CPI Card Group Inc. - Quarter Report: 2016 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

 

For the Quarterly Period Ended September 30, 2016.

 

or

 

☐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 001-37584

 

CPI Card Group Inc.

(Exact name of the registrant as specified in its charter)

 

(303) 973-9311

(Registrant’s telephone number, including area code) 

 

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☒     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☒     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☒

 

Number of shares of Common Stock, $0.001 par value, outstanding as of November 4, 2016: 55,293,251

 

 

 

Table of Contents

 

 

Item 1. Financial Statements

 

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Dollars in Thousands, Except Share and Per Share Amounts)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated)

(Unaudited)

 

1. Business Overview and Summary of Significant Accounting Policies

 

Business Overview

 

CPI Card Group Inc. (which, together with its subsidiaries, is referred to herein as “CPI” or the “Company”) is a leading provider of comprehensive Financial Payment Card solutions in North America. The Company defines Financial Payment Cards as credit, debit and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover) and Interac (in Canada). The Company serves its customers through a network of ten production and card services facilities, including eight high-security facilities in North America that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by the Company’s customers, certified to be in compliance with the standards of the Payment Card Industry (“PCI”) Security Standards Council. In addition to its eight North American facilities, the Company has two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards that are not issued on the networks of the Payment Card Brands, and personalization services.

 

Basis of Presentation

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2015 is derived from the audited financial statements as of that date.  The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Certain prior year amounts were reclassified to conform to the current year presentation.

 

The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) pursuant to an asset purchase agreement for $5,000 in cash. The Nevada operations primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands.  See Note 2, “Discontinued Operation and Disposition.”

 

In August 2015, the Company completed its shut-down and closure of its operation in Petersfield, United Kingdom.  Petersfield primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands.  Accordingly, the Company accrued facility contract termination costs of $681 in the three and nine months ended September 30, 2015.

 

Use of Estimates

 

Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets; valuation allowances for inventories and deferred tax assets; debt; and stock-based compensation expense. Actual results could differ from those estimates.

 

Recently Issued Accounting Pronouncements

 

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty

of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09, as amended, as of January 1, 2018. Upon adoption, the Company must elect to adopt either retrospectively to each prior reporting period presented or using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.  The Company has not determined what transition method it will use.  The Company is currently assessing the impact that the future adoption of ASU 2014-09, as amended, may have on its condensed consolidated financial statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the new guidance. 

The FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory, in July 2015.  ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016.  The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company is in the process of assessing the impact of ASU 2015-11 on its results of operations, financial position and consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets.  ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share based payment transactions, including the accounting for forfeitures, statutory withholding requirements, and classification in the statement of cash flows.  In addition, excess tax benefits recorded to equity under existing accounting guidance will be recognized in income tax expense under the new standard. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 (the Company’s fiscal year 2017), with early adoption permitted. The Company is in the process of assessing the impact of ASU 2016-09 on its results of operations, financial position and consolidated financial statements.

 

 

2. Discontinued Operation and Disposition

 

On January 12, 2015, the Company sold its Nevada non-secure operations pursuant to an asset purchase agreement for $5,000 in cash. The net carrying values of the assets sold as part of the discontinued operation included inventory and plant, equipment and leasehold improvements of $3,129 and $2,910, respectively. During the nine months ended September 30, 2015, the Company recognized a gain on the sale of a discontinued operation of $887, which is included in the gain from a discontinued operation, net of an income tax benefit of $1,926 in the Company’s Condensed Consolidated Statement of Operations.

 

The Nevada operations recognized a loss of $606 for the nine months ended September 30, 2015, net of an income tax benefit of $404.

 

After the Nevada sale, CPI retained no significant continuing involvement in the Nevada operations other than a 180 day transition of services agreement, which expired on July 11, 2015. The Nevada operations had $32,128 of tax deductible goodwill and intangible assets, of which $4,190 of the tax deductible goodwill resulted in the recognition of an income tax benefit of $1,510 during the nine months ended September 30, 2015.

 

There was no recorded activity related to this transaction during the three months ended September 30, 2015.

 

3. Inventories

 

Inventories are summarized below:

 

 

 

 

 

 

4. Plant, Equipment and Leasehold Improvements

 

Plant, equipment and leasehold improvements consist of the following:

 

For the Company’s continuing operations, amounts recorded for the depreciation of plant, equipment and leasehold improvements was $3,098 and $2,673 for the three months ended September 30, 2016 and 2015, respectively, and $9,124 and $8,424 for the nine months ended September 30, 2016 and 2015, respectively.

 

5. Goodwill and Other Intangible Assets

 

Goodwill of $72,339 at September 30, 2016 is attributable to the Company’s segments as follows: U.S. Debit and Credit $64,330; U.K. Limited $6,211; and Other $1,798. The change in goodwill from December 31, 2015 to September 30, 2016 was a result of foreign currency translation adjustments, primarily in the U.K. Limited segment.

 

Intangible assets consist of customer relationships, technology and software, non-compete agreements, favorable leases and trademarks. Total intangible assets are being amortized over a weighted-average useful life of 16 years. The changes in the cost basis of the intangibles from December 31, 2015 to September 30, 2016 are related to foreign currency translations. Intangible amortization expense was $1,132 and $1,145 for the three months ended September 30, 2016 and 2015, respectively.  Intangible amortization expense was $3,406 and $3,433 for the nine months ended September 30, 2016 and 2015, respectively.

 

As of September 30, 2016 and December 31, 2015, intangible assets, excluding goodwill, were comprised of the following:

 

 

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2016 is as follows:

 

 

 

 

6. Fair Value of Financial Instruments

 

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 (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

 

 

 

The Company’s financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:

 

 

 

 

 

 

 

 

 

7. Long-Term Debt and Credit Facility

 

As of September 30, 2016 and December 31, 2015, long-term debt and credit facilities consist of the following:

 

 

First Lien Credit Facility

 

On August 17, 2015, the Company entered into a first lien credit agreement (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan facility (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively.

 

The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.

 

Interest rates under the First Lien Credit Facility are based, at the Company’s election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50%, or a base rate plus a margin of 3.50%. Letters of credit are subject to a 0.125% fronting fee payable to the issuing bank and a fee payable to the revolving lenders equal to the margin applicable to Eurodollar revolving loans. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines.

 

The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company’s assets and affiliate transactions.  As of September 30, 2016, the Company was in compliance with all covenants under the First Lien Credit Facility.

 

The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an excess cash flow calculation, beginning as of the year ending December 31, 2016.   

 

The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage ratio not in excess of 7.0 times EBITDA.

 

As of September 30, 2016, the Company did not have any outstanding borrowings under the Revolving Credit Facility. The Company has one outstanding letter of credit for the security deposit on a real property lease agreement. This letter of credit totals $50, reducing availability under the Revolving Credit Facility to $39,950. The Company pays a fee on the outstanding letter of credit at the applicable margin, which was 4.50% as of September 30, 2016, in addition to a fronting fee of 0.125% per annum.

 

 

Sellers Note

 

The Company entered into a subordinated, unsecured promissory note for $9,000 (“Sellers Note”) with certain sellers of EFT Source, Inc. (“EFT Source”) in connection with its acquisition of EFT Source on September 2, 2014. All principal and unpaid interest under the Sellers Note was due and paid to the sellers on September 2, 2016.  Interest on the Sellers Note accrued at 5.0% per annum and was paid quarterly.

 

Deferred Financing Costs

 

Certain costs incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance.  These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method.

 

 

8. Income Taxes

 

During the three months ended September 30, 2016, the Company recognized an income tax expense of $2,541 on pre-tax income of $6,567, representing an effective income tax rate of 38.7%, compared to an income tax expense from continuing operations of $6,554 on pre-tax income of $21,314, representing an effective tax rate of 30.7% during the three months ended September 30, 2015.

 

During the nine months ended September 30, 2016, the Company recognized an income tax expense of $5,194 on pre-tax income of $14,607, representing an effective income tax rate of 35.6%, compared to an income tax expense from continuing operations of $16,528 on pre-tax income of $49,404, representing an effective tax rate of 33.5% during the nine months ended September 30, 2015.  The increase in the effective tax rate for the nine months ended September 30, 2016 compared to the same period in the prior year was primarily due to the impact of state taxes.

 

The effective tax rates for all periods presented also differ from the federal U.S. statutory rate primarily due to a benefit from permanent deductions related to credits for domestic production activities and the impact of state and foreign income taxes.

 

9. Series A Preferred Stock

 

There were no outstanding shares of Series A Preferred Stock as of September 30, 2016 or December 31, 2015.  On August 17, 2015, the Company redeemed 62,140 shares of Series A Preferred Stock for $276,688, at $4,446.70 per share. Of the $276,688 redemption amount, $55,946 was treated as a return of capital and $220,742 was treated as a dividend. During the nine months ended September 30, 2015, the Company redeemed a total of 62,233 shares of Series A Preferred Stock at prices ranging from $3,950.33 to $4,446.70 per share.  In addition, Series A Preferred Stock accrued dividends were $7,096 and $32,454 during the three and nine months ended September 30, 2015, respectively.

 

10. Stockholders’ Equity

 

Common Stock

 

On May 11, 2016, the Board of Directors approved a stock repurchase program that authorizes repurchases of up to $20,000 of the Company’s common stock, limited to a maximum of 2,827,105 common shares, prior to May 11, 2017.  Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share repurchase programs or other transactions.  During the three months ended September 30, 2016, there were no common shares repurchased.  During the nine months ended September 30, 2016, there were 1,439,422 common shares repurchased for $6,008, at an average cost of $4.17 per share.  The repurchase has been accounted for as a share retirement. At September 30, 2016, $13,992 remained available under the share repurchase authorization, up to a maximum of 1,387,683 shares.   

 

During the three and nine months ended September 30, 2016, there were 65,891 and 190,557 shares of common stock issued in connection with stock option exercises and the vesting of restricted stock units, respectively (Note 13, “Stock-Based Compensation”).  During the nine months ended September 30, 2015, the Company issued no common stock and redeemed 86,768 shares of common stock at values of $0.32 and $0.91 per share.  During the three months

ended September 30, 2015, there was no common stock issued or redeemed.  The redeemed common stock share values were calculated in accordance with the terms of the applicable award agreements.

 

During the three and nine months ended September 30, 2016, the Company paid dividends of $2,487 and $5,031, representing $0.045 and $0.09 per share, respectively.  Additionally, on August 10, 2016, the Board of Directors approved a dividend of $0.045 per share, payable on October 7, 2016 to stockholders of record as of the close of business on September 16, 2016. The accrued dividend of $2,488 is reflected in “Accrued expenses” in the Condensed Consolidated Balance Sheet as of September 30, 2016.  For the nine months ended September 30, 2016, the Company has declared aggregate dividends of $0.135 per share.

 

On September 3, 2015, the Company’s Board of Directors approved a 22-for-1 stock split of its common stock. Upon the effective date of the stock split, each outstanding share of common stock and restricted common stock was divided into 22 shares of common stock or restricted common stock, as applicable. Shares of common stock available for issuance under the Option Plan (as hereinafter defined) were increased accordingly. All of the share numbers, share prices and exercise prices have been retroactively adjusted to reflect the stock split in this Quarterly Report on Form 10-Q, including the accompanying condensed consolidated financial statements and these notes.

 

 

11. Earnings per Share

 

Basic and diluted earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period.

 

The following table sets forth the computation of basic and diluted EPS attributable to continuing and discontinued operations:

 

 

 

 

 

12. Commitments and Contingencies

 

Commitments

 

The Company incurred rent expense under non-cancellable operating leases of $907 and $757 for the three months ended September 30, 2016 and 2015, respectively, and $2,541 and $2,576 for the nine months ended September 30, 2016 and 2015, respectively.

 

Contingencies 

In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.)

On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 IPO.  The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among other things, damages and costs.  In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, the remainder of the fiscal year ending December 31, 2015, and the fiscal year .  The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. 

The Court has entered a briefing schedule on defendants' prospective motion(s) to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of such motions.  

The Company believes these claims are without merit and intends to defend the action vigorously. Given the current stage of these matters, the range of any potential loss is not estimable and no accrual has been recognized as of September 30, 2016.

Gemalto S.A. v. CPI Card Group Inc. (2 cases)

 

First case.  This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. Gemalto’s patent will expire in 2017. The Company successfully moved to transfer the lawsuit to the United States District Court for the District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips supplied by two specific vendors.

 

On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board, seeking re-examination of Gemalto’s asserted patent.  In light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the Patent Trial & Appeal Board’s consideration of the Company’s challenge to the patentability of asserted claims. 

 

Second case.  On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering.  Gemalto’s patent will expire in 2018.  On May 25, 2016, the Company moved to dismiss Gemalto's case because the patent's claims are not patentable under 35 U.S.C. section 101. The Company’s motion to stay the litigation in light of its pending motion to dismiss was denied on September 2, 2016.  The Company’s motion to dismiss remains pending. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. 

 

  With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend these suits vigorously. While a risk of loss is reasonably possible, given the current stage of these matters, as well as the aforementioned defenses, counterclaims and indemnity rights, the range of potential loss is not estimable and no accrual has been recognized as of September 30, 2016 and December 31, 2015.

 

In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business.  The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations.

 

 

13. Stock-Based Compensation

 

CPI Card Group Inc. Omnibus Incentive Plan

 During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company has reserved 4,000,000 shares of common stock for issuance under the Omnibus Plan.  As of September 30, 2016, there were 2,266,481 shares available for grant under the Omnibus Plan.

During the three months ended September 30, 2016, the Company granted awards of non-qualified stock options under the Omnibus Plan for 112,500 shares of common stock.  The stock option awards have an exercise price of $5.52 per share, a 10 year term, and vest 25% on each anniversary date of the awards over a four year period.  The fair value of the stock option awards was determined using a Black-Scholes option-pricing model with the following assumptions: volatility of 35.3%, risk-free interest rate of 1.4%, dividend yield of 3.3% and an expected term of approximately 6 years.

Outstanding and exercisable stock options under the Omnibus Plan are as follows:

 

 

Unvested options as of September 30, 2016 will vest as follows:

 

 

During the three months ended September 30, 2016, the Company granted awards of restricted stock units for 18,562 shares of common stock. The restricted stock unit awards contain conditions associated with continued employment or service, and vest 25% on each anniversary date of the awards over a four year period.  On the vesting dates, shares of common stock will be issued to the award recipients.