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1 Coverage Report Market Intelligence for Business Owners Q Capstone Partners Investment Banking Advisors BOSTON CHICAGO LONDON LOS ANGELES PHILADELPHIA SAN DIEGO SILICON VALLEY

2 Coverage Report MERGER & ACQUISITION ACTIVITY CAPSTONE PARTNERS LLC 200 South Wacker Drive 31st Floor Chicago, IL Ted Polk (312) Lisa Tolliver Director (312) The biometrics industry is highly fragmented and offers attractive growth prospects, driving aggressive M&A activity in the space from both corporate buyers and private equity groups. As an analyst from TechNavio s Hardware team stated, An increase in mergers and acquisitions is expected to continue in the coming years. Both existing vendors and new entrants prefer the acquisitive route to either enter the market or broaden their portfolio of offerings. Although activity softened during the first half of 2013, the reduced number of transactions was not surprising as it is reflective of general M&A activity. With the implementation of new capital gains tax rates in 2013, transaction timetables were accelerated, creating a spike in transactions in 2012 that were initially planned to close in However, analysts project M&A activity to pick up and remain strong through the rest of the year, foreshadowed by a high volume of transactions in May. With continued consolidation, biometrics is experiencing a transformationinitsproductapplicationfrom government to commercial, with blue chip names like Apple, Microsoft, Google and Facebook driving recent acquisitions and expected to propel further activity. 60 M&A Activity: Industry Source: Capital IQ, Capstone Partners LLC research YTD through 8/15/2013; Includes M&A transactions in North America and Europe Corporate buyers and private equity groups are seeking investments in proven biometric platforms as they continue to broaden their product capabilities. With an unprecedented growth rate expected for the industry, firms interested in IT security and government services will continue to be drawn to the industry. The fragmentation of the industry is expected to attract new entrants seeking to acquire platforms, scale upwards or enhance market share through acquisitions of several smaller firms. Capstone expects M&A activity in the biometrics space to resume its active pace as the industry gains greater public adoption and matures. The market is currently dominated by biometric fingerprinting technology, but as facial, iris, vein and other platforms move mainstream, more buyers will seek to enter the space and are expected to pay premium valuations for access to this growth opportunity. 1

3 MARKET GROWTH ATTRACTS BUYERS Segments of the biometrics industry are projected to grow at a 17.1% compound annual growth rate through Such high growth prospects are projected to drive strong M&A activity from both corporate buyers and private equity groups. The biometric market is projected to experience strong growth in the coming years, attracting both public and commercial attention to the up and coming industry. The global biometric reader market is projected to grow at a compound annual growth rate of 17.1% through Other studies show similar growth rates, with global revenues expected to reach $20 billion by Historically, the purchase of biometric readers via government contracts and expenditures a main driving factor in the industry s growth with applications in areas such as e passports, driving licenses, border management and national identification. As biometric technology continues to become more cost effective and mainstream, commercial applications in financial services and mobile security are gaining momentum. With its high growth prospects, both corporate buyers and private equity groups are seeking opportunities to expand within, or enter, the biometric market. Commercial applications are expected to drive industry growth. In fact, commercial sector revenues are projected to match public sector revenues by 2014 and eventually surpass the public sector to represent 55% of the global market by According to a report published by Heavy Reading, the exciting growth prospects in the biometrics industry stem from increased publicity surrounding hackers and security breaches. Notably, the mobile handset and financial services industries are turning to biometrics as the key solution for providing an additional layer of personalized security that is both effective and non interruptive to consumers. Increased standardization, coupled with the involvement of established IT practices, acts to further catalyze adoption by the commercial sector. Furthermore, cloud computing is revolutionizing the feasibility of biometrics by housing all IT infrastructure with a single hosting provider. Businesses are outsourcing hosting services, biometric template databases, network connectivity and processing software for verification, thereby reducing start up requirements to install hardware and establish an account with the provider. Thus, cloud computing minimizes startup procedures, provides an easily scalable platform to host biometric services and positions small and medium sized businesses to adopt biometrics at an affordable, fixed cost. Analysts project that both government contracts and consumer based applications will underpin the industry s expansion. Identified areas of particular growth include: Mobile Handset Security: As enterprises continue to adopt Bring Your Own Device (BYOD) programs, greater security needs for mobile devices are rising. could play a pivotal role as biometric authentication becomes better integrated and easier to optimize for mobile devices. National Border Management: New immigration reforms will require massive overhauls in border control, generating an estimated $1 to $4 billion in revenue as the U.S. government seeks to implement fingerprint and iris recognition software at border check spots. Biometric revenues related to global border control are projected to nearly triple by 2021, reaching $15.8 billion. Financial Services: Financial institutions are identifying voice and other biometric platforms as tools to revolutionize access to and security of client accounts and financial information. 2

4 BIOMETRICS OUTLOOK IN FACE OF U.S. GOVERNMENT SEQUESTRATION The U.S. government conservatively spends at least $450 million annually on biometric research alone. Analysts project the spend on biometrics to increase as homeland security spending rises from $190 billion in 2011 to an estimated $210 billion in In the wake of sequestration, the question at hand for the biometrics sector is how it will fare in the $1.2 trillion across the board spending cuts to government agencies. Despite undercutting the Department of Defense s budget needs, the answer is that the biometrics industry is expected to not only survive, but to prosper among the fiscally tight policies. Under the Department of Homeland Security, spending on biometrics is projected to grow alongside increased spending for homeland security in general. Research Group, Inc. conservatively estimates the U.S. government already spends at least $450 million annually on biometric research alone. Analysts project spending on biometrics to increase as homeland security spending rises from $190 billion in 2011 to an estimated $210 billion in Global homeland security is expected to grow at a 5.5% compound annual growth rate to a market value of $544 billion by With the push for increased homeland security spending both at home and abroad, analysts project biometrics security market growth rates as high as 35% through Despite defense markets slowing down, internal security markets, notably biometrics, are set to undergo rapidgrowthinthefaceofgovernmentsequestration. The National Commission on Terrorist Attacks Upon the United States highlighted biometric platforms as a vital tool providing the next generation of enhanced security applications to protect U.S. borders. In fact, biometric technology is at the forefront of the U.S. government pushing new technology to protect and secure borders. In 2012, biometric spending received the equivalent of a promotion within Homeland Security by US VISIT (United States Visitor and Immigrant Status Indicator Technology), becoming a separate Office of Biometric Identity Management (OBIM) rather than a subdivision of the technologically challenged Bureau of Customs and Border Protection. Additionally, OBIM s budget remains unaffected and intact to continue developing and implementing biometrics in border control to eliminate passport and visa fraud. The prospects of new immigration reforms passing Congress will require massive overhauls in border control security for US VISIT. Currently, there strong international cooperation on implementing biometrics in travel, such as epassports and egate technology, enabling travelers to pass through immigration without human interaction. However, if the new immigration reforms pass, the government plans to implement fingerprint and iris scanning at border check spots. This could manifest itself as an operating biometric exit system to track immigrants and identify those who are overstaying their visas. Analysts project the implementation of the exit system and other biometric measures will generate $1 to $4 billion in additional revenue for the biometrics and U.S. border control security markets. 3

5 NOTABLE TRANSACTIONS Transactions in the biometrics industry are primarily focused around strategic synergies and acquisitions that expand the functionality of products through the integration of biometric technology. Recent notable transactions are as follows, with a more inclusive summary of recent deals on the following page. Homeland Security Corporation acquires Sense Technologies Inc. (May 2013) Homeland Security Corporation acquired Sense Technologies in May The terms of the deal were not disclosed. Sense Technologies manufactures biometric identification platforms for time and attendance, as well as homeland security markets. Homeland Security s acquisition of Sense Technologies expanded its product offering into law enforcement, time and attendance and access control through biometric and card based technologies. Apple Inc. acquires AuthenTec, Inc. (October 2012) Apple acquired AuthenTec in October 2012 for a purchase price of $378 million. AuthenTec provides mobile and network security solutions for enterprise, government and consumer markets worldwide. With AuthenTec s fingerprint sensors already used by Apple, the acquisition represents Apple s push towards improved mobile security through biometrics platforms such as fingerprint reading and personal typing patterns. Many analysts see this move as potentially shaping the entire mobile device market in coming years, with particular opportunity for other handset and tablet makers to pursue similar transactions. Microsoft Corporation acquires PhoneFactor, Inc. (October 2012) Microsoft acquired PhoneFactor in October 2012 for an undisclosed purchase price. PhoneFactor provides multi factor authentication (MFA) solutions, adding additional layers of security through phone calls, SMS text methods and biometric voiceprint. Microsoft s acquisition strengthens security significantly on cloud based applications like Office 365. As cloud computing evolves and the demand for secure identification and authentication grows alongside it, biometric security as a service is expected to grow through similar transactions. Google, Inc. acquires Viewdle, Inc. (October 2012) Google acquired Viewdle in October 2012 for a purchase price of $45 million. Viewdle provides computer vision technology for face detection and facial recognition, enabling mobile device users to automatically tag and share photos and videos to Facebook and other social networks. This acquisition follows similar recent transactions of face recognition technology, such as Facebook s acquisition of Face.com and Google s acquisition of Pittsburgh Pattern Recognition. Novetta Solutions, LLC acquires International Biometric Group (September 2012) Novetta Solutions acquired International Biometric Group (IBG) in September 2012 for an undisclosed purchase price. IBG provides biometric consulting services and handles the verification of biometric projects for government and private sector clients. Novetta commented that this acquisition expands its technical solution breadth to emerging fields in identity intelligence, biometrics and virtual identity management. 4

6 SELECTED BIOMETRICS TRANSACTIONS Enterprise Value EV / LTM Date Target Buyer Target Line of Business ($mm) Revenue EBITDA Aug 13 prisma GmbH Prisma Global Limited Offers image recognition, augmented reality and business intelligence services. Jul 13 Clear Government Solutions (Security Div.) White Hat Corporation* Sense Technologies Inc. Feedback Data Brand New Technologies Proprietary Limited TWD ESS Services, LLC Offers recognition security solutions and services. Private Investor Avalon Gemalto Mar 13 Tweddle Connect Angle.com Incorporated Homeland Security Corporation Belgravium Technologies PLC Bytes Technology Group South Africa Ltd. Nuance Communications, Inc. Genesys Telecom. Laboratories, Inc. Dec 12 Dds Inc* Cybertouch Tech Co., Ltd. Oct 12 AuthenTec, Inc. Apple Inc. Oct 12 PhoneFactor, Inc. Microsoft Corporation Oct 12 Viewdle, Inc. Google, Inc. Sep 12 Sep 12 Aug 12 Jul 12 Jul 12 Jul 12 International Biometric Group Qualtec Systems LLC Hamilton Safe Company Vision Database Systems, Inc. Cross Match Technologies, Inc. Mitotyping Technologies LLC Novetta Solutions, LLC Medical Technology Solutions, LLC Gunnebo AB CardSmith LLC Francisco Partners Management LLC Fairfax Identity Laboratories, LLC Security based solutions including signature based identity authentication systems. Biometric identification products for homeland security including desktop fingerprint readers. Access control and time & attendance products including fingerprint and hand scanners. Physical and logical identity management services and software. Homeland security solutions for identify authentication and management. Connects Web apps to automotive computer systems, to which Nuance will add speech recognition. Voice biometrics in customer experience management solutions. Multi factor authentication platforms involving biometric authentications including fingerprint scanning. Mobile & network security solutions, fingerprint sensors & readers, and identity management software. Multi factor authentication solutions, including biometric voiceprint. Vision technology for face detection recognition for mobile gaming, social media and social networking. Biometric consulting services and solutions, including biometric identity intelligence systems. Healthcare IT solutions, including biometric, physical and electric security protection. Physical security products including biometric locking systems for banks. Integrated software solutions for identification, tracking and biometric authentication. Biometric identity management systems; fingerprint, palm, hand, facial and iris scanning and recognition. Forensic analysis services, including DNA analysis and identification by hair fragments. $ x 26.1x $ x $7.0 $80.0 $ x $ x 16.3x $ x $45.0 $ x Jul 12 IDesia Ltd. Intel Corporation Heartbeat identification technology to detect users on PC's and mobile devices. Jun 12 Face.com Facebook, Inc. Facial recognition software for photo sharing. $60.0 Mar 12 China Information Technology, Inc.* Undisclosed Feb 12 JailTracker InterAct911 Corporation Feb 12 Nexbis Limited Agathis Capital L.P. Jan 12 AMI Education Solutions Ltd. Jonas Computing Limited Intelligent recognition systems, storing biometric information from passengers in a database. Prisoner management software including detainee biometric identification. National security solutions including e passports and biometrics software products. $ x 3.7x $ x Integrated card and biometric solutions for education. $1.0 *Acquisition of Minority Stake LTM = last twelve months; EV = enterprise value Sources: Capstone Partners LLC research; Capital IQ; public filings and press releases Mean $ x 15.4x Median $ x 16.3x Harmonic Mean $ x 8.1x 5

7 CAPSTONE PARTNERS: REPRESENTATIVE TRANSACTIONS Capstone Partners has completed several M&A transactions in which we served as the primary financial advisor to technology companies with a particular focus on the government market. controlling interest has been L-1 Investment Partners, LLC Notably, Capstone professionals successfully advised Integrated Biometric Technology on its acquisition by L 1 Investment Partners. Integrated Biometric Technology provides electronic fingerprint products and services for use in the applicant fingerprint, time and control, and secure access markets. L 1 Investment Partners is now part of MorphoTrust USA. Capstone s experience provides us with insight into the valuable attributes and likely valuation of a target company, the active buyers in the industry and the nuances of transactions in this space. Command System, Inc. initial public offering $82,500,000 FINANCIAL ADVISOR H.P. White Laboratory, Inc. 6

8 THE BIOMETRICS TEAM Ted Polk, (312) Ted is and Head of the Central Region at Capstone, based out of Chicago. Prior to Capstone, Ted ran the corporate finance practice in the Central region for Morgan Stanley Smith Barney s Capital Strategies Group and its predecessor, Citi Capital Strategies. He has over 20 years of experience, having completed strategic sale and recapitalization transactions across a variety of industries. Ted is a frequent public speaker on the topic of business exits and recapitalizations of privately owned businesses. In 2008, Ted was recognized by The M&A Advisor for the Cross Border Middle Market Deal of the Year. In 2009, another of his transactions was recognized as the Middle Market M&A Financing Deal of the Year and in 2011 he was recognized for lead managing the Middle Market Deal of the Year. Previously, Mr. Polk worked at Valuemetrics, Inc. and in the Corporate Banking Group at The Bank of New York. Ted received his BSBA degree from Georgetown University and MBA from the University of Chicago. He is a Chartered Financial Analyst (CFA), a Series 7 and 63 Registered Securities Representative, and a Series 24 Registered Securities Principal. Lisa Tolliver, Director ltolliver@capstonellc.com (312) Lisa has 15 years of experience in the investment banking industry, primarily focused on advising private business owners in liquidity related transactions. Presently, Lisa is a Director in Capstone s Chicago office, supporting the management of the Central Region. Prior to Capstone, Ms. Tolliver worked in the Capital Strategies Group at Morgan Stanley Smith Barney, where she was involved in the evaluation, marketing and closing of numerous transactions across a wide range of industries. Specifically, Lisa has developed expertise within various industries including government and defense, software and technology, manufacturing, and outsourced business services. Lisa received her BA on academic scholarship from Illinois State University and is a Series 7 and 63 Registered Securities Representative. Daniel Schultz, Vice President dschultz@capstonellc.com (617) Dan oversees Capstone s national business development and industry coverage activities, working closely with current and prospective clients of the firm on matters related to corporate sales, recapitalizations, mergers & acquisitions and growth financings. In his role, Dan is able to deliver specific market intelligence to clients regarding M&A, financing, strategic, industry and competitive trends. Prior to spearheading the firm s business development and market initiatives, he was a Vice President in Capstone s M&A group, managing numerous successful transactions across a variety of industries. Dan also gained hands on transaction experience as an investment banker at Headwaters MB. He started his career with Ernst & Young s National Professional AABS practice in New York and later worked in Assurance and Advisory Business Services in the Denver office. Dan received a BE in Biomedical Engineering with a Business Minor from Vanderbilt University. He earned an MBA and a Master of Accountancy from the Daniels College of Business at the University of Denver. 7

9 ABOUT CAPSTONE PARTNERS Capstone Partners LLC is a leading international investment banking firm dedicated to serving the corporate finance needs of middle market business owners, investors and creditors. The firm provides merger & acquisition, private placement, corporate restructuring, valuation and financial advisory services. Capstone maintains various industry specialties including one in the Government & Defense sector. The firm also possesses merchant banking capabilities to actively co invest in transactions. Additional information about Capstone Partners can be found at LEADERSHIP TEAM NATIONAL John Ferrara Founder, President (617) jferrara@capstonellc.com CHICAGO Ted Polk (312) tpolk@capstonellc.com LOS ANGELES David Bench (949) dbench@capstonellc.com SAN DIEGO & SILICON VALLEY David Michaels (858) dmichaels@capstonellc.com BOSTON Jacob Voorhees Director and Principal (617) jvoorhees@capstonellc.com LONDON John Snead jsnead@capstonellc.com PHILADELPHIA Eric Williams (215) ewilliams@capstonellc.com CORPORATE RESTRUCTURING Brian Davies (617) bdavies@capstonellc.com World Class Wall Street Expertise. Built for the Middle Market Capstone Partners LLC. All rights reserved.