UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

**FORM 10-K**

| (Mark One) | ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF                                                                                                                                                                                   |   |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|            | X                                                                                                                                                                                                                                             |   | THE SECURITIES EXCHANGE  ACT OF 1934 |   |
|       | For the fiscal year ended  May 31, 2005                                                                                                                                                                                                  |   |
|       | OR                                                                                                                                                                                                                                            |   |
|            |                                                                                                                                                                                                                                          |   | TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF |   |
|       | THE SECURITIES EXCHANGE  ACT OF 1934                                                                                                                                                                                                          |   |
|       | For the transition period  from                 to                  |   |

 

Commission file number **0-14820**

**IMMUCOR, INC.**

(Exact name of registrant asspecified in its charter)

| **Georgia**                                                     | **22-2408354**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) | (I.R.S. Employer  Identification No.) |
| **3130 GATEWAY DRIVE,****P.O. BOX 5625Norcross, Georgia**  | **30091-5625******(Zip Code)          |
| (Address of principal  executive offices)                       |                                  |

 

Registrant’s telephone number,including area code, is**(770) 441-2051**

Securities registered pursuant to Section 12(b) ofthe Act:

**NONE**

Securities registered pursuant to Section 12(g) ofthe Act:

**COMMONSTOCK, $.10 PAR VALUE**

(Title of Class)

**COMMONSTOCK PURCHASE RIGHTS**

(Title of Class)

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

YES     X                 NO           

 

Indicate by acheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-K or any amendment to this Form 10-K.     X    

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

YES     X                 NO           

As of September 30,2005, the aggregate market value of the common stock held by non-affiliates ofthe registrant was $1,235,447,035, based upon the closing price on the NasdaqNational Market on that date. For the purpose of calculating this amount, allofficers and directors have been treated as affiliates.

As of September 30,2005, there were 45,581,791 shares of common stock outstanding.

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2           IMMUCOR, INC. ANNUAL REPORT 2005                       

 

**PART I**

**Item 1.**— Business.

Founded in 1982, Immucor, Inc.,a Georgia corporation (“Immucor” or the “Company”), develops, manufactures andsells a complete line of reagents and automated systems used primarily byhospitals, clinical laboratories and blood banks in a number of tests performedto detect and identify certain properties of the cell and serum components ofhuman blood prior to blood transfusion. The Company continues to placeincreasing emphasis on the development and sale of instruments and instrumentsystems that use the Company’s proprietary reagents, while promoting increasedsales of its traditional reagent product line.

**Backgroundand Developments during Fiscal Year 2005**

*New Pricing Strategies*.   OnDecember 9, 2004, the Company announced the cancellation of its contractswith two of its purchasing groups — Novation and Premier — effective January 10,2005 and January 26, 2005 respectively. In conjunction with thesecancellations, a new tier standardized pricing structure was launched and was applicableto all customers who were not members of group purchasing organizations(including former Novation and Premier customers). An additional fourpurchasing group contracts have been converted to the standardized pricingstructure as of August 1, 2005. The remaining two purchasing groupcontracts will expire in fiscal 2007 – one on July 31, 2006 and one on December 31,2006 – and are expected to also be converted to the standardized pricingstructure. Also in the third quarter of fiscal 2005, the Company converted fromselling Capture products in kits to selling them as individual components. As aresult of implementation of these combined strategies, the Company achieved asizable increase in year-over-year revenues for fiscal 2005, and expects to achievefurther revenue gains due to the year-over-year impact of the cancellation ofgroup purchasing contracts and their subsequent conversion to standardizedpricing, as well as the year-over-year impact of selling Capture products asindividual components.

*GalileoFurther Market Penetration.  *On June 21, 2005, theCompany announced that it had entered a long-term agreement with Canadian BloodServices for the purchase of five Galileo instruments along with relatedreagents. Canadian Blood Services manages the blood supply in all provinces andterritories in Canada outside of Quebec. Demand for the Company’s Galileo highvolume instrument continued to be robust in the European market and continuedto build, as well, in the U.S. and Japanese markets. As of May 31, 2005, 250 Galileoshad been placed worldwide: 191 in Europe, 57 in North America, and 2in Japan.

*Third Generation InstrumentDesign Progression*.   At the AmericanAssociation for Clinical Chemistry convention held in July 2005, theCompany presented a prototype of its new third generation instrument, theGalileo EchoTM. Development of this instrument has further progressed duringfiscal 2005. In accordance with the terms of the manufacturing agreement, theCompany issued a purchase order for 100 units upon acceptance of theengineering model in late fiscal 2005. The Company plans to launch theinstrument in Europe in the summer of 2006. The Galileo EchoTM is expected to besignificantly smaller and faster than the ABS2000, and have substantially allof the features of the Company’s larger Galileo product, apart from lowerthroughput. The Company believes the new instrument will appeal to the small-to medium-sized hospital market, the largest segment of its customers (whichnumber approximately 5,000 to 6,000 worldwide), to which the Company’s ABS2000instrument is currently marketed. The cost of development totaled $0.8 millionand $1.6 million in fiscal 2004 and fiscal 2005, respectively, and is expectedto total approximately $2.0 million in fiscal 2006.

*JapaneseJoint Venture Formation.  *On April 22, 2005, theCompany announced that it had entered into discussions with Kainos Laboratories, Inc.,the distributor of Immucor products in Japan, about the possibility ofstructuring Kainos’ blood banking business as a joint venture between Immucorand Kainos. The agreement to form the joint venture was announced by theCompany on June 20, 2005. The transaction was fully consummated on July 5,2005, with Immucor and Kainos owning 51% and 49%, respectively, ofImmucor-Kainos, Inc. — the newly-formed joint venture company that is nowImmucor’s distributor in Japan. Immucor paid Kainos approximately $4.2 millionfor its initial 51% interest in the joint venture company, and will buy theremaining 49% interest at a later date for approximately the same price. Kainoshas agreed to provide certain services to the joint venture company. TheCompany believes the formation of this joint venture is a key step towardsfurther penetrating the Japanese transfusion diagnostics market, the thirdlargest such market in the world after Europe and the United States.

*Outside Director Addition*.   OnApril 25, 2005, the Company announced that Hiroshi (Hiro) Hoketsu hadagreed to join Immucor’s Board of Directors effective immediately. Mr. Hoketsuhas extensive health care experience, having been in the industry since 1967. Hismost recent position was President of Ortho-Clinical Diagnostics, K.K. inJapan; a responsibility he held from 1981 until his retirement in 2002.Mr. Hoketsu was instrumental in taking Ortho-Clinical Diagnostics directin the blood banking market in Japan in 1985 and in growing their market shareto a leadership position.

*Stock Splits*.   Immucorimplemented two three-for-two stock splits in fiscal 2005, increasing thenumber of shares of common stock by 25,128,319 shares during the year. Thestock splits were the sixth and seventh for the Company since its initialpublic offering in December 1985. All share and per share amountsdisclosed in this document have been retroactively adjusted to reflect theimpact of the above stock splits.

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                                                                                                                                                                                                                RESULTS         3

 

*Sale of Long-term Investment*.   OnNovember   16, 2004, the Company announced that it had sold its investmentin Lionheart Technologies, Inc. (“Lionheart”), a long-term investmentwhich was being accounted for using the cost method and had a carrying value of$770,000 on the date of sale. In exchange, the Company received $1.3 million incash from the purchaser, Bio-Tek Instruments, Inc., a wholly ownedsubsidiary of Lionheart. As a result, the Company recorded a gain of $530,000.

*ShareRepurchase*.   The Company instituted a stockrepurchase program in June of 1998 for up to 4,050,000 shares, of which3,624,750 shares had been purchased prior to the end of the 2004 fiscal year,leaving 425,250 shares available for repurchase. On June 1, 2004, the Boardof Directors authorized the Company to repurchase up to an additional 450,000shares of its common stock. On August 2, 2004, the Board of Directorsauthorized the Company to repurchase up to an additional 750,000 shares of itscommon stock. During the year ended May 31, 2005, the Company repurchased622,500 shares at an average per share price of $12.87, bringing the aggregatenumber of shares to 4,247,250 repurchased to date since implementation of the1998 repurchase program. An aggregate of 1,002,750 shares remain available forrepurchase under the program.

**Industry**

Immucor is part of the immunohematology industry, whichgenerally seeks to prevent or cure certain diseases or conditions through thetransfusion of blood and blood components. In the U.S., the FDA regulates humanblood as a drug and as a biological product, and it regulates the transfusionof blood as the administration of a drug and of a biological product. The FDAregulates all phases of the immunohematology industry, including donor selectionand the collection, classification, storage, handling and transfusion of bloodand blood components. The FDA requires all facilities that manufacture productsused for any of those purposes, and the products themselves, to be registeredor licensed by the FDA. See “Regulation.”

The principal components of blood are plasma (the fluidportion) and red cells. Blood also contains antibodies and antigens. Antibodiesare proteins that are naturally produced by the human body in response to theintroduction of foreign substances (antigens). Antigens are substances thatstimulate the production of antibodies. Red blood cells, which transport oxygenfrom the lungs to other parts of the body and return carbon dioxide to thelungs, are categorized by four blood groups (A, B, AB and O) and two bloodtypes (Rh positive and Rh negative), based on the presence or absence ofcertain antigens on the surface of the cells. It is crucial that the healthcare provider correctly identify the antibodies and antigens present in patientand donor blood. For example, if a donor’s red blood cells contain antigensthat could react with the corresponding antibody in the patient’s plasma, thetransfusion of the red blood cells may result in the potentiallylife-threatening destruction of the transfused red blood cells.

Because of the critical importance of matching patientand donor blood, procedures for testing compatibility are generally performedby highly educated technologists in hospitals, blood banks and laboratories. Atpresent, with few exceptions, these tests are performed manually usingprocedures which the Company believes can be significantly improved using itsinstrumentation and solid phase system to automate the testing procedures. See “Instrumentsand Instrument Systems.”

The Company believes that theworldwide market for traditional blood bank reagents is approximately $500 to$600 million, and that this market is relatively mature given currenttechnology. The industry is labor-intensive and the Company estimates worldwideindustry labor costs approach approximately $1 billion. Therefore, theintroduction of labor saving products will provide additional growth in themarket. The Company believes that its blood bank automation and solid phasetesting systems improve test results and reduce the time necessary to performcertain test procedures, thereby offering a cost-effective alternative for itscustomers. The Company anticipates that automation will increase the availablemarket for traditional and automated reagents to approximately $1 billion whiledecreasing the overall cost of blood testing by reducing the labor component byapproximately $500 million.

**Strategy**

Immucor is focused on increasing worldwide market sharein the next one to three years with a focus on the United States, WesternEurope and Japan. The Company’s strategy is to further strengthen itscompetitive position in the blood bank testing market by restructuring themarket through automation of the transfusion laboratory and to firmly establishImmucor as the world leader in blood bank automation. In order to implementthis strategy, the Company intends to:

*Maximize Instrument Placements.  *TheCompany’s strategy is to strengthen its leadership position in the automationof blood bank testing by continuing to expand its base of installedinstruments. To facilitate instrument placements, the Company offers customersa selection of automated analyzers, which address the various needs of low,medium, and high-volume testing facilities. The Company utilizes a “razor/razorblade”business model. The Company’s instruments are designed to operate with theCompany’s proprietary reagents. Therefore, once a customer procures aninstrument from the Company, the customer is likely to continue to purchaseproprietary reagents from the Company for use with the instrument on agoing-forward basis. In order to satisfy the broad spectrum of customers’operational and financial criteria, the Company intends to continue to offerseveral instrument procurement options, including third-party financing leases,direct sales and reagent rentals and to expand the range and price points ofits instrument offerings.

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4           IMMUCOR, INC. ANNUAL REPORT 2005                       

 

*Align Prices with Costs andPromote Customer Loyalty.  *In the past, reagentmanufacturers were faced with increased costs of manufacturing while, duringthe same period, market prices for blood bank products decreased. Recently, theCompany has taken steps to increase its prices to align them with its costs. Infiscal 2005, the Company began implementation of its new pricing strategy toultimately convert all major group purchasing contracts to standardized tierpricing. In the third quarter of fiscal 2005, the Company also converted fromselling Capture products in kits to selling them as individual components forthe purpose of increasing overall pricing. The Company has also recentlyimplemented a Customer Loyalty Program, which is intended to promote highervolumes of sales, while partially shielding the Company’s more loyal customersfrom the effects of price increases. The Company expects these pricingadjustments will continue to have significant favorable impact on the Company’sfinancial performance while adding only slightly to the cost of a patient transfusion.

*Maximize Revenue Stream PerInstrument Placement.  *Each instrument placed typicallyprovides the Company with a recurring revenue stream through the sale ofreagents and supplies. Immucor’s family of blood bank testing systems operatesexclusively with the Company’s proprietary reagent lines and Capture technology.Because these reagents have been developed for automated technology, theycommand a premium price over traditional products. The average annual revenueper instrument placement is $20,000 to $100,000, depending on facility testingvolume. The Company also continues to develop new reagent applications andupgrade system software and hardware in order to expand instrument test menus,thereby increasing reagent usage per placement.

*DevelopNew and Enhanced Products.  *Immucor continually seeks toimprove existing reagent products and develop new reagent products to enhanceits market share and improve gross margins. The Company has successfullyintroduced and commercialized the ABS2000, the ROSYS Plato, the DIAS PLUS andthe second-generation Galileo automated analyzers, all of which operateexclusively with Immucor’s proprietary solid phase Capture assays.

**Proprietary Technology Platform**

Under traditional agglutination blood testingtechniques, the technologist mixes serum with red blood cells in a test tube,performs several additional procedures, and then examines the mixture todetermine whether there has been an agglutination reaction. A positive reactionwill occur if the cells are drawn together in clumps by the presence ofcorresponding antibodies and antigens. However, when the mixture remains in afluid state, it is sometimes difficult for the technologist to determinewhether a positive reaction has occurred, as very weak reactions are sometimesdifficult for the technologist to determine.

Due to the critical importance of matching patient anddonor blood, testing procedures, using agglutination techniques, are usuallyperformed manually by highly educated technologists. Depending on the manualtest method used (as well as the technical proficiency of the person performingthe test), the process can take from 30 minutes to one hour, and if the testresults are ambiguous the entire process may need to be repeated. Thus, asignificant amount of expensive labor is involved in manual agglutinationtesting. Based on industry sources, the Company believes that labor costs arethe largest component of the total cost of operating a hospital blood bank. TheCompany believes that its solid phase blood testing system improves testresults and reduces the time necessary to perform certain blood testingprocedures related to the transfusion of blood and blood components.

*Solid Phase Technology.  *Inthe Company’s proprietary solid phase blood test system, one of the reactants(either an antigen or an antibody) is applied or bound to a solid support, suchas a well in a microtitration plate. During testing, the bound reactantcaptures other reactants in a fluid state and binds those fluid reactants tothe solid phase (the bound reactant). The binding of the fluid reactants intothe solid phase occurs rapidly and results in clearly defined test reactionsthat are often easier to interpret than the subjective results sometimesobtained from existing agglutination technology. Based on results obtained withCapture-P, Capture-R, Capture-CMV, Capture-S and the Company’s ongoingresearch, the Company believes that solid phase test results, in batch testmode, can generally be obtained in substantially less time than by existingtechniques.

Immucor has obtained FDA clearancefor sale of five test systems using its solid phase technology: a PlateletAntibody Detection System, Capture-P; a Red Cell Antibody Detection System,Capture-R, Capture-R Select, used for antibody screening, identification,phenotyping, crossmatching and in the weak D test, and two Infectious DiseaseTests, Capture-CMV and Capture-S. In these test systems (all with the exceptionof Capture-R Select), antigens are applied and bound to the surface of a smallwell in a plastic microtitration plate, and patient or donor serum or plasma isplaced in the well. After the addition of special proprietary indicator cellsmanufactured by Immucor, positive reactions indicating the presence of bloodgroup antibodies adhere to the well as a thin layer and negative reactions donot adhere but settle to the bottom as a small cell button.

**Reagents**

Most of Immucor’s current reagent products are used intests performed prior to blood transfusions to determine the blood group andtype of patient and donor blood, in the detection and identification of bloodgroup antibodies, in platelet antibody detection and in prenatal care. The FDArequires the accurate testing of blood and blood components prior totransfusions using only FDA licensed reagents such as those manufactured andsold by the Company.

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                                                                                                                                                                                                                RESULTS         5

 

The following table sets forth the products sold by orexclusively for the Company, most of which are manufactured by or exclusivelyfor the Company.
| *Product Group*                                  | *** *** | ***Principal Use***                                                                                                                                                                                       |
|--------------------------------------------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ABO  Blood Grouping                              |         | Detect and identify ABO antigens on red blood cells in order to  classify a specimen’s blood group as either A, B, AB or O.                                                                          |
| Rh  Blood Typing                                 |         | Detect Rh antigens in order to classify a specimen as either Rh  positive or Rh negative, and to detect other Rh-hr antigens.                                                                             |
| Anti-human  Globulin Serums (Coombs Serums) |         | Used with other products for routine crossmatching, and antibody  detection and identification; allows a reaction to occur by bridging between  antibodies that by themselves could not cause a reaction. |
| Reagent  Red Blood Cells                         |         | Detect and identify antibodies in patient or donor blood, confirm ABO  blood grouping results and validate the performance of anti-human serum in  the test system.                                       |
| Rare  Serums                                     |         | Detect the presence or absence of rare red cell antigens.                                                                                                                                                 |
| Antibody  Potentiators                           |         | Increase the sensitivity of antigen-antibody tests.                                                                                                                                                       |
| Quality  Control Systems                         |         | Daily evaluation of the reactivity of routine blood testing reagents.                                                                                                                                     |
| Monoclonal  (Hybridoma) Antibody-based Reagents  |         | Detect and identify ABO and other antigens on red blood cells.                                                                                                                                            |
| Technical  Proficiency Systems                   |         | Reagent tests used to determine technical proficiency and provide  continuing education for technical staff.                                                                                              |
| Fetal  Bleed Screen Kit                          |         | Used to detect excessive fetal-maternal hemorrhage in Rh-negative  women.                                                                                                                                 |
| Capture-P                                        |         | Used for the detection of platelet antibodies.                                                                                                                                                            |
| Capture-R                                        |         | Used to detect and identify unexpected blood group antibodies.                                                                                                                                            |
| Capture-CMV                                      |         | Used for the detection of antibodies to cytomegalovirus.                                                                                                                                                  |
| Capture-S                                        |         | Used for the detection of antilipid antibodies for syphilis screening.                                                                                                                                    |
| Capture-R  Select                                |         | Used for antibody screening, identification, phenotyping,  crossmatching and in the weak D test.                                                                                                     |

 

**Instruments and Instrument Systems**

The Company believes that the blood banking industrytoday is labor-intensive, and that a market exists for further automation ofblood compatibility tests currently being performed manually by hospital anddonor center blood bank technologists. Based on the results of independentworkflow studies, the Company believes that its instruments and instrumentsystems significantly reduce the amount of blood bank technologist timerequired to perform routine blood compatibility tests.

*ABS2000*: *Fully Automated Blood Bank System.**  *This automated, “walk-away” blood bank analyzer usesImmucor’s proprietary Capture reagent product technology to perform blood bankpatient testing and is manufactured exclusively for Immucor by Bio-TekInstruments, Inc., a wholly-owned subsidiary of Lionheart Technologies, Inc.

*ROSYS Plato: Microplate LiquidHandler and Sample Processor.  *The system providesmedium sized donor centers, clinical reference laboratories and large hospitaltransfusion laboratories with automated liquid and sample handling for processingof microtitration plates and also uses Immucor’s proprietary solid phaseCapture assays.

*GALILEO: High Volume MicroplateProcessor.  *The system provides hospitals, clinicalreference laboratories and blood donor centers a fully automated solution toperform all the routine blood bank tests including blood grouping, antibodyscreening, crossmatch and antibody identification. A high throughputinstrument, Galileo can process up to 224 different samples at once. TheGalileo uses Immucor’s proprietary Capture reagent product technology and ismanufactured exclusively for Immucor by Stratec.

*Multireader Plus: MicroplateReader.  *This semi-automatedspectra photometric microtitration plate reader reads and interprets testresults of Immucor’s proprietary Capture products. Together with the ROSYSPlato*,*the Multireader Plus completes asemi-automated blood bank system ideally suited for blood donor centers, largehospital transfusion laboratories and large reference laboratories.

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6           IMMUCOR, INC. ANNUAL REPORT 2005                       

 

*LaboratoryEquipment*.   Immucor also distributes laboratoryequipment designed to automate certain blood testing procedures and used inconjunction with the Company’s Capture product.

**Collagen**

In March 2003, Immucor, Incsigned a development agreement for the production of human collagen mesh withInamed Corporation (Nasdaq: IMDC), a global healthcare company and the marketleader in the popular dermal filler market. Under terms of the agreement, GammaBiologicals, Inc. (“Gamma”), a wholly owned subsidiary of Immucor,optimized the manufacturing process for the production of a human collagen rawmaterial for Inamed. Production of collagen began in fiscal 2004 with the firstshipment in May 2004. Gamma also produces NouriCel®, a by-product of humancollagen.

**Products Under Development**

Immucor continually seeks to improve its existingproducts and to develop new ones in order to enhance its market share. Prior totheir sale, any new products will require licensing or pre-market approval bythe FDA. The Company employs several persons in the U.S. whose specific dutiesare improving existing products and developing new products for the Company’sexisting and potential customers. The Company also has establishedrelationships with other individuals and institutions that provide similarservices and the Company expects that it will continue to form and maintainsuch relationships. The Company intends to continue focusing its productdevelopment efforts primarily in the areas of blood bank automation and solidphase technology and in several other areas that may also be useful inconnection with the development of these products. For the fiscal years ended May 31,2005, 2004 and 2003, the Company spent approximately $4.5 million, $3.7 millionand $2.1 million, respectively, for research and development. The Company mayin the future acquire related technologies and product lines, or the companiesthat own them, to improve the Company’s ability to meet the needs of itscustomers.

*Blood Bank Automation*.   TheCompany has identified the need for a fast, lightweight, fully automatedinstrument, and on January 19, 2004, entered into an instrument purchaseagreement with Bio-Tek Instruments, Inc. for the development of such aninstrument. This third generation assay instrument, Galileo EchoTM, is targetedto serve the small- to medium-sized hospital market, the largest segment of theCompany’s customers, numbering approximately 5,000 to 6,000 worldwide, to whichthe Company’s ABS2000 instrument is currently marketed. The Galileo EchoTM isexpected to be significantly smaller and faster than the ABS2000, and havesubstantially all of the features of the Company’s larger Galileo product,apart from lower throughput. The cost of development totaled $0.8 million and $1.6 millionin fiscal 2004 and fiscal 2005, respectively, and is expected to totalapproximately $2.0 million in fiscal 2006. The Company accepted themanufacturer’s engineering model in fiscal 2005, whereupon the Company wasdeemed to issue a purchase order for 100 units. In accordance with the November 2004amendment to the instrument purchase agreement, once the last of these unitshave been received the Company will be deemed to issue a purchase order for anadditional 100 units. There is no minimum purchase requirement to maintainexclusivity. The Company expects to launch the instrument in Europe in thesummer of 2006.

*Additional Solid PhaseApplications*.   The Company plans tocontinue to develop and refine its patented solid phase technology. The Companyhas developed a new Capture product, Capture-R Select. This new product is ascreening test for the detection of weak D antigens on donor red cellsthat has been available to Galileo customers in Europe, and became available tothe U.S. market when the Galileo was approved by the FDA. Capture-R Selectuses an anti-human RBC specific monoclonal to immobilize unwashed humanred blood cells. It has been developed for use on the Galileo for antibodyscreening, antibody identification, phenotyping, crossmatching and in the weakD test. The anti-human RBC specific monoclonal is grown at the Company’sHouston facility.

*Monoclonal Antibodies*.   Monoclonalantibodies are derived by fusing an antibody-producing cell with a tumor cell,resulting in a hybridoma cell that manufactures the original antibody. TheCompany is actively engaged in the development of additional monoclonalantibodies for a variety of uses, including the detection of blood group andinfectious disease antigens and for use in its solid phase test systems. Monoclonalantibodies are highly specific, a trait which allows them to detect andidentify antigens with greater efficiency than other reagents. Product qualityand consistency is maintained from production lot to production lot. TheCompany continues to pursue the development of such antibodies principallythrough its Gamma and Dominion subsidiaries.

*KiwiIngenuity Limited Technology Licensing Agreement.  *In July 2005,the Company signed a comprehensive technology licensing agreement with Kiwi IngenuityLimited (“Kiwi”) to use Kiwi’s KODETM technology platform to create a qualitycontrol system for blood group typing. Kiwi Ingenuity Limited, in associationwith the Auckland University of Technology Biotechnology Research Institute,has developed a range of KODETM technology platforms which allow for theattachment of molecules to the outside of cells, thereby resulting in a qualitycontrol system for blood grouping. The Company expects to be able to offer itscustomers heightened assurance as to the accuracy of test results byincorporating Kiwi’s technology into the Company’s products.

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**Marketing and Distribution**

Immucor’s potential U.S. customers are approximately6,000 blood banks, hospitals and clinical laboratories. The Company maintainsan active client base of over 5,500 customers worldwide, and no single customerpurchases in excess of 2% of the Company’s current annual sales volume. TheCompany believes there is a slight amount of seasonality to its sales activityas fewer donations and elective surgical procedures are performed in its firstquarter (June-August) and third quarter (December-February). There is nomaterial backlog of reagent revenues. At May 31, 2005, the Company had abacklog of installed but unrecorded instrument sales of approximately $5.4 million.Additionally, as of May 31, 2005, the Company had received unrecordedinstrument purchase orders from customers totaling $1.1 million.

The Company believes that it and Ortho ClinicalDiagnostics are the only two companies offering a complete line of bloodbanking reagents in the U.S. The Company believes it is now the market leaderin North America and seeks to continue to increase its worldwide market sharethrough the use of its experienced direct sales force and through the expansionof its product line to offer customers a full range of products for theirreagent needs. The Company believes it can increase its market share bymarketing products based on its blood bank automation strategy and solid phasetechnology.

The Company markets and sells its products to itscustomers directly through 124 sales, marketing and support personnel employedby the Company in the U.S., Canada, Germany, Portugal, Italy, Spain, andBelgium. In addition, the Company utilizes 12 sales agents in Italy. TheCompany has hired personnel whom the Company considers to be highly experiencedand respected for their knowledge of the blood bank diagnostic business and/orindividuals with previous success in laboratory instrument reagent sales. Inoperating as a systems-oriented organization, the Company conducts extensivecapital sales training of its sales force and specialized capital salesrepresentatives. Immucor also sponsors workshops in the U.S., Europe, LatinAmerica and Asia to which customers are invited to hear the latest developmentsin the field.

The Company also markets itsproducts internationally through distributors located throughout the world. Forthe fiscal years ended May 31, 2005, 2004 and 2003, the Company hadforeign net sales, including net domestic export sales to unaffiliatedcustomers, of approximately $53.4 million, $44.9 million and $38.4 million,respectively. These sales accounted for approximately 36.9%, 39.9% and 38.9% ofthe Company’s total net sales for the respective fiscal years. During the yearsended May 31, 2005, 2004 and 2003, the Company’s U.S. operations made netexport sales to unaffiliated customers of approximately $6.9 million, $4.9million and $4.8 million, respectively. Most of the Company’s foreign salesoccurred in Europe and Canada where the Company maintains subsidiaries. TheCompany’s German operations made net export sales to unaffiliated customers ofapproximately $5.5 million, $4.9 million and $3.1 million for the yearsended May 31, 2005, 2004, and 2003, respectively. The Company’s Canadianoperations made net export sales to unaffiliated customers of approximately$1.9 million, $2.2 million and $2.2 million for the years ended May 31,2005, 2004 and 2003, respectively.The Company’s Italian operations made salesin Italy of $12.6 million, $9.6 million, and $7.6 million for the years ended May 31,2005, 2004, and 2003, respectively. Please refer to Note 14 to the consolidatedfinancial statements for revenue and profit information for each of our lastthree fiscal years attributable to the different geographic areas in which theCompany does business. Revenue is allocated by geographic area based on thesubsidiary from which the sale originates. Fluctuations in foreign exchangerates, principally with the U.S. dollar versus the Euro, could impact operatingresults when translations of the Company’s subsidiaries’ financial statementsare made in accordance with current accounting guidelines. For the year ended May 31,2005, foreign net sales increased****$2.5 milliondue to the exchange fluctuation of the Euro. Since the end of the fiscal year,the Euro has remained relatively constant against the dollar for the fourmonths ended September 30, 2005 and exchange fluctuations had littleaffect on foreign net sales.

**Suppliers**

The Company obtains raw materials from numerous outsidesuppliers. The Company is not dependent on any single supplier, except forcertain manufacturers of instrumentation, including Bio-Tek Instruments, Inc.for the ABS2000 and the Galileo EchoTM (our third-generation automated assayinstrument currently in development), Stratec Biomedical AG for the Galileo,(see Note 11 to the consolidated financial statements) and Celliance, Ltd.(formerly Serologicals, Inc.), the joint manufacturer of some of theCompany’s monoclonal antibody-based products (see Note 8 to the consolidatedfinancial statements). The Company believes that its business relationship withits suppliers is excellent. Management believes that if the supply ofinstrumentation were interrupted, alternate suppliers could be found, but thecommencement of supply could take one to two years.

Certain of the Company’s productsare derived from blood having particular or rare combinations of antibodies orantigens, which are found in a limited number of individuals. The Company todate has not experienced any major difficulty in obtaining sufficientquantities of such blood for use in manufacturing its products, but there canbe no assurance that a sufficient supply of such blood will always be availableto the Company.

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8           IMMUCOR, INC. ANNUAL REPORT 2005                       

 

**Regulation**

The manufacture and sale of blood banking products is ahighly regulated business and is subject to continuing compliance with multipleU.S., Canadian, European and other country-specific statutes, regulations andstandards that generally include licensing, product testing, facilitiescompliance, product labeling, post-market vigilance and consumer disclosure. See“Industry”.

An FDA facility license is issued for an indefiniteperiod of time, subject to the FDA’s right to revoke the license. As part ofits overview responsibility, the FDA makes plant and facility inspections on anunannounced basis. Further, a sample of each production lot of many of theCompany’s products must be submitted to and approved by the FDA prior to itssale or distribution. The Company operates under U.S. Government EstablishmentLicense No. 886 granted by the FDA in December 1982 to Immucor, Inc.for the Norcross facility and U.S. Government Establishment License No. 435,granted by the National Institutes of Health in 1971 to Gamma Biologicals, Inc.for the Houston facility.

In March 2005, the FDA inspected the Immucor, Inc.facility in Norcross, Georgia and reported two minor observations. The Companyresponded to the observations in May 2005. In February 2005, the FDAinspected the Gamma Biologicals, Inc. facility in Houston, Texas andreported eight minor observations. The Company responded to these observationson May 2, 2005. The FDA routinely verifies company commitments during the nextinspections.

In addition, each product manufactured by the Companyis subject to formal product submissions and review processes by the FDA andother regulatory bodies, such as Health Canada, a European recognized NotifiedBody and the Japanese Ministry of Health prior to authorization to market. Significantchanges to the Company’s products or facilities can require additionalsubmission and review prior to implementation.

For example, the Company holds several FDA productlicenses to manufacture blood-grouping reagents, anti-human globulin reagentsand reagent red blood cells. The Company must prepare biological productlicense applications or 510(k) pre-market notifications to the FDA toobtain product licenses or market clearance for a new product or instrument. Toaccomplish this, the Company must submit detailed product information to theFDA, perform a clinical trial of the product, and demonstrate to thesatisfaction of the FDA that the product meets certain efficacy and safetystandards. There can be no assurance that any future product licenses orinstrument clearances will be obtained by the Company.

In 2003, all Immucor manufacturing facilities worldwidewere issued certification or certification renewal to the ISO 13485: 1996standard for its quality management systems. This is an internationallyrecognized standard and certification is required in order to continue productdistribution in key markets such as Europe and Canada. Efforts are ongoing ateach site for successful transition and certification to the next revision ofthe standard, ISO 13485:2003. In addition, to continue marketing its productsto the European Union, the Company is required to maintain certification underthe EC Full Quality Assurance System Assessment in accordance with therequirements of Annex IV of the IVD Medical Devices Directive 98/79/EC. Thiscertification authorizes the use of the CE mark on Company products that allowsproducts free access to all countries within the European Union. The Companysuccessfully completed certifications for CE marking all products manufacturedfor the European market.

In addition to the U.S., Europe and Canada, there aremultiple countries worldwide that also impose regulatory barriers to marketentry. The Company continues to maintain product registrations and approvalsnecessary to maintain access to foreign markets.

In North America, the Company hashired and retained several employees who are highly experienced in FDA andother regulatory authority compliance, and the Company believes that itsmanufacturing and on-going quality control procedures conform to the requiredstatutes, regulations and standards.

**Patents, Trademarks and Royalties**

Since 1986, the U.S. Patent Office has issued toImmucor six patents pertaining to its solid phase technology.

Immucor’s solid phase technology, including patentrights, was acquired from five researchers at the Community Blood Center ofGreater Kansas City (“Blood Center”) pursuant to an agreement entered into on March 11,1983, and amended in 1985 and 1987. In 1987, one of the researchers joined theCompany as Director of Research and Development to continue to develop newproducts using the solid phase technology. The agreement terminates on August 26,2006; the date on which the last patent issued on the technology expires. TheCompany has agreed to pay the Blood Center royalties equal to 4% of the netsales from products utilizing the solid phase technology. For the fiscal yearsended May 31, 2005, 2004 and 2003 the Company paid royalties of approximately$523,000, $451,000, and $463,000 under this agreement. See Note 10 to theconsolidated financial statements.

The Company has registered the trademark “Immucor” andseveral product names, such as “ABS2000”, “ImmuAdd”, “Capture”, “Capture-P”, “MCP”,“Capture-R”, “Ready-Screen”, “Ready-ID”, “Capture-CMV” and “Galileo”. DominionBiologicals, Limited has registered the trademark “NOVACLONE”. GammaBiologicals, Inc. has registered the trademark “Gamma.”

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                                                                                                                                                                                                                RESULTS         9

 

Through the acquisition of the BCAblood bank division of Biopool International, Inc. (now known as TrinityBiotech Manufacturing Ltd.), the Company acquired several registered trademarksbut produces only one of the products with the registered trademark “RESt”. TheCompany continues to distribute four products manufactured by Trinity BiotechManufacturing Ltd.

**Competition**

Competition is based on quality of product, price, andtalent of sales forces, ability to furnish a range of existing and newproducts, customer services and continuity of product supply. In the pastseveral years, the industry experienced aggressive price competition,particularly among manufacturers that targeted large hospitals and institutionsas key customers. In spite of this competitive environment, the Company hasmaintained its worldwide sales and increased its domestic reagent market share.Management believes that this is due to the Company’s emphasis on productquality, the introduction of new products, specialty products, customer serviceand training. The Company believes that Ortho-Clinical Diagnostics, a Johnson &Johnson company, is its sole competitor with licenses to manufacture a completeline of blood banking reagents in the United States. The Company believes thatit became the North American market leader in terms of sales during fiscal 1999and remains the North American market leader.

The Galileo instrument was introduced to the majorEuropean countries starting in June 2002. Throughput for the routinebattery of tests is 70 per hour. This is very important to the European market,since in most cases the laboratories are open for one shift only and thetesting is condensed into an eight-hour period versus a 24-hour period inthe United States. The Company believes that none of the instruments marketedby its competitors can approach the speed of the Galileo. The Company believesthat the instrument speed gives Galileo the advantage in the U.S. market aswell. The Company received FDA clearance to market the Galileo in the UnitedStates in April 2004.

In June 2003, Ortho-Clinical Diagnostics announcedthat its Micro Typing Systems subsidiary received FDA clearance to beginmarketing the Ortho ProVueTM. Throughput for ABO/Rh and antibody screening isbelieved to be eight to ten tests per hour and is to be used in conjunctionwith the proprietary ID-Micro TypingTM Gel TestTM for both ABO/Rh type andantibody screen. The Company believes that the only Immucor instrument withwhich the ProVueTM competes directly is the ABS2000. Immucor management believesthe ABS2000’s use of traditional reagents for ABO and Rh type combined with itsproprietary technologies for antibody screen offers the customer significantprice savings over the ID-Micro TypingTM Gel TestTM required for the ProVueTM.

Olympus America Inc. has developed an automatedanalyzer for the blood donor market. The instrument, known as the PK7200, hasbeen on the market for a number of years. The instrument performs only ABO/Rhtesting and does not perform antibody screening. The Olympus instrument userscurrently must dilute ABO and Rh reagents for the machine’s use. Gamma hasdeveloped diluted ready-for-use reagents for Olympus and has received clearancefrom the FDA for the last of these reagents in late fiscal 2003. Olympus hasbegun the conversion of their customers to the diluted ready-for-use reagents. Managementdoes not believe the Olympus diluted reagents or the Olympus PK7200 instrumentwill have an adverse effect on the Company’s revenue or instrument strategy inNorth America.

On July 28, 2005, Olympus America Inc. received approvalto market the Tango, a fully automated instrument to perform ABO/Rh andantibody screening. The Tango was developed by Biotest AG and will bedistributed by Olympus in the U.S. market. The Company believes the Tango hasbeen sold in Europe and other markets by Biotest AG for over eight years,during which time approximately 100 units have been placed. The Company doesnot believe the Tango or its successor, the Tango Optima, will be available inthe U.S. until the fourth quarter of calendar year 2005 at the earliest.

Biotest AG, a German pharmaceutical and diagnosticcompany, presently has FDA licenses for six reagent products, as well as thespecial reagents utilized by the Tango. The Company believes it will takebetween 18 to 24 months for Biotest to have a complete line of traditionalreagents. Since the****product lineis incomplete, there is no evidence that Biotest will be in a position, in thenear term, to market a complete viable commercial product line.

Diamed, a Swiss company, markets in Europe the WalkAway Diana instrument that is manufactured by Grifols, a Spanish company. Thissystem utilizes Diamed’s proprietary gel cards and is the same instrument thatis marketed as the ProVueTM by Ortho-Clinical Diagnostics in the United States.

Both Biotest and Diamed have been established longerthan the Company and may have greater financial and other resources than theCompany. Additionally, Diamed has a larger global market share than the Company.However, the Company believes that it is well positioned to compete favorablyin the blood bank business principally because of the completeness of itsproduct line, quality and price of its products, the sale of innovativeproducts such as blood bank automation, the Company’s Capture products (seeReagents, and Instruments and Instrument Systems), continuing research effortsin the area of blood bank automation (see Products Under Development), theexperience and expertise of its sales personnel (see Marketing andDistribution) and the expertise of its technical and customer support staff.

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10           IMMUCOR, INC. ANNUAL REPORT 2005                       

 

Ortho-Clinical Diagnostics alsocompetes in the European instrument market with the AutoVue instrument. Throughputfor ABO/Rh and antibody screening is approximately 25 tests per hour. Thesystem utilizes Ortho gel cards. Immucor management believes the ABS2000’s useof traditional reagents for ABO and Rh type combined with its proprietarytechnologies for antibody screen offers the customer significant price savingsover the use of gel cards.

**Employees**

At May 31, 2005, the Company and its subsidiarieshad a total of 526 employees. The Company had 355 full-time employees in theU.S., of whom 44 were in sales and marketing, 264 were in manufacturing,research and distribution, and 47 were in administration. In Germany, Portugal,Italy, Spain, Canada, and Belgium, the Company had 171 full-time employees, ofwhom 80 were in sales and marketing, 64 were in manufacturing, research anddistribution, and 27 were in administration.

The Company has experienced a lowturnover rate among its technical and sales staff. There are no Companyemployees that are represented by a union. The Company considers its employeerelations to be good.

**Available Information**

Immucor files reports, proxystatements and other information under the Securities Exchange Act of 1934, asamended (the “1934 Act”) with the Securities and Exchange Commission (the “Commission”).The public may read and copy any Company filings at the Commission’s PublicReference Room at 100 F Street, N.E., Washington, D.C. 20549. Informationon the operation of the Public Reference Room may be obtained by callingthe Commission at 1-800-SEC-0330. Because the Company makesfilings to the Commission electronically, information may also be accessed atthe Commission’s Internet site (http://www.sec.gov). This site containsreports, proxies and information statements and other information regardingissuers that file electronically with the Commission. Electronic versions ofthe Company’s annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and any amendments to these reportsfiled or furnished with the SEC may also be accessed through the Companywebsite at www.immucor.com under “About Us/Investor Information/SECFilings”. All such reports are available through the Company’s website free ofcharge.

**Item 2.** — Properties.

The Company leases approximately 158,000 square feet inNorcross, Georgia, a suburb of Atlanta, as its executive offices, laboratoriesand manufacturing facilities. Rent charges for the fiscal year ended May 31,2005 were approximately $870,000. The term of the lease is for an eleven-yearperiod ending June 2016 with a right to renew for an additional five years.The Company owns a 41,000 square foot building on a three-acre tract of land innorthwest Houston, which is used primarily for manufacturing.

In Germany, the Company leases2,300 square meters near Frankfurt. Rent expense for the fiscal year ended May 31,2005 totaled approximately $258,000. The term of the lease in Germany isthrough April 2009. InItaly, rent expense for the fiscal year ended May 31, 2005 totaledapproximately $127,000 for 850 square meters. The Company has five separatelease agreements for the facility in Italy with terms expiring between April 2006and November 2007. In Portugal, the Company leases 110 square meters ofoffice space and rent expense for the fiscal year ended May 31, 2005 wasapproximately $23,000. In Spain, the Company leases 314 square meters of officespace and rent expense for the fiscal year ended May 31, 2005 wasapproximately $59,000. In Belgium, the Company owns land and an 880 squaremeter building subject to a first lien mortgage. In Canada, the Company owns a15,000 square foot building on approximately one acre of land. The Companybelieves all of its facilities and lease terms are adequate and suitable forthe Company’s current and anticipated business for the foreseeable future.

**Item 3.** — Legal Proceedings.

As previously reported by the Company in a November 2004press release and in subsequently-filed SEC periodic reports, our Italiansubsidiary and Dr. Gioacchino De Chirico, the former President of theItalian subsidiary, became the subjects of a criminal investigation in Milan,Italy. The investigation centers on payments by several companies to an Italianphysician allegedly in exchange for favorable contract awards by his hospital.This development prompted us to initiate an internal investigation, which wasconducted by the Audit Committee of the Board of Directors. The internalinvestigation determined that the physician rendered services as the organizerand chairman of a convention sponsored by the Italian subsidiary in October 2003;the Company paid the physician 13,500 Euro in April 2004 for thoseservices; and the payment was not improper. However, the invoice for thoseservices did not properly identify the doctor or the nature of his services, inviolation of the books and records provisions of the Foreign Corrupt PracticesAct. In November 2004 we voluntarily reported this violation to the SEC. Theinternal investigation also addressed six payments to another physician in1998, 1999 and 2000 totaling approximately $47,000. Based on the investigationit appears those payments may have been related not only to the performance ofcertain services but also to the introduction of an instrument system into thatphysician’s hospital and perhaps other hospitals.

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                                                                                                                                                                                                                RESULTS         11

 

We have made three voluntary submissions to the SEC,some of our officers and one of our directors have voluntarily testified, andwe continue to cooperate with the SEC. The SEC has issued a formalinvestigative order in the matter, but has yet to express to us any conclusionsabout the ultimate outcome of its investigation. We have also had discussionswith the Italian prosecutor concerning his investigation, but he has notexpressed to us any conclusions about the ultimate outcome of the investigation.The Italian investigation is continuing and has been expanded to several othercompanies not related to Immucor, which may delay the closure of this matter inItaly. No determination can yet be made as to whether, in connection with thesecircumstances, we will become subject to any fines, penalties and/or othercharges imposed by any governmental authority, or any other damages or coststhat may arise in connection with these circumstances.

The internal investigation also addressed theunderpayment of value added tax (VAT) by our Italian subsidiary. All due butunpaid VAT has now been paid, with required interest, although the Italian taxauthorities may impose a penalty for underpayment of VAT. See Note 8 toour consolidated financial statements.

We are aware of seven class-action lawsuits having beenfiled in the United States District Court for the Northern District of Georgiaagainst the Company and certain of our current and former directors andofficers with respect to alleged violations of the securities laws. All of theactions essentially duplicate one another, pleading essentially the sameallegations. The complaints filed in the lawsuits allege violations of Sections10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, specifically alleging, among other things, that wemisrepresented that our financial statements and disclosures during portions ofthe 2005 calendar year fairly and accurately reflected our results ofoperations, which allegedly resulted in the purchase of our common stock atartificially inflated market prices. The lawsuits seek compensatory and otherdamages, and costs and expenses associated with the litigation. We believe thateach of the lawsuits is without merit, and intend to defend each of these lawsuitsvigorously. While we do not currently expect these matters to materially affectour financial condition or results of operations, there can be no assurance ofany particular outcome.

Other than as set forth above, weare not currently subject to any material legal proceedings, nor, to ourknowledge, is any material legal proceeding threatened against us. However,from time to time we may become a party to certain legal proceedings in theordinary course of business.

**Item 4.** — Submission of Matters to aVote of Security Holders.

Not applicable.

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12         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

**PART II**

**Item 5. — Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities.**

Immucor’scommon stock trades on The NASDAQ National Market System of The NASDAQ StockMarket under the symbol: BLUDE. Prior to September 6, 2005, Immucor’sstock traded under the symbol: BLUD. The following table sets forth thequarterly high and low prices of the common stock for the fiscal periodsindicated as reported by NASDAQ. These prices represent inter-dealer quotationswithout retail markups, markdowns or commissions and may not represent actualtransactions.

| ** **                                                        | ** ** | ***High*** | *** *** | ***Low*** | ** ** |
|-------------------------------------------------------------------|------------|------------|--------------|-----------|------------|
| **Period from June 1 through****September 30,****2005** |       | $          | 36.00        |      | $          | 22.66 |   |
| Fiscal Year Ended  May 31, 2005                              |       |       |         |      |       |
| First Quarter                                                     |       | $          | 14.82        |      | $          | 11.71 |   |
| Second Quarter                                                    |       | 21.48      |         | 13.63     |       |
| Third Quarter                                                     |       | 31.74      |         | 21.17     |       |
| Fourth Quarter                                                    |       | 34.98      |         | 26.16     |       |
| Fiscal Year Ended  May 31, 2004                              |       |       |         |      |       |
| First Quarter                                                     |       | $          | 7.57         |      | $          | 5.64 |   |
| Second Quarter                                                    |       | 10.33      |         | 7.11      |       |
| Third Quarter                                                     |       | 10.78      |         | 7.25      |       |
| Fourth Quarter                                                    |       | 13.97      |         | 7.00      |       |

 

As of September 30, 2005, there were 266****holders of record of the Company’s common stock. The lastreported sales price of the common stock on such date was $27.44.

Immucor has not declared any cash dividends withrespect to its common stock. The Company presently intends to continue toretain all earnings in connection with its business. The Company’s agreementwith its principal lender contains certain financial and other covenants that,among other things, limit annual capital expenditures, limit payment of cashdividends and the repurchase of stock, limit the incurrence of additional debt,and require the maintenance of certain financial ratios. See Note 3 to theconsolidated financial statements.

Immucor distributed a three-for-two stock split, affectedin the form of a 50% stock dividend on November 14, 2003 to theshareholders of record on October 24, 2003, which resulted in the issuanceof 6,542,601 shares of common stock, net of 2,048 fractional shares for whichcash dividends were paid. On June 1, 2004, the Board of Directors approveda three-for-two stock split, affected in the form of a 50% stock dividend, toshareholders of record as of the close of business on June 30, 2004. Thestock split was distributed on July 16, 2004 and increased the number ofshares outstanding by 10,066,940, net of 326 fractional shares for which cashdividends were paid. On November 15, 2004 the Board of Directors approveda three-for-two stock split, affected in the form of a 50% stock dividend, toshareholders of record as of the close of business on November 22, 2004. Thestock split was distributed on December 13, 2004 and increased the numberof shares outstanding by 15,061,379 net of 82.5 fractional shares for whichcash dividends were paid. All share and per share amounts disclosed in thisdocument have been retroactively adjusted to reflect the stock splits describedabove.

The stock splits were the fifth,sixth and seventh for the Company since its initial public offering in December 1985.Previously, the Company implemented a three-for-two split in 2002, athree-for-two split in 1991, a five-for-four split in 1990, and a five-for-foursplit in 1987. All share and per share amounts disclosed in this document havebeen retroactively adjusted to reflect the impact of the above stock splits.

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                                                RESULTS         13

 

**EquityCompensation Plan Information**

The followingtable provides information as of May 31, 2005 with respect to the sharesof our common stock that may be issued under our existing equity compensationplans:

| **Plan category**                                         | ** ** | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | ** ** | **Number of securities  remaining available for  future issuance** | ** ** |
|----------------------------------------------------------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------|---------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders *      |       |       |                                                                                                                                                 | 2,549,280  |       |                                                                                                             |       |       | $                                                                                           | 7.30       |   |   |   |   | 886,844 |   |   |
| Equity compensation plans not approved by security  holders ** |       |       |                                                                                                                                                 | 1,624,990  |       |                                                                                                             |       |       | $                                                                                           | 1.67       |   |   |   |   | 214,590 |   |   |
| Total                                                          |       |       |                                                                                                                                                 | 4,174,270  |       |                                                                                                             |       |       | $                                                                                           | 5.11       |   |   |   |   | 1,101,434 |   |   |

 

*              Includesthe Company’s 1998 Stock Option Plan and 2003 Stock Option Plan. For adescription of the material features of these plans, see Note 6 to theconsolidated financial statements.

**         Includesthe Company’s 1990 Stock Option Plan and 1995 Stock Option Plan. For adescription of the material features of these plans, see Note 6 to theconsolidated financial statements.

**Stock Repurchase Program**

The Company instituted a stockrepurchase program in June 1998 for up to 4,050,000 shares, of which3,624,750 shares had been purchased prior to the end of the 2004 fiscal year,leaving 425,250 shares available for repurchase. On June 1, 2004, theBoard of Directors authorized the Company to repurchase up to an additional450,000 shares of its common stock. On August 2, 2004, the Board ofDirectors authorized the Company to repurchase up to an additional 750,000shares of its common stock. During the fiscal year ended May 31, 2005, theCompany repurchased 622,500 shares at an average per share price of $12.87,bringing the aggregate number of shares to 4,247,250 repurchased to date sinceimplementation of the 1998 repurchase program. There were no repurchases ofshares of the Company’s common stock during the fourth quarter of fiscal 2005. Theaggregate amount remaining available for repurchase under the program is1,002,750 shares as of May 31, 2005. The Company’s repurchase program doesnot have an expiration date.

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14         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

**Item 6.** — Consolidated Selected FinancialData.

(All amounts are in thousands,except per share amounts)

| ** **                                | ** ** | **For the Year Ended May 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2005 (1)**                                       | ** ** | **2004 (1)(2)** | ** ** | **2003 (1)(2)** | ** ** | **2002 (1)(2)** | ** ** | **2001 (1)(2)** | ** ** |
| **Statement of Income Data:**             |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                 |       | $                                                       | 144,786    |   |   | $ | 112,558 |   |   |   | $ | 98,648 |   |   |   | $ | 84,472 |   |   |   | $ | 69,795 |   |   |
| Cost of sales                             |       | 57,541                                                  |       |   | 50,488 |   |   |   | 42,939 |   |   |   | 37,608 |   |   |   | 38,218 |   |   |
| Gross profit                              |       | 87,245                                                  |       |   | 62,070 |   |   |   | 55,709 |   |   |   | 46,864 |   |   |   | 31,577 |   |   |
| Operating  expenses:                      |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                  |       | 4,463                                                   |       |   | 3,749 |   |   |   | 2,051 |   |   |   | 1,997 |   |   |   | 1,894 |   |   |
| Selling, general, and  administrative     |       | 45,530                                                  |       |   | 36,619 |   |   |   | 31,354 |   |   |   | 29,826 |   |   |   | 30,744 |   |   |
| Loss on impairment of  goodwill           |       | —                                                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 3,063 |   |   |
| Total operating expenses                  |       | 49,993                                                  |       |   | 40,368 |   |   |   | 33,405 |   |   |   | 31,823 |   |   |   | 35,701 |   |   |
| Income (loss) from  operations            |       | 37,252                                                  |       |   | 21,702 |   |   |   | 22,304 |   |   |   | 15,041 |   |   |   | (4,124 | ) |   |
| Other:                                    |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                           |       | 624                                                     |       |   | 41 |   |   |   | 127 |   |   |   | 41 |   |   |   | 58 |   |   |
| Interest expense                          |       | (662                                                    | )          |   | (881 | ) |   |   | (2,406 | ) |   |   | (4,454 | ) |   |   | (3,747 | ) |   |
| Other (expense) income -  net             |       | 767                                                     |       |   | (598 | ) |   |   | 158 |   |   |   | 1,356 |   |   |   | 229 |   |   |
| Total other                               |       | 729                                                     |       |   | (1,438 | ) |   |   | (2,121 | ) |   |   | (3,057 | ) |   |   | (3,460 | ) |   |
| Income  (loss) before income taxes        |       | 37,981                                                  |       |   | 20,264 |   |   |   | 20,183 |   |   |   | 11,984 |   |   |   | (7,584 | ) |   |
| Income taxes                              |       | 14,071                                                  |       |   | 7,726 |   |   |   | 5,813 |   |   |   | 3,189 |   |   |   | 465 |   |   |
| Net income (loss)                         |       | $                                                       | 23,910     |   |   | $ | 12,538 |   |   |   | $ | 14,370 |   |   |   | $ | 8,795 |   |   |   | $ | (8,049 | ) |   |
| Income  (loss) per share:                 |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Per common share                          |       | $                                                       | 0.53       |   |   | $ | 0.28 |   |   |   | $ | 0.34 |   |   |   | $ | 0.24 |   |   |   | $ | (0.22 | ) |   |
| Per common share – assuming dilution |       | $                                                       | 0.50       |   |   | $ | 0.27 |   |   |   | $ | 0.32 |   |   |   | $ | 0.23 |   |   |   | $ | (0.22 | ) |   |
| Weighted  average shares outstanding:     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common shares                             |       | 45,132                                                  |       |   | 44,258 |   |   |   | 42,305 |   |   |   | 36,987 |   |   |   | 36,885 |   |   |
| Common shares – assuming  dilution   |       | 47,567                                                  |       |   | 46,994 |   |   |   | 45,473 |   |   |   | 38,655 |   |   |   | 36,885 |   |   |

 

| ** **                                   | ** ** | **May 31,** | ** ** |
|----------------------------------------------|------------|------------------|------------|
| ** **                                   | ** ** | **2005**         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Balance Sheet Data:**                      | ** ** | ** **       | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Working capital                              |       | $                | 70,946     |   |   | $ | 48,261 | ** ** |   |   | $ | 40,872 | ** ** |   |   | $ | 27,070 | ** ** |   |   | $ | 19,536 | ** ** |   |
| Total assets                                 |       | 157,613          |       |   | 124,417 | ** ** |   |   | 116,886 | ** ** |   |   | 101,367 | ** ** |   |   | 95,813 | ** ** |   |
| Long-term obligations,  less current portion |       | 2,991            |       |   | 7,216 | ** ** |   |   | 18,231 | ** ** |   |   | 31,581 | ** ** |   |   | 39,951 | ** ** |   |
| Retained earnings                            |       | 79,857           |       |   | 55,956 | ** ** |   |   | 43,426 | ** ** |   |   | 29,057 | ** ** |   |   | 20,262 | ** ** |   |
| Shareholders’ equity                    |       | 117,432          |       |   | 92,953 | ** ** |   |   | 73,695 | ** ** |   |   | 43,953 | ** ** |   |   | 29,843 | ** ** |   |
|                                              |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(1) All share and per share amounts have beenretroactively adjusted to reflect the December 2004, July 2004, November 2003and September 2002 three-for-two stock splits.

(2) Certain prior year salary expenses have beenreclassified to conform to the current year presentation; thesereclassifications impact Cost of sales and Selling, general and administrativeexpenses for all prior years shown above.

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                                                RESULTS         15

 

**Item 7.** — Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

*Certain statements that Immucor may make from time totime, including all statements contained in this report that are not statementsof historical fact, constitute “forward-looking statements” under the federalsecurities laws. Forward-looking statements may be identified by words such as “plans,”“expects,” “believes,” “anticipates,” “estimates,” “projects,” “will,” “should”and other words of similar meaning used in conjunction with, among otherthings, discussions of future operations, financial performance, productdevelopment and new product launches, FDA and other regulatory applications andapprovals, market position and expenditures. Factors that could cause actualresults to differ materially from those expressed in any forward-lookingstatement made by, or on behalf of, Immucor include the following, some ofwhich are described in greater detail below: the decision of customers to defercapital spending, increased competition in the sale of instruments andreagents, product development or regulatory obstacles, the ability to hire andretain key managers, changes in interest rates, changes in demand for theCompany’s human collagen product and general economic conditions. In addition,the strengthening of the dollar versus the Euro would adversely impact reportedEuropean results. Investors are cautioned not to place undue reliance on anyforward-looking statements. Immucor cautions that historical results should notbe relied upon as indications of future performance. Immucor assumes noobligation to update any forward-looking statements.*

**Critical Accounting Policies**

*General*

We have identified the policiesbelow as critical to our business operations and the understanding of ourresults of operations. The impact and any associated risks related to thesepolicies on our business operations is discussed throughout Management’sDiscussion and Analysis of Financial Condition and Results of Operations wheresuch policies affect our reported and expected financial results. For adetailed discussion on the application of these and other accounting policies,see Note 1 to the consolidated financial statements in Item 8 of this AnnualReport on Form 10-K. Note that our preparation of this Annual Report on Form 10-Krequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of our financial statements, and the reported amounts of revenueand expenses during the reporting period. Actual results could differ fromthose estimates, and certain assumptions could prove to be incorrect. Seniormanagement has discussed the development and selection of critical accountingestimates and related Management’s Discussion and Analysis of FinancialCondition and Results of Operations disclosure with the Audit Committee of theCompany’s Board of Directors.

*Revenue Recognition*

The Company recognizesrevenue when the following four basic criteria have been met: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or servicesrendered; (3) the fee is fixed and determinable; and (4) collectibilityis reasonably assured. Should changes in conditions cause management todetermine these criteria are not met for certain future transactions, revenuerecognized for any reporting period could be adversely affected.

**·**   *Reagent sales*

Revenue from the sale of the Company’s reagents in theU.S. market is recognized upon shipment when both title and risk of losstransfer to the customer upon shipment. Revenue from the sale of the Company’sreagents in the export market is recognized FOB customs clearance when bothtitle and risk of loss transfer to the customer.

**·**   *Human collagen andcollagen by-product sales*

Revenue from the sale of the Company’s human collagen productand from the sale of by-products of collagen is recognized upon shipment andeither passage of a 10-day inspection period (or, for by-products of collagen,passage of a 30-day inspection period) or upon receipt of notification ofcustomer acceptance. In accordance with a revenue-sharing agreement between theCompany and the Company’s human collagen customer, revenue from the sale ofby-products is allocated 66.7% to the Company and 33.3% to the collagencustomer.

**·**   *Medical instrument sales*

Revenue from the sale of the Company’s medicalinstruments is generally recognized upon shipment and completion of contractualobligations relating to training and/or installation based on terms of therelated agreements. Revenue from rentals of the Company’s medical instrumentsis recognized over the life of the rental agreement. Instrument servicecontract revenue is recognized over the life of the contract.

The Company recognizes revenue on the sale of medicalinstruments in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21,*Accounting for Revenue Arrangements withMultiple Deliverables*, for agreements entered into beginning in thesecond quarter of fiscal year 2004. The Company’s medical instrument salescontracts involve multiple deliverables, including the sale or rental of aninstrument (including training), the subsequent servicing of the instrumentduring the first year, reagent products provided to the customer during thevalidation period and, in some cases, price guarantees for consumablespurchased during the 

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16         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

contract period and/or a software interface to beprovided to the customer. The Company has determined the fair value of certainof these elements, such as training, validation reagents, and first yearservice. The portion of the instrument sales price applicable to the instrumentitself is recognized upon shipment and completion of contractual obligationsrelating to training and/or installation based on the terms of the relatedagreement. If the agreement does not include any price guarantees, the salesprice in excess of the fair values of training, validation reagents, andservice is allocated to the instrument itself. The fair value of at least onecustomer training session is recognized as revenue when the instrument itselfis recognized, provided that the training has been provided. If multiplesessions are contractually provided for, and not all training has been completeat the time the instrument is recognized, additional training revenue isrecognized upon delivery. The fair value of reagent products provided to thecustomer during the validation period is also recognized when the instrumentitself is recognized. The fair value of first year service is deferred andrecognized over the first year of the contract. The Company believes it notpossible to determine the fair value of price guarantees. If the agreementcontains price guarantees, the entire sales price is deferred and recognizedover the guarantee period. The allocation of the total consideration receivedbased on the estimated fair value of the units of accounting requires judgmentby management.

In certain limited situations involving third-partyleasing arrangements, the Company enters into a repurchase agreement whereby ifthe ultimate customer terminates the lease, the Company agrees to repurchasethe instrument for an amount equal to the remaining unpaid lease payments owedto the third-party leasing company. In these limited situations, the Companycontinues to defer the revenue related to the sale and subsequently recognizesthe revenue over the lease term as the lease payments are made to thethird-party leasing company and it is clear that the ultimate customer has notterminated the related lease. In prior periods, the Company also deferred thecorresponding cost of these instrument sales and recognized the costs over thesame period as the related revenue. During the fiscal quarter ended February 28,2005, the Company determined that it was more appropriate to recognize theinstrument costs in these deferral situations when the instrument has beeninstalled and written acceptance has been received from the customer. Accordingly,during the fiscal quarter ended February 28, 2005, the Company recordedadditional cost of sales totaling approximately $327,000, which was related toprior quarters but which was not material to any single quarter. The Companynow records all instrument costs at the time the instrument is installed andaccepted by the customer and title has legally transferred to the customer.

**·**   *Sales subject to a plan offactoring*

Sales subject to a plan offactoring are recorded at their net realizable value (defined as gross salesless the annual estimated cost of factoring the sale). Should the factored saleremain uncollected by the factor at the end of one year, an estimate of theadditional factoring discount is made and recorded monthly as an additionalreduction of sales revenue.

**·**   *Shipping and handling charges*

The amounts charged customers forshipping and handling of orders are classified as revenue and reported asinvoiced in the statement of operations as net sales.

*Allowance for DoubtfulAccounts*

Immucor maintains an allowance fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. The Company’s current policy for its NorthAmerican affiliates, based on historical collection experience, is to providean allowance of 2% of domestic third-party gross receivables and an allowanceof 10% of international third-party gross receivables. The Company’s currentpolicy for all other affiliates, based on historical collection experience, isto provide an allowance of 4% of all third-party gross receivables. Inaddition, any third-party invoices over three years old are also provided forin the allowance. At May 31, 2005, the allowance is approximately 5.1% ofthe gross accounts receivable balance. The Company continually monitors thecollectibility of its customer accounts and when indications arise that anamount is not likely to be collected, the amount is charged to the allowancefor doubtful accounts. If the financial condition of any of Immucor’s customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances could be required.

*Inventory*

Inventories are stated at the lowerof first-in, first-out cost or market. Cost includes material, labor andmanufacturing overhead. The Company uses a standard cost system as a tool tomonitor production efficiency. The standard cost system applies estimated laborand manufacturing overhead factors to inventory based on budgeted productionand efficiency levels, staffing levels and costs of operation, based on theexperience and judgment of management. Actual costs and production levels mayvary from the standard established and are charged to the consolidatedstatement of income as a component of cost of sales. Since U.S. generallyaccepted accounting principles require that the standard cost approximateactual cost, periodic adjustments are necessary. The provision for obsoleteand/or excess inventory is reviewed on a quarterly basis. All finished goodreagent products which will expire in less than six months are reserved in theperiod in which this expiration threshold is met. Any raw, intermediate, orfinished product that has been quarantined because it has failed qualitycontrol (QC) is reserved in the period in which the product fails QC testing. Shouldthe product be successfully reworked 

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                                                RESULTS         17

 

and pass final quality controlchecks, it is then valued at its standard cost. Obsolete and quarantinedinventory is physically segregated from useable and saleable inventory anddestroyed according to regulatory and fiscal guidelines. No material changeshave been made to the inventory policy during fiscal 2005.

*Excess of Cost Over NetAssets Acquired and Other Long-lived Assets*

In assessing the recoverability ofthe Company’s excess of cost over net assets acquired and other long-livedassets, the Company must make assumptions regarding estimated future cash flowsand other factors to determine the fair value of the respective assets. Ifthese estimates or their related assumptions change in the future, the Companymay be required to record impairment charges not previously recorded for theseassets. On June 1, 2002, the Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 142, *Goodwill and OtherIntangible Assets*, and is required to analyze its goodwill andintangible assets for impairment on an annual basis or more frequently if impairmentindicators arise. On June 1, 2002, the Company also adopted SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-lived Assets*. This SFAS supersedes SFAS No. 121, *Accounting for the Impairment of Long-lived Assets and for Long-livedAssets to be Disposed of;*however it retains the fundamentalprovisions of that statement related to the recognition and measurement of theimpairment of long-lived assets to be “held and used.”

*Income Taxes*

Our income tax policy records theestimated future tax effects of temporary differences between the tax bases ofassets and liabilities and amounts reported in the accompanying consolidatedbalance sheets, as well as operating loss and tax credit carry-forwards. TheCompany follows very specific and detailed guidelines regarding therecoverability of any tax assets recorded on the balance sheet and provide anyallowances as required. The Company believes that the value of the Company’sdeferred tax assets assumes that the Company will be able to generate sufficientfuture taxable income in certain tax jurisdictions, based on estimates andassumptions. If these estimates and related assumptions change in the future,the Company may be required to record additional valuation allowances againstits deferred tax assets resulting in additional income tax expense in theCompany’s consolidated statements of income. In assessing the realizability ofdeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, carry-back opportunities, and tax-planning strategies in makingthis assessment. Management evaluates the realizability of the deferred taxassets and assesses the need for additional valuation allowances quarterly. Nomaterial changes have been made to the income tax policy during fiscal 2005. SeeNote 9 to the consolidated financial statements.

*Stock-based Employee Compensation*

The Company currently accounts for stock option grantsin accordance with APB Opinion No. 25, *Accounting for StockIssued to Employees*, and accordingly does not recognize compensationexpense for the stock option grants. The Company grants stock options for afixed number of shares to employees with an exercise price equal to the fairvalue of the shares at the date of the grant. Beginning in fiscal 2005, theCompany began awarding grants to eligible new hires with the respectiveexercise price equal to the closing price on the business day immediately priorto the grant date; therefore in these cases, the exercise price may be higheror lower than the fair value of the shares at the date of grant. Management hasdetermined that the aggregate difference between the grant date fair values andthe exercise prices for grants awarded to new hires is not material, andaccordingly has not included any such compensation cost related to these grantsin the Company’s results of operations.

In December 2002, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 148, *Accountingfor Stock-based Compensation –Transition and Disclosure –an amendment of FASB Statement No. 123.*This Statement providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. In addition,this Statement amends the disclosure requirements of Statement 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The Company adopted the interim disclosurerequirements in the period ended May 31, 2003. See Note 1 to theconsolidated financial statements.

In December 2004, the FASBissued Statement No. 123 (revised 2004), *Share-basedPayment*, which is a revision of FASB Statement No. 123,*Accounting for Stock-based Compensation*. Generally,the approach in Statement 123(R) is similar to the approach described inStatement 123. However, Statement 123(R) requires all share-based payments to employees, including grantsof employee stock options, to be recognized in the statement of income based ontheir fair values. Pro forma disclosure is no longer an alternative. The newstandard was to be effective for public entities (excluding small businessissuers) in the first interim or annual reporting period beginning after June 15,2005. However, as a result of complex implementation issues raised by numerousregistrants and their independent registered public accounting firms, theSecurities and Exchange Commission announced in April 2005 a phase-inimplementation process, requiring implementation in the first annual reportingperiod beginning after June 15, 2005. See Note 1 to the consolidatedfinancial statements for pro forma disclosure of this new standard’s effect onthe Company’s net income and earnings per share calculations for each of thethree 

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18         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

fiscal years ended in the periodended May 31, 2005. Actual results in future years may differ from the proforma results reflected in Note 1 due to an increase or decrease in grantsof employee stock options and/or changes in assumptions, such as the use ofestimated versus actual forfeitures or a change in expected life.

**Overview**

The Company’s overallstrategy in fiscal 2005 was to continue to improve gross margin (gross profitas a percentage of sales). In this effort, the Company was successful, as grossmargin increased to 60.3% for the year ended May 31, 2005 from 55.1% forthe year ended May 31, 2004. As further discussed below under “Results ofOperations,” the improvement in gross margin during the year ended May 31,2005, as compared to the prior year period, was due to several factors,including:

·         Reagentprice increases, attributable in part to the cancellation of supply agreementswith two group purchasing organizations in January 2005 in order toincrease member purchasing prices as well as reduce administrative feesassociated with these contracts,

·         IncreasedCapture revenues, driven by the placement of additional instruments whichrequire use of this technology,

·         Increasedhuman collagen revenues, due primarily to the fact that the first shipment ofthis product did not occur until May 2004, but also due in part to fiscal2005 sales of NouriCel® –a by-product of human collagen, and

·         Increasedmanufacturing efficiencies due in part to (1) the elimination of a numberof redundant products currently manufactured at the Company’s threemanufacturing facilities during the fourth quarter of fiscal 2004 and the firstquarter of fiscal 2005 and (2) the consolidation of the Company’s red cellproduct manufacturing, previously produced at both the Norcross and Houstonfacilities, to the Company’s Norcross facility, completed at the end of thefourth quarter of fiscal 2004.

The Company’s goal of improving gross margin in fiscal2005 was somewhat hindered by the application of Emerging Issues Task Force (“EITF”)Issue No. 00-21, *Accounting for RevenueArrangements with Multiple Deliverables*. The accounting treatmentmandated by this pronouncement resulted in a reduction of fiscal 2005 revenuesof $3.8 million, which will be recognized as additional revenue in futureperiods. This revenue reduction adversely impacted gross margin as the costsassociated with these deferred revenues were not deferred, as accountingguidance prohibits such cost deferral.

For fiscal 2006, the Companyis continuing to focus on improving gross margin through achieving continuedbenefits from strategies already implemented prior to May 31, 2005, aswell as through the implementation of new strategies. Listed below are the keyfactors which the Company expects to drive further gross margin improvement infiscal 2006:

**·***   Implementation of Customer Loyalty Program*

This new program has been built upon the standardizedtier pricing structure first implemented in fiscal 2005. As with the structureimplemented in fiscal 2005, there are three pricing tiers – eachrepresenting differing levels of customer loyalty, with the highest tierconsisting of the lowest prices for an automated instrument customer and thelowest tier consisting of the highest prices for the non-committed, occasionalcustomer. The new program, which was implemented in August 2005, isintended to promote higher sales volumes while partially shielding the Company’smore loyal customers from the effects of price increases.

**·***   Impact of Galileo increased marketpenetration*

The Company expects Capture revenues to continue toincrease in fiscal 2006 over fiscal 2005, due to the continued impact of fiscal2005 Galileo placements as well as expected new placements in fiscal 2006. Inaddition, service revenue is expected to continue to increase as the servicewarranty periods for prior year Galileo placements expire and additionalservice contracts are purchased by customers. As of May 31, 2005, theCompany has placed 191 Galileo instruments with European customers sinceintroducing the Galileo to the European market in the first quarter of fiscal2003. Additionally, 52, 5, and 2 Galileo instruments, respectively, have beenplaced as of May 31, 2005 in the U.S. market since FDA clearance wasreceived in April 2004, in the Canadian market since Health Canadaclearance was received in July 2004, and in the Japanese market sinceMinistry of Health clearance was received in July 2004.

**·***       **IncreasedJapanese market penetration*

On April 22, 2005, the Company announced that ithad entered into discussions with Kainos Laboratories, Inc., thedistributor of Immucor products in Japan, about the possibility of structuringKainos’ blood banking business as a joint venture between Immucor and Kainos.The agreement to form the joint venture was announced by the Company on June 20,2005. The transaction was fully consummated on July 5, 2005, with Immucorand Kainos owning 51% and 49%, respectively, of Immucor-Kainos, Inc.— thenewly-formed joint venture company that is now Immucor’s distributor in Japan. Immucorpaid Kainos approximately $4.2 million for its initial 51% interest in thejoint venture company, and will buy the remaining 49% interest at a later datefor approximately the same price. Kainos has agreed to provide certain servicesto the joint venture company. The Company believes the formation of this jointventure is a key step towards further penetrating the Japanese transfusiondiagnostics market, the third largest such market in the world after Europe andthe United States.

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**·***   Implementation of new Kiwi technology*

In July 2005, the Company signed a technologylicensing agreement with Kiwi Ingenuity Limited (“Kiwi”), a partner to AucklandUniversity of Technology Biotechnology Research Institute to use Kiwi’s KODETMtechnology platform to create a quality control system for blood group typing.This technology allows for the attachment of molecules on to the outside ofcells, thereby resulting in a quality control system for blood grouping. TheCompany expects to begin using this new technology in manufacturing productsbeginning in late fiscal 2006, and expects that offering its customersheightened assurance as to the accuracy of test results will provide theCompany with a competitive advantage, thereby increasing overall revenues. TheCompany expects to spend approximately $15,000 in research and developmentcosts regarding this agreement in fiscal 2006.

**·***   Increased manufacturing efficiencies*

The Company expects to continue the process ofeliminating redundant products currently manufactured at the Company’s threemanufacturing facilities.

Additionally, the Company expects to continueincreasing manufacturing efficiencies going into fiscal 2007 throughimplementation of a Manufacturing Execution System (“MES”), a new salesforecasting system, and a new marketing database, the combination of which isexpected to drive more accurate forecasting of product demand and resultingmaterial and labor requirements. The new marketing database was implemented in June 2005.The new sales forecasting system is expected to be implemented in January 2006.MES is expected to be implemented in the first quarter of fiscal 2007.

In addition to the abovestrategies, the Company expects to further improve its competitive position goinginto fiscal 2007 through the launch of its third generation automated assayinstrument, which is expected to be released in the European market in thesummer of 2006. At the American Association for Clinical Chemistry conventionheld in July 2005, the Company presented a prototype of its new thirdgeneration instrument, the Galileo EchoTM. Development of this instrument hasfurther progressed during fiscal 2005 with the Company accepting themanufacturer’s engineering model in late fiscal 2005. The Galileo EchoTM isexpected to be significantly smaller and faster than the ABS2000, and havesubstantially all of the features of the Company’s larger Galileo product,apart from lower throughput. The Company believes the new instrument willappeal to the small- to medium-sized hospital market, the largest segment ofits customers (which number approximately 5,000 to 6,000 worldwide), to whichthe Company’s ABS2000 instrument is currently marketed. The cost of developmenttotaled $0.8 million and $1.6 million in fiscal 2004 and fiscal 2005,respectively, and is expected to total approximately $2.0 million in fiscal2006.

**Liquidity and Capital Resources**

As of May 31, 2005, the Company’s cash and cashequivalents balance totaled $37.1 million, an increase of $21.4 million overfiscal 2004 and $25.9 million over fiscal 2003. These increases were driven byhigher net cash provided by operating activities resulting primarily fromhigher net income. Net cash provided by operating activities totaledapproximately $41.5 million, $22.7 million, and $20.3 million for the fiscalyears 2005, 2004 and 2003, respectively.

As outlined inthe chart below, management continued to work diligently to reduce the dayssales in accounts receivable. Some of the Company’s foreign subsidiaries havehistorically slower collection rates due to their respective economicenvironments. The Company has been successful with the factoring of Italianaccounts receivable that continues to improve the Italian subsidiary’sfinancial position. The Company has made a 17% improvement in days sales inreceivables over the past two years. The Company has also experienced a 4%improvement in days sales in inventory over the last two years. Improvements ininventory management through product consolidation and production planning havebeen partially offset by the $2.4 million increase in instruments in inventoryfrom the addition of the Galileo to the product line.

| ** **                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Days Sales in Receivables |       |     | 80         |     |       |     | 84         |   |   |   | 96 |   |   |
| Days Sales in Inventory   |       |     | 132        |     |       |     | 133        |   |   |   | 137 |   |   |

 

For the year ended May 31, 2005, $7.1 million ofcash was used in investing activities consisting primarily of capitalexpenditures totaling $6.6 million and investments in marketable debtsecurities totaling $2.0 million, partially offset by $1.3 million in proceedsfrom the November 2004 sale of the Company’s long-term investment inLionheart Technologies, Inc. The sale of this investment resulted in again of $0.5 million which is included in the consolidated statement of incomecaption, “Other (expense) income, net” for the year ended May 31, 2005. The$6.6 million in capital expenditures for the year ended May 31, 2005consisted primarily of $2.8 million for Galileo and other instruments used fordemonstration purposes by the sales force or placed at customer sites onreagent rental agreements to be depreciated over the life of the respectiveagreements, $1.9 million for machinery and equipment upgrades for use primarilyat the Company’s Norcross facility, and $1.1 million for computer hardware andsoftware enhancements of the enterprise software system. Planned capitalexpenditures for fiscal 2006 total approximately $8.7 million, includingapproximately $2.6 million for planned upgrades 

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20         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

at its Norcross facility for its manufacturing, qualityand support systems, approximately $2.4 million for offsite placements of theGalileo instruments by the foreign affiliates, and approximately  $2.4 million in computer hardware and softwareexpenditures for infrastructure upgrades as well as new systems to furtherimprove production planning, forecasting and management reporting capabilities.

On December 18, 2003, the Company obtained a new$27.0 million secured credit facility with SunTrust Bank. Proceeds of theseborrowings were primarily used to repay the Company’s previous arrangement withWachovia Bank (which was cancelled upon repayment). The new credit facilitymatures in December 2006 and is comprised of a $15.0 million revolver anda $12.0 million term loan. The term loan is payable in quarterly installmentsof $1.0 million. The term loan and the revolver bear interest of LIBOR plusadditional percentage points ranging from 1.0% to 1.75%, or SunTrust Bank primerate plus additional percentage points ranging from (0.5%) to 1.0% based on certaincalculations as defined in the Loan Agreement. The loans are collateralized bythe capital stock of all of the Company’s subsidiaries. The Company recorded anon-cash, pre-tax charge of $924,000 in the third quarter of fiscal 2004 towrite off unamortized deferred financing charges related to its previous creditfacility. As of May 31, 2005, there was $6.0 million outstanding on theterm loan and none outstanding on the revolver.

Net cash used in financing activities totaledapproximately $12.4 million. The majority of the usage of cash for the currentyear period is attributable to $8.0 million in stock repurchases, as describedmore fully below, and to $5.0 million in principal payments on the term loanwith SunTrust Bank.

The Company instituted a stock repurchase program in June 1998for up to 4,050,000 shares, of which 3,624,750 shares had been purchased priorto the end of the 2004 fiscal year, leaving 425,250 shares available forrepurchase. On June 1, 2004, the Board of Directors authorized the Companyto repurchase up to an additional 450,000 shares of its common stock. On August 2,2004, the Board of Directors authorized the Company to repurchase up to anadditional 750,000 shares of its common stock. In the quarter ended August 31,2004, the Company repurchased 622,500 shares at an average per share price of$12.87, bringing the aggregate number of shares to 4,247,250 repurchased todate since implementation of the 1998 repurchase program. There were no sharerepurchases during the remainder of the year ended May 31, 2005. Theaggregate amount remaining available for repurchase under the program is1,002,750 shares as of May 31, 2005.

At May 31, 2005 and May 31, 2004, the Companyhad an interest rate swap agreement in the Company’s functional currency,maturing in 2005 with an initial notional principal amount of $15.0 million,which amortizes over the life of the instrument. The fair value of the interestrate swap agreement represents the estimated receipts or payments that would bemade to terminate the agreement. At May 31, 2005 and May 31, 2004,the Company would have paid approximately $19,000 and $157,000, respectively,to terminate the agreement in the Company’s functional currency. Theliabilities at May 31, 2005 and 2004 are included in Other accruedliabilities and Other liabilities, respectively, in the Consolidated BalanceSheets. The interest rate swap agreement, with SunTrust Bank, is guaranteed bythe Company. See Item 7A—Quantitative and Qualitative Disclosures About MarketRisk—Interest Rates.

As further discussed in Note 8 to the consolidatedfinancial statements, the Company initiated in October 2004 an internalinvestigation into certain events involving its Italian subsidiary. Theinternal investigation also addressed the underpayment of value added tax (VAT)by our Italian subsidiary. All due but unpaid VAT has now been paid, withrequired interest, although the Italian tax authorities may impose a penaltyfor underpayment of VAT. See Note 8 to our consolidated financial statements.

As of May 31, 2005, the Company had incurredapproximately $2.6 million in professional fees associated with the Italianinvestigation discussed above. Of this amount, $0.8 million was unpaid andincluded in Other accrued liabilities in the Company’s Consolidated BalanceSheet as of May 31, 2005. The Company believes it may incur up to anadditional $2.0 million in fiscal 2006 in professional fees and/or other costsrelated to this investigation. As discussed more fully in Note 8 to theconsolidated financial statements, no determination can yet be made as towhether the Company, in connection with the circumstances surrounding theItalian investigation, will become subject to any fines, penalties and/or othercharges imposed by any governmental authority, or any other damages or coststhat may arise in connection with these circumstances. Accordingly, noprovisions for any liabilities that may result upon closure of this matter havebeen made in the accompanying financial statements, other than the $0.8 milliondiscussed above.

As discussed in Note 8 to the consolidated financialstatements, we are aware of seven class-action lawsuits having been filed inthe United States District Court for the Northern District of Georgia againstthe Company and certain of our current and former directors and officers withrespect to alleged violations of the securities laws. All of the actionsessentially duplicate one another, pleading essentially the same allegations. Thecomplaints filed in the lawsuits allege violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, specifically alleging, among other things, that wemisrepresented that our financial statements and disclosures during portions ofthe 2005 calendar year fairly and accurately reflected our results ofoperations, which allegedly resulted in the purchase of our common stock atartificially inflated market prices. The lawsuits seek compensatory and otherdamages, and costs and expenses associated with the litigation. We believe thateach of the lawsuits is without merit, and intend to defend each of theselawsuits vigorously. While we do not currently expect these matters tomaterially affect our financial condition or results of operations, there canbe no assurance of any particular outcome.

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On April 22, 2005, the Companyannounced that it had signed a letter of intent to engage in discussions withKainos Laboratories, Inc. (“Kainos”), the distributor of Immucor productsin Japan, about the possibility of structuring Kainos’ blood banking businessas a joint venture between Immucor and Kainos. A definitive agreement to formthe joint venture was signed, and announced by the Company, on June 20,2005. On June 30, 2005, Kainos accordingly spun-off its blood-bankingbusiness, consisting primarily of certain assets and no debt, as a separatelegal entity. On July 5, 2005, final documents were signed fullyconsummating the joint venture arrangement, with Immucor and Kainos owning 51%and 49%, respectively, of Immucor-Kainos, Inc.—the newly-formed jointventure company that is now Immucor’s distributor in Japan. For its initial 51%interest, Immucor paid Kainos 459.0 million Japanese Yen which equated to $4.2million U.S. Dollars. The joint venture has 800 shares of common stockauthorized, of which 200 shares were issued upon establishment; Immucorpurchased 102 of these shares from Kainos on July 5, 2005. The Company iscurrently evaluating whether this joint venture will meet the definition of avariable interest entity as defined in the Financial Accounting Standards BoardInterpretation No. 46, *Consolidation of VariableInterest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51*(“FIN No. 46”). However, the Company has determined that it will be theprimary beneficiary; therefore regardless of whether the joint venture isdeemed to be a variable interest entity, the transaction is expected to beaccounted for as a purchase of a majority-owned business, the results ofoperations of which will be included in the Company’s consolidated financialstatements as of the date of acquisition. Pro forma results of operations forthe year ended May 31, 2005 would not have been materially different as aresult of this acquisition and therefore are not presented. The Company isawaiting additional information concerning certain asset valuations, primarilythe value of the new distribution agreement (see further discussion below), forpurposes of finalizing the allocation of the purchase price.

In accordance with the terms of theStock Purchase Agreement associated with the above acquisition, Immucor willpurchase the remaining 49% interest from Kainos for 441.0 million Japanese Yen.The Company expects to purchase this remaining interest after a three-yeartransition period ending on June 30, 2008, but upon mutual agreement withKainos, may purchase the interest prior to the end of the transition period. Inaccordance with the terms of a Services Agreement, Kainos has agreed to supplycertain services to the joint venture during the transition period.

The acquisition price, which willtotal 900.0 million Japanese Yen upon Immucor’s purchase of Kainos’ 49%interest, includes a premium based on management’s belief that this businesswill achieve higher future profitability levels with the installment of Immucorpersonnel in key managerial positions overseeing the operations of the jointventure. Revenues from the date of acquisition through May 31, 2006 areexpected to approach $9.0 million.

In accordance with the terms of theJoint Venture Agreement, Immucor has agreed to fund the joint venture’spurchase of Kainos’ blood-banking inventory, the majority of which consists ofImmucor products. This inventory repurchase is expected to occur by the end ofthe second quarter of fiscal 2006.

Additionally, a new distributionagreement was signed on July 5, 2005 between Immucor, Kainos and the jointventure. The new agreement stipulates that Kainos will act as an intermediarybetween Immucor and the joint venture in that Kainos will have exclusive rightsto supply the joint venture with Immucor product during the term of theagreement. In accordance with this agreement, the joint venture guarantees thatKainos will receive a minimum net profit (as defined in the agreement) of 300million Japanese Yen by the end of the three-year transition period ending June 30,2008 on sales of Immucor product to the joint venture. The agreement expires onMay 30, 2009, but may be terminated sooner (1) upon mutual agreementof the parties, (2) at the end of the transition period, or (3) uponKainos’ realization of the minimum guaranteed net profit.

Management continues to focus onreducing the leverage on the Company’s balance sheet and does not anticipatethat there will be a need for additional borrowings. Management expects thatcash and cash equivalents and cash flows from operations will be sufficient tosupport operations, scheduled debt repayments and planned capital expendituresfor the next 12 months, as well as fund future long-term debt payments. Thereare no restrictions on the Company’s foreign subsidiaries in the matter ofsending dividends, or making loans or advances to the parent Company. Contractualobligations and commercial commitments, primarily for the next five years, aredetailed in the table below. Other long-term obligations represent outstandingunrecorded purchase commitments as of May 31, 2005.

*Contractual Obligations and Commercial Commitments*

| **Contractual Obligations**    | ** ** | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|-------------------------------------|------------|------------|--------------------------------------------------------------------|------------|
| ** **                          | ** ** | ** ** | **Total**                                                          | ** ** | ** ** | **Less than 1 year** | ** ** | ** ** | **1-3 years** | ** ** | ** ** | **4 - 5 years** | ** ** | ** ** | **After 5 years** | ** ** |
| Long-Term Debt and Lines  of Credit |       |       | $                                                                  | 6,271      |   |   |   | $ | 4,190 |   |   |   |   | $ | 2,081 |   |   |   |   | $ | — |   |   |   |   | $ | — |   |   |
| Capital Lease Obligations           |       |       | 1,337                                                              |       |   |   | 427 |   |   |   |   | 696 |   |   |   |   | 214 |   |   |   |   | — |   |   |
| Operating Leases                    |       |       | 8,885                                                              |       |   |   | 2,280 |   |   |   |   | 4,055 |   |   |   |   | 2,550 |   |   |   |   | — |   |   |
| Other Long-Term  Obligations (1)    |       |       | 13,691                                                             |       |   |   | 9,154 |   |   |   |   | 2,405 |   |   |   |   | 2,132 |   |   |   |   | — |   |   |
| Total Contractual Cash  Obligations |       |       | $                                                                  | 30,184     |   |   |   | $ | 16,051 |   |   |   |   | $ | 9,237 |   |   |   |   | $ | 4,896 |   |   |   |   | $ | — |   |   |

 

(1) Represents outstandingpurchase commitments, including commitments to Celliance, Ltd. as more fullydiscussed in Note 8 to the consolidated financial statements.

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22         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

*Repurchase Obligations(Instruments)*

In certain limited situationsinvolving third-party leasing arrangements, the Company enters into arepurchase agreement whereby if the ultimate customer terminates the lease, theCompany agrees to repurchase the instrument for an amount equal to theremaining unpaid lease payments owed to the third-party leasing company. Inthese limited situations, the Company continues to defer the revenue related tothe sale and subsequently recognizes the revenue over the lease term as thelease payments are made to the third-party leasing company and it is clear thatthe ultimate customer has not terminated the related lease. In prior periods,the Company also deferred the corresponding cost of these instrument sales andrecognized the costs over the same period as the related revenue. During thefiscal quarter ended February 28, 2005, the Company determined that it wasmore appropriate to recognize the instrument costs in these deferral situationswhen the instrument has been installed and written acceptance has been receivedfrom the customer. Accordingly, during the fiscal quarter ended February 28,2005, the Company recorded additional cost of sales totaling approximately$327,000, which was related to prior quarters. The Company now records allinstrument costs at the time the instrument is installed and accepted by thecustomer and title has legally transferred to the customer.

*Off-Balance SheetArrangements*

The Company has no off-balancesheet financial arrangements as of May 31, 2005.

**Results of Operations**

For the fiscal year ended May 31,2005, net sales totaled $144.8 million, a $32.2 million increase over the prioryear. Net income was $23.9 million, a $11.4 million increase over theprior year. Diluted earnings per share totaled $0.50 on 47.6 million weightedaverage shares outstanding for fiscal 2005, as compared to diluted earnings pershare of $0.27 on 47.0 million weighted average shares outstanding for theprior year.

*Comparison of Years EndedMay 31, 2005 and May 31, 2004*
| Net sales | ** ** |
|-----------|------------|

 

Reagentrevenues grew to $128.8 million compared to $102.3 million in the prior year, a25.9% increase. The growth in reagent revenues occurred as a result oftraditional reagent price increases in North America, which contributed $15.9million to the increase, and volume and price increases in proprietary Captureproducts. Capture product sales were $29.6 million versus $21.9 million infiscal 2004. Human collagen sales were $3.5 million versus $0.5 million infiscal 2004, as the first shipment of collagen did not occur untilMay 2004. Sales of instruments were $12.5 million in fiscal 2005, comparedto $9.8 million in fiscal 2004. Instrument revenues grew in part due to higherservice contract revenue as a result of new placements under service contracts,as well as increases in service contract pricing.
| Gross margin | ** ** |
|--------------|------------|

 

The grossmargin (gross profit as a percentage of sales) on traditional reagents for theyear ended May 31, 2005 benefited from the price increases discussedabove, increasing to 63.4% for fiscal 2005 from 56.4% for fiscal 2004. Thebenefit of the prices increases was partially offset by higher regulatory costsin the first quarter of fiscal 2005 to support CE-marking in Europe. The grossmargin on Capture products was 79.7% for fiscal 2005, compared with 74.0% forfiscal 2004. Capture gross margin was favorably impacted by a changeover fromselling the products in kits to selling the individual components — anoperational change which resulted in increases in both volume and price. Thegross margin on human collagen sales was 37.8% for fiscal 2005, compared with20.5% for fiscal 2004. This improvement was due in part to a fourth quarterfiscal 2005 adjustment totaling approximately $193,000 regarding previouslyinvoiced shipments for which quantity discounts were not earned. The grossmargin on instruments, including the impact of the cost of providing servicewas a negative 4.5% for fiscal 2005, compared to a positive 5.3% for fiscal2004. As more fully discussed in Note 1 to the consolidated financials, in thequarter ended February 28, 2005 the Company also changed how it wasaccounting for the costs of instruments under third-party leasing arrangementsand, as a result, recorded additional cost of sales of approximately $327,000.
| Operating  expenses | ** ** |
|---------------------|------------|

 

Research and development expenses were $4.5 million forfiscal 2005, $0.7 million higher than those recorded in the prior fiscal year.Spending on the development of the new third generation instrument targeted forthe small- to medium-sized hospital market (the “Galileo EchoTM”) was $1.6million and $0.8 million in fiscal 2005 and 2004, respectively.

Selling and marketing expenses increased $2.0 millionover the prior fiscal year, but decreased as a percentage of sales. Thisdecrease as a percentage of sales was due primarily to higherperiod-over-period sales as discussed more fully above.

Distribution expenses for fiscal 2005 decreased by $0.5million from those recorded in the prior year period. This reduction was dueprimarily to the consolidation of the Houston facility shipping function intothe Norcross facility, a process which was begun during the fourth quarter offiscal 2004 and completed in the first quarter of fiscal 2005.

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                                                RESULTS         23

 

General and administrative expenses in fiscal 2005 rose$7.0 million over fiscal 2004. The increase was attributable primarily tohigher legal fees due mainly to the Italian investigation as discussed morefully in Note 8 to the consolidated financial statements, as well as higheraudit and tax fees, due in part to Sarbanes-Oxley Section 404 internalcontrol assessment.

Amortizationand other expenses for the year ended May 31, 2005 included a $0.3 millioncharge related to improperly recorded transactions on the Company’s Italiansubsidiary’s books. See Note 8 to the consolidated financial statements.
| Interest  income | ** ** |
|------------------|------------|

 

Interest income for the year endedMay 31, 2005, primarily consists of interest income on factoredreceivables. See Note 1 to the consolidated financial statements.
| Interest expense | ** ** |
|------------------|------------|

 

When compared to the prior year,interest expense decreased $0.2 million in fiscal 2005. The decrease isprimarily the result of reduced levels of long-term debt.
| Other income  (expense) | ** ** |
|-------------------------|------------|

 

Other income, net, for fiscal year2005, primarily reflects a $0.5 million gain on the sale of the Company’slong-term investment in Lionheart Technologies, Inc. inNovember 2004, as well as a net gain on foreign currency transactions.These gains were partially offset by a $0.2 million charge representing a legalsettlement agreed upon in December 2004 regarding a claim pre-existing anda $0.3 million charge associated with the buyout of a distribution agreement inthe first quarter of fiscal 2005. Other income (expense), net, for fiscal 2004,reflects a charge of $0.9 million in the third quarter of fiscal 2004 to writeoff unamortized deferred financing charges related to its previous creditfacility. See Note 3 to the consolidated financial statements.
| Income taxes | ** ** |
|--------------|------------|

 

The provision for income taxes rose$6.3 million in fiscal 2005 from the prior year, primarily due to higherpre-tax income. State tax rates are estimated to be higher as the Companyrefines its state tax structure. The increase in the provision for the year waspartially offset by a benefit for a research and development tax credit for thecurrent fiscal year as well as the prior three fiscal years. This credittotaled approximately $622,000, on which the Company provided a 30% reservebased on historical settlement claims of similar cases with the InternalRevenue Service.

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24         IMMUCOR, INC. ANNUAL REPORT 2005

 

*Comparison of Years Ended May 31, 2004 and May 31,2003*
| Net sales | ** ** |
|-----------|------------|

 

Sales of traditional reagentproducts, i.e., products not utilizing the Company’s patented Capturetechnology, increased $8.6 million, or 12.0%, from $71.9 million in fiscal 2003to $80.5 million in fiscal 2004. Sales of Capture products increasedapproximately $3.1 million to $21.9 million, a 16.5% increase over the prioryear. The Company believes growth in reagent revenue, including bothtraditional reagent products and Capture products, occurred as a result ofapproximately $4.3 million in price increases in North America, approximately$4.1 million in changes in the Euro exchange rate, and approximately $3.3million in increased reagent volumes from instrument placements worldwide. Instrumentsales for fiscal 2004 increased by approximately $1.7 million to $9.8 million,an increase of 22.1% over the prior year. Instrument revenue grew primarily asa result of increased sales of the Galileo instrument to distributors in Europeand to a $0.2 million change in the Euro exchange rate. The first shipmentunder the human collagen development agreement with Inamed occurred in May 2004and contributed $0.5 million to the revenue increase.
| Gross margin | ** ** |
|--------------|------------|

 

Gross margin was 55.1% versus 56.5%for the years ended May 31, 2004 and 2003, respectively. Manufacturingexpenses for the United States increased $3.0 million, or 12.6% for the yearended May 31, 2004, as compared to the year ended May 31, 2003 andunfavorable manufacturing variances had a corresponding increase of $0.7million, or 13.5%, for the year ended May 31, 2004, as compared to theyear ended May 31, 2003. Manufacturing expenses increased due toadditional personnel and expenditures to support domestic and internationalefforts to expand Company presence, and assure compliance with the FDA. Theincrease in manufacturing expenses also included approximately $0.4 million inworldwide expenses related to CE marking and European Union quality regulationcompliance for products intended for sale within the European Union. Managementhad recognized the need for margin improvement early in the fiscal year anddeveloped a detailed plan to consolidate the manufacture of the complex redcell products into the Norcross facility. The project was completed in May 2004,at a cost of approximately $0.3 million. Consolidation of redundant red cellpanels and the accompanying supplemental products will allow the Company toproduce a panel that gives the customer a better selection of antibodies andincrease the Company’s efficiency. A plan to eliminate a number of redundantproducts, which were manufactured at the Company’s three manufacturingfacilities, was partially completed during the fourth quarter of fiscal 2004and was continued through the first quarter of fiscal 2005. Better inventorymanagement and production planning resulted in manufacturing efficiencyimprovement of $1.6 million, or 43.1%, for the year ended May 31, 2004, ascompared to the year ended May 31, 2003.

Gross margin on traditionalreagents fell to 55.6% for the fiscal year ended May 31, 2004, comparedwith 57.7% in the prior fiscal year, in spite of the $4.5 million in priceincreases, due primarily to the increased manufacturing expenses addingapproximately $2.5 million in additional costs. Gross margin on Captureproducts was 76.3%, compared with 75.2% in the prior year period. The increasedsales volume of the Capture products mentioned above was principally generatedthrough sales to the distributor network in Europe at margins approximately 6%lower, or $1.9 million, than achieved through direct sales in the U.S. Increasedmanufacturing expenses translated to approximately $0.6 million of the declinein Capture gross profit. The gross margin on instruments, including the impactof the cost of providing service was 5.3% for fiscal 2004 versus 1.3% forfiscal 2003. Instrument sales in Europe were made at a 33.9% gross margin forfiscal 2004 versus at a 23.0% gross margin for fiscal 2003, adding anadditional $0.6 million to gross profit for fiscal 2004. Instrument revenue inthe United States, which includes the cost of providing service, was made at a(30.7%) gross margin for fiscal 2004 versus at a (32.8%) gross margin forfiscal 2003. Instrument service continues to be provided at a loss for the yearas overall instrument placements have not reached the level required forservice operations to break-even and the older model ABS2000 instruments in thefield advance in age. The instrument service burden of $1.0 million reduced thegross margin by 0.9%. The change in the Euro exchange rate increased grossprofit by approximately $1.8 million.
| Operating  expenses | ** ** |
|---------------------|------------|

 

When compared to the prior year,research and development costs for fiscal 2004 increased $1.7 million, or 82.8%.During the year, $1.0 million was incurred for contract research feesrelated to the Galileo EchoTM, platelet and Galileo U.S. software developmentprojects. Key personnel and resources were reallocated from manufacturing andadministrative functions to research and development functions for theseprojects, amounting to approximately $0.4 million. Preproduction collagen costsamounted to approximately $0.3 million for the year.

Selling and marketing expensesincreased $2.3 million for the year ended May 31, 2004, as compared to theprior year, of which $1.0 million was a result of the change in the Euroto dollar exchange rate. Travel, personnel and marketing expense increases inassociation with the sales efforts to further market the Galileo in Europe andthe ABS2000 in the United States, to launch the Galileo in the United States,and to develop worldwide product branding, accounted for the remaining $1.3million increase for the year.

Distribution expenses for fiscal2004 increased by $1.5 million compared to the prior year primarily due toadditional personnel and expenses of $0.4 million incurred by the Germansubsidiary to establish a European distribution hub and $0.4 million in higherfreight 

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                                                RESULTS         25

 

and supplies related to theshipping package reconfiguration for the Houston facility. The exchange rateeffect of the Euro versus the dollar increased distribution expense $0.3million.

General and administrative expensesfor the year ended May 31, 2004, rose approximately $1.4 million over theprior year. The change in the Euro exchange rate accounted for approximately$0.7 million. Approximately $0.2 million of the increase was due to higherlegal, debt recovery and staffing costs for the Company’s Italian subsidiary. Theremainder of the increase was due to additional personnel and expendituresworldwide to support domestic and international efforts to expand Companypresence and assure compliance with European Union quality regulations andaccounting and regulatory mandates in the United States.
| Interest expense | ** ** |
|------------------|------------|

 

When comparedto the prior year, interest expense decreased $1.5 million in fiscal 2004. Thedecrease is the result of reduced levels of long-term debt at more favorableinterest rates amounting to savings of $1.0 million and a swing in the mark-to-marketadjustment of the interest rate swap agreement amounting to $0.3 million. Loweramortization of debt issue costs due to reduced debt issue costs, subsequent tothe extinguishment of the Company’s previous credit facility, reduced interestexpense by $0.2 million for the current period. See *Deferred Costs* in Note 1 and *Primary Obligations* in Note 3 to the consolidated financialstatements.
| Other income  (expense) | ** ** |
|-------------------------|------------|

 

Other income (expense), net, forthe year ended May 31, 2004 includes a $0.9 million pre-tax, non-cashcharge to write off unamortized deferred financing charges related to theCompany’s previous credit facility. Fiscal 2003 amounts primarily reflectedforeign currency transaction gains that exceeded foreign currency transactionlosses and a $0.2 million impairment of assets. See Note 1 to the consolidatedfinancial statements.
| Income taxes | ** ** |
|--------------|------------|

 

The effective tax rate for the yearended May 31, 2004 was 38.1% versus 28.8% for the year ended May 31,2003. Fiscal 2004 includes a true up of the estimated tax benefit of the 2003European restructure and adjustments for misapplication of Texas franchise tax rules forfiscal years 2002 and 2003, that added $0.1 million and $0.3 million to incometax expense, respectively. In addition, a reserve of $0.2 million wasestablished to recognize the increasingly conservative positions taken by thevarious taxing authorities. In the fiscal year ended May 31, 2003, theincome tax provision for current year earnings was offset by a $1.4 million taxbenefit generated through a restructuring of certain European operations thatallowed for the utilization of tax losses generated in prior years.

**Impact ofRecently Issued Accounting Standards**

In November 2004, the FASBissued Statement No. 151, *Inventory Costs—anamendment of ARB No. 43, Chapter 4*(“SFAS No. 151”)*.*SFAS No. 151 amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . .under some circumstances, items such as idle facility expense, excessivespoilage, double freight, and rehandling costs may be so abnormal as to requiretreatment as current period charges. . . “ SFAS No. 151 requires thatthose items be recognized as current-period charges regardless of whether theymeet the criterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. This new standard iseffective for inventory costs incurred during fiscal years beginning after June 15,2005. Earlier application is permitted for inventory costs incurred duringfiscal years beginning after November 23, 2004. The Company is in theprocess of evaluating the impact SFAS No. 151 will have upon adoption butdoes not anticipate it will have a significant impact on its financialstatements.

In December 2004, the FASBissued Statement No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29, Accounting for NonmonetaryTransactions*(“SFAS No. 153”). The amendments made by SFAS No. 153are based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged. Further, theamendments eliminate the narrow exception for nonmonetary exchanges of similarproductive assets and replace it with a broader exception for exchanges ofnonmonetary assets that do not have commercial substance. Previously, Opinion29 required that the accounting for an exchange of a productive asset for asimilar productive asset or an equivalent interest in the same or similarproductive asset should be based on the recorded amount of the assetrelinquished. By focusing the exception on exchanges that lack commercialsubstance, the Board believes SFAS No. 153 produces financial reportingthat more faithfully represents the economics of the transactions. Thisstatement is effective for nonmonetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005. The Company does not believe theadoption of this new statement will have a material impact on its financialstatements.

In December 2004, the FASBissued Statement No. 123 (revised 2004), *Share-BasedPayment*, which is a revision of FASB Statement No. 123,*Accounting for Stock-Based Compensation* (“SFAS No. 123(R)”). Generally,the approach in SFAS No. 123(R) is similar to the approach describedin Statement 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grantsof employee stock options, to be recognized in the statement of income based ontheir fair values. Pro forma disclosure is no longer an 

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26         IMMUCOR, INC. ANNUAL REPORT 2005

 

alternative. Upon issuance, SFAS123(R) required public companies to apply the provisions of the Statementin the first interim or annual reporting period beginning after June 15,2005. In April 2005, the Securities and Exchange Commission approved a newrule that delays the effective date, requiring public companies to applythe Statement in the first annual period beginning after June 15, 2005.Except for the deferral of the effective date, the guidance in SFAS 123(R) isunchanged. We expect to adopt SFAS    123(R) in our firstinterim period of fiscal 2007 using the modified retrospective method wherebyprior period results are restated to reflect the impact of adoption of SFAS 123(R) andhave concluded that SFAS 123(R) will have a material impact on ourfinancial position and results of operations. The adoption of this statementshould impact net income and earnings per share similar to the pro formaamounts disclosed for fiscal 2005, 2004 and 2003 in Note 1 to the consolidatedfinancial statements. Actual results in future years, however, may differ fromthe pro forma results reflected in Note 1 due to an increase or decrease ingrants of employee stock options and/or changes in assumptions, such as the useof estimated versus actual forfeitures or a change in expected life.

In March 2005, the FASB issuedInterpretation No. 47 *Accounting forConditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143(“FIN 47”).*This Interpretation clarifies that the term conditionalasset retirement obligation as used in SFAS No. 143, *Accounting for Asset Retirement Obligations,*refers to a legal obligation to perform an asset retirement activity in whichthe timing and (or) method of settlement are conditional on a future eventthat may or may not be within the control of the entity. The obligation toperform the asset retirement activity is unconditional even though uncertaintyexists about the timing and (or) method of settlement. Thus, the timingand (or) method of settlement may be conditional on a future event.Accordingly, an entity is required to recognize a liability for the fair valueof a conditional asset retirement obligation if the fair value of the liabilitycan be reasonably estimated. This Interpretation also clarifies when an entitywould have sufficient information to reasonably estimate the fair value of anasset retirement obligation. This Interpretation is effective no later than theend of fiscal years ending after December 15, 2005. The Company is in theprocess of evaluating the impact FIN 47 will have upon adoption but does notanticipate it will have a significant impact on its financial statements.

In May 2005, the FASB issuedStatement No. 154, *Accounting Changes andError Corrections* (“SFAS No. 154”), which replaces AccountingPrinciples Board Opinions No. 20 “Accounting Changes” and SFAS No. 3,*Reporting Accounting Changes in Interim FinancialStatements-An Amendment of APB Opinion No. 28*. SFAS No. 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes retrospective application, or the latestpracticable date, as the required method for reporting a change in accountingprinciple and the reporting of a correction of an error. SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The Company does not expect theadoption of SFAS No. 154 to have a material impact on its financialstatements.

**Item7A.**— Quantitative and Qualitative Disclosures About Market Risk

*MarketRisk*.   TheCompany is exposed to various market risks, including changes in foreigncurrency exchange rates and interest rates that could adversely impact itsresults of operations and financial condition. To manage the volatilityrelating to these typical business exposures, the Company may enter intovarious derivative transactions when appropriate. The Company does not hold orissue derivative instruments for trading or other speculative purposes.

*InterestRate Risk.  *The Company is exposed to interest rate risk,primarily through its debt facility with its principle lender, which is subjectto changes in LIBOR rates. The amount outstanding for this debt facility was$6.0 million and $11.0 million at May 31, 2005 and 2004, respectively. TheCompany has utilized interest rate swap agreements with the objective ofmanaging exposure to interest rate changes by effectively converting a portionof variable rate bank debt into fixed rates. At May 31, 2005 and May 31,2004, the Company had an interest rate swap agreement in the Company’sfunctional currency, maturing in September 2005, with an initial notionalprincipal amount of $15.0 million that amortizes over the life of theinstrument. The fair value of the interest rate swap agreement represents theestimated receipts or payments that would be made to terminate the agreement. Theliability to terminate the agreement in the Company’s functional currency was$19,000 and is included in Other accrued liabilities at May 31, 2005; theliability was $157,000 and is included in Other liabilities at May 31,2004. Based on the Company’s results for fiscal 2005 and debt balanceoutstanding at May 31, 2005, a hypothetical 100 basis point change ininterest rates would impact annual pre-tax earnings by $0.1 million. See Note 3to the consolidated financial statements.

*ForeignCurrency*.   Operating income generated outside theUnited States as a percentage of total operating income was 15% in 2005, 5% in2004 and 9% in 2003. Fluctuations in foreign exchange rates, principally withthe U.S. dollar versus the Euro, could impact operating results whentranslations of the Company’s subsidiaries’ financial statements are made inaccordance with current accounting guidelines. It has not been the Company’spractice to actively hedge its foreign subsidiaries’ assets or liabilitiesdenominated in local currency. Most of the foreign currency exposures aremanaged locally by the Company’s foreign subsidiaries through the hedging ofpurchase commitments with the advance purchase of the required non-functionalcurrencies. However, the Company believes that over time weaknesses in oneparticular currency are offset by strengths in others. In 2005, 2004, and 2003the Company recorded net foreign currency transaction gains of approximately$541,000, $491,000, and $697,000, respectively. For fiscal 2005, the fluctuationof the Euro weighted average exchange rate increased net sales by approximately$2.5 million. A ten percent change in the year-to-date weighted average Euroexchange rate would have had the effect of increasing or decreasing net salesby approximately $3.8 million.

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                                                RESULTS         27

 

**Item 8.** —Financial Statements and Supplementary Data

The followingconsolidated financial statements of the Company are included under this item:
| - Management’s Report on Internal Control Over Financial  Reporting                                      |
|--------------------------------------------------------------------------------------------------------------------|
| - Report of Independent  Registered Public Accounting Firm on Internal Control Over Financial  Reporting      |
| - Report of Ernst & Young LLP Independent  Registered Public Accounting Firm                         |
| - Consolidated  Balance Sheets, May 31, 2005 and 2004                                                    |
| - Consolidated  Statements of Income for the Years Ended May 31, 2005, 2004 and 2003                     |
| - Consolidated  Statements of Shareholders’ Equity for the Years Ended May 31, 2005,  2004 and 2003 |
| - Consolidated  Statements of Cash Flows for the Years Ended May 31, 2005, 2004 and 2003                 |
| - Notes to Consolidated  Financial Statements                                                                 |
| - Consolidated Financial  Statement Schedule                                                                  |

 

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28       IMMUCOR, INC. ANNUAL REPORT 2005

 

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

The management of Immucor is responsible forestablishing and maintaining adequate internal control over financialreporting, as such is defined in Rules 13a-15(f) and 15d-15(f) promulgatedunder the Securities Exchange Act of 1934, as amended. The Company’s internalcontrol over financial reporting is a process that is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles.

Internal control systems, no matter how well designed,have inherent limitations. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation, and may not prevent or detectmisstatements. In addition, projections of any evaluation of effectiveness tofuture periods are subject to risks that controls may become inadequate becauseof changes in conditions, individuals make errors in judgment, or individualsdo not comply with policies or procedures.

Immucor’s management performed an assessment of theeffectiveness of the Company’s internal control over financial reporting as of May 31,2005, utilizing the criteria described in “Internal Control—IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”). The objective of this assessment is to determine whetherthe Company’s internal control over financial reporting was effective as of May 31,2005.

In our assessment of theeffectiveness of the Company’s internal control over financial reporting as of May 31,2005, we identified areas where we concluded there were material controlweaknesses.

*Revenue Recognition andBilling Processes*

Management has concluded that as of May 31, 2005,material weaknesses existed related to ineffective controls over the Company’srevenue recognition and billing processes resulting from: the lack of controlsover the review of all arrangement documentation in order to properly recordrevenue, the lack of controls over ensuring that all arrangement terms andconditions are known for proper revenue recognition evaluation, and the lack ofpersonnel with sufficient skills and experience to properly record revenue frommulti element arrangements.

As a result of these controldeficiencies, management recorded material adjustments to the revenue, accountsreceivable and deferred revenue accounts during the fiscal year ended May 31,2005. These control deficiencies could result in misstatements of revenue,accounts receivable and deferred revenue balances that would result in amaterial misstatement of the annual or interim consolidated financialstatements that would not be prevented or detected.

*Financial Statement CloseProcess*

Management has also concluded that as of May 31,2005, material weaknesses existed related to the Company’s financial statementclose process resulting from: the lack of adequate processes, controls, reviewand approval procedures to ensure that financial statements and disclosuresgenerated for external purposes are prepared in accordance with generallyaccepted accounting principles, the lack of personnel with sufficient skills andexperience to properly analyze certain technical accounting issues inaccordance with generally accepted accounting principles, and the lack ofadequate policies and procedures in certain international locations withrespect to preparing journal entries and reconciling certain significantaccounts.

As a result of these control deficiencies, managementrecorded material adjustments to the financial statements during the fiscalyear ended May 31, 2005. These control deficiencies related to thefinancial statement close process affect all of the Company’s significantaccounts. These control deficiencies could result in a material misstatement ofthe annual or interim consolidated financial statements that would not beprevented or detected.

Because of the material weaknesses described above, theCompany’s management concluded that the Company did not maintain effectiveinternal control over financial reporting as of May 31, 2005, based on thecriteria in “Internal Control—Integrated Framework” issued by the COSO.

Management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of May 31, 2005 has been audited by Ernst &Young LLP, an independent registered public accounting firm, as stated in theirreport appearing on pages 29 and 30 hereof.
| /s/ Edward L. Gallup                              |                                                                | /s/ Patrick D. Waddy |   |
|---------------------------------------------------|---------------------------------------------------------------------|----------------------|--------|
| Edward L. Gallup                                  | Patrick D. Waddy                                                    |
| Chairman of the Board and Chief Executive Officer | Vice President — Interim Chief Financial Officer and Secretary |

 

** **

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                                                RESULTS         29

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON INTERNAL CONTROL OVER FINANCIAL REPORTING**

To Board ofDirectors and Shareholders

Immucor, Inc.

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control over FinancialReporting, appearing on page 28 hereof, that Immucor, Inc. andsubsidiaries (the “Company”) did not maintain effective internal control overfinancial reporting as of May 31, 2005, because of the effect of the materialweaknesses identified in management’s assessment and described below, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesseshave been identified and included in management’s assessment:

*Revenue Recognition and BillingProcesses*.   As of May 31, 2005, materialweaknesses existed related to ineffective controls over the Company’s revenuerecognition and billing processes resulting from: the lack of controls over thereview of all arrangement documentation in order to properly record revenue,the lack of controls over ensuring that all arrangement terms and conditionsare known for proper revenue recognition evaluation, and the lack of personnelwith sufficient skills and experience to properly record revenue from multielement arrangements.

As a result of these control deficiencies, managementrecorded material adjustments to the revenue, accounts receivable and deferredrevenue accounts during the fiscal year ended May 31, 2005. These controldeficiencies could result in misstatements of revenue, accounts receivable anddeferred revenue balances that would result in a material misstatement of theannual or interim consolidated financial statements that would not be preventedor detected.

*Financial Statement Close Process*.   Asof May 31, 2005, material weaknesses existed related to the Company’sfinancial statement close process resulting from: the lack of adequateprocesses, controls, review and approval procedures to ensure that financialstatements and disclosures generated for external purposes are prepared inaccordance with generally accepted accounting principles, the lack of personnelwith sufficient skills and experience to properly analyze certain technicalaccounting issues in accordance with generally accepted accounting principles,and the lack of adequate policies and procedures in certain internationallocations with respect to preparing journal entries and reconciling certainsignificant accounts.

As a result of these control deficiencies, managementrecorded material adjustments to the financial statements during the fiscalyear ended May 31, 2005. These control deficiencies related to thefinancial statement close process affect all of the Company’s significant 

----

30         IMMUCOR, INC. ANNUAL REPORT 2005

 

accounts. These control deficiencies could result in amaterial misstatement of the annual or interim consolidated financialstatements that would not be prevented or detected.

These material weaknesses were considered indetermining the nature, timing, and extent of audit tests applied in our auditof the fiscal 2005 financial statements, and this report does not affect ourreport dated September 13, 2005 on those financial statements.

In our opinion, management’s assessment that Immucor, Inc.and subsidiaries did not maintain effective internal control over financialreporting as of May 31, 2005, is fairly stated, in all material respects,based on the COSO control criteria. Also, in our opinion, because of the effectof the material weaknesses described above on the achievement of the objectivesof the control criteria, Immucor, Inc. and subsidiaries has not maintainedeffective internal control over financial reporting as of May 31, 2005,based on the COSO control criteria.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of Immucor, Inc.and subsidiaries as of May 31, 2005 and 2004, and the related consolidatedstatements of income, shareholders’ equity, and cash flows for each of thethree years in the period ended May 31, 2005 and our report dated September 13,2005, and appearing on page 31 hereof, expressed an unqualified opinionthereon.
|                         | /s/ Ernst & Young LLP |   |
|-------------------------|--------------------------------|--------|
| Atlanta, Georgia        |                           |
| September 13, 2005 |                           |

 

----

                                                RESULTS         31

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To Board ofDirectors and Shareholders

Immucor, Inc.

We have audited the accompanying consolidated balancesheets of Immucor, Inc. and subsidiaries (the “Company”) as of May 31,2005 and 2004 and the related consolidated statements of income, shareholders’equity, and cash flows for each of the three years in the period ended May 31,2005. Our audits also included the financial statement schedule listed inthe Index at Item 15(a). These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the Company’s consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position as of May 31, 2005 and 2004, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended May 31, 2005, in conformity with U.S. generallyaccepted accounting principles. Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of the Company’s internalcontrol over financial reporting as of May 31, 2005, based on criteriaestablished in*Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), and our report dated September 13, 2005,expressed an unqualified opinion on management’s assessment of, and an adverseopinion on the effectiveness of internal controls over financial reporting*.*
|                         | /s/ Ernst & Young LLP |   |
|-------------------------|--------------------------------|--------|
| Atlanta, Georgia        |                           |
| September 13, 2005 |                           |

 

----

32         IMMUCOR, INC. ANNUAL REPORT 2005

 
| IMMUCOR, INC.  AND SUBSIDIARIES  |
|----------------------------------|
| **CONSOLIDATED  BALANCE SHEETS** |

 

| ** **                                                                                                       | ** ** | **As of May 31,** | ** **  |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| **ASSETS**                                                                                                       | ** ** | **2005**                         | ** **  | **2004** | ** ** |
| CURRENT ASSETS:                                                                                                  |       |                             |        |   |   |
| Cash and cash  equivalents                                                                                       |       | $                                | 37,107,539  |   | $ | 15,697,082 |   |
| Short-term  investments                                                                                          |       | 1,972,649                        |        | — |   |
| Accounts receivable,  trade (less allowance for doubtful accounts of $1,873,657 in 2005 and  $1,330,305 in 2004) |       | 34,629,624                       |        | 26,533,796 |   |
| Other  receivables                                                                                               |       | 1,112,671                        |        | 1,235,748 |   |
| Inventories                                                                                                      |       | 21,836,412                       |        | 20,160,858 |   |
| Income taxes  receivable                                                                                         |       | 222,133                          |        | 1,102,198 |   |
| Deferred  income taxes                                                                                           |       | 1,568,137                        |        | 1,545,493 |   |
| Prepaid  expenses and other                                                                                      |       | 2,433,309                        |        | 2,347,906 |   |
| Total current  assets                                                                                            |       | 100,882,474                      |        | 68,623,081 |   |
| LONG-TERM INVESTMENT                                                                                             |       | —                           |        | 770,000 |   |
| PROPERTY, PLANT AND  EQUIPMENT - Net                                                                             |       | 23,034,727                       |        | 23,034,984 |   |
| DEFERRED INCOME TAXES                                                                                            |       | 1,845,203                        |        | 504,908 |   |
| OTHER ASSETS – Net                                                                                          |       | 1,112,997                        |        | 1,029,752 |   |
| DEFERRED LICENSING COSTS -  Net                                                                                  |       | 772,240                          |        | 1,036,904 |   |
| CUSTOMER LIST - Net                                                                                              |       | 1,140,000                        |        | 1,225,000 |   |
| EXCESS OF COST OVER NET  TANGIBLE ASSETS ACQUIRED - Net                                                          |       | 28,825,592                       |        | 28,192,198 |   |
|                                                                                                             |       | $                                | 157,613,233 |   | $ | 124,416,827 |   |

 

See notes to consolidated financial statements.

----

                                                  RESULTS       33

 

 
| IMMUCOR, INC.  AND SUBSIDIARIES             |
|---------------------------------------------|
| **CONSOLIDATED BALANCE SHEETS (continued)** |

 

| ** **                                                                                                                                            | ** ** | **As of May 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                        | ** ** | **2005**                         | ** **  | **2004** | ** ** |
| CURRENT  LIABILITIES:                                                                                                                                 |       |                             |        |   |   |
| Current portion of borrowings under bank line of  credit agreements                                                                                   |       | $                                | 148,188     |   | $ | 146,765 |   |
| Current portion of long-term debt                                                                                                                     |       | 4,042,295                        |        | 5,043,450 |   |
| Current portion of capital lease obligations                                                                                                          |       | 426,926                          |        | 652,363 |   |
| Accounts payable                                                                                                                                      |       | 8,027,562                        |        | 8,116,645 |   |
| Income taxes payable                                                                                                                                  |       | 3,448,502                        |        | 205,495 |   |
| Accrued salaries and wages                                                                                                                            |       | 3,343,894                        |        | 1,574,758 |   |
| Deferred income taxes                                                                                                                                 |       | 661,040                          |        | 439,271 |   |
| Deferred revenue                                                                                                                                      |       | 4,044,069                        |        | 1,174,480 |   |
| Other accrued liabilities                                                                                                                             |       | 5,794,071                        |        | 3,009,168 |   |
| Total current liabilities                                                                                                                             |       | 29,936,547                       |        | 20,362,395 |   |
| BORROWINGS  UNDER BANK LINE OF CREDIT AGREEMENTS – Net of current portion                                                                        |       | —                           |        | 146,610 |   |
| LONG-TERM  DEBT – Net of current portion                                                                                                         |       | 2,080,713                        |        | 6,121,751 |   |
| CAPITAL  LEASE OBLIGATIONS – Net of current portion                                                                                              |       | 910,405                          |        | 947,577 |   |
| DEFERRED  INCOME TAXES                                                                                                                                |       | 2,285,344                        |        | 2,763,243 |   |
| DEFERRED  REVENUE                                                                                                                                     |       | 3,514,633                        |        | 616,252 |   |
| OTHER  LIABILITIES                                                                                                                                    |       | 1,453,240                        |        | 505,900 |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                        |       | —                           |        | — |   |
| SHAREHOLDERS’  EQUITY:                                                                                                                           |       |                             |        |   |   |
| Common stock - authorized 60,000,000 shares, $0.10  par value; issued and outstanding 45,525,592 at May 31, 2005 and  45,264,512 at May 31, 2004 |       | 4,552,560                        |        | 4,526,451 |   |
| Additional paid-in capital                                                                                                                            |       | 32,691,614                       |        | 32,798,742 |   |
| Retained earnings                                                                                                                                     |       | 79,856,954                       |        | 55,956,052 |   |
| Accumulated other comprehensive income (loss)                                                                                                         |       | 331,223                          |        | (328,146 | ) |
| Total shareholders’ equity                                                                                                                       |       | 117,432,351                      |        | 92,953,099 |   |
|                                                                                                                                                  |       | $                                | 157,613,233 |   | $ | 124,416,827 |   |

 

See notes to consolidated financial statements.

----

34       IMMUCOR, INC. ANNUAL REPORT 2005                       

 
| IMMUCOR, INC.  AND SUBSIDIARIES        |
|----------------------------------------|
| **CONSOLIDATED  STATEMENTS OF INCOME** |

 

| ** **                                 | ** ** | **For the Year Ended May 31,** | ** **  |
|--------------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                                 | ** ** | **2005**                                                | ** **  | **2004** | ** ** | **2003** | ** ** |
| NET SALES                                  |       | $                                                       | 144,785,544 |   | $ | 112,557,916 |   | $ | 98,647,794 |   |
| COST OF SALES                              |       | 57,540,432                                              |        | 50,487,588 |   | 42,939,244 |   |
| GROSS PROFIT                               |       | 87,245,112                                              |        | 62,070,328 |   | 55,708,550 |   |
| OPERATING EXPENSES:                        |       |                                                    |        |   |   |   |   |
| Research and  development                  |       | 4,463,430                                               |        | 3,749,158 |   | 2,051,055 |   |
| Selling and  marketing                     |       | 18,227,531                                              |        | 16,181,987 |   | 13,834,671 |   |
| Distribution                               |       | 8,043,940                                               |        | 8,498,831 |   | 6,964,789 |   |
| General and administrative                 |       | 18,559,293                                              |        | 11,568,975 |   | 10,185,979 |   |
| Amortization  expense and other            |       | 699,235                                                 |        | 369,361 |   | 368,374 |   |
|                                       |       | 49,993,429                                              |        | 40,368,312 |   | 33,404,868 |   |
| INCOME FROM OPERATIONS                     |       | 37,251,683                                              |        | 21,702,016 |   | 22,303,682 |   |
| OTHER:                                     |       |                                                    |        |   |   |   |   |
| Interest  income                           |       | 623,750                                                 |        | 41,039 |   | 126,838 |   |
| Interest  expense                          |       | (661,641                                                | )           | (881,527 | ) | (2,406,370 | ) |
| Other  (expense) income, net               |       | 766,544                                                 |        | (597,959 | ) | 158,318 |   |
|                                       |       | 728,653                                                 |        | (1,438,447 | ) | (2,121,214 | ) |
| INCOME BEFORE INCOME TAXES                 |       | 37,980,336                                              |        | 20,263,569 |   | 20,182,468 |   |
| INCOME TAXES                               |       | 14,070,682                                              |        | 7,725,763 |   | 5,812,711 |   |
| NET INCOME                                 |       | $                                                       | 23,909,654  |   | $ | 12,537,806 |   | $ | 14,369,757 |   |
| INCOME PER SHARE                           |       |                                                    |        |   |   |   |   |
| Per common  share                          |       | $                                                       | 0.53        |   | $ | 0.28 |   | $ | 0.34 |   |
| Per common share – assuming  dilution |       | $                                                       | 0.50        |   | $ | 0.27 |   | $ | 0.32 |   |

 

See notes to consolidated financial statements.

----

                                                 RESULTS         35

 

 
| IMMUCOR, INC.  AND SUBSIDIARIES                           |
|-----------------------------------------------------------|
| **CONSOLIDATED  STATEMENTS OF SHAREHOLDERS’ EQUITY** |

 

| ** **                                              | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                              | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**  | ** ** |
| ** **                                              | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** |
| ** **                                              | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income (Loss)** | ** ** | **Equity** | ** ** |
| BALANCE, MAY 31, 2002                              |       | 39,000,270            |       | $           | 3,900,029  |           | $          | 16,391,005        |       | $                      | 29,056,538 |       |       | $ | (5,394,698 | ) |   |   | $ | 43,952,874 |   |   |
| Exercise of stock options  and warrants                 |       | 4,420,601             |       | 442,059     |       | 6,887,170      |       | —            |       |                   | —     |       |       |   | 7,329,229 |   |   |
| Tax benefits related to stock options and other         |       | —                |       | —      |       | 3,431,181      |       | —            |       |                   | —     |       |       |   | 3,431,181 |   |   |
| Comprehensive income:                                   |       |                  |       |        |       |           |       |              |       |                   |       |       |       |   |   |   |   |
| Foreign  currency translation adjustment                |       | —                |       | —      |       | —         |       | —            |       |                   | 4,591,888  |       |       |   | 4,591,888 |   |   |
| Hedge loss  reclassified into earnings                  |       | —                |       | —      |       | —         |       | —            |       |                   | 20,548     |       |       |   | 20,548 |   |   |
| Net income                                              |       | —                |       | —      |       | —         |       | 14,369,757        |       |                   | —     |       |       |   | 14,369,757 |   |   |
| Total comprehensive income                              |       |                  |       |        |       |           |       |              |       |                   |       |       |       |   | 18,982,193 |   |   |
| BALANCE, MAY 31, 2003                              |       | 43,420,871            |       | $           | 4,342,088  |           | $          | 26,709,356        |       | $                      | 43,426,295 |       |       | $ | (782,262 | ) |   |   | $ | 73,695,477 |   |   |
| Exercise of stock options  and warrants                 |       | 1,846,713             |       | 184,671     |       | 2,507,474      |       | —            |       |                   | —     |       |       |   | 2,692,145 |   |   |
| Tax benefits related to stock options and other         |       | —                |       | —      |       | 3,581,809      |       | —            |       |                   | —     |       |       |   | 3,581,809 |   |   |
| Cash paid for fractional shares from stock split        |       | (3,072                | )          | (308        | )          | 103            |       | (8,049            | )          |                   | —     |       |       |   | (8,254 | ) |   |
| Comprehensive income:                                   |       |                  |       |        |       |           |       |              |       |                   |       |       |       |   |   |   |   |
| Foreign  currency translation adjustment                |       | —                |       | —      |       | —         |       | —            |       |                   | 433,568    |       |       |   | 433,568 |   |   |
| Hedge loss  reclassified into earnings                  |       | —                |       | —      |       | —         |       | —            |       |                   | 20,548     |       |       |   | 20,548 |   |   |
| Net income                                              |       | —                |       | —      |       | —         |       | 12,537,806        |       |                   | —     |       |       |   | 12,537,806 |   |   |
| Total comprehensive income                              |       |                  |       |        |       |           |       |              |       |                   |       |       |       |   | 12,991,922 |   |   |
| BALANCE, MAY 31, 2004                              |       | 45,264,512            |       | $           | 4,526,451  |           | $          | 32,798,742        |       | $                      | 55,956,052 |       |       | $ | (328,146 | ) |   |   | $ | 92,953,099 |   |   |
| Exercise of stock options                               |       | 884,154               |       | 88,416      |       | 1,469,505      |       | —            |       |                   | —     |       |       |   | 1,557,921 |   |   |
| Expense recognized on options awarded to  non-employees |       | —                |       | —      |       | 21,175         |       | —            |       |                   | —     |       |       |   | 21,175 |   |   |
| Stock repurchases and retirements                       |       | (622,500              | )          | (62,250     | )          | (7,965,317     | )          | —            |       |                   | —     |       |       |   | (8,027,567 | ) |   |
| Cash paid for fractional shares from stock split        |       | (574                  | )          | (57         | )          | 16             |       | (8,752            | )          |                   | —     |       |       |   | (8,793 | ) |   |
| Tax benefits related to stock options and other         |       | —                |       | —      |       | 6,367,493      |       | —            |       |                   | —     |       |       |   | 6,367,493 |   |   |
| Comprehensive income:                                   |       |                  |       |        |       |           |       |              |       |                   |       |       |       |   |   |   |   |
| Foreign  currency translation adjustment                |       | —                |       | —      |       | —         |       | —            |       |                   | 638,821    |       |       |   | 638,821 |   |   |
| Hedge loss  reclassified into earnings                  |       | —                |       | —      |       | —         |       | —            |       |                   | 20,548     |       |       |   | 20,548 |   |   |
| Net income                                              |       | —                |       | —      |       | —         |       | 23,909,654        |       |                   | —     |       |       |   | 23,909,654 |   |   |
| Total comprehensive income                              |       |                  |       |        |       |           |       |              |       |                   |       |       |       |   | 24,569,023 |   |   |
| BALANCE,  MAY 31, 2005                             |       | 45,525,592            |       | $           | 4,552,560  |           | $          | 32,691,614        |       | $                      | 79,856,954 |       |       | $ | 331,223 |   |   |   | $ | 117,432,351 |   |   |

 

See notes to consolidated financial statements.

----

36         IMMUCOR, INC. ANNUAL REPORT 2005                       

 
| IMMUCOR, INC.  AND SUBSIDIARIES            |
|--------------------------------------------|
| **CONSOLIDATED  STATEMENTS OF CASH FLOWS** |

 

| ** **                                                                         | ** ** | **Year Ended May 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| OPERATING ACTIVITIES:                                                              |       |                                  |       |   |   |   |   |
| Net income                                                                         |       | $                                     | 23,909,654 |   | $ | 12,537,806 |   | $ | 14,369,757 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                  |       |   |   |   |   |
| Depreciation  and amortization of property and equipment                           |       | 7,015,258                             |       | 5,824,696 |   | 5,144,326 |   |
| Amortization  of other assets                                                      |       | 377,555                               |       | 369,361 |   | 368,374 |   |
| Amortization  of debt issue costs                                                  |       | 48,629                                |       | 245,971 |   | 449,817 |   |
| Loss on  retirement of fixed assets                                                |       | 700,063                               |       | 189,348 |   | 111,200 |   |
| Loss on debt  retirements                                                          |       | —                                |       | 924,344 |   | — |   |
| Impairment of  long-term investment                                                |       | —                                |       | — |   | 230,000 |   |
| Deferred tax  provision (benefit)                                                  |       | (1,634,741                            | )          | 1,199,353 |   | (601,092 | ) |
| Provision for  doubtful accounts                                                   |       | 941,682                               |       | 206,223 |   | 641,996 |   |
| Gain on sale  of long-term investment                                              |       | (530,000                              | )          | — |   | — |   |
| Other                                                                              |       | 390,937                               |       | — |   | — |   |
| Changes in  operating assets and liabilities:                                      |       |                                  |       |   |   |   |   |
| Accounts  receivable, trade                                                        |       | (8,786,020                            | )          | (491,665 | ) | 4,056,154 |   |
| Income taxes                                                                       |       | 11,195,330                            |       | 2,799,701 |   | (78,311 | ) |
| Inventories                                                                        |       | (2,015,314                            | )          | (3,322,551 | ) | (2,132,654 | ) |
| Other  receivables                                                                 |       | 140,316                               |       | 1,072,069 |   | (1,785,881 | ) |
| Other current  assets                                                              |       | (846,484                              | )          | 321,402 |   | (835,037 | ) |
| Other  long-term assets                                                            |       | (240,670                              | )          | (507,754 | ) | 72,656 |   |
| Accounts  payable                                                                  |       | (143,813                              | )          | 160,504 |   | 143,435 |   |
| Deferred  revenue                                                                  |       | 5,767,970                             |       | 935,752 |   | 430,086 |   |
| Other current  liabilities                                                         |       | 4,249,036                             |       | 449,654 |   | (510,782 | ) |
| Other  long-term liabilities                                                       |       | 946,260                               |       | (253,712 | ) | 219,773 |   |
| Total  adjustments                                                                 |       | 17,575,994                            |       | 10,122,696 |   | 5,924,060 |   |
| Cash provided by operating  activities                                             |       | 41,485,648                            |       | 22,660,502 |   | 20,293,817 |   |
| INVESTING ACTIVITIES:                                                              |       |                                  |       |   |   |   |   |
| Purchases of  / deposits on property and equipment                                 |       | (6,592,936                            | )          | (7,106,490 | ) | (5,234,192 | ) |
| Proceeds from  sale of property, plant and equipment                               |       | 27,710                                |       | — |   | — |   |
| Sale of  long-term investment                                                      |       | 1,300,000                             |       | — |   | — |   |
| Surrender of  life insurance policy for cash                                       |       | 110,000                               |       | — |   | — |   |
| Investments  in held-to-maturity marketable debt securities                        |       | (1,960,554                            | )          | — |   | — |   |
| Cash used in investing  activities                                                 |       | (7,115,780                            | )          | (7,106,490 | ) | (5,234,192 | ) |
|                                                                                    |            |                                       |            |  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

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                                                RESULTS         37

 

 
| IMMUCOR, INC.  AND SUBSIDIARIES                        |
|--------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF CASH  FLOWS (continued)** |

 

| ** **                                                         | ** ** | **Year Ended May 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| FINANCING ACTIVITIES:                                              |       |                                  |       |   |   |   |   |
| Borrowings, net of repayments  under line of credit agreements     |       | $                                     | (152,625   | ) | $ | 69,940 |   | $ | (3,351,534 | ) |
| Borrowings of long-term debt                                       |       | —                                |       | 12,000,000 |   | — |   |
| Repayments of long-term debt and  capital leases                   |       | (5,805,509                            | )          | (26,472,874 | ) | (11,378,290 | ) |
| Repurchase of stock                                                |       | (8,027,567                            | )          | — |   | — |   |
| Proceeds from exercise of stock  options and warrants              |       | 1,582,147                             |       | 3,299,116 |   | 7,865,001 |   |
| Payment of cash from fractional  shares resulting from stock split |       | (8,793                                | )          | (8,254 | ) | — |   |
| Payment of debt issue costs                                        |       | —                                |       | (153,080 | ) | (1,050,000 | ) |
| Cash used in financing activities                                  |       | (12,412,347                           | )          | (11,265,152 | ) | (7,914,823 | ) |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                            |       | (547,064                              | )          | 224,905 |   | 25,955 |   |
| INCREASE IN CASH AND CASH EQUIVALENTS                              |       | 21,410,457                            |       | 4,513,765 |   | 7,170,757 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                     |       | 15,697,082                            |       | 11,183,317 |   | 4,012,560 |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                           |       | $                                     | 37,107,539 |   | $ | 15,697,082 |   | $ | 11,183,317 |   |
| NON-CASH INVESTING AND FINANCING ACTIVITIES:                       |       |                                  |       |   |   |   |   |
| Capital lease obligations                                          |       | $                                     | 385,018    |   | $ | 938,847 |   | $ | 695,357 |   |
| CASH PAID DURING THE YEAR FOR:                                     |       |                                  |       |   |   |   |   |
| Interest                                                           |       | $                                     | 834,363    |   | $ | 1,368,237 |   | $ | 2,525,472 |   |
| Income taxes                                                       |       | 5,352,704                             |       | 4,655,915 |   | 6,950,840 |   |

 

See notes to consolidated financial statements.

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38         IMMUCOR, INC. ANNUAL REPORT 2005                       

 
| IMMUCOR, INC.  AND SUBSIDIARIES                 |
|-------------------------------------------------|
| **NOTES  TO CONSOLIDATED FINANCIAL STATEMENTS** |

 

**1.**                  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

*Nature of Business*– TheCompany’s principal business activities are the development, manufacture andmarketing of immunological diagnostic medical products. The Company operatesfacilities in North America and Europe.

*Consolidation Policy*– Theconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries (see Note 14 to the consolidated financialstatements). All significant inter-company balances and transactions have beeneliminated in consolidation.

*Use of Estimates*– Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates.

*Reclassifications*– Certainprior year balances have been reclassified to conform to the current yearpresentation, including the classification of certain salary expenses. Thesereclassifications had no impact on the consolidated balance sheets,consolidated statements of stockholders’ equity or consolidated statements ofcash flows, but did have an impact on certain captions on the consolidatedstatements of income. Additionally, the consolidated balance sheets includereclassifications of certain assets under capital lease, presentation of deferredrevenues separately from other accrued liabilities and other liabilities, andretroactive adjustments of equity due to a three-for-two stock split. Theseretroactive adjustments of equity also impacted the consolidated statements ofstockholders’ equity, but retroactive adjustments and reclassifications had noimpact on the consolidated statements of income or on the consolidatedstatements of cash flows.

*Stock-Based Compensation* – TheCompany currently accounts for stock option grants in accordance with APBOpinion No. 25, *Accounting for StockIssued to Employees*, and accordingly does not recognize compensationexpense for the stock option grants. The Company grants stock options for afixed number of shares to employees with an exercise price equal to the fairvalue of the shares at the date of the grant. Beginning in fiscal 2005, theCompany began awarding grants to eligible new hires with the respectiveexercise price equal to the closing price on the business day immediately priorto the grant date; therefore in these cases, the exercise price may be higheror lower than the fair value of the shares at the date of grant. Management hasdetermined that the aggregate difference between the grant date fair values andthe exercise prices for grants awarded to new hires is not material, andaccordingly has not included any such compensation cost related to these grantsin the Company’s results of operations.

In December 2002,the FASB issued SFAS No. 148, *Accounting for Stock-BasedCompensation – Transition and Disclosure – an amendment of FASB Statement No. 123.*This Statement provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, this Statement amends the disclosurerequirements of Statement 123 to require prominent disclosures in both annualand interim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results. Thefollowing table illustrates the effect on net income and earnings per share asif the Company had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation.

| ** **                                                                                                                      | ** ** | **For the year ended May 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2005**                                                | ** ** | **2004 (1)** | ** ** | **2003 (1)** | ** ** |
| Net income as reported                                                                                                          |       | $                                                       | 23,909,654 |   | $ | 12,537,806 |   | $ | 14,369,757 |   |
| Deduct total stock-based employee compensation  expense determined under fair value based methods for all awards, net of  taxes |       | 2,066,427                                               |       | 1,111,142 |   | 1,317,804 |   |
| Pro forma net income                                                                                                            |       | $                                                       | 21,843,227 |   | $ | 11,426,664 |   | $ | 13,051,953 |   |
| Earnings per share as  reported:                                                                                                |       |                                                    |       |   |   |   |   |
| Per common  share                                                                                                               |       | $                                                       | 0.53       |   | $ | 0.28 |   | $ | 0.34 |   |
| Per common  share–assuming dilution                                                                                        |       | $                                                       | 0.50       |   | $ | 0.27 |   | $ | 0.32 |   |
| Pro forma earnings per  share:                                                                                                  |       |                                                    |       |   |   |   |   |
| Per common  share                                                                                                               |       | $                                                       | 0.48       |   | $ | 0.26 |   | $ | 0.31 |   |
| Per common share–assuming  dilution                                                                                        |       | $                                                       | 0.46       |   | $ | 0.24 |   | $ | 0.29 |   |

 

*Concentration of Credit Risk**–*Cash and cash equivalents in the Consolidated BalanceSheets includes $36.1 million and $15.7 million at May 31, 2005 and2004, respectively, representing cash on deposit with high-quality financialinstitutions, located primarily in the U.S. and Italy. At May 31, 2005,the Company also had short-term investments in high-quality debt securities 

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                                                RESULTS         39

 

totaling $3.0 million, of which $2.0 million has been shown separatelyas Short-term investments, with the remainder, representing those withmaturities equal to or less than 90 days, included in Cash and cash equivalentsin the Consolidated Balance Sheets.

The Company obtains raw materials from numerous outsidesuppliers. The Company is not dependent on any single supplier other thancertain instrumentation manufacturers (see Note 11 to the consolidatedfinancial statements) and the joint manufacturer of some of the Company’smonoclonal antibody-based products. The Company believes that its businessrelationships with its suppliers are excellent.

Certain of the Company’s products are derived fromblood having particular or rare combinations of antibodies or antigens that arefound in a limited number of individuals. The Company to date has notexperienced any major difficulty in obtaining sufficient quantities of suchblood for use in manufacturing its products, but there can be no assurance thatthe Company will always have available to it a sufficient supply of such blood.

The Company has only one customer for collagen and onecustomer for the collagen by-product. Sales to these customers are listed as “Netcollagen sales” in Note 14 to the consolidated financial statements.

At May 31, 2005 and 2004, the Company’s accountsreceivable balance of $34.6 million and $26.5 million, respectively, was 49%and 59% of foreign origin, predominantly European. Some European countriesrequire longer payment terms as a part of doing business. This may subject theCompany to a higher risk of uncollectiblity. Consideration of this risk is madewhen the allowance for doubtful accounts is evaluated. The Company generallydoes not require collateral from its customers. Factoring of accountsreceivable is an additional method used by the Company to mitigate the risk ofuncollectibility for certain customers who routinely take longer than one yearto pay. Factored receivables are disclosed as other receivables and were $0.9million and $1.2 million as of May 31, 2005 and 2004, respectively. Whenan account is factored, the balance of the account is classified as otherreceivable on the consolidated balance sheet and the factoring fee is chargedagainst revenues on the consolidated statement of income. The factoring fee,totaling approximately $72,000 and $74,000, respectively, for fiscal 2005 and2004, represents a discount on the related accounts receivable at an effectiveinterest rate of approximately 5.1% and 4.0%, respectively, for fiscal 2005 and2004. The discount rate is estimated using an effective interest rate over thehistorical collection period. As collection occurs, the Company recognizesinterest income.

*Cash and Cash Equivalents**–*TheCompany considers all highly liquid investments with an original maturity ofthree months or less when purchased to be cash and cash equivalents.

*Short-term Investments**–*In the fourth quarter of fiscal 2005, the Company investedin high-quality short-term debt securities, at a discount of approximately$47,000, and has classified these securities as held-to-maturity. The discountis being amortized into income over the maturity periods of the relatedsecurities; such amortization is included in interest income. At May 31,2005, the aggregate carrying value, net of unamortized discount, is approximately$3.0 million, of which approximately $1.0 million has an original maturity ofthree months or less and is therefore included in cash and cash equivalents. Theremaining balance of $2.0 million has an original maturity of greater thanthree months but less than a year.

*Inventories**–*Inventories are stated at the lower of first-in, first-outcost or market. Cost includes material, labor and manufacturing overhead. TheCompany uses a standard cost system as a tool to monitor production efficiency.The standard cost system applies estimated labor and manufacturing overheadfactors to inventory based on budgeted production and efficiency levels,staffing levels and costs of operation, based on the experience and judgment ofmanagement. Actual costs and production levels may vary from the standardestablished and are charged to the consolidated statement of income as acomponent of cost of sales. Since U.S. generally accepted accounting principlesrequire that the standard cost approximate actual cost, periodic adjustmentsare necessary. The provision for obsolete inventories is reviewed on aquarterly basis. All finished good reagent products which will expire in lessthan six months are reserved in the period in which this expiration thresholdis met. Any raw, intermediate, or finished product that has been quarantinedbecause it has failed quality control (QC) is reserved in the period in whichthe product fails QC testing. Should the product be successfully reworked andpass final quality control checks, it is then valued at its standard cost. Obsoleteand quarantined inventories are physically segregated from useable and saleableinventories and destroyed according to regulatory and fiscal guidelines. Nomaterial changes have been made to the inventory policy during fiscal 2005,2004 or 2003.

*Interest Rate Swap**–*TheCompany uses interest rate swaps to hedge interest rate risk associated withthe cash flows of some of its borrowings. Any differences paid or received oninterest rate swap agreements are recognized as adjustments to interest expenseas incurred, thereby adjusting the effective interest rate on the underlyingobligation. The Company has established strict counter-party credit guidelinesand only enters into transactions with financial institutions of investmentgrade or better. As a result, the Company estimates the risk of counter-partydefault to be minimal. In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 133, *Accounting for DerivativeInstruments and Hedging Activities,*the Company recognizes allderivatives on the balance sheet at fair value, based on dealer quotes. Forderivatives designated as hedges, the change in the fair value of thederivative will either be offset against the change in the fair value of the hedgedasset, liability, or firm commitment through 

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40         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

earnings or recognized in other comprehensive income until the hedgeditem is recognized in earnings. The ineffective portion, as determined bycomparing the terms of the interest rate swap agreements and their designateddebt instruments, of a derivative’s change in fair value will be immediatelyrecognized in earnings. At May 31, 2005 and May 31, 2004, the Companyhad an interest rate swap agreement in the Company’s functional currency,maturing in September 2005, with an initial notional principal amount of$15.0 million that amortizes over the life of the instrument. The fair value ofthe interest rate swap agreement represents the estimated receipts or paymentsthat would be made to terminate the agreement. The liability to terminate theagreement in the Company’s functional currency was $19,000 and is included inOther accrued liabilities at May 31, 2005; the liability was $157,000 andis included in Other liabilities at May 31, 2004. See Note 3 to the consolidatedfinancial statements.

*Fair Value of Financial Instruments**–*Thecarrying amounts reported in the consolidated balance sheets for cash and cashequivalents, accounts receivable, long-term investment and accounts payableapproximate their fair values. The fair values of the Company’s long-term debtapproximate the reported amounts in the accompanying consolidated balancesheets as their interest rates approximate the May 31, 2005 and 2004market rates for similar debt instruments.

*Property, Plant and Equipment**–*Property,plant and equipment is stated at cost less accumulated depreciation. Expendituresfor replacements are capitalized, and the replaced items are retired. Normalmaintenance and repairs are charged to operations. Major maintenance and repairactivities that significantly enhance the useful life of the asset arecapitalized. Gains and losses from the sale of plant assets are included inincome. Depreciation is computed using the straight-line method over theestimated lives of the related assets ranging from three to 30 years. Certaininternal and external costs incurred in the development of computer softwarefor internal use are capitalized and included in property, plant and equipmentin accordance with Statement of Position 98-1, *Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*.

*Excess of Cost Over Net Assets Acquired**–*Excess of cost over net assets acquired comprises the costof purchased businesses in excess of values assigned to net tangible assetsreceived, and was being amortized using the straight-line method over 20 to 30years. Accumulated amortization at May 31, 2005 and 2004 was $7.4 millionand $7.3 million respectively. Effective June 1, 2002, the Company adoptedSFAS No. 142, *Goodwill and OtherIntangible Assets*. Under Statement 142, goodwill and indefinitelived intangible assets are no longer amortized but are reviewed annually forimpairment, or more frequently if impairment indicators arise. Intangibleassets that have finite lives are continuing to be amortized over their usefullives. The Company believes that the carrying value of the recorded long-livedassets is not impaired.

*Long-Term Investment and Other Long-Lived Assets**–*On November 10, 2004, the Company sold its common stockinvestment in Lionheart Technologies, Inc. (“Lionheart”), a long-terminvestment which was being accounted for using the cost method and had acarrying value of $770,000 on the date of sale. In exchange, the Companyreceived $1.3 million in cash from the purchaser, Bio-Tek Instruments, Inc.,a wholly owned subsidiary of Lionheart. Accordingly, the Company recorded again of $530,000 included in Other Income (Expense) in the ConsolidatedStatements of Income for the year ended May 31, 2005. See Note 11 to theconsolidated financial statements.

The Company evaluates long-lived assets for impairmentwhen events and circumstances indicate that the assets might be impaired andrecords an impairment loss if the undiscounted cash flows estimated to begenerated by those assets are less than the carrying amount of those assets. Theimpairment loss recognized is equal to the difference between the undiscountedcash flows and the carrying amount of the assets. In fiscal 2003, the Companyevaluated the carrying value of the long-term investment in LionheartTechnologies and estimated that the undiscounted cash flows indicatedimpairment. An impairment loss of $230,000 was charged to other expenseincluded in Other – Net in the Consolidated Statement of Income for the yearended May 31, 2003.

*Deferred Costs**–*Deferred licensing costs primarily consist of distributionrights for the Company’s complete line of reagents purchased from its Canadiandistributor, Immucor Canada, Inc., on September 1, 1998, and arebeing amortized using the straight-line method over ten years. The remainingbalance is attributed to license fees for cell lines acquired in the purchaseof Gamma Biologicals, Inc. (“Gamma”). Once a product is developed from acell line, the related license fee is amortized over the term of the respectiveagreement, generally five years. Accumulated amortization related to deferredlicensing costs at May 31, 2005 and 2004 was $1.8 million and $1.5million, respectively.

Costs and fees associated with the Company’s bank lineof credit agreements and debt obligations are included in other assets in theaccompanying consolidated balance sheets and are amortized over the term of therelated debt agreements. In the third quarter of fiscal 2004, the Company wroteoff $924,000 in unamortized deferred financing costs as a result of therepayment and cancellation of the associated debt. During the last half offiscal 2004, an additional $132,000 in deferred financing costs was recorded,associated with the Company’s new credit facility with SunTrust Bank (see Note3 to the consolidated financial statements). Total net deferred loan costs asof May 31, 2005 and 2004 were approximately $78,000 and $150,000,respectively. Amortization of these deferred financing costs is included ininterest expense in the consolidated statements of income. Amortization relatedto deferred costs totaled approximately $49,000, $246,000 and $450,000 for theyears ended May 31, 2005, 2004 and 2003, respectively.

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                                                RESULTS         41

 

*Foreign Currency Translation**–*Thefinancial statements of foreign subsidiaries have been translated into U.S.dollars in accordance with SFAS No. 52,*Foreign CurrencyTranslation*. All balance sheet accounts have been translated usingthe exchange rates in effect at the balance sheet dates, except for the equityaccounts which are reported at historical amounts. Income statement amountshave been translated using the average exchange rates for each year. The gainsand losses resulting from the changes in exchange rates from year to year havebeen reported separately as a component of comprehensive income. The effect offoreign currency transaction gains and losses has been recorded in theaccompanying Consolidated Statements of Income. In 2005, 2004, and 2003 theCompany recorded foreign currency transaction gains of approximately $541,000,$491,000, and $697,000, respectively. For fiscal 2005, the fluctuation of theEuro weighted average exchange rate increased net sales by approximately $2.5million. A ten percent change in the year-to-date weighted average Euroexchange rate would have had the effect of increasing or decreasing net salesby approximately $3.8 million.

*Revenue Recognition**–*TheCompany recognizes revenue when the following four basic criteria have beenmet: (1) persuasive evidence of an arrangement exists; (2) deliveryhas occurred or services rendered; (3) the fee is fixed and determinable;and (4) collectibility is reasonably assured. Should changes in conditionscause management to determine these criteria are not met for certain futuretransactions, revenue recognized for any reporting period could be adverselyaffected.

**·*****  ***Reagentsales

Revenue from the sale of theCompany’s reagents in the U.S. market is recognized upon shipment when bothtitle and risk of loss transfer to the customer upon shipment. Revenue from thesale of the Company’s reagents in the export market is recognized FOB customsclearance when both title and risk of loss transfer to the customer.

**·*****  ***Humancollagen and collagen by-product sales

Revenue from the sale of theCompany’s human collagen product and from the sale of by-products of collagenis recognized upon shipment and either passage of a 10-day inspectionperiod (or, for by-products of collagen, passage of a 30-day inspectionperiod) or upon receipt of notification of customer acceptance. In accordancewith a revenue-sharing agreement between the Company and the Company’s humancollagen customer, revenue from the sale of collagen by-products is allocated66.7% to the Company and 33.3% to the collagen customer.

**·*****  ***Medicalinstrument sales

Revenue from the sale of theCompany’s medical instruments is generally recognized upon shipment andcompletion of contractual obligations relating to training and/or installationbased on terms of the related agreements. Revenue from rentals of the Company’smedical instruments is recognized over the life of the rental agreement. Instrumentservice contract revenue is recognized over the life of the contract.

The Company recognizes revenue onthe sale of medical instruments in accordance with Emerging Issues Task Force (“EITF”)Issue No. 00-21, *Accounting for RevenueArrangements with Multiple Deliverables*, for agreements entered intobeginning in the second quarter of fiscal year 2004. The Company’s medicalinstrument sales contracts involve multiple deliverables, including the sale orrental of an instrument (including training), the subsequent servicing of theinstrument during the first year, reagent products provided to the customerduring the validation period and, in some cases, price guarantees forconsumables purchased during the contract period and/or a software interface tobe provided to the customer. The Company has determined the fair value ofcertain of these elements, such as training, validation reagents, and firstyear service. The portion of the instrument sales price applicable to theinstrument itself is recognized upon shipment and completion of contractualobligations relating to training and/or installation and/or provision of asoftware interface based on the terms of the related agreement. If theagreement does not include any price guarantees, the sales price in excess ofthe fair values of training, validation reagents, and service is allocated tothe instrument itself. The fair value of at least one customer training sessionis recognized as revenue when the instrument itself is recognized provided thetraining has been provided. If multiple sessions are contractually providedfor, and not all training has been complete at the time the instrument isrecognized, additional training revenue is recognized upon delivery. The fairvalue of reagent products provided to the customer during the validation periodis also recognized when the instrument itself is recognized. The fair value offirst year service is deferred and recognized over the first year of thecontract. The Company believes it not possible to determine the fair value ofprice guarantees. If the agreement contains price guarantees, the entire salesprice is deferred and recognized over the guarantee period. The allocation ofthe total consideration received based on the estimated fair value of the unitsof accounting requires judgment by management.

In certain limited situationsinvolving third-party leasing arrangements, the Company enters into arepurchase agreement whereby if the ultimate customer terminates the lease, theCompany agrees to repurchase the instrument for an amount equal to theremaining unpaid lease payments owed to the third-party leasing company. Inthese limited situations, the Company continues to defer the revenue related tothe sale and subsequently recognizes the revenue over the lease term as thelease 

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42         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

payments are made to the third-partyleasing company and it is clear that the ultimate customer has not terminatedthe related lease. In prior periods, the Company also deferred thecorresponding cost of these instrument sales and recognized the costs over thesame period as the related revenue. During the fiscal quarter ended February 28,2005, the Company determined that it was more appropriate to recognize theinstrument costs in these deferral situations when the instrument has beeninstalled and written acceptance has been received from the customer. Accordingly,during the fiscal quarter ended February 28, 2005, the Company recordedadditional cost of sales totaling approximately $327,000, which was related toprior quarters. The Company now records all instrument costs at the time theinstrument is installed and accepted by the customer and title has legallytransferred to the customer.

**·*****    ***Salessubject to a plan of factoring

Sales subjectto a plan of factoring are recorded at their net realizable value (defined asgross sales less the annual estimated cost of factoring the sale). Should thefactored sale remain uncollected by the factor at the end of one year, anestimate of the additional factoring discount is made and recorded monthly asan additional reduction of sales revenue.

*Shipping and Handling Revenues and Costs**–*The amounts charged to customers for shipping and handlingof orders are classified as revenue and reported in the statement of income asnet sales as invoiced. The cost of handling customer orders and the cost ofshipments are reported in the operating cost section of the statements ofincome as distribution expense as incurred. The cost of handling customerorders and the cost of shipments were approximately $8.0 million, $8.5 millionand $7.0 million for the years ended May 31, 2005, 2004 and 2003,respectively.

*Earnings Per Share**–*All earnings per share amounts reflect the December 2004,July 2004, November 2003 and September 2002 three-for-two stocksplits. See Note 7 to the consolidated financial statements.

*Accounts Receivable, Trade**–*Trade receivables at May 31, 2005, totaling $34.6million, and at May 31, 2004, totaling $26.5 million, are net ofallowances for doubtful accounts of $1.9 million and $1.3 million, respectively.The allowance for doubtful accounts represents a reserve for estimated lossesresulting from the inability of its customers to make required payments. TheCompany’s current policy for its North American affiliates, based on historicalcollection experience, is to provide an allowance of 2% of domestic third-partygross receivables and an allowance of 10% of international third-party grossreceivables. The Company’s current policy for all other affiliates, based onhistorical collection experience, is to provide an allowance of 4% of allthird-party gross receivables. In addition, any third-party invoices overthree years old are fully provided for in the allowance. At May 31, 2005,the allowance is approximately 5.1% of the gross accounts receivable balance.The Company continually monitors the collectibility of its customer accountsand when indications arise that an amount is not likely to be collected, theamount is charged to the allowance for doubtful accounts. If the financialcondition of any of Immucor’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances could berequired.

*Advertising Costs**–*The amounts for advertising are expensed as incurred andare classified as selling and marketing operating expenses. Advertising expensewas $0.4 million, $0.7 million, and $0.4 million for the years ended May 31,2005, 2004 and 2003, respectively.

*Impact of Recently Issued Accounting Standards**–*In November 2004, the FASB issued Statement No. 151,*Inventory Costs—an amendment of ARB No. 43,Chapter 4*(“SFAS No. 151”). SFAS No. 151 amends theguidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,previously stated that “. . . under some circumstances, items such as idlefacility expense, excessive spoilage, double freight, and rehandling costs maybe so abnormal as to require treatment as current period charges. . . “ SFAS No. 151requires that those items be recognized as current-period charges regardless ofwhether they meet the criterion of “so abnormal.” In addition, this Statementrequires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. Thisnew standard is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The Company is in the process of evaluatingthe impact SFAS No. 151 will have upon adoption but does not anticipate itwill have a significant impact on its financial statements.

In December 2004, the FASB issued Statement No. 153,*Exchanges of Nonmonetary Assets,**an amendment of APB Opinion No. 29*, *Accounting for Nonmonetary Transactions*(“SFAS No. 153”).The amendments made by SFAS No. 153 are based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged. Further, the amendments eliminate the narrow exceptionfor nonmonetary exchanges of similar productive assets and replace it with abroader exception for exchanges of nonmonetary assets that do not havecommercial substance. Previously, Opinion 29 required that the accounting foran exchange of a productive asset for a similar productive asset or anequivalent interest in the same or similar productive asset should be based onthe recorded amount of the asset relinquished. By focusing the exception on exchangesthat lack commercial substance, the Board believes SFAS No. 153 producesfinancial reporting that more faithfully represents the economics of thetransactions. This statement is effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005. The Companydoes not believe the adoption of this new statement will have a material impacton its financial statements.

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                                                RESULTS         43

 

In December 2004, the FASB issued Statement No. 123(revised 2004), *Share-Based Payment*,which is a revision of FASB Statement No. 123,*Accounting for Stock-Based Compensation* (“SFAS No. 123(R)”). Generally,the approach in SFAS No.123(R) is similar to the approach described in Statement 123. However,SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the statement of income based on their fairvalues. Pro forma disclosure is no longer an alternative. Upon issuance, SFAS123(R) required public companies to apply the provisions of the Statementin the first interim or annual reporting period beginning after June 15,2005. In April 2005, the Securities and Exchange Commission approved a newrule that delays the effective date, requiring public companies to applythe Statement in the first annual period beginning after June 15, 2005.Except for the deferral of the effective date, the guidance in SFAS 123(R) isunchanged. The Company expects to adopt SFAS 123(R) in its first interimperiod of fiscal 2007 using the modified retrospective transition methodwhereby prior period results are restated to reflect the impact of adoption ofSFAS 123(R) and have concluded that SFAS 123(R) will have a materialimpact on our financial position and results of operations. The adoption ofthis statement should impact net income and earnings per share similar to thepro forma amounts disclosed in the table above for fiscal 2005, 2004 and 2003. Actualresults in future years, however, may differ from the pro forma resultsreflected above due to an increase or decrease in grants of employee stockoptions and/or changes in assumptions, such as the use of estimated versusactual forfeitures or a change in expected life.

In March 2005, the FASB issued Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations—an interpretation of FASBStatement No. 143 (“FIN 47”). This Interpretation clarifies that the termconditional asset retirement obligation as used in SFAS No. 143,Accounting for Asset Retirement Obligations, refers to a legal obligation toperform an asset retirement activity in which the timing and (or) methodof settlement are conditional on a future event that may or may not be withinthe control of the entity. The obligation to perform the asset retirementactivity is unconditional even though uncertainty exists about the timing and(or) method of settlement. Thus, the timing and (or) method ofsettlement may be conditional on a future event. Accordingly, an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated. This Interpretation also clarifies when an entity would havesufficient information to reasonably estimate the fair value of an assetretirement obligation. This Interpretation is effective no later than the endof fiscal years ending after December 15, 2005. The Company is in theprocess of evaluating the impact FIN 47 will have upon adoption but does notanticipate it will have a significant impact on its financial statements.

In May 2005, the FASB issued Statement No. 154,*Accounting Changes and Error Corrections*(“SFAS No. 154”), which replaces Accounting Principles Board Opinions No. 20,*Accounting Changes* and SFAS No. 3, *Reporting Accounting Changes in Interim Financial Statements-AnAmendment of APB Opinion No. 28*. SFAS No. 154 providesguidance on the accounting for and reporting of accounting changes and errorcorrections. It establishes retrospective application, or the latestpracticable date, as the required method for reporting a change in accountingprinciple and the reporting of a correction of an error. SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The Company does not expect theadoption of SFAS No. 154 to have a material impact on its financialstatements.

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44         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

**2.**                  BALANCE SHEET DETAIL

| ** **                                                | ** ** | **May 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|
| ** **                                                | ** ** | **2005**         | ** ** | **2004** | ** ** |
| **Inventories:**                                          |       |             |       |   |   |
| Raw materials                                             |       | $                | 5,710,331  |   | $ | 5,204,792 |   |
| Work in process                                           |       | 2,946,336        |       | 3,471,433 |   |
| Finished goods, goods  purchased for resale, and supplies |       | 13,179,745       |       | 11,484,633 |   |
|                                                      |       | $                | 21,836,412 |   | $ | 20,160,858 |   |
| **Property, plant and equipment:**                        |       | ** **       |       | ** ** |   |
| Assets owned:                                             |       |             |       |   |   |
| Land                                                      |       | $                | 336,097    |   | $ | 357,778 |   |
| Buildings and improvements                                |       | 7,669,308        |       | 7,452,252 |   |
| Leasehold improvements                                    |       | 4,217,429        |       | 3,497,954 |   |
| Furniture and fixtures                                    |       | 2,865,185        |       | 2,636,458 |   |
| Machinery and equipment                                   |       | 35,622,786       |       | 31,429,690 |   |
|                                                      |       | 50,710,805       |       | 45,374,132 |   |
| Less accumulated  depreciation                            |       | (29,292,444      | )          | (24,399,928 | ) |
| Property, plant and  equipment –  net                |       | 21,418,361       |       | 20,974,204 |   |
| Assets under  capital lease:                              |       |             |       |   |   |
| Furniture and fixtures                                    |       | 17,763           |       | 141,064 |   |
| Machinery and equipment                                   |       | 2,266,197        |       | 2,619,980 |   |
|                                                      |       | 2,283,960        |       | 2,761,044 |   |
| Less accumulated  depreciation                            |       | (667,594         | )          | (700,264 | ) |
| Assets under capital lease  –  net                   |       | 1,616,366        |       | 2,060,780 |   |
| Property, plant and equipment – net                  |       | $                | 23,034,727 |   | $ | 23,034,984 |   |

 

**3.**                  BANK LINE OF CREDIT AGREEMENTS AND DEBT OBLIGATIONS

| ** **                                                                                                                                         | ** ** | **May 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                         | ** ** | **2005**         | ** ** | **2004** | ** ** |
| **Primary Obligations**                                                                                                                            | ** ** |             | ** ** |   | ** ** |
| Term Loan (interest rate ranging from LIBOR plus 1.0%  to LIBOR plus 1.75% maturing December 2006)                                            |       | $                | 6,000,000  |   | $ | 11,000,000 |   |
| **Secondary  Obligations**                                                                                                                         | ** ** |             | ** ** |   | ** ** |
| Line of  credit – Spanish subsidiary (denominated in Euros at an interest rate of 4.5%  maturing in March 2005)                     |       | —           |       | 146,765 |   |
| Line of credit  – Spanish subsidiary (denominated in Euros at an interest rate of EURIBOR  plus 0.45% maturing in June 2005)             |       | 148,188          |       | 146,610 |   |
| Mortgage note  payable – Belgian subsidiary (denominated in Belgian Francs at an interest  rate of 6.25% maturing in November 2007) |       | 123,008          |       | 165,201 |   |
|                                                                                                                                               |       | 6,271,196        |       | 11,458,576 |   |
| Less current portion                                                                                                                               |       | (4,190,483       | )          | (5,190,215 | ) |
|                                                                                                                                               |       | $                | 2,080,713  |   | $ | 6,268,361 |   |

 

***Primary Obligations***

On December 18, 2003 theCompany obtained a new $27.0 million secured credit facility with SunTrust Bank.Proceeds of these borrowings were primarily used to repay the Company’sprevious arrangement with Wachovia Bank (which was cancelled upon repayment).The new credit facility matures in December 2006 and is comprised of a$15.0 million revolver and a $12.0 million term loan. The term loan is payablein quarterly installments of $1.0 million. The term loan and the revolver bearinterest of LIBOR plus additional percentage points ranging from 1.0% to 1.75%,or SunTrust Bank prime rate plus (or minus) additional percentage pointsranging from (0.5%) to 1.0% based on certain calculations as defined in theLoan Agreement. The loans are collateralized by the capital stock of all of theCompany’s subsidiaries. The Company recorded a non-cash, pre-tax charge of $924,000in the third quarter of fiscal 2004 to write off unamortized deferred financingcharges related to its previous credit facility.

----

                                                RESULTS         45

 

At May 31, 2005, there was $15.0 million in fundsavailable under the U.S. line of credit. The commitment fee on the unusedborrowings is 0.125%.

The Company’s agreement with its principal lendercontains certain financial and other covenants that, among other things, limitannual capital expenditures, limit payment of cash dividends and the repurchaseof stock, limit the incurrence of additional debt, and require the maintenanceof certain financial ratios.

The Company has an interest rateswap agreement, maturing in December 2005, with its principal lender. Dueto the ineffectiveness of the swap related to the U.S. loan, approximately$20,500 and $20,500 was reclassified from comprehensive income (loss) toearnings as interest expense for the years ended May 31, 2005 and 2004,respectively, and approximately $138,000 and $266,000 was charged directly tointerest expense for the years ended May 31, 2005 and 2004, respectively. Theremaining balance of approximately $10,500 will be amortized over the remainingterm of the loan. See Note 1 to the consolidated financial statements.

***Secondary Obligations***

At May 31, 2005, the Company had approximately$148,000 in funds available under the Spanish line of credit agreements. At May 31,2005, the Italian subsidiary had available borrowing capacity of approximately$185,235 under a line of credit.

Upon the acquisition of Immucor Benelux, the Companyassumed a mortgage note that is collateralized by a first lien on ImmucorBenelux’s land and building. The approximate carrying value of the land andbuilding is $653,000. Immucor Benelux also has $612,000 in line of creditagreements denominated in Euro with one Belgian bank. At May 31, 2005, theCompany had $612,000 available under these line of credit agreements, which areguaranteed by the Company.

Aggregatematurities of all long-term obligations and lines of credit for each of thenext five years are as follows:

| **Year  Ending May 31:** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|
| 2006                          |       | $          | 4,190,483  |   |
| 2007                          |       | 2,045,055  |       |
| 2008                          |       | 35,658     |       |
|                          |       | $          | 6,271,196  |   |

 

**4.**                  CAPITAL LEASE OBLIGATIONS

| ** **                                                                                                                                                                                   | ** ** | **May 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Machinery and equipment related to the telephone  system bearing an interest rate of 7.93% with a maturity date of  December 2008                                                  |       | $                | 116,518    |   | $ | 147,491 |   |
| Instruments at customer sites—German subsidiary,  bearing interest at 2.2% and with a maturity date of October 2005                                                                |       | 21,250           |       | 95,527 |   |
| Instruments at customer sites—Spanish subsidiary, bearing  interest rates ranging from 5.18% to 8.5% and with maturity dates  ranging from June 2008 to September 2009   |       | 1,134,521        |       | 934,921 |   |
| Instruments at customer sites—Italian subsidiary,  bearing interest rates ranging from 2.5% to 2.75% and with maturities  ranging from August 2005 to February 2006 |       | 65,042           |       | 395,548 |   |
| Manufacturing equipment, bearing interest at rates  ranging from 5.46% to 9.89% and with maturities ranging from April 2003  to September 2005                                     |       | —           |       | 9,404 |   |
| Office furniture and build-outs for facility  expansion, bearing interest at rates ranging from 5.6% to 7.63% and with  maturities ranging from January 2003 to December 2004 |       | —           |       | 17,049 |   |
|                                                                                                                                                                                         |       | 1,337,331        |       | 1,599,940 |   |
| Less current portion                                                                                                                                                                         |       | (426,926         | )          | (652,363 | ) |
|                                                                                                                                                                                         |       | $                | 910,405    |   | $ | 947,577 |   |

 

All of the above capital lease obligations arecollateralized by the indicated assets. Amortization on related assets isincluded in depreciation expense.

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46         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

Aggregatematurities of capital leases for each of the next five years are as follows:

| **Year Ending May 31:** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2006                         |       | $          | 426,926    |   |
| 2007                         |       | 348,201    |       |
| 2008                         |       | 348,225    |       |
| 2009                         |       | 174,745    |       |
| 2010                         |       | 39,234     |       |
| Thereafter                   |       | —     |       |
|                         |       | $          | 1,337,331  |   |

 

Total imputed interest to be paidout under existing capital leases as of May 31, 2005 is approximately $93,000.

**5.**                  COMMON STOCK

Immucor distributed a three-for-two stock split,affected in the form of a 50% stock dividend on November 14, 2003 to theshareholders of record on October 24, 2003, which resulted in the issuanceof 6,542,601 shares of common stock, net of 2,048 fractional shares for whichcash dividends were paid. On June 1, 2004, the Board of Directors approveda three-for-two stock split, affected in the form of a 50% stock dividend, toshareholders of record as of the close of business on June 30, 2004. Thestock split was distributed on July 16, 2004 and increased the number ofshares outstanding by 10,066,940, net of 326 fractional shares for which cashdividends were paid. On November 15, 2004 the Board of Directors approveda three-for-two stock split, affected in the form of a 50% stock dividend, toshareholders of record as of the close of business on November 22, 2004. Thestock split was distributed on December 13, 2004 and increased the numberof shares outstanding by 15,061,379 net of 82.5 fractional shares for whichcash dividends were paid. The stock splits were the fifth, sixth and seventhfor the Company since its initial public offering in December 1985. Previously,the Company implemented a three-for-two split in 2002, a three-for-two split in1991, a five-for-four split in 1990, and a five-for-four split in 1987. Allshare and per share amounts disclosed in this document have been retroactivelyadjusted to reflect the impact of the above stock splits.

At May 31, 2005, 5,275,704 shares of common stockwere reserved for future issuance upon exercise of previously granted stockoptions.

In connection with the acquisition of Medichim, S.A.and Immunochim, s.a.r.l. (now Immucor Benelux), the Company issued to theseller an option to acquire, in whole or in part, 337,500 shares of Immucorstock at $2.65 per share in a transaction exempt under Section 4(2) ofthe Securities Act. The 337,500 options became exercisable at the rate of 33%per year commencing March 2001, expire in fiscal year 2010, and werevalued at $310,000 at the date of the acquisition and included in goodwill. DuringJune 2002, all 337,500 options were fully exercised.

As part of the acquisition of Dominion Biologicals,Limited, in December 1996, the Company issued to the sellers five- andten-year warrants to acquire, in whole or in part, 1,614,656 and 506,250 sharesof Immucor stock at $3.56 and $3.55 per share, respectively. These warrantsbecame exercisable one year after the issuance date, with the five-yearwarrants expiring in December 2001 unexercised and the ten-year warrantsexpiring in 2006. Immucor filed a registration statement on Form S-3 in May 1999with the Securities and Exchange Commission covering the issuance of the sharesto be issued upon exercise of these warrants. By the end of fiscal 2004, all506,250 of the ten-year warrants had been exercised and none were outstanding.

The Company has a Shareholders’ Rights Plan under whichone common stock purchase right is presently attached to and trades with eachoutstanding share of the Company’s common stock. The rights become exercisableand transferable apart from the common stock ten days after a person or group,without the Company’s consent, acquires beneficial ownership of, or the rightto obtain beneficial ownership of, 15% or more of the Company’s common stock orannounces or commences a tender offer or exchange offer that could result in atleast 15% ownership. If a person or a group acquires at least 15% ownership,except in a transaction approved by the Company under the rights plan, theneach right not owned by the acquirer or related parties will entitle its holderto purchase, at the right’s exercise price, common stock or common stockequivalents having a market value immediately prior to the triggering of theright of twice that exercise price. In addition, after an acquirer obtains atleast 15% ownership, if the Company is involved in certain mergers, businesscombinations, or asset sales, each right not owned by the acquirer or relatedpersons will entitle its holder to purchase, at the right’s exercise price,shares of common stock of the other party to the transaction having a marketvalue immediately prior to the triggering of the right of twice that exerciseprice. Once exercisable, each right entitles the holder to purchase 3.4 sharesof the Company’s common stock at an exercise price of $45, subject toadjustment to prevent dilution. The rights have no voting power and, untilexercised, no dilutive effect on net income per common share. The rights expireon April 20, 2009, and in most cases are redeemable at the discretion ofthe Board of Directors at $0.01 each. All 

----

                                                RESULTS         47

 

reservations of shares of common stock for purposesother than the rights plan shall take precedence and be superior to anyreservation of shares in connection with or under the rights plan.

The Company instituted a stockrepurchase program in June 1998 for up to 4,050,000 shares, of which3,624,750 shares had been purchased prior to the end of the 2004 fiscal year,leaving 425,250 shares available for repurchase. On June 1, 2004, theBoard of Directors authorized the Company to repurchase up to an additional450,000 shares of its common stock. On August 2, 2004, the Board ofDirectors authorized the Company to repurchase up to an additional 750,000shares of its common stock. During the year ended May 31, 2005, theCompany repurchased 622,500 shares at an average per share price of $12.87,bringing the aggregate number of shares to 4,247,250 repurchased to date sinceimplementation of the 1998 repurchase program. An aggregate of 1,002,750 sharesremain available for repurchase under the program.

**6.**                  STOCK OPTIONS

All references to historical awards, outstanding awardsand availability of shares for future grants under Immucor’s stock plans, asdescribed below, and related prices per share have been retroactively adjusted,for comparability purposes, to reflect the three-for-two stock splitsdistributed in December 2004, July 2004, November 2003 and September 2002.

The Company has various stock option plans thatauthorize the Company’s Stock Option Committee to grant employees, officers anddirectors options to purchase shares of the Company’s common stock. Exerciseprices of stock options are determined by the Stock Option Committee and, withthe exception of those awarded to new employees in fiscal 2005, have been thefair market value at the date of the grant.

The Company’s 1990 Stock Option Plan authorizes thegrant of options to employees, officers and directors for up to 3,796,875shares of the Company’s common stock. All options have 10-year terms and vestand become fully exercisable 50% at the end of two years, 25% at the end ofthree years, and 25% at the end of four years of continued employment.

The Company’s 1995 Stock Option Plan authorizes thegrant of options to employees, officers and directors for up to 5,352,186shares of the Company’s common stock including an amendment by the Board ofDirectors in fiscal 2003 to increase shares allocated. All options have 10-yearterms and vest and become fully exercisable 50% at the end of two years, 25% atthe end of three years, and 25% at the end of four years of continuedemployment.

The Company’s 1998 Non-Incentive Stock Option Planauthorizes the grant of options to employees, officers and directors for up to5,062,500 shares of the Company’s common stock. All options have 10-year termsand vest and become fully exercisable 50% at the end of two years, 25% at theend of three years, and 25% at the end of four years of continued employment.

The Company’s 2003 Non-Incentive Stock Option Planauthorizes the grant of options to employees, officers and directors for up to1,650,000 shares of the Company’s common stock. All options have 10-year termsand vest and become fully exercisable 50% at the end of two years, 25% at theend of three years, and 25% at the end of four years of continued employment.

The Company has elected to followAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees*, (“APB 25”) and relatedInterpretations in accounting for its employee stock options. Under APB 25,because the exercise price of the Company’s employee stock options equals themarket price of the underlying stock on the date of grant, no compensationexpense is recognized. Beginning in fiscal 2005, the Company began awardinggrants to eligible new hires with the respective exercise price equal to theclosing price on the business day immediately prior to the grant date;therefore in these cases, the exercise price may be higher or lower than thefair value of the shares at the date of grant. Management has determined thatthe aggregate difference between the grant date fair values and the exerciseprices for grants awarded to new hires is not material, and accordingly has notincluded any such compensation cost related to these grants in the Company’sresults of operations.

Pro formainformation regarding net income and earnings per share is required by SFAS No. 123,which also requires that the information be determined as if the Company hasaccounted for its employee stock options granted subsequent to June 1,1995 under the fair value method of that Statement. For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting periods. The fair value for these options wasestimated at the date of grant using a Black-Scholes option-pricing model withthe following weighted average assumptions:

| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate  |       |     | 4.00       | %        |       |     | 3.68       | % |   |   | 3.93 | % |   |
| Expected life (years)    |       |     | 8.0        |     |       |     | 8.0        |   |   |   | 8.0 |   |   |
| Expected volatility      |       |     | 68.4       | %        |       |     | 68.6       | % |   |   | 71.4 | % |   |
| Expected  dividend yield |       |     | 0.0        | %        |       |     | 0.0        | % |   |   | 0.0 | % |   |

 

The Black-Scholes option valuationmodel was developed for use in estimating the fair value of traded options thathave no vesting restrictions and are fully transferable. See Note 1 to theconsolidated financial statements for pro forma presentation.

----

48         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

The Company isauthorized to issue up to 5,275,704 shares of its common stock under variousemployee and director stock option arrangements. Options granted under theseplans become exercisable at various times and, unless exercised, expire atvarious dates through fiscal 2015. Transactions involving these stock optionarrangements are summarized as follows:

| ** **                        | ** ** | **Shares** | ** ** | **Range of  Exercise  Prices** | ** **                            | **Weighted Average  Exercise  Price** | ** ** |
|-----------------------------------|------------|------------|------------|-------------------------------------|---------------------------------------|--------------------------------------------|------------|
| Outstanding at May 31, 2002  |       | 9,158,660  |       | $                                   |   0.50 -  $  3.34 |                                       |       | $ | 1.47 |   |   |
| Granted                           |       | 269,157    |       | $                                   |   3.73 -  $  6.60 |                                       |       | $ | 4.83 |   |   |
| Exercised                         |       | (3,386,340 | )          | $                                   |   0.59 -  $  2.87 |                                       |       | $ | 1.53 |   |   |
| Forfeited                         |       | (92,003    | )          | $                                   |   0.55 -  $  2.45 |                                       |       | $ | 1.35 |   |   |
| Outstanding at  May 31, 2003 |       | 5,949,474  |       | $                                   |   0.50 -  $  6.60 |                                       |       | $ | 1.60 |   |   |
| Granted                           |       | 1,031,153  |       | $                                   |   6.10 -  $  9.90 |                                       |       | $ | 8.78 |   |   |
| Exercised                         |       | (1,795,457 | )          | $                                   |   0.50 -  $  3.03 |                                       |       | $ | 1.46 |   |   |
| Forfeited                         |       | (112,985   | )          | $                                   |   0.53 -  $  6.60 |                                       |       | $ | 2.05 |   |   |
| Outstanding at  May 31, 2004 |       | 5,072,186  |       | $                                   |   0.50 -  $  9.90 |                                       |       | $ | 3.11 |   |   |
| Granted                           |       | 281,321    |       | $                                   | 12.73 - $31.61                        |                                       |       | $ | 28.41 |   |   |
| Exercised                         |       | (902,621   | )          | $                                   |   0.50 -  $  5.93 |                                       |       | $ | 1.67 |   |   |
| Forfeited                         |       | (276,616   | )          | $                                   |   0.50 - $14.42             |                                       |       | $ | 2.68 |   |   |
| Outstanding at May 31, 2005  |       | 4,174,270  |       | $                                   |   0.53 - $31.61             |                                       |       | $ | 5.11 |   |   |

 

At May 31, 2005, 2004, and 2003, options for2,023,521, 1,984,638 and 1,853,618 shares of common stock, respectively, wereexercisable, at weighted average exercise prices of $1.66, $1.61 and $1.78,respectively. At May 31, 2005, 1,101,434 shares of common stock wereavailable for future grants. The weighted average grant date fair value ofoptions granted during fiscal 2005 was $12.74 for those granted at marketvalue, $16.36 for those granted at above market value, and $14.06 for thosegranted at below market value. The weighted average grant date fair value ofoptions granted during fiscal 2004 and 2003 were $6.46 and $5.00, respectively —all were granted at market value.

The followingtable as of May 31, 2005 sets forth by group of exercise price ranges, thenumber of shares, weighted average exercise prices and weighted averageremaining contractual lives of options outstanding, and the number and weightedaverage exercise prices of options currently exercisable.

| ** **                                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**           | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| **Range of  Exercise  Prices**                         | ** ** | **Number  of  Shares**       | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Contractual  Life (Years)** | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $  0.00  - $  1.00                      |       | 188,110                      |       |                                   | $          | 0.54 |   |   |   | 6.1 |   |   | 76,097 |   |   | $ | 0.54 |   |   |
|     1.01 -     2.00 |       | 2,468,259                    |       |                                   | 1.54       |   |   |   | 5.3 |   |   | 1,841,104 |   |   | 1.60 |   |   |
|     2.01 -     4.00 |       | 131,728                      |       |                                   | 2.96       |   |   |   | 5.5 |   |   | 86,162 |   |   | 2.83 |   |   |
|     4.01 -     8.00 |       | 277,504                      |       |                                   | 5.75       |   |   |   | 7.9 |   |   | 20,158 |   |   | 5.59 |   |   |
|     8.01 -   16.00            |       | 849,954                      |       |                                   | 9.24       |   |   |   | 8.8 |   |   | — |   |   | — |   |   |
|   16.01 -   32.00                       |       | 258,715                      |       |                                   | 29.35      |   |   |   | 9.8 |   |   | — |   |   | — |   |   |
|                                                        |       | 4,174,270                    |       |                                   | $          | 5.11 |   |   |   | 6.5 |   |   | 2,023,521 |   |   | $ | 1.66 |   |   |

 

 

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                                                RESULTS         49

 

**7.**                  EARNINGS PER SHARE

The followingtable sets forth the computation of earnings per common share and common share –assuming dilution in accordance with SFAS No. 128, *Earnings perShare*.

| ** **                                              | ** ** | **Year Ended May 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator for basic and diluted earnings per share:     |       |                                  |       |   |   |   |   |
| Net income                                              |       | $                                     | 23,909,654 |   | $ | 12,537,806 |   | $ | 14,369,757 |   |
| Denominator:                                            |       |                                  |       |   |   |   |   |
| For basic  earnings per share - weighted average shares |       | 45,132,434                            |       | 44,257,673 |   | 42,303,905 |   |
| Effect of  dilutive stock options and warrants          |       | 2,434,330                             |       | 2,736,276 |   | 3,168,138 |   |
| Denominator  for diluted earnings per share -           |       |                                  |       |   |   |   |   |
| Adjusted  weighted-average shares                       |       | 47,566,764                            |       | 46,993,949 |   | 45,472,043 |   |
| Earnings per common share                               |       | $                                     | 0.53       |   | $ | 0.28 |   | $ | 0.34 |   |
| Earnings  per common share - assuming dilution          |       | $                                     | 0.50       |   | $ | 0.27 |   | $ | 0.32 |   |

 

The effect of 29,549, 870,503 and16,875 out-of-the-money options and warrants were excluded from the abovecalculation, as inclusion of these securities would be anti-dilutive, for theyears ended May 31, 2005, 2004 and 2003, respectively.

**8.**                  COMMITMENTS AND CONTINGENCIES

***Lease Commitments***

The Company leases domestic office, warehousing andmanufacturing facilities under an operating lease agreement expiring in fiscal2017 with a right to renew for an additional five years. The Company leases anadditional domestic warehousing facility under an operating lease agreementexpiring in fiscal 2008 with a right to renew for an additional five years. TheCompany leases foreign office, manufacturing and warehouse facilities andautomobiles under operating lease agreements expiring at various dates throughfiscal 2010. Total rental expense, principally for office, manufacturing andwarehouse space, was $2,240,000 in fiscal 2005, $1,896,000 in fiscal 2004, and$1,156,000 in fiscal 2003.

In Germany, the office facility is leased from acompany owned by the family of a former officer. Rental payments under thislease were $258,000, $244,000 and $170,000 for fiscal 2005, 2004 and 2003,respectively, and are believed to be at fair market value.

In fiscal 2005, the Company received a cash incentivetotaling $136,000 regarding its domestic office, warehousing and manufacturingfacilities. This incentive was accounted for as deferred rent and is beingamortized over the term of the lease. The current portion of this incentive($12,000 at May 31, 2005) is included in other accrued liabilities; theremaining unamortized portion is included in other liabilities. This lease alsocontained a leasehold improvement incentive allowing for a maximumreimbursement of $1.4 million. A reimbursement check totaling $984,000 wasreceived in June 2005 for improvements incurred and submitted to thelandlord in fiscal 2005 for reimbursement. Accordingly, this reimbursement wasaccrued as a receivable at May 31, 2005 and is included in prepaidexpenses and other. Leasehold improvement reimbursements are recorded asdeferred rent and amortized as reductions of rent expense over the term of thelease.

The following is a schedule ofapproximate future annual lease payments under all operating leases that haveinitial or remaining non-cancelable lease terms in excess of one year as of May 31,2005:

| **Year Ending May 31:** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2006                                   |       | $          | 2,279,961  |   |
| 2007                                   |       | 2,151,006  |       |
| 2008                                   |       | 1,903,824  |       |
| 2009                                   |       | 1,653,788  |       |
| 2010                                   |       | 896,122    |       |
| Thereafter                             |       | —     |       |
|                                   |       | $          | 8,884,701  |   |

 

The Company may, at its option, extend its office andwarehouse facilities lease terms through various dates.

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50         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

***OtherCommitments***

In January 2004, the Company entered into aninstrument purchase agreement with Bio-Tek Instruments, Inc. for the developmentof its third generation automated assay instrument, the Galileo EchoTM. The costof development under this agreement totaled $1.6 million in fiscal 2005and $0.8 million in fiscal 2004. In accordance with the terms of the agreement,the Company issued a purchase order for 100 units upon acceptance of theengineering model in late fiscal 2005. In November 2004, an amendment tothe original agreement was signed, stipulating that upon receipt of the lastunit of the initial 100 unit purchase order, the Company will have been deemedto issue a purchase order for an additional 100 units. There is no minimumpurchase requirement to maintain exclusivity. See Note 11 to the consolidatedfinancials statements.

In September 1999, the Company entered into a manufacturingand development agreement with Stratec Biomedical AG (“Stratec”), headquarteredin Germany. Under the agreement, Stratec has developed and manufactures thefully automated analyzer known as the Galileo. In order to maintain exclusiveEuropean distribution rights, the Company must purchase 250 instruments by theend of fiscal 2007, the end of the five-year period beginning with the firstshipment of production instruments. If the Company purchases less than 250instruments over the period, it will be allowed to negotiate a good faithextension. The Company met this purchase requirement in fiscal 2005. TheCompany purchased Galileo instruments totaling approximately $3.5 million, $9.4million, and $9.0 million in fiscal 2005, 2004 and 2003, respectively. TheCompany has outstanding purchase commitments to Celliance, Ltd. (formerlySerologicals, Inc.), totaling approximately $5.8 million, for some of theCompany’s monoclonal antibody based products to be purchased over the nextthree years ($1.7 million in fiscal 2006, $1.9 million in fiscal 2007 and $2.1million in fiscal 2008). The Company purchased approximately $1.4 million and$2.5 million in fiscal 2005 and 2004, respectively, in monoclonal antibodybased products.

In April 2003, Immucor, Inc. and Bio-TekInstruments Inc., the manufacturer of Immucor’s ABS2000 fully automated bloodbank instrument, announced the signing of an agreement with the University ofVermont to commercialize an in-vitro diagnostic test to measure plateletmarkers useful in anti-platelet pharmacological drug development andpotentially to improve real-time treatment of cardiovascular disease. The assaywill be useful in determining the risk associated with increased plateletactivity (thrombotic occlusion of vessels, which can lead to a myocardialinfarct) and decreased reactivity (excess bleeding) and for the prediction ofcoronary artery and cerebrovascular disease in patients without a previousdisease history. The Company spent approximately $0.1 million in fiscal 2004,and although there were no expenditures in fiscal 2005, the Company expects tospend an additional $40,000 in fiscal 2006 and an additional $60,000 in fiscal2007.

In order to satisfy the broadspectrum of customers’ operational and financial criteria, the Company offersseveral instrument procurement options, including third-party financing leases,direct sales and reagent rental agreements under which the Company recovers thecost of the instrument through increased reagent pricing. In connection with certainthird party financing leases of the Company’s automated systems, the thirdparty lessor’s customers are committed to purchasing reagent productsexclusively from the Company. If the Company is unable to supply such products,this could represent a breach of the Company’s agreement with the third partyfinancing company. See additional commitments in Note 11 to the consolidatedfinancial statements.

***Contingencies***

As previously reported by the Company in a November 2004press release and in subsequently-filed SEC periodic reports, the Company’sItalian subsidiary and Dr. Gioacchino De Chirico, the former President ofthe Italian subsidiary, became the subjects of a criminal investigation inMilan, Italy. The investigation centers on payments by several companies to anItalian physician allegedly in exchange for favorable contract awards by hishospital. This development prompted the Company to initiate an internalinvestigation, which was conducted by the Audit Committee of the Board ofDirectors. The internal investigation determined that the physician renderedservices as the organizer and chairman of a convention sponsored by the Italiansubsidiary in October 2003; the Company paid the physician 13,500 Euro in April 2004for those services; and the payment was not improper. However, the invoice forthose services did not properly identify the doctor or the nature of hisservices, in violation of the books and records provisions of the ForeignCorrupt Practices Act. In November 2004 the Company voluntarily reportedthis violation to the SEC. The internal investigation also addressed sixpayments to another physician in 1998, 1999 and 2000 totaling approximately$47,000. Based on the investigation it appears those payments may have beenrelated not only to the performance of certain services but also to theintroduction of an instrument system into that physician’s hospital and perhapsother hospitals.

The Company has made three voluntary submissions to theSEC, some of the Company’s officers and one of the Company’s directors havevoluntarily testified, and the Company continues to cooperate with the SEC. TheSEC has issued a formal investigative order in the matter, but has yet toexpress to the Company any conclusions about the ultimate outcome of its investigation.The Company has also had discussions with the Italian prosecutor concerning hisinvestigation, but he has not expressed to the Company any conclusions aboutthe ultimate outcome of the investigation. The Italian investigation iscontinuing and has been expanded to several other companies not related toImmucor, which may delay the closure of this matter in Italy. No 

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                                                RESULTS         51

 

determination can yet be made as to whether, inconnection with these circumstances, the Company will become subject to anyfines, penalties and/or other charges imposed by any governmental authority, orany other damages or costs that may arise in connection with thesecircumstances.

The Company is aware of seven class-action lawsuitshaving been filed in the United States District Court for the Northern Districtof Georgia against the Company and certain of its current and former directorsand officers with respect to alleged violations of the securities laws. All ofthe actions essentially duplicate one another, pleading essentially the sameallegations. The complaints filed in the lawsuits allege violations of Sections10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, specifically alleging, among other things, that theCompany misrepresented that its financial statements and disclosures duringportions of the 2005 calendar year fairly and accurately reflected the Company’sresults of operations, which allegedly resulted in the purchase of the Company’scommon stock by at artificially inflated market prices. The lawsuits seekcompensatory and other damages, and costs and expenses associated with thelitigation. The Company believes that each of the lawsuits is without merit,and intends to defend each of these lawsuits vigorously. While the Company doesnot currently expect these matters to materially affect its financial conditionor results of operations, there can be no assurance of any particular outcome.

Other than as set forth above, the Company is notcurrently subject to any material legal proceedings, nor, to the Company’sknowledge, is any material legal proceeding threatened against the Company.However, from time to time, the Company may become a party to certain legalproceedings in the ordinary course of business.

In October 2004, the Companyinitiated an internal investigation into the matter discussed above regardingits Italian subsidiary. The Company had already identified certain deficienciesin internal control over financial reporting in that subsidiary in connectionwith its preparation for Sarbanes-Oxley Section 404 internal controlassessment, and was in the process of strengthening those internal controls atthe time the internal investigation was initiated. That process was acceleratedin connection with the internal investigation, and the Company has nowundertaken a thorough review of the books and records of the Italian subsidiary.That review identified a number of improperly recorded transactions whichresulted in a charge of approximately $0.7 million, of which $0.5 million, $0.1million and $0.1 million is included in Amortization and other, Selling andmarketing, and Cost of sales, respectively, in the Consolidated Statements ofIncome for the three months ended November 30, 2004. Included in the $0.7 millioncharge were estimates for interest and penalties on unpaid value-added taxesowed to the Italian government. Upon further review during the quarter ended February 28,2005, the Company determined that the amount of unpaid VAT owing was lower thanpreviously estimated resulting in lower penalties and that some of theimproperly recorded transactions were thefts by a previously terminatedemployee that could be recovered from our insurance company and thereforerecorded a $0.2 million reduction in expenses in Amortization and other in theConsolidated Statements of Income for the three-months ended February 28,2005.

**9.      INCOME TAXES**

Sources ofincome before income taxes are summarized below:

| ** **          | ** ** | **Year Ended May 31,** | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Domestic Operations |       | $                                     | 31,710,051 |   | $ | 19,031,785 |   | $ | 19,042,237 |   |
| Foreign Operations  |       | 6,270,285                             |       | 1,231,784 |   | 1,140,231 |   |
| Total               |       | $                                     | 37,980,336 |   | $ | 20,263,569 |   | $ | 20,182,468 |   |

 

The provisionfor income taxes is summarized as follows:

| ** **   | ** ** | **Year Ended May 31,** | ** ** |
|--------------|------------|---------------------------------------|------------|
| ** **   | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:     |       |                                  |       |   |   |   |   |
| Federal      |       | $                                     | 12,978,337 |   | $ | 5,293,703 |   | $ | 6,114,270 |   |
| Foreign      |       | 1,908,331                             |       | 1,044,487 |   | 398,587 |   |
| State        |       | 1,377,024                             |       | 760,412 |   | 583,210 |   |
|         |       | 16,263,692                            |       | 7,098,602 |   | 7,096,067 |   |
| Deferred:    |       |                                  |       |   |   |   |   |
| Federal      |       | (2,616,702                            | )          | 687,042 |   | (1,181,916 | ) |
| Foreign      |       | 504,584                               |       | (492,158 | ) | 100,926 |   |
| State        |       | (80,892                               | )          | 432,277 |   | (202,366 | ) |
|         |       | (2,193,010                            | )          | 627,161 |   | (1,283,356 | ) |
| Income taxes |       | $                                     | 14,070,682 |   | $ | 7,725,763 |   | $ | 5,812,711 |   |

 

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52         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

Deferred income taxes reflect the net tax effects of: (a) temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and income tax purposes; and (b) operatingloss carry-forwards. Valuation allowances are established when necessary toreduce deferred tax assets to the amounts expected to be realized. The Company’sSpanish subsidiary had net operating loss carry-forwards for income taxpurposes of approximately $123,000, which begin to expire in 2015. The Company’sGerman subsidiary had net operating loss carry-forwards for income tax purposesof approximately $24,000, which do not expire. Based on an assessment of allavailable evidence including, but not limited to, the operating history andlack of profitability of certain subsidiaries, the Company is uncertain as tothe ability to realize the Spanish net operating loss carry-forward and taxbenefit and, as a result, a deferred tax valuation allowance has been recordedagainst this deferred tax asset.

The tax effectsof significant items comprising the Company’s net deferred tax asset(liability) at May 31, 2005 and 2004 are as follows:

| ** **                          | ** ** | **Year Ended May 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Deferred tax liabilities:           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Amortization                        |       | $                                     | (1,662,454 | ) | $ | (1,562,710 | ) |
| Depreciation                        |       | (865,244                              | )          | (1,386,195 | ) |
| Other                               |       | (637,813                              | )          | (351,225 | ) |
| Deferred tax assets:                |       |                                  |       |   |   |
| Reserves not currently deductible   |       | 3,466,141                             |       | 1,304,350 |   |
| Operating loss carry-forwards       |       | 146,817                               |       | 961,241 |   |
| Uniform capitalization              |       | 142,502                               |       | 148,140 |   |
|                                |       | 589,949                               |       | (886,399 | ) |
| Valuation allowance                 |       | (122,993                              | )          | (265,714 | ) |
| Net deferred tax asset  (liability) |       | $                                     | 466,956    |   | $ | (1,152,113 | ) |

 

Deferred taxes are not provided for temporarydifferences of approximately $8,416,000, $5,039,000 and $4,178,000 as of May 31,2005, 2004 and 2003, respectively, representing earnings of non-U.S.subsidiaries that are intended to be permanently reinvested. Computation of thepotential deferred tax liability associated with these undistributed earningsis not practicable.

The Company is currently evaluating the impact on itsconsolidated financial position and disclosures from new U.S. tax legislation,the American Jobs Creation Act of 2004, signed into law on October 22,2004. The new law provides an opportunity to repatriate up to $10,600,000 ofreinvested foreign earnings and to claim an 85% dividend received deductionagainst the repatriated amount. The Company expects to make a decision onimplementation in the first half of fiscal 2006. Any impact from thislegislation has not been reflected in the amounts shown as permanentlyreinvested.

The Company’s effective tax ratediffers from the federal statutory rate as follows:

| ** **                                                               | ** ** | **Year Ended May 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal statutory tax rate                                               |       |                                  | 35         | % |   |   | 35 | % |   |   | 35 | % |   |
| State income taxes, net of  federal tax benefit                          |       |                                  | 3          |   |   |   | 1 |   |   |   | 2 |   |   |
| Extraterritorial income  exclusion/foreign sales corporation commissions |       |                                  | (1         | ) |   |   | (2 | ) |   |   | (2 | ) |   |
| Difference in effective  income tax rates of other countries             |       |                                  | 1          |   |   |   | — |   |   |   | 1 |   |   |
| Excess of cost over  tangible assets acquired – net                 |       |                                  | (1         | ) |   |   | — |   |   |   | — |   |   |
| Change in deferred tax  valuation allowance                              |       |                                  | —     |   |   |   | 1 |   |   |   | (9 | ) |   |
| Other                                                                    |       |                                  | —     |   |   |   | 3 |   |   |   | 2 |   |   |
|                                                                     |       |                                  | 37         | % |   |   | 38 | % |   |   | 29 | % |   |

 

As a result of utilizing compensation cost deductionsarising from the exercise of nonqualified employee stock options for federaland state income tax purposes, the Company realized income tax benefits of$6,367,493, $3,581,809 and $3,431,181 in fiscal 2005, 2004 and 2003,respectively. These income tax benefits are recognized in the accompanyingfinancial statements as additions to additional paid-in capital rather than asreductions of the respective income tax provisions because the relatedcompensation deductions are not recognized as compensation expense forfinancial reporting purposes.

In fiscal 2004, a true up of the estimated tax benefitof the 2003 European restructure and adjustments for misapplication of Texasfranchise tax rules for fiscal years 2002 and 2003 added $0.1 million and$0.3 million, respectively, to income tax expense. In addition, a reserve of$225,000 was established to recognize that the Company’s state and local taxplanning has become less effective due to increasingly conservative positionstaken by the various taxing authorities. The Company added approximately 

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                                                RESULTS         53

 

$907,000 to this reserve in fiscal 2005. The reservewas increased largely due to the significant changes in the state taxlegislative landscape in particular, in our headquarter state of Georgia. GeorgiaHouse Bill 191 was signed into law in April 2005 as a corporate tax reformbill and gives the state express authority to invalidate related party businesstransactions as part of a growing national trend which continued to buildmomentum in 2005. Moreover, these legislative changes have been the basis forthe clear shift in the level of scrutiny of related party transactions by statetaxing authorities even those not expressly covered by the statutory language.

In fiscal 2005, the Company claimedcredits for qualified research and development activities performed during theyears 2001 through 2005 of approximately $622,000. The Company has recorded a$187,000 reserve, approximately 30% of the credits claimed.

**10.**            TECHNOLOGY RIGHTS

In March 1983, the Companyacquired rights to technology to be used in developing diagnostic testingproducts. In connection with this acquisition, the Company has agreed to pay tothe Blood Center of Greater Kansas City royalties equal to 4% of the net salesthrough August 26, 2006 from products utilizing the technology. Royaltiesunder this agreement amounted to approximately $523,000, $451,000 and $463,000in fiscal 2005, 2004 and 2003, respectively.

**11.**            INSTRUMENT DEVELOPMENT AND MANUFACTURING AGREEMENTS

The Company has identified the need for a fast,lightweight, fully automated instrument, and on January 19, 2004, enteredinto an instrument purchase agreement with Bio-Tek Instruments, Inc. forthe development of such an instrument. This third generation assay instrument,the Galileo EchoTM, is targeted to serve the small- to medium-sized hospitalmarket, the largest segment of the Company’s customers numbering approximately5,000 to 6,000 worldwide, to which the Company’s ABS2000 instrument iscurrently marketed. The Galileo EchoTM is expected to be significantly smallerand faster than the ABS2000, and have substantially all of the features of theCompany’s larger Galileo product, apart from lower throughput. The cost ofdevelopment totaled $0.8 million and $1.6 million in fiscal 2004 and fiscal2005, respectively, and is expected to total approximately $2.0 million infiscal 2006. The Company accepted the manufacturer’s engineering model infiscal 2005, whereupon the Company was deemed to issue a purchase order for 100units. In accordance with the November 2004 amendment to the instrumentpurchase agreement, once the last of these units have been received the Companywill be deemed to issue a purchase order for an additional 100 units. There isno minimum purchase requirement to maintain exclusivity. The Company expects tolaunch the instrument in Europe in the summer of 2006.

In September 1999, the Company entered into amanufacturing and development agreement with Stratec Biomedical AG (“Stratec”),headquartered in Germany. Under the agreement, Stratec has developed and ismanufacturing a fully automated analyzer utilizing the Company’s Capturetechnology known as the Galileo which was initially targeted to the Europeancommunity and has now begun to be marketed to customers in the U.S., Canada andJapan. The instrument is marketed exclusively to hospital transfusionlaboratories and blood donor centers, for patient and donor blood typing andantibody screening and identification. In order to maintain exclusive Europeandistribution rights, the Company must purchase 250 instruments by the end offiscal 2007, the end of the five-year period beginning with the first shipmentof production instruments. If the Company purchases less than 250 instrumentsover the period it will be allowed to negotiate a good faith extension. TheCompany met this purchase requirement in fiscal 2005.

The Company contracted with Bio-Tek Instruments, Inc.for the development of a fully automated, “walk-away”, blood bank analyzer. Knownas the ABS2000, the analyzer utilizes the Company’s patented Capturetechnologyand is being marketed in Europe and the United States to hospital transfusionlaboratories for patient testing.****Under theterms of the 15-year agreement, the Company reimburses Bio-Tek Instruments, Inc.for its development costs, and the Company is granted worldwide marketingrights to sell the instrument for use in the human clinical diagnostic marketfor testing of human blood or blood components with centrifugation. Bio-TekInstruments, Inc. may sell the product in other markets paying the Companyup to a 4% royalty of the selling price. To date, Bio-Tek has not exercisedthis option. To maintain the exclusive worldwide marketing rights the Companywas required to purchase 250 instruments over a six-year period beginning withthe delivery of the first production instrument that occurred in fiscal 1997. TheCompany did not meet this requirement but does not view the loss of exclusivityas detrimental due to the fact that the ABS2000 is designed to work solely withthe Company’s proprietary reagents. On July 31, 2002, the Company enteredinto a $3.3 million instrument purchasing agreement with Bio-Tek fordevelopmental work and fifty ABS2000 instruments. The Company met this purchaserequirement in fiscal 2004.

In fiscal 2005, 2004 and 2003, theCompany incurred and expensed approximately $1,614,000, $923,000 and $388,000,respectively, in instrument research and development costs.

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54         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

**12.**            RETIREMENT PLAN

The Company maintains a 401(k) retirement plancovering its domestic employees who meet certain age and length of servicerequirements, as defined in the Plan document. The Company matches a portion ofemployee contributions to the plan. During the years ended May 31, 2005,2004 and 2003, the Company’s matching contributions to the plan wereapproximately $336,000, $269,000 and $225,000, respectively. Effective January 1,2005, employees vest immediately in the Company’s matching contributions. Priorto this date, vesting in the Company’s matching contributions was based onyears of continuous service.

The Company’s Canadian affiliatemaintains a defined contribution pension plan covering all Canadian employees,except temporary employees. The Company matches a portion of employeecontributions to the plan, and each employee vests in the Company’s matchingcontributions once they have been a participant continuously for two years. Duringthe years ended May 31, 2005, 2004 and 2003, the Company’s matchingcontributions to the plan were approximately $58,000, $59,000 and $56,000,respectively.

**13.**    QUARTERLY FINANCIAL DATA (UNAUDITED)

| ** **                      | ** ** | **(In thousands, except per share amounts)** | ** ** | ** **                    | ** ** | ** **                               | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------|------------|
| ** **                      | ** ** | **Net  Sales**                                                        | ** ** | **Gross  Profit (1)(2)** | ** ** | **Income  from  Operations (1)(2)** | ** ** | **Net  Income (2)** | ** ** | **Earnings  Per Common  Share (3)** | ** ** | **Earnings Per  Common Share -  Assuming  Dilution (2)(3)** | ** ** |
| **Fiscal Year Ended** |       |                                                                  |       |                          |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **May 31,  2005**          |       |                                                                  |       |                          |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter                   |       | $                                                                     | 32,102     |                          |       | $                                        | 18,312     |   |   |   | $ | 8,105 |   |   |   | $ | 4,949 |   |   |   | $ | 0.11 |   |   |   | $ | 0.10 |   |   |
| Second Quarter                  |       | 32,640                                                                |       |                          | 18,321     |                                     |       |   | 6,648 |   |   |   | 4,209 |   |   |   | $ | 0.09 |   |   |   | $ | 0.09 |   |   |
| Third Quarter                   |       | 37,982                                                                |       |                          | 23,866     |                                     |       |   | 9,658 |   |   |   | 6,224 |   |   |   | $ | 0.14 |   |   |   | $ | 0.13 |   |   |
| Fourth Quarter                  |       | 42,062                                                                |       |                          | 26,746     |                                     |       |   | 12,841 |   |   |   | 8,528 |   |   |   | $ | 0.19 |   |   |   | $ | 0.18 |   |   |
|                            |       | $                                                                     | 144,786    |                          |       | $                                        | 87,245     |   |   |   | $ | 37,252 |   |   |   | $ | 23,910 |   |   |   | $ | 0.53 |   |   |   | $ | 0.50 |   |   |
| **May 31, 2004**           |       |                                                                  |       |                          |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter                   |       | $                                                                     | 27,262     |                          |       | $                                        | 15,158     |   |   |   | $ | 5,858 |   |   |   | $ | 3,676 |   |   |   | $ | 0.09 |   |   |   | $ | 0.08 |   |   |
| Second Quarter                  |       | 27,207                                                                |       |                          | 15,056     |                                     |       |   | 5,694 |   |   |   | 3,442 |   |   |   | $ | 0.08 |   |   |   | $ | 0.07 |   |   |
| Third Quarter                   |       | 27,876                                                                |       |                          | 14,714     |                                     |       |   | 4,268 |   |   |   | 2,038 |   |   |   | $ | 0.05 |   |   |   | $ | 0.04 |   |   |
| Fourth Quarter                  |       | 30,213                                                                |       |                          | 17,142     |                                     |       |   | 5,882 |   |   |   | 3,382 |   |   |   | $ | 0.07 |   |   |   | $ | 0.07 |   |   |
|                            |       | $                                                                     | 112,558    |                          |       | $                                        | 62,070     |   |   |   | $ | 21,702 |   |   |   | $ | 12,538 |   |   |   | $ | 0.28 |   |   |   | $ | 0.27 |   |   |

 

(1)             Certainprior year balances have been reclassified to conform to the current yearpresentation. See Note 1 to consolidated financial statements.

(2)             Resultsfor the third quarter of fiscal 2005 have been retroactively adjusted toreflect an accrual of employee bonuses recorded at May 31, 2005 for whicha portion were earned in the third quarter.

(3)             Allshare and per share amounts have been retroactively adjusted to reflect the December 2004,July 2004 and November 2003 three-for-two stock splits.

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                                                RESULTS         55

 

**14.**    DOMESTICAND FOREIGN OPERATIONS

Information concerning the Company’sdomestic and foreign operations is summarized below (in thousands):

| ** **                       | ** ** | **Year Ended May 31, 2005** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **U.S.**                                        | ** ** | **Germany** | ** ** | **Italy** | ** ** | **Canada** | ** ** | **Other (1)** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net reagent sales:               |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unaffiliated customers           |       | $                                               | 88,616     |   |   | $ | 11,674 |   |   | $ | 11,637 |   |   | $ | 8,095 |   |   |   | $ | 8,778 |   |   |   | $ | — |   |   |   | $ | 128,800 |   |   |
| Affiliates                       |       | 9,237                                           |       |   | 2,199 |   |   | — |   |   | 245 |   |   |   | 139 |   |   |   | (11,820 | ) |   |   | — |   |   |
| Subtotal                         |       | 97,853                                          |       |   | 13,873 |   |   | 11,637 |   |   | 8,340 |   |   |   | 8,917 |   |   |   | (11,820 | ) |   |   | 128,800 |   |   |
| Net instrument sales:            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unaffiliated customers           |       | 6,250                                           |       |   | 2,578 |   |   | 927 |   |   | 170 |   |   |   | 2,589 |   |   |   | — |   |   |   | 12,514 |   |   |
| Affiliates                       |       | 937                                             |       |   | 4,612 |   |   | 15 |   |   | — |   |   |   | 2 |   |   |   | (5,566 | ) |   |   | — |   |   |
| Subtotal                         |       | 7,187                                           |       |   | 7,190 |   |   | 942 |   |   | 170 |   |   |   | 2,591 |   |   |   | (5,566 | ) |   |   | 12,514 |   |   |
| Net collagen sales:              |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unaffiliated customers           |       | 3,472                                           |       |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 3,472 |   |   |
| Affiliates                       |       | —                                          |       |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Subtotal                         |       | 3,472                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3,472 |   |   |
| Total                            |       | 108,512                                         |       |   | 21,063 |   |   | 12,579 |   |   | 8,510 |   |   |   | 11,508 |   |   |   | (17,386 | ) |   |   | 144,786 |   |   |
| Depreciation                     |       | 3,231                                           |       |   | 970 |   |   | 1,657 |   |   | 259 |   |   |   | 898 |   |   |   | — |   |   |   | 7,015 |   |   |
| Amortization                     |       | 378                                             |       |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 378 |   |   |
| Income from operations           |       | 31,548                                          |       |   | 2,169 |   |   | (11 | ) |   | 3,217 |   |   |   | 355 |   |   |   | (26 | ) |   |   | 37,252 |   |   |
| Interest expense                 |       | (366                                            | )          |   | (5 | ) |   | (253 | ) |   | 23 |   |   |   | (74 | ) |   |   | 13 |   |   |   | (662 | ) |   |
| Interest income                  |       | 31                                              |       |   | 36 |   |   | 567 |   |   | — |   |   |   | 3 |   |   |   | (13 | ) |   |   | 624 |   |   |
| Income tax expense               |       | 11,650                                          |       |   | 862 |   |   | 243 |   |   | 1,213 |   |   |   | 95 |   |   |   | 8 |   |   |   | 14,071 |   |   |
| Capital expenditures             |       | 3,397                                           |       |   | 249 |   |   | 1,881 |   |   | 217 |   |   |   | 849 |   |   |   | — |   |   |   | 6,593 |   |   |
| Long-lived assets at year  end   |       | 12,754                                          |       |   | 2,473 |   |   | 4,240 |   |   | 1,182 |   |   |   | 2,386 |   |   |   | — |   |   |   | 23,035 |   |   |
| Identifiable assets at  year end |       | 140,319                                         |       |   | 13,730 |   |   | 16,814 |   |   | 11,881 |   |   |   | 10,054 |   |   |   | (35,185 | ) |   |   | 157,613 |   |   |
| Net assets at year end           |       | 112,995                                         |       |   | 5,651 |   |   | 11,172 |   |   | 8,171 |   |   |   | 3,701 |   |   |   | (24,258 | ) |   |   | 117,432 |   |   |
|                                  |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                      | ** ** | **Year Ended May 31, 2004** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | **U.S.**                                        | ** ** | **Germany** | ** ** | **Italy** | ** ** | **Canada** | ** ** | **Other (1)** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net reagent sales:              |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unaffiliated customers          |       | $                                               | 67,785     |   |   | $ | 10,444 |   |   | $ | 9,042 |   |   | $ | 7,193 |   |   |   | $ | 7,862 |   |   |   | $ | — |   |   |   | $ | 102,326 |   |   |
| Affiliates                      |       | 9,269                                           |       |   | 2,691 |   |   | — |   |   | 116 |   |   |   | 162 |   |   |   | (12,238 | ) |   |   | — |   |   |
| Subtotal                        |       | 77,054                                          |       |   | 13,135 |   |   | 9,042 |   |   | 7,309 |   |   |   | 8,024 |   |   |   | (12,238 | ) |   |   | 102,326 |   |   |
| Net instrument sales:           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unaffiliated customers          |       | 4,316                                           |       |   | 2,682 |   |   | 573 |   |   | 111 |   |   |   | 2,091 |   |   |   | — |   |   |   | 9,773 |   |   |
| Affiliates                      |       | 154                                             |       |   | 3,969 |   |   | — |   |   | — |   |   |   | 39 |   |   |   | (4,162 | ) |   |   | — |   |   |
| Subtotal                        |       | 4,470                                           |       |   | 6,651 |   |   | 573 |   |   | 111 |   |   |   | 2,130 |   |   |   | (4,162 | ) |   |   | 9,773 |   |   |
| Net collagen sales:             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unaffiliated customers          |       | 459                                             |       |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 459 |   |   |
| Affiliates                      |       | —                                          |       |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Subtotal                        |       | 459                                             |       |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 459 |   |   |
| Total                           |       | 81,983                                          |       |   | 19,786 |   |   | 9,615 |   |   | 7,420 |   |   |   | 10,154 |   |   |   | (16,400 | ) |   |   | 112,558 |   |   |
| Depreciation                    |       | 3,003                                           |       |   | 884 |   |   | 1,134 |   |   | 114 |   |   |   | 690 |   |   |   | — |   |   |   | 5,825 |   |   |
| Amortization                    |       | 369                                             |       |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 369 |   |   |
| Income (loss) from operations   |       | 17,486                                          |       |   | (1,130 | ) |   | 309 |   |   | 2,344 |   |   |   | (333 | ) |   |   | 3,026 |   |   |   | 21,702 |   |   |
| Interest expense                |       | (723                                            | )          |   | (17 | ) |   | (31 | ) |   | (87 | ) |   |   | (24 | ) |   |   | — |   |   |   | (882 | ) |   |
| Interest income                 |       | 5                                               |       |   | 21 |   |   | 9 |   |   | — |   |   |   | 6 |   |   |   | — |   |   |   | 41 |   |   |
| Income tax (benefit) expense    |       | 7,171                                           |       |   | (543 | ) |   | 191 |   |   | 848 |   |   |   | 57 |   |   |   | 2 |   |   |   | 7,726 |   |   |
| Capital expenditures            |       | 3,123                                           |       |   | 938 |   |   | 1,965 |   |   | 186 |   |   |   | 894 |   |   |   | — |   |   |   | 7,106 |   |   |
| Long-lived assets at year end   |       | 12,291                                          |       |   | 3,299 |   |   | 3,987 |   |   | 1,123 |   |   |   | 2,335 |   |   |   | — |   |   |   | 23,035 |   |   |
| Identifiable assets at year end |       | 114,062                                         |       |   | 16,992 |   |   | 15,836 |   |   | 9,610 |   |   |   | 10,853 |   |   |   | (42,936 | ) |   |   | 124,417 |   |   |
| Net assets at year end          |       | 93,200                                          |       |   | 4,302 |   |   | 10,915 |   |   | 5,554 |   |   |   | 3,206 |   |   |   | (24,224 | ) |   |   | 92,953 |   |   |
|                                 |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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56         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

 

| ** **                     | ** ** | **Year Ended May 31, 2003** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **U.S.**                                        | ** ** | **Germany** | ** ** | **Italy** | ** ** | **Canada** | ** ** | **Other (1)** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net reagent sales:             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unaffiliated customers         |       | $                                               | 62,000     |   |   | $ | 9,433 |   |   | $ | 7,519 |   |   | $ | 6,343 |   |   |   | $ | 5,546 |   |   |   | $ | — |   |   |   | $ | 90,841 |   |   |
| Affiliates                     |       | 7,788                                           |       |   | 613 |   |   | 4 |   |   | 113 |   |   |   | 271 |   |   |   | (8,789 | ) |   |   | — |   |   |
| Subtotal                       |       | 69,788                                          |       |   | 10,046 |   |   | 7,523 |   |   | 6,456 |   |   |   | 5,817 |   |   |   | (8,789 | ) |   |   | 90,841 |   |   |
| Net instrument sales:          |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unaffiliated customers         |       | 3,084                                           |       |   | 1,071 |   |   | 92 |   |   | — |   |   |   | 3,560 |   |   |   | — |   |   |   | 7,807 |   |   |
| Affiliates                     |       | 41                                              |       |   | 4,129 |   |   | — |   |   | — |   |   |   | — |   |   |   | (4,170 | ) |   |   | — |   |   |
| Subtotal                       |       | 3,125                                           |       |   | 5,200 |   |   | 92 |   |   | — |   |   |   | 3,560 |   |   |   | (4,170 | ) |   |   | 7,807 |   |   |
| Total                          |       | 72,913                                          |       |   | 15,246 |   |   | 7,615 |   |   | 6,456 |   |   |   | 9,377 |   |   |   | (12,959 | ) |   |   | 98,648 |   |   |
| Depreciation                   |       | 2,743                                           |       |   | 834 |   |   | 928 |   |   | 106 |   |   |   | 533 |   |   |   | — |   |   |   | 5,144 |   |   |
| Amortization                   |       | 341                                             |       |   | — |   |   | — |   |   | — |   |   |   | 27 |   |   |   | — |   |   |   | 368 |   |   |
| Income  (loss) from operations |       | 20,435                                          |       |   | (300 | ) |   | 346 |   |   | 1,534 |   |   |   | 443 |   |   |   | (154 | ) |   |   | 22,304 |   |   |
| Interest  expense              |       | (2,017                                          | )          |   | (111 | ) |   | (57 | ) |   | (200 | ) |   |   | (21 | ) |   |   | — |   |   |   | (2,406 | ) |   |
| Interest income                |       | 6                                               |       |   | 120 |   |   | — |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | 127 |   |   |
| Income  tax (benefit) expense  |       | 5,378                                           |       |   | (183 | ) |   | 225 |   |   | 510 |   |   |   | (52 | ) |   |   | (65 | ) |   |   | 5,813 |   |   |
| Capital expenditures           |       | 2,487                                           |       |   | 1,707 |   |   | 258 |   |   | 61 |   |   |   | 721 |   |   |   | — |   |   |   | 5,234 |   |   |
|                                |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Note 1:                 Informationrelating to Spain, Portugal, France, and Belgium is included in “Other”.

Note 2:                 Revenue isallocated by geographic area based on the subsidiary with which the saleoriginates.

During the years ended May 31,2005, 2004 and 2003, the Company’s U.S. operations made net export sales tounaffiliated customers of approximately $6,910,000, $4,874,000 and $4,842,000,respectively. The Company’s German operations made net export sales tounaffiliated customers of $5,498,000, $4,859,000 and $3,089,000 for the yearsended May 31, 2005, 2004, and 2003, respectively. The Company’s Canadianoperations made net export sales to unaffiliated customers of $1,862,000,$2,152,000 and $2,152,000 for the years ending May 31, 2005, 2004, and2003, respectively. Product sales to affiliates are valued at market prices.

**15.    COMPREHENSIVE INCOME**

Comprehensiveincome for the years ended May 31, 2005, 2004 and 2003 is as follows:

| ** **                                   | ** ** | **FY 2003** | ** ** | **FY 2004** | ** ** | **FY 2005** | ** ** |
|----------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| Retained earnings/net  income                |       | $                | 14,369,757 |             | $          | 12,537,806       |       | $ | 23,909,654 |   |
| Foreign currency  translation adjustment     |       | 4,591,888        |       | 433,568          |       | 638,821          |       |
| Hedge loss reclassified to  interest expense |       | 20,548           |       | 20,548           |       | 20,548           |       |
| Comprehensive income                         |       | $                | 18,982,193 |             | $          | 12,991,922       |       | $ | 24,569,023 |   |

 

**16.    EXCESS OF COST OVER NET TANGIBLE ASSETSACQUIRED AND CUSTOMER LISTS**

As of May 31, 2005, the financial statementsincluded acquisition-related goodwill of $28.8 million, net of previousamortization of $7.4 million. Goodwill, net of amortization, totaled $17.8million, $3.0 million, $1.0 million and $7.0 million in the U.S., Germany,Italy and Canada, respectively.

In June 2001, the FASB issued SFAS No. 141, *Business Combinations*, and SFAS No. 142, *Goodwill and Other Intangible Assets*. Under the new rules,goodwill and indefinite lived intangible assets are no longer amortized but arereviewed annually for impairment, or more frequently if impairment indicatorsarise. The review process entails assessing the fair value of the net assets underlyingthe Company’s acquisition related goodwill on a business-by-business basis. Ifthe fair value is deemed less than the related carrying value, the Company isrequired to reduce the amount of the goodwill. Separable intangible assets thatare not deemed to have indefinite lives continue to be amortized over theiruseful lives.

----

                                                RESULTS         57

 

The grosscarrying amount and accumulated amortization of the Company’s Customer List isas follows:

| ** **         | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|--------------------|------------|-------------------|------------|-------------------------------|------------|--------------------------|------------|
| May 31, 2005: |       |              |       |                          |       |                     |       |   |   |
| Customer List      |       | $                 | 1,700,000  |                          |       | $                        | 560,000    |   |   | $ | 1,140,000 |   |
| May 31, 2004: |       |              |       |                          |       |                     |       |   |   |
| Customer List      |       | $                 | 1,700,000  |                          |       | $                        | 475,000    |   |   | $ | 1,225,000 |   |

 

Amortizationexpense recorded on the Customer List for the years ended May 31, 2005,2004 and 2003 was $85,000 for each year, respectively. The Customer List isbeing amortized over a useful life of 20 years. The estimated amortizationexpense relating to the Customer List for each of the next five fiscal yearsand thereafter is as follows:

| **Year Ending May 31:** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2006                                   |       | $          | 85,000     |   |
| 2007                                   |       | 85,000     |       |
| 2008                                   |       | 85,000     |       |
| 2009                                   |       | 85,000     |       |
| 2010                                   |       | 85,000     |       |
| Thereafter                             |       | 715,000    |       |
|                                   |       | $          | 1,140,000  |   |

 

**17.    CANCELLATION OF GROUP PURCHASING CONTRACTS**

The Company mutually agreed withtwo group purchasing organizations to cancel supply agreements. The Company’scontracts with Novation and Premier were cancelled effective January 10,2005 and January 26, 2005, respectively. These cancellations wereundertaken for the purpose of increasing prices to the members of each groupwhich occurred simultaneously with each cancellation. These groups contributeapproximately $24.9 million in revenues to Immucor annually. Thesecancellations are also expected to result in the Company paying approximately$0.8 million less in annual administration fees to the groups.

**18.    SUBSEQUENT EVENTS**

In July 2005, the Company signed a technologylicensing agreement with Kiwi Ingenuity Limited (“Kiwi”) to use Kiwi’s KODETMtechnology platform to create a quality control system for blood group typing.Kiwi Ingenuity Limited, in association with the Auckland University ofTechnology Biotechnology Research Institute, has developed a range of KODETMtechnology platforms which allow for the attachment of molecules on to theoutside of cells, thereby resulting in a quality control system for bloodgrouping. The Company expects to be able to offer its customers heightenedassurance as to the accuracy of test results by incorporating Kiwi’s technologyinto the Company’s products. The Company expects to spend approximately $15,000in research and development costs regarding this agreement in fiscal 2006.

On April 22, 2005, the Company announced that ithad signed a letter of intent to engage in discussions with Kainos Laboratories, Inc.(“Kainos”), the distributor of Immucor products in Japan, about the possibilityof structuring Kainos’ blood banking business as a joint venture betweenImmucor and Kainos. A definitive agreement to form the joint venture wassigned, and announced by the Company, on June 20, 2005. On June 30,2005, Kainos accordingly spun-off its blood-banking business, consistingprimarily of certain assets and no debt, as a separate legal entity. On July 5,2005, final documents were signed fully consummating the joint venturearrangement, with Immucor and Kainos owning 51% and 49%, respectively, ofImmucor-Kainos, K.K. — the newly-formed joint venture company that is nowImmucor’s distributor in Japan. For its initial 51% interest, Immucor paidKainos 459.0 million Japanese Yen which equated to $4.2 million. The jointventure has 800 shares of common stock authorized, of which 200 shares wereissued upon establishment; Immucor purchased 102 of these shares from Kainos onJuly 5, 2005. The Company is currently evaluating whether this jointventure will meet the definition of a variable interest entity as defined inthe Financial Accounting Standards Board Interpretation No. 46, *Consolidation of Variable Interest Entities, an Interpretation ofAccounting Research Bulletin (ARB) No. 51* (“FIN No. 46”). However,the Company has determined that it will be the primary beneficiary; thereforeregardless of whether the joint venture is deemed to be a variable interestentity, the transaction is expected to be accounted for as a purchase of amajority-owned business, the results of operations of which will be included inthe Company’s consolidated financial statements as of the date of acquisition. Proforma results of operations for the year ended May 31, 2005 would not havebeen materially different as a result of this acquisition and therefore are notpresented. The Company is awaiting additional information concerning certainasset valuations, primarily the value of the new distribution agreement (seefurther discussion below), for purposes of finalizing the allocation of thepurchase price.

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58         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

In accordance with the terms of the Stock PurchaseAgreement associated with the above acquistion, Immucor will purchase theremaining 49% interest from Kainos for 441.0 million Japanese Yen. The Companyexpects to purchase this remaining interest after a three-year transitionperiod ending on June 30, 2008, but upon mutual agreement with Kainos, maypurchase the interest prior to the end of the transition period. In accordancewith the terms of a Services Agreement, Kainos has agreed to supply certainservices to the joint venture during the transition period.

The acquisition price, which will total 900.0 millionJapanese Yen upon Immucor’s purchase of Kainos 49% interest, includes a premiumbased on management’s belief that this business will achieve higher futureprofitability levels with the installment of Immucor personnel in keymanagerial positions overseeing the operations of the joint venture.

In accordance with the terms of the Joint VentureAgreement, Immucor has agreed to fund the joint venture’s purchase of Kainos’blood-banking inventory, the majority of which consists of Immucor productssold to Kainos in the ordinary course of business. This inventory repurchase isexpected to occur by the end of the second quarter of fiscal 2006.

Additionally, a new distribution agreement was signedon July 5, 2005 between Immucor, Kainos and the joint venture. The newagreement stipulates that Kainos will act as an intermediary between Immucorand the joint venture in that Kainos will have exclusive rights to supply thejoint venture with Immucor product during the term of the agreement. Inaccordance with this agreement, the joint venture guarantees that Kainos willreceive a minimum net profit (as defined in the agreement) of 300 millionJapanese Yen by the end of the three-year transition period ending June 30,2008 on sales of Immucor product to the joint venture. The agreement expires onMay 30, 2009, but may be terminated sooner (1) upon mutual agreementof the parties, (2) at the end of the transition period, or (3) uponKainos’ realization of the minimum guaranteed net profit.

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                                                RESULTS         59

 

**IMMUCOR,INC. AND SUBSIDIARIES**

**SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTSYEARS ENDED MAY 31, 2005, 2004 AND 2003**

| ** **                       | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expense** | ** ** | **Deductions  (Note 1)** | ** ** | **Balance  at End  of Period** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------|------------|------------------------------------------|------------|
| 2005:                            |       |                                           |       |                                         |       |                          |       |                                     |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts |       |                                           | $          | 1,330,305                                    |       |                          |       | $                                        | 941,682    |   |   |   | $ | (398,330 | ) |   | $ 1,873,657 |   |
| 2004:                            |       |                                           |       |                                         |       |                          |       |                                     |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts |       |                                           | $          | 1,678,361                                    |       |                          |       | $                                        | 206,223    |   |   |   | $ | (554,279 | ) |   | $ 1,330,305 |   |
| 2003:                            |       |                                           |       |                                         |       |                          |       |                                     |       |   |   |   |   |   |   |
| Allowance for doubtful accounts  |       |                                           | $          | 1,483,688                                    |       |                          |       | $                                        | 641,996    |   |   |   | $ | (447,323 | ) |   | $ 1,678,361 |   |

 

Note 1:            “Deductions”for the “Allowance for doubtful accounts” represent accounts written off duringthe period less recoveries of accounts previously written off and exchangedifferences generated.

**Item 9.—**Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

**Item 9A. —**Controls and Procedures.

***Evaluation of Disclosure Controls and Procedures***

As of the end of the period covered by this report, theCompany carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedurespursuant to Rule 13a-15(b) and 15d-15(b) under the ExchangeAct.

As described in our management’s report on our internalcontrols over financial reporting appearing on page 28 hereof, Immucor’smanagement identified material weaknesses in internal controls over financialreporting, as defined in Rule 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934.

Based on our evaluation, managementconcluded that the Company’s disclosure controls and procedures were noteffective as of May 31, 2005 because of material weaknesses described inmanagement’s annual report on internal control over financial reporting.

***Management’s Annual Reporton Internal Control Over Financial Reporting and Report of IndependentRegistered Public Accounting Firm***

“Report of Independent RegisteredPublic Accounting Firm on Internal Control Over Financial Reporting” and “Management’sAnnual Report on Internal Control Over Financial Reporting” are included on pages 29and 30, and page 28, respectively, of this Report, and incorporated hereinby reference.

***Changes in Internal Control Over Financial Reporting***

There were no changes in ourinternal control over financial reporting identified in connection with theevaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15or 15d-15 that occurred during our most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

**Remediation Efforts**

The Company will undertakeefforts to remediate the control weaknesses identified, including;

·         Formalizingcontrols around periodic monitoring of impairment indicators for inventory andfixed assets;

·         Strengtheningthe policies and procedures surrounding fixed assets, including periodicphysical counts and reconciliations of significant assets;

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60         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

·         Strengtheningthe policies and procedures surrounding the accounting for leases includingcentralization of contracts for significant leases;

·         Strengtheningthe controls related to stock option grant authorization, accounting andreporting;

·         Strengtheningthe review and approval process around contract documentation, and seeking outadditional expertise in revenue accounting policy matters;

·         Expandingreview procedures at each quarter end in support of footnote disclosuresthrough a structured disclosure committee that will be established;

·         Strengtheningthe controls and review procedures relating to income taxes;

·         Furtheraddition of internal audit staff to increase the periodic review of compliancewith management’s stated policies and procedures;

·         Furtheraddition of accounting staff and expertise to improve the control environmentand to compensate for the weaknesses identified.

We intend to continue to monitorour internal controls and our progress on the remediation steps identifiedabove. If further improvements or enhancements are identified, we will takesteps to implement such improvement or enhancements.

**PART III**

**Item10. —**Directors and Executive Officers of the Registrant.

**Directors**

Our currentdirectors are as follows:

| ** **                     | ** ** | ** ** | ** ** | ** **                          | ** ** | **Director**                                                                    | ** ** |
|--------------------------------|------------|------------|------------|-------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Name**                       | ** ** | **Age**    | ** ** | **Position with Company** | ** ** | **Since**                                                                       | ** ** |
| Roswell S. Bowers              |       |       | 56         |                                |       | Director                                                                        |       |   | 2001 |   |   |
| Dr. Gioacchino De Chirico |       |       | 52         |                                |       | Director and  President                                                         |       |   | 1994 |   |   |
| Ralph A. Eatz                  |       |       | 61         |                                |       | Director and  Senior Vice President –   Chief Scientific Officer |       |   | 1982 |   |   |
| Edward L. Gallup               |       |       | 66         |                                |       | Chairman of  the Board of Directors and Chief Executive Officer                 |       |   | 1982 |   |   |
| John A. Harris                 |       |       | 54         |                                |       | Director                                                                        |       |   | 2003 |   |   |
| Hiroshi Hoketsu                |       |       | 64         |                                |       | Director                                                                        |       |   | 2005 |   |   |
| Joseph  E. Rosen               |       |       | 62         |                                |       | Director                                                                        |       |   | 1998 |   |   |

 

**Roswell S. Bowers**has been a directorof the Company since December 2001. Mr. Bowers has extensiveexperience in the financial services industry. He began his career in 1971 withCitizens & Southern National Bank, a predecessor of NationsBank andBank of America. He held a variety of leadership positions in commercial,corporate and international banking during his career. He retired from Bank of Americain 2001, where his most recent position was Executive Vice President andNational Commercial Credit Process Executive. He has served on the AdvisoryCommittee of Alliance Technology Ventures, an early-stage venture capital firminvesting in communications technology, internet infrastructure and lifescience startups. Mr. Bowers is a past member of the Board of Trustees ofEgleston Children’s Health Care System, Inc., the Board of Trustees of theGeorgia Tech Alumni Association, the Board of Directors of the Georgia TechSchool of Management and has served on numerous other civic boards andcommittees.

**Dr. Gioacchino De Chirico**has beenPresident of the Company since July 2003. He also served as ChiefExecutive Officer from April 2004 through October 2004. Prior toassuming his position as President, Dr. De Chirico served as the Company’sDirector of European Operations since May 1998, and previous to that, asPresident of Immucor Italia S.r.l., a subsidiary of the Company, sinceFebruary 1994. From 1989 until 1994, Dr. De Chirico was employed byOrtho Diagnostic Systems, Inc. as General Manager, Immunocytometry, withworldwide responsibility. Ortho Diagnostics is a diagnostics subsidiary ofJohnson & Johnson that, among other things, produces and distributesblood banking reagents.

**Ralph A. Eatz**, who has worked in theblood banking reagent field for over 30 years, has been a director of theCompany since its founding. Mr. Eatz served as Vice President – Operationsof the Company since its founding until being appointed Senior Vice President – Operationsin 1988. In July 2003, Mr. Eatz assumed his present position ofSenior Vice President – ChiefScientific Officer.

**Edward L. Gallup**has been Chairman ofthe Board of Directors of the Company since its founding. Except for the periodfrom April 2004 through October 2004, Mr. Gallup has also beenthe Chief Executive Officer of the Company. He also was the President of theCompany until July 2003. Mr. Gallup continues to be employed by theCompany and remains involved in the management of the Company. Mr. Galluphas worked in the blood banking business for over 35 years.

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                                                RESULTS         61

 

**John A. Harris**has been a director ofthe Company since August 2003. He is a retired financial executive.Mr. Harris has extensive health care experience having been in theindustry since 1981. He also has extensive financial experience with 24 yearsas a financial executive. His most recent position was Executive VicePresident, Finance and Strategic Planning and Treasurer for the CeruleanCompanies/Blue Cross Blue Shield of Georgia, from February 1996 throughMarch 2001, when Cerulean was acquired by Wellpoint Health Networks.

**Hiroshi Hoketsu**has been a directorof the Company since April 2005. Mr. Hoketsu has extensive healthcare experience having been in the industry since 1967. His most recentposition was President of Ortho-Clinical Diagnostics, K.K. in Japan; aresponsibility he held from 1981 until his retirement in 2002.

**Joseph E. Rosen**hasbeen a director of the Company since April 1998. He currently is Director– Business Development and Planning for BioLife Plasma Services. Previously,Mr. Rosen had been employed in various capacities at Sera-Tec Biologicalssince its inception in 1969 and served as its president from 1986 until 2001.Mr. Rosen is currently serving as Chairman of the Board of the PPTASource, the plasma collection industry trade group, and has been a member ofthe board of directors of several public and private health care companies. Hehas over 30 years of experience in the blood banking industry.

**Executive Officers**

Our currentexecutive officers are as follows:

| **Name**                        | ** ** | **Age** | ** ** | **Position with Company** | ** ** | **Since**                                                                       | ** ** |
|---------------------------------|------------|---------|------------|-------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| Edward L. Gallup                |       |    | 66         |                                |       | Chief  Executive Officer                                                        |       |   | 1982 |   |   |
| Dr. Gioacchino De  Chirico |       |    | 52         |                                |       | President                                                                       |       |   | 2003 |   |   |
| Ralph A. Eatz                   |       |    | 61         |                                |       | Senior Vice  President – Chief  Scientific Officer               |       |   | 2003 |   |   |
| Patrick D. Waddy                |       |    | 48         |                                |       | Vice  President – Interim  Chief Financial Officer and Secretary |       |   | 2005 |   |   |
| Didier L. Lanson                |       |    | 55         |                                |       | Director of European Operations                                                 |       |   | 2003 |   |   |

 

Biographical information forcertain Executive Officers not listed below is included above under “Directors.”

**Patrick D. Waddy**has been VicePresident –Interim Chief Financial Officer and Secretary since August 2005. He alsohas served as Vice President –Finance since August 2004. Mr. Waddy is also the President ofDominion Biologicals, Ltd., a position he has held since the Company’sacquisition of this subsidiary in December 1996. Mr. Waddy is aChartered Accountant and has more than 17 years of financial managementexperience.

**Didier L. Lanson**has been Director ofEuropean Operations since July 2003. Mr. Lanson served as a directorof the Company from October 1989 until July 2003, when he assumed hiscurrent position as Director of European Operations. Between July 2002 andJuly 2003, he served as a consultant for biotech and software companies.Between November 1999 and April 2002, he served as CEO of GenOdysseeS.A., an early-stage functional genomic company. From September 1992 untilMarch 1999, he served first as Vice President, Europe and then VicePresident Global Operations and International Affairs of SyStemix Inc., aNovartis company. SyStemix developed therapeutic products for diseases of theblood and immune system. From 1987 until April 1991, Mr. Lanson was aDirector and the President and CEO of Diagnostics Transfusion (“DT”), a Frenchcorporation, which develops, manufactures and distributes reagent products.

There are no family relationshipsamong any of the directors or executive officers of the Company.

**Board Meetings and Committees**

The Board of Directors conducts its business throughmeetings of the Board and through committees established in accordance with theCompany’s Bylaws. During the fiscal year ended May 31, 2005, the Board ofDirectors met eight times. Each Director attended at least 75% of the total ofall meetings of the Board of Directors and any committee on which he served.

The Board of Directors had four committees during thefiscal year ended May 31, 2005: the Audit Committee, the CompensationCommittee, the Stock Option Committee, and the Corporate Governance andNominating Committee. During the fiscal year ended May 31, 2005, theduties of the Stock Option Committee were assumed by the CompensationCommittee.

The Audit Committee is responsible for reviewing theCompany’s financial statements with management and the independent registeredpublic accounting firm prior to the publication of such statements, theselection and oversight of the Company’s independent registered publicaccounting firm, and the oversight of the Company’s internal control overfinancial reporting. Messrs. Bowers, Harris and Rosen comprised theCompany’s Audit Committee during the fiscal year ended May 31, 2005. TheBoard has determined that Mr. Harris is an “audit committee financialexpert” as defined by Item 401(h) of Regulation S-K. Each member whoserved on the Audit Committee during the fiscal year ended May 31, 2005 is“independent” as defined by the standards of the NASDAQ National Marketapplicable to 

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62         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

audit committee members. The Audit Committee performsits duties pursuant to a written Audit Committee Charter adopted by the Boardof Directors. The Audit Committee met eight times in the fiscal year endedMay 31, 2005.

The Compensation Committee has responsibility over mattersrelating to compensation of executives, employees and non-employee directors ofthe Company, including reviewing the performance of management in achieving theCompany’s goals and objectives and for setting the annual compensation of theCompany’s executive officers. The Compensation Committee also hasresponsibility over matters relating to the Company’s equity incentive andother benefit plans, including the authority to grant stock options and otherequity incentive awards to employees, directors and any other eligibleindividuals from time to time and to administer the Company’s various equityincentive plans. Duties related to the Company’s stock option plans werepreviously performed by a separate Stock Option Committee that was combined inJanuary 2005 with the Compensation Committee. Messrs. Bowers andRosen were members of the Compensation Committee during the fiscal year endedMay 31, 2005, as was Dr. Mark Kishel prior to his resignation fromthe Board in August 2005, and Mr. Hoketsu became a member inSeptember 2005. Messrs. Bowers and Rosen were members of the formerStock Option Committee. The Compensation Committee met three times during thefiscal year ended May 31, 2005, and the former Stock Option Committee metonce.

The Board of Directors establisheda Corporate Governance and Nominating Committee in July 2004. TheCorporate Governance and Nominating Committee is responsible for recommendingto the full Board of Directors candidates for election to the Board, reviewingperiodically the composition and structure of the Board, monitoring Boardeffectiveness, and for developing and overseeing the Company’s corporategovernance guidelines. The Board has adopted a Corporate Governance andNominating Committee charter, which is available on the Company’s website atwww.immucor.com by scrolling over “About Us” and clicking on “CorporateGovernance.” Shareholders may also request a free copy of the CorporateGovernance and Nominating Committee Charter by writing to: Patrick D. Waddy,Vice President –Interim Chief Financial Officer and Secretary, Immucor, Inc., 3130 GatewayDrive, PO Box 5625, Norcross, GA 30091-5625. The Committee has not identifiedany specific, minimum qualifications or skills that it believes must be met bya nominee for director. It is the intent of the Committee to review from timeto time the appropriate skills and characteristics of directors in the contextof the current make-up of the Board and the requirements and needs of theCompany at a given time. The Corporate Governance and Nominating Committee willconsider nominees proposed by shareholders. Shareholders wishing to nominate acandidate for consideration at the Annual Meeting of Shareholders in 2006should submit the nominee’s name, affiliation and other pertinent informationalong with a statement as to why such person should be considered fornomination. Such nominations should be addressed to the Corporate Governanceand Nominating Committee in care of the Secretary of the Company and bereceived no later than 120 days before the date of the 2006 Annual Meeting ofShareholders. The Committee will evaluate any such nominees in a manner similarto that for all director nominees. The Corporate Governance and NominatingCommittee consists of Mr. Harris and, prior to his resignation from theBoard in August 2005, also included Dr. Kishel, each of whom is“independent” as defined by the standards of the NASDAQ National Marketapplicable to nominating committee members. The Board of Directors is expectedin the near future to appoint another member of the Corporate Governance andNominating Committee. The Corporate Governance and Nominating Committee mettwice during the fiscal year ended May 31, 2005.

**Section 16(a) Beneficial Ownership Reporting Compliance**

Section 16(a) of theSecurities Exchange Act of 1934 and regulations of the Securities and ExchangeCommission thereunder require the Company’s executive officers and directorsand persons who own more than ten percent of the Company’s Common Stock, aswell as certain affiliates of such persons, to file initial reports ofownership and changes in ownership with the Securities and Exchange Commission.Executive officers, directors and persons owning more than ten percent of theCompany’s Common Stock are required by Securities and Exchange Commissionregulations to furnish the Company with copies of allSection 16(a) reports they file. Based solely on its review of thecopies of such reports received by it and written representations that no otherreports were required for those persons, the Company believes that, during thefiscal year ended May 31, 2005, all filing requirements applicable to itsexecutive officers, directors and owners of more than ten percent of theCompany’s Common Stock were met.

**Code of Ethics**

Immucor has adopted a code of business conduct andethics for directors, officers and employees, known as the Code of Conduct. TheCode of Conduct is available on the Company website athttp://www.immucor.com/site/aum_corporate_governance.jsp. Shareholders mayrequest a free copy of the Code of Conduct by writing to: Patrick D. Waddy,Vice President –Interim Chief Financial Officer and Secretary, Immucor, Inc., 3130 GatewayDrive, PO Box 5625, Norcross, GA 30091-5625.

Immucor, Inc. has retained theservices of TeleSentry LLC to provide a 24 hour a day, seven day a weekanonymous hotline service for shareholder reporting of suspected violations ofthe Code of Conduct. Shareholders in the U.S. may access the hotline service at(888) 883-1499. International shareholders may access the hotline bydialing 203-557-8604.

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                                                RESULTS         63

 

**Item11. —**Executive Compensation.

**ExecutiveCompensation**

The following table sets forth the compensation earnedby each of the Company’s executive officers for services rendered in allcapacities to the Company for the last three fiscal years.

**SUMMARY COMPENSATIONTABLE**

|                                            | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **                                     | ** ** | ** **                               | ** ** | **Long Term**                           | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------|------------|------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                 | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **                                     | ** ** | ** **                               | ** ** | **Compensation**                             | ** ** |
| ** **                                 | ** ** | **Annual Compensation** | ** ** | ** ** | ** ** | **Awards**                                     | ** ** |
| **Name and  Principal Position** | ** ** | **Year**                     | ** ** | **Salary** | ** ** | **Bonus and  401(k)  contributions  (1)** | ** ** | **Other Annual  Compensation  (2)** | ** ** | **Securities  Underlying  Options (3)** | ** ** |
| Edward L. Gallup                           |       |                         | 2005       |       |       | $                                              | 350,844    |                                     |       | $                                            | —     |   |   |   | $ | 42,840 |   |   |   | — |   |   |
| Chairman of the Board and                  |       |                         | 2004       |       |       | 329,500                                        |       |                                     | —     |                                         |       |   | 36,550 |   |   |   | 56,250 |   |   |
| Chief Executive Officer                    |       |                         | 2003       |       |       | 279,616                                        |       |                                     | —     |                                         |       |   | 49,340 |   |   |   | — |   |   |
| Dr. Gioacchino De Chirico             |       |                         | 2005       |       |       | 375,032                                        |       |                                     | 37,293     |                                         |       |   | 41,604 |   |   |   | — |   |   |
| President                                  |       |                         | 2004       |       |       | 309,650                                        |       |                                     | 25,399     |                                         |       |   | 25,602 |   |   |   | 56,250 |   |   |
|                                       |       |                         | 2003       |       |       | 270,833                                        |       |                                     | —     |                                         |       |   | 16,625 |   |   |   | — |   |   |
| Ralph A. Eatz                              |       |                         | 2005       |       |       | 340,048                                        |       |                                     | 8,803      |                                         |       |   | 34,168 |   |   |   | — |   |   |
| Senior Vice President – Chief         |       |                         | 2004       |       |       | 319,361                                        |       |                                     | 6,379      |                                         |       |   | 34,168 |   |   |   | 56,250 |   |   |
| Scientific Officer                         |       |                         | 2003       |       |       | 271,300                                        |       |                                     | 6,441      |                                         |       |   | 32,960 |   |   |   | — |   |   |
| Steven C. Ramsey (4)                       |       |                         | 2005       |       |       | 250,317                                        |       |                                     | 8,570      |                                         |       |   | 2,500 |   |   |   | — |   |   |
| Vice President – Chief  Financial     |       |                         | 2004       |       |       | 237,265                                        |       |                                     | 7,118      |                                         |       |   | 2,500 |   |   |   | 22,596 |   |   |
| Officer and Secretary                      |       |                         | 2003       |       |       | 218,345                                        |       |                                     | 5,165      |                                         |       |   | 2,500 |   |   |   | — |   |   |
| Didier L. Lanson                           |       |                         | 2005       |       |       | 104,000                                        |       |                                     | 51,299     |                                         |       |   | 144,268 |   |   |   | — |   |   |
| Director of European  Operations           |       |                         | 2004       |       |       | 100,000                                        |       |                                     | 8,258      |                                         |       |   | 83,940 |   |   |   | 95,625 |   |   |
|                                            |       |                         | 2003       |       |       | —                                         |       |                                     | —     |                                         |       |   | — |   |   |   | — |   |   |
|                                            |            |                              |            |            |            |                                                |            |                                          |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

(1)    Represents amounts the Company contributed to the401(k) retirement plan on behalf of the named executive officers. Alsoincludes in 2005 $25,000 relocation assistance paid to Dr. De Chirico and$17,427 in contributions to a French retirement plan on behalf ofMr. Lanson, as well as a bonus of $33,872 awarded to Mr. Lanson.Includes in 2004 $25,000 in relocation assistance paid to Dr. De Chiricoand $8,258 in contributions to a French retirement plan on behalf ofMr. Lanson.

(2)    Includes the value of life insurance premiums and an allowancefor automobile expenditures for each of the above named executive officers asfollows: **For 2005**–****for Dr. De Chirico andMessrs. Gallup, Eatz, Ramsey, and Lanson life insurance premiums of$32,004, $33,240, $24,568, $2,500, and $2,537, respectively, and an allowancefor automobile expenditures for Dr. De Chirico and Messrs. Gallup,Eatz and Lanson of $9,600 each. **For 2004**–for Dr. De Chirico and Messrs. Gallup, Eatz, Ramsey, andLanson life insurance premiums of $16,002, $26,950, $24,568, $2,500, and$1,892, respectively, an allowance for automobile expenditures for Dr. DeChirico and Messrs. Gallup and Eatz of $9,600 each and for Mr. Lansonof $7,200. **For 2003**–****for Dr. De Chirico and Messrs. Gallup,Eatz, and Ramsey, life insurance premiums of $7,025, $39,740, $23,360, and$2,500, respectively, and an allowance for automobile expenditures forDr. De Chirico and Messrs. Gallup and Eatz of $9,600 each.

Also includespayments to Mr. Lanson in the amounts of $132,131 and $78,848 in fiscalyear 2005 and 2004, respectively, for his service as a member of the Board ofDirectors of Immucor Italia S.r.l. (the Company’s Italian subsidiary).

(3)    Includes stock options granted for each of the above namedofficers as follows: **For 2005**–No options were granted to any of these officers during the fiscal year.**For 2004**–for Dr. De Chirico and Messrs. Gallup and Eatz, optionsgranted to purchase 56,250 shares; for Mr. Ramsey, options granted topurchase 22,596 shares; and for Mr. Lanson, options granted to purchase95,625 shares. **For 2003**–No options were granted to executive officers during the fiscal year.

(4)    Mr. Ramsey resigned as the Company’s Vice President –Chief Financial Officer and Secretary in August 2005.

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64         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

**OptionHoldings**

The table below presents information concerning optionexercises during the past fiscal year and the value of unexercised options heldas of the end of the fiscal year by each of the individuals listed in theSummary Compensation Table.

**AGGREGATEDOPTION EXERCISES IN LAST FISCAL YEAR ANDFISCAL YEAR-END OPTION VALUES**

| ** **                     | ** ** | ** **           | ** ** | ** **   | ** ** | **Number of Securities** | ** ** | ** **                            | ** ** | ** **      | ** ** |
|--------------------------------|------------|----------------------|------------|--------------|------------|------------------------------------|------------|---------------------------------------|------------|-----------------|------------|
| ** **                     | ** ** | ** **           | ** ** | ** **   | ** ** | **Underlying Unexercised**    | ** ** | **Value of Unexercised**    | ** ** |
| ** **                     | ** ** | **Shares**           | ** ** | ** **   | ** ** | **Options at**                | ** ** | **In-the-Money Options at** | ** ** |
| ** **                     | ** ** | **Acquired On** | ** ** | **Value**    | ** ** | **May 31, 2005**         | ** ** | **May 31, 2005 (1)**   | ** ** |
| **Name**                       | ** ** | **Exercise**         | ** ** | **Realized** | ** ** | **Exercisable**                    | ** ** | **Unexercisable**                     | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Edward L. Gallup               |       |                 | —     |         |       |                               | $          | —                                |       |            |       | 392,342 |   |   |   | 119,532 |   |   |   | $ | 12,511,495 |   |   |   | $ | 3,405,181 |   |   |   |
| Dr. Gioacchino De Chirico |       |                 | —     |         |       |                               | $          | —                                |       |            |       | 274,217 |   |   |   | 119,532 |   |   |   | $ | 8,776,062 |   |   |   | $ | 3,405,181 |   |   |   |
| Ralph A. Eatz                  |       |                 | —     |         |       |                               | $          | —                                |       |            |       | 489,542 |   |   |   | 119,532 |   |   |   | $ | 15,594,874 |   |   |   | $ | 3,405,181 |   |   |   |
| Steven C. Ramsey (2)           |       |                 | —     |         |       |                               | $          | —                                |       |            |       | 18,983 |   |   |   | 52,879 |   |   |   | $ | 610,816 |   |   |   | $ | 1,435,759 |   |   |   |
| Didier L. Lanson               |       |                 | —     |         |       |                               | $          | —                                |       |            |       | 12,656 |   |   |   | 108,282 |   |   |   | $ | 407,232 |   |   |   | $ | 2,933,817 |   |   |   |

 

(1)    Based on the amount that the closing price as reported by NASDAQexceeds the exercise price for the Common Stock at the end of the fiscal year.The closing price on May 31, 2005 was $33.51 per share.

(2)    Mr. Ramseyresigned as the Company’s Vice President –Chief Financial Officer and Secretary in August 2005.

**Employment Contracts, Termination of Employment and Change of ControlArrangements**

The Company has written employment agreements with itsfour current named executive officers, Dr. De Chirico andMessrs. Gallup, Eatz, and Lanson. The Company also has an employmentagreement with its interim Chief Financial Officer, Mr. Waddy.

The agreement with Dr. De Chirico was entered intoon December 1, 2003, and amended May 1, 2004. The agreement providesa base salary for Dr. De Chirico of $375,000 and renews for a period offive years from each anniversary date unless sooner terminated. If the Companyterminates his employment without cause, then he would continue to becompensated at a rate equal to his average annual compensation for theremainder of the five year period, as renewed. “Cause” is defined generally toinclude dishonesty, an act of defalcation, continuing inability or refusal toperform reasonable duties assigned to him, and moral turpitude. If Dr. DeChirico terminates his own employment within 60 days after a change of control,or if the Company terminates his employment within two years after a change ofcontrol, the Company must pay him a lump sum equal to five times his averageannual compensation, plus certain additional amounts if such payments subjecthim to a federal excise tax under Section 4999 of the Internal RevenueCode, and he may also be entitled to outplacement assistance. If there is anchange of control (whether or not Dr. De Chirico’s employment terminates),all of his stock options will immediately vest and become exercisable in fullfor the remainder of the terms of those options.

The Company entered into employment agreements withMessrs. Gallup and Eatz on May 1, 2004. Each agreement is for atwo-year term, unless sooner terminated. The agreements provide base salariesfor Mr. Gallup and Mr. Eatz ($351,488 and $340,672, respectively, atMay 31, 2005). If the Company terminates the employment of Mr. Gallupor Mr. Eatz without cause (as defined above), then the terminated executivewould continue to be compensated at a rate equal to his average annualcompensation (that is, his base salary plus average bonus over the last twoyears) for the remainder of the two year period, and such amounts would be paidover such period of time rather than in a lump sum. If there is a change ofcontrol of the Company, and either Mr. Gallup or Mr. Eatz terminateshis own employment within 60 days after the change of control, or the Companyterminates either of them during the term of the agreement, then the Companyinstead must pay the terminated executive a lump sum equal to five times hisaverage annual compensation, plus certain additional amounts to compensate himif such payments subject him to a federal excise tax under Section 4999 ofthe Internal Revenue Code. If Mr. Gallup’s or Mr. Eatz’s employmentterminates for any reason other than for Cause, or if there is an change ofcontrol (whether or not his employment terminates), all of his stock optionswill immediately vest and become exercisable in full for the remainder of theterms of those options. Each of Mr. Gallup and Mr. Eatz is requiredunder his agreement to work a minimum of one-half of a normal workschedule.

The Company entered into an employment agreement withMr. Lanson on July 28, 2003. This agreement is for a one-year termand automatically renews for additional one-year terms, unless soonerterminated. The agreement currently provides a base salary for Mr. Lansonof $109,200. If the Company terminates his employment without cause (as definedabove), then he would continue to be compensated at a rate equal to his averageannual compensation for the remaining term of the agreement. If Mr. Lansonterminates his own employment within 60 days after a change of control, or ifthe Company terminates his employment within two years after a change ofcontrol, the Company must pay Mr. Lanson a lump sum equal to two times hisaverage annual compensation, and he may also be entitled to outplacementassistance. If there is an change of control (whether or not Mr. Lanson’semployment terminates), all of his stock options will immediately vest andbecome exercisable in full for the remainder of the terms of those options.Mr. Lanson also 

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                                                RESULTS         65

 

receives €109,200 (approximately$132,000) annually for his service as President of the Board of Directors ofImmucor Italia S.r.l. (the Company’s Italian subsidiary). There is no contractassociated with this arrangement.

The Company entered into an employment agreement withMr. Waddy on October 13, 1998. This agreement is for a one-year termand automatically renews for additional one-year terms, unless soonerterminated. The agreement currently provides a base salary for Mr. Waddyof $221,672. If the Company terminates his employment without cause (as definedabove), then he would continue to be compensated at a rate equal to his averageannual compensation for the remaining term of the agreement. If Mr. Waddyterminates his own employment within 60 days after a change of control, or ifthe Company terminates his employment after a change of control, the Companymust pay Mr. Waddy a lump sum equal to two times his average annualcompensation, and he may also be entitled to outplacement assistance. If thereis an change of control (whether or not Mr. Waddy’s employmentterminates), all of his stock options will immediately vest and becomeexercisable in full for the remainder of the terms of those options.

The Company’s agreement to compensate these executivesin connection with a change of control is designed to secure for the Companysuch executives’ time and attention to help negotiate the best deal for theCompany and its shareholders in the event of a change of control without suchexecutives being distracted by the effects of such change of control upon theirown financial interests. All of these agreements contain covenants prohibitingthese executives from disclosing confidential information and from competingwith the Company, both during and for specified periods after the terminationof employment.

The Company entered into anemployment agreement with Steven C. Ramsey, the Company’s former ChiefFinancial Officer, on October 13, 1998. On August 24, 2005, theCompany accepted Mr. Ramsey’s resignation. As a result, Mr. Ramsey’semployment agreement was terminated effective August 24, 2005.

**Compensation Committee Report**

**Executive Officer Compensation**

The Compensation Committee has responsibility overmatters relating to compensation of executives, employees and non-employeedirectors of the Company, including reviewing the performance of management inachieving the Company’s goals and objectives and for setting the annualcompensation of the Company’s executive officers. The Compensation Committeealso has responsibility over matters relating to the Company’s equity incentiveand other benefit plans, including the authority to grant stock options andother equity incentive awards to employees, directors and any other eligibleindividuals from time to time and to administer the Company’s various equityincentive plans. Duties related to the Company’s stock option plans werepreviously performed by a separate Stock Option Committee that was combined inJanuary 2005 with the Compensation Committee. Messrs. Bowers andRosen were members of the Compensation Committee during the fiscal year endedMay 31, 2005, as was Dr. Mark Kishel prior to his resignation fromthe Board in August 2005, and Mr. Hoketsu became a member inSeptember 2005. Mr. Rosen became Chairman of the committee upon Dr. Kishel’sresignation. Messrs. Bowers and Rosen were members of the former StockOption Committee. The Compensation Committee believes the Board must act on theshareholders’ behalf when establishing executive compensation programs, and theCompensation Committee has developed a compensation policy which is designed toattract and retain qualified key executive officers critical to the Company’soverall long-term success. As a result, the Compensation Committee develops abase salary, bonus incentive, and other long-term incentive compensation plansfor its executive officers.

*Base Salary.**  *The base salaries for the executiveofficers are governed by the terms of their employment agreements. See“Employment Contracts, Termination of Employment and Change of ControlArrangements” above. The employment agreements contain the general terms of eachofficer’s employment and establish the minimum compensation that such officersare entitled to receive, but do not prohibit, limit or restrict these officers’ability to receive additional compensation from the Company, whether in theform of base salary, bonus, stock options or otherwise. In determining whetherthe base salaries of the executive officers should be increased, theCompensation Committee considers numerous factors including the qualificationsof the executive officer and the amount of relevant individual experience theexecutive officer brings to the Company, the financial condition and results ofoperations of the Company, and the compensation necessary to attract and retainqualified management.

The Compensation Committee awarded an average fivepercent (5%) merit increase in the base salaries of all executive officersexcept for Dr. De Chirico in June 2004. Dr. De Chirico was noteligible for a merit increase in June 2004 as he had already received anincrease within the twelve months prior to June 2004. The CompensationCommittee awarded a three percent (3%) merit increase in the base salaries ofthe executive officers in December 2003. An average four percent (4%)merit increase in the base salaries of the executive officers was awarded inDecember 2002. In December 2002, the Compensation Committee also madea one-time adjustment for Dr. De Chirico and Messrs. Gallup, Eatz andRamsey to bring their compensation in line with companies of similar marketcapitalization.

*Incentive Bonus*.*  *Eachyear the Compensation Committee recommends to the Board of Directors anincentive cash bonus pool to be paid to the Company’s executive officers, aswell as all other managers within the Company, based upon the Company’soperating results. The amount of the bonus pool varies from year to year at thediscretion of the Compensation Committee. No bonuses were paid to any 

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66         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

executive officer serving as such for the fiscal years endedMay 31, 2005, 2004 and 2003, with the exception of Mr. Lanson who wasawarded a bonus of $33,872 for fiscal year ended May 31, 2005.

*Long-TermIncentives.*   Currently, the Company’s stockoption program is the Company’s primary long-term incentive plan for executiveofficers and other key employees. If the Immucor, Inc. 2005 Long-TermIncentive Plan is approved by the Company’s shareholders, then the CompensationCommittee will have available a range of other long-term incentives, includingSARs, restricted stock, deferred stock, and stock-based and cash-basedlong-term performance awards. The Compensation Committee reviews the financialperformance of the Company, such as increases in income from operations andearnings per share, in determining whether awards should be granted, the typeand number of awards to be granted, and the number of options and other awardsthat can be granted to executive officers as a group. The CompensationCommittee then determines the type and number of awards to be granted toindividual executive officers. In this way, the long-term compensation ofexecutive officers and other key employees are aligned with the interests ofthe Company’s shareholders. As a result, each key individual is provided asignificant incentive to manage the Company’s performance from the perspectiveof an owner of the business with an equity stake. The number of shares subjectto each option grant is based upon the executive officer’s tenure, level ofresponsibilities and position within the Company. Stock options are granted atmarket price and will only increase in value if the Company’s stock priceincreases. In addition, all stock option grants require various periods ofminimum employment beyond the date of the grant in order to exercise theoption. Dr. De Chirico and Messrs. Gallup and Eatz each received infiscal 2004 options to purchase 56,250 shares of Common Stock. Mr. Ramseyreceived in fiscal 2004 options to purchase 22,596 shares of Common Stock. Nostock options were granted to any executive officer during the fiscal yearsended May 31, 2005 and 2003.

**ChiefExecutive Officer Compensation**

In establishing the compensation of Mr. Gallup,including his base salary, stock options, and share of any bonus pool, theCompensation Committee considered the Company’s short-term and long-term goals,past compensation practices, comparative peer data and competitive marketguidelines for the position, taking into account that Mr. Gallup was oneof the founders of the Company, has been Chairman of the Board of Directors,President and Chief Executive Officer of the Company since 1982, and has workedin the blood banking business for over 35 years. Dr. De Chirico succeededMr. Gallup as President of the Company in July 2003 and as ChiefExecutive Officer in April 2004. Mr. Gallup resumed his position asChief Executive Officer in November 2004. The Compensation Committeebelieves the salaries paid and the options granted to Mr. Gallup andDr. De Chirico will help align their respective interests with those ofthe Company and its shareholders. Mr. Gallup and Dr. De Chirico eachreceived in fiscal 2004 options to purchase 56,250 shares of Common Stock; nobonuses were earned by either in fiscal 2004. No bonus was earned by, oroptions granted to, Mr. Gallup and Dr. De Chirico for fiscal years2005 and 2003.

Section 162(m) of theInternal Revenue Code limits, with certain exceptions, the Company’s corporatetax deduction for compensation paid to certain officers of the Company to nomore than $1,000,000 per executive per year. Given the current level ofcompensation paid to the executive officers of the Company, the Company has notneeded to address Section 162(m).

Compensation Committee MembersRoswell S. BowersHiroshi HoketsuJoseph E. Rosen

**Compensation Committee Interlocks and Insider Participation**

The Compensation Committee has responsibility over allmatters relating to executive compensation. The Compensation Committeedetermines the annual compensation of the Company’s executive officers,including all stock option and other equity incentive awards. Duties related tothe Company’s stock option plans were previously performed by a separate StockOption Committee that was combined in January 2005 with the CompensationCommittee. Messrs. Bowers and Rosen were members of the CompensationCommittee during the fiscal year ended May 31, 2005, as wasDr. Kishel prior to his resignation from the Board in August 2005,and Mr. Hoketsu became a member in September 2005.Messrs. Bowers and Rosen were members of the former Stock OptionCommittee. At the request of the Board of Directors, the Company’s interimChief Financial Officer and Vice President of Human Resources attend meetingsof the Compensation Committee, although they do not participate indeliberations. None of Messrs. Bowers and Rosen or Dr. Kishel is, norhave ever been, officers or employees of the Company.

During the last fiscal year, noexecutive officer of the Company served either as: (1) a member of thecompensation committee (or other board committee performing equivalentfunctions or, in the absence of any such committee, the entire board ofdirectors) of another entity, one of whose executive officers served on thecompensation committee (or other board committee performing equivalentfunctions or, in the absence of any such committee, the entire board ofdirectors) of the Company; (2) a director of another entity, one of whoseexecutive officers served on the compensation committee (or other boardcommittee performing equivalent functions or, in the absence of any suchcommittee, the entire board of directors) of the Company; or (3) a memberof the compensation committee (or 

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                                                RESULTS         67

 

other board committee performing equivalentfunctions or, in the absence of any such committee, the entire board ofdirectors) of another entity, one of whose executive officers served as adirector of the Company.

**PerformanceGraph**

The following performance graph compares the cumulativetotal shareholder return on an investment of $100 in the Common Stock of theCompany for the last five fiscal years with the total return of theS & P 500 and a Peer Group Index for the Company’s last five fiscalyears. With the acquisition of Gamma Biologicals, Inc. during fiscal yearended May 31, 1999, the only other public company engaged in the bloodbank reagent business is Johnson & Johnson through its Ortho-ClinicalDiagnostics business unit. Due to the size and diversity of Johnson andJohnson, the Company does not believe it to be a true peer. For this reason,the Peer Group Index includes Xtrana, Inc., Biosite, Inc., andMeridian Bioscience, Inc., which the Company considers peers because theyare medical technology companies without large pharmaceutical operations.

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*AMONG IMMUCOR, INC., THE S & P 500 INDEXAND A PEER GROUP**

* $100 invested on 5/31/00in stock or index-including reinvestment of dividends. Fiscal year ending May31.

Copyright © 2002, Standard &Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.www.researchdatagroup.com/S&P.htm

**Compensationof Directors**

Members of the Board of Directors,who are not also executive officers of the Company, receive an annual retainerof $15,000, $2,500 per meeting, and are reimbursed for all travel expenses toand from meetings of the Board. Except for the Audit Committee, committee membersdo not receive compensation for committee meetings attended. The AuditCommittee Chair is paid an additional $15,000 annual retainer; the other AuditCommittee members are each paid an additional $10,000 annual retainer. Mr. Harris was paid an additional $10,000 as theaudit committee member who has supervised the internal investigation regardingactivities in the Company’s Italian subsidiary. In addition, the Companyprovides each of the non-employee directors a grant of an option to purchaseshares of the Company’s Common Stock upon their election as a director at thestock’s then current fair market value, and at the direction of the Board, theymay receive additional options. The amount of shares subject to the option isdetermined at the time of the grant. Stock options to purchase 11,250 shares atan option price of $30.05 were granted to Mr. Hoketsu upon his appointmentto the Board of Directors in fiscal 2005. Stock options to purchase 50,625shares at an option price of $6.77 were granted to Mr. Harris upon hisappointment to the Board of Directors in fiscal 2004. In addition, Dr. DeChirico and Messrs. Gallup and Eatz each received in fiscal 2004 optionsto purchase 56,250 shares of the Company’s Common Stock; Messrs. Rosen,Bowers, and Harris each received in fiscal 2004 options to purchase 16,875shares of the Company’s Common Stock.

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68         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

**Item12. —**Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters.

The information required by Item 201(d) ofRegulation S-K appears under “Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities – StockRepurchase Program” above.

The following table sets forth the number of shares ofCommon Stock of Immucor beneficially owned by (i) each director,(ii) each executive officer of the Company listed in the SummaryCompensation Table in this Proxy statement, (iii) each person known to theCompany to own more than 5% of the outstanding shares of Common Stock, and (iv) allof the executive officers and directors of the Company as a group. Theinformation provided is as of September 30, 2005 except where indicated.Unless otherwise indicated, the address of each beneficial owner below is 3130Gateway Drive, P.O. Box 5625, Norcross, GA 30091-5625.

| **Name of Beneficial Owner  (and address for those  owning more than five percent)** | ** ** | **Amount and Nature  of Beneficial  Ownership of (1)** | ** ** | **Percent  of Class (1)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Roswell S. Bowers                                                                                                                      |       |                                                                            | 53,905     |  (2)                           |       |   | * |   |   |
| Dr. Gioacchino  De Chirico                                                                                                        |       |                                                                            | 274,217    |  (3)                           |       |   | * |   |   |
| Ralph  A. Eatz                                                                                                                         |       |                                                                            | 840,244    |  (4)                           |       |   | 1.8 | % |   |
| Edward  L. Gallup                                                                                                                      |       |                                                                            | 526,307    |  (5)                           |       |   | 1.2 | % |   |
| John  A. Harris                                                                                                                        |       |                                                                            | 26,062     |  (6)                           |       |   | * |   |   |
| Hiroshi  Hoketsu                                                                                                                       |       |                                                                            | 37,500     |                                |       |   | * |   |   |
| Joseph  E. Rosen                                                                                                                       |       |                                                                            | 45,550     |  (7)                           |       |   | * |   |   |
| Didier  L. Lanson                                                                                                                      |       |                                                                            | 46,406     |  (8)                           |       |   | * |   |   |
| Steven  C. Ramsey                                                                                                                      |       |                                                                            | 18,983     |  (9)                           |       |   | * |   |   |
| All directors and  executive officers as a group (ten persons)                                                                         |       |                                                                            | 1,890,558  |  (10)                          |       |   | 4.1 | % |   |

 

* less than1%.

(1)    Pursuant to the rules of the Securities and ExchangeCommission (the “SEC”), a person is deemed to beneficially own shares of theCompany’s Common Stock if that person has or shares “voting power,” whichincludes the power to vote or to direct the voting of a security, or“investment power,” which includes the power to dispose of or to direct thedisposition of a security. Accordingly, more than one person may be deemed tobe a beneficial owner of the same securities. For purposes of this table, aperson is also deemed to beneficially own any shares that such person has aright to acquire within sixty days of September 30, 2005, such as by theexercise of stock options, and any such Common Stock not presently outstandingshall be deemed to be outstanding for the purpose of computing the percentageof outstanding securities of the class owned by such person but shall not bedeemed to be outstanding for the purpose of computing the percentage of theclass owned by any other person.

(2)    Includes options to purchase 28,593 shares at an exercise priceof $1.48 per share.

(3)    Includes options to purchase 59,062 shares at an exercise priceof $1.91, options to purchase 25,312 shares at an exercise price of $1.85, andoptions to purchases 189,843 shares at an exercise price of $1.33 per share.

(4)    Includes options to purchase 21,262 shares at an exercise priceof $1.91, options to purchase 278,437 shares at an exercise price of $1.85 andoptions to purchase 189,843 shares at an exercise price of $1.33 per share.

(5)    Includes options to purchase 126,562 shares at an exercise priceof $1.91, options to purchase 75,937 shares at an exercise price of $1.85, andoptions to purchase 189,843 shares at an exercise price of $1.33 per share.

(6)    Includes options to purchase 25,312 shares at an exercise priceof $6.77 per share.

(7)    Includes options to purchase 37,968 shares at an exercise priceof $1.33 per share.

(8)    Consists of options to purchase 12,656 shares at an exerciseprice of $1.33 and options to purchase 33,750 shares at an exercise price of$6.22 per share.

(9)    Includes options to purchase 18,983 shares at an exercise priceof $1.33 per share. Mr. Ramsey served as the Company’s Vice President – ChiefFinancial Officer and Secretary until his resignation in August 2005.

(10)  Includes 2,401 shares and options to purchase 18,983 shares at anexercise price of $1.33 per share, which were beneficially owned byMr. Waddy who was appointed Vice President – Interim Chief Financial Officerand Secretary in August 2005.

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                                                RESULTS         69

 

**Item13. —**Certain Relationships and Related Transactions.

Not applicable.

**Item14. —**Principal Accountant Fees and Services.

Ernst & Young LLP,Atlanta, Georgia, acted as the Company’s independent registered publicaccounting firm for the fiscal year ended May 31, 2005. The Company hasnot yet selected anyone to act as the Company’s independent registered publicaccounting firm for its fiscal year ending May 31, 2006.

*AuditFees*

Fees for audit services totaledapproximately $2,564,282 and $859,925 during the fiscal years endedMay 31, 2005 and 2004, respectively. These amounts included feesassociated with the annual audit, the Sarbanes-Oxley 404Section attestation, the reviews of the Company’s quarterly reports onForm 10-Q, statutory audits required internationally, and other SECfilings and audit consultations.

*Audit-RelatedFees*

Fees for audit-related servicestotaled approximately $42,338 and $54,417 during the fiscal years endedMay 31, 2005 and 2004, respectively. Audit-related services principallyrepresent fees for employee benefit plan audits.

*TaxFees*

Fees for tax services, includingtax compliance, tax advice and tax planning services, totaled approximately$702,773 during the fiscal year ended May 31, 2004. Such fees duringfiscal year ended May 31, 2005 totaled approximately $61,928 and wereoffset by credits totaling approximately $109,864 primarily relating to feesfor tax planning services during the fiscal year ended May 31, 2004.

*AllOther Fees*

Fees for all other services not included above totaledapproximately $16,320 and $6,000 during the fiscal years ended May 31,2005 and 2004, respectively, principally including online research services andlitigation assistance.

The Audit Committee considered whether the provision ofeach of the above-referenced non-audit services by Ernst & Young LLPwas compatible with maintaining the independence of Ernst & Young LLPand concluded that such independence has been maintained.

The Company’s Audit Committee hasadopted a pre-approval policy regarding the engagement of the Company’sindependent registered public accounting firm to perform services for theCompany. This policy is attached hereto as Exhibit 99.1.

**PART IV**

**Item15. —**Exhibits andFinancial Statement Schedules.

(a)              Documents filed aspart of this report:

| 1.     |   | Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | The Consolidated Financial  Statements, Notes thereto, and Report of Independent Registered Public  Accounting Firm thereon are included in Part II, Item 8 of this report.  Also included in Part II, Item 8 of this report are the Management’s  Report on Internal Control Over Financial Reporting and Report of Independent  Registered Public Accounting Firm on Internal Control Over Financial  Reporting. |
| 2.     |   | Consolidated Financial Statement  Schedule included in Part II, Item 8 of this report                                                                                                                                                                                                                                                                                                                                   |
|   |   | Schedule II — Valuation and  Qualifying Accounts                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | Other financial statement  schedules are omitted as they are not required or not applicable.                                                                                                                                                                                                                                                                                                                                      |
| 3.     |   | Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.1    |   | Amended and Restated Articles of  Incorporation (incorporated by reference to Exhibit 3.1 to  Immucor, Inc.’s quarterly report on Form 10-Q filed on  January 14, 2005).                                                                                                                                                                                                                                 |
| 3.2    |   | Amended and Restated Bylaws  (incorporated by reference to Exhibit 3.2 to Immucor, Inc.’s Annual  Report on Form 10-K filed on August 16, 2004).                                                                                                                                                                                                                                                         |

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70         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

 

| 4.1     |   | Amended and Restated Shareholder Rights Agreement dated as of  November 20, 2001 between Immucor, Inc. and EquiServe Trust  Company, N.A. as Rights Agent (incorporated by reference to Exhibit 4.1  to Immucor, Inc.’s quarterly report on Form 10-Q filed on  January 14, 2002).                                                    |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1    |   | Standard Industrial Lease, dated  July 21, 1982, between the Company and Colony Center, Ltd. (incorporated  by reference to Exhibit 10.2 to Immucor, Inc.’s Annual Report on  Form 10-K for the fiscal year ended May 31, 1985).                                                                                                           |
| 10.1-1  |   | Lease Amendment dated  June 28, 1989, between the Company and Colony Center, Ltd. (incorporated  by reference to Exhibit 10.1-1 to Immucor, Inc.’s Annual Report on  Form 10-K for the fiscal year ended May 31, 1989).                                                                                                                    |
| 10.1-2  |   | Lease Amendment dated  November 8, 1991, between the Company and Colony Center, Ltd. (incorporated  by reference to Exhibit 10.1-1 to Immucor, Inc.’s Annual Report on  Form 10-K for the fiscal year ended May 31, 1992).                                                                                                                 |
| 10.1-3  |   | Lease Agreement, dated  February 2, 1996, between the Company and Connecticut General Life  Insurance Company (incorporated by reference to Exhibit 10.1-3 to  Immucor, Inc.’s Annual Report on Form 10-K for the fiscal year  ended May 31, 1996).                                                                                        |
| 10.1-4  |   | Lease Amendment, dated  March 8, 1998, between the Company and Connecticut General Life  Insurance Company (incorporated by reference to Exhibit 10.1-4 to  Immucor, Inc.’s Annual Report on Form 10-K for the fiscal year  ended May 31, 1998).                                                                                           |
| 10.1-5  |   | Lease Amendment, dated  August 11, 1999, between the Company and Connecticut General Life  Insurance Company (incorporated by reference to Exhibit 10.1-5 to  Immucor, Inc.’s Annual Report on Form 10-K for the fiscal year  ended May 31, 1999).                                                                                         |
| 10.2    |   | Agreement, dated March 11,  1983, between the Company and The Kansas City Group, as amended through  January 21, 1985 (incorporated by reference to Exhibit 10.2 to  Registration Statement No. 33-16275 on Form S-1).                                                                                                                          |
| 10.3    |   | Agreement dated  August 27, 1987, between the Company and the Kansas City Group amending  Exhibit 10.2 (incorporated by reference to Exhibit 10.3 to  Immucor, Inc.’s Annual Report on Form 10-K for the fiscal year  ended May 31, 1989).                                                                                            |
| 10.4    |   | United States Department of  Health and Human Services Establishment License dated December 28, 1982,  for the manufacture of biological products (incorporated by reference to  Exhibit 10.12 to Registration Statement No. 33-966 on  Form S-1).                                                                                                   |
| 10.5    |   | United States Department of  Health and Human Services Product License dated December 28, 1982, for  the manufacture and sale of reagent red blood cells (incorporated by  reference to Exhibit 10.13 to Registration Statement No. 33-966 on  Form S-1).                                                                                            |
| 10.6    |   | United States Department of  Health and Human Services Product License dated May 20, 1983, for the  manufacture and sale of blood grouping sera (incorporated by reference to  Exhibit 10.14 to Registration Statement No. 33-966 on  Form S-1).                                                                                                     |
| 10.7    |   | United States Department of  Health and Human Services Product License date November 18, 1983, for  the manufacture and sale of anti-human serum (incorporated by reference to  Exhibit 10.15 to Registration Statement No. 33-966 on Form S-1).                                                                                                     |
| 10.8*   |   | 2003 Stock Option Plan  (incorporated by reference to Exhibit 10.8 to Immucor, Inc.’s  Annual Report on Form 10-K filed on August 16, 2004).                                                                                                                                                                                                    |
| 10.8-1* |   | Amended and Restated 2003 Stock  Option Plan (amended and restated as of November 10, 2004).                                                                                                                                                                                                                                                                        |
| 10.9*   |   | Amended and Restated 1998 Stock  Option Plan (incorporated by reference to Exhibit 10.9 to  Immucor, Inc.’s Annual Report on Form 10-K filed on August 16,  2004).                                                                                                                                                                              |
| 10.10*  |   | Amended and Restated 1995 Stock  Option Plan (incorporated by reference to Exhibit 10.10 to  Immucor, Inc.’s Annual Report on Form 10-K filed on August 16,  2004).                                                                                                                                                                             |
| 10.11*  |   | 1990 Stock Option Plan, including  form of Stock Option Agreement used thereunder (incorporated by reference to  Exhibit 10.15 to Immucor, Inc.’s Annual Report on Form 10-K  for the fiscal year ended May 31, 1995).                                                                                                                          |
| 10.12*  |   | Employment Agreement dated  October 13, 1998, between the Company and Patrick D. Waddy.                                                                                                                                                                                                                                                                             |
| 10.13   |   | Loan Agreement among  Immucor, Inc., Dominion Biologicals, Limited, and Immucor Medizinische  Diagnostik GmbH, as borrowers, and Wachovia Bank, National Association, as  lender, dated as of February 23, 2001 (incorporated by reference to  Exhibit 10.23 to Immucor, Inc.’s quarterly report on Form 10-Q  filed April 23, 2001). |

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                                                RESULTS         71

 

 

| 10.14  |   | Loan Modification No. 1 dated as of September 11, 2001  between Immucor, Inc., Dominion Biologicals, Limited, Immucor  Medizinische Diagnostik GmbH and Wachovia Bank, National Association  (incorporated by reference to Exhibit 10.21 to Immucor, Inc.’s  quarterly report on Form 10-Q filed January 14, 2002).          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15* |   | Form of  indemnification agreement between the Company and certain directors  (incorporated by reference to Exhibit 10.22 to Immucor, Inc.’s  quarterly report on Form 10-Q filed January 14, 2002).                                                                                                                                   |
| 10.16  |   | Loan Modification No. 2  dated as of July 18, 2002 between Immucor, Inc., Dominion  Biologicals, Limited, Immucor Medizinische Diagnostik GmbH and Wachovia Bank,  National Association (incorporated by reference to Exhibit 10.23 to  Immucor, Inc.’s Annual Report on Form 10-K for the fiscal year  ended May 31, 2002). |
| 10.17  |   | Loan Agreement among  Immucor, Inc., as borrower, and SunTrust Bank, as lender, dated as of  December 18, 2003 (incorporated by reference to Exhibit 10.1 to  Immucor, Inc.’s quarterly report on Form 10-Q filed on April 14,  2004).                                                                                            |
| 10.18  |   | Human Extracellular Matrix Mesh  Supply Agreement dated June 30, 2003, between the Company and Inamed  Corporation (incorporated by reference to Exhibit 10.18 to  Immucor, Inc.’s Annual Report on Form 10-K filed on August 16,  2004).                                                                                              |
| 10.19* |   | Employment Agreement dated  May 1, 2004, between the Company and Edward L. Gallup (incorporated by  reference to Exhibit 10.19 to Immucor, Inc.’s Annual Report on  Form 10-K filed on August 16, 2004).                                                                                                                               |
| 10.20* |   | Employment Agreement dated  May 1, 2004, between the Company and Ralph A. Eatz (incorporated by  reference to Exhibit 10.20 to Immucor, Inc.’s Annual Report on  Form 10-K filed on August 16, 2004).                                                                                                                                  |
| 10.21* |   | Employment Agreement dated  December 1, 2003, between the Company and Dr. Gioacchino De Chirico  (incorporated by reference to Exhibit 10.21 to Immucor, Inc.’s  Annual Report on Form 10-K filed on August 16, 2004).                                                                                                            |
| 10.22* |   | Amendment No. 1, dated  May 1, 2004, to the Employment Agreement between the Company and  Dr. Gioacchino De Chirico (incorporated by reference to  Exhibit 10.22 to Immucor, Inc.’s Annual Report on Form 10-K  filed on August 16, 2004).                                                                              |
| 10.23* |   | Employment Agreement dated  July 28, 2003, between the Company and Didier Lanson.                                                                                                                                                                                                                                                                               |
| 21     |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                      |
| 23.1   |   | Consent of Independent Registered  Public Accounting Firm.                                                                                                                                                                                                                                                                                                           |
| 31.1   |   | Certification of Principal  Executive Officer Pursuant to Rule 13a-14(a).                                                                                                                                                                                                                                                                                       |
| 31.2   |   | Certification of Principal  Financial Officer Pursuant to Rule 13a-14(a).                                                                                                                                                                                                                                                                                       |
| 32.1   |   | Certification of Chief Executive  Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of Chief Financial  Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                            |
| 99.1   |   | Audit Committee Policy for  Pre-Approval of Independent Registered Public Accounting Firm Services.                                                                                                                                                                                                                                                                  |

 

*              Denotesa management contract or compensatory plan or arrangement.

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72         IMMUCOR, INC. ANNUAL REPORT 2005                       

 

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
| **IMMUCOR, INC.** |                                                                 |
|-------------------|----------------------------------------------------------------------|
| By:               | /s/ EDWARD L. GALLUP                                                 |   |
|              | Edward L. Gallup, Chairman  of the Board and Chief Executive Officer |
|              | (Principal Executive  Officer)                                       |
|              | October 18, 2005                                                |
|                   |                                                                      |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| /s/ EDWARD L. GALLUP                                                              |   |
|-----------------------------------------------------------------------------------|--------|
| Edward L. Gallup, Director, Chairman of the Board of Directors,                   |   |
| and Chief Executive Officer                                                       |   |
| (Principle Executive Officer)                                                     |   |
| October 18, 2005                                                             |   |
| /s/ PATRICK D. WADDY                                                              |   |
| Patrick D. Waddy, Vice President - Interim Chief Financial Officer and  Secretary |
| (Principal Financial and Accounting Officer)                                      |   |
| October 18, 2005                                                             |   |
| /s/ ROSWELL S. BOWERS                                                             |   |
| Roswell S. Bowers, Director                                                       |   |
| October 18, 2005                                                             |   |
| /s/ JOHN A. HARRIS                                                                |   |
| John A. Harris, Director                                                          |   |
| October 18, 2005                                                             |   |
| /s/ JOSEPH E. ROSEN                                                               |   |
| Joseph E. Rosen, Director                                                         |   |
| October 18, 2005                                                             |   |

 

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                                                RESULTS         73

 

**EXHIBIT INDEX**
| Number  | ** ** | **Description**                                                                                           |
|---------|------------|-----------------------------------------------------------------------------------------------------------|
| 10.8-1* |       | Amended and Restated 2003 Stock  Option Plan.                                                             |
| 10.12*  |       | Employment Agreement dated  October 13, 1998, between the Company and Patrick D. Waddy.              |
| 10.23*  |       | Employment Agreement dated  July 28, 2003, between the Company and Didier Lanson.                    |
| 21      |       | Subsidiaries of the Registrant.                                                                           |
| 23.1    |       | Consent of Independent Registered  Public Accounting Firm.                                                |
| 31.1    |       | Certification of Principal  Executive Officer Pursuant to Rule 13a-14(a).                            |
| 31.2    |       | Certification of Principal  Financial Officer Pursuant to Rule 13a-14(a).                            |
| 32.1    |       | Certification of Chief Executive  Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2    |       | Certification of Chief Financial  Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.1    |       | Audit Committee Policy for  Pre-Approval of Independent Registered Public Accounting Firm Services.       |

 

*Denotes a management contract or compensatory plan or arrangement.

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