.6 million during the six months ended June 30, 2014. Increases in accounts receivable and accounts payable combined with decreases in prepaid expenses and other assets used $0.3 million in cash, mainly due to the timing of payments.

We generated $24.6 million in cash from operations during the six months ended June 30, 2013. Net income after adjusting for depreciation and amortization, amortization of deferred financing costs, share based compensation, excess tax benefit on stock options, provision for doubtful accounts, deferred income taxes and unrealized currency loss on foreign denominated intercompany transactions generated $25.1 million in cash. Deferred revenue generated $1.7 million in cash, due to royalty prepayments received. A decrease in accrued expenses and other liabilities used $1.4 million, primarily a result of the payment of 2012 accrued variable compensation amounts. Increases in accounts receivable and accounts payable combined with decreases in prepaid expenses, other assets and accrued income taxes, used $0.9 million in cash, which is mainly due to timing of payments.

Investing Activities

During the six months ended June 30, 2014 we used $3.5 million in investing activities mainly for the purchase of $2.5 million of property and equipment, and $1.0 million for acquisitions. During the six months ended June 30, 2013 we used $0.7 million mainly for the purchase of property and equipment.

Financing Activities

Cash used in financing activities for the six months ended June 30, 2014 was $24.3 million. We received cash from exercises of stock options of $3.1 million and excess tax benefit on stock options provided $2.0 million. We paid cash dividends of $5.5 million, and purchased $23.9 million in treasury stock in the six months ended June 30, 2014.

Cash used in financing activities for the six months ended June 30, 2013 was $11.4 million. All outstanding debt was repaid resulting in a $22.3 million use of cash and we paid cash dividends of $3.8 million. There was a significant amount of employee stock option exercises during the six months ended June 30, 2013, which resulted in $14.7 million in proceeds from the exercise of common stock options and excess tax benefit on stock options.

Dividends

On April 28, 2014 our Board of Directors approved a $0.08 per share or $3.2 million, quarterly cash dividend on our outstanding common stock. The record date was July 1, 2014 and the dividend was paid to shareholders of record on July 21, 2014. We anticipate this to be a recurring quarterly dividend with future payments and record dates, subject to board approval. On July 25, 2014 the Company’s Board of Directors approved a $0.08 per share, quarterly cash dividend on our outstanding common stock. The record date is set for October 1, 2014 and the dividend is payable to shareholders of record on October 21, 2014.

Credit Facility

On July 13, 2011 we entered into a five-year $120.0 million revolving credit facility (the “Credit Facility”). The Credit Facility replaced the Amended and Restated Credit Agreement, which was scheduled to expire on July 30, 2012.

Borrowings under the Credit Facility bear interest based on the leverage ratio at either (i) the prime rate plus 1.25%, as defined in the credit agreement, or (ii) LIBOR plus 2.25%. The Company is required to pay an unused line fee equal to 0.375% per annum on the undrawn portion available under the revolving credit facility and variable per annum fees in respect of outstanding letters of credit. At June 30, 2014 our rate, inclusive of applicable margins, was 3.75% for prime and we had no outstanding debt under the Credit Facility. There are no required repayments. The Company, in accordance with the Credit Facility, is permitted to request that the Lenders, at their election, increase the secured credit facility to a maximum of $140.0 million.

In addition, the Credit Facility provides that we not exceed a maximum leverage ratio. The leverage ratio is defined as the ratio of aggregate outstanding indebtedness to trailing twelve months Adjusted EBITDA. Adjusted EBITDA is defined as consolidated net earnings (or loss), plus net interest expense, income taxes, depreciation and amortization and share based compensation expense, plus restructuring, issuance costs, cash non-operating costs and other expenses or losses minus cash non-operating gains and other non-cash gains; provided however that the aggregate of all cash non-operating expense shall not exceed $250 thousand and all such fees, costs and expenses shall not exceed $1.5 million on a trailing twelve months basis.

Additional limits are imposed on acquisition related expenses. We also must maintain a minimum fixed charge ratio. As of June 30, 2014, the maximum leverage ratio permitted was 3.00:1.00 and our leverage ratio was 0.00:1.00 and the minimum fixed charge coverage ratio was 1.25:1.00 and our fixed charge ratio was 3.67:1.00. Failure to comply with these covenants, or the occurrence of an event of default, could permit the Lenders under the Credit Facility to declare all amounts borrowed under the Credit Facility, together with accrued interest and fees, to be immediately due and payable. In addition, the Credit Facility is secured by substantially all of our assets and places limits on the Company’s and its subsidiaries’ ability to incur debt or liens and engage in sale-leaseback transactions, make loans and investments, incur additional indebtedness, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its business.

The following table presents a reconciliation from net income, which is the most directly comparable GAAP operating performance measure, to EBITDA and from EBITDA to Adjusted EBITDA as defined in our credit facilities (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
Net income	$	7,691		$	7,311	$	16,136		$	15,927
Provision for income taxes		4,549			4,299		9,657			8,530
Interest expense, net		250			308		526			726
Depreciation and amortization		2,988			3,022		5,970			6,019

EBITDA	$	15,478		$	14,940	$	32,289		$	31,202
Share based compensation		2,756			2,086		5,016			3,835
Non-cash add backs		(552	)		—		(552	)		—
Restructuring, issuance and cash non-operating costs ⁽²⁾		66			76		39			170
Acquisition expenses		340			—		398			—

Adjusted EBITDA ⁽¹⁾	$	18,088		$	17,102	$	37,190		$	35,207

(1)

Adjusted EBITDA is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as income (loss) from operations and net income (loss). Adjusted EBITDA as an operating performance measure has material limitations since it excludes the statement of income impact of depreciation and amortization expense, interest expense, net, the provision (benefit) for income taxes and share based compensation and therefore does not represent an accurate measure of profitability, particularly in situations where a company is highly leveraged or has a disadvantageous tax structure. We have significant intangible assets and amortization expense is a meaningful element in our financial statements and therefore its exclusion from Adjusted EBITDA is a material limitation. We have had a significant amount of debt, and interest expense is a necessary element of our costs and therefore its exclusion from Adjusted EBITDA is a material limitation. We generally incur significant U.S. federal, state and foreign income taxes each year and the provision for income taxes is a necessary element of our costs and therefore its exclusion from Adjusted EBITDA is a material limitation. We have share based compensation and the associated expense has a meaningful impact on our financial statements and therefore its exclusion from Adjusted EBITDA is a material limitation. Non-cash expenses, restructuring, issuance and cash non-operating expenses have a meaningful impact on our financial statements. Therefore, their exclusion from Adjusted EBITDA is a material limitation. As a result, Adjusted EBITDA should be evaluated in conjunction with net income for complete analysis of our profitability, as net income includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to Adjusted EBITDA. As Adjusted EBITDA is not defined by GAAP, our definition of Adjusted EBITDA may differ from and therefore may not be comparable to similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.

(2)	Permits an add-back of up to $250 thousand of cash non-operating expense, which is not to exceed $1.5 million when combined together with restructuring and issuance costs.

The Credit Facility also contains provisions for an increased interest rate during periods of default. We do not believe that these covenants will affect our ability to operate our business, and we were in compliance with all covenants under our Credit Facility as of June 30, 2014.

Non-GAAP Measures

In addition to Adjusted EBITDA as discussed above, we rely internally on certain measures that are not calculated according to GAAP. This non-GAAP measure is net adjusted EBITDA, which is defined as income (loss) from operations before depreciation, amortization of acquired intangible assets and share based compensation expenses. We use net adjusted EBITDA as a principal indicator of the operating performance of our business. We use net adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our board of directors,

determining bonus compensation for our employees based on operating performance and evaluating short-term and long-term operating trends in our operations. We believe that net adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary from period-to-period without direct correlation to underlying operating performance. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. We believe that trends in our net adjusted EBITDA may be valuable indicators of our operating performance.

The following table presents a reconciliation from income from operations, which is the most directly comparable GAAP operating financial measure, to net adjusted EBITDA as used by management (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Income from operations	$	12,781	$	12,180	$	26,699	$	25,986
Depreciation and amortization		2,988		3,022		5,970		6,019
Share based compensation		2,756		2,086		5,016		3,835

Net adjusted EBITDA(1)	$	18,525	$	17,288	$	37,685	$	35,840

(1)

Net adjusted EBITDA is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as income (loss) from operations and net income (loss). Net adjusted EBITDA as an operating performance measure has material limitations since it excludes the statement of income impact of depreciation and amortization expense and share based compensation and therefore does not represent an accurate measure of profitability. We have significant intangible assets and amortization expense is a meaningful element in our financial statements and therefore its exclusion from net adjusted EBITDA is a material limitation. Share based compensation and the associated expense has a meaningful impact on our financial statements and therefore its exclusion from net adjusted EBITDA is a material limitation. As a result, net adjusted EBITDA should be evaluated in conjunction with income (loss) from operations for complete analysis of our profitability, as income (loss) from operations includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to net adjusted EBITDA. As net adjusted EBITDA is not defined by GAAP, our definition of net adjusted EBITDA may differ from and therefore may not be comparable to similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that net adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.

In our quarterly earnings press releases and conference calls, in addition to Adjusted EBITDA and net adjusted EBITDA as discussed above, we discuss a key measure that is not calculated according to GAAP. This non-GAAP measure is non-GAAP earnings per diluted share, which is defined as earnings per diluted share before amortization of acquired intangible assets and stock-based compensation expenses. We use non-GAAP earnings per diluted share as one of our principal indicators of the operating performance of our business. We use non-GAAP earnings per diluted shares in internal forecasts, supplementing the financial results and forecasts reported to our board of directors and evaluating short-term and long-term operating trends in our operations. We believe that non-GAAP earnings per diluted share permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary from period-to-period without direct correlation to underlying operating performance. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. We believe that trends in our non-GAAP earnings per diluted share may be valuable indicators of our operating performance.

The following table presents a reconciliation from earnings per diluted share, which is the most directly comparable GAAP measure, to non-GAAP earnings per diluted share as used by management:


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
GAAP earnings per diluted share	$	0.19	$	0.18	$	0.40	$	0.40
Amortization, net of tax		0.04		0.04		0.08		0.09
Share based compensation, net of tax		0.04		0.04		0.08		0.07

Non-GAAP earnings per diluted share ⁽¹⁾	$	0.27	$	0.26	$	0.56	$	0.56

(1)

Non-GAAP earnings per diluted share is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as earnings per share and earnings per diluted share. Non-GAAP earnings per diluted share as an operating performance measure has material limitations since it excludes the statement of income impact of amortization expense and share based compensation, and therefore, does not represent an accurate measure of profitability. We have significant intangible assets and amortization expense is a meaningful element in our financial statements and therefore its exclusion from non-GAAP earnings per diluted share is a material limitation. Share based compensation and the associated expense has a meaningful impact on our financial statements and therefore its exclusion from non-GAAP diluted earnings per share is a material limitation. As a result, non-GAAP earnings per diluted share should be evaluated in conjunction with earnings per diluted share for complete analysis of our profitability, as earnings per diluted share includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to non-GAAP earnings per diluted share. As non-GAAP earnings per diluted share is not defined by GAAP, our definition of non-GAAP earnings per diluted share may differ from and therefore may not be comparable to similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that non-GAAP earnings per share has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.

Other Liquidity Matters

Contractual Obligations

The table below summarizes our operating lease contractual obligations at June 30, 2014 and the effects of such obligations on liquidity and cash flow in future years (in thousands). There is no change in our other contractual obligations from those disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013.


Contractual Obligations	Total		July 2014 - June 2015		July 2015 - June 2017		July 2017 - June 2019		Thereafter
Operating leases	$	15,272	$	2,902	$	4,879	$	3,394	$	4,097

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2014-9, Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of good or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. This guidance is effective for annual reporting and interim periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective application, with early adoption not permitted. Accordingly, the standard is effective for the Company on January 1, 2017. The Company is currently evaluating the adoption method it will apply and the impact that this guidance will have on its financial statements and related disclosures.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risk, including interest rate risk and foreign currency exchange risk.

Concentration of Revenue and Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Cash equivalents consist primarily of bank deposits and certain investments, such as commercial paper, corporate securities and municipal securities, with maturities less than 90 days or containing seven day guaranteed put features to the issuer. Deposits of cash held outside the United States totaled approximately $9.8 million and $6.8 million at June 30, 2014 and December 31, 2013, respectively.

We grant credit to customers in the ordinary course of business. Credit evaluations are performed on an ongoing basis to reduce credit risk, and no collateral is required from our customers. An allowance for uncollectible accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and credit evaluation. None of our customers individually accounted for 10% or more of our gross accounts receivable as of June 30, 2014 and December 31, 2013. Due to the nature of our quarterly revenue streams derived from royalty revenue, it is not unusual for our accounts receivable balances to include a few customers with large balances. Historically, we have not recorded material losses due to customers’ nonpayment.

For the three and six months ended June 30, 2014 and 2013, no customer accounted for more than 10% of our revenue.

Derivative Financial Instruments and Interest Rate Risk

In the past we have used interest rate derivative instruments to hedge our exposure to interest rate volatility resulting from our variable rate debt. ASC Topic No.815, Derivatives and Hedging , or ASC 815, requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships, including a requirement that all designations must be made at the inception of each instrument. As we did not make such initial designations, ASC 815 requires changes in the fair value of the derivative instrument to be recognized as current period income or expense.

The fair value of derivative instruments is estimated based on the amount that we would receive or pay to terminate the agreements at the reporting date. Our exposure to market risk associated with changes in interest rates relates primarily to our long term debt. The interest rate on our Credit Facility fluctuates with either the prime rate or the LIBOR interest rate. At June 30, 2014 and December 31, 2013, the Company had no borrowings under our revolving Credit Facility. Historically, we have purchased interest rate swap instruments to hedge our exposure to interest rate fluctuations on our debt obligations.

Foreign Currency Exchange Rate Risk

In accordance with ASC Topic No. 830, Foreign Currency Matters , or ASC 830, all assets and liabilities of our foreign subsidiaries whose functional currency is a currency other than U.S. dollars are translated into U.S. dollars at an exchange rate as of the balance sheet date. Revenue and expenses of these subsidiaries are translated at the average monthly exchange rates. The resulting translation adjustments as calculated from the translation of our foreign subsidiaries to U.S. dollars are recorded as a separate component of stockholders’ equity.

We incur foreign currency exchange gains and losses related to certain customers that are invoiced in U.S. dollars, but who have the option to make an equivalent payment in their own functional currencies at a specified exchange rate as of a specified date. In the period from that date until payment in the customer’s functional currency is received and converted into U.S. dollars, we can incur realized gains and losses. We also incur foreign currency exchange gains and losses on certain intercompany assets and liabilities denominated in foreign currencies. We are currently utilizing 30-day forward contracts to mitigate our exposure on these currency fluctuations. At both June 30, 2014 and December 31, 2013 there was one currency contract outstanding, to purchase and sell two different currencies, which was entered into on those dates, and accordingly, the fair value was materially equivalent to its book value.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2014, our principal executive officer and principal financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II—OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

There are no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Sales of Equity Securities

None.

(b) Use of proceeds

Not applicable.

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information about purchases by the Company during the quarter ended June 30, 2014 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

Monotype Imaging Holdings Inc. Purchases of Equity Securities


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs
April 1, 2014 to April 30, 2014 ⁽¹⁾⁽²⁾		178,078	$	24.66		174,939	$	35,960,749
May 1, 2014 to May 30, 2014 ⁽²⁾		347,970		25.97		347,970		26,927,998
June 2, 2014 to June 30, 2014 ⁽¹⁾⁽²⁾		116,675		18.33		116,269		23,926,244

Total		642,723	$	22.99		639,178	$	23,926,244

(1)

The Company repurchased 2,842 and 703 shares of unvested restricted stock in accordance with the Amended and Restated 2007 Stock Option and Incentive Plan, and the Second Amended and Restated 2007 Stock Option and Incentive Plan (the “Second Amended 2007 Stock Option Plan”) and the 2010 Inducement Stock Plan, respectively. The price paid by the Company was determined pursuant to the terms of either the 2007 Stock Option Plan or 2010 Inducement Stock Plan and related restricted stock agreements.

(2)	The Company purchased shares of common stock in accordance with its share repurchase program announced on October 31, 2013. The Company purchased shares on the open market at prevailing market prices.

The Company repurchased 11,920 shares of common stock for $0.3 million in the period of July 14 to July 22, 2014, at an average price per share of $28.14. The Company purchased these shares on the open market at prevailing market prices and in accordance with the Plan. At July 22, 2014, $23.6 million remains for future purchase under the Plan.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report on Form 10-Q and such Exhibit Index is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MONOTYPE IMAGING HOLDINGS INC.

Date: July 28, 2014	By:	/ S / D OUGLAS J. S HAW
		Douglas J. Shaw President, Chief Executive Officer and Director (Principal Executive Officer)

Date: July 28, 2014	By:	/ S / S COTT E. L ANDERS
		Scott E. Landers Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)

EXHIBIT INDEX

Listed and indexed below are all exhibits filed as part of this report.


Exhibit No.		Description

10.1		Fifth Amendment to Lease by and between Acquiport Unicorn, Inc. and Monotype Imaging, Inc., dated as of May 2, 2014.*

10.2		Second Amended and Restated 2007 Stock Option and Incentive Plan (1)

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer.*

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer.*

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer.**

101.INS		XBRL Instance Document**

101.SCH		XBRL Taxonomy Extension Schema Document**

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document**

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document**

101.LAB		XBRL Taxonomy Extension Label Linkbase Document**

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document**

(1)	Incorporated by reference to the Company’s Registration Statement on Form S-8 filed on May 6, 2014.

*	Filed herewith.

**	Furnished herewith.

Exhibit 10.1

ASSIGNMENT AND FIFTH AMENDMENT TO LEASE

THIS ASSIGNMENT AND FIFTH AMENDMENT TO LEASE (this “ Assignment and Amendment ”) is entered into as of the 2 ^nd day of May, 2014 (the “ Effective Date ”), by and between ND/CR UNICORN LLC, a Delaware limited liability company (the “ Landlord ”), MONOTYPE IMAGING HOLDINGS, INC., a Delaware corporation (the “ Tenant ”) and MONOTYPE IMAGING, INC., a Delaware corporation (the “ Original Tenant ”).

Recitals

A. Reference is made to that certain Office Lease dated for reference January 5, 2005, by and between by and between Acquiport Unicorn, Inc., predecessor-in-interest to Landlord, as landlord, and Original Tenant, as tenant, as affected by that certain First Amendment to Lease dated as of January 26, 2005, as further affected by that certain Second Amendment to Lease dated May 26, 2006, as further affected by that certain Third Amendment to Lease dated March 4, 2008, and as further affected by that certain Fourth Amendment to Lease dated December 2, 2009 (as so amended, collectively, the “ Lease ”) with respect to approximately 38,380 rentable square feet of space (the “ Original Premises ”) on the second (2 ^nd ) floor of the building located on the property known as and numbered 500 Unicorn Park, Woburn, Massachusetts (the “ Original Building ”).

B. Original Tenant desires to assign all of its right, title and interest in and to the Lease to Tenant, and Tenant desires to accept such assignment of Original Tenant’s right, title and interest in and to the Lease.

C. Landlord and Tenant have agreed to relocate Tenant (the “ Relocation ”) to approximately 42,250 rentable square feet of space on the third (3 ^rd ) floor (33,224 rsf) and fourth (4 ^th ) floor (9,026 rsf) of the building located on the property known as and numbered 600 Unicorn Park, Woburn, Massachusetts (the “ New Building ”), as more particularly described in Exhibit A attached hereto and made a part hereof (the “ New Premises ”).

D. Landlord and Tenant desire to (i) memorialize the Relocation and (ii) otherwise amend the Lease as more particularly set forth below.

Agreements

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby mutually acknowledged, Landlord, Tenant and Original Tenant hereby agree as follows:

1. Capitalized Terms . Each capitalized term appearing but not defined herein shall have the meaning, if any, ascribed to such term in the Lease.

2. Recitals . The recitals above set forth are true and complete and are incorporated herein by reference.

3. Assignment and Assumption of Lease . Original Tenant does hereby assign, transfer, convey and deliver to Tenant all of Original Tenant’s right, title and interest in and to the Lease (including the Security Deposit which shall continue to be held by Landlord as set forth in the Lease) and the Premises. Tenant does hereby accept the assignment, transfer, conveyance and delivery to Tenant all of Original Tenant’s right, title and interest in and to the Lease and the Premises and expressly assumes and agrees hereafter to pay, perform and observe all the terms, covenants, conditions and obligations of Original Tenant under the Lease. Notwithstanding anything to the contrary herein, this Assignment and Amendment shall not release Original Tenant from any of its obligations under the Lease.

4. Surrender of Original Premises . Tenant acknowledges and agrees that, within five (5) business days after the New Premises Commencement Date (as hereinafter defined), Tenant shall vacate and surrender the Original Premises, vacant, broom clean and free of debris and shall repair any damage to the Original Premises resulting from the removal of Tenant’s fixtures, furniture, equipment and other personal property. Pursuant to and without limiting Landlord’s rights under Section 14 of the Lease, if Tenant fails to timely vacate and surrender to Landlord any portion of the Original Premises as required herein, then Tenant shall be obligated to pay to Landlord, the Holdover Rate specified in Section 14 of the Lease and also pay all damages sustained by Landlord by reason of such failure to vacate and surrender the Original Premises as provided in Section 14 of the Lease. Notwithstanding any provision of the Lease to the contrary, in no event shall any failure of Tenant to vacate the Original Premises (or any portion thereof) or the acceptance by Landlord of the Holdover Rate be deemed to be a consent to such occupancy or be deemed to create a tenancy-at-will or any other tenancy, unless Landlord elects otherwise pursuant to Section 14 of the Lease.

5. New Premises .

a. Landlord shall endeavor to deliver the New Premises to Tenant on or before September 1, 2014, in vacant, broom clean condition, with all base building systems and equipment in good working order and repair. Except as expressly provided in the prior sentence, the New Premises are being leased by Tenant in their condition as of the New Premises Delivery Date (as hereinafter defined), “As Is,” without representation or warranty by Landlord. Tenant acknowledges that it has inspected the New Premises and common facilities of the Building and, except as described in the foregoing sentence and the Base Building Work (as hereinafter defined), has found the same satisfactory. The date that Landlord delivers the New Premises to Tenant in such condition is hereinafter referred to as the “ New Premises Delivery Date ”. Tenant shall have access to the New Premises from and after the New Premises Delivery Date through the New Premises Commencement Date for the purposes of designing and performing the Initial Work in the Premises. Such access shall be subject to and upon all of the terms and conditions of the Lease other than the payment of Base Rent or Additional Rent. Tenant acknowledges that (i) all or a portion of the New

Premises are currently occupied by other tenants, (ii) except as hereinafter provided, Landlord shall not be liable to Tenant for failing to deliver the New Premises, or any portion thereof, to Tenant by any particular date, and (iii) Tenant shall not have the right to terminate this Lease for Landlord’s failure to timely deliver the New Premises, or any portion thereof, to Tenant by any particular date, but shall accept delivery of such New Premises when delivered by Landlord. Notwithstanding the foregoing, if the New Premises Delivery Date has not occurred on or before September 1, 2014, other than as a result of force majeure, Tenant shall be entitled to an additional day for day credit against Base Rent for each day after such date that the New Premises Delivery Date has not occurred until November 30, 2014. If the New Premises Delivery Date has not occurred on or before December 1, 2014, other than as a result of force majeure, Landlord agrees to reimburse Tenant for actual third party costs incurred by Tenant in an amount not to exceed $250,000 (the “ Existing Premises Work Costs ”) to reconfigure or refurbish the Original Premises to enhance functionality and better accommodate employee occupancy (the “ Existing Premises Work ”). All of the Existing Premises Work shall be completed by Tenant in accordance with the requirements set forth in Section 6 of the Lease and the Rules and Regulations for Initial Work and Tenant Alterations attached hereto as Exhibit E . Tenant agrees to mitigate the Existing Premises Work Costs to the extent possible – e.g . acquiring used furniture and quantity and quality of building materials consistent with the current improvements to the Existing Premises. At Tenant’s election, Tenant may receive such reimbursement of the Existing Premises Work Costs as a credit in the amount of such Costs applied against subsequent obligations of Tenant to pay Rent. If the New Premises Delivery Date has not occurred on or before January 1, 2015, other than as a result of force majeure, Tenant shall have the right to extend the term of the Lease with respect to the Original Premises (the “Original Premises Extension Term”) exercisable upon written notice to Landlord given no later than January 31, 2015, for an extension term expiring on the earlier of (a) April 30, 2016 and (b) the date that is six (6) months following the receipt of written notice to Landlord of Tenant’s election to terminate the Original Premises Extension Term. Such extension shall be on the same terms, covenants and conditions as the current Term of the Lease with respect to the Original Premises (without giving effect to this Amendment) and shall be Tenant’s sole and exclusive remedy for Landlord’s failure to deliver the New Premises. Notwithstanding the foregoing, if Tenant exercises such right of extension and Landlord delivers the New Premises in accordance herewith on or before the date that is thirty (30) days following receipt of Tenant’s extension notice, such notice shall be null and void and of no further force and effect and the Lease (and this Amendment) shall continue in full force and effect.

b. From and after the New Premises Commencement Date (as defined in the attached Reference Pages), the New Premises shall constitute the “Premises” and the New Building shall constitute the “Building” under the Lease for all purposes, and from and after the New Premises Commencement Date, the Reference Pages (the “ Amended Reference Pages ”) attached hereto shall be the Reference Pages for all purposes under the Lease and Exhibit A , Exhibit A-1 and Exhibit B to the Lease shall be deleted and Exhibit A , Exhibit A-1 and Exhibit B attached hereto shall be substituted therefor and made a part hereof.

6. Term . Effective as of the New Premises Commencement Date, the Term of the Lease shall be as set forth in the Amended Reference Pages.

7. Rent . Effective as of New Premises Commencement Date, Annual Rent and Monthly Installments of Rent shall be due and payable by Tenant pursuant to Article 3 of the Lease in accordance with the schedule set forth in the Amended Reference Pages.

8. Rent Adjustments . Effective as of New Premises Commencement Date, the definition of “Tenant’s Proportionate Share”, “Base Year (Expenses)”, Base Year (Insurance)” and “Base Year (Taxes)” shall be as set forth in the Amended Reference Pages.

9. Condition of New Premises .

a. Preparation of Plans . Landlord and Tenant have approved the schematic plans attached hereto as Exhibit B (the “ Schematic Plans ”) for the interior finish and layout of the initial improvements which Tenant desires to have performed in the New Premises, including the demolition of interior partitions, remove ceilings, lighting and ductwork and voice/data cabling in the New Premises (collectively, the “ Initial Work ”). Tenant shall prepare, at its sole cost and expense (subject to the Landlord’s Contribution), final plans and specifications for the Initial Work consistent with the Schematic Plans (the “ Plans ”). The Plans shall be prepared by Spagnolo Gisniss & Associates, Inc. (the “ Architect ”). The Plans shall be submitted to Landlord for its approval, which shall not be unreasonably withheld, conditioned or delayed, and Landlord shall approve or disapprove of the Plans within ten (10) days of receiving them. At Tenant’s sole cost and expense (subject to the Landlord’s Contribution), Tenant shall cause the Plans to be revised in a manner sufficient to remedy the Landlord’s reasonable objections and/or respond to the Landlord’s concerns and for such revised Plans to be redelivered to Landlord, and Landlord shall approve or disapprove Tenant’s revised Plans within five (5) business days following the date of resubmission. The Plans shall be stamped by the Architect and engineer, such engineer being subject to Landlord’s prior reasonable approval, and shall comply with Applicable Law and the requirements of the Rules and Regulations and shall be in a form satisfactory to appropriate governmental authorities responsible for issuing permits, approvals and licenses required for such Initial Work. The Architect shall agree to reasonably cooperate with Landlord and the general contractor to administer the construction contract and issue certifications and certificates of payment thereunder. Landlord shall not charge any administrative or management fees in connection with the Initial Work.

b. Initial Work . All of the Initial Work shall be completed by Tenant in accordance with the requirements set forth in Section 6 of the Lease and the Rules and Regulations for Initial Work and Tenant Alterations attached hereto as Exhibit E (which shall be applicable to the Initial Work and any further Alterations).

c. Landlord’s Contribution . Landlord shall reimburse Tenant for the costs incurred by the Tenant with respect to the design and performance of the Initial Work (the “ Cost of Initial Work ”) up to $1,683,160 (the “ Landlord’s Contribution ”), subject to the provisions hereof. If the Cost of the Initial Work is less than the Landlord’s Contribution, the remaining balance (not to exceed $126,237) may be used by Tenant for moving and voice and data cabling expenses (the “ Moving Allowance ”), subject to the provisions hereof. To the extent that the Cost of Initial Work exceeds the Landlord’s Contribution, Tenant shall be entirely responsible for such excess. Landlord’s Contribution shall be payable by Landlord directly to the general contractor in installments as the Initial Work progresses. Prior to payment of any such installment, Tenant shall deliver to Landlord a written request, to be submitted no more frequently than once every thirty (30) days, for such disbursement, which request shall be accompanied by: (i) invoices for the Initial Work covered by any previous requisition; (ii) copies of partial lien waivers or final lien waivers (in the case of a final installment); and (iii) a certificate signed by the Architect and an officer of the Tenant certifying that the Initial Work represented by the aforementioned invoices has been completed substantially in accordance with the Plans and that the remaining portion of Landlord’s Contribution is sufficient to pay in full for the completion of the Initial Work. If at any time the amount of Landlord’s Contribution remaining is insufficient to pay for the remaining amount of the Initial Work, then Tenant shall pay from its own funds all further sums necessary to enable Tenant and Tenant’s architect to again make the certification required under subsection (iii) above. Notwithstanding the foregoing, Tenant may elect to fund any sums necessary to complete the Initial Work up to $420,790.00, which may be financed by Landlord pursuant to a promissory note made by Tenant to the order of Landlord (the “ Note ”) in the form attached hereto as Exhibit PN . Any default under the Note continuing beyond applicable notice and cure periods shall be an Event of Default under the Lease.

Any portion of Landlord’s Contribution which has not been requested on or before the first anniversary of the date hereof shall be deemed forfeited by Tenant and Landlord shall have no further obligation with respect thereto. The Landlord’s Contribution shall be deemed a part of the Concession Amount under Section 19.3 of the Lease.

d. Early Entry . Landlord shall use reasonable efforts to coordinate access for Tenant to the New Premises after the execution hereof for design, space planning and inspection to such space in the event Tenant requires access, subject to the terms and provisions of the applicable leases of existing tenants of the New Premises.

10. Base Building Work . Landlord shall, at Landlord’s expense, in a good and workmanlike manner complete (or pay for to the extent the parties agree that the

Base Building Work is included in the Initial Work and is performed by Tenant’s general contractor) the following work in the common areas of the Building and the New Premises, as applicable prior to the New Premises Commencement Date, subject to force majeure, Tenant Delay and other reasons beyond Landlord’s reasonable control (the “ Base Building Work ”):

Complete, if necessary, any improvements to the restrooms, elevators or egress on the 3 ^rd and 4 ^th floors of the Building to evidence compliance with the Americans with Disabilities Act of 1990 (the “ADA”).

Deliver the existing window coverings in the Premises in clean and good condition free from any material defects.

Replace all existing single level water fountains with bi-level water fountains to meet ADA requirements.

Replace covers on all wall unit heaters in the New Premises.

Ensure all concrete floors within the New Premises are free of any material defect.

Ensure that fire alarm panels are in compliance with current codes.

11. Signage . Tenant shall be permitted, at its sole cost and expense, to install, maintain, repair and use on a non-exclusive basis a sign on the exterior elevation of the Building facing Interstate Route 93 (the “ Exterior Sign ”). The Exterior Sign, including the location, size, style, type, materials used and installation methods employed, shall be subject to Landlord’s prior written consent, not to be unreasonably withheld upon submission of detailed plans by Tenant. Tenant shall obtain all necessary permits and approvals and comply with all applicable laws, codes and ordinances in connection with the installation, operation maintenance and use of the Exterior Sign. At the expiration of the term or earlier termination of this Lease, Tenant shall remove the Exterior Sign and repair all damage caused by such removal in a good and workmanlike manner and restore the exterior elevation and facade of the Building to the same condition as existed prior to the installation of the Exterior Sign.

12. Back Up Power Generator and Supplemental HVAC . Tenant, at its sole cost and expense, shall have the non-exclusive right (it being understood that Landlord may grant, extend or renew similar rights to others) to install, operate, maintain, and from time to time replace a Back Up Power Generator (the “ Generator ”) and a Supplemental HVAC Unit (the “ Unit ”) either on the roof of the Building or at ground level on the Property. Possible locations for the Generator and Unit are noted on Exhibit A. Prior to commencing any installation, operation or maintenance of either the Generator or the Unit, Tenant shall (i) obtain Landlord’s prior approval of the plans and specifications therefor, including the proposed size, weight (if located on the roof) and location and, if located on the roof, the method for fastening to the roof and the power supply therefor, (ii) such installation and/or replacement shall comply strictly with all Laws and, if located

on the roof, the conditions of any bond or warranty maintained by Landlord on the roof, (iii) use the Generator and/or the Unit solely for its own use or such Building common area use as approved by Landlord, (iv) not grant any right to use of the Unit to any other party, and (v) obtain and maintain in effect, at Tenant’s sole cost and expense, any necessary federal, state, and municipal permits, licenses and approvals, and deliver copies thereof to Landlord. If located on the roof, Landlord may supervise or perform any roof penetration related to the installation of the Generator or the Unit, as applicable, and Landlord may charge the cost thereof to Tenant. Tenant agrees that all installation, construction, operation and maintenance shall be performed in a neat, responsible, good and workmanlike manner, using generally acceptable construction standards, consistent with such reasonable requirements as shall be imposed by Landlord. Tenant shall repair any damage to the Building caused by Tenant’s installation, maintenance, replacement, use or removal of the Generator and the Unit, as applicable. Any Generator or Unit shall remain the property of Tenant, and Tenant may remove the same at its cost at any time during the Term. Tenant shall remove the Generator and the Unit, as applicable, at Tenant’s cost and expense upon the expiration or termination of this Lease. Tenant agrees that the Generator and the Unit, as applicable, and any wires, cables or connections relating thereto, and the installation, maintenance and operation thereof shall in no way interfere with the use and enjoyment of the Building or the equipment of other tenants or occupants of the Property. If such interference shall occur, Landlord shall give Tenant written notice thereof and Tenant shall correct promptly after receipt of such notice.

13. Expenses . The definition of Expenses in Section 4.1.2 of the Lease is amended to provide that the management fee included in Expenses shall not exceed 4% of the gross rent for the Building. Section 4.3 of the Lease is amended by adding the words “or Base Year” to the end of the last sentence thereof. Further Section 4.3 is amended by adding the following at the end thereof:

Landlord will provide a cap on increases in Controllable Expenses (as hereinafter defined) not to exceed 105% of the prior Lease Year’s Controllable Expenses but such cap shall only apply in the event that Expenses exceed by more than 105% Expenses for the prior Lease Year. In calculating the cap on Controllable Expenses in any Lease Year, first , Uncontrollable Expenses (as hereinafter defined) shall be deducted from Expenses (if overall Expenses exceed more than 105% Expenses for the prior Lease Year), second , the cap shall be applied to Controllable Expenses for the current Lease Year, if applicable, third , Uncontrollable Expenses shall be added to Controllable Expenses, as limited by the cap hereunder. As used herein, “Controllable Expenses” shall mean all Expenses except for Uncontrollable Expenses and “Uncontrollable Expenses” shall mean expenses for (i) snow removal, (ii) utilities, (iii) labor cost premiums for cleaning services resulting from collective bargaining/union contracts, and (iv) extraordinary repair and maintenance items.

14. Gym . Landlord agrees to cause a gym to be operated in the Park, subject to casualty and condemnation, force majeure, other causes beyond Landlord’s reasonable control and occasional down time due to change of management or ownership or

remodeling. The location, days and hours of operation and type of equipment and services of such gym shall be determined by Landlord in its sole discretion. This covenant shall terminate at such time as Tenant no longer occupies and is conducting business in substantially the entire Premises.

15. Use . The New Premises shall be used solely for general office use.

16. Insurance . Section 11.1 of the Lease is deleted in its entirety and the following is substituted therefor:

“11.1 Tenant shall keep in force throughout the Term: (a) a Commercial General Liability insurance policy with a limit of not less than $3,000,000 per occurrence and not less than $5,000,000 in the annual aggregate, or such larger amount as Landlord shall prudently require from time to time, covering bodily injury and property damage liability and $2,000,000 products liability/completed operations aggregate; (b) Business Auto Liability covering owned, non-owned and hired vehicles with a limit of not less than $1,000,000 per accident; (c) Worker’s compensation with limits at least as required by statute and Employers Liability with limits of at least $1,000,000 Bodily Injury by Accident for Each Accident, $1,000,000 Bodily Injury by Disease for Each Person and $1,000,000 Bodily Injury by Disease policy limit (d) All Risk or Special Form coverage protecting Tenant against loss of or damage to Tenant’s alterations, additions, improvements, carpeting, floor coverings, panelings, decorations, fixtures, inventory and other business personal property situated in or about the Premises to the full replacement value of the property so insured; and (e) Business Interruption Insurance with limit of liability representing loss of at least approximately six (6) months of income. Tenant may satisfy such insurance requirements by including the Premises in a so-called “blanket” and/or “umbrella” insurance policy, provided that the amount of coverage allocated to the Premises shall fulfill the requirements set forth herein.”

17. Extension Option . Section 37 of the Lease is amended by deleting the first paragraph thereof and substituting therefor the following:

“Tenant shall have the option (the “ Extension Option ”) to extend the Term of this Lease for two (2) additional periods of five (5) years each with respect to all of the Premises or with respect to only the portion of the Premises located on the third (3 ^rd ) floor of the Building consisting of 33,224 rentable square feet. Tenant’s right to exercise its Extension Option is conditioned upon (a) no Default of Tenant existing on the date of exercise or the date the Extension Term is to commence, (b) this Lease being in full force and effect and (c) Monotype Imaging Holdings Inc. (or Affiliate to whom the Lease has been assigned pursuant to Section 9.2 of the Lease) occupying no less than 50% of the Premises from the New Premises Commencement Date on the date of its exercise of such Extension Option and the date on which the Extension Term is to commence. If Tenant exercises its Extension Option, then the portion of the Term preceding the originally scheduled Termination Date shall be referred to as the “ Initial Term ,”

and the portion of the Term from and after the originally scheduled Termination Date shall be referred to as the “ Extension Term .” The Extension Term shall be upon all the same terms, covenants and conditions as the Initial Term, except (i) as to Annual Rent and Monthly Installment of Rent, which shall be determined as set forth in Section 37.2, and (ii) that on the second extended term Tenant shall have no further extension rights unless otherwise expressly provided herein or hereafter agreed to in writing by Landlord.”

18. Right of First Offer . From and after the New Premises Commencement Date, Section 41 of the Lease is deleted in its entirety and the following is substituted therefor: “Tenant shall have a right of first offer (the “ Right of First Offer ”) to lease any space which is immediately contiguous to, and on the same floor as, the Premises which becomes available in the Building (the “ Expansion Space ”), subject to the existing rights of other tenants in the Building as of the Effective Date of this Assignment and Amendment, and subject to the right of Landlord to extend or renew any then current lease (or enter into a new lease with the same tenant even if no extension or renewal rights are contained in said then current lease). If (a) Landlord decides to lease any part of the Expansion Space, (b) such Expansion Space is to become available for leasing, (c) no other party has a prior right thereto, and (d) Landlord has not extended or renewed any then current lease thereof, Landlord agrees to offer the Expansion Space to Tenant (the “ Offer ”) first before offering it to any other person. The Expansion Space is to be offered at the fair market rent determined by Landlord in its sole discretion (the “ Expansion Space Rent ”), but otherwise on the same terms and conditions as contained in this Lease (other than condition, which shall be “as is” without any contribution by Landlord for fit- up of the Expansion Space), except that Tenant’s Proportionate Share shall be adjusted proportionately to reflect the Expansion Space and except that the Term with respect to the Premises, including without limitation, the Expansion Space, may be extended by virtue of any acceptance of the Offer as set forth below.

The Offer shall set forth (1) Landlord’s determination of the Expansion Space Rent, (2) the anticipated delivery date, (3) the additional letter of credit or and/or security deposit to be required, and (4) the term of the Lease which will be required for all of the Premises as more particularly described below. The term of the Lease as to all the Premises shall end on the later to occur of (y) the Termination Date hereof, and (z) the date which is three (3) years after the date the Expansion Space would become part of the Premises hereunder as set forth in the Offer. In such instance, the Offer shall also set forth the Annual Rent for the non-Expansion Space for the period from and after the expiration of the then current Term. Tenant shall have ten (10) business days following receipt of the Offer to provide Landlord with written notice that Tenant accepts or rejects the Offer, time being of the essence. If Tenant fails to notify Landlord of its decision within the ten (10) business day period, Tenant shall be deemed to have rejected the Offer and Landlord shall be free thereafter to offer the Expansion Space to any person on such terms as may be agreed to with such third party.

If Tenant accepts the Offer, then Tenant shall be fully responsible, at its sole cost and expense, to construct leasehold improvements therein and to demise the same.

Tenant’s right to be provided with an Offer and its right to accept the Offer are conditioned upon (i) no Event of Default of Tenant having occurred either on or before the date of the exercise or the date the Expansion Space is added to the Premises, (ii) this Lease being in force and effect and (c) Monotype Imaging Holdings Inc. (or Affiliate to whom the Lease has been assigned pursuant to Section 9.2 of the Lease) occupying no less than 50% of the Premises on the date of its exercise of such Extension Option and the date on which the Extension Term is to commence.

If Tenant shall fail or decline to accept any Offer, then this Right of First Offer shall lapse and this Section 41 shall be void and of no further force and effect as to the Expansion Space so offered, provided, however, that if Landlord desires to lease such Expansion Space at a net effective rent less than ninety percent (90%) of the Expansion Space Rent set forth in Landlord’s offer or to offer for lease the Expansion Space twelve (12) months or more after Tenant elected not to lease, or the date by which Tenant failed timely to elect to lease, such Expansion Space then, prior to leasing the applicable Expansion Space to another party, Landlord shall again give Tenant notice of the availability of the applicable Expansion Space and the offer terms and an opportunity to lease the same in accordance with the foregoing provisions of this Section.”

19. Miscellaneous . Tenant hereby acknowledges that (i) Landlord has no undischarged obligations under the Lease to perform any work or improvements to the Original Premises or, except as provided herein, the New Premises or to provide any tenant improvement allowance under the Lease; (ii) there are no offsets or defenses that Tenant has against the full enforcement of the Lease by Landlord; (iii) neither Landlord nor Tenant is in any respect in default under the Lease; and (iv) Tenant has not assigned, transferred or hypothecated the Lease or any interest therein or subleased all or any portion of the Original Premises.

20. Brokers . Landlord and Tenant hereby represent and warrant to each other that neither has dealt with any real estate broker or agent in connection with the procurement of this Assignment and Amendment other than Cushman & Wakefield. Landlord and Tenant shall indemnify and hold each other harmless from any costs, expenses or liabilities (including costs of suit and reasonable attorneys’ fees) for any compensation, commission or fees claimed by any real estate broker or agent other than the aforementioned broker in connection with the procurement of this Assignment and Amendment because of any act or statement by Landlord or Tenant.

21. Entire Amendment . This Assignment and Amendment contains all the agreements of the parties with respect to the subject matter hereof and supersedes all prior dealings between the parties with respect to such subject matter.

22. Authority . Landlord and Tenant each warrant to the other that the person or persons executing this Assignment and Amendment on its behalf has or have authority to do so and that such execution has fully obligated and bound such party to all terms and provisions of this Assignment and Amendment.

23. Binding Amendment . This Assignment and Amendment shall be binding upon, and shall inure to the benefit of the parties hereto, and their respective successors and assigns.

24. Ratification . Except as herein modified, the Lease is hereby ratified and confirmed.

25. Governing Law . This Assignment and Amendment shall be governed by the law of the Commonwealth of Massachusetts.

26. Enforceability . If any clause or provision of this Assignment and Amendment is or should ever be held to be illegal, invalid or unenforceable under any present or future law applicable to the terms hereof, then and in that event, it is the intention of the parties hereto that the remainder of this Assignment and Amendment shall not be affected thereby, and that in lieu of each such clause or provision of this Assignment and Amendment that is illegal, invalid or unenforceable, such clause or provision shall be judicially construed and interpreted to be as similar in substance and content to such illegal, invalid or unenforceable clause or provision as the context thereof would reasonably suggest, so as to thereafter be legal, valid and enforceable.

27. No Offer . Submission of this Assignment and Amendment for examination or signature is without prejudice and does not constitute a reservation, option or offer, and this Assignment and Amendment shall not be effective until execution and delivery by all parties.

28. Counterparts . This Assignment and Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

29. Independent Covenants . As a material inducement for Landlord and Tenant to enter into this Assignment and Amendment and the Lease, both Landlord and Tenant acknowledge and agree that the Lease shall be construed as though the covenants therein between Landlord and Tenant are completely independent and not dependent and Tenant hereby expressly agrees that if Landlord fails to perform its obligations set forth therein, Tenant shall not be entitled to make any repairs or perform any acts thereunder at Landlord’s expense or to any setoff of the Rent or other amounts owing hereunder against Landlord (except as otherwise provided in the Lease) or terminate the Lease as a result of Landlord’s failure to perform or refraining from performing any covenant or obligation of Landlord thereunder. This Section shall not limit any equitable remedies that Tenant may have or its rights under applicable law.

30. OFAC Certification . Tenant certifies that (a) it is not acting, directly or indirectly, for or on behalf of any Person, group or nation named by an Executive Order or the United States Treasury Department as a terrorist, “Specially Designated National and Blocked Person,” or other banned or blocked Person, nation, or transaction pursuant to any law, order, rule or regulation that is enforced or administered by the Office of Foreign Assets Control, and (b) Tenant has not entered into this Lease, directly or

indirectly on behalf of any such Person, group, or nation. Tenant hereby agrees to defend, indemnify and hold harmless Landlord from and against any and all claims, damages, losses, risks, liabilities, and reasonably expenses (including, without limitation, attorney’s fees and costs) arising from or related to any breach of the foregoing certification.

31. Effective Date . The parties agree that this Assignment and Amendment shall be effective as of the Effective Date. To the extent this Assignment and Amendment contains language which purports to amend the Lease with respect to periods of time prior to the Effective Date, such language is for clarification purposes only and shall not be deemed to change the obligations of the parties with respect thereto. In no event shall this Assignment and Amendment be construed to (y) limit, waive, release or terminate any default by, or outstanding obligation of, Tenant whatsoever existing under the Lease prior to the Effective Date, all of which, if any, shall expressly survive the effect of this Assignment and Amendment and are hereby reserved, or (z) impose any liability on Landlord for any period of time preceding its ownership of the Building.

[The Remainder of this Page Intentionally Left Blank]

IN WITNESS WHEREOF, the parties hereto have executed this Assignment and Amendment under seal as of the date and year first above written.


LANDLORD:

ND/CR UNICORN LLC, a Delaware limited liability company

By: CR/ND Unicorn LLC, a Delaware limited liability company, its Operations Member

By: ND Unicorn LLC, a Massachusetts limited liability company, its Managing Member

By: ND Real Estate, Inc., a Massachusetts corporation, its Manager

By:

Name:		Edward L. Marsteiner
Title:		Vice President

TENANT:

MONOTYPE IMAGING HOLDINGS, INC., a Delaware corporation

By:

		Name: Douglas J. Shaw
		Title: President & CEO

ORIGINAL TENANT:

MONOTYPE IMAGING, INC., a Delaware corporation

By:

		Name: Douglas J. Shaw
		Title: President & CEO

AMENDED REFERENCE PAGES

Attached to and made a part of Lease bearing the

Lease Reference Date of January 5, 2005 between

ND/CR Unicorn LLC, as Landlord, and

Monotype Imaging Holdings, Inc., as Tenant, as amended


LEASE REFERENCE DATE:		January 5, 2005

LANDLORD:		ND/CR Unicorn LLC, a Delaware limited liability company

LANDLORD’S ADDRESS:		c/o National Development 2310 Washington Street Newton Lower Falls, MA 02462 Attention: Edward L. Marsteiner
WIRE INSTRUCTIONS AND/OR ADDRESS FOR RENT PAYMENTS:		Wiring Instructions:
		Bank:
		ABA/Routing #:

		Account Name:
		Account Number:
		Account Type:

		Mailing Address:

		National Development 2310 Washington Street Newton Lower Falls, MA 02462 Attention: Accounting

LANDLORD’S MANAGING AGENT:		National Development Asset Management of New England Limited Partnership, or such other person or entity from time to time designated by Landlord.

TENANT:		Monotype Imaging Holdings, Inc., a Delaware corporation

TENANT’S NOTICE ADDRESS:		Prior to New Premises Commencement Date: 500 Unicorn Park Drive Woburn, MA 01801 Attention: After New Premises Commencement Date: 600 Unicorn Park Drive



		Woburn, MA 01801 Attention:

BUILDING:		600 Unicorn Park Drive Unicorn Park Woburn, MA 01801

LOT:		The land area described on the attached Exhibit A-1

PARK:		The office park described on Exhibit A-2

PREMISES ADDRESS:		600 Unicorn Park Drive Unicorn Park Woburn, MA 01801

PREMISES RENTABLE AREA:		Approximately 42,250 rentable square feet (for outline of Premises see Exhibit A).

NEW PREMISES COMMENCEMENT DATE:		The date that is the first to occur of (a) four (4) months after the New Premises Delivery Date and (b) the date that Tenant substantially completes the Initial Work and occupies the New Premises for the conduct of its business.

TERM OF LEASE:		8 Years commencing on the New Premises Commencement Date and expiring on the Termination Date; provided however if the New Premises Commencement Date is other than the first of the month the Term shall include the period up to the first day of next full calendar month.

TERMINATION DATE:		The last day of the ninety-sixth (96 ^th ) full calendar month after the New Premises Commencement Date

ANNUAL RENT AND MONTHLY INSTALLMENT OF RENT (Article 3):


Period	Annual Rent		Monthly Installment of Rent

Months 1 – 3; including any partial month at the beginning of the Term		$0.00; provided Tenant is not in default hereunder		$0.00; provided Tenant is not in default hereunder

Months 4 - 36	$	1,193,562.50	$	99,463.54

Months 37 – 72	$	1,235,812.50	$	102,984.38

Months 73 - 96	$	1,278,062.50	$	106,505.21

Tenant shall be responsible for Tenant’s electricity costs (including, but not limited to, electricity for lights, plugs, VAV boxes and any supplemental HVAC systems) throughout the Term in addition to the above- referenced Rent and in addition to Expenses. Such electricity costs are estimated to be $1.50/ s.f. per year and Tenant shall make monthly electricity payments to Landlord, as additional rent along with the Monthly Installment of Rent, in an amount determined by Landlord, based on such estimate. As part of the annual cost of Tenant’s usage for the year in question, based on the sub-meter readings and the utility company rates, Tenant shall pay any underpayment, or be entitled to a credit for any overpayment, in same manner as contemplated in Section 4.5.


BASE YEAR (EXPENSES):		Calendar Year 2015

BASE YEAR (INSURANCE):		Calendar Year 2015

BASE YEAR (TAXES):		Fiscal Year 2015 (i.e. July 1, 2014 – June 30, 2015)

TENANT’S PROPORTIONATE SHARE:		32.28% (42,250 sf/ 130,876 sf)

SECURITY DEPOSIT:		$142,325.84, in cash

ASSIGNMENT/SUBLETTING FEE:		$2,000

AFTER HOURS HVAC COST:		$50.00 per hour, subject to change

PARKING:		The Parking ratio for the Lot is 3.5 spaces per 1,000 square feet of rentable space in the Building and 148 parking spaces are available, non-exclusively, on an unreserved, first come, first served basis. As part of the parking spaces available to Tenant, Tenant shall have the right to use fifty (50) reserved parking spaces within the parking deck on the Lot in an area designated by Landlord and as noted on Exhibit A, Tenant shall also have the right to use 21 additional spaces on the first (1 ^st ) floor at the parking garage located at the adjacent property owned by Landlord known as and numbered 400 Unicorn Park Drive.

REAL ESTATE BROKER DUE COMMISSION:		Cushman & Wakefield

BUILDING BUSINESS HOURS:		Monday through Friday, 8:00 a.m. – 6:00 p.m. Saturday 8:00 a.m. – 1:00 p.m.

AMORTIZATION RATE:		11%

The Amended Reference Pages information is incorporated into and made a part of the Lease and each reference in the Lease to any of the foregoing terms shall be construed to incorporate that term set forth in the Amended Reference Pages. The Lease includes Exhibits A – D, all of which are made a part of the Lease.


LANDLORD:

ND/CR UNICORN LLC, a Delaware limited liability company

By:		CR/ND Unicorn LLC, a Delaware limited liability company, its Operations Member

By:		ND Unicorn LLC, a Massachusetts limited liability company, its Managing Member

By:		ND Real Estate, Inc., a Massachusetts corporation, its Manager

By:

Name:		Edward L. Marsteiner
Title:		Vice President

TENANT:

MONOTYPE IMAGING HOLDINGS, INC., a Delaware corporation

By:

		Name: Douglas J. Shaw
		Title: President & CEO

Exhibit A

Attached to and made a part of Lease

between

ND/CR Unicorn LLC, as Landlord, and

Monotype Imaging Holdings, Inc., as Tenant, as amended

PREMISES

Exhibit A is intended only to show the general layout of the Premises as of the beginning of the Term of this Lease. It does not in any way supersede any of Landlord’s rights set forth in Article 17 with respect to arrangements and/or locations of public parts of the Building and changes in such arrangements and/or locations. It is not to be scaled; any measurements or distances shown should be taken as approximate.

LOGO

Exhibit A-1

Attached to and made a part of Lease

between

ND/CR Unicorn LLC, as Landlord, and

Monotype Imaging Holdings, Inc., as Tenant, as amended

DESCRIPTION OF LOT

600 Unicorn Park Drive

Unicorn Park

Woburn, Massachusetts

The Lot described in the attached Lease is identified as Lot 5 on the plan recorded with the Middlesex South District Registry of Deeds as Plan No. 1283 of 1980, in Book 14105, Page 86.

Exhibit B

Attached to and made a part of Lease

between

ND/CR Unicorn LLC, as Landlord, and

Monotype Imaging Holdings, Inc., as Tenant, as amended

Initial Work Schematic Plan

LOGO

Exhibit PN

Attached to and made a part of Lease

between

ND/CR Unicorn LLC, as Landlord, and

Monotype Imaging Holdings, Inc., as Tenant, as amended

PROMISSORY NOTE


$ .00		, 2014

FOR VALUE RECEIVED , [ ], a corporation, with an address of 600 Unicorn Park Drive, Woburn, Massachusetts (hereinafter collectively referred to as the “Maker”), unconditionally promises to pay to the order of ND/CR UNICORN LLC , a Delaware limited liability company (hereinafter called the “Payee”, which term shall include the holder or holders from time to time of this Note), at 2310 Washington Street, Newton Lower Falls, Massachusetts 02462, or at such other place as the Payee may from time to time designate in writing, the principal sum of AND NO/100 DOLLARS ($ .00) (hereinafter referred to as the “Loan Amount”) in lawful money of the United States of America, with interest thereon or on the balance thereof from time to time outstanding, at the Interest Rate (as hereinafter defined), computed from the date hereof until all obligations hereunder are paid in full. As used herein, “Interest Rate” shall mean an annual interest rate of eight percent (8%) per annum.

Reference is made to that certain Office Lease dated for reference January 5, 2005, by and between by and between Acquiport Unicorn, Inc., predecessor-in-interest to Payee, as landlord, and Tenant, as tenant, as affected by that certain First Amendment to Lease dated as of January 26, 2005, as further affected by that certain Second Amendment to Lease dated May 26, 2006, as further affected by that certain Third Amendment to Lease dated March 4, 2008, as further affected by that certain Fourth Amendment to Lease dated December 2, 2009, as further affected by that certain Fifth Amendment to Lease dated , 2014 (as so amended, collectively, the “ Lease ”) with respect to approximately 42,079 rentable square feet of space (the “ Premises ”) in the building located on the property known as and numbered 600 Unicorn Park, Woburn, Massachusetts. Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Lease. Under the Lease, Payee, as landlord, has agreed to fund a portion of the Cost of the Initial Work. $ of the Cost of the Initial Work is being financed by Payee under this Note.

Maker shall make monthly payments of principal and interest of $ beginning on the New Premises Commencement Date and on the same day of each calendar month thereafter until the principal together with all interest and other charges payable with respect to the Loan are fully paid. All accrued interest, outstanding principal and other charges due under this Note shall be due and payable on the Termination Date under the Lease (the “Maturity Date”).

All payments received by the Payee are to be applied as follows: (a) first, to payment of all costs and expenses of the Payee incurred in connection with the enforcement of any provision of this Note, or with respect to any collateral or security herefor, or any collection activities relating to all or any portion of the indebtedness evidenced hereby, (b) second, to payment of accrued but unpaid interest due hereunder, and (c) third, to payment of unpaid principal as a full or partial prepayment hereunder.

This Note and all accrued and unpaid interest and other amounts due hereunder may be prepaid in full or in part at any time without premium or penalty.

In the event of (i) default in any payment due hereunder continuing for more than ten (10) days after written notice thereof from Payee, except for payment in full hereunder on the Maturity Date when no notice shall be required, or (ii) an Event of Default under the Lease, then in any such event the principal balance then remaining unpaid, including, without limitation, all unpaid interest and other amounts due hereunder, at the option of the Payee, shall immediately become due and payable. The failure of the Payee to exercise said option to accelerate shall not constitute a waiver of the right to exercise the same at any other time. No delay or omission on the part of the Payee in exercising any right hereunder shall operate as a waiver of such right or any other right of the Payee, nor shall any delay, omission or waiver on any one occasion, be deemed a bar to or waiver of the same or any other right on any future occasion.

All amounts due under this Note paid after when due, including, without limitation, the Maturity Date and/or after acceleration, shall bear interest at a rate of eighteen percent (18%) per annum for the due date until such amounts due under this Note or such other amounts as are due hereunder are paid to the Payee.

All notices permitted or required pursuant to this Note shall BE given in the manner provided for under the Lease.

The Maker waives presentment and demand for payment, notice of dishonor, protest and notice of protest and agrees to pay all costs and expenses incurred or paid by the Payee hereof in enforcing this Note or any collateral or security therefor, including, without limitation, reasonable attorneys’ fees and expenses, whether or not litigation is commenced.

This Note shall be governed by and construed according to the laws of the Commonwealth of Massachusetts.

In the event that fulfillment of any provision of this Note at the time performance of such provision shall be due and as a result of any circumstance, shall involve transcending the limit of validity presently or hereinafter prescribed by any applicable usury statute or any other law with regard to obligations of like character and amount, then ipso facto the obligation to be fulfilled shall be reduced to the limit of such validity, so that in no event shall any exaction be possible under this Note that is in excess of the limit of such validity. In no event shall the Maker be bound to pay for the use, forbearance or detention of the money loaned pursuant hereto, interest of more than the maximum rate, if any, permitted by law to be charged by the Payee; the right to demand any such excess being hereby expressly waived by the Payee.

All of the provisions of this Note shall be binding upon and inure to the benefit of the Maker and the Payee hereof and their respective successors and assigns, provided that the Maker may not assign the obligations under this Note.

This Note may not be changed or terminated orally, but only by an agreement in writing signed by the party against whom enforcement of such change or termination is sought.

[End of text. Signatures on next page.]

IN WITNESS WHEREOF, the Maker has duly executed and delivered this Note under seal as of the day and year first above written.

Exhibit E

Attached to and made a part of Lease

between

ND/CR Unicorn LLC, as Landlord, and

Monotype Imaging Holdings, Inc., as Tenant, as amended

Rules and Regulations for Initial Work and Tenant Alterations

General

a. All Alterations made by Tenant in, to or about the Premises shall be made in accordance with the requirements of this Exhibit and by contractors or mechanics approved by Landlord.

b. Tenant shall, prior to the commencement of any work, submit for Landlord’s written approval, complete plans for the Alterations, with full details and specifications for all of the Alterations, in compliance with Section D below.

c. Alterations must comply with the Building Code applicable to the Property and the requirements, rules and regulations and any other governmental agencies having jurisdiction.

d. No work shall be permitted to commence before Tenant obtains and furnishes to Landlord copies of all necessary licenses and permits from all governmental authorities having jurisdiction.

e. All demolition, removals or other categories of work that may inconvenience other tenants or disturb Building operations, must be scheduled and performed before or after normal business hours, and Tenant shall provide Landlord’s Managing Agent with at least 24 hours’ notice prior to proceeding with such work.

f. All inquiries, submissions, approvals and all other matters shall be processed through Landlord’s Managing Agent.

g. All work, if performed by a contractor or subcontractor, shall be subject to reasonable supervision and inspection by Landlord’s representative. Such supervision and inspection shall be at Tenant’s sole expense and Tenant shall pay Landlord’s reasonable charges for such supervision and inspection.

2.	Prior to Commencement of Work

a. Tenant shall submit to the Building manager a request to perform the work. The request shall include the following enclosures:

(1)

A list of Tenant’s contractors and/or subcontractors for Landlord’s approval.

(2)

Four complete sets of plans and specifications properly stamped by a registered architect or professional engineer.

(3)

A properly executed building permit application form.

(4)

Four executed copies of the Insurance Requirements Agreement in the form attached to this Exhibit as Attachment I and made a part hereof from Tenant’s contractor and, if requested by Landlord, from the contractor’s subcontractors.

(5)

Contractor’s and subcontractor’s insurance certificates.

b. Landlord will return the following to Tenant:

(1)

A letter of approval or disapproval with specific comments as to the reasons therefor (such approval or comments shall not constitute a waiver of approval of governmental authorities).

(2)

Two fully executed copies of the Insurance Requirements Agreement.

c. Landlord’s approval of the plans, drawings, specifications or other submissions in respect of any Alterations shall create no liability or responsibility on the part of Landlord for their completeness, design sufficiency or compliance with requirements of Applicable Law.

d. Tenant shall obtain a building permit from the Building Department and necessary permits from other governmental agencies. Tenant shall be responsible for keeping current all permits. Tenant shall submit copies of all approved plans and permits to Landlord and shall post the original permit on the Premises prior to the commencement of any work.

3.	Requirements and Procedures

a. All structural and floor loading requirements of Tenant shall be subject to the prior approval of Landlord’s structural engineer at Tenant’s sole cost and expense.

b. All mechanical (HVAC, plumbing and sprinkler) and electrical requirements shall be subject to the approval of Landlord’s mechanical and electrical engineers and all mechanical and electrical work shall be performed by contractors who are engaged by Landlord in constructing, operating or maintaining the Building. When necessary, Landlord will require engineering and shop drawings, which drawings must be approved by Landlord before work is started. Drawings are to be prepared by Tenant and all approvals shall be obtained by Tenant.

c. If shutdown of risers and mains for electrical, life safety system, HVAC, sprinkler and plumbing work is required, such work shall be supervised by Landlord’s representative. No work will be performed in Building mechanical equipment rooms without Landlord’s approval and under Landlord’s supervision.

d. Tenant’s contractor shall:

(1)

have a superintendent or foreman on the Premises at all times;

(2)

police the job at all times, continually keeping the Premises orderly;

(3)

maintain cleanliness and protection of all areas, including elevators (if any) and lobbies.

(4)

protect the front and top of all peripheral HVAC units and thoroughly clean them at the completion of work;

(5)

block off supply and return grills, diffusers and ducts to keep dust from entering into the Building air conditioning system; and

(6)

avoid the disturbance of other tenants.

e. If Tenant’s contractor is negligent in any of its responsibilities, Tenant shall be charged for corrective work.

f. All equipment and installations must be equal to the standards generally in effect with respect to the remainder of the Building. Any deviation from such standards will be permitted only if indicated or specified on the plans and specifications and approved by Landlord.

g. A properly executed air balancing report signed by a professional engineer shall be submitted to Landlord upon the completion of all HVAC work.

h. Upon completion of the Alterations, Tenant shall submit to Landlord a permanent certificate of occupancy and final approval by the other governmental agencies having jurisdiction.

i. Tenant shall submit to Landlord a final “as-built” set of drawings showing all items of the Alterations in full detail, in both hard copy and electronic form.

j. Additional and differing provisions in the Lease, if any, will be applicable and will take precedence.

4.	Standards for Plans and Specifications

Whenever Tenant shall be required by the terms of the Lease (including this Exhibit) to submit plans to Landlord in connection with any Alterations, such plans shall include at least the following:

a. Floor plan indicating location of partitions and doors (details required of partition and door types).

b. Location of standard electrical convenience outlets and telephone outlets.

c. Location and details of special electrical outlets; e.g. , photocopiers, etc.

d. Reflected ceiling plan showing layout of standard ceiling and lighting fixtures. Partitions to be shown lightly with switches located indicating fixtures to be controlled.

e. Locations and details of special ceiling conditions, lighting fixtures, speakers, etc.

f. Location and specifications of floor covering, paint or paneling with paint colors referenced to standard color system.

g. Finish schedule plan indicating wall covering, paint, or paneling with paint colors referenced to standard color system.

h. Details and specifications of special millwork, glass partitions, rolling doors and grilles, blackboards, shelves, etc.

i. Hardware schedule indicating door number keyed to plan, size, hardware required including butts, latchsets or locksets, closures, stops, and any special items such as thresholds, soundproofing, etc. Keying schedule is required.

j. Verified dimensions of all built-in equipment (file cabinets, lockers, plan files, etc.)

k. Location and weights of storage files.

l. Location of any special soundproofing requirements.

m. Location and details of special floor areas exceeding 50 pounds of live load per square foot.

n. All structural, mechanical, plumbing and electrical drawings, to be prepared by the base building consulting engineers, necessary to complete the Premises in accordance with Tenant’s Plans.

o. All drawings to be uniform size (30” x 46”) and shall incorporate the standard project electrical and plumbing symbols and be at a scale of 1/8” = 1’ or larger.

p. All drawings shall be stamped by an architect (or, where applicable, an engineer) licensed in the jurisdiction in which the Property is located and without limiting the foregoing, shall be sufficient in all respects for submission to applicable authorization in connection with a building permit application.

Attachment I to Exhibit E

Contractor’s Insurance Requirements

Building: 600 Unicorn Park, Woburn, MA

Landlord: ND/CR Unicorn LLC

Tenant: Monotype Imaging Holdings, Inc.

Premises: 42,079 rsf on the 3 ^rd and 4 ^th floor of the Building

The undersigned contractor or subcontractor (“ Contractor ”) has been hired by the tenant named above (hereinafter called “ Tenant ”) of the Building named above (or by Tenant’s contractor) to perform certain work (“ Work ”) for Tenant in the Premises identified above. Contractor and Tenant have requested the landlord named above (“ Landlord ”) to grant Contractor access to the Building and its facilities in connection with the performance of the Work, and Landlord agrees to grant such access to Contractor upon and subject to the following terms and conditions:

Contractor agrees to indemnify and save harmless Landlord and Landlord’s Agents and their respective affiliates, subsidiaries and partners, and each of them, from and with respect to any claims, demands, suits, liabilities, losses and expenses, including reasonable Attorneys’ Fees, arising out of or in connection with the Work (and/or imposed by law upon any or all of them) because of personal injuries, bodily injury (including death at any time resulting therefrom) and loss of or damage to property, including consequential damages, whether such injuries to person or property are claimed to be due to negligence of the Contractor, Tenant, Landlord or any other party entitled to be indemnified as aforesaid except to the extent specifically prohibited by law (and any such prohibition shall not void this Agreement but shall be applied only to the minimum extent required by law).

Contractor shall provide and maintain at its own expense, until completion of the Work, the following insurance:

a. Workmen’s Compensation and Employers, Liability Insurance covering each and every workman employed in, about or upon the Work, as provided for in each and every statute applicable to Workmen’s Compensation and Employers’ Liability Insurance.

b. Comprehensive General Liability Insurance including coverages for Protective and Contractual Liability (to specifically include coverage for the indemnification clause of this Agreement) for not less than the following limits:

Personal Injury:

$3,000,000 per person

$10,000,000 per occurrence

Property Damage:

$3,000,000 per occurrence

$3,000,000 aggregate

c. Comprehensive Automobile Liability Insurance (covering all owned, non-owned and/or hired motor vehicles to be used in connection with the Work) for not less than the following limits:

Bodily Injury:

$1,000,000 per person

$1,000,000 per occurrence

Property Damage:

$1,000,000 per occurrence

Contractor shall furnish a certificate from its insurance carrier or carriers to the Building office before commencing the Work, showing that it has complied with the above requirements regarding insurance and providing that the insurer will give Landlord ten (10) days’ prior written notice of the cancellation of any of the foregoing policies.

Contractor shall require all of its subcontractors engaged in the Work to provide the following insurance:

a. Comprehensive General Liability Insurance including Protective and Contractual Liability coverages with limits of liability at least equal to the limits stated in paragraph 2(b).

b. Comprehensive Automobile Liability Insurance (covering all owned, non-owned and/or hired motor vehicles to be used in connection with the Work) with limits of liability at least equal to the limits stated in paragraph 2(c).

Upon the request of Landlord, Contractor shall require all of its subcontractors engaged in the Work to execute an Insurance Requirements agreement in the same form as this Agreement.

Agreed to and executed this day of , .


Contractor:



By:

By:

By:

Exhibit 31.1

CERTIFICATION

I, Douglas J. Shaw, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Monotype Imaging Holdings Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2014

/ S / D OUGLAS J. S HAW

Douglas J. Shaw

Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Scott E. Landers, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Monotype Imaging Holdings Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2014

/ S / S COTT E. L ANDERS

Scott E. Landers

Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Monotype Imaging Holdings Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Douglas J. Shaw, Chief Executive Officer of the Company, and Scott E. Landers, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to our knowledge, that:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: July 28, 2014

/ S / D OUGLAS J. S HAW

Douglas J. Shaw

Chief Executive Officer

/ S / S COTT E. L ANDERS

Scott E. Landers

Chief Financial Officer

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company