e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
from to .
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Commission File Number
001-33002
L-1
IDENTITY SOLUTIONS, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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02-0807887
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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177 Broad Street, 12th Floor, Stamford, CT
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06901
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone number, including area code:
(203)-504-1100
Securities registered pursuant to Section 12(b) of the Act:
Common Stock $.001 par value NYSE
Securities registered pursuant to Section 12(g)of the Act:
None
Indicate by a check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. o
Yes
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No
Indicate by a check mark if the Registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the Exchange
Act. o
Yes
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No
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.
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Yes
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No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference into
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by a check mark whether the Registrant is a shell
Company (as defined in
Rule 12b-2). o
Yes
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No
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 30, 2009, was
approximately $579.6 million.
As of February 25, 2010, the registrant had
92,266,210 shares of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the
2010 Annual Meeting of Stockholders of the registrant is
incorporated by reference into Part III of this
Form 10-K.
INDEX
L-1
Identity Solutions 2009 Annual Report | 2
PART I
In this Annual Report on
Form 10-K,
the words
L-1
and the Company refer to
L-1 Identity
Solutions, Inc. and, except as otherwise specified herein, to
L-1
subsidiaries.
L-1s
fiscal year ended on December 31, 2009.
BUSINESS
OVERVIEW
L-1 Identity
Solutions, Inc.
(L-1
or the Company) is a provider of technology,
products, systems and solutions, and services that protect and
secure personal identities and assets. Through its divisions,
L-1 delivers
the full range of offerings required for solving complex
problems associated with managing identity.
The Company operates in two reportable segments: Solutions
and Services.
Solutions
The Solutions segment consists of the Secure Credentialing and
Biometrics / Enterprise Access Divisions. Solutions
from these divisions are marketed to Federal agencies, State and
Local government agencies (including law enforcement and
department of corrections), foreign governments, and commercial
entities (such as financial and health care institutions and
casinos).
Solutions revenue includes products and related services, which
comprise hardware, components, consumables and software, as well
as maintenance, consulting and training services.
Services
The Services segment includes the Enrollment Services Division
and Government Consulting Services Group.
Enrollment Services perform fingerprinting and process
background checks for civilians at centers across the
U.S. and Canada.
Government Consulting Services includes the businesses of
Advanced Concepts (Information Technology Solutions), McClendon
(Engineering & Analytical Solutions), and SpecTal
(Intelligence Services).
Government Consulting Services offer comprehensive consulting,
program management, information analysis, training, security,
technology development, and information technology solutions to
the U.S. intelligence community.
Depending upon customer needs,
L-1 services
can be bundled with identity solutions, product and services
offerings to create an integrated solution.
The L-1
Portfolio of Identity Management
Solutions and Services
L-1
Identity Solutions 2009 Annual Report | 3
SECURE
CREDENTIALING SOLUTIONS
The Secure
Credentialing division provides solutions that protect and
secure identities and assets by helping customers produce the
most secure credentials possible.
The division builds and maintains an
end-to-end
secure process for ID production starting with identity
proofing, vetting, and enrollment; incorporating biometric-based
recognition and identity database management; card design and
production; and inspection and authentication.
There are more than 6,500
L-1 systems
in more than 20 countries used for large-scale credentialing
programs around the world.
L-1 systems
are used to produce more than 80 percent of
U.S. drivers licenses (including Enhanced
Drivers Licenses), the U.S. Passport,
U.S. Passport Card and Border Crossing Card, and other
citizen credentials such as National and Voter IDs, passports
and more. More than two billion cards have been produced to date
using L-1
solutions.
During 2009,
L-1 was
awarded 19 of 20 competitive credentialing procurements and
booked approximately $289 million in global drivers
license extensions and new contracts. The contracts awarded in
2009 had a
price-per-card
increase on average of 50 percent over prior contracts due
to the inclusion of more value-added services and security
technologies as part of the credential issuance process.
L-1 believes
that Department of Motor Vehicle bureaus across the
U.S. are increasingly turning to
L-1 to
enhance their issuance systems and establish more secure
end-to-end
processes for license production.
This is evidenced by the following:
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Revenue growth from
L-1 online
skills testing in excess of 68 percent year-over-year in
2009.
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Demand for workflow re-engineering and upgrades to ID card
structures and features.
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Addition of facial recognition technologies used today in 31
States to prevent persons from establishing duplicate identities.
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Use of document authentication in 11 States as part of the
drivers license issuance process.
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L-1 has
introduced new self service kiosks and value-added services in
2009 which offer further opportunity for growth independent
from, and additive to, that generated from State drivers
license production contracts.
At the Federal level, in 2009 the Department of State reiterated
its commitment to
L-1 with a
five-year sole source contract award for U.S. Passport
printing valued at up to $195.0 million and continued to
enhance Passport Cards and Border Crossing Cards produced by
L-1.
International demand continued to build with opportunities for
large scale National and Voter ID programs in Latin America,
Africa, India and the Middle East.
Finally, L-1
is expected to be the exclusive provider of secure credentialing
services and technologies to Alclear LLC, the winning bidder,
for the assets of Verified Identity Pass (VIP), a private
Company which was engaged in the airport passcard program
authorized by the TSA.
L-1
Identity Solutions 2009 Annual Report | 4
BIOMETRIC /
ENTERPRISE ACCESS SOLUTIONS
The Biometric Division
of L-1
provides solutions that protect and secure personal identities
and assets by providing
state-of-the
art technologies that capture, store, manage and distribute
biometric data for positive, rapid ID and tracking of persons of
interest as part of large-scale identity management programs.
Customers include State, Local, Federal and international
government agencies and ministries, and commercial businesses.
The solutions are part of civilian and criminal identification
management programs in border management, credentialing, law
enforcement and military applications.
Solutions and products include multi-modal automated biometric
identification and matching systems (ABIS), finger and palm
print scanners, integrated multi-biometric (finger, face and
iris) devices including
HIIDEtm
and
PIERtm
automated facial recognition systems both static (digital photo
or mug shot) and dynamic (video) and automated iris recognition
systems (AIRS).
L-1 also
manufactures multi-biometric-based readers used to secure
buildings and restricted areas, available though more than 400
partners worldwide.
The divisions revenue in 2009 included more than
$95 million of combined software and hardware solutions
delivered to customers.
Development highlights in 2009 include:
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A new eGate solution using
L-1 facial
recognition is facilitating self service border crossings at the
Frankfurt International Airport.
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A new middleware platform was developed in partnership with
European customers that enables HIIDE to integrate with ID
systems of foreign Defense Ministries in NATO countries.
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A next generation technology transformed the access control
device into a smart security appliance. New devices built on the
platform are deployed for employee access control at several
international airports and as part of several U.S. port
project evaluations.
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A new live scan fingerprint product, Agile TP, was introduced
for high-volume civil identification programs. The system is
capable of capturing a full set of fingerprints in less than ten
seconds.
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At the Federal level,
L-1s
facial recognition technology was incorporated into the
U.S. Passport program in 2009, an extension beyond its
current use in the U.S. Visa program (the largest facial
database in the world with more than 80 million records).
The Department of Defense (DoD) next generation ABIS system is
running 28 times faster and finding hundreds of thousands more
matches than the legacy DoD system according to DoD reports.
Internationally, a Middle Eastern customer expanded its contract
with L-1 to
take advantage today of system integration capabilities and
customized functionality made possible through technological
advances in HIIDE 5 due out in 2010.
L-1 iris
technology is performing nearly half a billion cross-comparisons
per second on the largest iris database in the world.
Other new international contracts included facial recognition
for customs police, narcotics and
e-passport
customers across Asia Pacific, and multi-modal search for civil
and criminal applications in Canada, Qatar, Egypt, New Zealand,
Mexico and the UK.
L-1
Identity Solutions 2009 Annual Report | 5
ENROLLMENT
SERVICES
The Enrollment
Services division provides services that protect and secure
identities and assets by performing fingerprinting and
processing background checks for civilians at centers across the
U.S. and Canada.
With more than 1,000 locations today,
L-1 believes
it is the largest network of enrollment centers in the
U.S. and Canada. The centers processed more than two
million individuals in 2009.
The centers use enrollment stations, live scan systems and
software to fingerprint and process background checks for
civilian applications.
Enrollment Services revenue growth exceeded 47 percent for
the year as compared to the prior year period. Growth is coming
in part from new contracts, such as those in New York and
Indiana, which encompass more than 170 sites and dozens of
agencies. Growth is also occurring through the expansion of
existing contracts such as in Texas where 688,000 applicants
were printed in 2009.
Today the division has established a nationwide scalable network
that L-1
believes is capable of expanding to capitalize on new revenue
opportunities. These include:
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Expanding beyond fingerprints to capture additional biometrics.
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Performing background checks for non-employment licenses, such
as handgun permits.
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Servicing more than 5,000 schools and school districts
throughout the U.S. with customers across State Agencies,
public school districts, private schools, colleges and
universities.
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Serving the healthcare community by processing checks required
for nurses, doctors, home health care and nursing facility
workers, and more.
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Supporting individuals requiring Financial Industry Regulatory
Authority (FINRA) registration and others employed as mortgage
brokers, insurance agents and other positions within financial
services.
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The infrastructure behind
L-1s
network enables the centers to support Local, State and Federal
enrollments. This ranges from checks against a State AFIS
(Automated Fingerprint Identification System) to processing
directly through the FBI channel.
Approximately one-third of all
L-1 centers
process applicants for Federal programs (TWIC, HAZPRINT).
L-1 also is
one of only 15 approved FBI channels.
In 2009, the TWIC program was fully transitioned to
L-1 from its
partner at the end of 2009.
L-1 expects
the program to continue to grow as new initiatives are added to
print other transportation-related employees.
L-1
Identity Solutions 2009 Annual Report | 6
GOVERNMENT
CONSULTING SERVICES
The Government
Consulting Services Group provides services that protect and
secure personal identities and assets by providing highly
specialized solutions and services that address critical
concerns in national security and intelligence.
The group includes the businesses of Advanced Concepts
(Information Technology), McClendon (Engineering &
Analytical), and SpecTal (Intelligence Services).
Advanced Concepts
(Information
Technology (IT))
Advanced Concepts delivers IT solutions and services that help
customers assure information superiority over any enemy, help
make critical information systems and infrastructure more
secure, and ensure that Federal sector processes and
transactions move at maximum speed.
Advanced Concepts core competencies include:
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IT Infrastructure Engineering
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Systems Engineering and Integration
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Software Development
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Information Assurance
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McClendon
(Engineering & Analytical)
McClendon delivers engineering and analytical services to the
Department of Defense and Intelligence Community.
L-1 believes
that McClendon is distinguished by highly qualified experts in
the areas of its core competencies. When combined with proven
procedures and best practices policies, McClendon (Engineering
& Analytical) ensures prompt and quality work within budget.
McClendons core competencies include:
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Systems Engineering & Integration
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GEOINT and MASINT Science
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Intelligence Analysis & Operations
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SETA, PMO & Acquisition
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IT & Software Development
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SpecTal
(Intelligence Services)
SpecTal provides government and corporate clients with
specialized security and intelligence consulting, going beyond
assessments to present results-oriented solutions. Building on
its employees intelligence careers marked by achievement in
demanding assignments, SpecTal offers clients a broad range of
experience and expertise.
L-1 believes
that its results have earned the group a reputation for service,
responsiveness, and integrity.
SpecTals core competencies include:
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Intelligence Analysis and Operations
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IT and Physical Security
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Linguists
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In 2009, Government Consulting Services group benefited from the
emergence of cyber security related initiatives and renewed
demand for counterterrorism technologies across the intelligence
community.
L-1 is
playing an important role in government contracts related to
transportation issues and Homeland Security. In addition, the
Government Consulting Services group is on several cybersecurity
related task orders and provides direct support to customers
under the Comprehensive National Cybersecurity Initiative (CNCI)
and other established Information Assurance (IA) programs.
Resources continue to grow in all areas of cybersecurity,
including operational Computer Security Incident Response Center
(CSIRC)/Computer Emergency Response Team (CERT) analytic
support, Computer Network Defense (CND) strategy &
tactics, and IA architecture development and policy analysis.
L-1
Identity Solutions 2009 Annual Report | 7
INDUSTRY
OVERVIEW
MARKETS AND
TRENDS IN CREDENTIALING AND BIOMETRIC SOLUTIONS
Government-issued breeder documents (such as birth
certificates and social security cards) and IDs granted based on
these documents (such as drivers licenses or passports)
serve as the primary means for confirming the identity of an
individual. The integrity, however, of these documents and
credentials can be compromised because they can be counterfeited
or altered, issued under false pretenses and historically have
rarely been linked to an identity database. Failure to provide
adequate identification protection can lead to breaches of
security and identity theft, the consequences of which can range
from national security threats and loss of life to significant
economic loss. Within this context,
L-1 believes
that there is increasing pressure on governments and businesses
to accelerate the adoption of advanced technology identity
solutions to validate identities.
A core element to the
L-1 identity
management value proposition is biometrics. Biometrics are
unique, individual physiological or behavioral characteristics,
such as fingerprints, palm prints, facial characteristics, iris
and voice patterns, hand geometry and handwriting patterns,
which can be used to determine or verify an individuals
identity. Technology digitally captures and encodes these
individual biometric characteristics and then compares that
uniquely personal characteristic against previously encoded
biometric data to determine or validate an individuals
identity.
Each biometric is unique to each person, making it the best
means possible today to verify that a person is whomever
he/she
claims to be. Furthermore, biometric technology provides
improved accuracy and security of the credential, as well as
convenience and cost-effectiveness for the individual,
overcoming the limitations inherent in traditional
identification and authentication processes such as paper
credentials, passwords, PIN codes and magnetic access cards.
Governments and their agencies were the early adopters of
biometrics and today remain the primary customers for the
industry. For law
enforcement, biometric technology permits more efficient
criminal booking and processing and also allows officers in the
field to identify potential suspects more reliably and
efficiently. Within the military, biometrics are used for the
verification and identification of military personnel and
contractors and collection and processing of biometrics from
non-military personnel for the purpose of identifying potential
hostile persons. At the national level, governments throughout
the world have taken steps to improve security in response to
heightened concerns over public safety from the threat of
terrorism. National governments have mandated increased spending
on security measures, implemented new regulations and placed
greater emphasis on technology to address growing security
concerns.
L-1 believes
that the market for biometrics will continue to grow
significantly.
L-1 believes
that this growth is a function of customer demand and the
ability for the industry to meet the demand.
L-1 believes
that major drivers of biometric growth in the future will
include:
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Implementation of biometrics in national security-related
applications broadly characterized as anti-terror, such as
border management, national ID, immigration control and critical
infrastructure applications such as employee authentication and
access control.
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Integration into commercial access control solutions that grant
entry and confirm presence in buildings and restricted areas
based on biometric recognition.
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Expansion of biometrics within law enforcement to enroll, verify
and ID suspects, detainees and prisoners and confirm if the
individual is wanted, incarcerated or has a criminal history.
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Inclusion of biometrics as a component of solutions that address
identity theft.
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Incorporation of biometrics into licensing processes and
background checks required for people employed in licensed
positions, such as daycare workers, insurance agents and those
employed in education-related fields.
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L-1
Identity Solutions 2009 Annual Report | 8
In addition,
L-1 believes
that identity-related mandates within the government will
increase demand for biometric solutions. The Company anticipates
the government will recommend and in some cases mandate the use
of secure authentication, such as biometrics, as a key component
of identity verification. Some of the programs include the
U.S. Visitor and Immigrant Status Indicator Technology
program (U.S. VISIT), which uses biometric data as part of
new screening procedures for
non-U.S. citizens
entering the United States; Department of State (DoS) Western
Hemisphere Travel Initiative (WHTI) Passport Card and Border
Crossing Card (BCC) programs that issue limited use passports in
a wallet size format for use in crossing U.S. borders;
Transportation Workers Identification Credential (TWIC) for
transportation workers; Transportation Security Administration
(TSA) Hazardous Material Threat Assessment Program (HAZMAT)
mandating fingerprinting and security threat assessment of
commercial truck drivers applying for, renewing or transferring
the hazardous materials endorsement (HME) on State-issued
Commercial Drivers Licenses (CDL); Homeland Security
Presidential Directive 12 (HSPD-12), which mandates that a
common identification card be utilized by all Federal government
employees and contractors; and the REAL ID Act, signed into law
in May 2005, which mandates authentication of a persons
identity before they are issued a drivers license.
While fingerprints are expected to continue to be the most
prevalent biometric technology in the U.S. in the near
term, iris, face, palm and other technologies are being adopted
and combined with fingerprinting in multi-biometric applications
to provide an additional level of security and accuracy and to
allow for increased flexibility for applications where
fingerprints are not suitable.
Automated Biometric Identification Systems (ABIS) and Live Scan
Systems are the largest market space for biometrics. These are
large scale and highly complex systems used in law enforcement,
background checks, and civil identification programs. Live scans
are deployed as a front end to most ABIS systems and include
hardware and software that captures and processes fingerprint
images prior to submission. The ABIS and Live Scan
market is
considerably more mature than any other biometric market sector.
Increasingly, multiple biometrics are also being incorporated
into these systems, augmenting fingerprints with hand/palm
prints, facial images and iris patterns.
Internationally, many countries have established or are
establishing more secure national identification, drivers
license, passport, border crossing control and voter
registration programs and many of these systems are expected to
utilize biometric technologies. In addition to protecting
citizens, some of these programs are also aimed at helping
identify potential terrorist threats. The U.S. established
legislation requiring biometric identifiers to be included in
the passports of current Visa Waiver countries (countries where
citizens are not required to obtain a Visa prior to entering the
U.S.). L-1
offers a range of solutions, products and technologies that can
be utilized in national identification
and/or
passport and border crossing programs to enroll and verify
citizens, visitors and potential threats
and/or to
add biometric identifiers to national identification
and/or
passport programs. Accordingly the Company believes that
international markets provide an opportunity for revenue growth.
While L-1
anticipates consistent opportunities for revenue growth, the
following may adversely affect the rate of this growth:
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The global economic slowdown and its impact on government
funding and procurements related to security.
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Dependence on complex government programs with elongated
procurement, sales and implementation cycles.
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Competition from non-biometric technologies that provide more
affordable, but less robust, authentication (such as tokens and
smart cards).
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Privacy and legal challenges relating to biometric identifiers
by private citizens and advocacy groups.
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The potential for changes in government policy relating to
privacy issues.
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L-1
Identity Solutions 2009 Annual Report | 9
MARKETS AND
TRENDS FOR GOVERNMENT SERVICES
The Federal government is the largest consumer of information
technology services and solutions in the United States.
L-1 believes
that the Federal governments spending on information
technology and services will continue to increase in the next
several years, driven by the expansion of National Defense and
Homeland Security programs, the continued need for sophisticated
intelligence gathering and information sharing, increased
reliance on technology service providers due to shrinking ranks
of government employee technical professionals, and the
continuing impact of Federal procurement reform and Office of
Management and Budget mandates regarding IT spending. Federal
government spending on information technology has consistently
increased in each year since 1980.
L-1 believes
the following trends will continue to impact spending and
dependence on technology and support contractors among the
Companys core intelligence community customers.
The emphasis on counter-terrorism, irregular warfare,
Homeland Defense, and combating the spread of weapons of mass
destruction remain overarching guiding principles for current
and out-year funding priorities.
L-1
believes Intelligence Agencies will increase demand for data and
text mining solutions to enable them to extract, analyze, and
present data gathered from the massive volumes of information
available through open sources such as the Internet. This
increased focus on National Security, Homeland Security, and
intelligence has also reinforced the need for interoperability
among the many disparate information technology systems
throughout the Federal government.
L-1 believes
the Department of Defense, Department of Homeland Security and
the intelligence community will continue to be interested in
systems that strengthen the coordination within and among
agencies and departments.
Demand for technology service providers is expected to
increase due to the need for Federal agencies to maintain core
operational functions while the available technical workforce
shrinks.
L-1 believes
this trend will continue, despite the fact that certain
agencies within the Intelligence community have indicated a goal
of reducing reliance on contractors. Given the difficulty the
Federal government has experienced in hiring and retaining
skilled technology personnel in recent years,
L-1 believes
the Federal government will continue to rely on technology
service providers that have experience with government systems,
can sustain mission critical operations and have the
required government security clearances to deploy qualified
personnel in classified environments.
Alternative choices of contract acquisition vehicles have
created market-based environments in government procurement.
In recent years, Federal agencies have had increased access to
alternative choices of contract acquisition vehicles-such as
indefinite delivery/indefinite quantity (ID/IQ) contracts,
Government Wide Acquisition Contracts (GWACs), the General
Services Administration (GSA) schedule and agency specific
Blanket Purchase Agreements (BPAs). These choices have created a
market-based environment in government procurement that has
increased contracting flexibility and provided government
agencies access to multiple channels to contractor services.
Contractors successful past performance, as well as
technical capabilities and management skills, remain critical
elements of the award process.
L-1 believes
that the increased flexibility associated with the multiple
channel access, such as ID/IQ contracts, GWACs, GSA schedule
contracts and BPAs, will result in the continued utilization of
these contracting vehicles in the future, and will facilitate
access to service providers to meet the demand for, and delivery
of, required services and solutions.
An emphasis on addressing cyber-security is expected to drive
greater demand for a variety of
L-1
government services. The Comprehensive National Cyber
Security Initiative of 2008 has a dozen components intended to
better protect computer systems and networks from cybercrime and
improve information technology processes and policies within the
government. Specific improvements aimed at cyber counter
intelligence, situational awareness, and implementation of
information technology will have the most impact on
L-1.
L-1
Identity Solutions 2009 Annual Report | 10
The current strategic environment dictates the need for more
dependencies in the form of alliances and partnerships.
Alliances with large and small companies that have agency
mission knowledge
and/or
established credentials related to specific solutions and
services are critical in winning large contracts.
CUSTOMERS
Over 95 percent of
L-1 sales
are to Federal, State, Local and foreign governments and
government agencies. Contracts with governments and agencies
generally allow the customer to terminate the contract for
convenience or failure of the government to appropriate funds.
For the year ended December 31, 2009, U.S. Federal
government agencies accounted for 59 percent of
L-1s
consolidated revenues. Historically,
L-1 has
experienced minimal customer turnover and the Company believes
this is a result of its strong solutions and emphasis on
customer service and support.
L-1
customers include:
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Most Federal agencies and branches of the U.S. military.
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More than 29 international governments.
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Many State and Local Public Safety Organizations across the
U.S., including Department of Motor Vehicles and law enforcement
agencies.
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Many of the traditional large systems integrators.
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Several commercial enterprises including those in gaming,
finance, healthcare and more.
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L-1
Growth in International Sales of
Products and Solutions
As a percentage of
L-1 revenue,
excluding the domestically focused service businesses,
L-1s
international sales in products and solutions have grown from
12 percent in 2006 to 14 percent in 2007 to
16 percent in 2008 to 17 percent in 2009. The trend
reflects an increased international marketing focus, which we
expect to continue.
COMPETITION
The market for
L-1
solutions and services is extremely competitive.
L-1s
ability to differentiate from the competition is predicated on a
number of factors, the most significant of which are described
below.
State-of-the-art
technologies and solutions that encompass every major biometric
modality.
L-1 is the
only Company that directly offers Fingerprint and Palm print
(AFIS/APIS), facial and iris recognition technologies.
Accordingly,
L-1 can
provide a complete turnkey solution. Because of
L-1s
in depth knowledge of the core identity technologies,
L-1 can
offer customers speed of operation and value for identity
solutions. Furthermore,
L-1 remains
at the forefront of innovation through its strong and focused
internal development team.
The flexibility to use products and services together as a
complete solution or as modular components within an existing
solution. A customer-focused solution set
approach enables
L-1 to
customize and integrate its products and services to solve the
unique identity challenges of customers in Federal,
L-1
Identity Solutions 2009 Annual Report | 11
civil, State and Local, criminal, border management and
commercial markets.
Strong and tenured relationships with customers and
partners. Today
L-1
customers include most Federal agencies and branches of the
U.S. military, more than 29 international governments, the
majority of U.S. State Departments of Motor Vehicle
(DMV) and local law enforcement agencies, and other
commercial customers. The pervasiveness of
L-1
relationships makes the Company a trusted choice for customers
and partners seeking relationships with proven vendors.
L-1 is on
several teams for Biometric Operations Systems and Services
(BOSS) program.
L-1 believes
its ability to offer
multi-modal
identity solutions incorporating finger, face, palm/hand and
iris technologies, together with search and matching software to
work with large databases, is a significant differentiator for
the Company.
The comprehensive nature of
L-1
solutions, products and services encompass the full spectrum of
identity management needs, including:
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Delivering the effective means of uniquely identifying
individuals through advanced multi-modal biometric recognition
technologies.
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Producing the most highly secure credentials that serves as
proof of identity.
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Providing biometrically-enabled access control for buildings and
secure areas.
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Offering enrollment service centers for fast, accurate
electronic civilian fingerprinting and background checks.
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Delivering government consulting services that address the most
important areas of security and intelligence in the
U.S. today.
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L-1 faces
competition from a number of companies that are actively engaged
in developing and marketing identity management related
solutions and services. Many of
L-1s
competitors have greater financial resources than
L-1,
including large system integrators who may enter markets
L-1 competes
in.
The markets for
L-1
solutions and services are characterized by rapid technological
change as a result of technical developments exploited by
competitors, the changing technical needs of the customers, and
frequent introductions of new features.
L-1 expects
competition to increase as other companies introduce products
that are more price competitive, may have increased performance
or functionality, or that incorporate technological advances not
yet developed or implemented by
L-1. To
compete effectively in this environment,
L-1 must
continually develop and market new and enhanced products at
competitive prices, and have the resources to invest in
significant research and development activities.
L-1 competes
based on technology (with particular emphasis on speed and
accuracy), service and support, product quality, price,
reliability, capability to work with large database systems and
flexibility in accommodating customer technical and business
needs.
BUSINESS
DEVELOPMENT, MARKETING AND SALES, BIDS AND PROPOSALS
Marketing and
Sales
L-1
solutions and services are marketed through a direct sales
force, channel partners, and strategic partnerships and
alliances.
The direct sales force markets and sells the entire identity
solutions and services portfolio. The worldwide sales force
delivers solutions and services to markets in North and South
America, Europe, the Middle East, Africa, Russia, India and Asia
Pacific. A dedicated U.S. Federal sales team in
Washington, D.C. markets and sells to U.S. government
agencies such as the Department of Defense, Department of State,
Department of Justice and Department of Homeland Security, among
others. A dedicated team of sales and services professionals
operating from locations in Germany, the United Kingdom, Hong
Kong, Australia, India, UAE and Switzerland strengthen global
sales coverage and access to the international markets.
L-1s
marketing efforts were realigned in 2009 to improve coordination
of State and Local offerings across
L-1
businesses. The Company also adopted a coordinated team approach
to
L-1
Identity Solutions 2009 Annual Report | 12
pursuing intelligence agency opportunities to provide broader
and stronger service offerings.
Sales plans are developed by market by division focusing on
Federal, State and Local, international and commercial. The
emphasis is on maintaining responsibility within the divisional
profit and loss centers for accountability of performance.
The sales organizations are supported by functional groups which
architect solutions or services
and/or
design, engineer, source manufacture, market, fulfill and
support market-specific offerings. Sales teams are further
supported by a professional service group which customizes
solutions for each market and a field service group that ensures
ongoing performance of
L-1 systems.
At the end of 2009,
L-1 employed
140 professionals in business development, sales and marketing.
Strategic
Partnerships
L-1 has
strategic partnerships and distribution channels that broaden
coverage and increase market opportunities globally.
L-1
established Original Equipment Manufacturer (OEM) distribution
arrangements with partners to leverage
L-1
technologies.
L-1 uses
channels of distribution for its document authentication
products to expand markets outside of the
U.S. L-1
also works with systems integrators, solution providers and
service organizations to deliver identity solutions in
combination with their core capabilities to expand access to
pre-existing relationships, marketing resources and credibility
in new markets. Local agents are also utilized to expand
L-1s
international access to market opportunities internationally.
Bids and
Proposals
The majority of
L-1
government services business and much of its solutions business
is won through submission of formal competitive bids. Commercial
bids are frequently negotiated as to terms and conditions for
schedule, specifications, delivery and payment. However, in most
cases the client specifies the terms and conditions and form of
contract. In situations where the client-imposed contract type
and/or terms
appear to expose
L-1 to
inappropriate risk, the Company may seek alternative
arrangements or opt not to bid for the work.
L-1
contracts and subcontracts are composed of many contract types,
including firm fixed-price, cost reimbursement,
time-and-materials,
indefinite delivery/indefinite quantity (ID/IQ) and Government
Wide Acquisition Contracts (GWACs), the General Services
Administration (GSA) schedule and agency specific Blanket
Purchase Agreements (BPAs).
The majority of
L-1 sales to
new customers are the result of competitive bidding for
contracts pursuant to public sector procurement rules. In some
cases, L-1
may be competing with an entity that has a pre-existing
relationship with a potential customer, which could put
L-1 at a
significant competitive disadvantage. In other cases,
L-1 may have
pre-existing relationships with customers, which gives the
Company an advantage over the competition. All material bids and
proposals are subject to review and approval by senior corporate
management prior to submission.
RESEARCH AND
DEVELOPMENT
Research and development activities are organized into centers
of excellence located across, and managed by the Companys
divisions, primarily the Biometrics and Secure Credentialing
Divisions.
The research and development team totals approximately 260
developers, scientists and engineers distributed among these
centers. Activities are coordinated at the corporate level under
the Companys Chief Strategic Officer to ensure support of
the overall innovation goals and mission of
L-1 and the
realization of synergies in the research and development
investment.
Research and development efforts are focused on critical
components for advanced technology identity solutions. These
include, but are not limited to:
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Proprietary software that addresses image capture.
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Image processing.
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Face, iris, fingerprint and palm recognition.
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L-1
Identity Solutions 2009 Annual Report | 13
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Biometric fusion logic and intelligent decision making.
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Information retrieval from identity databases.
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Scalability of search and the accuracy of searching and matching
algorithms within very large databases.
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Document authentication.
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The Company invests in the development of capture technologies
for finger, palm and iris.
L-1
maintains an active program for the development of new security
features for credentials.
L-1 believes
the next generation biometric matching algorithms for
fingerprint, facial, and iris recognition technology will be
more reliable and cost effective than current technology, as
well as provide additional functionality, including the storage
of fingerprint
and/or
facial and iris templates on smart cards and similar storage
devices. In addition,
L-1 focuses
on expanding its capabilities in solutions for the civil
identification, criminal identification and border management
markets.
The Company benefits from the development activities of
manufacturers of the components integrated into
L-1 systems.
This includes cameras, database software and computers.
L-1 performs
research and development for customers, including efforts for
the U.S. government and its agencies.
Gross research and development expenditures aggregated to
$46.9 million for the year ended December 31, 2009
compared to $43.0 million in the prior year. Virtually all
of L-1
research and development costs are attributable to the Solutions
segment. As a percentage of Solutions revenues, gross research
and development costs were 15 percent for years ended
December 31, 2009 and 2008.
INTELLECTUAL
PROPERTY
L-1 relies
on patent, copyright, trademark and trade secrets and contract
law to establish and maintain proprietary rights in technology
products and manufacturing processes. The success of the
business will depend in part on this proprietary technology and
protection of that technology.
While intellectual property rights are important to success,
L-1 believes
that neither its business as a whole, nor any business segment
is materially dependent on any particular patent, trademark,
license or other intellectual property right.
The Company owns a portfolio of 219 U.S. and foreign
patents. In addition,
L-1 has 160
U.S. and foreign patent applications in process for
biometrics and document authentication technologies. While the
duration of patents varies, the Company believes that the
duration of its patents is adequate relative to the expected
lives of L-1
products.
L-1 owns the
registered trademarks for
L-1
and
L-1
Identity Solutions, and owns a broad portfolio of other
vital registered and pending trademarks in the U.S. and
foreign jurisdictions.
BACKLOG
Backlog represents sales value of firm orders for products and
services not yet delivered and, for long term executed
contractual arrangements (contracts, subcontracts, and customer
commitments), the estimated future sales value of estimated
product shipments, transactions processed and services to be
provided over the term of the contractual arrangements,
including renewal options expected to be exercised.
For contracts with indefinite quantities, backlog reflects
estimated quantities based on current activity levels. Backlog
will not necessarily result in future revenue because firm
orders may be cancelled, firm orders from governmental agencies
are subject to funding options, appropriations may not be
exercised by the customers, and the quantities ordered, the
volume of transaction processed or services to be provided may
be less than estimated. Backlog includes deferred revenues.
Contractual arrangements could be cancelled by customers without
penalty for lack of performance. Contracts terminated by
customers for convenience generally would result in recovery of
actual costs incurred and profit, if any, on work performed
through the date of cancellation.
L-1
Identity Solutions 2009 Annual Report | 14
L-1
Backlog of $1.3 Billion
At December 31, 2009 backlog, determined as described
above, approximated $1.3 billion, of which approximately
$510.0 million is expected to be realized in 2010.
Revenues from backlog, together with other recurring revenues
not in backlog, are expected to be approximately
$645.0 million or 87 percent of 2010 expected revenues.
MANUFACTURING
L-1
engineers and designs the hardware products it sells and
develops much of the software embedded in them. Except as
described below with respect to secure credentials,
L-1 either
limits manufacturing activities to the assembly, repair, and
testing of these products, or manages production through
contract manufacturers. In either case,
L-1
qualifies suppliers for the core components which typically have
established supply chains.
L-1 believes
this permits rapid expansion of production capacity to meet any
significant increase in product demand and minimizes both
development costs and the cost of scaling of manufacturing
capabilities.
L-1 believes
that these costs will decline if manufacturing volumes increase.
L-1
engineers, designs and produces most of the card products used
for the production of secure credentials that have proprietary
features or functionality and which account for over
50 percent of
L-1
credentialing volume.
L-1
purchases the remaining card products from established sources.
L-1 produces
driver licenses for 21 States in secure central issuance
facilities in Texas, Florida, North Carolina, Pennsylvania,
Indiana, California, Georgia, and Washington. In 2010 the
Company expects to open a new central issuance facility in
Massachusetts to accommodate States converting,
or expected to convert, to central issuance in 2010 and 2011.
L-1 also
produces the Mexican voter identification credentials in a
central issuance facility in Mexico City.
L-1
purchases certain components,
sub-assemblies
and finished products used in manufacturing and supply chain
operations from sole source suppliers. While L- 1 is careful to
partner with stable, reliable suppliers, the partial or complete
loss of supplies available from sole sources or limited sources
of supply or the delay in receiving supplies from these sources
could result in delays in manufacturing and product shipments
which may result in the assessment of liquidated damages in
certain contracts and which may require the incurrence of
development and other costs to establish alternative sources of
supply. While
L-1 makes
every effort to maintain inventory of sole sourced components at
the appropriate level, it may take the Company several months to
locate alternative suppliers if required, or redesign products
to accommodate components from different suppliers.
SEASONALITY
In general, the
L-1 business
is not seasonal. However, because most of its government
consulting services revenue is earned on a time and material and
fixed price level of effect basis, the Company is impacted by
holidays and vacations taken by employees.
L-1 also is
impacted by the fiscal funding and appropriation cycles of major
customers. For example, the U.S. governments fiscal
year ends on September 30 of each year, and it is not uncommon
for government agencies to award extra tasks or complete other
contract actions in the weeks before the end of the fiscal year
in order to avoid the loss of unexpended fiscal year funds.
Moreover, in years when the U.S. government does not
complete its budget process before the end of its fiscal year,
government operations typically are funded pursuant to a
continuing resolution that authorizes agencies of the
U.S. government to continue to operate, but traditionally
does not authorize new spending initiatives. When much of the
U.S. government operates under a continuing resolution,
delays can occur in procurement of products and services, and
such
L-1
Identity Solutions 2009 Annual Report | 15
delays can affect
L-1 revenue
and profit during the period of delay.
FINANCIAL
INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
For the years ended December 31, 2009, 2008 and 2007,
foreign and export sales were approximately $56.0 million,
$47.7 million, and $29.0 million, respectively.
Foreign operations and export sales may increase in relative and
absolute terms in the future due to
L-1s
increased focus on markets outside the United States. See
Note 12 to
L-1s
consolidated financial statements for additional information.
2007
2009 L-1
Foreign Operations and Export Sales
REPORTABLE
SEGMENTS AND GEOGRAPHIC INFORMATION
See Note 12 of Consolidated Financial Statements provided
in response to Item 8 of this annual report on
Form 10-K.
RECENT
ACQUISITIONS
During 2009,
L-1 did not
consummate any acquisitions. In 2008,
L-1 acquired
Bioscrypt Inc. and the ID Systems business of Digimarc
Corporation. In 2007,
L-1 acquired
Advanced Concepts Inc., McClendon Corporation and ComnetiX Inc.
See Note 13 of
L-1s
Consolidated Financial Statements provided in response to
Item 8 of this annual report on
Form 10-K.
CAPITAL
REQUIREMENTS
L-1s
most significant capital requirements arise primarily from
acquisitions in support of its business strategy, capital
expenditures for new secure credentialing contracts,
expenditures for research and development and working capital
needs. For example,
L-1 must
commit to provide up-front capital expenditures in order to
install systems necessary to perform when bidding on new State
drivers license contracts. The most significant capital
expenditures are related to the Secure Credentialing business,
which has increased in size and scope due to the acquisition of
the ID Systems business of Digimarc Corporation (Old
Digimarc) in August 2008. Accordingly,
L-1 expects
capital requirements to increase as the Company bids on and is
awarded new contracts or as contracts are renewed. In 2009,
L-1s
capital expenditures increased to $55.0 million compared to
$22.5 million in 2008 and are expected to increase to
$60.0 million in 2010 as
L-1 is
required to fund capital expenditures for contracts awarded and
expected to be awarded.
L-1 expects
capital expenditures to decline significantly in 2011, as it
completes the build out of systems for recently awarded
contracts.
L-1 expects
to meet
L-1s
capital requirements from operating cash flows. See Item 7,
Liquidity and Capital Resources.
ENVIRONMENTAL
PROTECTION REGULATIONS
L-1 believes
that compliance with Federal, State and Local environmental
regulations will not have a material adverse effect on the
Companys financial position or results of operations.
EMPLOYEES
As of December 31, 2009,
L-1 had
2,339 full time employees. No employees are covered by
collective bargaining agreements. The Company believes that its
relations with employees are good.
OFFICERS
L-1
executive officers are appointed by the Board of Directors and
serve until their successors have been duly appointed and
qualified.
L-1
Identity Solutions 2009 Annual Report | 16
Robert V. LaPenta, 64, has served as the Chairman of the
Board since December 2005, President and Chief Executive Officer
of L-1 since
August 2006. Mr. LaPenta is the founder and Chief Executive
Officer of
L-1
Investment Partners, LLC, a private investment management firm.
From April 1997 to April 2005, Mr. LaPenta served as
President, Chief Financial Officer and a Director of L-3
Communications Holdings, Inc., which he co-founded in April
1997. From April 1996 when Loral Corporation was acquired by
Lockheed Martin Corporation, until April 1997, Mr. LaPenta
was a Vice President of Lockheed Martin and was Vice President
and Chief Financial Officer of Lockheed Martins Command,
Control, Communications and Intelligence and Systems Integration
Sector. Prior to the April 1996 acquisition of Loral, he was
Lorals Senior Vice President and Controller, a position he
held since 1991. He joined Loral in 1972 and was named Vice
President and Controller of its largest division in 1974. He
became Corporate Controller in 1978 and was named Vice President
in 1979. Mr. LaPenta is on the Board of Trustees of Iona
College, the board of directors of Core Software Technologies
and the board of directors of Leap Wireless International, Inc.
Dr. Joseph Atick, 45, joined
L-1 in
August 2006 as Executive Vice President and Chief Strategic
Officer effective with the merger of Identix with
L-1. Prior
to that, he served as President & Chief Officer of
Identix since June of 2002. Prior to that, he had co-founded one
of the original facial recognition companies, Visionics
Corporation. Over the years, Dr. Atick co-founded and
managed several companies focused on technology transfer and
development, and has served as a technical advisor to many
high-tech enterprises and organizations, including NATO. He had
also led the Computational Neuroscience Laboratory at
Rockefeller University and the Neural Cybernetics Group at the
Institute for Advanced Study in Princeton, New Jersey.
Dr. Atick holds a Ph.D. in Mathematical Physics from
Stanford University.
James A. DePalma, 58, joined
L-1 as
Executive Vice President, Chief Financial Officer and Treasurer
effective with the merger of Identix with
L-1. He
brings three decades of operational
and finance experience in the defense and technology industries
to his role within the Company. Prior to joining
L-1,
Mr. DePalma was a founding partner of
L-1
Investment Partners. Prior to the formation of
L-1
Investment Partners, Mr. DePalma served as a consultant to
L-3 Communications Holdings, Inc. and was Chief Executive
Officer of Core Software Technology, a leading software provider
to the intelligence community and an equity investment of L-3
Communications Holdings, Inc. Mr. DePalma has also held
high level executive positions with Westinghouse Electric
Corporation, CBS Corporation and Viacom International. He
also was a senior partner at PricewaterhouseCoopers.
Doni L. Fordyce, 50, joined L-l as Executive Vice
President of Corporate Communications effective with the merger
of Identix with
L-1. Prior
to August 2006, she was a founding partner of
L-1
Investment Partners and brings two decades of senior executive
and investment management experience to the Company, serving
most recently as Chief Executive Officer, President and Chief
Operation Officer of Bear Stearns Asset Management (BSAM) Inc.
Prior to that Ms. Fordyce was Vice President of Goldman
Sachs Inc. from 1986 to 1996 where she was one of the founders
of the asset management business. She has also worked in IT
solutions consulting, specializing networking, data management
and printing for investment banks and financial institutions.
Mark S. Molina, 50, joined
L-1 in
August 2006 as Executive Vice President, Chief Legal Officer and
Secretary in August 2006 effective with the merger of Identix
with L-1.
Prior to joining
L-1, he was
Executive Vice President, Chief Legal Officer and Secretary at
Identix, which he joined as Vice President and General Counsel
in 1999. Mr. Molina is a business and technology lawyer
with over 20 years experience structuring and negotiating
mergers, acquisition, dispositions, joint ventures, technology
licenses, financings and investments. He has considerable
experience with public offerings and private placements as well
as SEC reporting compliance and obligations of publicly traded
companies.
L-1
Identity Solutions 2009 Annual Report | 17
Joseph Paresi, 54, joined
L-1 in
August 2006 as Executive Vice President and Chief Marketing
Officer effective with the merger of Identix with
L-1. He was
a founding partner of
L-1
Investment Partners LLC. Mr. Paresi brings three decades of
executive management, product development, and design
engineering experience in the technology and defense industries
to his role with the Company. Prior to joining
L-1
Investment Partners, he served as Corporate Vice President of
product development for L-3 Communications and as President of
L-3 Security & Detection Systems from 1997 to 2005.
Vincent A. DAngelo, 65, joined
L-1 as
Senior Vice President of Finance in August 2006 effective with
the merger of Identix with
L-1. Prior
to that, he was a consultant for
L-1
Investment Partners. Prior to that, Mr. DAngelo was a
Senior Audit Partner with PricewaterhouseCoopers for more than
35 years where he was involved in all facets of the
business, including client service, management, operations,
governance, SEC filings, and mergers and acquisitions.
There are no family relationships among any of
L-1s
executive officers and directors.
On April 23, 2007, the Company entered into an employee
arrangement with Mr. Robert LaPenta, Jr., the son of
the Companys Chief Executive Officer, to serve as Vice
President, M&A/Corporate Development.
INTERNET
WEBSITE
L-1
maintains a corporate website with the address www.L1id.com. Its
intended use is as a regular means of disclosing material
non-public information and for complying with disclosure
obligations under Regulation FD promulgated by the SEC.
Such disclosures will be included on the website under the
heading Investor Relations Events and
Presentations. Accordingly, investors should monitor such
portions of the website, in addition to following the
Companys press releases, SEC filings and public conference
calls and webcasts.
L-1 is not
incorporating information contained in the website by reference
into this Annual Report on
Form 10-K.
The Company makes available, free of charge through the website,
its Annual
Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
and any amendments to these reports as soon as reasonably
practicable after electronically filing such material with, or
furnish such material to, the Securities and Exchange Commission.
Materials filed with the SEC can be read or copies at the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information about the Public Reference Room. The SEC
also maintains a website, www.sec.gov containing the
reports, proxy and other information filed with the SEC.
ITEM 1A. RISK
FACTORS
This Annual Report on
Form 10-K
contains or incorporates a number of forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements are based on current
expectations, estimates, forecasts and projections about the
industry and markets in which
L-1 operates
and managements beliefs and assumptions. Any statements
contained herein (including without limitation statements to the
effect that management, we or
L-1
believes, expects,
anticipates, plans and similar
expressions) that are not statements of historical fact should
be considered forward-looking statements and should be read in
conjunction with consolidated financial statements and notes to
consolidated financial statements included in this report. These
statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult
to predict. There are a number of important factors that could
cause actual results to differ materially from those indicated
by such forward-looking statements. These factors include,
without limitation, those set forth below. The risks and
uncertainties described below are not the only ones
L-1 faces.
Additional risks and uncertainties, including those not
presently known to
L-1 or that
the Company currently deems immaterial, may also impair the
business.
L-1
expressly disclaim any obligation to update any forward-looking
statements, except as may be required by law.
L-1
Identity Solutions 2009 Annual Report | 18
BUSINESS
RISKS
L-1 has a
history of operating losses.
L-1 has a
history of operating losses before income taxes. The business
operations began in 1993 and, except for 1996 and 2000, have
resulted in losses before income taxes in each year, which have
included significant asset impairments and merger related
expenses, amortization of intangible assets and stock-based
compensation expense. At December 31, 2009,
L-1 had an
accumulated deficit of approximately $627.4 million.
L-1 will
continue to invest in the development of secure credential and
biometric technologies, as well as government services and will
make significant capital expenditures to meet the requirements
of recently awarded secure credentialing contracts. The need for
these expenditures to grow the business will affect the ability
to report operating profit and reduce the accumulated deficit.
Over 95 percent of
L-1 revenue
is from government contracts which are often non-standard,
involve competitive bidding, may be subject to cancellation with
or without penalty and may produce volatility in earnings and
revenue. More than 95 percent of
L-1s
business involves providing solutions and services under
contracts with U.S. Federal, State, Local and foreign
government agencies. Obtaining contracts from government
agencies is challenging and government contracts often include
provisions that are not standard in commercial transactions.
For example, government contracts may:
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Include provisions that allow the government agency to
unilaterally terminate the contract without penalty under some
circumstances.
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Be subject to purchasing decisions of agencies that are subject
to political considerations.
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Include bonding requirements.
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Be subject to onerous procurement procedures.
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Be subject to cancellation or reduction if government funding
becomes unavailable or is cut back.
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Securing government contracts can be a protracted process
involving competitive bidding. In many cases, unsuccessful
bidders may challenge contract awards, which can lead to
increased costs, delays and possible loss of the contract for
the winning bidder. Protests, and similar delays, regarding any
future government contracts of a material nature that may be
awarded to
L-1 could
result in materially adverse revenue volatility, making
management of inventory levels, cash flows and profitability
inherently difficult. Outright loss of any material government
contract through the protest process or otherwise, could have a
material adverse effect on financial results and stock price.
In addition, government contracts may specify performance
criteria that must be satisfied before the customer accepts the
products and services. Collection of accounts receivable may be
dependent on meeting customer requirements, which may be
unpredictable, subject to change by the customer, and not fully
understood by
L-1 at the
time of acceptance of the order, and may require the incurrence
of unexpected costs that may be uncompensated and could
negatively affect profit margins and liquidity.
Government contracts are subject to continued appropriations
by Congress and availability of funding for State and Local
programs. Reduced funding or changes in procurement policies
that curtail the use of outside contractors could result in
terminated, delayed or de-scoped contracts with
L-1 and
adversely affect the ability for
L-1 to meet
sales and earnings goals. For the year ended
December 31, 2009 and 2008, U.S. Federal government
agencies, directly or indirectly, accounted for 59 percent
and 64 percent of
L-1
consolidated revenues, respectively. Future sales under existing
and future awards of U.S. government contracts are
conditioned upon the continuing availability of Congressional
appropriations, which could be affected by current or future
economic conditions. In addition, while spending authorizations
for intelligence and defense-related programs by the Federal
government has increased in recent years, particularly after the
2001 terrorist attacks and more recently in support of
U.S. war efforts in Southwest Asia,
L-1
Identity Solutions 2009 Annual Report | 19
future levels of expenditures, mission priorities and
authorizations for these programs may decrease, remain constant
or shift to programs in areas where
L-1 does not
currently provide services. Current Federal government spending
levels for defense-related programs are in part related to the
U.S. military operations in Afghanistan and Iraq, and may
not be sustainable, as a result of changes in government
leadership, policies or priorities.
Recently the Federal government has indicated a goal of reducing
the use of contractors in certain areas and
in-sourcing the related functions. These initiatives
may adversely impact the growth of portions of
L-1
government services businesses.
Similar to Federal government contracts, State and Local
government agency contracts may be contingent upon availability
of funds provided by Federal, State or Local entities. In the
current economic environment, many States may reduce
expenditures which may result in cancellation or deferral of
projects. State and Local law enforcement and other government
agencies are subject to political, budgetary, purchasing and
delivery constraints which may result in quarterly and annual
revenue and operating results that may be irregular and
difficult to predict. Such revenue volatility makes management
of inventory levels, cash flows and profitability inherently
difficult. In addition, if
L-1 is
successful in winning such procurements, there may be unevenness
in delivery schedules, as well as potential delays and changes
in the timing of deliveries and recognition of revenue, or
cancellation of such procurements.
The full amount of
L-1 revenues
reflected in backlog may not be realized, which could harm
operations and significantly reduce future revenues. There
can be no assurances that backlog estimates will result in
actual revenues in any particular fiscal period because clients
may modify or terminate projects and contracts and may decide
not to exercise contract options or estimate of quantities may
not materialize.
L-1 backlog
represents sales value of firm orders for products and services
not yet delivered and, for long term executed contractual
arrangements (contracts, subcontracts, and customers
commitments), the estimated future sales value
of estimated product shipments, transactions processed and
services to be provided over the term of the contractual
arrangements, including renewal options expected to be
exercised. For contracts with indefinite quantities backlog
reflects estimated quantities based on current activity levels.
Backlog includes estimates of revenues that are dependent on
future government appropriation, option exercise by clients
and/or is
subject to contract modification or termination. Due to current
economic environment and potential spending constraints
experienced by State and Local governments, in particular,
realization of backlog may be adversely impacted. At
December 31, 2009,
L-1 backlog
was approximately $1.3 billion of which approximately
$510.0 million is expected to be realized in 2010. Revenues
from backlog, together with other recurring revenues not in
backlog comprise $645.0 million or 87 percent of
expected 2010 revenues. These estimates are based on
L-1
experience under such contracts and similar contracts, and the
Company believes such estimates to be reasonable in the
circumstances. However,
L-1 believes
that the estimate of revenues reflected in backlog for the
following twelve months will generally be more reliable than
estimate for periods thereafter.
If L-1 does
not realize a substantial amount of backlog, operations could be
harmed and expected future revenues could be significantly
reduced.
Quarterly results are difficult to predict due to factors
including long sales cycles; if quarterly financial expectations
are missed, the
L-1 stock
price could decline. Quarterly revenue and operating results
are difficult to predict and fluctuate from quarter to quarter.
The sales cycle for solutions and services is typically long and
subject to a number of significant risks and potential delays
over which the Company has no or little control. While potential
customers are evaluating
L-1
products, the Company may incur substantial selling and
marketing costs and expend significant management resources in
an effort to obtain sales order and contracts that may never
materialize. In addition, as operating expenses are based on
anticipated revenue levels, fluctuations in revenues as a result
of the timing of contract awards and the exercise of
L-1
Identity Solutions 2009 Annual Report | 20
options and task orders can cause operating results to vary
significantly between periods. Factors which may delay procuring
decisions include:
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Time required for a prospective customer to recognize the need
for L-1
solutions.
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Timing of appropriation of funds by governments.
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Political and economic uncertainties.
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Customer requirements for customized features and
functionalities.
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Turnover of key personnel at existing and prospective customers.
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Customer internal budgeting and processes.
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Customer internal procedures for the approval of large contracts.
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Protest processes affecting government contract awards which may
be initiated by competitors.
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Due to the factors described above, operating results in some
periods may be below the guidance provided and may not meet
investor expectations. If this happens, the market price of
L-1 common
stock could be adversely impacted. Fluctuations in future
quarterly operating results may also be caused by many other
factors, including:
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The size and timing of new contract awards and customer orders
which may be received unevenly throughout a fiscal year.
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The mix of revenues between solutions and services.
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The application of new accounting standards or interpretations.
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Cancellation or modification of contracts or changes in contract
revenue estimates.
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Contract performance delays.
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L-1s
exploration of strategic alternatives may not result in any sale
transaction. In January 2010,
L-1
announced that one of its strategic goals and objectives for
2010 was to explore alternatives to enhance shareholder value.
At this time, there can be no assurance that the exploration of
strategic alternatives will result in any sale transaction, the
timing of such a sale transaction, or whether a significant
premium to current market trading prices for
L-1s
common stock can be obtained as part of any such transaction.
L-1 may
be unable to obtain additional capital required to finance
acquisitions due to continuing adverse market conditions and the
Company must fund substantial capital expenditures for the
secure credentialing business. One of the components of the
L-1 strategy
is growth through strategic acquisitions. In addition, the
installation of secure credentialing systems requires
significant capital expenditures. The need to fund such capital
expenditures has increased following the acquisition of the
secure credentialing business of Digimarc.
For the twelve months ended December 31, 2009, capital
expenditures increased to $55.0 million, as compared to
$22.5 million in the corresponding period of the prior year
and are expected to increase to $60.0 million in 2010.
While L-1
expects to fund capital requirements primarily from operating
cash flows, in the near term, cash otherwise available to fund
strategic opportunities and prepay long-term debt is reduced. At
December 31, 2009,
L-1 had cash
and cash equivalents of $6.6 million and availability under
the line of credit of $123.0 million, net of borrowings and
letters of credit, subject to continuing compliance with
covenants contained in the agreement. While the Company believes
it has adequate capital resources to meet current working
capital and capital expenditure requirements and has been
successful in the past in obtaining financing for acquisitions,
L-1 expects
to have increased capital needs as it continues to expand its
business.
In addition, the ability to execute the Companys
acquisition strategy may be adversely affected by the current
market conditions which may continue over a prolonged period.
The Company may be unsuccessful in raising additional financing
to fund growth or it may have difficulty in obtaining financing
at attractive rates or on terms that are not excessively
dilutive to existing stockholders. Failure to secure additional
financing in a timely manner and on favorable terms could have a
L-1
Identity Solutions 2009 Annual Report | 21
material adverse effect on the growth strategy, financial
performance and stock price and could require the Company to
delay or abandon expansion.
Covenants in the Companys credit facility may restrict
financial and operating flexibility.
L-1
maintains a credit agreement with Bank of America N.A. The
agreement provides for up to $435 million in available
borrowings through 2013, pursuant to which $123 million is
currently available, subject to continuing compliance with debt
covenants. Under the agreement,
L-1 is
required to maintain specific financial covenants related to a
leverage ratio and fixed charge coverage. The agreement also
places limitations on additional borrowings, mergers and
related-party transactions, on payment of dividends and with
respect to capital expenditures. Borrowings under the agreement
are collateralized by Companys assets and bear interest at
the Eurodollar Rate, or the lenders base rate, plus
market-rate spreads that are determined based on the
Companys leverage ratio calculation.
The ability to satisfy these financial ratios can be affected by
events beyond the Companys control and it cannot assure
meeting these ratios. Default under the credit facility could
allow the lenders to declare all amounts outstanding to be
immediately due and payable.
L-1 has
pledged substantially all of its assets to secure the debt under
the credit facility. If the lenders declare amounts outstanding
under the credit facility to be due, the lenders could proceed
against those assets. Any event of default, therefore, could
have a material adverse effect on the business if the creditors
determine to exercise their rights. The Company also may incur
future debt obligations that might subject
L-1 to
restrictive covenants that could affect financial and
operational flexibility, restrict ability to pay dividends on
common stock, or subject
L-1 to other
events of default.
L-1 is
subject to government regulation and failure to comply with
applicable regulations could subject the Company to penalties
that may restrict its ability to conduct business.
L-1 is
affected by and must comply with various government regulations
that impact operating costs, profit margins and the internal
organization and operation of the business.
Failure to comply with applicable regulations, rules and
approvals could result in the imposition of penalties, the loss
of government contracts or disqualification as a
U.S. government contractor, all of which could adversely
affect the business, financial condition and results of
operations. Among the most significant regulations affecting the
business are:
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Export control regulations.
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Federal Acquisition Regulation, or the FAR, and agency
regulations supplementing the FAR, which comprehensively
regulate the formation and administration of, and performance
under government contracts.
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Truth in Negotiations Act that requires certification and
disclosure of all cost and pricing data in connection with
contract negotiations.
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Foreign Corrupt Practices Act.
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Laws, regulations and executive orders restricting the use and
dissemination of information classified for national security
purposes and the exportation of certain products and technical
data.
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Laws and regulation established to protect the privacy and
personal information of employees and third parties.
|
These regulations affect how
L-1 and its
customers do business and, in some instances, impose added costs
to L-1. Any
changes in applicable laws and regulations could restrict the
ability for
L-1 to
conduct business. Any failure by
L-1 to
comply with applicable laws and regulations could result in
contract termination, price or fee reductions or suspension,
debarment or disqualification from contracting with the Federal,
State and Local governments.
The Company could be adversely affected by a negative audit
by the U.S. government. U.S. government agencies,
including the Defense Contract Audit Agency and various agency
Inspectors General, routinely audit and investigate government
contractors. These agencies review a contractors
performance under its contracts, cost structure and compliance
with applicable laws, regulations, and standards. The
U.S. government also
L-1
Identity Solutions 2009 Annual Report | 22
reviews the adequacy of, and a contractors compliance
with, its internal control systems and policies, including the
contractors management, purchasing, property, estimating,
compensation, accounting, and information systems. Any costs
found to be misclassified may be subject to repayment. If an
audit or investigation uncovers improper or illegal activities,
L-1 may be
subject to civil or criminal penalties and administrative
sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines, and suspension or
prohibition from doing business with the U.S. government.
In addition,
L-1 could
suffer serious reputational harm if allegations of impropriety
were made.
Biometric technologies have not yet achieved widespread
commercial acceptance and the strategy of expanding the
biometric business could adversely affect
L-1 business
operations and financial conditions.
L-1s
strategy includes the enhancement of the Companys
leadership in biometric technologies. Pursuing this strategy
involves risks. For example, to date biometric technologies have
not yet gained widespread commercial acceptance. Although there
has been more commercial activity recently, there is no
assurance that this activity will continue or expand. Some of
the obstacles to the use of biometric technologies include a
perceived loss of privacy and public perceptions as to the
usefulness of biometric solutions. Whether the market for
biometric technologies and solutions expands is dependent upon
factors such as:
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National or international events which may affect the need for
or interest in biometric solutions or services.
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The cost, performance and reliability of the solutions and
services and those of the competition.
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Customer perception of the perceived benefit of biometric
solutions and services and satisfaction with solutions and
services.
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Public perceptions regarding the confidentiality of private
information.
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Proposed or enacted legislation related to privacy of
information.
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Marketing efforts and publicity regarding these solutions and
services.
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Competition from non-biometric technologies that provide more
affordable, but less robust, authentication (such as tokens and
smart cards).
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Privacy and legal challenges relating to biometric identifiers
driven by private citizens and advocacy groups.
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The potential for changes in government policy regarding privacy
issues with a new executive branch administration.
|
L-1 does not
know when, if ever, biometric solutions and services will gain
widespread commercial acceptance. Certain groups have publicly
objected to the use of biometric solutions and services for some
applications on civil liberties grounds and legislation has been
proposed to regulate the use of biometric security solutions.
Biometric technologies have been the focus of organizations and
individuals seeking to curtail or eliminate such technologies on
the grounds that they may be used to diminish personal privacy
rights. If such initiatives result in restrictive legislation,
the market for biometric solutions may be adversely affected.
Even if biometric technologies gain wide market acceptance,
L-1
biometric solutions and services may not adequately address the
requirements of the market and may not gain widespread
commercial acceptance.
L-1 faces
intense competition that could result in lower revenues and
higher R&D expenditures and could adversely affect results
of the Companys operations. Since the events of
September 11, 2001 regulatory and policy changes in the
U.S. and abroad have heightened interest in the use of
biometric security solutions, and
L-1 expects
competition in this field, which is already substantial, to
intensify.
Competitors are developing and marketing semiconductor
ultrasonic and optically based direct contact fingerprint image
capture devices, or retinal blood vessel, iris pattern, hand
geometry, voice or various types of facial structure solutions.
L-1
solutions also compete with non-biometric technologies which may
be less costly, such as
L-1
Identity Solutions 2009 Annual Report | 23
certificate authorities and traditional keys, cards,
surveillance systems and passwords. Widespread adoption of one
or more of these technologies or approaches in the markets
targeted could significantly reduce the potential market for
L-1 systems
and solutions. Some competitors have significantly more
resources than
L-1.
Competitors may introduce products that are more price
competitive, have increased performance or functionality or
incorporate technological advances that
L-1 has not
yet developed or implemented. To remain competitive,
L-1 must
continue to develop, market and sell new and enhanced solutions
at competitive prices, which will require significant research
and development expenditures. If
L-1 does not
develop new and enhanced solutions or if the Company is not able
to invest adequately in research and development activities, the
business, financial condition and results of operations could be
severely and negatively impacted.
L-1 must
keep pace with changing technologies or risk losing existing and
new customers. In order to compete effectively in the
biometrics market,
L-1 must
continually design, develop and market new and enhanced
products. Future success will depend, in part, upon the
Companys ability to address the changing and sophisticated
needs of customers. Frequently, technical development programs
in the biometric industry require assessments to be made of the
future directions of technology and technology markets
generally, which are inherently risky and difficult to predict.
L-1 may not
be able to accurately predict which technologies customers will
support. If the Company fails to choose correctly among
technical directions, or fail to offer innovative solutions at
competitive prices in a timely manner, customers may forego
purchases of
L-1
solutions and purchase those of competitors.
Security breaches in systems sold or maintained by
L-1 could
result in the disclosure of sensitive government information or
private personal information that could result in the loss of
customers and negative publicity. Many of the systems
included in
L-1
solutions manage private personal information and protect
information
involved in sensitive government functions. The protective
security measures that are used in these systems may not prevent
security breaches, and failure to prevent security breaches may
disrupt business, damage reputation, and expose
L-1 to
litigation and liability. A party that is able to circumvent
protective security measures used in these systems could
misappropriate sensitive or proprietary information or cause
interruptions or otherwise damage
L-1
products, services and reputation, and the property and privacy
of customers. If unintended parties obtain sensitive data and
information, or create bugs or viruses or otherwise sabotage the
functionality of systems,
L-1 may
receive negative publicity, incur liability to customers or lose
the confidence of customers, any of which may cause the
termination or modification of contracts. Further, insurance
coverage may be insufficient to cover losses and liabilities
that may result from such events.
L-1 may be
required to expend significant capital and other resources to
protect the Company against the threat of security breaches or
to alleviate problems caused by the occurrence of any such
breaches. In addition, protective or remedial measures may not
be available at a reasonable price or at all, or may not be
entirely effective.
Reliance on external suppliers and contract manufacturers may
result in delays and loss of sales or customers. The
lead-time for ordering certain products and materials and for
building many of
L-1 products
included in the Companys solutions can be many months. As
a result,
L-1 must
order such products and materials based on forecasted demand. If
demand for solutions lags significantly behind forecasts,
L-1 may
purchase more products than the Company can sell, resulting in
increased cash needs and write-downs of obsolete or excess
inventory. In addition, if the delivered product purchases are
delayed, the Company may lose customers and sales.
L-1 relies
on contract manufacturers to produce hardware products under
short term manufacturing arrangements. Although
L-1 believes
it can find alternative sources for the manufacturing of
hardware, any disruption of
L-1
Identity Solutions 2009 Annual Report | 24
contractual arrangements could result in delaying deliveries or
in the loss of sales. The Company obtains certain hardware and
services, as well as software applications, from a limited group
of suppliers. The reliance on these suppliers involves risks,
including reduced control over quality and delivery schedules.
Any financial instability of suppliers could result in having to
find new suppliers.
L-1 may
experience delays in manufacturing and deliveries of products
and services to customers if the Company loses its sources or if
supplies and services delivered from these sources are delayed,
which could result in the loss of sales or customers.
The market for
L-1
solutions is still developing and if the biometrics industry
adopts standards or a platform different from
L-1s,
then the Companys competitive position would be negatively
affected. The market for identity solutions is still
developing. The evolution of this market may result in the
development of different technologies and industry standards
that are not compatible with
L-1s
current solutions, products or technologies.
Several organizations, such as the International Civil Aviation
Organization, sets standards for travel documents that its
member States then put into effect, and the National Institute
for Standards and Testing, which is part of the
U.S. Department of Commerce, set standards for biometrics
to be used in identification and documentation. Although
L-1 believes
that its biometric technologies comply with existing standards
for finger, face and iris recognition, these standards may
change and any standards adopted could prove disadvantageous to
or incompatible with the
L-1 business
model and current or future solutions, products and services.
The L-1
plan to pursue sales in international markets may be limited by
risks related to conditions in such markets. For the year
ended December 31, 2009
L-1 derived
approximately 9 percent of total revenues from
international sales and the Companys strategy is to expand
its international operations. There is a risk that the Company
may not be able to successfully market, sell and deliver
solutions, products and services in foreign countries.
Risks inherent in marketing, selling and delivering products in
foreign and international markets, each of which could have a
severe negative impact on financial results and stock price,
include those associated with:
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Regional economic or political conditions.
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Delays in or absolute prohibitions on exporting solutions,
products and services resulting from export restrictions for
certain products and technologies.
|
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Loss of, or delays in importing products, services and
intellectual property developed abroad, resulting from unstable
or fluctuating social, political or governmental conditions.
|
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Fluctuations in foreign currencies related to the
U.S. dollar.
|
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Loss of revenue, property (including intellectual property) and
equipment from expropriation, nationalization, war,
insurrection, terrorism, criminal acts and other political and
social risks.
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Liabilities resulting from any unauthorized actions of local
resellers or agents under the Foreign Corrupt Practices Act or
local anti-corruption statutes.
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Overlap of different tax structures.
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Risks of increases in taxes and other government fees.
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Involuntary renegotiations of contracts with foreign governments.
|
L-1 expects
that it will have increased exposure to foreign currency
fluctuations. As of December 31, 2009, accumulated other
comprehensive gain includes foreign currency translation gains
of approximately $1.2 million.
In addition,
L-1 has
significant Japanese Yen denominated transactions with Japanese
suppliers of hardware and consumables for the delivery to
customers. Fluctuations in foreign currencies, including the
Japanese Yen, Canadian Dollar, and the Euro could result in
unexpected fluctuations to results of operations, which could be
material and adverse.
If L-1
does not successfully expand direct sales and services
organizations and
L-1
Identity Solutions 2009 Annual Report | 25
partnering arrangements, the Company may not be able to
increase sales to meet
L-1s
growth expectations.
L-1 services
are sold and licensed through the Companys direct business
development and sales organization. Future success depends on
substantially increasing the size and scope of the direct
business development and sales force and partnering
arrangements, both domestically and internationally.
L-1 may face
intense competition for personnel, and the Company cannot
guarantee that it will be able to attract, assimilate or retain
additional qualified business development and sales personnel on
a timely basis.
Moreover, given the large-scale deployment required by some
customers,
L-1 may need
to hire and retain a number of highly trained customer service
and support personnel. The Company cannot guarantee that it will
be able to increase the size of the customer service and support
organization on a timely basis to provide the high quality of
support required by its customers. The ability to add additional
business development and sales and customer service personnel
could result in customer dissatisfaction and loss of customers.
The Company relies in part upon system integrators, Original
Equipment Manufacturers (OEMs) and distribution partners to sell
some L-1
solutions, technologies and services; the Company may be
adversely affected if those parties do not actively promote the
products or pursue installations that do not use
L-1
solutions, technologies and services. A portion of
L-1 revenue
comes from sales to partners including OEMs, systems
integrators, distributors and resellers. Some of these
relationships have not been formalized in a detailed contract,
and may be subject to termination at any time. Even where these
relationships are formalized in a detailed contract, the
agreements can often be terminated with little or no notice and
subject to periodic amendment.
L-1 intends
to continue to seek strategic relationships to distribute,
license and sell certain of
L-1
products. However the Company may not be able to negotiate
acceptable relationships in the future and cannot predict
whether current or future relationships will be successful.
If solutions, systems and products are not delivered in a
timely fashion or do not perform as promised,
L-1 could
experience increased costs, lower margins, liquidated damage
payment obligations and reputational harm.
L-1
often provides complex systems that are required to operate in
difficult or sensitive circumstances. The development of such
complex systems may be subject to delays or failure to meet
performance requirements to customer specifications. The
negative effects of any delay or failure to deliver to meet
performance requirements could be exacerbated if the delay or
failure occurs in systems that provide personal security, secure
sensitive computer data, authorize significant financial
transactions or perform other functions where a security breach
could have significant consequences.
If a product launch is delayed or is the subject of an
availability shortage because of problems with the
Companys ability to manufacture or assemble the product
successfully on a timely basis, or if a product or service
otherwise fails to meet performance criteria,
L-1 may lose
revenue opportunities entirely
and/or
experience delays in revenue recognition associated with a
product or service in addition to incurring higher operating
expenses during the period required to correct the defects.
There is a risk that for unforeseen reasons
L-1 may be
required to repair or replace a substantial number of systems in
use or to reimburse customers for systems that fail to work or
meet strict performance criteria. From time to time, in certain
critical or complex sale or licensing transactions,
L-1 may be
compelled to accept liability provisions that vary from the
Companys preferred contracting model. There is a risk that
in certain contracts and circumstances
L-1 may not
be successful in adequately minimizing product and related
liabilities or that the protections negotiated will not
ultimately be deemed enforceable.
L-1 carries
product liability insurance, but existing coverage may not be
adequate to cover potential claims. Although the Company will
deploy
back-up
systems, the failure of products to perform as promised could
result in
L-1
Identity Solutions 2009 Annual Report | 26
increased costs, lower margins, liquidated damage payment
obligations and harm to reputation. This could result in
contract terminations and have a material adverse effect on
business and financial results.
Failure to maintain the proprietary nature of
L-1
technology, intellectual property and manufacturing processes
could have a material adverse affect on the business and the
Companys ability to effectively compete.
L-1
principally relies upon patent, trademark, copyright, trade
secret and contract law to establish and protect proprietary
rights. There is a risk that claims allowed on any patents or
trademarks held by
L-1 may not
be broad enough to protect the Companys technology. In
addition, patents or trademarks may be challenged, invalidated
or circumvented and
L-1 cannot
be certain that the rights granted there under will provide
competitive advantages.
Moreover, any current or future issued or licensed patents, or
trademarks, or currently existing or future developed trade
secrets or know-how may not afford sufficient protection against
competitors with similar technologies or processes, and the
possibility exists that certain of already issued patents or
trademarks may infringe upon third party patents or trademarks
or be designed around by others.
In addition, there is a risk that others may independently
develop proprietary technologies and processes, which are the
same as, substantially equivalent or superior to
L-1, or
become available in the market at a lower price.
L-1 may be
required to expend significant resources to monitor and protect
intellectual property rights. The Company may have to litigate
to enforce patents or trademarks or to determine the scope and
validity of other parties proprietary rights. Litigation
could be very costly and divert managements attention. An
adverse outcome in any litigation may have a severe negative
effect on financial results and stock price.
To determine the priority of inventions,
L-1 may
participate in interference proceedings declared by the United
States Patent and Trademark Office or oppositions in foreign
patent and trademark offices, which could result in
substantial cost and limitations on the scope or validity of
patents or trademarks.
In addition, foreign laws treat the protection of proprietary
rights differently from laws in the United States and may not
protect proprietary rights to the same extent as U.S. laws.
The failure of foreign laws or judicial systems to adequately
protect
L-1s
proprietary rights or intellectual property, including
intellectual property developed on the Companys behalf by
foreign contractors or subcontractors may have a material
adverse effect on the
L-1
business, operations, financial results and stock price.
Legal claims regarding infringement by
L-1 or
suppliers of third party intellectual property rights could
result in substantial costs, diversion of managerial resources
and reputational harm. Although
L-1 believes
that its solutions, products and services do not infringe
currently existing and validly issued intellectual property
rights of others, the Company might not be able to defend
successfully against a third-party infringement claim. A
successful infringement claim against
L-1, its
customers or suppliers could subject the Company to:
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Liability for damages and litigation costs, including
attorneys fees.
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Lawsuits that prevent
L-1 from
further use of the intellectual property.
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|
License intellectual property from a third party that could
include significant licensing fees.
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Develop a non-infringing alternative which could be costly and
delay projects.
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Indemnify clients with respect to losses incurred as a result of
the alleged infringement.
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Establish alternative sources for products supplied to
L-1 by third
parties.
|
Failure to prevail against any third party infringement claim
could have a material adverse effect on the business and
financial results. Even if
L-1 is not
found liable in a claim for intellectual property infringement,
such a claim could result in substantial costs, diversion of
resources and management attention,
L-1
Identity Solutions 2009 Annual Report | 27
termination of customer contracts and harm to the Companys
reputation.
L-1 faces
inherent product liability or other liability risks that could
result in large claims against the Company.
L-1 has
inherent risk of exposure to product liability and other
liability claims resulting from the use of its products,
especially to the extent customers may depend on
L-1 products
in public safety situations that may involve physical harm or
even death to individuals, as well as exposure to potential loss
or damage to property. Despite quality control systems and
inspection, there remains an ever-present risk of an accident
resulting from a faulty manufacture or maintenance of products,
or an act of an agent outside of the Companys or
suppliers control. Even if
L-1 products
perform properly, the Company may become subject to claims and
costly litigation due to the catastrophic nature of the
potential injury and loss. A product liability claim, or other
legal claims based on theories including personal injury or
wrongful death, made against
L-1 could
adversely affect operations and financial condition. Although
L-1 may have
insurance to cover product liability claims, the amount of
coverage may not be sufficient.
L-1 is
dependent on a small number of individuals and if the Company
loses key personnel, the business will be adversely
affected. Much of
L-1s
future success depends on the continued service and availability
of senior management, including the Chairman of the Board,
President and Chief Executive Officer, Robert V. LaPenta, and
other members of the executive team. These individuals have
acquired specialized knowledge and skills with regards to
advanced technology identity solutions. The loss of any of these
individuals could severely harm the business.
L-1 also is
highly dependent on the ability to retain, hire and motivate
talented highly skilled personnel. Experienced personnel in the
advanced technology identity solutions industry are in high
demand and competition for their talents is intense. If
L-1 is
unable to successfully attract, retain and motivate key
personnel, the business may be severely harmed.
If L-1
fails to recruit and retain skilled employees or employees with
the necessary
security clearances, the Company may not be able to perform
under government services contracts or win new business. To
be competitive,
L-1 must
have employees with advanced information technology and
technical services skills that work well with customers in a
government or defense-related environment. Often, these
employees require some of the highest security clearances in the
United States. These employees are in great demand and are
likely to remain a limited resource in the foreseeable future.
If L-1 is
unable to recruit and retain a sufficient number of these
employees, the ability to maintain and grow the business could
be negatively impacted.
In addition, some government services contracts contain
provisions requiring
L-1 to
commit to staff a program with certain personnel the customer
considers key to successful performance under the contract. In
the event
L-1 is
unable to provide these key personnel or acceptable
substitutions, the customer may terminate the contract and the
Company may not be able to recover certain incurred costs.
Certain
L-1 shareholders
have significant relationships with the Company that could
result in actions taken that are not supported by unaffiliated
shareholders. In connection with the Aston investment in the
Company, Aston became the largest shareholder of
L-1,
currently owning approximately 8.3 percent of
L-1s
outstanding common stock. As a result, Aston (together with its
affiliate,
L-1
Investment Partners LLC) has an influence on matters
requiring approval by shareholders, including the election of
directors and most corporate actions, such as mergers and
acquisitions. In addition,
L-1 has
significant relationships within
L-1
Investment Partners LLC and Aston including Mr. Robert V.
LaPenta, founder and Chief Executive Officer of
L-1
Investments Partners LLC who is Chairman of the Board and Chief
Executive Officer and President of
L-1.
Mr. James DePalma, Mr. Joseph Paresi and Ms. Doni
Fordyce are affiliates of
L-1
Investment Partners LLC and Aston, serve as the Executive Vice
President and Chief Financial Officer, Executive Vice President
and Chief Marketing
L-1
Identity Solutions 2009 Annual Report | 28
and Sales Officer, and Executive Vice President of Corporate
Communications, respectively.
L-1 has
entered into certain transactions with Aston,
L-1
Investment Partners and Mr. LaPenta, including a sublease
of office space from
L-1
Investment Partners, an agreement in principle to purchase a
portfolio Company of Aston at fair market value (if and as
approved by the Board of Directors), and a private placement
issuance of securities to Mr. LaPenta in connection with
his participation in
L-1s
$120 million private placement to fund in part the
acquisition of the ID Systems business of Digimarc. See
Note 4 to the Consolidated Financial Statements,
Related Party Transactions for a more detailed
description of these transactions.
Mr. LaPenta also has a significant personal investment in
L-1 common
stock through his controlling interest in Aston and his direct
ownership which, considered in the aggregate, represents
beneficial ownership of approximately 14.6 percent of
outstanding
L-1 common
stock. The concentration of large percentages of ownership in
any single shareholder, or in any series of single shareholders,
may influence the likelihood or timing of any change in control
of the Company. Additionally, the sale of a significant number
of shares in the open market by single shareholders or otherwise
could adversely affect stock price.
ACQUISITION
STRATEGY RISKS
Integration of recently acquired businesses may be difficult
to achieve and will consume significant financial and managerial
resources, which may adversely affect operations. The
L-1
operating philosophy is to let acquired businesses operate in
autonomous manner subject to corporate oversight but integrating
and rationalizing duplicative functions to achieve revenue and
cost synergies. The Company may encounter substantial
difficulties, costs and delays in integrating the operations
recently acquired and future acquisitions such as:
|
|
|
Exposure to unknown liabilities of acquired companies or assets.
|
|
|
Higher than anticipated acquisition costs and expenses.
|
|
|
|
Assumption of ongoing litigation matters that may be highly
complex and involve significant time, cost and expense.
|
|
|
Potential conflicts between business cultures.
|
|
|
Adverse changes in business focus perceived by third-party
constituencies.
|
|
|
Disruption of ongoing business.
|
|
|
Potential conflicts in distribution, marketing or other
important relationships.
|
|
|
Potential constraints of management resources.
|
|
|
Failure to maximize financial and strategic position by the
successful incorporation of acquired technology.
|
|
|
Failure to realize acquired technology potential, complete
product development, or obtain / secure appropriate
protection of intellectual property rights.
|
|
|
Loss of key employees
and/or the
diversion of managements attention from other ongoing
business concerns.
|
The geographic distance between acquired businesses and their
respective offices and operations increases the risk that the
integration will not be completed successfully or in a timely
and cost-effective manner.
L-1 may not
be successful in overcoming these risks or any other problems
encountered in connection with the integration of the companies.
The simultaneous integration of these acquisitions may place
additional strain on
L-1
resources and increase the risk that business may be adversely
affected by the disruption caused by the acquisitions. The
strategy contemplates acquiring additional businesses, the
integration of which may consume significant financial and
managerial resources, and could have a severe negative impact on
the business, financial condition and results of operations.
Acquisitions could result in future impairment and other
charges, which could adversely affect operational results.
Although no impairment was recorded in 2009,
L-1 recorded
impairment charges aggregating $528.6 million in 2008 for
goodwill and long-lived assets, primarily related to the
biometric businesses. At December 31, 2009, goodwill,
L-1
Identity Solutions 2009 Annual Report | 29
intangible assets and property and equipment amounted to
$889.8 million, $102.4 million and
$115.5 million, respectively. Because goodwill represents a
residual after the purchase price is allocated to the fair value
of acquired assets and liabilities, it is difficult to quantify
the factors that contribute to the recorded amounts and
subsequent impairments, if any. Nevertheless, management
believes that the following factors have contributed to the
amount recorded:
|
|
|
Technological development capabilities and intellectual capital.
|
|
|
Expected significant growth in revenues and profits from the
expanding market in identity solutions.
|
|
|
Expected synergies resulting from providing multi modal product
offerings to existing customer base and to new customers of the
combined Company.
|
The recorded amounts at the purchase date for goodwill and other
intangible assets are estimates at a point in time and are based
on valuations and other analyses of fair value that require
significant estimates and assumptions about future events,
including but not limited to projections of revenues, market
growth, demand, technological developments, political
developments, government policies, among other factors, which
are derived from information obtained from independent sources,
as well as the management of the acquired businesses and
business plans for the acquired businesses or intellectual
property.
If estimates and assumptions used to initially record goodwill
and intangible assets do not materialize, or unanticipated
adverse developments or events occur, ongoing reviews of the
carrying amounts of such goodwill and intangible assets may
result in impairments which will require
L-1 to
record a charge in the period in which such an impairment is
identified, and could have a severe negative impact on its
business and financial statements.
If L-1 stock
price were to decrease materially from current levels and remain
depressed for a sustained period of time, the Company may be
required to
assess the carrying amount of goodwill and long-lived assets of
reporting units before the next scheduled annual impairment
test. If at that time the estimated fair values of the reporting
units are less than their respective carrying amounts,
L-1 would
need to determine whether goodwill and long-lived assets would
be impaired. Moreover, if economic conditions deteriorate and
capital markets conditions negatively impact the valuation of
enterprises, the estimated fair values of
L-1
reporting units could be adversely impacted, which could result
in future impairments.
If L-1
does not achieve expected benefits from completed acquisitions,
the price of
L-1 common
stock could decline.
L-1 expects
that its consummated acquisitions will enhance leadership in the
identity solutions industry through the combination of
respective technologies. However, the combination of such
technologies might not meet the demands of the customers.
If L-1
technologies fail to meet such demand, customer acceptance of
L-1
biometric products could decline, which would have an adverse
effect on results of operations and financial conditions.
Further, L-1
expects that the additions to solutions offerings will extend
current market reach and provide a critical component to the
Companys comprehensive offering for new markets in need of
identity solutions. However, there can be no assurance that
current customers or customers in new markets will be receptive
to these additional offerings. Further,
L-1 might
not be able to market successfully its products and services to
the customers of the businesses acquired. If
L-1
solutions offerings and services fail to meet the demands of
customers, results of operations and financial condition could
be adversely affected.
There is also a risk that
L-1 will not
achieve the anticipated benefits of the acquisitions as rapidly
as, or to the extent, anticipated by financial or industry
analysts, or that such analysts will not perceive the same
benefits to the acquisitions as does the Company. If these risks
materialize, the
L-1 stock
price could be adversely affected.
L-1
Identity Solutions 2009 Annual Report | 30
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
There are no unresolved staff comments.
L-1 does not
own any properties. Significant leasing arrangements are
outlined below.
The Corporate headquarters comprises approximately
17,000 square feet of space in facilities located in
Stamford, Connecticut.
L-1
subleases space from
L-1
Investment Partners LLC. The sublease terminates on the earlier
of the date that the Companys Chairman and Chief Executive
Officer ceases employment with the Company or March 2015.
L-1 uses
this property for corporate, administrative and general business
needs.
Information about the Companys leased facilities follows.
|
|
|
|
|
|
|
|
|
Square
|
|
Expire
|
Location
|
|
Feet
|
|
Date
|
|
|
Billerica, Massachusetts
|
|
|
90,000
|
|
|
April 2016
|
Bloomington, Minnesota
|
|
|
59,000
|
|
|
Oct. 2014
|
Fort Wayne, Indiana
|
|
|
48,000
|
|
|
Jan. 2010
|
Martinez, California
|
|
|
26,000
|
|
|
Feb. 2011
|
Chantilly, Virginia
|
|
|
24,000
|
|
|
May 2012
|
Nashville, Tennessee
|
|
|
21,000
|
|
|
July 2013
|
Arlington, Virginia
|
|
|
20,000
|
|
|
Dec. 2012
|
Reston, Virginia
|
|
|
19,000
|
|
|
May 2012
|
Jersey City, New Jersey
|
|
|
18,000
|
|
|
July 2017
|
Stamford, Connecticut
|
|
|
17,000
|
|
|
March 2015
|
Springfield, Illinois
|
|
|
15,000
|
|
|
June 2010
|
Markham, Canada
|
|
|
15,000
|
|
|
Nov. 2010
|
Sacramento, California
|
|
|
11,000
|
|
|
Monthly
|
Forest Park, Georgia
|
|
|
10,000
|
|
|
Jan. 2014
|
Oakville, Canada
|
|
|
8,000
|
|
|
Jan. 2010
|
El Segundo, California
|
|
|
8,000
|
|
|
Jan. 2011
|
Lacey, Washington
|
|
|
8,000
|
|
|
June 2010
|
Columbia, Maryland
|
|
|
7,000
|
|
|
Dec. 2012
|
Harrisburg, Pennsylvania
|
|
|
6,000
|
|
|
Sept. 2011
|
Carrollton, Georgia
|
|
|
5,000
|
|
|
Dec. 2010
|
L-1 also
leases sales and support offices in multiple locations
throughout the United States and internationally.
While the Company believes that these facilities are adequate to
meet immediate needs, it may become necessary to secure
additional space in the future to accommodate any future growth.
The Company believes that such additional space will
be available as needed in the future on commercially reasonable
terms.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
OLD DIGIMARC
LITIGATION
In connection with the Companys August 2008 acquisition of
Digimarc Corporation, which consisted of its Secure ID Business
following the spin-off of its digital watermarking business
(Old Digimarc), the Company assumed certain legal
proceedings of Old Digimarc as described below.
Beginning in May 2001, a number of substantially identical class
action complaints alleging violations of the Federal securities
laws were filed in the United States District Court for the
Southern District of New York naming approximately
300 companies, including Old Digimarc, certain officers and
directors and certain underwriters of the Companies
initial public offerings as defendants. The complaints were
subsequently consolidated into a single action, and a
consolidated amended complaint was filed in April 2002. The
amended complaint alleges, among other things, that the
underwriters of Old Digimarcs initial public offering
violated securities laws by failing to disclose certain alleged
compensation arrangements in Old Digimarcs initial public
offering registration statement and by engaging in manipulative
practices to artificially inflate the price of Old
Digimarcs stock in the aftermarket subsequent to the
initial public offering. Old Digimarc and certain of its
officers and directors are named in the amended complaint
pursuant to Section 11 of the Securities Act of 1933 and
Section 10(b) and
Rule 10b-5
of the Securities Exchange Act of 1934 on the basis of an
alleged failure to disclose the underwriters alleged
compensation arrangements and manipulative practices. The
complaint sought unspecified damages. In July 2002, the claims
against Old Digimarc under Section 10(b) were dismissed. In
October 2002, the individual officer and director defendants
were dismissed without prejudice pursuant to tolling agreements.
In June 2004, a stipulation of partial settlement among the
plaintiffs, the companies, and the officers and directors was
submitted to the District Court. While the partial settlement
was pending approval, the plaintiffs continued to litigate their
claims against the
L-1
Identity Solutions 2009 Annual Report | 31
underwriter defendants. The district court directed that the
litigation proceed within a number of focus cases
rather than in all of the 309 cases that have now been
consolidated. Old Digimarc was not one of these focus cases. In
October 2004, the district court certified the focus cases as
class actions. The underwriter defendants appealed that ruling
and, on December 5, 2006, the Court of Appeals for the
Second Circuit reversed the district courts class
certification decision for the six focus cases. In light of the
Second Circuit opinion, in June 2007, the district court entered
an order terminating the settlement. On August 14, 2007,
the plaintiffs filed their second consolidated amended class
action complaints against the focus cases and on
September 27, 2007, again moved for class certification. On
November 12, 2007, certain of the defendants in the focus
cases moved to dismiss the second consolidated amended class
action complaints. The court issued an opinion and order on
March 26, 2008, denying the motions to dismiss except as to
Section 11 claims raised by those plaintiffs who sold their
securities for a price in excess of the initial offering price
and those who purchased outside the previously certified class
period. The class certification motion was withdrawn without
prejudice on October 10, 2008. On April 2, 2009, a
stipulation and agreement of settlement among the plaintiffs,
issuer defendants (including Old Digimarc) and underwriter
defendants was submitted to the Court for preliminary approval.
Old Digimarcs portion of the settlement, which is wholly
immaterial, is covered entirely by insurance. On June 10,
2009, the Judge granted preliminary approval of the settlement,
and on October 5, 2009, the Judge granted final approval of
the settlement. Notices of appeal of this decision have been
filed; the deadline for filing further notices of appeal is
February 22, 2010.
On October 10, 2007, an Old Digimarc stockholder filed a
lawsuit in the United States District Court for the Western
District of Washington against several companies that acted as
lead underwriters for the Old Digimarc initial public offering.
The complaint, which also named Old Digimarc as a nominal
defendant but did not assert any claims against Old Digimarc,
asserted claims against the underwriters under
Section 16(b) of the Securities Exchange Act of 1934. On
February 28, 2008, an amended complaint was filed, with Old
Digimarc still named only as a nominal defendant. Similar
complaints have been filed by this same plaintiff against a
number of other issuers in connection with their initial public
offerings, and the factual allegations are closely related to
the allegations in the litigation pending in the United States
District Court for the Southern District of New York which is
described above. On March 12, 2009, after considering
motions to dismiss, one filed by thirty moving issuers and the
other filed by the underwriters, the judge dismissed the
plaintiffs claims on a jurisdictional and statute of
limitations basis. On April 10, 2009, the plaintiff filed a
notice of appeal of the dismissal. The final appellate brief was
filed on November 17, 2009; the Ninth Circuit has not
indicated whether it will schedule oral arguments. The Company
currently believes that the outcome of this litigation will not
have a material adverse impact on its condensed consolidated
financial position and results of operations.
OTHER
The Company records a liability for any claim, demand,
litigation and other contingency when management believes that
it is both probable that a liability has been incurred and can
reasonably estimate the amount of the potential loss. Based on
current information and belief, the Company believes it has
adequate provisions for any such matters. The Company reviews
these provisions quarterly and adjusts these provisions to
reflect the impact of negotiations, settlements, rulings, advice
of legal counsel and other information and events pertaining to
a particular matter. However, because of the inherent
uncertainties of litigation the ultimate outcome of certain
litigation cannot be accurately predicted by the Company; it is
therefore possible that the consolidated financial position,
results of operations or cash flows of the Company could be
materially adversely affected in any particular period by the
unfavorable resolution of one or more of these matters and
contingencies.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of 2009.
L-1
Identity Solutions 2009 Annual Report | 32
PART II
ITEM 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR
L-1 COMMON
STOCK
L-1 common
stock is traded on the New York Stock Exchange under the symbol
ID. As of February 25, 2010, there were 801
holders of record of
L-1 common
stock.
The quarterly high and low sales prices, as reported by the New
York Stock Exchange or NASDAQ, as applicable, of
L-1 common
stock during 2009 and 2008 were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
8.16
|
|
|
$
|
3.23
|
|
|
$
|
18.54
|
|
|
$
|
10.66
|
|
Second Quarter
|
|
$
|
9.50
|
|
|
$
|
4.93
|
|
|
$
|
16.02
|
|
|
$
|
12.77
|
|
Third Quarter
|
|
$
|
8.64
|
|
|
$
|
6.74
|
|
|
$
|
17.22
|
|
|
$
|
11.66
|
|
Fourth Quarter
|
|
$
|
7.90
|
|
|
$
|
5.67
|
|
|
$
|
15.28
|
|
|
$
|
4.33
|
|
DIVIDEND
POLICY
L-1 paid no
dividends in 2009 or
2008. L-1
presently intends to retain its cash for use in the operation
and expansion of business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. In
addition,
L-1 is
prohibited from paying dividends pursuant to its credit
agreement with Bank of America, N.A.
RECENT SALES OF
UNREGISTERED SECURITIES
None.
REPURCHASES OF
COMMON STOCK
None.
L-1
Identity Solutions 2009 Annual Report | 33
STOCK PERFORMANCE
CHARTS
The following performance chart assumes an investment of $100 on
December 31, 2004 and compares the change through
December 31, 2009 in the market price for
L-1 common
stock with the Russell 2000 Index, the NASDAQ Composite Index,
and a peer group identified by the Company (the Selected
Peer Group Index). The Selected Comparative Group Index
was selected to include publicly-traded companies engaging in
one or more of the Companys lines of business.
The Selected Comparative Group Index is weighted according to
the respective issuers stock market capitalization and is
comprised of the following companies: CACI International, Inc.,
Cogent, Inc., LaserCard Corporation, AcitvIdentity Corporation,
Bio-Key International and ImageWare Systems, Inc.
The comparisons in the graphs below are based on historical data
and are not intended to forecast the possible future performance
of
L-1s
common stock.
STOCK PERFORMANCE
CHART
L-1
Identity Solutions 2009 Annual Report | 34
The following chart supplements the stock performance chart to
show the stock performance from October 5, 2005, the day
prior that Aston Capital Partners LP announced its investment in
L-1, through
December 31, 2009 since during this period the Company
underwent significant changes in operations and capital
structure, including the issuance of $100 million of common
stock to Aston, the merger with Identix and acquisitions of IBT,
SecuriMetrics, Iridian, SpecTal, ComnetiX, ACI, McClendon,
Bioscrypt and Digimarc as well as significant changes in the
Board of Directors and management.
SUPPLEMENTAL
STOCK PERFORMANCE CHART
L-1
Identity Solutions 2009 Annual Report | 35
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The financial data set forth below should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and
L-1 audited
consolidated financial statements as of December 31, 2009
and 2008 and for each of the three years in the period ended
December 31, 2009 included in this annual report on
Form 10-K
. The other financial data has been derived from the audited
financial statements for the respective years. The historical
results of operations are not necessarily indicative of future
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009(1)(3)(4)
|
|
|
2008(1)(2)(3)(4)
|
|
|
2007(1)(2)(3)(4)
|
|
|
2006(1)(3)
|
|
|
2005(3)
|
|
|
|
(in thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
650,937
|
|
|
$
|
562,872
|
|
|
$
|
389,507
|
|
|
$
|
164,386
|
|
|
$
|
66,224
|
|
Cost of revenues
|
|
|
459,319
|
|
|
|
394,869
|
|
|
|
268,431
|
|
|
|
113,529
|
|
|
|
47,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
191,618
|
|
|
|
168,003
|
|
|
|
121,076
|
|
|
|
50,857
|
|
|
|
18,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
40,004
|
|
|
|
37,055
|
|
|
|
27,719
|
|
|
|
14,430
|
|
|
|
7,832
|
|
Research and development
|
|
|
20,730
|
|
|
|
25,244
|
|
|
|
18,482
|
|
|
|
11,589
|
|
|
|
4,618
|
|
General and administrative
|
|
|
93,855
|
|
|
|
86,793
|
|
|
|
62,318
|
|
|
|
29,953
|
|
|
|
12,068
|
|
Asset impairments and merger related expenses
|
|
|
|
|
|
|
529,683
|
|
|
|
5,000
|
|
|
|
22,767
|
|
|
|
|
|
Acquisition related expenses and amortization of acquired
intangible assets
|
|
|
1,895
|
|
|
|
2,996
|
|
|
|
2,519
|
|
|
|
401
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
156,484
|
|
|
|
681,771
|
|
|
|
116,038
|
|
|
|
79,140
|
|
|
|
25,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
35,134
|
|
|
|
(513,768
|
)
|
|
|
5,038
|
|
|
|
(28,283
|
)
|
|
|
(6,543
|
)
|
Interest income
|
|
|
120
|
|
|
|
288
|
|
|
|
407
|
|
|
|
1,770
|
|
|
|
362
|
|
Interest expense
|
|
|
(41,321
|
)
|
|
|
(27,894
|
)
|
|
|
(14,314
|
)
|
|
|
(1,598
|
)
|
|
|
(159
|
)
|
Other income (expense), net
|
|
|
(394
|
)
|
|
|
(260
|
)
|
|
|
(508
|
)
|
|
|
(122
|
)
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(6,461
|
)
|
|
|
(541,634
|
)
|
|
|
(9,377
|
)
|
|
|
(28,233
|
)
|
|
|
(5,971
|
)
|
Benefit (provision) for income taxes
|
|
|
2,458
|
|
|
|
(9,960
|
)
|
|
|
25,184
|
|
|
|
(2,804
|
)
|
|
|
(1,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,003
|
)
|
|
|
(551,594
|
)
|
|
|
15,807
|
|
|
|
(31,037
|
)
|
|
|
(7,353
|
)
|
Net loss attributable to non-controlling interest
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
L-1 shareholders
|
|
$
|
(4,198
|
)
|
|
$
|
(551,594
|
)
|
|
$
|
15,807
|
|
|
$
|
(31,037
|
)
|
|
$
|
(7,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to
L-1 shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(7.12
|
)
|
|
$
|
0.22
|
|
|
$
|
(0.71
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(7.12
|
)
|
|
$
|
0.22
|
|
|
$
|
(0.71
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
85,516
|
|
|
|
77,518
|
|
|
|
71,663
|
|
|
|
43,823
|
|
|
|
19,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
85,516
|
|
|
|
77,518
|
|
|
|
72,385
|
|
|
|
43,823
|
|
|
|
19,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets, net of current liabilities
|
|
$
|
9,403
|
|
|
$
|
24,371
|
|
|
$
|
40,869
|
|
|
$
|
11,658
|
|
|
$
|
77,482
|
|
Total assets
|
|
|
1,323,825
|
|
|
|
1,309,821
|
|
|
|
1,435,595
|
|
|
|
1,227,225
|
|
|
|
294,108
|
|
Long-term debt, including current maturities
|
|
|
446,366
|
|
|
|
448,491
|
|
|
|
234,918
|
|
|
|
80,000
|
|
|
|
215
|
|
Equity
|
|
|
730,461
|
|
|
|
708,480
|
|
|
|
1,098,749
|
|
|
|
1,067,085
|
|
|
|
274,660
|
|
L-1
Identity Solutions 2009 Annual Report | 36
|
|
|
(1) |
|
The results reflect the adoption of the accounting standard,
Share-Based Payments, effective January 1, 2006. |
|
(2) |
|
See Note 14 to the consolidated financial statements. |
|
(3) |
|
The results of each of the years presented have been materially
impacted by acquisitions. See Note 13 to the consolidated
financial statements. |
|
(4) |
|
Reflects the retrospective adoption of guidance related to the
accounting for convertible debt instruments and guidance related
to the expensing of acquisition related costs. See Note 2
to the consolidated financial statements. |
L-1
Identity Solutions 2009 Annual Report | 37
ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in
conjunction with
L-1s
consolidated financial statements and the accompanying notes
thereto provided pursuant to Item 8. Financial
Statements and Supplementary Data contained within this
Annual Report on
Form 10-K.
OVERVIEW
L-1 Identity
Solutions, Inc.
(L-1
or the Company) is a provider of technology,
products, systems and solutions, and services that protect and
secure personal identities and assets. Together with its
divisions,
L-1 delivers
the full range of offerings required for solving complex
problems associated with managing identity.
The business is evaluated primarily through financial metrics
including revenues, operating income (loss) and Adjusted EBITDA
(earnings before, interest expense, net, depreciation and
amortization, stock- based compensation expense, asset
impairments and provision (benefit) for income taxes), and
unlevered free cash flow.
The Company operates in two reportable segments: Solutions and
Services.
The Solutions reportable segment consists of the Secure
Credentialing and Biometrics / Enterprise Access
Divisions. Solutions from these divisions are marketed to
Federal agencies, State and Local government agencies (including
law enforcement and department of corrections), foreign
governments, and commercial entities (such as financial and
health care institutions and casinos).
Solutions revenue includes products and related services, which
are comprised of hardware, components, consumables and software,
as well as maintenance, consulting and training services.
The Services reportable segment includes the Enrollment Services
Division and Government Consulting Services group.
Enrollment services perform fingerprinting and process
background checks for civilians.
Government Consulting Services includes the businesses of
Advanced Concepts (Information Technology Solutions), McClendon
(Engineering & Analytical Solutions), and SpecTal
(Intelligence Services).
Government Consulting Services offer comprehensive consulting,
program management, information analysis, training, security,
technology development, and information technology solutions to
the U.S. intelligence community.
Depending upon customer needs, identity solutions can be bundled
with services offerings to create an integrated solution.
REVENUES
The Secure Credentialing business, which prior to
December 15, 2005 comprised
L-1s
sole business, generates revenues from the sales of solutions
consisting of bundled proprietary software with commercial
off-the-shelf
equipment and related maintenance and services, the sale of
secure printing solutions and related consumables, and the
design, customization and installation of secure credential
issuance systems which generate revenues as the credentials are
issued by the customer. The division also generates revenues
from sales of solutions using biometric technologies of other
divisions.
The Biometrics/Enterprise Access business generates revenues
from the sale of biometric solutions incorporating fingerprint,
facial, skin and iris biometrics and system components necessary
for the biometric capture and knowledge discovery and the sale
of biometrics solutions using proprietary multi-biometric
capture devices bundled together with proprietary software and
other biometric technologies, as well as sales of licenses and
software. The divisions offerings include Live Scan and
mobile systems and services for biometric capture and
identification, systems and biometric solutions that include
modules and software for biometric matching and verification,
and related maintenance services. Revenues are generated by
sales of hardware, software and maintenance and other services.
In addition, the division provides solutions that
L-1
Identity Solutions 2009 Annual Report | 38
include biometrics-based readers used to secure buildings and
restricted areas.
The Enrollment Services business generates revenues through the
sales of enrollment and background screening products and
fingerprinting services principally under long term service
contracts.
Government Consulting Services consists of the businesses of
Advanced Concepts Inc., McClendon LLC, SpecTal LLC, and
generates revenue by providing consulting and information
technology services to U.S. intelligence and military
communities, principally under long term Federal contracts and
subcontracts
L-1 markets
its solutions and services primarily to U.S. and foreign,
Federal, State and Local government agencies and law enforcement
agencies.
L-1 also is
working to expand the use of its solutions in commercial
markets, particularly financial services, transportation and
healthcare. In a typical contract with a government entity for
an identity solution,
L-1 designs
the system, supplies and installs equipment and software and
integrates the solution within the entitys existing
infrastructure and provides maintenance services. These
contracts may be structured as fixed price contracts with
payments made upon completion of agreed milestones or deliveries
and with each milestone or delivery typically having a value
specified in the contract. Alternatively, these contracts may
provide for a fixed price per credential issued as is typical in
the drivers license market. For services contracts,
L-1 is
compensated at a rate per fingerprint delivered in the case of
fingerprinting services or on a time and material, fixed price
level of effort and cost reimbursable basis for
L-1
government consulting services.
L-1 revenues
have grown to $650.9 million in 2009 from
$66.2 million in 2005.
L-1 growth
in revenues is due principally to acquisitions consummated, as
well as increased demand for identity solutions related to
heightened emphasis on security, secure credentials, document
authentication and biometrics, as well as increased demand for
government security services.
L-1
anticipates that the U.S. government agencies will continue
to be major customers for the foreseeable future.
L-1 also
expects to experience increased demand
from a number of other government entities as they deploy
identity solutions, particularly document authentication, at
points of entry and exit, including borders, seaports and
airports and in connection with national identification
programs. Notwithstanding expectations regarding demand for
these solutions, the quantity and timing of orders from both
U.S. and foreign government entities depends on a number of
factors outside of the Companys control, such as the level
and timing of budget appropriations. Any funding delays or other
changes in the rollout of government programs utilizing
L-1
solutions, products and services could cause revenues to fall
short of expectations.
L-1 revenues
increased to $650.9 million for the year ended
December 31, 2009 from $562.9 million for the year
ended December 31, 2008. Net loss for the year was
$4.2 million compared to $551.6 million loss in 2008.
The 2009 loss includes $1.0 million for financing costs
related to the modification of debt and a provision of
$1.2 million related to the suspension of the Registered
Traveler program. The 2008 loss includes impairments of
long-lived assets of $98.6 million and goodwill of
$430.0 million, as well as merger related expenses of
$1.1 million. In addition, the 2008 results reflect an
increase in the deferred tax valuation allowance of
$48.0 million and an income tax benefit of
$37.4 million for the tax benefit of the impairment of
long-lived assets. Also in 2009,
L-1 incurred
interest expense of $41.3 million compared to interest
expense of $27.9 million in 2008, as a result of increased
borrowings to fund the acquisition of Old Digimarc.
ACQUISITIONS
L-1 has
pursued strategic acquisitions to complement and expand its
existing solutions and services. Acquisitions since
January 1, 2007 include:
|
|
|
August 2008 acquisition of Old Digimarc, which provides secure
credentialing systems to State and Local government agencies.
|
|
|
March 2008 acquisition of Bioscrypt, which provides enterprise
access products and solutions to government agencies and
commercial entities.
|
L-1
Identity Solutions 2009 Annual Report | 39
|
|
|
July 2007 acquisitions of McClendon and ACI, which provide
technical, network security and professional services to the
U.S. intelligence and military communities.
|
|
|
February 2007 acquisition of ComnetiX, which provides an
important presence in the fingerprinting services segment in the
Canadian market and a complementary base of customers,
particularly within the law enforcement community.
|
The acquisitions have resulted in the consolidation of certain
marketing resources, corporate functions of the separate
entities and are expected to have a continuing material effect
on operations resulting from, but not limited to:
|
|
|
Synergies resulting from providing a comprehensive product line
to current and future customers.
|
|
|
Growth in revenues and profits from expanded markets for
identity solutions.
|
|
|
Enhancement of technical capabilities resulting from combining
the intellectual capital of the acquired businesses.
|
|
|
Rationalization of technology costs and research and development
activities.
|
|
|
Realignment of the businesses to complement each business
unique capabilities and rationalizing costs.
|
|
|
Leveraging the Companys infrastructure to achieve higher
revenues and profitability.
|
ADJUSTED
EBITDA
L-1 uses
Adjusted EBITDA as a non-GAAP financial performance measurement.
Adjusted EBITDA is calculated by adding back to net income
(loss):
interest-net,
income taxes, depreciation and amortization, goodwill and
long-lived
asset impairments and stock-based compensation, including
retirement plan contributions settled, or to be settled, in
common stock. Adjusted EBITDA is provided to investors to
supplement the results of operations reported in accordance with
GAAP. Management believes Adjusted EBITDA is useful to help
investors analyze the operating trends of the business and to
assess the relative underlying
performance of businesses with different capital and tax
structures. Management also believes that Adjusted EBITDA
provides an additional tool for investors to use in comparing
L-1
financial results with other companies in the industry, many of
which also use Adjusted EBITDA in their communications to
investors. By excluding non-cash charges such as amortization
and depreciation, stock-based compensation expense, goodwill and
long-lived
asset impairments as well as non-operating charges for
interest-net
and income taxes, investors can evaluate
L-1
operations and can compare
L-1 results
on a more consistent basis to the results of other companies.
Management uses Adjusted EBITDA to evaluate potential
acquisitions, establish internal budgets and goals, evaluate
performance of
L-1 business
units and management, and to evaluate compliance with debt
covenants.
L-1
considers Adjusted EBITDA to be an important indicator of the
Companys operational strength and performance of its
business and a useful measure of
L-1s
historical and prospective operating trends. However, there are
significant limitations to the use of Adjusted EBITDA since it
excludes interest income and expense, income taxes, goodwill and
long-lived
asset impairments, and
stock-based
compensation expense, including retirement plan contributions
settled, or to be settled in common stock, all of which impact
L-1
profitability, as well as depreciation, and amortization related
to the use of long-lived assets that benefit multiple periods.
The Company believes that these limitations are compensated for
by providing Adjusted EBITDA only with GAAP performance measures
and clearly identifying the difference between the two measures.
Consequently, Adjusted EBITDA should not be considered in
isolation or as a substitute for net income (loss), or operating
income (loss) presented in accordance with GAAP. Adjusted EBITDA
as defined by the Company may not be comparable with similarly
named measures provided by other entities.
L-1
Identity Solutions 2009 Annual Report | 40
A reconciliation of GAAP net income (loss) to Adjusted EBITDA
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net Income (Loss)
|
|
$
|
(4,003
|
)
|
|
$
|
(551,594
|
)
|
|
$
|
15,807
|
|
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) Provision for Income Taxes
|
|
|
(2,458
|
)
|
|
|
9,960
|
|
|
|
(25,184
|
)
|
Interest net
|
|
|
41,201
|
|
|
|
27,606
|
|
|
|
13,907
|
|
Stock-Based Compensation Costs
|
|
|
23,665
|
|
|
|
18,064
|
|
|
|
11,291
|
|
Depreciation and Amortization
|
|
|
37,129
|
|
|
|
49,412
|
|
|
|
39,237
|
|
Long-lived Asset Impairments and Other
|
|
|
(195
|
)
|
|
|
528,577
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
95,339
|
|
|
$
|
82,025
|
|
|
$
|
60,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REPORTABLE
SEGMENTS AND RESULTS OF OPERATONS
L-1 operates
in two reportable segments, the Solutions segment and the
Services segment. During the first quarter of 2008,
L-1
integrated the authentication and identification business of
ComnetiX in the Solutions segment and the fingerprinting
services business in the Services segment. In 2009, the Company
integrated the McClendon segment into the SpecTal segment and is
in process of integrating the Enterprise Access segment into the
Biometrics segment.
L-1 measures
segment performance primarily based on revenues, operating
income (loss) and Adjusted EBITDA and unlevered free cash flow.
Operating results by segment, including allocation of corporate
expenses, for the three years ended December 31, 2009 are
as follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
322,512
|
|
|
$
|
280,045
|
|
|
$
|
211,029
|
|
Operating Income (Loss)
|
|
|
20,240
|
|
|
|
(527,958
|
)
|
|
|
(836
|
)
|
Depreciation and Amortization Expense
|
|
|
29,348
|
|
|
|
40,928
|
|
|
|
32,996
|
|
Adjusted EBITDA
|
|
|
63,264
|
|
|
|
48,772
|
|
|
|
47,165
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
328,425
|
|
|
|
282,827
|
|
|
|
178,478
|
|
Operating Income
|
|
|
14,894
|
|
|
|
14,190
|
|
|
|
5,874
|
|
Depreciation and Amortization Expense
|
|
|
7,781
|
|
|
|
8,484
|
|
|
|
6,241
|
|
Adjusted EBITDA
|
|
|
32,075
|
|
|
|
33,253
|
|
|
|
12,893
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
650,937
|
|
|
|
562,872
|
|
|
|
389,507
|
|
Operating Income (Loss)
|
|
|
35,134
|
|
|
|
(513,768
|
)
|
|
|
5,038
|
|
Depreciation and Amortization Expense
|
|
|
37,129
|
|
|
|
49,412
|
|
|
|
39,237
|
|
Adjusted EBITDA
|
|
|
95,339
|
|
|
|
82,025
|
|
|
|
60,058
|
|
In 2009, the Solutions reportable segment includes a provision
of $1.2 million related to the suspension of the Registered
Traveler program. In 2008, the Solutions and Services reportable
segments include goodwill and long-lived asset impairments of
$527.2 million and $1.4 million, respectively, and the
Solutions segment includes merger related severance costs of
$1.1 million. In 2007, the Solutions segment includes asset
impairments and merger related costs of $5.0 million.
Excluding the above charges, the operating loss for Solutions
was $21.4 million in 2009, $0.3 million in 2008 and
$4.2 million in 2007. The 2008 and 2007 periods reflect
higher intangible amortization of intangible assets. Excluding
impairment costs, Services operating income was
$14.9 million in 2009, $15.6 million in 2008 and
$5.9 million in 2007.
Revenue and EBITDA increases for the Solutions segment are
primarily attributable to the acquisition of Digimarc in August
2008 and Bioscrypt in March 2008 as well as organic growth in
the business as discussed below. Revenue and EBITDA increases
for the Services segment reflect the acquisition of ACI and
McClendon in 2007, as well as organic revenue growth of
L-1s
SpecTal business and
L-1s
Enrollment Services businesses.
L-1
Identity Solutions 2009 Annual Report | 41
DEPENDENCE ON
SIGNIFICANT CUSTOMERS
For the year ended December 31, 2009, U.S. Federal
government agencies, directly or indirectly, accounted for
59 percent of consolidated revenues. For the years ended
December 31, 2008 and 2007, U.S. Federal Government
agencies, directly or indirectly accounted for 64 percent
and 69 percent of consolidated revenues, respectively.
Accounts receivable from U.S. government agencies amounted
to $47.4 million and $53.6 million at
December 31, 2009 and 2008, respectively.
CONSOLIDATED
RESULTS OF OPERATIONS
Comparative results of operations have been affected by the
February 2007 acquisition of ComnetiX, the July 2007
acquisitions of ACI and McClendon, the March 2008 acquisition of
Bioscrypt and the August 2008 acquisition of Old Digimarc
(collectively the Acquisitions).
In addition to the impact of the Acquisitions, the following
items impacted operating results, net of related tax effects, if
applicable (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Goodwill impairment
|
|
$
|
|
|
|
$
|
(430.0
|
)
|
|
$
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
(61.3
|
)
|
|
|
(3.0
|
)
|
(Addition) reduction of valuation allowance
|
|
|
0.7
|
|
|
|
(48.0
|
)
|
|
|
21.8
|
|
Merger related costs
|
|
|
(0.4
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
Costs and provision related to Suspended Registered Traveler
Program
|
|
|
(1.5
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.2
|
)
|
|
$
|
(540.8
|
)
|
|
$
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific information regarding the impact of the Acquisitions on
the results of operations is provided below.
COMPARISON OF
2009 TO 2008
Revenues (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
327,253
|
|
|
$
|
282,161
|
|
Solutions
|
|
|
323,684
|
|
|
|
280,711
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
650,937
|
|
|
$
|
562,872
|
|
|
|
|
|
|
|
|
|
|
Products and
Services Revenues
The following represents details of the products and services
for revenues for the years ended December 31, 2009 and 2008
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
U.S. Federal government services
|
|
$
|
249,553
|
|
|
$
|
224,272
|
|
Hardware and consumables
|
|
|
116,305
|
|
|
|
137,590
|
|
State and Local government solutions and services
|
|
|
195,237
|
|
|
|
125,612
|
|
Software, licensing fees and other
|
|
|
56,057
|
|
|
|
46,126
|
|
Maintenance
|
|
|
33,785
|
|
|
|
29,272
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
650,937
|
|
|
$
|
562,872
|
|
|
|
|
|
|
|
|
|
|
Revenues increased by $88.1 million for the year ended
December 31, 2009, of which $59.9 million related to
the Acquisitions. Excluding the impact of the Acquisitions,
revenues increased $28.2 million or 6 percent from the
year ended December 31, 2008. The increase from the prior
year is a result of increased revenue and new contracts in
L-1s
enrollment services and increases in
L-1s
government services, both of which are included in
L-1s
Services segment.
Approximately 50 percent of
L-1 revenues
in 2009 and 2008 were derived from long-term service contracts
with the U.S. Federal and State governments included in
L-1 Services
reportable segment. These contracts are fixed unit price
contracts for which
L-1 is
compensated as the Company provides the services, as
fingerprints are transmitted to the appropriate government
agency for fingerprinting services and on a time and material,
fixed price level of effort or cost reimbursable basis for
government services.
Approximately 18 percent and 12 percent of
L-1 revenues
in 2009 and 2008, respectively, were derived from long-term
contracts for the production of drivers licenses and
credentials for which
L-1 is
compensated on a fixed unit price per license or credential
produced. The unit price for these contracts is fixed throughout
the term of the contract. The prices are established in
competitive bids in which price is one among many important
criteria evaluated by the customer.
The remaining revenues, including other revenues from the
drivers licenses contracts which are not based on card
production volumes, comprise
L-1
Identity Solutions 2009 Annual Report | 42
32 percent and 38 percent of revenues for the years
ended December 31, 2009 and 2008, respectively, and were
derived from contracts and purchase orders for consumables,
hardware, software and custom solutions, including maintenance.
These revenues are priced at prevailing prices at the time the
order or contract is negotiated. These orders and contracts are
often competitively bid, although some, particularly consumables
sold pursuant to driver license and credential contracts, are
sole source. Most of
L-1 research
and development and sales and marketing costs are related to
generating these revenues.
Cost of Revenues
and Gross Margin
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cost of revenues, excluding items noted below
|
|
$
|
420,126
|
|
|
$
|
347,036
|
|
Depreciation and amortization expense
|
|
|
23,021
|
|
|
|
17,098
|
|
Amortization of acquired intangible assets
|
|
|
8,446
|
|
|
|
24,687
|
|
Stock- based compensation
|
|
|
7,726
|
|
|
|
6,048
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
459,319
|
|
|
$
|
394,869
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
191,618
|
|
|
$
|
168,003
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
29%
|
|
|
|
30%
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues increased by $64.5 million for the year
ended December 31, 2009 compared to the year ended
December 31, 2008, of which $44.4 million is related
to the Acquisitions. Excluding the Acquisitions, cost of
revenues increased by $20.1 million or 6 percent in
2009 compared to the previous year which is consistent with
increased sales. Gross margin for 2009 was 29 percent
compared to 30 percent in 2008. The decrease was due
primarily to increased revenue from lower margin enrollment and
government consulting services, offset in part by the growth in
L-1s
higher margin biometrics solutions.
Included in the cost of revenues were $39.2 million and
$47.8 million of non-cash charges for the
years ended December 31, 2009 and 2008, respectively, which
decreased by $8.6 million, reflecting lower amortization in
2009 resulting from intangible asset impairments recorded in
2008, offset by additional amortization related to the
Acquisitions. This decrease was offset by higher depreciation
resulting from the acquisition of Digimarc and higher
stock-based compensation expense. These non-cash charges reduced
gross margins by 6 percent and 8 percent for the years
ended December 31, 2009 and 2008, respectively.
Sales and
Marketing Expenses (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Sales and marketing expenses
|
|
$
|
40,004
|
|
|
$
|
37,055
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenues
|
|
|
6%
|
|
|
|
7%
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses increased by approximately
$2.9 million for the year ended December 31, 2009
compared to the prior year. Excluding the effects of the
Acquisitions, sales and marketing expenses decreased by
$1.9 million for the year ended December 31, 2009.
These decreases are attributable to cost reductions from
synergies and rationalization in certain of
L-1
businesses, offset by continued investment in increasing sales
and international marketing resources. Sales and marketing
expenses consists primarily of salaries and costs including
stock-based compensation, commissions, travel and entertainment
expenses, promotions and other marketing and sales support
expenses.
Research and
Development Expenses
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Research and development expenses
|
|
$
|
20,730
|
|
|
$
|
25,244
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenues
|
|
|
3%
|
|
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
L-1
Identity Solutions 2009 Annual Report | 43
Research and development expenses decreased by approximately
$4.5 million for the year ended December 31, 2009
compared to the prior year. Excluding the effects of the
Acquisitions, research and development expenses in 2009
decreased by $1.7 million.
L-1
continues to focus on enhancing
L-1
credentialing and biometric solutions offerings while maximizing
L-1s
research costs to focus on those activities with the greatest
technological and revenue potential. Gross research and
development expenses were offset by higher utilization of
research and development resources in the performance of
contracts, the cost of which is included in cost of revenues and
in other projects. Gross research and development expenditures
aggregated to $46.9 million for the year ended
December 31, 2009 compared to $43.0 million in the
prior year. Virtually all of
L-1s
research and development costs are attributable to the Solutions
segment. As a percentage of Solutions revenues, gross research
and development costs were 15 percent for the years ended
December 31, 2009 and 2008. Research and development
expenses consist primarily of salaries and related personnel
costs, including stock-based compensation and other costs
related to the design, development, testing and enhancement of
L-1 products.
General and
Administrative Expenses
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
General and administrative expenses
|
|
$
|
93,855
|
|
|
$
|
86,793
|
|
|
|
|
|
|
|
|
|
|
As percentage of revenues
|
|
|
14%
|
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense increased approximately by
$7.1 million for year ended December 31, 2009 compared
to 2008, of which approximately $5.8 million is directly
related to the Acquisitions. Excluding the effects of the
Acquisitions, the increase was $1.3 million over the year
ended December 31, 2008 as the Company continues to realize
operating leverage by increasing revenue without
corresponding increases in general and administrative expenses.
As a percentage of revenues, general and administrative expenses
decreased to 14 percent, as compared to 15 percent in
the prior year and reflects the impact of improved leverage.
General and administrative costs in 2009 also include a
provision of $1.2 million related to suspension of the
Registered Traveler program. General and administrative expenses
consist primarily of salaries and related personnel costs,
including stock-based compensation for
L-1s
executive and administrative personnel, professional and Board
of Directors fees, public and investor relations and
insurance.
Asset Impairments
and Merger Related Expenses (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Asset impairments and merger related expenses
|
|
$
|
|
|
|
$
|
529,683
|
|
|
|
|
|
|
|
|
|
|
In 2008, assets impairments consist of goodwill of
$430.0 million and long-lived assets of $98.6 million,
principally intangible assets recorded in connection with
acquisitions, and relate principally to the Companys
biometrics businesses included in the Solutions segment. The
impairment charges resulted from the deteriorating economic
conditions that manifested themselves in the fourth quarter of
2008 as well as capital market conditions that adversely
impacted valuation of businesses
L-1 acquired
and the Companys stock prices and market capitalization.
The remaining $1.1 million related to merger related
expense for the Old Digimarc acquisition.
L-1
Identity Solutions 2009 Annual Report | 44
Acquisition
Related Expenses and Amortization of Acquired Intangible Assets
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Acquisition related expenses and amortization of acquired
intangible assets
|
|
$
|
1,895
|
|
|
$
|
2,996
|
|
|
|
|
|
|
|
|
|
|
Acquisition related expenses and amortization of acquired
intangible assets decreased by $1.1 million for the year
ended December 31, 2009 from the comparable period in the
prior year due to impairments recorded in the fourth quarter of
2008 which resulted in lower amortization, offset by
$0.6 million in acquisition expenses recorded in 2009.
Interest Income
and Expense (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Interest income
|
|
$
|
120
|
|
|
$
|
288
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
|
(28,191
|
)
|
|
|
(19,168
|
)
|
Other financing costs
|
|
|
(13,130
|
)
|
|
|
(8,726
|
)
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
$
|
(41,201
|
)
|
|
$
|
(27,606
|
)
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, net interest expense
increased by approximately $13.6 million compared to the
prior year as a result of increased borrowings under
L-1s
credit facility in August 2008, incurred primarily to fund the
Acquisitions, as well as higher interest rates and
$1.0 million in costs incurred in connection with the July
2009 modification of
L-1s
credit facility.
Other Expense,
Net (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Other expense, net
|
|
$
|
(394
|
)
|
|
$
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
Other expense, net includes realized and unrealized currency
transaction gains and
losses on foreign currency transactions. The increases in other
expense, net are related primarily to changes in the value of
the U.S. dollar relative to the Canadian Dollar and the
Japanese Yen during the periods.
Income Taxes (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Benefit (provision) for income taxes
|
|
$
|
2,458
|
|
|
$
|
(9,960
|
)
|
|
|
|
|
|
|
|
|
|
The 2009 results reflect an income tax benefit of
$2.5 million, primarily reflecting an increase in deferred
tax assets as a result of current year temporary differences,
net of the utilization of net operating losses to offset
estimated net taxable income. At December 31, 2009, the
Company had U.S. Federal net operating loss carryforwards
of $447.7 million, which may be used to reduce future
taxable income. In addition, the Company has $159.5 million
of deductible goodwill. Management evaluated the adequacy of the
valuation allowance in light of the results for the year based
on the cumulative results of operations for the three years
ended December 31, 2009, after considering items that do
not enter in the determination of taxable income, and the likely
future operating results. The review indicated that the recorded
valuation allowance related to net operating losses is adequate
as of December 31, 2009. Management will continue to
evaluate the adequacy of the valuation allowance annually, and
when its assessment of whether it is more likely than not that
the related tax benefits will be realized changes, the valuation
allowance will be increased or reduced with a corresponding
benefit or charge included in income.
The 2008 results reflect an income tax expense of
$10.0 million, primarily reflecting an increase in the
deferred tax asset valuation allowance of approximately
$48.0 million offset by the deferred benefit of
$40.5 million primarily related to the impairment of
long-lived assets recorded for the year (excluding the impact of
the goodwill impairment which is not deductible for income tax
purposes), and a current tax provision of $2.4 million.
During the fourth quarter of 2008, management evaluated the
adequacy of the
L-1
Identity Solutions 2009 Annual Report | 45
valuation allowance in light of the results for the year and
determined that, based on the cumulative results of operations
for the three years ended December 31, 2008, after
considering items that do not enter in the determination of
taxable income, and the likely future operating results, it was
more likely than not that the portion of the tax benefits of its
net operating loss carryforwards that would not be realized
would be higher than previously recorded. As a result, the
Company increased the deferred tax asset valuation allowance to
reflect the estimated tax benefits it expected to realize.
Comprehensive
Loss (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net loss
|
|
$
|
(4,003
|
)
|
|
$
|
(551,594
|
)
|
Changes in accumulated comprehensive income (loss)
|
|
|
1,879
|
|
|
|
(7,664
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(2,124
|
)
|
|
$
|
(559,258
|
)
|
|
|
|
|
|
|
|
|
|
The change in comprehensive loss results from the net loss in
2009 of $4.0 million compared to $551.6 million in
2008, (the components of which are described above) changes in
the fair value and amortization of derivatives accounted for as
hedges which resulted in a net gain of $0.5 million in 2009
and $1.1 million loss in 2008. There were translation gains
of $1.4 million and losses of $6.6 million in 2009 and
2008, respectively, resulting from the changes in the value of
the U.S. dollar relative to foreign currencies, primarily
the Euro and the Canadian Dollar.
COMPARISON OF
2008 TO 2007
Revenues (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
282,161
|
|
|
$
|
177,974
|
|
Solutions
|
|
|
280,711
|
|
|
|
211,533
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
562,872
|
|
|
$
|
389,507
|
|
|
|
|
|
|
|
|
|
|
Products and
Services Revenues
The following details revenues by major categories of products
and services for the years ended December 31, 2008 and 2007
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
U.S. Federal government services
|
|
$
|
224,272
|
|
|
$
|
136,328
|
|
Hardware and consumables
|
|
|
137,590
|
|
|
|
126,537
|
|
State and Local government solutions and services
|
|
|
125,612
|
|
|
|
72,969
|
|
Software, licensing fees and other
|
|
|
46,126
|
|
|
|
29,093
|
|
Maintenance
|
|
|
29,272
|
|
|
|
24,580
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
562,872
|
|
|
$
|
389,507
|
|
|
|
|
|
|
|
|
|
|
Revenues increased by $173.4 million for the year ended
December 31, 2008 of which $121.1 million related to
the Acquisitions. Excluding the impact of the Acquisitions,
revenues increased $52.2 million or 15 percent from
the year ended December 31, 2007. The increase from the
prior year period reflects growth related to
L-1s
secure credentialing solutions and government consulting
services, offset by lower biometric revenues primarily due to
unusually large shipments of biometric products in the fourth
quarter of 2007.
Approximately 50 percent and 46 percent of
L-1s
revenues in 2008 and 2007, respectively, were derived from
long-term service contracts with the U.S. Federal and State
governments included in
L-1s
Services segment. These contracts are fixed unit price contracts
for which
L-1 is
compensated as
L-1 provides
the services, as fingerprints are transmitted to the appropriate
government agency for fingerprinting services and on a time and
material, fixed price level of effort or cost reimbursable basis
for government services.
Approximately 12 percent and 8 percent of
L-1s
revenues in 2008 and 2007, respectively, were derived from
long-term contracts for the production of drivers licenses
and credentials for which
L-1 is
compensated on a fixed unit
L-1
Identity Solutions 2009 Annual Report | 46
price per license or credential produced. The unit price for
these contracts is fixed throughout the term of the contract.
The prices are established in competitive bids in which price is
one among many important criteria evaluated by the customer.
Remaining revenues, including other revenues from the
drivers licenses contracts which are not based on card
production volumes, comprise 38 percent and 46 percent
of revenues for the years ended December 31, 2008 and 2007,
respectively, and were derived from contracts and purchase
orders for consumables, hardware, software and custom solutions,
including maintenance and services. These revenues are priced at
prevailing prices at the time the order or contract is
negotiated. These orders and contracts are often competitively
bid, although some, particularly consumables sold pursuant to
driver license and credential contracts, are sole source. Most
of
L-1s
research and development and sales and marketing costs are
related to generating these revenues.
Cost of Revenues
and Gross Margin
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cost of revenues
|
|
$
|
347,036
|
|
|
$
|
233,862
|
|
Depreciation expense
|
|
|
17,098
|
|
|
|
6,671
|
|
Amortization of acquired intangible assets
|
|
|
24,687
|
|
|
|
27,095
|
|
Stock-based compensation
|
|
|
6,048
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
394,869
|
|
|
$
|
268,431
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
168,003
|
|
|
$
|
121,076
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
30%
|
|
|
|
31%
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues increased by $126.4 million for the year
ended December 31, 2008 compared to the year ended
December 31, 2007, of which $77.3 million is related
to the Acquisitions. Excluding the Acquisitions, cost of
revenues increased by $49.1 million or 20 percent in
2008 compared to the previous year which is consistent with
increased sales. Gross margin for 2008 was
30 percent compared to 31 percent in 2007. The
decrease was due to changes in the revenue mix resulting from
lower biometric revenues and higher revenues from secure
credentialing and services, as well as the impact of non cash
charges described below.
Included in the cost of revenues in 2008 were $47.8 million
of non cash charges, which increased by approximately
$13.2 million from the prior year primarily due to higher
depreciation and stock-based compensation charges offset by
lower amortization resulting from impairment of long-lived
assets which included the acquired intangible assets. Non cash
charges reduced consolidated gross margins by 8 percent and
9 percent for the years ended December 31, 2008 and
2007, respectively. Costs of revenues also reflect higher
depreciation charges related to the acquisition of Digimarc.
Sales and
Marketing Expenses (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Sales and marketing expenses
|
|
$
|
37,055
|
|
|
$
|
27,719
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenues
|
|
|
7%
|
|
|
|
7%
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses increased by approximately
$9.3 million for the year ended December 31, 2008
compared to the prior year, of which the Acquisitions accounted
for $8.1 million. Excluding the effects of the
Acquisitions, sales and marketing expenses increased by
$1.2 million for the year ended December 31, 2008.
These increases are attributable to additional investments made
to expand
L-1s
focus on U.S. government and international opportunities.
Sales and marketing expenses consists primarily of salaries and
related personnel costs including stock-based compensation,
commissions, travel and entertainment expenses, promotions and
other marketing and sales support expenses.
L-1
Identity Solutions 2009 Annual Report | 47
Research and
Development Expenses
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Research and development expenses
|
|
$
|
25,244
|
|
|
$
|
18,482
|
|
|
|
|
|
|
|
|
|
|
As a percentage of revenues
|
|
|
4%
|
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses increased by approximately
$6.8 million for the year ended December 31, 2008
compared to the prior year, of which approximately
$4.3 million is due to the Acquisitions. Excluding the
effects of the Acquisitions, research and development expenses
in 2008 increased by $2.5 million, as
L-1
continued to focus on the development of biometric technology.
Research and development expenses were offset by higher
utilization of research and development resources in the
performance of contracts, the cost of which is included in cost
of revenues, and other products. Research and development
expenses consist primarily of salaries, stock-based compensation
and related personnel costs and prototype costs related to the
design, development, testing and enhancement of
L-1
products. Gross research and development expenditures aggregated
to $43.0 million for the year ended December 31, 2008
compared to $26.4 million in the prior year. As a
percentage of Solutions revenues, gross research and development
costs were 15 percent and 13 percent for years ended
December 31, 2008 and 2007, respectively. Virtually all of
L-1 research
and development costs are attributable to
L-1s
Solutions segment.
General and
Administrative Expenses
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
General and administrative expenses
|
|
$
|
86,793
|
|
|
$
|
62,318
|
|
|
|
|
|
|
|
|
|
|
As percentage of revenues
|
|
|
15%
|
|
|
|
16%
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense increased approximately
$24.5 million for year ended December 31, 2008
compared to 2007, of which approximately $20.5 million are
directly related to the Acquisitions. Excluding the effects of
acquisitions, the increase was $3.9 million over the year
ended December 31, 2007 and relates to stock-based
compensation expense, legal, accounting and auditing and other
professional services. As a percentage of revenues, general and
administrative expenses decreased to 15 percent, as
compared to 16 percent in the prior year as
L-1
continues to leverage
L-1s
cost structure over a larger revenue base. General and
administrative expenses consist primarily of salaries and
related personnel costs, including stock-based compensation for
L-1s
executive and administrative personnel, professional and board
of directors fees, public and investor relations and
insurance.
Asset Impairments
and Merger Related Expenses (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Asset impairments and merger related expenses
|
|
$
|
529,683
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
In 2008, assets impairments consist of goodwill of
$430.0 million and long-lived assets of $98.6 million,
principally intangible assets recorded in connection with
acquisitions, and relate principally to the Companys
biometrics businesses included in the Solutions segment. The
impairment charges result from the deteriorating economic
conditions that manifested themselves in the fourth quarter of
L-1
Identity Solutions 2009 Annual Report | 48
2008 as well as capital market conditions that adversely
impacted valuation of businesses
L-1 acquired
and the Companys stock prices and market capitalization.
The remaining $1.1 million represents merger related
expenses related to the Old Digimarc acquisition. In 2007, an
impairment charge of $5.0 million was recognized related to
certain acquired product lines of the biometrics business.
Acquisition
Related Expenses and Amortization of Acquired Intangible Assets
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Acquisition related expenses and amortization of acquired
intangible assets
|
|
$
|
2,996
|
|
|
$
|
2,519
|
|
|
|
|
|
|
|
|
|
|
Acquisition related expenses and amortization of acquired
intangible assets increased by $0.5 million for the year
ended December 31, 2008 from the comparable period in the
prior year due to the Acquisitions.
Interest Income
and Expense (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Interest income
|
|
$
|
288
|
|
|
$
|
407
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
|
(19,168
|
)
|
|
|
(10,015
|
)
|
Other financing costs
|
|
|
(8,726
|
)
|
|
|
(4,299
|
)
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
$
|
(27,606
|
)
|
|
$
|
(13,907
|
)
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, net interest expense
increased by approximately $13.7 million compared to the
prior year primarily as a result of the issuance of senior
convertible notes in May 2007 and borrowings under
L-1s
revolving credit facility and term loan incurred primarily to
fund the Acquisitions.
Other Expense,
Net (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Other expense, net
|
|
$
|
(260
|
)
|
|
$
|
(508
|
)
|
|
|
|
|
|
|
|
|
|
Other expense, net includes realized and unrealized currency
transaction gains and losses on Yen-denominated purchases, as
well as unrealized gains and losses forward currency contracts.
Income Taxes (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Benefit (provision) for income taxes
|
|
$
|
(9,960
|
)
|
|
$
|
25,184
|
|
|
|
|
|
|
|
|
|
|
The 2008 results reflect an income tax expense of
$10.0 million, primarily reflecting an increase in the
deferred tax asset valuation allowance of approximately
$48.0 million offset by the deferred benefit of
$40.5 million primarily related to the impairment of
long-lived assets recorded for the year (excluding the impact of
the goodwill impairment which is not deductible for income tax
purposes) and a current tax provision of $2.4 million.
During the fourth quarter of 2008, management evaluated the
adequacy of the valuation allowance in light of the results for
the year and determined that, based on the cumulative results of
operations for the three years ended December 31, 2008,
after considering items that do not enter in the determination
of taxable income, and the likely future operating results, it
was more likely than not that the portion of the tax benefits of
its net operating loss carryforwards that would not be realized
would be higher than previously recorded. As a result, the
Company increased the deferred tax asset valuation allowance to
reflect the estimated tax benefits it expects to realize.
The 2007 results reflect an income tax benefit of
$25.2 million, primarily reflecting the reduction of the
deferred tax asset valuation allowance of approximately
$21.8 million. During the fourth quarter of 2007,
management determined that based on the cumulative results of
operations
L-1
Identity Solutions 2009 Annual Report | 49
for the three years ended December 31, 2007, after
considering items that do not enter in the determination of
taxable income, and the expected future operating results, it is
more likely than not that the Company will realize a substantial
portion of the tax benefits of its net operating loss
carryforwards. As a result, the Company reduced its previously
recorded deferred tax asset valuation allowance to reflect the
estimated benefits it expected to realize.
Comprehensive
Income (Loss) (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net income (loss)
|
|
$
|
(551,594
|
)
|
|
$
|
15,807
|
|
Changes in accumulated comprehensive income (loss)
|
|
|
(7,664
|
)
|
|
|
5,722
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(559,258
|
)
|
|
$
|
21,529
|
|
|
|
|
|
|
|
|
|
|
The change in comprehensive income (loss) results from the net
loss in 2008 of $551.6 million compared to
$15.8 million net income in 2007, the components of which
are described above, as well as foreign currency translation
losses of $6.6 million and gains of $5.7 million in
2008 and 2007, respectively, resulting from the strengthening of
the U.S. dollar in 2008 and the weakening in 2007 relative
to foreign currencies which include the Euro and the Canadian
Dollar. Also in 2008,
L-1 recorded
an unrealized loss of $1.1 million, net of related tax
effect of $0.7 million, in comprehensive income for the
fair value of an interest rate protection agreement.
LIQUIDITY AND
CAPITAL RESOURCES
Capital
Requirements
The Companys most significant capital requirements are
capital expenditures for new secure credentialing contracts,
research and development and working capital needs. The most
significant capital expenditures are related to
L-1s
Solutions segment. Generally, new State drivers license
contracts provide for up front capital expenditures necessary to
perform under the
contract. As expected, with the acquisition of Old Digimarc,
L-1s
capital requirements have increased as
L-1 has bid
on and was awarded new contracts or as contracts have been
renewed. In 2009,
L-1s
capital expenditures increased to $55.0 million compared to
$22.5 million in 2008 and are expected to increase to
$60.0 million in 2010 to fund capital expenditures for
contracts awarded and expected to be awarded.
L-1 expects
capital expenditures to decline significantly in 2011 as we
complete the build out of systems from recently awarded
contracts.
L-1 expects
to
fund L-1s
capital requirements primarily with operating cash flows.
Liquidity
As of December 31, 2009,
L-1 had
$9.4 million of working capital including deferred income
taxes of $11.5 million, $6.6 million in cash and cash
equivalents and current maturities of long term debt of
$27.1 million. In addition,
L-1 has
financing arrangements, as further described below, available to
support
L-1s
ongoing liquidity needs, pursuant to which
L-1 has
available $123.0 million at December 31, 2009 under
L-1s
revolving credit facility, subject to continuing compliance with
debt covenants.
L-1 believes
that its existing cash and cash equivalent balances, existing
financing arrangements and cash flows from operations will be
sufficient to meet
L-1s
operating and debt service requirements for the next
12 months. However, it is likely that
L-1 will
require additional financing to execute acquisitions and in that
connection,
L-1
evaluates financing needs and the terms and conditions and
availability under
L-1s
credit facility on a regular basis and consider other financing
options. There can be no assurance that additional debt or
equity financing will be available on commercially reasonable
terms, or at all.
L-1s
ability to meet
L-1s
business plan is dependent on a number of factors, including
those described in the section of this report entitled
Risk Factors.
Credit
Agreement
On August 5, 2008,
L-1 entered
into a Second Amended and Restated Credit Agreement (the
Credit Agreement), among
L-1s
wholly owned subsidiary
L-1 Identity
Operating,
L-1, Bank of
L-1
Identity Solutions 2009 Annual Report | 50
America, N.A., Wachovia Bank, National Association, Banc of
America Securities LLC and Wachovia Capital Markets LLC, to
amend and restate the Amended and Restated Credit Agreement, by
and among
L-1, Bank of
America, N.A. (Administrative Agent), Bear Stearns
Corporate Lending, Inc., Bear Stearns & Co., Inc.,
Banc of America Securities LLC, Wachovia Bank, N.A. and Credit
Suisse, Cayman Islands Branch. The Credit Agreement provides for
a senior secured term loan facility in an aggregate principal
amount of up to $300.0 million, with a term of five years,
and a senior secured revolving credit facility in an aggregate
principal amount of up to $135.0 million. The proceeds of
the senior secured facilities were used to (i) fund, in
part, the purchase price paid, and fees and expenses incurred,
in connection with
L-1s
acquisition of Digimarc Corporation after giving effect to the
spin-off of its digital watermarking business (Old
Digimarc), (ii) repay borrowings under
L-1s
then existing revolving credit facility and (iii) provide
ongoing working capital and fund other general corporate
purposes of
L-1.
On July 9, 2009,
L-1 entered
into an amendment to the Credit Agreement pursuant to which the
term loans under the Credit Agreement have been split into two
tranches:
Tranche B-1
Term Loans and
Tranche B-2
Term Loans. The
Tranche B-1
Term Loans, with an aggregate principal amount of approximately
$148.6 million at December 31, 2009, requires annual
principal payments (payable quarterly) of 5 percent of the
related original principal amount through September 30,
2009, 10 percent of the original principal amount through
September 30, 2010, 20 percent of the original principal
amount through September 30, 2012, and thereafter,
increasing over the duration of the Credit Agreement. The
Tranche B-2
Term Loans, with an aggregate principal amount of approximately
$133.5 million at December 31, 2009, require annual
principal payments (also payable quarterly) of 1 percent of
the related original principal amounts over the remaining term
of the Credit Agreement. The Company had $4.9 million of
borrowings which were outstanding under the revolving credit
facility at December 31, 2009.
Under the terms of the amended senior secured credit facility
the Company has the option to borrow at LIBOR (subject to a
floor of 3 percent) plus 2.75 percent to
5.0 percent per annum or at prime (subject to a floor of
2 percent) plus 1.75 percent to 4.0 percent per
annum. L-1
is required to pay a fee of 0.5 percent on the unused
portion of the revolving credit facility. All obligations of
L-1
Operating under the Credit Agreement are guaranteed on a senior
secured basis by
L-1 and by
each of
L-1s
existing and subsequently acquired or organized direct or
indirect wholly-owned subsidiaries (subject to certain
exceptions). At December 31, 2009, the interest rates were
6.75 percent for
Tranche B-1
Term Loans, 7.25 percent for
Tranche B-2
Term Loans and 6.00 percent for borrowings under the
revolving credit facility.
In addition,
L-1 is
required to maintain the following financial covenants under the
Credit Agreement:
|
|
|
As of the end of any fiscal quarter, the ratio of Consolidated
EBITDA (as defined in the Credit Agreement) of
L-1
Operating and its consolidated subsidiaries for the period of
four consecutive fiscal quarters ending on or immediately prior
to such date to the sum of (i) Consolidated Interest
Charges (as defined in the Credit Agreement) of
L-1
Operating and its consolidated subsidiaries paid or payable in
cash during the period of four consecutive fiscal quarters ended
on or immediately prior to such date, plus
(ii) Consolidated Debt Amortization (as defined in the
Credit Agreement) of the borrower and its consolidated
subsidiaries as of such date, shall not be less than 2.25:1.00.
At December 31, 2009, the ratio was 2.35:1:00.
|
|
|
As of the end of any fiscal quarter, the ratio of
L-1
Operatings Consolidated Funded Indebtedness (as defined in
the Credit Agreement which excludes standby letters of credit
issued in connection with performance bonds) as of such date to
its Consolidated EBITDA (as defined in the Credit Agreement) for
the period of four consecutive fiscal quarters ended on or
immediately prior to such date, may not be
|
L-1
Identity Solutions 2009 Annual Report | 51
|
|
|
more than: (i) 3.25:1.00 from the Closing Date (as defined
in the Credit Agreement) to and including March 10, 2010,
(ii) 3.00:1.00 from March 11, 2010 to March 30,
2011, and (iii) 2.75:1.00 at the end of each fiscal quarter
thereafter. At December 31, 2009, the ratio was 2.97:1.00.
|
Under the terms of the amendment,
L-1s
compliance with these financial covenants, through
March 31, 2010, will be measured after giving effect to the
reduced principal payments provided by the amendment, as if the
amendment had been in effect at the beginning of each
measurement period through March 30, 2010, and after
eliminating the effects of certain recently adopted accounting
standards.
As of December 31, 2009, the Company has approximately
$123.0 million available under its revolving credit
facility, subject to continuing compliance with covenants under
the credit agreement.
Under the terms of the Credit Agreement,
L-1
Operating may incur, assume or guarantee unsecured subordinated
indebtedness in an amount up to $200.0 million, provided
that no default or event of default shall have occurred or would
occur as a result of the incurrence of such subordinated debt
and the borrower and its subsidiaries are in pro forma
compliance, after giving effect to the incurrence of such
subordinated debt, with each of the covenants in the Credit
Agreement, including, without limitation, the financial
covenants mentioned above.
Pursuant to the terms of the Credit Agreement,
L-1 may
incur, assume or guarantee any amount of unsecured subordinated
indebtedness, provided, that no default or event of default
shall have occurred or would occur as a result of the incurrence
of such subordinated debt and the pro forma Consolidated
Leverage Ratio (as defined in the Credit Agreement) of
L-1 and its
subsidiaries after giving effect to the incurrence of such
subordinated debt shall be less than 4.75:1.00. The Credit
Agreement limits the ability of
L-1 to
(i) pay dividends or other distributions or repurchase
capital stock, (ii) create, incur, assume or suffer to
exist any indebtedness, (iii) create, incur, assume or
suffer to exist liens
upon any of its property, assets or revenues, (iv) sell,
transfer, license, lease or otherwise dispose of any property,
(v) make or become legally obligated to make capital
expenditures above certain thresholds, subject to certain
permitted adjustments (vi) make investments, including
acquisitions, and (vii) enter into transactions with
affiliates. These covenants are subject to a number of
exceptions and qualifications. The Credit Agreement provides for
customary events of default which include (subject in certain
cases to customary grace and cure periods), among others:
nonpayment, breach of covenants or other agreements in the
Credit Agreement or the other Loan Documents (as defined in the
Credit Agreement), payment defaults or acceleration of other
indebtedness, failure to pay certain judgments, inability to pay
debts as they become due and certain events of bankruptcy,
insolvency or reorganization. Generally, if an event of default
occurs, the Administrative Agent may, with the consent of the
Required Lenders (as defined in the Credit Agreement) declare
all outstanding indebtedness under the Credit Agreement to be
due and payable.
The Company has entered into interest rate protection agreements
to reduce its exposure to the variable interest rate payments on
its term loan. In October 2008, the Company entered into an
interest rate protection agreement with a notional amount of
$62.5 million, which expires in November, 2011. Under the
term of the agreement, the Company pays the counter party a
fixed rate of 4.1 percent and receives variable interest
based on three-month LIBOR (subject to a floor of
3.0 percent). In May 2009, the Company entered into two
additional interest rate protection agreements with notional
amounts of $50.0 million each, pursuant to which the
Company pays a fixed rate of 1.4 percent and receives three
month LIBOR.
The counterparties to these agreements are highly rated
financial institutions. In the unlikely event that the
counterparties fail to meet the terms of the interest rate swap
agreement, the Companys exposure is limited to the
interest rate differential on the notional amount at each
quarterly settlement period over the life of the
L-1
Identity Solutions 2009 Annual Report | 52
agreements.
L-1 does not
anticipate non-performance by the counterparties.
Convertible
Senior Notes
On May 17, 2007, the Company issued $175.0 million of
Convertible Notes with a conversion feature which allows the
Company the option to settle the debt either in shares of common
stock or to settle the principal amount in cash and the
conversion spread in cash or stock. The proceeds of the
Convertible Notes offering, net of deferred financing costs
amounted to $168.7 million. In connection with the issuance
of the Convertible Notes,
L-1 entered
into an agreement with Bear Stearns (now JP Morgan Chase) to
purchase approximately 3.5 million shares of
L-1s
common stock for approximately $69.8 million. The shares
will be delivered in May 2012; however,
L-1 settled
its obligation at closing for a cash payment.
The Notes are governed by an indenture, dated May 17, 2007
(the Indenture), between the Company and the
trustee. The Notes will be convertible only under certain
circumstances, as described below. If, at the time of
conversion, the daily volume-weighted average price per share
for a 25 trading day period calculated in accordance with the
Indenture (as defined in greater detail in the Indenture,
VWAP) of the Companys common stock is less
than or equal to $32.00 per share, which is referred to as the
base conversion price, the Notes will be convertible into
31.25 shares of common stock of the Company per $1,000
principal amount of the Notes, subject to adjustment upon the
occurrence of certain events. If, at the time of conversion, the
VWAP of the shares of common stock of the Company exceeds the
base conversion price of $32.00 per share, the conversion rate
will be determined pursuant to a formula resulting in
holders receipt of up to an additional 14 shares of
common stock per $1,000 principal amount of the Notes, subject
to adjustment upon the occurrence of certain events and
determined as set forth in the Indenture. As an example, if the
volume-weighted price per share (VWAP) of the Company stock were
to increase to $40.00 per share, the additional shares issuable
upon conversion would be 2.8, and the shares
issuable per $1,000 principal amount of the Notes would be 34.05.
The Notes are convertible until the close of business on the
second business day immediately preceding May 15, 2027, in
multiples of $1,000 in principal amount, at the option of the
holder under the following circumstances: (1) during the
five
business-day
period after any five consecutive trading day period (the
measurement period) in which the trading price per
Note, for each day of such measurement period was less than
98 percent of the product of the last reported sale price
of shares of common stock of the Company and the applicable
conversion rate for such trading day; (2) during any fiscal
quarter, if the last reported sale price of shares of common
stock of the Company for 20 or more trading days in a period of
30 consecutive trading days ending on the last trading day of
the immediately preceding calendar quarter is greater than or
equal to 130 percent of the base conversion price on the
related trading day; (3) if the Company calls any or all of
the Notes for redemption; and (4) upon the occurrence of
specified corporate transactions described in the Indenture.
Upon conversion, the Company has the right to deliver shares of
common stock based upon the applicable conversion rate, or a
combination of cash and shares of common stock, if any, based on
a daily conversion value as described above calculated on a
proportionate basis for each trading day of a 25
trading-day
observation period. In the event of a fundamental change as
specified in the Indenture, the Company will increase the
conversion rate by a number of additional shares of common stock
specified in the Indenture, or, in lieu thereof, the Company may
in certain circumstances elect to adjust the conversion rate and
related conversion obligation so that the Notes will become
convertible into shares of the acquiring or surviving Company.
The Notes bear interest at a rate of 3.75 percent per year
payable semiannually in arrears in cash on May 15 and
November 15. The Notes will mature on May 15, 2027,
unless earlier converted, redeemed or repurchased. The Company
may redeem the Notes at its option, in whole or in part, on or
after May 20, 2012,
L-1
Identity Solutions 2009 Annual Report | 53
subject to prior notice as provided in the Indenture. The
redemption price during that period will be equal to the
principal amount of the notes to be redeemed, plus any accrued
and unpaid interest. The holders may require the Company to
repurchase the Notes for cash on May 15, 2012, May 15,
2017 and May 15, 2020.
Equity
Securities
On August 5, 2008, pursuant to the terms and conditions of
(i) the Securities Purchase Agreement, by and between
L-1 and
Robert V. LaPenta (the LaPenta Agreement),
(ii) the Securities Purchase Agreement (the Iridian
Agreement), by and between
L-1 and
Iridian Asset Management LLC (Iridian) and
(iii) the LRSR Agreement (together with the LaPenta
Agreement and Iridian Agreement, the Investor
Agreements).
L-1 issued
an aggregate of 8,083,472 shares of
L-1 common
stock and 15,107 shares of Series A Convertible
Preferred Stock (the Series A Preferred Stock)
for aggregate proceeds to
L-1 of
$119.0 million, net of related issuance costs, which were
used to fund a portion of
L-1s
acquisition of Old Digimarc. In accordance with its terms, the
Series A Preferred Stock was subsequently converted into
1,310,992 shares of common stock. See Note 4 for
additional information.
Consolidated Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities
|
|
$
|
60,602
|
|
|
$
|
52,768
|
|
|
$
|
40,958
|
|
Investing activities
|
|
|
(66,246
|
)
|
|
|
(350,919
|
)
|
|
|
(151,919
|
)
|
Financing activities
|
|
|
(8,521
|
)
|
|
|
310,820
|
|
|
|
114,055
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
340
|
|
|
|
(423
|
)
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(13,825
|
)
|
|
$
|
12,246
|
|
|
$
|
3,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of
2009 to 2008
Cash flows from operating activities increased by approximately
$7.8 million for the year ended December 31, 2009 as
compared to the corresponding period of the prior year. Net loss
for the year ended December 31, 2009 was
$4.0 million and includes non-cash charges of
$37.1 million for depreciation and amortization,
$23.7 million for stock-based compensation and retirement
contributions settled or to be settled in common stock,
$12.1 million for amortization of deferred financing costs,
debt discount and other, and $2.9 million for non-cash
income tax benefit. Operating cash flows reflect the impact in
accruals and deferrals related to operating assets and
liabilities which had an adverse impact on cash flows of
$5.4 million for the year ended December 31, 2009 and
an adverse impact on cash flows of $7.7 million in the
corresponding period in the prior year.
Cash used for acquisitions in 2009, consisting principally of
payments of acquisition related costs, totaled $3.7 million
for the year ended December 31, 2009, compared to
$320.5 million for the same period in the prior year, which
was primarily related to the acquisition of Old Digimarc in
August 2008. Capital expenditures were approximately
$55.0 million and $22.5 million for the years ended
December 31, 2009 and 2008, respectively, and are primarily
related to
L-1s
drivers license business.
Net cash used in financing activities in 2009 was
$8.5 million compared to $310.8 million provided from
financing activities in 2008.
L-1 repaid
$15.1 million of long-term debt during 2009 and had net
borrowings of $4.9 million under
L-1s
revolving credit facility.
L-1 had net
borrowings of $206.2 million in 2008 which was primarily
used to fund the Acquisitions.
L-1 paid
debt issuance costs of $0.8 million for the year ended
December 31, 2009 compared to $14.0 million in the
prior year. In 2008,
L-1
repurchased 362,000 shares of
L-1s
common stock for $6.2 million and
L-1 issued
common and preferred stock for net proceeds of
$119.0 million.
Comparison of
2008 to 2007
Cash flows from operating activities increased by approximately
$11.8 million for the year ended December 31, 2008 as
compared to the prior year.
L-1s
net loss for the year ended December 31, 2008 was
$551.6 million, and includes non-cash items aggregating
$612.0 million compared to $31.4 million in
L-1
Identity Solutions 2009 Annual Report | 54
2007 and are comprised of $528.6 million related to
long-lived asset impairments, $49.4 million for
depreciation and amortization, $18.1 million for
stock-based compensation, non-cash income tax charges of
$6.9 million, amortization of deferred financing costs and
debt discount of $8.7 million and other non-cash charges of
$0.3 million. Cash flows from operating activities before
changes in operating assets and liabilities reflects the results
of operations including the impact of acquisitions. Changes in
operating assets and liabilities had the impact of reducing cash
and cash equivalents by $7.7 million in 2008 and
$6.3 million in 2007.
Cash flows used in investing activities increased by
approximately $199.0 million for the year ended
December 31, 2008 as compared to the prior year. During
2008, L-1
used $320.5 million in connection with the Acquisitions,
net of acquired cash, primarily related to the acquisition of
Old Digimarc. The cash paid for acquisitions in 2007, net of
cash acquired, approximated $132.8 million and primarily
related to the acquisitions of ACI, McClendon and ComnetiX.
Capital expenditures were approximately $22.5 million and
$13.0 million for the years ended December 31, 2008
and 2007, respectively, and primarily related to the
Companys drivers licenses product line. The increase
is primarily related to the acquisition of Old Digimarc.
Expenditures for the additions to intangible assets were
$8.0 million in 2008 and $6.3 million in 2007.
Net cash provided by financing activities in 2008 was
$310.8 million compared to $114.1 million in 2007. The
proceeds from the issuance of the term loan aggregated
$295.0 million and common and preferred stock issued in a
private placement resulted in proceeds of $119.0 million,
net of financing costs, which were used for the acquisition of
Old Digimarc. In addition, net payments under the revolving
credit agreement were $84.0 million, and proceeds from the
issuance of common stock to employees were $5.5 million,
purchases of treasury stock were $6.2 million and payments
of financing costs were $14.0 million In 2007,
L-1 borrowed
$175.0 million by issuing convertible notes and purchased a
prepaid forward for $69.8 million.
WORKING
CAPITAL
December 31,
2009
Accounts receivable increased by approximately
$10.7 million as of December 31, 2009 from
December 31, 2008, primarily due to increased revenues over
the prior year. Days sales outstanding at December 31, 2009
was 67 days compared to 66 days at December 31,
2008.
Inventory decreased by $5.1 million as of December 31,
2009, compared to December 31, 2008, primarily as a result
of planned reductions of
L-1s
biometrics and secure credentialing inventories. Inventory is
maintained at the levels required to meet expected deliveries of
L-1s
credentialing and biometric solutions.
Accounts payable, accrued expenses and other current liabilities
decreased by $3.9 million as of December 31, 2009,
compared to December 31, 2008, as a result of lower
accruals for incentive compensation and benefits and
professional fees.
Total deferred revenue decreased by $3.8 million as of
December 31, 2009, compared to December 31, 2008,
primarily as a result of recognition of revenues related to
transactions for which the Company received customer prepayments
in 2008.
December 31,
2008
Accounts receivable related to
L-1s
March 2008 Bioscrypt acquisition and August 2008 acquisition of
Digimarc, (2008 Acquisitions) were approximately
$18.2 million at December 31, 2008. Excluding the 2008
Acquisitions, accounts receivable decreased by approximately
$2.8 million as of December 31, 2008 compared to
December 31, 2007, primarily due to improved collections.
Days sales outstanding improved from December 31, 2008 to
66 days from 73 days at December 31, 2007.
Excluding $6.6 million related acquisitions, inventory
increased by $6.4 million at December 31, 2008
compared to December 31, 2007. The increase related
primarily to
L-1s
building inventory to meet future contract delivery of
multi-modal biometric recognition devices and solutions,
fingerprint scanning devices and consumables.
L-1
Identity Solutions 2009 Annual Report | 55
Accounts payable, accrued expenses and other current liabilities
related to the 2008 Acquisitions were $22.6 million at
December 31, 2008. Excluding the impact of the 2008
Acquisitions, accounts payable, accrued expenses and other
current liabilities increased by $14.1 million at
December 31, 2008 from December 31, 2007 primarily due
to timing of vendor payments and payroll, increased workforce,
increases in purchases of materials and more efficient cash
management.
Total deferred revenue related to the 2008 Acquisitions was
$10.4 million at December 31, 2008. Excluding the
impact of the 2008 Acquisitions, deferred revenue increased by
$3.0 million related to maintenance, service and software
contract deliverables.
CONTRACTUAL
OBLIGATIONS
The following table sets forth
L-1s
contractual obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
2-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Operating lease obligations
|
|
$
|
32,421
|
|
|
|
8,682
|
|
|
|
12,445
|
|
|
|
8,083
|
|
|
|
3,211
|
|
Debt and capital lease obligations
|
|
$
|
542,281
|
|
|
|
53,527
|
|
|
|
295,733
|
|
|
|
193,021
|
|
|
|
|
|
Included in debt are $175.0 million outstanding under
L-1s
Convertible Notes which bears interest at 3.75 percent and
$282.1 million in term loans of which
Tranche B-1
bears interest at 6.75 percent and
Tranche B-2
bears interest at 7.25 percent. The amount shown includes
interest assuming the Convertible Notes are redeemed at the end
of five years, in 2012. The table also reflects the repayment of
the term loans prior to the repayment of the Convertible Notes
as required by the terms of the credit agreement, and reflects
the reduced principal repayment schedule required by
L-1s
credit agreement amendment.
The Company has consulting agreements with two formerly related
parties under which each receives annual compensation of
$0.1 million through the earlier of January 2012 or
commencement of full time employment elsewhere. In addition, the
Company is subject to a royalty arrangement with a related party
whereby the Company is subject to royalty payments on certain of
its face recognition software revenue through June 30,
2014, up to a maximum $27.5 million.
In connection with the merger with Identix Incorporated
(Identix), Aston Capital Partners, LLC, an
affiliated Company, and
L-1 have
agreed in principle that the Company may, subject to the
approval of the Board of Directors, purchase AFIX Technologies,
Inc., a portfolio Company of Aston, at fair market value to be
determined by an independent appraiser retained by the
Companys Board of Directors. In March 2009,
L-1
concluded that due to a variety of factors, it is not advisable
to pursue the transaction to purchase AFIX at this point in time.
L-1
Identity Solutions 2009 Annual Report | 56
Contingent
Obligations
L-1 has no
material contingent obligations at December 31, 2009.
Off Balance Sheet
Arrangements
L-1 does not
have any off balance sheet arrangements, transaction,
obligations or other relationships with unconsolidated entities
that would be expected to have a material effect on
L-1s
financial condition, results of operations or cash flows.
Inflation
Although some of
L-1s
expenses increased with general inflation in the economy,
inflation has not had a material impact on
L-1s
financial results to date.
Critical
Accounting Policies and Significant Estimates
L-1 prepares
its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of
America, or U.S. GAAP. Consistent with U.S. GAAP,
L-1 has
adopted accounting policies that
L-1 believes
are most appropriate given the conditions and circumstances of
L-1s
business. The application of these policies has a significant
impact on
L-1s
reported results of operations. In addition, some of these
policies require management to make assumptions and estimates.
These assumptions and estimates, which are based on historical
experience and analyses of current conditions and circumstances,
have a significant impact on
L-1s
reported results of operations and assets and liabilities and
disclosures of contingent assets and liabilities. The most
significant assumptions and estimates relate to the allocation
of purchase price of the acquired businesses, assessing the
impairment of goodwill, other intangible assets and property and
equipment, revenue recognition estimating the useful life of
long lived assets, income taxes, contingencies, litigation and
valuation of financial instruments, including warrants and stock
options. If actual results differ significantly from the
estimates reflected in the financial statements, there could be
a material effect on
L-1s
consolidated financial statements.
Valuation of
Goodwill and Other Long-Lived Assets
L-1s
long-lived assets include property and equipment, intangible
assets and goodwill. As of December 31, 2009 the balances
of property and equipment, intangible assets and goodwill, all
net of accumulated depreciation and amortization, were
$115.5 million, $102.4 million and
$889.8 million, respectively. As of December 31, 2008,
the balances of property and equipment, intangible assets and
goodwill, all net accumulated depreciation and amortization,
were $81.3 million, $108.3 million and
$891.0 million, respectively.
In 2008, L-1
recorded impairments of goodwill and
long-lived
assets of $430.0 million and $98.6 million,
respectively. There were no impairments recorded in 2009, as the
estimated fair values of the reportable units significantly
exceeded their respective carrying amounts.
L-1
depreciates property and equipment and intangible assets that
have finite lives over their estimated useful lives. For
purposes of determining whether there are any impairment losses,
management evaluates the carrying amounts of identifiable
long-lived tangible and intangible assets, including their
estimated useful lives, when indicators of impairment are
present. If such indicators are present,
L-1 compares
the related undiscounted cash flows before interest and taxes to
the
long-lived
assets carrying amounts. If the undiscounted cash flows are less
than the carrying amounts of an impairment loss is recorded
based on the fair value of the asset, as compared to the
carrying amounts of the asset, such loss is recorded in the
period L-1
identified the impairment. Based on
L-1s
review of the carrying amounts of the long-lived tangible assets
with finite lives,
L-1 may also
determine that shorter estimated useful lives are appropriate.
In that event,
L-1 would
record depreciation and amortization over shorter future
periods, which would reduce
L-1s
earnings.
L-1s
most significant balances of property, plant and equipment
relate to capitalized costs incurred to build system assets for
L-1s
drivers license contracts.
L-1
periodically reviews the estimated useful lives of property and
equipment used in State drivers licenses contracts to
assess whether it is probable that the State will exercise
L-1
Identity Solutions 2009 Annual Report | 57
its option to extend contracts and
L-1 adjusts
the remaining estimated useful lives based on that assessment.
L-1 tests
goodwill for impairment on an annual basis, or earlier if
indicators of potential impairment exist, and to write-down
goodwill when impaired.
L-1
evaluates goodwill for impairment using the two-step process.
The first step is to compare the estimated fair value of the
reporting unit to the carrying amount of the reporting unit. If
the carrying amount exceeds the estimated fair value, a second
step must be followed to calculate impairment. Otherwise, if the
estimated fair value of the reporting unit exceeds the carrying
amounts, the goodwill is not considered to be impaired as of the
measurement date.
L-1
estimates the fair value of
L-1s
reporting units primarily using the present value of future cash
flows, but also considering other factors such as
L-1s
market capitalization, an assessment of the fair value of the
reporting units based on comparable companies and comparable
transactions and multiples.
The date of
L-1s
annual goodwill impairment test was October 31, 2009.
Factors L-1
generally considers important and which could trigger an
impairment review of the carrying value of long-lived tangible
assets and goodwill include the following:
|
|
|
Significant underperformance relative to expected operating
results.
|
|
|
Significant changes in the manner of use of assets or the
strategy for
L-1s
overall business.
|
|
|
Underutilization of
L-1s
tangible assets.
|
|
|
Discontinuance of product lines by
L-1 or its
customers.
|
|
|
Significant negative industry or economic trends.
|
|
|
Significant decline in
L-1 stock
price for a sustained period.
|
|
|
Significant decline in
L-1 market
capitalization relative to net book value.
|
Although L-1
believes that the remaining recorded amounts of
L-1s
long-lived tangible and intangible
assets and goodwill were realizable as of December 31,
2009, future events could cause us to conclude otherwise.
If L-1 stock
price were to decrease and remain at that level for a sustained
period of time
L-1 may be
required to assess the carrying amount of goodwill and long
lived assets of
L-1
reporting units before
L-1s
next scheduled annual impairment test. If at that time the
estimated fair values of
L-1
reporting units are less than their respective carrying amounts,
L-1 would
need to determine whether
L-1 goodwill
and long-lived assets would be impaired. Moreover, if economic
conditions continue to deteriorate and capital markets
conditions continue to adversely impact the valuation of
enterprises, the estimated fair values of
L-1
reporting units could be adversely impacted, which could result
in future impairments.
Purchase Price
Allocations of Acquired Businesses
Valuations of acquired businesses requires
L-1 to make
significant estimates, which are derived from information
obtained from the management of acquired businesses,
L-1s
business plans for the acquired business or intellectual
property and other sources. Critical assumptions and estimates
used in the initial valuation of goodwill and other intangible
assets include, but are not limited to:
|
|
|
Assessments of appropriate valuation methodologies in the
circumstances.
|
|
|
Future expected cash flows from product sales, customer
contracts and acquired developed technologies, patents and other
intellectual property.
|
|
|
Expected costs to complete any in process research and
development projects and commercialize viable products and
estimated cash flows from sales of such products.
|
|
|
The acquired Companies brand awareness and market position.
|
|
|
Assumptions about the period of time over which
L-1 will
continue to use the acquired brand and intangible assets.
|
|
|
Discount rates.
|
L-1
Identity Solutions 2009 Annual Report | 58
The estimates and assumptions may not materialize because
unanticipated events and circumstances may occur. If estimates
and assumptions used to initially value goodwill and intangible
assets prove to be different from actual results, ongoing
reviews of the carrying values of such goodwill and intangible
assets may indicate impairment, which will require us to record
an impairment charge in the period in which it is identified.
Revenue
Recognition
L-1 revenue
is derived primarily from sales to Federal and State government
customers, some of which are fulfilled through solutions that
include the delivery of consumables, hardware and software
components, and related maintenance, technical support, training
and installation, as well as fingerprinting, technology and
security services. When a customer arrangement does not require
significant production, modification or customization of
software, or is otherwise not within the scope of the standards
applicable to long term contracts revenue is recognized when the
following four criteria are met:
|
|
|
Persuasive evidence of an arrangement exists
L-1 requires
evidence of an agreement with a customer specifying the terms
and conditions of the products or services to be delivered
typically in the form of a signed contract or purchase order.
|
|
|
Delivery has occurred For products, delivery
generally takes place when title to the products, which in
certain instances includes hardware and software licenses, are
shipped to or accepted by the customer. For services, delivery
takes place as the services are performed.
|
|
|
The fee is fixed or determinable Fees are fixed or
determinable if they are not subject to a refund or cancellation
and do not have payment terms that exceed
L-1 standard
payment terms.
|
|
|
Collection is probable
L-1
evaluates all customers with significant transactions to
determine whether collection of the sales price is probable.
|
Transactions which typically do not involve significant
production, modification or customization of software, do not
include services considered to be essential to the functionality
of the software or otherwise are not within the scope of the
standards for long term contracts include:
|
|
|
Secure credentialing solutions, primarily to Federal and State
government customers.
|
|
|
Sale of hardware products and related maintenance and services.
|
|
|
Sale of printing system components and consumables including
printers, secure coating, ribbon, film, and other parts,
primarily to Federal government customers.
|
|
|
Sale of portable devices that provide iris, face and fingerprint
identification and recognition related maintenance and services.
|
|
|
Licenses of
off-the-shelf
versions of fingerprint, face and iris recognition software and
related maintenance and services.
|
|
|
Sale of software and software developer kits and related
maintenance and services.
|
|
|
Services and software to scan, collect and transmit fingerprints
for identity and background verification.
|
|
|
Sale of document authentication products and services, which
typically include sales of hardware, software, maintenance and
support.
|
|
|
Information technology and security services provided to the
U.S. intelligence community.
|
Many of L-1
sales arrangements include multiple elements. Such elements may
include one or more of the following: consumables, equipment,
hardware, software, rights to additional software, when and if
available software, hardware maintenance, software maintenance,
hardware repair or replacement, technical support services,
training, installation and consulting services. For
multiple-element arrangements not within the scope of standards
applicable to software revenue recognition standards,
L-1
allocates value to each of the elements based on estimated
relative fair value, if fair value exists for each element of
the arrangement. For
L-1
Identity Solutions 2009 Annual Report | 59
arrangements within the scope of standards applicable to
software revenue recognition standards, which do not involve
significant production, modification or customization of
software or otherwise include services that are considered
essential to the functionality of software
L-1
allocates fair value based on vendor specific objective evidence
(VSOE) of fair value, which is determined based on the price
charged when each element is sold separately, considering
renewals and other evidence of fair value, as appropriate. If
fair value or VSOE of fair value, if applicable, exists for all
undelivered elements, but does not exist for the delivered
element, the residual method is used to allocate value to each
element. Under the residual method, each undelivered element is
allocated value based on fair value for that element, and the
remainder of the total arrangement consideration is allocated to
the delivered element. If fair value or VSOE of fair value if
applicable, does not exist for all undelivered elements, revenue
is deferred until evidence of fair value of the undelivered
elements are established, at which time revenue is recognized
for all delivered elements. Revenue of maintenance and support
is recognized ratably over the remaining term of any maintenance
and support period.
For transactions not within the scope of the standards
applicable to revenue recognition for long term contracts or
software sales, revenue is recognized upon transfer of title for
product sales, and performance for services, provided the four
revenue criteria listed above are met at that time.
In certain cases, customer acceptance is required, in which case
revenue is deferred until customer acceptance is obtained unless
acceptance is deemed perfunctory. If the fee due from the
customer is not fixed or determinable, revenue is recognized as
payments become due from the customer. If collection is not
considered probable, revenue is recognized when the fee is
collected. Revenues from security and information technology,
training and similar services are typically recognized as the
services are performed. Software maintenance, hardware
maintenance, and technical support for such products, are
typically recognized ratably over the contract term, which
approximates the timing
of the services rendered. Revenues earned pursuant to time and
material, fixed price level effort contracts and cost
reimbursable contracts are recognized as the services are
performed. Revenue from the collection of fingerprints for
identity and background verification is recognized when the
fingerprint is transmitted to the applicable background vetting
agency. Expenses on all services are recognized when the costs
are incurred.
L-1
contractual arrangements generally do not provide for a right to
return.
Revenue from consumables, equipment and hardware sales that
require no installation, is recognized in accordance with the
terms of the sale, generally when
L-1 ships
the product, provided no significant obligations remain and
collection is deemed reasonably assured. Certain of
L-1 hardware
sales to end users require installation subsequent to shipment
and transfer of title. Recognition of revenue related to
hardware sales that are contingent on installation is deferred
until installation is complete, title has transferred and
customer acceptance has been obtained. When hardware products
are sold through authorized representatives, dealers,
distributors or other third party sales channels, the obligation
to install the hardware generally does not remain
L-1s
responsibility, but is rather an obligation of the authorized
representative, dealer, distributor or other third party to its
ultimate customer. Consequently, for sales to third party
distributors, revenue is recognized at the time title is
transferred, which is generally upon shipment. On rare
occasions,
L-1 is
required to install
L-1 products
on behalf of
L-1 third
party distributors. In these cases, revenue is recorded in the
same manner as products sold to end users where acceptance of
product by the third party distributor is contingent upon
successful installation of product.
Revenues from software sales and licenses, including software
developer kits are recognized in accordance with standards
applicable to software sales.
L-1
recognizes revenue of software products when persuasive evidence
of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, VSOE of fair value exists to allocate the
total fee to all undelivered
L-1
Identity Solutions 2009 Annual Report | 60
elements of the arrangement and collection fee is deemed
probable.
In the event that a multiple element arrangement includes
hardware, software and services and the software is more than
incidental to the arrangement, but not essential to the
functionality of the hardware,
L-1
recognizes revenues on the software and non software elements
pursuant to the respective standard applicable to software and
non software elements.
When multiple-element arrangements include software deliverable
and involves significant production, modification or
customization of the software, or otherwise involves services
that are considered to be essential to the functionality of the
software,
L-1 applies
the accounting standards applicable to long term contracts. When
VSOE of fair value exists for the software maintenance,
technical support or other services in arrangements requiring
contract accounting, revenue for software maintenance, technical
support on other services is recognized as the services are
performed and the rest of the arrangement is accounted for under
accounting standards applicable to long term contracts. When
VSOE of fair value is not available for such services the entire
arrangement is accounted for under accounting standards
applicable to long term contracts and the related revenue is
recognized with the rest of the contract deliverables under the
percentage of completion method.
In general, transactions that involve significant production,
modification or customization of software, or otherwise include
services considered to be essential to the functionality of the
software and which are accounted in accordance with standards
applicable to long-term contracts, include:
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Contracts or elements of contracts for the production of
drivers licenses and other identification credentials that
require the delivery and installation of customized software.
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Identity solutions contracts, typically providing for the
development, customization and installation of fingerprinting,
face and iris recognition systems for government
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agencies, law enforcement agencies and commercial businesses.
|
L-1 also
utilizes contract accounting for certain Federal government
contracts.
Revenue from long term contracts is recognized using the
percentage of completion method.
L-1 measures
the percentage of completion using either input measures (e.g.
costs incurred) or output measures (e.g. contract milestones),
whichever provides the most reliable and meaningful measure of
performance in the circumstances. Milestones are specific events
or deliverables clearly identified in the contract and can
include delivering customized systems, installation and
services. When milestone measures are used, revenue is
recognized based on total milestones billable to the customer
less revenue related to future maintenance or services. On
contracts where milestones are not used,
L-1
generally recognizes revenue on a
cost-to-cost
basis or as the units are delivered whichever is most
appropriate in the circumstances. The cumulative impact of any
revision in estimates to complete or recognition of losses on
contracts is reflected in the period in which the changes or
losses become known.
L-1 records
costs and estimated earnings in excess of billings under these
contracts as current assets.
L-1
contracts related to the delivery of drivers licenses and
identification credentials typically provide that the State
departments of motor vehicles, or similar agencies pay a fixed
price per credential produced utilizing equipment and systems
that L-1
owns, designs, implements and supports.
The price includes charges for materials and the data that is
stored on the credentials. Prices for these contracts vary
depending among other things:
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Design and integration complexities.
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Nature and number of workstations and sites installed.
|
|
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Projected number of credentials to be produced.
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Size of databases.
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L-1
Identity Solutions 2009 Annual Report | 61
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Cost of consumable materials expected to be used.
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Level of post-installation involvement.
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Competitive considerations.
|
Drivers licenses or credentials contracts or contract
elements within such contracts generally require that
L-1 incur
up-front costs related to the software, hardware and other
equipment. The delivery of the licenses or credentials typically
also require us to customize, design, and install equipment and
software at customer locations, as well as perform training,
supply consumables, maintain the equipment and provide support
services. Costs related to the customized software and hardware
used in drivers license contracts are capitalized during
the period in which
L-1 develops
and installs the system and are amortized over the estimated
economic life of the contract beginning when the system goes
into service. Revenue on these contracts is earned based on, and
is contingent upon, the production of licenses or credentials
utilizing the deployed system and is therefore recognized as the
licenses or credentials are produced. If the contractual
arrangement includes the sale of consumables whose title is
transferred to the customer,
L-1
recognizes revenue when title is transferred.
Income
Taxes
L-1 has
recorded net deferred tax assets of $38.2 million at
December 31, 2009, including the tax benefits of net
operating loss carryforwards aggregating $35.7 million, net
of a related valuation allowance.
The 2009 results reflect an income tax benefit of
$2.5 million, primarily related to an increase in deferred
tax assets resulting from current year temporary differences,
net of the utilization of prior year net operating losses to
offset the current year estimated taxable income.
Management evaluated the adequacy of the valuation allowance in
light of the results for the year, based on the cumulative
results of operations for the three years ended
December 31, 2009, after considering items that do not
enter in the determination of taxable income, and the likely
future operating results. The evaluation indicated
the recorded valuation allowance for deferred tax assets related
to net operating loss carry forwards is adequate as of
December 31, 2009. Management evaluates the adequacy of the
valuation allowance annually and, if its assessment of whether
it is more likely than not that the related tax benefits will be
realized, changes the valuation allowance will be increased or
reduced with a corresponding benefit or charge included in
income. At December 31, 2009, the Company had
U.S. Federal net operating loss carryforwards of
$447.6 million, which may be used to reduce future taxable
income or charge. In addition, the Company has
$159.5 million of deductible goodwill.
Utilization of net operating loss carryforwards is dependent on
generating future taxable income of the appropriate type and in
the appropriate jurisdiction. In addition, substantially all of
the net operating loss carryforwards are subject to limitations
imposed by Section 382 of the Internal Revenue Code or
similar foreign limitations. The determination of the limitation
is complex and requires significant judgment and analyses of
past transactions. For Federal income tax purposes, the Identix
merger has been accounted for as an acquisition of the Company
by Identix, accordingly,
L-1s
net operating loss carryforwards are also subject to limitations
imposed by Section 382 of the Internal Revenue Code. In
addition, the net operating carryforwards of Digimarc,
Bioscrypt, Iridian, SecuriMetrics and ComnetiX, as well as other
previously acquired companies of both Identix and
L-1, are
subject to separate limitations imposed by Section 382.
L-1 has
analyzed the limitations and recorded a deferred tax asset only
for those net operating losses that are realizable within the
carry forward period.
Uncertain tax positions are recognized if the Company determines
that it is more likely than not that a tax position will be
sustained based on the technical merits of the position, on the
presumption that the position will be examined by the
appropriate taxing authority that would have full knowledge of
all relevant information. The tax position is measured at the
largest amount of benefit that is greater than 50 percent
likely of being realized upon ultimate settlement.
L-1
Identity Solutions 2009 Annual Report | 62
L-1 does not
believe it has significant uncertain tax positions.
Stock-Based
Compensation
Stock-based compensation is recognized over the vesting period
for new awards granted after January 1, 2006 and for
unvested awards outstanding at January 1, 2006. Stock-based
compensation is recognized based on the fair value of the date
of grant for stock options and the market value of the shares
for restricted stock awards.
Determining the appropriate fair value model for valuing stock
options and related assumptions requires judgment, including
estimating common stock price volatility, forfeiture rates and
expected terms. The following weighted average assumptions were
utilized in the valuation of stock option awards for 2009 and
2008:
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|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
Expected common stock price volatility
|
|
|
59.3%
|
|
|
|
51.9%
|
|
Risk free interest rate
|
|
|
3.9%
|
|
|
|
4.1%
|
|
Expected life of options
|
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|
6.3 Years
|
|
|
|
6.3 Years
|
|
Expected annual dividends
|
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|
The expected volatility rate is based on the historical
volatility of the Companys common stock. During 2007, the
Company reviewed the historical volatility of its common stock
and began using a weighted average method that more accurately
reflects volatility. The expected life of options is based on
the average life of 6.3 years. The Company estimated
forfeitures when recognizing compensation expense based on
historical rates. The risk free interest rate is based on the
7 year treasury security as it approximates the estimated
6.3 years expected life of the options. The Company updates
these assumptions on at least an annual basis and on an interim
basis if significant changes to the assumptions are warranted.
Contingencies and
Litigation
In the normal course of business, the Company is subject to
litigation, investigations, proceedings, claims or assessments
and various contingent liabilities incidental to its businesses
or assumed in connection with business acquisitions. The
Company records a liability for contingencies when management
believes that it is both probable that a liability has been
incurred and can reasonably estimate the amount of the potential
loss. The Company believes it has adequate provisions for any
such matters. The Company reviews these provisions quarterly and
adjusts these provisions to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel and other
information and events pertaining to a particular matter.
Because of the inherent uncertainties of litigation the ultimate
outcome cannot be accurately predicted. It is therefore possible
that the consolidated financial position, results of operations
or cash flows of the Company could be materially adversely
affected in any particular period by the unfavorable resolution
of one or more of these matters and contingencies.
Recent Accounting
Pronouncements
During 2009, the Company adopted the following accounting
standards:
In September 2006, the Financial Accounting Standards Board
(FASB) issued the accounting standard, Fair Value
Measurements and Disclosures. With respect to
financial assets and liabilities, this was effective for
financial statements issued for fiscal years beginning after
November 15, 2007. With respect to non-financial assets and
liabilities, the standard was effective on January 1, 2009.
The adoption of this standard did not have a material effect on
the consolidated financial statements of any period presented.
In March 2008, the FASB issued the accounting standard,
Disclosures about Derivative Instruments and Hedging
Activities. The adoption of this standard, effective
January 1, 2009, did not have a material impact on the
condensed consolidated financial statements.
In December 2007, the FASB issued the accounting standard,
Business Combinations, which establishes
standards for how the acquirer of a business recognizes and
measures the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree in its
financial statements. The standard also provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and for information to disclose.
L-1
Identity Solutions 2009 Annual Report | 63
Among other things, the standard requires securities issued to
be valued as of the acquisition date, transaction costs incurred
in connection with an acquisition be expensed, except acquiree
costs that meet the accounting standard, Accounting for
Costs Associated with Exit or Disposal Activities,
contingent consideration be recognized at fair value as of the
date of acquisition with subsequent changes reflected in income,
and in-process research and development be capitalized as an
intangible asset. The Company adopted the provisions of the
standard effective January 1, 2009. As a result of the
adoption of the standard, the Company expensed transaction costs
of $0.7 million for the year ended December 31, 2009
and retroactively expensed previously deferred transaction costs
of $0.1 million in prior periods.
L-1 expects
that the adoption of the standard will have a continuing
material impact in accounting for future acquisitions.
In December 2007, the FASB issued the standard
Noncontrolling Interests in Consolidated Financial
Statements adopted as of January 1, 2009. The
Company did not retroactively revise the financial statements
for prior periods because the impact was immaterial.
In May 2008, the FASB issued the standard Accounting
for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement).
This guidance required the Company to separately account for the
liability and equity components of the Companys
3.75 percent Convertible Notes in a manner that results in
recording interest expense using the Companys
nonconvertible debt borrowing rate for such debt. The associated
discount is amortized using the effective interest rate method
over five years from the date of the debt issuance. The Company
adopted the standard on January 1, 2009, and applied its
provisions retrospectively to all periods presented.
In April 2009, the FASB issued the standard, Interim
Disclosures about Financial Instruments. The standard
amends previous guidance to require disclosures about fair value
of financial instruments not measured on the balance sheet at
fair value in interim and in annual financial statements and
requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of
financial instruments. This guidance was effective for interim
periods ending after June 15, 2009. The adoption of this
standard did not have a material effect on the consolidated
financial statements of any period presented.
In April 2009, the FASB issued the standard, Accounting
for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies which amends
and clarifies previous guidance to address application issues
related to the initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business
combination. The standard was effective for assets or
liabilities arising from contingencies in business combinations
consummated after December 15, 2008.
L-1 expects
that the adoption of this guidance will likely have a continuing
material impact in accounting for future acquisitions.
In May 2009, the FASB issued the standard, Subsequent
Events, which establishes general accounting standards
for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available
to be issued. This standard was effective for interim or annual
financial periods ending after June 15, 2009. The adoption
of this standard did not have a material impact on the financial
statements for any of the periods presented.
In August 2009, the FASB issued the standard, Fair
Value Measurements and Disclosure. This accounting
update was effective for interim periods ending after August
2009. The adoption of this standard did not have a material
impact on the financial statements for any period presented.
Recently Issued
Accounting Standards
In June 2009, the FASB issued the standard, Amendments
to FASB Interpretation No. 46(R). The standard
changes the criteria to determine how an investee for a Company
is insufficiently capitalized or is not controlled through
voting (or similar rights) and therefore should be consolidated.
The standard is to become effective for transactions consummated
after January 1, 2010.
L-1 expects
that if it enters into transactions that are within the scope of
this
L-1
Identity Solutions 2009 Annual Report | 64
standard, its adoption of this standard could have a material
impact on
L-1s
financial statements.
In October 2009, the FASB issued the standard, Multiple
Element Arrangements, which modifies accounting for
multiple element arrangements by requiring that the separation
of the arrangements be based on estimated selling prices based
on entity specific assumptions rather than fair value,
eliminating the residual method of allocation and requiring
additional disclosures related to such arrangements. The
standard is effective prospectively for arrangements entered
into or materially modified in fiscal years beginning on or
after June 15, 2010. The Company has not yet evaluated the
impact the adoption of the standard will have on its
consolidated financial statements.
Also in October 2009, the FASB issued the standard,
Certain Revenue Arrangements That Include Software
Elements, which amends software revenue recognition
guidance to eliminate from its scope tangible products
containing software components that function together to deliver
the tangible products essential functionality and to
provide guidance on how to allocate arrangement consideration to
deliverables in an arrangement that contain both tangible
products and software. The standard is effective prospectively
for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. The
Company has not yet evaluated the impact the adoption of the
standard will have on its consolidated financial statements.
In January 2010, the FASB issued the standard, Fair
Value Measurements and Disclosures Improving
Disclosures about Fair Value Measurements. This
accounting update was effective for the first interim or annual
financial reporting period beginning after December 15,
2009. The adoption of this standard is not expected to have a
material impact on the financial statements.
L-1
Identity Solutions 2009 Annual Report | 65
QUARTERLY
FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data
for 2009 and 2008 (in thousands, except per share data):
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First Quarter
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Second Quarter
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Third Quarter
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Fourth Quarter
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For the Year Ended December 31, 2009
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|
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|
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Revenues
|
|
$
|
150,189
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|
|
$
|
168,053
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|
|
$
|
172,533
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|
|
$
|
160,163
|
|
Gross profit
|
|
|
43,590
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|
|
|
48,781
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|
|
|
54,993
|
|
|
|
44,252
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|
Net income (loss)
|
|
|
(3,786
|
)
|
|
|
(1,249
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)
|
|
|
1,372
|
|
|
|
(540
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)
|
Basic net income (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
$0.02
|
|
|
$
|
(0.01
|
)
|
Diluted net income (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
$0.02
|
|
|
$
|
(0.01
|
)
|
For the Year Ended December 31, 2008
|
|
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|
|
|
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|
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Revenues
|
|
$
|
115,996
|
|
|
$
|
144,952
|
|
|
$
|
154,464
|
|
|
$
|
147,460
|
|
Gross profit
|
|
|
31,354
|
|
|
|
47,626
|
|
|
|
47,274
|
|
|
|
41,749
|
|
Net income (loss)
|
|
|
(2,584
|
)
|
|
|
2,464
|
|
|
|
(1,913
|
)
|
|
|
(549,561
|
)
|
Basic net income (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
$0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
(6.56
|
)
|
Diluted net income (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
$0.03
|
|
|
$
|
(0.02
|
)
|
|
$
|
(6.56
|
)
|
The fourth quarter of 2008 includes impairments of long-lived
assets and goodwill of $98.6 million ($61.2 million,
net of the related tax effect) and $430.0 million,
respectively, an increase in the deferred tax asset valuation
allowance of $48.0 million and a merger related severance
charge of $1.1 million ($0.7 million, net of related
tax effect). See Notes 11 and 14 to
L-1s
consolidated financial statements.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE
RISK
L-1 is
exposed to interest rate risk related to borrowings under
L-1s
Credit Agreement. At December 31, 2009, borrowings
outstanding under the Credit Agreement aggregated
$286.9 million, bearing interest at variable rates. At
December 31, 2009, the market value of the Term Loan was
approximately $283.8 million and the carrying amount was
$278.9 million. The Company is exposed to risks resulting
from increases in interest rates and benefits from decreasing
interest rates subject to floors as described in the Credit
Agreement. A change in the interest rate of 1 percent would
increase or decrease interest expense by $2.8 million. The
Company has partially mitigated this interest rate risk by
entering into interest rate protection agreements with an
aggregate notional amount of $162.5 million pursuant to
which it receives variable interest based on three month LIBOR,
subject to a floor of 3.0 percent with respect to
$62.5 million notional amount and pays a fixed interest
rate.
L-1s
Convertible Notes bear interest at a fixed rate and mature on
May 15, 2027, but can be redeemed by us or called by the
holders in May 2012 and are convertible into shares of
L-1 common
stock at an initial conversion price of $32.00
(31.25 shares per $1,000 principal amount) in the following
circumstances:
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If during any five consecutive trading day period the trading
day period the trading price is less than 98 percent of the
product of the last reported sales price multiplied by the
applicable conversion rate.
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After December 31, 2009, if the sale price of
L-1 common
stock for twenty or more trading days exceeds 130 percent
of the initial conversion price.
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If the Company calls the Convertible Notes for redemption or
upon certain specified transactions.
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L-1
Identity Solutions 2009 Annual Report | 66
The market value of the Convertible Notes is impacted by changes
in interest rates and changes in the market value of
L-1 common
stock. At December 31, 2009, the estimated market value of
the Convertible Notes was approximately $160.4 million and
the carrying amount was $161.0 million.
For additional information regarding debt and financing
instruments see Notes 3 and 5 to
L-1
consolidated financial statements.
FOREIGN CURRENCY
EXPOSURES
The transactions of
L-1
international operations, primarily
L-1 German,
Canadian and Mexican subsidiaries, are denominated in Euros,
Canadian Dollars, and Mexican Pesos, respectively. Financial
assets and liabilities denominated in foreign currencies consist
primarily of accounts receivable and accounts payable and
accrued expenses. At December 31, 2009, financial assets
and liabilities denominated in Euros aggregate $2.0 million
and $0.7 million, respectively, and at December 31,
2008 aggregated $2.2 million and $1.0 million,
respectively. At December 31, 2009, financial assets and
liabilities denominated in Canadian Dollars aggregated
$4.7 million and $2.2 million, respectively, and at
December 31, 2008 aggregated $2.4 million and
$1.7 million, respectively.
At December 31, 2009, financial assets and liabilities
denominated in Mexican Pesos were $1.0 million and
$0.4 million and at December 31, 2008 aggregated
$1.8 million and $0.5 million, respectively.
Hardware and consumables purchases related to contracts
associated with the U.S. Department of State are
denominated in Japanese Yen and the Companys costs and
operations are exposed to changes in the value of the Yen since
the related revenues are fixed in U.S. dollars. At
December 31, 2009 and at December 31, 2008 these
Japanese Yen denominated liabilities aggregated
$1.8 million and $3.5 million, respectively. The
Company utilized foreign currency forward contracts to settle
obligations denominated in Japanese Yen. All gains and losses
resulting from the change in fair value of the currency forward
contracts are recorded in
operations and are offset by unrealized gains and losses related
to recorded liabilities. None of the contracts were terminated
prior to settlement. As of December 31, 2009 and 2008, the
Company had committed to foreign currency forward contracts that
substantially mitigate all foreign currency exposures for the
liabilities denominated in Yen. The fair value of these
contracts at December 31, 2009 and 2008, was an unrealized
loss of less than $0.1 million and unrealized gain of
$0.4 million, respectively.
L-1
international operations and transactions are subject to risks
typical of international operations, including, but not limited
to, differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions and
foreign currency exchange rate volatility. Accordingly,
L-1s
future results could be materially impacted by changes in these
or other factors.
L-1s
principal exposure is related to subsidiaries whose costs and
assets and liabilities denominated in Euros, Japanese Yen,
Canadian Dollars and Mexican Pesos. As of December 31, 2009
and 2008, the cumulative effect from foreign currency
translation adjustments related to foreign operations was
approximately gains of $1.2 million and losses of
$0.2 million, respectively.
Prepaid Forward
Contract
L-1 has
entered into a pre-paid forward contract with Bear Stearns (now
JP Morgan Chase) to purchase approximately 3.5 million
shares of
L-1 common
stock at a price of $20.00 per share for delivery in May 2012.
However, L-1
settled the obligation with a cash payment at closing. The price
of the common stock at the time of delivery may be higher or
lower than $20.00.
Forward-Looking
Statements
This annual report on
Form 10-K
contains or incorporates forward-looking statements within the
meaning of section 27A of the Securities Act of 1933 and
section 21e of the Securities Exchange Act of 1934. These
forward-looking statements are managements beliefs and
assumptions. In addition, other written or oral statements that
constitute forward-looking
L-1
Identity Solutions 2009 Annual Report | 67
statements are based on current expectation, estimates, and
projections about the industry and markets in which
L-1 operates
and statements may be made by or on
L-1s
behalf. Words such as should, could,
may, expect, anticipate,
intend, plan, believe,
seek, estimate, variations of such words
and similar expressions are intended to identify such
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are
not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict.
L-1 has
included important factors in under the heading Risk
Factors that
L-1 believes
could cause
L-1s
actual results to differ materially from the forward-looking
statements
L-1 makes.
L-1 does not
intend to update publicly any forward-looking statements whether
as a result of new information or otherwise.
L-1 does not
maintain any off-balance sheet arrangements, transactions,
obligations or other relationships with unconsolidated entities
that would be expected to have a material current or future
effect upon
L-1s
financial condition or results of operations.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The Companys financial statements are included in
pages F-1 to F-42 of this annual report on
Form 10-K.
PART III
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
L-1 has
established and maintained disclosure controls and procedures
that are designed to ensure that material information relating
to the Company and
L-1
subsidiaries required to be disclosed by us in
L-1 reports
under the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and
that such information is accumulated and communicated to
L-1
management, including the Companys Chief Executive
Officer, or CEO, and Chief Financial Officer, or CFO, as
appropriate to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, as
L-1 is
designed to do, and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
In connection with the preparation of this Annual Report on
Form 10-K,
an evaluation under the supervision and with the participation
of L-1
management, including the CEO and CFO, of the effectiveness of
the design and operation of
L-1
disclosure controls and procedures (as defined in
Rule 13a-15(e)
under the Exchange Act) was performed as of December 31,
2009. Based on this evaluation,
L-1s
CEO and CFO concluded that
L-1s
disclosure controls and procedures were effective as of
December 31, 2009.
(b) Managements annual report on internal control
over financial reporting.
Management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rule 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended, as a
process designed by, or under the supervision of, the
Companys principal executive and financial officers and
effected by the Companys Board of Directors, management
and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America. All internal control systems, no matter how well
designed, have
L-1
Identity Solutions 2009 Annual Report | 68
inherent limitations. Therefore, even systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation and the
prevention and detection of misstatements. Projections of any
evaluations of effectiveness to future periods are subject to
risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or
procedures may deteriorate.
L-1 has
designed its internal control over financial reporting to
provide reasonable assurance that controls will achieve their
objectives. However, any system of internal control over
financial reporting, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance its
objectives are met. Further, the design of an internal control
system must include as assessment of the costs and related risks
associated with the control and the purpose for which it was
intended. Because of the inherent limitations in all internal
control systems, no evaluation of controls can provide absolute
assurance that all internal control deficiencies, including
instances of fraud and control breakdowns, will not occur
because of human error or mistakes. Additionally, controls can
be circumvented by the individual acts by collusion of two or
more people, or by management override of the controls. The
design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that a design will succeed in
achieving its stated goals under all potential future
conditions. Over time,
L-1 control
systems may become inadequate because of changes in conditions,
or the degree of compliance with the policies of procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected and could be material.
Management, with the participation of the Companys
principal executive and financial officers, has assessed the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2009 pursuant to
rules 13a-15(c)
and
15d-15(c)
under the Securities Exchange act of 1934, as amended. In making
its assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations, or COSO, of the Treadway
Commission in Internal Control-Integrated Framework.
Based on such assessment, Management believes that, as of
December 31, 2009, the Companys internal control over
financial reporting was effective.
The Companys independent registered public accounting
firm, Deloitte & Touche LLP has issued a report dated
February 25, 2009 on the Companys internal control
over financial reporting.
(c) Changes in internal controls.
During 2009, in connection with
L-1s
evaluation of internal controls as of December 31, 2009,
L-1
implemented enhanced internal controls over financial reporting
for the acquisitions
L-1
consummated in 2008.
L-1
installed new or updated accounting systems at certain of
L-1s
divisions and enhanced controls for oversight over divisional
financial reporting. Based on managements evaluation of
changes in internal controls over financial reporting pursuant
to
rules 13a-15(d)
and
15d-15(d)
under the Securities Exchange Act of 1934, as amended,
management believes that there have been no changes materially
affecting or reasonably likely to materially affect internal
control over financial reporting during the fiscal quarter ended
December 31, 2009, except as disclosed above.
The certification of
L-1s
principal executive officer and principal financial officer
required in accordance with
Rule 13a-14(a)
under the Exchange Act are attached as exhibits to this Annual
Report on
Form 10-K.
The disclosures set forth in this Item 9A contain
information concerning the evaluation of
L-1s
disclosure controls and procedures, and changes in
L-1s
internal control over financial reporting, referred to in
paragraph 4 of those certifications. The certifications
should be read in conjunction with this Item 9A for a more
complete understanding of the matters covered by the
certifications.
L-1
Identity Solutions 2009 Annual Report | 69
REPORT OF
INDEPENDENT REGISTRED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
L-1 Identity
Solutions, Inc.
Stamford, Connecticut
We have audited the internal control over financial reporting of
L-1 Identity
Solutions, Inc. and subsidiaries (the Company) as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an
opinion on of the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based
upon assessed risk and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A Companys internal control over financial reporting is a
process designed by, or under the supervision of, the
Companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the Companys board of directors, management, and other
personnel 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. A Companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management
and directors of the Company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2009 of the Company and our report dated
February 25, 2010 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 25, 2010
L-1
Identity Solutions 2009 Annual Report | 70
L-1
Identity Solutions 2009 Annual Report | 71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 26 day of February, 2010.
L-1 IDENTITY
SOLUTIONS, INC.
|
|
|
|
By:
|
/s/ Robert
V. LaPenta
|
Robert V. LaPenta
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated, on
the [26th] day of February, 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Robert
V. LaPenta
Robert
V. LaPenta
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ James
A. DePalma
James
A. DePalma
|
|
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
|
|
|
|
/s/ Vincent
A. DAngelo
Vincent
A. DAngelo
|
|
Senior Vice President, Finance and Chief Accounting Officer
(Principal Accounting Officer)
|
|
|
|
/s/ B.G.
Beck
B.G.
Beck
|
|
Director
|
|
|
|
/s/ Milton
E. Cooper
Milton
E. Cooper
|
|
Director
|
|
|
|
/s/ Robert
S. Gelbard
Robert
S. Gelbard
|
|
Director
|
|
|
|
/s/ Malcolm
J. Gudis
Malcolm
J. Gudis
|
|
Director
|
|
|
|
/s/ John
E. Lawler
John
E. Lawler
|
|
Director
|
|
|
|
/s/ Admiral
James M. Loy
Admiral
James M. Loy
|
|
Director
|
|
|
|
/s/ Peter
Nessen
Peter
Nessen
|
|
Director
|
|
|
|
/s/ Harriet
Mouchly-Weiss
Harriet
Mouchly-Weiss
|
|
Director
|
|
|
|
/s/ B.
Boykin Rose
B.
Boykin Rose
|
|
Director
|
L-1
Identity Solutions 2009 Annual Report | 72
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Reorganization, dated as of
January 11, 2006, by and among Viisage Technology, Inc.,
VIDS Acquisition Corp. and Identix Incorporated (filed as
Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on January 13, 2006).*
|
|
2
|
.2
|
|
Agreement and Plan of Merger, dated as of February 5, 2006,
by and among Viisage Technology, Inc., SecuriMetrics, Inc. and
VS Able Acquisition Corp. (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on February 6, 2006).*
|
|
2
|
.3
|
|
Agreement and Plan of Merger, dated as of July 14, 2006, by
and among Viisage Technology, Inc., Iris Acquisition I Corp.,
Iridian Technologies, Inc., Perseus 2000 L.L.C., as stockholder
representative, and other parties named therein (filed as
Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on July 18, 2006).*
|
|
2
|
.4
|
|
Arrangement Agreement, dated as of November 15, 2006 (the
Arrangement Agreement), among
L-1 Identity
Solutions, Inc., 6653375 Canada Inc. and ComnetiX Inc. (filed as
Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on November 16, 2006).*
|
|
2
|
.4(a)
|
|
Amendment No. 1 to the Arrangement Agreement, dated
January 9, 2007 (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on January 11, 2007).*
|
|
2
|
.4(b)
|
|
Amendment No. 2 to the Arrangement Agreement, dated
January 25, 2007 (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on January 29, 2007).*
|
|
2
|
.4(c)
|
|
Amendment No. 3 to the Arrangement Agreement, dated
February 7, 2007 (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on February 13, 2007).*
|
|
|
|
|
|
|
|
2
|
.5
|
|
Agreement and Plan of Reorganization, dated May 16, 2007,
by and among
L-1 Identity
Solutions, Inc.,
L-1 Identity
Solutions Operating Company and
L-1 Merger
Co. (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on May 16, 2007).*
|
|
2
|
.6
|
|
Agreement and Plan of Merger, dated as of June 18, 2007, by
and among McClendon LLC, the selling stockholders,
L-1 Identity
Solutions, Inc.,
L-1 Identity
Solutions Operating Company and Patty Hardt, as the selling
stockholders representative (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on June 20, 2007).*
|
|
2
|
.7
|
|
Arrangement Agreement, dated as of January 5, 2008, by and
among L-1
Identity Solutions, Inc.,
L-1 Identity
Solutions Operating Company, 6897525 Canada Inc. and Bioscrypt
Inc. (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on January 10, 2008).*
|
|
2
|
.8
|
|
Amended and Restated Agreement and Plan of Merger, dated as of
June 29, 2008, by and among
L-1 Identity
Solutions, Inc., Dolomite Acquisition Co. and Digimarc
Corporation (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on July 3, 2008).*
|
|
2
|
.8(a)
|
|
Amendment No. 1 to the Amended and Restated Agreement and
Plan of Merger, dated July 17, 2008, by and among
L-1 Identity
Solutions, Inc., Dolomite Acquisition Co. and Digimarc
Corporation (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on July 17, 2008).*
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation as filed with
the Secretary of State of the State of Delaware on May 16,
2007 (filed as Exhibit 3.1 to
L-1s
Current Report on
Form 8-K
filed on May 16, 2007).*
|
|
3
|
.2
|
|
Amended and Restated By-Laws (filed as Exhibit 3.2 to
L-1s
Current Report on
Form 8-K
filed on November 5, 2007).*
|
L-1
Identity Solutions 2009 Annual Report | 73
|
|
|
|
|
|
4
|
.1
|
|
Specimen Certificates for Common Stock (filed as
Exhibit 4.1 to
L-1s
Registration Statement on
Form 8-A
filed on August 29, 2006).*
|
|
4
|
.2
|
|
Indenture relating to Convertible Senior Notes due 2027, dated
as May 17, 2007, by and between
L-1 Identity
Solutions, Inc. and The Bank of New York, as trustee (including
the form of 3.75 percent Convertible Senior Notes due 2027)
(filed as Exhibit 4.1 to
L-1s
Current Report on
Form 8-K
filed on May 23, 2007).*
|
|
4
|
.3
|
|
Warrant, dated as of March 9, 2004, issued by Identix
Incorporated in favor of Delean Vision Worldwide, Inc. (filed as
Exhibit 4.2 to the Registration Statement on
Form S-3
filed by Identix Incorporated on March 25, 2004).*
|
|
10
|
.1
|
|
Amended and Restated License Agreement, dated as of
August 20, 1996, between Viisage Technology, Inc. and Lau
Technologies (filed as Exhibit 10.1 to Amendment No. 1
to
L-1s
Registration Statement on
Form S-1
filed on October 9, 1996) (SEC File
No. 333-10649).*
|
|
10
|
.2
|
|
Investment Agreement, dated as of October 5, 2005, between
Viisage Technology, Inc. and
L-1
Investment Partners, LLC (filed as Exhibit 10.1 to
L-1s
Current Report on
Form 8-K
filed on October 11, 2005).*
|
|
10
|
.3
|
|
Registration Rights Agreement, dated December 16, 2005, by
and among Viisage Technology, Inc.,
L-1
Investment Partners LLC and Aston Capital Partners, L.P. (filed
as Exhibit 10.5 to the Schedule 13D filed by Aston
Capital Partners, L.P. on December 23, 2005).*
|
|
10
|
.4
|
|
Consulting Agreement, dated August 29, 2006, between
L-1
Investment Partners LLC and Viisage Technology, Inc. (filed as
Exhibit 10.07 to
L-1s
Current Report on
Form 8-K
filed on September 6, 2006).*
|
|
|
|
|
|
|
10
|
.5
|
|
Termination and Non-Competition Agreement, dated August 29,
2006, between
L-1 Identity
Solutions, Inc. and
L-1
Investment Partners LLC (filed as Exhibit 10.08 to
L-1s
Current Report on
Form 8-K
filed on September 6, 2006).*
|
|
10
|
.6
|
|
Sublease Agreement, dated August 29, 2006, between
L-1
Investment Partners LLC and Viisage Technology, Inc. (filed as
Exhibit 10.09 to
L-1s
Current Report on
Form 8-K
filed on September 6, 2006).*
|
|
10
|
.7
|
|
Securities Purchase Agreement, dated September 11, 2006, by
and among SpecTal, LLC, John A. Cross, Louise V. Brouillette,
Ann J. Holcomb, Ronald Hammond, Jr. and Mark Oliva,
L-1 Identity
Solutions, Inc. and John A. Cross, as sellers
representative (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on September 14, 2006).*
|
|
10
|
.7(a)
|
|
Amendment No. 1 to Securities Purchase Agreement, dated
October 19, 2006, among
L-1 Identity
Solutions, Inc. and John A. Cross, as sellers
representative (filed as Exhibit 10.02 to
L-1s
Current Report on
Form 8-K
filed on October 25, 2006).*
|
|
10
|
.8
|
|
Stock Purchase Agreement, dated as of May 1, 2007, by and
among Advanced Concepts, Inc., John Register and Frank White,
L-1 Identity
Solutions, Inc., and John Register, in his capacity as the
sellers representative (filed as Exhibit 2.1 to
L-1s
Current Report on
Form 8-K
filed on May 2, 2007).*
|
|
10
|
.9
|
|
Purchase Agreement, dated as of May 10, 2007, by and among
L-1 Identity
Solutions, Inc.,
L-1 Identity
Solutions Operating Company and Bear, Stearns & Co.
Inc and Banc of America Securities LLC, as representatives of
the initial purchasers (filed as Exhibit 10.1 to
L-1s
Current Report on
Form 8-K
filed on May 23, 2007).*
|
L-1
Identity Solutions 2009 Annual Report | 74
|
|
|
|
|
|
10
|
.10
|
|
Pre-paid Forward Share Purchase Agreement, dated as of
May 10, 2007, by and between
L-1 Identity
Solutions, Inc.,
L-1 Identity
Solutions Operating Company and Bear, Stearns International
Limited (filed as Exhibit 10.2 to
L-1s
Current Report on
Form 8-K
filed on May 23, 2007).*
|
|
10
|
.11
|
|
Assignment and Assumption Agreement, dated as of May 16,
2007, by and between
L-1 Identity
Solutions, Inc. and
L-1 Identity
Solutions Operating Company (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on May 16, 2007).*
|
|
10
|
.12
|
|
Registration Rights Agreement, dated as of May 17, 2007, by
and among
L-1 Identity
Solutions, Inc. and Bear, Stearns & Co. Inc. and Banc
of America Securities LLC, as representatives of the initial
purchasers (incorporated by reference to Exhibit 4.3 to
L-1s
Current Report on
Form 8-K
filed on May 23, 2007).*
|
|
10
|
.13
|
|
Securities Purchase Agreement, dated as of June 29, 2008,
by and between
L-1 Identity
Solutions, Inc. and Robert V. LaPenta (filed as
Exhibit 10.1 to
L-1s
Quarterly Report on
Form 10-Q
filed on August 4, 2008).*
|
|
10
|
.14
|
|
Securities Purchase Agreement, dated as of June 29, 2008,
by and between
L-1 Identity
Solutions, Inc. and Iridian Asset Management LLC (filed as
Exhibit 10.3 to
L-1s
Quarterly Report on
Form 10-Q
filed on August 4, 2008).*
|
|
10
|
.15
|
|
Securities Purchase Agreement, dated as of June 30, 2008,
by and between
L-1 Identity
Solutions, Inc. and LRSR LLC (filed as Exhibit 10.2 to
L-1s
Quarterly Report on
Form 10-Q
filed on August 4, 2008).*
|
|
10
|
.15(a)
|
|
Amendment No. 1 to the Securities Purchase Agreement, dated
as of August 4, 2008, by and between
L-1 Identity
Solutions, Inc. and LRSR LLC (filed as Exhibit 10.2(a) to
L-1s
Registration Statement on
Form S-3
filed on August 5, 2008).*
|
|
|
|
|
|
|
10
|
.16
|
|
Registration Rights Agreement, dated as of June 29, 2008,
by and between
L-1 Identity
Solutions, Inc. and Robert V. LaPenta (filed as
Exhibit 10.2 to the Statement on
Schedule 13-D/A
filed by Aston Capital Partners, L.P. and others on July 3,
2008).*
|
|
10
|
.17
|
|
Registration Rights Agreement, dated as of June 29, 2008,
by and between
L-1 Identity
Solutions, Inc. and Iridian Asset Management LLC (filed as
Exhibit 4.2 to
L-1s
Quarterly Report on
Form 10-Q
filed on August 4, 2008).*
|
|
10
|
.18
|
|
Registration Rights Agreement, dated as of August 5, 2008,
by and among
L-1 Identity
Solutions, Inc. and MHR Capital Partners Master Account LP, MHR
Capital Partners (100) LP and MHR Institutional
Partners III LP (filed as Exhibit 4.15 to
L-1s
Registration Statement on
Form S-3
filed on August 5, 2008).*
|
|
10
|
.19
|
|
Registration Rights Agreement, dated as of February 17,
2006, by and between Viisage Technology, Inc. and the former
stockholders of SecuriMetrics, Inc. named therein (filed as
Exhibit 4.1 to
L-1s
Current Report on
Form 8-K
filed on February 24, 2006).*
|
|
10
|
.20
|
|
Viisage Technology, Inc. Second Amended and Restated 1996
Management Stock Option Plan (included as Appendix B to
L-1s
Schedule 14A filed on April 16, 2004).*
|
|
10
|
.20(a)
|
|
Form of Option Agreement for the Viisage Technology, Inc. 1996
Management Stock Option Plan (filed as Exhibit 10.10 to
Amendment No. 1 to
L-1s
Registration Statement on
Form S-1
(SEC File
No. 333-10649)
filed on October 9, 1996).*
|
|
10
|
.21
|
|
Viisage Technology, Inc. Amended and Restated 1996 Director
Stock Option Plan (included as Appendix C to
L-1s
Schedule 14A filed on April 16, 2004).*
|
|
10
|
.21(a)
|
|
Form of Option Agreement for the Viisage Technology, Inc.
1996 Director Stock Option Plan (filed as
Exhibit 10.11 to Amendment No. 1 to
L-1s
Registration Statement on
Form S-1
filed on October 9, 1996) (SEC File
No. 333-10649).*
|
L-1
Identity Solutions 2009 Annual Report | 75
|
|
|
|
|
|
10
|
.22
|
|
Amended and Restated Viisage Technology, Inc. 2001 Stock in Lieu
of Cash Compensation for Directors Plan (filed as
Exhibit 10.42 to
L-1s
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001) (SEC File
No. 000-21559).*
|
|
10
|
.23
|
|
L-1 Identity
Solutions, Inc. 2005 Long Term Incentive Plan (included as
Appendix B to
L-1s
Schedule 14A filed on September 7, 2005).*
|
|
10
|
.23(a)
|
|
Form of Grant Agreement under the
L-1 Identity
Solutions, Inc. 2005 Long Term Incentive Plan.(filed as
Exhibit 10.12(a) to
L-1s
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, filed on
February 28, 2008).*
|
|
10
|
.24
|
|
L-1 Identity
Solutions, Inc. 2008 Long-Term Incentive Plan (included as
Appendix A to
L-1s
Schedule 14A filed on March 14, 2008).*
|
|
10
|
.24(a)
|
|
Form of L-1
Identity Solutions, Inc. 2008 Long-Term Incentive Plan Option
Award Grant Agreement (filed as Exhibit 99.2 to
L-1s
Registration Statement on
Form S-8
filed on May 30, 2008).*
|
|
10
|
.25
|
|
Bioscrypt Inc. Primary Stock Option Plan (filed as
Exhibit 99.1 to
L-1s
Registration Statement on
Form S-8
filed on March 5, 2008).*
|
|
10
|
.26
|
|
Bioscrypt Inc. A4Vision Plan (filed as Exhibit 99.2 to
L-1s
Registration Statement on
Form S-8
filed on March 5, 2008).*
|
|
10
|
.27
|
|
Identix Incorporated 2002 Equity Incentive Plan (filed as
Exhibit 99.3 to
L-1s
Registration Statement on
Form S-8
filed on August 30, 2006).*
|
|
10
|
.27(a)
|
|
Form of Grant Agreement under the Identix Incorporated 2002
Equity Incentive Plan (filed as Exhibit 10.22(a) to
L-1s
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, filed on
February 28, 2008).*
|
|
10
|
.28
|
|
Identix Incorporated New Employee Stock Incentive Plan (filed as
Exhibit 99.4 to
L-1s
Registration Statement on
Form S-8
filed on August 30, 2006).*
|
|
|
|
|
|
|
10
|
.29
|
|
Identix Incorporated Non-employee Directors Stock Option Plan
(filed as Exhibit 99.5 to
L-1s
Registration Statement on
Form S-8
filed on August 30, 2006).*
|
|
10
|
.30
|
|
Identix Incorporated Equity Incentive Plan (filed as
Exhibit 99.6 to
L-1s
Registration Statement on
Form S-8
filed on August 30, 2006).*
|
|
10
|
.31
|
|
Visionics Corporation 1990 Stock Option Plan (filed as
Exhibit 99.7 to
L-1s
Registration Statement on
Form S-8
filed on August 30, 2006).*
|
|
10
|
.32
|
|
Visionics Corporation 1998 Stock Option Plan (filed as
Exhibit 99.8 to
L-1s
Registration Statement on
Form S-8
filed on August 30, 2006).*
|
|
10
|
.33
|
|
Visionics Corporation Stock Incentive Plan (filed as
Exhibit 99.9 to
L-1s
Registration Statement on
Form S-8
filed on August 30, 2006).*
|
|
10
|
.34
|
|
Employment Agreement, dated August 29, 2006, between
Viisage Technology, Inc. and Robert V. LaPenta (filed as
Exhibit 10.01 to
L-1s
Current Report on
Form 8-K
filed on September 6, 2006).*
|
|
10
|
.34(a)
|
|
Amendment to LaPenta Employment Agreement dated as of
July 31, 2009 (filed as Exhibit 10.1 to
L-1s
Current Report on
Form 8-K
filed on August 5, 2009).*
|
|
10
|
.35
|
|
Employment Agreement, dated August 29, 2006, between
Viisage Technology, Inc. and James DePalma (filed as
Exhibit 10.02 to
L-1s
Current Report on
Form 8-K
filed on September 6, 2006).*
|
|
10
|
.35(a)
|
|
Amendment to DePalma Employment Agreement dated as of
July 31, 2009 (filed as Exhibit 10.2 to
L-1s
Current Report on
Form 8-K
filed on August 5, 2009).*
|
|
10
|
.36
|
|
Employment Agreement, dated August 29, 2006, between
Viisage Technology, Inc. and Joseph Paresi (filed as
Exhibit 10.03 to
L-1s
Current Report on
Form 8-K
filed on September 6, 2006).*
|
L-1
Identity Solutions 2009 Annual Report | 76
|
|
|
|
|
|
10
|
.36(a)
|
|
Amendment to Paresi Employment Agreement dated as of
July 31, 2009 (filed as Exhibit 10.3 to
L-1s
Current Report on
Form 8-K
filed on August 5, 2009).*
|
|
10
|
.37
|
|
Employment Agreement, dated August 29, 2006, between
Viisage Technology, Inc. and Mark S. Molina (filed as
Exhibit 10.04 to
L-1s
Current Report on
Form 8-K
filed on September 6, 2006).*
|
|
10
|
.37(a)
|
|
Amendment to Molina Employment Agreement dated as of
July 31, 2009 (filed as Exhibit 10.4 to
L-1s
Current Report on
Form 8-K
filed on August 5, 2009).*
|
|
10
|
.38
|
|
Employment Agreement, dated Sept 21, 2006, between
L-1 Identity
Solutions, Inc. and Vincent DAngelo. (filed as
Exhibit 10.33 to
L-1s
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, filed on
February 28, 2008).*
|
|
10
|
.39
|
|
Employment Agreement, dated December 19, 2006, between
L-1 Identity
Solutions, Inc. and Dr. Joseph J. Atick (filed as
Exhibit 10.01 to
L-1s
Current Report on
Form 8-K
filed on December 22, 2006).*
|
|
10
|
.39(a)
|
|
Amendment to Dr. Atick Employment Agreement dated as of
July 31, 2009 (filed as Exhibit 10.5 to
L-1s
Current Report on
Form 8-K
filed on August 5, 2009).*
|
|
10
|
.40
|
|
Employment Agreement, dated January 31, 2007, between
L-1 Identity
Solutions, Inc. and Doni Fordyce (filed as Exhibit 10.01 to
L-1s
Current Report on
Form 8-K
filed on January 9, 2007).*
|
|
10
|
.40(a)
|
|
Amendment to Fordyce Employment Agreement dated as of
July 31, 2009 (filed as Exhibit 10.6 to
L-1s
Current Report on
Form 8-K
filed on August 5, 2009).*
|
|
10
|
.41
|
|
Form of Indemnification Agreement (filed as Exhibit 10.10
to
L-1s
Current Report on
Form 8-K
filed on September 6, 2006).*
|
|
|
|
|
|
|
10
|
.42
|
|
Second Amended and Restated Credit Agreement, dated as of
August 5, 2008, among
L-1 Identity
Solutions Operating Company,
L-1 Identity
Solutions, Inc., Bank of America, N.A., Wachovia Bank, National
Association, Banc of America Securities LLC and Wachovia Capital
Markets LLC. (filed as Exhibit 10.1 to
L-1s
Current Report on
Form 8-K
filed on August 8, 2008)(the Credit Agreement)*
|
|
10
|
.42(a)
|
|
Amendment No. 1 to the Credit Agreement dated as of
July 8, 2009, by and among
L-1 Identity
Solutions Operating Company,
L-1 Identity
Solutions, Inc., each of the other guarantors thereto, each
lender thereto, and Bank of America, N.A. (filed as
Exhibit 10.01 to
L-1s
Current Report on
Form 8-K
filed on July 14, 2009)*
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP, Independent
Registered Public Accounting Firm.
|
|
31
|
.1
|
|
Certification pursuant to Exchange Act
Rules 13a-14
and 15d-14 of the Chief Executive Officer.
|
|
31
|
.2
|
|
Certification pursuant to Exchange Act
Rules 13a-14
and 15d-14 of the Chief Financial Officer.
|
|
32
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350 of
the Chief Executive Officer.
|
|
32
|
.2
|
|
Certification pursuant to 18 U.S.C. Section 1350 of
the Chief Financial Officer.
|
|
|
|
* |
|
Incorporated herein by reference. |
|
|
|
Exhibit is a management contract or compensatory plan or
arrangement. |
L-1
Identity Solutions 2009 Annual Report | 77
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
L-1
Identity Solutions 2009 Annual Report | F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
L-1 Identity
Solutions, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheets of
L-1 Identity
Solutions, Inc. and subsidiaries (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in equity and comprehensive
income (loss), and cash flows for each of the three years in the
period ended December 31, 2009. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
L-1 Identity
Solutions, Inc. and subsidiaries as of December 31, 2009
and 2008, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 25, 2010 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 25, 2010
L-1
Identity Solutions 2009 Annual Report | F-2
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,624
|
|
|
$
|
20,449
|
|
Accounts receivable, net
|
|
|
116,353
|
|
|
|
105,606
|
|
Inventory, net
|
|
|
29,384
|
|
|
|
34,509
|
|
Deferred tax asset, net
|
|
|
11,514
|
|
|
|
11,101
|
|
Other current assets
|
|
|
9,249
|
|
|
|
9,628
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
173,124
|
|
|
|
181,293
|
|
Property and equipment, net
|
|
|
115,500
|
|
|
|
81,268
|
|
Goodwill
|
|
|
889,814
|
|
|
|
890,977
|
|
Intangible assets, net
|
|
|
102,375
|
|
|
|
108,282
|
|
Deferred tax asset, net
|
|
|
26,733
|
|
|
|
23,609
|
|
Other assets, net
|
|
|
16,279
|
|
|
|
24,392
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,323,825
|
|
|
$
|
1,309,821
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
110,089
|
|
|
$
|
118,109
|
|
Current portion of deferred revenue
|
|
|
19,890
|
|
|
|
16,998
|
|
Current maturities of long-term debt
|
|
|
27,062
|
|
|
|
19,256
|
|
Other current liabilities
|
|
|
6,680
|
|
|
|
2,559
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
163,721
|
|
|
|
156,922
|
|
Deferred revenue, net of current portion
|
|
|
6,676
|
|
|
|
13,323
|
|
Long-term debt, net of current maturities
|
|
|
419,304
|
|
|
|
429,235
|
|
Other long-term liabilities
|
|
|
3,663
|
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
593,364
|
|
|
|
601,341
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 125,000,000 shares
authorized; 91,745,135 and 86,615,859 shares issued at
December 31, 2009 and 2008, respectively
|
|
|
92
|
|
|
|
87
|
|
Series A preferred convertible stock, $0.01 par value,
15,107 shares issued and outstanding at December 31,
2008
|
|
|
|
|
|
|
15,107
|
|
Additional paid-in capital
|
|
|
1,432,898
|
|
|
|
1,393,763
|
|
Accumulated deficit
|
|
|
(627,449
|
)
|
|
|
(623,251
|
)
|
Pre-paid forward contract
|
|
|
(69,808
|
)
|
|
|
(69,808
|
)
|
Treasury stock, 368,843 shares of common stock, at cost
|
|
|
(6,173
|
)
|
|
|
(6,161
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
622
|
|
|
|
(1,257
|
)
|
Noncontrolling interest
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
730,461
|
|
|
|
708,480
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,323,825
|
|
|
$
|
1,309,821
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
L-1
Identity Solutions 2009 Annual Report | F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
327,253
|
|
|
$
|
282,161
|
|
|
$
|
177,974
|
|
Solutions
|
|
|
323,684
|
|
|
|
280,711
|
|
|
|
211,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
650,937
|
|
|
|
562,872
|
|
|
|
389,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
249,355
|
|
|
|
206,998
|
|
|
|
130,516
|
|
Solutions
|
|
|
201,518
|
|
|
|
163,184
|
|
|
|
110,820
|
|
Amortization of acquired intangible assets
|
|
|
8,446
|
|
|
|
24,687
|
|
|
|
27,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
459,319
|
|
|
|
394,869
|
|
|
|
268,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
191,618
|
|
|
|
168,003
|
|
|
|
121,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
40,004
|
|
|
|
37,055
|
|
|
|
27,719
|
|
Research and development
|
|
|
20,730
|
|
|
|
25,244
|
|
|
|
18,482
|
|
General and administrative
|
|
|
93,855
|
|
|
|
86,793
|
|
|
|
62,318
|
|
Asset impairments and merger related expenses
|
|
|
|
|
|
|
529,683
|
|
|
|
5,000
|
|
Acquisition related expenses and amortization of acquired
intangible assets
|
|
|
1,895
|
|
|
|
2,996
|
|
|
|
2,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
156,484
|
|
|
|
681,771
|
|
|
|
116,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
35,134
|
|
|
|
(513,768
|
)
|
|
|
5,038
|
|
Interest income
|
|
|
120
|
|
|
|
288
|
|
|
|
407
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual interest
|
|
|
(28,191
|
)
|
|
|
(19,168
|
)
|
|
|
(10,015
|
)
|
Other financing costs
|
|
|
(13,130
|
)
|
|
|
(8,726
|
)
|
|
|
(4,299
|
)
|
Other expense, net
|
|
|
(394
|
)
|
|
|
(260
|
)
|
|
|
(508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(6,461
|
)
|
|
|
(541,634
|
)
|
|
|
(9,377
|
)
|
Benefit (provision) for income taxes
|
|
|
2,458
|
|
|
|
(9,960
|
)
|
|
|
25,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,003
|
)
|
|
|
(551,594
|
)
|
|
|
15,807
|
|
Net income attributable to noncontrolling interest
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
L-1 shareholders
|
|
$
|
(4,198
|
)
|
|
$
|
(551,594
|
)
|
|
$
|
15,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to
L-1 shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(7.12
|
)
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(7.12
|
)
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
85,516
|
|
|
|
77,518
|
|
|
|
71,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
85,516
|
|
|
|
77,518
|
|
|
|
72,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
L-1
Identity Solutions 2009 Annual Report | F-4
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|
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|
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Pre-paid
|
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Forward
|
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|
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Series A
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Contract To
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Accumulated
|
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|
|
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Convertible
|
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Additional
|
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Purchase
|
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Other
|
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Non-
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Common
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Preferred
|
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Paid-in
|
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Accumulated
|
|
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Common
|
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Treasury
|
|
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Comprehensive
|
|
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Controlling
|
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Comprehensive
|
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Stock
|
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|
Stock
|
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Capital
|
|
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Deficit
|
|
|
Stock
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Interest
|
|
|
Total
|
|
|
Income (Loss)
|
|
|
Balance, January 1, 2007
|
|
|
73
|
|
|
|
|
|
|
|
1,153,791
|
|
|
|
(87,464
|
)
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
|
|
|
|
|
1,067,085
|
|
|
|
|
|
Exercise of employee stock options
|
|
|
1
|
|
|
|
|
|
|
|
10,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
10,038
|
|
|
|
|
|
Adjustment to fair value of stock options assumed in merger with
Identix
|
|
|
|
|
|
|
|
|
|
|
8,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,520
|
|
|
|
|
|
Common stock issued for acquisition of McClendon
|
|
|
2
|
|
|
|
|
|
|
|
32,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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33,000
|
|
|
|
|
|
Common stock issued for directors fees
|
|
|
|
|
|
|
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
545
|
|
|
|
|
|
Common stock issued under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
2,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,315
|
|
|
|
|
|
Deferred tax benefit of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
Retirement plan contributions paid in common stock
|
|
|
|
|
|
|
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261
|
|
|
|
|
|
Pre-paid forward contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,808
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
9,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,243
|
|
|
|
|
|
Issuance of convertible notes
|
|
|
|
|
|
|
|
|
|
|
15,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,891
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,722
|
|
|
|
|
|
|
|
5,722
|
|
|
$
|
5,722
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,807
|
|
|
|
15,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
76
|
|
|
|
|
|
|
|
1,233,731
|
|
|
|
(71,657
|
)
|
|
|
(69,808
|
)
|
|
|
|
|
|
|
6,407
|
|
|
|
|
|
|
|
1,098,749
|
|
|
|
|
|
Exercise of employee stock options
|
|
|
|
|
|
|
|
|
|
|
2,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,860
|
|
|
|
|
|
Common stock and stock options issued for acquisition of
Bioscrypt
|
|
|
2
|
|
|
|
|
|
|
|
36,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,570
|
|
|
|
|
|
Common stock issued to investors
|
|
|
8
|
|
|
|
|
|
|
|
103,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,865
|
|
|
|
|
|
Preferred stock issued to investor
|
|
|
|
|
|
|
15,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,107
|
|
|
|
|
|
Common stock issued for directors fees
|
|
|
|
|
|
|
|