UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
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THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended May 31, 2014 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
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THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 0-14820
IMMUCOR, INC.
(Exact name of registrant as specified in its charter)
Georgia |
22-2408354 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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3130 GATEWAY DRIVE, P.O. BOX 5625 | 30091-5625 |
Norcross, Georgia | (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) and 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes___ No X ___
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes __X__ No ____
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ____No __X___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes_ X __ No _____
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [ ] |
Accelerated filer [ ] |
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Non-accelerated filer [ X] |
Small reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes____ No __ X___
As of November 30, 2012, there was no established public trading market for the Company’s common stock; therefore, the aggregate market value of the common stock is not determinable.
As of August 26, 2014, there were 100 shares of common stock outstanding.
Table Of Contents | ||
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Part I |
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Item 1. |
Business |
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Item 1A. |
Risk Factors |
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Item 1B. |
Unresolved Staff Comments |
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Item 2. |
Properties |
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Item 3. |
Legal Proceedings |
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Item 4. |
[Reserved] |
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Part II |
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Item 5. |
Market For The Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities |
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Item 6. |
Selected Financial Data |
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Item 7. |
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations |
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Item 7A. |
Quantitative And Qualitative Disclosures About Market Risk |
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Item 8. |
Financial Statements And Supplementary Data |
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Item 9. |
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure |
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Item 9A. |
Controls And Procedures |
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Item 9B. |
Other Information |
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Part III |
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Item 10. |
Directors, Executive Officers and Corporate Governance |
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Item 11. |
Executive Compensation |
Item 12. | Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters | |
Item 13. | Certain Relationships And Related Transactions, And Director Independence | |
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Item 14. |
Principal Accountant Fees And Services |
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Part IV |
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Item 15. | Exhibits And Financial Statement Schedules | |
Signatures | ||
Ex-21 | Subsidiaries Of The Registrant | |
Ex-31.1 | Certificate Of Principal Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 | |
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Ex-31.2 |
Certificate Of Principal Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
Ex-32 |
Certifications Required Under Section 906 Of The Sarbanes-Oxley Act Of 2002 | |
FORWARD – LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements which include information concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other statements that are not related to present facts or current conditions or that are not purely historical. Many of these statements appear, in particular, under the headings “Business” and “Management’s discussion and analysis of financial condition and results of operations.” When used in this report, the words “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of operating trends, are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but there can be no assurance that we will realize our expectations or that our beliefs will prove correct.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ include but are not limited to:
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our substantial indebtedness; | |
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lower industry blood demand; |
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lower than expected demand for our instruments; |
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the decision of customers to defer capital spending; |
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the failure of customers to efficiently integrate our products into their operations; | |
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increased competition; | |
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product development, manufacturing and regulatory obstacles; | |
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the failure to successfully integrate and capitalize on past or future acquisitions; |
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general economic conditions; and |
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other risks and uncertainties discussed in this report, particularly in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” |
There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements.
All forward-looking statements attributable to us apply only as of the date they are made and are expressly made subject to the cautionary statements included in this report. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date they were made or to reflect the occurrence of unanticipated events.
Item 1. — Business.
Founded in 1982, Immucor, Inc., a Georgia corporation (“Immucor” or the “Company”), is a worldwide leader in the transfusion and transplantation in vitro diagnostics markets. Our products perform typing and screening of blood and organs to ensure donor-recipient compatibility. Our offerings are targeted at hospitals, donor centers and reference laboratories around the world.
Acquisitions
Our Company
On August 19, 2011, Immucor was acquired by investment funds sponsored by TPG Capital, L.P. (collectively, the “Sponsor”) and certain co-investors, for a purchase price of approximately $1.9 billion, including the assumption of approximately $1.1 billion of acquisition-related debt and the incurrence of approximately $55.3 million of collective transaction costs that were incurred by Immucor and the Sponsor (the “Immucor Acquisition”). As a result of the Immucor Acquisition, our stock is no longer publicly traded. Currently, the issued and outstanding shares of Immucor are indirectly owned by the Sponsor and certain co-investors.
To consummate the Immucor Acquisition, we entered into new debt financing initially consisting of (i) $715.0 million of senior secured credit facilities (the “Senior Credit Facilities”) comprised of: (a) a $100.0 million, 5-year revolving credit facility (the “Revolving Facility”), which was undrawn at closing and (b) a $615.0 million, 7-year term loan credit facility (the “Term Loan Facility”), and (ii) $400.0 million of Senior Notes due 2019 (the “Notes”).
LIFECODES
On March 22, 2013, we acquired the LIFECODES business (“LIFECODES”), one of the market leaders in transplantation diagnostics. LIFECODES manufactures and markets diagnostics products used primarily by hospitals and reference laboratories in a number of tests performed to detect and identify certain properties of human tissue to ensure the most compatible match between patient and donor. These tests are performed for pre-transplant human leukocyte antigen (“HLA”) typing and screening processes as well as for post-transplant patient monitoring to aid in the identification of graft rejection. LIFECODES also offers other immune-monitoring products which are used to identify certain properties commonly found in patients with severe illnesses, and with an immune response to certain drug therapies.
Acquiring LIFECODES strengthens our position in the global in vitro diagnostics market by creating a single source for transfusion and transplantation-related testing products, and signals our initial steps in implementing our strategy to become a global leader in transfusion and transplantation medicine. Our goal is to diversify our business into the new and growing market of transplant diagnostics. Such diversification enhances our ability to grow our business, expand our customer reach and better insulate us against market and economic downturns. LIFECODES had approximately 170 employees at the date of acquisition.
We paid $86.2 million in cash to acquire LIFECODES financed with a combination of debt and equity. In conjunction with the LIFECODES acquisition, the Term Loan Facility was amended and an additional $50.0 million was issued with the same terms and maturity as the then-existing facility. An equity investment of $42.5 million was contributed by our parent company, IVD Intermediate Holdings B Inc. (the “Parent”), to fund the acquisition, including transaction costs and provide additional working capital.
LIFECODES Distribution Businesses
We completed the acquisition of two LIFECODES distribution businesses on January 31, 2014, one in United Kingdom (“UK”) and one in Italy. These acquisitions enable us to streamline the distribution of our LIFECODES products in Europe. We paid $6.4 million in cash to acquire these distribution businesses which was funded from cash flows from operating activities.
Organ-i
On May 30, 2014, we completed the acquisition of Organ-i, Inc. (“Organ-i”) a privately-held company focused on developing non-invasive tests to monitor and predict organ health for transplant recipients. This acquisition expands our product offering for post-transplant testing and directly complements our existing LIFECODES business. We paid $12.0 million in cash at closing to acquire this business, which was funded from cash flows from operating activities.
Financial Information about Segments
We determine our operating segments in accordance with our internal operating structure, which is organized based upon product groups. Each segment is separately managed and is evaluated primarily upon operating results. The Company has two operating segments, the Transfusion segment and the Transplant & Molecular segment, which have been aggregated into one reportable segment. We aggregate our operating segments because they have similar class of consumer, economic characteristics, nature of products, nature of production and distribution methods.
Competitive Strengths
Automation – Since 1998, our strategy in transfusion diagnostics (or “immunohematology”) has been to drive automation in the blood bank with the goal of improving operations as well as patient safety. Due to the critical importance of matching patient and donor blood, manual testing is performed by highly educated and skilled technologists. In the U.S. market, we estimate that approximately 60% of customers perform testing on a manual basis without the use of an automated instrument. These customers are primarily in the small- to medium-hospital segment of the market. A significant number of customers in the high volume segment of the U.S. market (large hospitals, donor centers and reference laboratories) are automated. Outside the U.S., a significant portion of customers are automated in the developed international markets while there continues to be need for automation in the developing markets.
We believe our customers, whether a hospital, a donor center or a reference laboratory, are able to realize significant economic benefits while improving patient safety from adopting our automation. Automation can allow customers to reduce headcount and/or overtime in the blood bank, which can be beneficial given the current shortage of qualified blood bank technologists in the U.S. Given the reduction in both human and economic capital, we estimate that our instruments have an average payback period of one year or less, depending on the size of the lab. We believe our automated products represent an attractive value proposition for manual customers to switch to automation.
Leadership position in niche markets – We estimate the global market for our transfusion and transplantation products is approximately $1.6 billion and we believe we have leadership positions in our focused markets. We believe our transfusion products, ranging from our automated instruments to our proprietary Capture® technology, are widely used and recognized by the immunohematology industry worldwide. In transplantation, our LIFECODES® products leverage the significant installed base of Luminex Corporation (“Luminex”) instruments to enable adoption of our products in HLA labs around the world. We look to maintain our leadership position in these markets by continuing to innovate and introduce high value products for our customers.
Product Innovations –We continually seek to improve existing products and develop new products to increase our market share and to improve the operations of our customers. In support of our immunohematology customers, we have launched four generations of automated serology instruments and we continue to develop innovative products, including our offering to support molecular methods, which we believe will be the future of immunohematology. In support of our transplant customers, we continue to launch new assays that support both pre- and post-transplant testing, including monitoring of patients to reduce the probability of transplant rejection.
Donor-patient compatibility – Our product offering, whether in transfusion or transplant medicine, is focused on achieving compatibility between donors and patients, which is explained in more detail in “Products” below.
Products
Our products are used to determine compatibility between a patient and a donor for the purposes of a blood transfusion, organ or stem cells (bone marrow) transplant. Compatibility is determined by performing a “type and screen” for both the patient and the donor.
Typing for both transfusions and transplants involves identifying antigens. For transfusion, antigens in the Human Erythrocyte Antigen (“HEA”) system on the surface of red blood cells are identified. For transplant, antigens in the HLA system on the surface white blood cells are identified. Screening for both a transfusion and a transplant determines whether there are any antibodies present that could cause a negative immune response.
We sell reagents as well as instruments to allow laboratories – whether in a hospital, a donor center or a reference lab – to perform compatibility testing. Our automated instrument-reagent systems operate on a “razor/razor blade” model, with our instruments serving as the “razors” and our reagents serving as the “razor blades.” For transfusion diagnostics, our instruments are “closed systems,” meaning our proprietary reagents can only be used on our instruments. For transplant diagnostics, our reagents run on Luminex instruments, which are open systems. The “razor/ razor blade” business model generates a recurring revenue stream for us.
Transfusion Diagnostics
REAGENTS
We offer both traditional and proprietary serology reagents. Our serology instruments use both our traditional reagents, as well as our proprietary solid phase technology, marketed under the name Capture, to perform tests.
Traditional reagents are used in a manual setting with testing performed via traditional agglutination blood testing techniques in a test tube. Certain traditional reagents are also used on our automated instruments.
Capture reagents are used with our instruments to perform antibody screening and identification. Delivered in a microtitration plate, the technology delivers clearly defined, machine-readable test results that are often easier to interpret than the subjective results sometimes obtained from existing agglutination technology (manual method). Also, in batch test mode the solid phase test results can generally be obtained in substantially less time than by traditional agglutination techniques.
INSTRUMENTS
NEO – Targeted at donor centers, large volume hospitals and reference laboratories, NEO® provides a fully-automated solution to perform all routine blood bank tests, including blood grouping, antibody screening, crossmatch, direct antiglobulin test (DAT) and antibody identification. NEO is our fourth generation automated instrument. NEO’s added functionality includes STAT functionality, a faster turnaround time and improved reliability. NEO can process up to 224 different samples at once, and can perform approximately 60 type-and-screen tests an hour. We believe that NEO has the highest type and screen throughput available in the global market.
ECHO – The Echo® is targeted at small- to medium-sized hospitals as well as at integrated delivery networks (both hospital and lab systems) in combination with NEO. Echo has a broad test menu and the capacity to load 20 samples at a time, performing approximately 14 type-and-screen tests an hour. Echo features STAT functionality, exceptional mean time between failures and what we believe is the fastest turnaround time in the industry.
CAPTURE WORKSTATION (Semi-automated Processor) – The Capture Workstation has semi-automated components for performing our proprietary Capture assays manually. It is marketed as a back-up system for our fully automated NEO and Echo instruments, or as a standalone test system for small laboratories looking to standardize testing.
Transplant and Molecular Diagnostics
Our molecular products perform typing for both transfusion and transplantation, including the HEA and HLA systems.
For transfusion, our molecular typing assays use our multiplex, polymerase chain reaction (“PCR”) technology. Our current offering includes HEA and Human Platelet Antigen (“HPA”) assays as well as our current semi-automated molecular immunohematology instrument, the Array Imaging System and BASIS database.
In May 2014, the U.S. Food and Drug Administration (“ FDA”) approved our PreciseTypeTM HEA test, which is the first FDA-approved molecular immunohematology product on the market. Formerly marketed as the HEA BeadChip™ Test, PreciseType provides clinicians with detailed genetic matching information that can reduce the risk of alloimmunization (antibody production) and serious hemolytic reactions associated with transfusions, which can be especially problematic for patients receiving frequent blood transfusions. With its FDA in-vitro diagnostic approval, PreciseType is now the “test of record” in the U.S. for both patient and donor typing of red blood cells. The test has been CE-marked in Europe for in vitro diagnostics, or IVD, use since 2010.
For transplant diagnostics, we deliver our reagents for both typing and screening on Luminex’s xMAP multiplex technology. In addition to other HLA-related testing products, such as serological typing trays, we also sell assays that monitor organ health post-transplant.
We also offer platelet-focused products for both transfusion medicine and specialty coagulation.
Marketing, Distribution and Seasonality
Our target customers are donor centers, hospitals and reference laboratories. Our products are distributed globally through both direct affiliate offices and third-party distribution arrangements. No single customer represents 10% or more of our annual consolidated revenue. We believe there is a slight amount of seasonality in our business as fewer blood donations and elective surgical procedures are generally performed in our first fiscal quarter (June-August).
Backlog
For the majority of our products, the nature and shelf life prohibits us from maintaining a material backlog. For the orders in backlog, it is expected that the majority will be shipped or completed within the following 12 months. At May 31, 2014, our backlog was not material.
Suppliers
We obtain raw materials from numerous outside suppliers and believe our business relationships with them are good. Some of our products are derived from blood having particular or rare combinations of antibodies or antigens, which are found in a limited number of individuals. To date, we have been able to obtain sufficient quantities of such blood for use in manufacturing our products, but there can be no assurance that a sufficient supply of such blood will always be available to us.
We source our transfusion diagnostic instruments from single-source suppliers. Although we currently do not have written contract with our Echo instrument supplier, we generally operate under the terms of past contractual arrangements with that supplier. We believe that our business relationships with these suppliers are good. While these relationships are significant, we believe that other manufacturers could supply these instruments to us after a reasonable transition period. In the event one or more of these suppliers experience financial problems that prevent it from continuing to produce our instruments, we believe it would take in the range of 18 months to 24 months to begin production with a new supplier. While a change in suppliers would disrupt our business during the transition period, we do not believe it would have a material financial impact on our business as a whole.
We source our transplant diagnostic instrument as well as certain raw materials from Luminex. Our relationship with Luminex is significant. However, we have a long-term contractual relationship with them and our business relationship is good.
Regulation
The manufacture and sale of transfusion in vitro diagnostics products is a highly regulated business and is subject to continuing compliance with country-specific statutes, regulations and standards that generally include licensing, product testing, facilities compliance, product labeling, post-market vigilance and consumer disclosure. In the U.S., the Food and Drug Administration (“FDA”) regulates the transfusion of human blood as a drug and as a biological product. The FDA regulates all phases of the transfusion process, including donor selection and the collection, classification, storage, handling and transfusion of blood and blood components.
In the U.S., an FDA biologics license is issued for an indefinite period of time, subject to the FDA’s right to revoke the license. As part of its overview responsibility, the FDA makes facility inspections on an unannounced basis. In addition, each product manufactured by us is subject to formal product submissions and review processes by the FDA and other regulatory bodies, such as Health Canada, a European Union recognized Notified Body and the Japanese Ministry of Health prior to authorization to market. Significant changes to our products or facilities can require additional submission and review prior to implementation. For example, we hold several FDA biologic licenses to manufacture blood grouping reagents, anti-human globulin reagents and reagent red blood cells. We must submit biologic license applications, pre-market approval applications or 510(k) pre-market notifications to the FDA to obtain product licenses, market approval or market clearance for new products or instruments. To accomplish this, we must submit detailed product information to the FDA, perform a clinical trial of the product, and demonstrate to the satisfaction of the FDA that the product meets certain efficacy and safety standards. There can be no assurance that any future product licenses, product clearances or instrument clearances will be obtained by us.
Our manufacturing and distribution facilities in the U.S., Germany and Canada are certified to ISO 13485:2003. This is an internationally recognized standard and certification is required in order to continue product distribution in key markets such as the European Union and Canada. In addition, to allow continued marketing of our products in the European Union, we are required to maintain certification under the EC Full Quality Assurance System Assessment in accordance with the requirements of Annex IV of the IVD Medical Devices Directive 98/79/EC. This certification authorizes the use of the CE Mark on our products that allows products free access to all countries within the European Union. We have successfully completed certifications for CE marking of all products manufactured for the European market.
There are multiple countries worldwide that also impose regulatory barriers to market entry. We maintain product registrations and approvals necessary to maintain access to certain foreign markets.
Environmental
Some of our processes generate hazardous waste and we have a U.S. Environmental Protection Agency identification number. We believe we are in compliance with applicable portions of the federal and state hazardous waste regulations.
Research, Development and Intellectual Property
We rely on a combination of patent and trade secret laws, know-how and licensing opportunities to establish and protect our proprietary technologies and products. We enforce our intellectual property rights consistent with our strategic business objectives. We do not believe that we own any single patent or hold any single license (or series of patents or licenses) that is material to the operation of our business, but we consider them in the aggregate to be of material importance to our business.
We continually seek to improve our existing products and to develop new ones in order to increase our market share. Prior to sale, any new product requires regulatory approvals, including licensing or pre-market clearance from the FDA in the U.S. and CE marking in Western Europe. For fiscal 2014, fiscal 2013, the Successor fiscal 2012 period (August 20, 2011 to May 31, 2012), and the Predecessor fiscal 2012 period (June 1, 2011 to August 19, 2011), we spent approximately $29.1 million (including $7.8 million for LIFECODES), $21.3 million (including $1.7 million for LIFECODES), $13.9 million, and $4.9 million, respectively, for research and development.
We use trademarks on most of the products we sell. These trademarks are protected by registration in the U.S. and other countries where such products are marketed using the trademarks. We consider these trademarks in the aggregate to be of material importance in the operation of our business.
Competition
Competition in the transfusion and transplantation in vitro diagnostics markets is based on quality of products, pricing, talent of the sales forces, ability to furnish a range of products, reliable technology, skilled and trained technicians, customer service and continuity of product supply. We believe we are well positioned to compete favorably in our markets because of the completeness, reliability and quality of our product lines, our competitive pricing structure and our introduction of innovative products that enhances our competitive position. We also believe that new product introductions and the experience and expertise of our sales technical support personnel will enable us to remain competitive in the market.
Our principal competitors worldwide in transfusion diagnostics are Ortho-Clinical Diagnostics and Bio-Rad Laboratories, Inc. In transplantation diagnostics, our primary competitor is Thermo Fisher Scientific.
Employees
At May 31, 2014, we had approximately 1,090 full-time employees worldwide. We have a low staff turnover rate and consider our employee relations to be good. In addition to our full-time work force, we employ temporary and contract employees. None of our employees are represented by a labor union.
Available Information
We file periodic reports under the Securities Exchange Act of 1934 with the SEC. Electronic versions of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished with the SEC may be accessed free of charge through our website at www.immucor.com. The information may also be accessed at the SEC’s web site at www.sec.gov. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contain on the website is not part of this document.
Item 1A. — Risk Factors.
We are subject to various risks and uncertainties relating to or arising out of the nature of our business and general business, economic, financing, legal and other factors or conditions that may affect us. We provide the following cautionary discussion of risks and uncertainties relevant to our business, which we believe are factors that, individually or in the aggregate, could have a material and adverse impact on our business, results of operations and financial condition, or could cause our actual results to differ materially from expected or historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, our operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.
Risks Relating to Our Company
Lower blood demand could negatively impact our financial results.
Our transfusion diagnostics products are used to test blood prior to transfusion. Lower demand for blood in the markets in which we operate could result in lower testing volumes. For example, we believe the U.S. market has been experiencing lower demand for blood in our last three fiscal years. Lower blood demand could result from a variety of factors, such as fewer elective surgeries and more efficient blood utilization by hospitals. Blood is a large expense for hospital laboratories and pressure on hospital budgets due to macroeconomic factors and healthcare reform could force changes in the ways in which blood is used. Lower blood demand could negatively impact our revenue, profitability and cash flows.
A catastrophic event at our Norcross, Georgia facility would prevent us from producing many of our reagent products.
Substantially all our reagent products for transfusion diagnostics are produced in our Norcross facility. While we have reliable supplies of most raw materials, our reagent production is highly dependent on the uninterrupted and efficient operation of the Norcross facility, and we currently have no plans to develop a third-party reagent manufacturing capability as an alternative source of supply. Therefore, if a catastrophic event occurred at the Norcross facility, such as a fire or tornado, many of those products could not be produced until the manufacturing portion of the facility was restored and cleared by the FDA. We maintain a disaster recovery plan to minimize the effects of such a catastrophe, and we have obtained insurance to protect against certain business interruption losses. However, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all.
We may not be successful in capitalizing on our acquisitions.
The long-term success of our LIFECODES acquisition, our other acquisitions and any additional acquisitions we may complete in the future will depend upon our ability to successfully grow the acquired businesses as well as realize the anticipated benefits from combining the acquired businesses with our business. We may fail to grow the LIFECODES business or realize anticipated benefits for a number of reasons.
With the acquisition of LIFECODES, Immucor entered the new markets of transplantation and coagulation in which we do not have significant experience. Our success is dependent on our ability to understand and be effective competitively in these new markets. Problems may arise with our ability to successfully grow and to successfully integrate acquired businesses and technologies, which may result in us not operating as effectively and efficiently as expected. Acquisitions could cause diversion of management time as well as a shift of focus from operating the businesses to issues related to integration and administration or inadequate management resources available for oversight as well as integration activities. We may face difficulties and inefficiencies in managing and operating businesses in multiple locations or operating businesses in which we have either limited or no direct experience today. In addition, we may not be able to achieve the expected synergies or anticipated growth targets from acquisitions or it may take longer than expected to achieve those synergies and growth targets. Acquisitions may cause other unexpected costs or liabilities and our failure to realize the anticipated benefits from acquisitions could harm our business and prospects.
Our business may be harmed by the contingent earn-out obligations in connection with acquisitions.
In connection with some of our acquisitions, we incur obligations to make contingent earn-out payments if certain financial and product development targets of certain acquired businesses are met over specified periods. Contractual provisions relating to the contingent earn-out obligation include covenants to operate the acquired businesses in a manner that may not otherwise be most advantageous to us. These provisions may also result in the risk of litigation relating to the calculation of the earn-out obligation amount due as well as the operation of the acquired businesses. Such litigation could be expensive and divert management attention and resources. We can give no assurance that our contingent obligations, including the associated covenants relating to the operation of the acquired businesses, will not otherwise adversely affect our business, liquidity, capital resources or results of operations.
Unforeseen product performance problems could prevent us from selling or result in a recall of the affected products.
In the event that we experience a product performance problem with either our instruments or our reagents, we may be required to, or may voluntarily recall or suspend selling the products until the problem is resolved. We have from time to time initiated voluntary recalls of our products. Depending on the product as well as the availability of acceptable substitutes, such a product recall or suspension could significantly impact our operating results.
Product performance could increase operating costs and result in the loss of current or future customers.
Product performance and reliability is a key factor in satisfying current customers and attracting new customers. Poor performance or unreliability of our products would not only increase maintenance costs, in the case of our instruments, but also could result in losing important current customers and an inability to gain new customers which could adversely affect our financial results.
Because we sell our products internationally, we could be adversely affected by fluctuations in foreign currency exchange rates.
In the fiscal year ended May 31, 2014, revenue outside the U.S. was approximately 38% of total revenue. As a result, fluctuations in foreign currency exchange rates against the U.S. Dollar could make our products less competitive and affect our revenue and earnings levels. An increase in our revenue outside the U.S. would increase this exposure. We have not historically hedged against currency exchange rate fluctuations.
Gross margin volatility may negatively impact our profitability.
Our gross margin may be volatile from period to period due to various factors, including instrument sales, product mix, geographic mix and manufacturing costs. As we continue to drive automation in the blood bank marketplace, we may experience increased instrument sales. The probable sales mix (in terms of instrument/reagent sales) could make it difficult for us to sustain the overall gross margins we have generated in the past. The higher margins on the reagents used on our instruments may not be enough to offset the lower margins on the instruments themselves. For our products, margins vary depending upon the type of product. Additionally, market pricing for our products varies by geographic region. Depending upon the product and geographic sales mix, margins could vary significantly from period to period. Our reagent products are manufactured in-house. Margins for these products could be impacted based upon costs of raw materials and labor as well as overhead and the efficiency of our manufacturing operations from period to period. Margins may also be negatively impacted by increased competition. New market entrants or existing market participants seeking to gain market share may foster a competitive environment of pricing pressures and/or increased marketing and other expenditures that could negatively impact profitability.
If customers delay integrating our instruments into their operations, the growth of our business could be negatively impacted.
From time to time in the past, some of our customers have experienced significant delays between the purchase of an instrument and the time at which it has been successfully integrated into the customer’s existing operations and is generating reagent revenue at its expected annualized run rate. These delays may be due to a number of factors, including staffing and training issues and difficulties interfacing our instruments with the customer’s computer systems. Because our business operates on a “razor/razor blade” model, such integration delays result in delayed purchases of the reagents used with the instrument. Delays of customers successfully integrating instruments into their operations could adversely impact our future revenues, earnings and cash flow.
We may not be successful in capitalizing on acquisitions of former distributors or newly established distribution networks outside the U.S.
An integral part of our strategy is to sell our products in additional markets outside North America. To further this strategy, in the past we have either acquired third party distribution businesses or have established our own direct distribution organizations. Our ability to grow successfully in overseas markets depends in part on our ability to achieve product acceptance and customer loyalty in these markets. Additionally, our operations in foreign countries present certain challenges and are subject to certain risks not necessarily present in our domestic operations, such as fluctuations in currency exchange rates, shipping delays, changes in applicable laws and regulations and various restrictions on trade. These factors could impact our ability to compete successfully in these markets, which could in turn negatively affect our international expansion goals, and could have a material adverse effect on our operating results.
Our financial performance is dependent on the timely and successful introduction of new products and services.
Our financial performance depends in part upon our ability to successfully develop and market next generation automated instruments and other products in a rapidly changing technological and economic environment. Our market share and operating results would be adversely affected if we fail to successfully identify new product opportunities and timely develop and introduce new products that achieve market acceptance, or if new products or technology are introduced in the market by competitors that could render our products uncompetitive or obsolete. In addition, delays in the introduction of new products due to regulatory, developmental, or other obstacles could negatively impact our revenue, earnings and market share.
Industry adoption of alternative technology could negatively impact our ability to compete successfully.
Our products are used to test antibodies and DNA to determine a match prior to a transfusion or a transplant as well as for post-transplant monitoring to aid in the determination of graft rejection. Various advances in the treatment and monitoring of patients could cause lower demand for testing with our products. Additionally, customers could adopt alternative technologies for testing, instead of our technology, which could result in lower demand for our products.
We may need to develop new technologies for our products to remain competitive. We may have problems in the process of developing and delivering new products to the market, which could cause our financial performance to be negatively impacted.
Global economic conditions may have a material adverse impact on our results.
We are a global company with customers around the world. General economic conditions impact our customers, particularly hospitals. For our instruments, reduced capital budgets that result from negative economic conditions, such as a global recession, could result in lower instrument sales, which would negatively impact our future revenue, profitability and cash flow. Additionally, global economic conditions may adversely affect the ability of our customers to access funds to enable them to fund their operating and capital budgets. Budget constraints could slow our progress in driving automation in both our customer base and the blood banking industry as a whole, as well as the adoption of new products, which could negatively impact our future revenues, profitability and cash flow.
We are highly dependent on our senior management team and other key employees, and the loss of one or more of these employees could adversely affect our operations.
Our success is dependent upon the efforts of our senior management and staff, including sales, technical and management personnel, many of whom have very specialized industry and technical expertise that is not easily replaced. If key individuals leave us, we could be adversely affected if suitable replacement personnel are not quickly recruited. Our future success depends on our ability to continue to attract, retain and motivate qualified personnel. For example, there is intense competition for medical technologists, and in some markets there is a shortage of qualified personnel in our industry. If we are unable to continue to attract or retain highly qualified personnel, the development, growth and future success of our business could be adversely affected.
Supply chain interruptions could negatively impact our operations and financial performance.
Supply chain interruptions could negatively impact our operations and financial performance. The supply of any of our manufacturing materials may be interrupted because of poor vendor performance or other events outside our control, which may require us, among other things, to identify alternate vendors and could result in lost sales and increased expenses. While such interruption could impact any of our third-party sourced materials, three particular areas of note are our transfusion diagnostic instrument suppliers, our supply sources for rare antibodies or antigen combinations and our supply of raw materials from Luminex, which are described below.
We purchase our transfusion diagnostic instruments from single-source suppliers. If the supply of any of our instruments were interrupted, due to the supplier’s financial problems or otherwise, we believe an alternative supplier could be found but that it would take in the range of 18 months to 24 months to transfer the technology and begin production with a new instrument supplier. The disruption of one of these supply relationships could cause us to incur costs associated with the development of an alternative source. Also, we may be required to obtain FDA clearance of the instrument if it is not built to the same specifications as with the previous supplier. The process of changing an instrument supplier could have an adverse impact on future growth opportunities during the transition period if supplies of instruments on hand were insufficient to satisfy demand.
Some of our reagent products are derived from blood having particular or rare combinations of antibodies or antigens, which are found in a limited number of individuals. If we had difficulty in obtaining sufficient quantities of such blood and the supply was interrupted, we would need to establish a viable alternative, which may take both time and expense to either identify and/or develop and could have an adverse impact on our operations and financial position.
Luminex is our technology partner for our HLA products and we secure certain raw materials from Luminex to manufacture our HLA reagents. A disruption in supply of these raw materials could cause us to not be able to supply products to our customers. Additionally, a long-term disruption of supply from Luminex could result in us having to develop an alternate technology platform on which to deliver our HLA products, which could be both costly and result in a loss of revenue until a new product was brought to market.
Interruptions in our production capabilities could increase our production costs or reduce sales.
Our manufacturing processes are dependent upon critical pieces of equipment for which there may be only limited or no production alternatives and this equipment may, on occasion, be out of service as a result of unanticipated failures. We may experience periods of reduced production as a result of these types of equipment failures, which could cause us to lose or prevent us from taking advantage of various business opportunities or prevent us from responding to competitive pressures.
Distribution chain interruptions could negatively impact our operations and financial performance.
Distribution chain interruptions could negatively impact our operations and financial performance. Our international affiliates get almost all of their reagent products from our U.S. manufacturing facilities. If circumstances arose that disrupted our distribution of U.S.-sourced products internationally, we would need to establish an alternate distribution channel, which may take both time and expense to establish and could have an adverse impact on our operations and financial position.
Our molecular diagnostics products may not gain wide commercial acceptance.
BioArray’s molecular diagnostics products have slowly gained commercial traction. In May 2014, the FDA approved our PreciseTypeTM HEA test, but even with regulatory approval, these products are new to the marketplace and we will have to develop the nascent market for these products over time. Our molecular transfusion diagnostic business is also subject to risks associated with reimbursement, cannibalization of a portion of our existing serology business and the same macroeconomic factors, such as lower blood demand, that our serology business faces.
We may be unable to adequately protect our proprietary technology.
We have a substantial patent portfolio of issued patents or pending patent applications supporting our molecular immunohematology offering. We also have patents supporting our transfusion and coagulation products. Our competitiveness depends in part on our ability to maintain the proprietary nature of our owned and licensed intellectual property. Because the law is constantly changing, and unforeseen facts may arise, there is always a risk that patents may be found to be invalid or unenforceable. Therefore, there is no absolute certainty as to the exact scope of protection associated with any intellectual property. We believe our patents, together with our trade secrets and know-how, will prevent any current or future competitors from successfully copying and distributing our products. However, there can be no assurance that competitors will not develop around the patented aspects of any of our current or proposed products or independently develop technology or know-how that is equivalent to or competitive with our technology and know-how. Any damage to our intellectual property portfolio could result in an adverse effect on our current or proposed products, our revenues and our operations.
Protecting our intellectual property rights is costly and time consuming. We may need to initiate lawsuits to protect or enforce our patents, or litigate against third-party claims, which would be expensive and, if we lose, may cause us to lose some of our intellectual property rights and reduce our ability to compete in the marketplace. Furthermore, these lawsuits may divert the attention of our management and technical personnel.
We may be subject to intellectual property rights infringement claims in the future, which are costly to defend, could require us to pay substantial damages and could limit our ability to use certain technologies in the future.
Our commercial success depends, in part, not only on protecting our own intellectual property but on not infringing the patents or proprietary rights of third parties. Were third parties to claim that we infringe on their intellectual property rights, responding to such claims, regardless of their merit, could be time consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. Our practices, products and technologies, particularly with respect to the field of molecular immunohematology, may not be able to withstand third-party claims, regardless of the merits of such claims.
As a result of such potential intellectual property infringement claims, we could be required or otherwise decide it is appropriate to discontinue manufacturing, using, or selling particular products subject to infringement claims or develop other technology not subject to infringement claims, which could be time-consuming and costly or may not be possible. In addition, to the extent potential claims against us are successful, we may have to pay substantial monetary damages or discontinue certain of our practices, products or technologies that are found to be in violation of another party’s rights. We also may have to seek third-party licenses to continue certain of our existing or planned product lines, thereby incurring substantial costs related to royalty payments for such licenses, which could negatively affect our gross margins. Also, license agreements can be terminated under appropriate circumstances. No assurance can be given that efforts to remediate any infringement would be successful or that licenses could be obtained on acceptable terms or that litigation will not occur.
In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products, or a successful claim of infringement against us requiring us to pay royalties to a third party and we fail to license such technology on acceptable terms and conditions or to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.
Risks relating to our industry
Government regulation may delay or prevent new product introduction and affect our ability to continue manufacturing and marketing existing products.
Our instruments, reagents and other products are subject to regulation by governmental and private agencies in the U.S. and abroad, which regulate the testing, manufacturing, packaging, labeling, distribution and marketing of medical supplies and devices. Certain international regulatory bodies also impose import and tax restrictions, tariff regulations, and duties on imported products. Delays in agency review can significantly delay new product introduction and may result in a product becoming “outdated” or losing its market opportunity before it can be introduced. Also, the FDA and international agencies have the authority to require a recall or modification of products in the event of a defect.
FDA clearance or approval may be required before we can market new instruments or reagents in the U.S. or make significant changes to existing products. The process of obtaining marketing clearances and approvals from regulatory agencies for new products can be time consuming and expensive. There is no assurance that clearances or approvals will be granted or that agency review will not involve delays that would adversely affect our ability to commercialize our products.
If any of our products failed to perform in the manner represented during this clearance or approval process, particularly concerning safety issues, one or more of these agencies could require us to cease manufacturing and selling that product, or even recall previously-placed products, and to resubmit the product for clearance or approval before we could sell it again. Depending on the product, and the availability of acceptable substitutes, such an agency action could result in significantly reduced revenues and earnings for an indefinite period.
Federal, state and foreign regulations regarding the manufacture and sale of our products are subject to change. We cannot predict what impact, if any, such changes might have on our business. In addition, there can be no assurance that regulation of our products will not become more restrictive in the future and that any such development would not have a material adverse effect on our business.
We are subject to a number of existing laws and regulations, non-compliance with which could adversely affect our business, financial condition and results of operations, and we are susceptible to a changing regulatory environment.
The sales, marketing and pricing of products and relationships that medical device companies have with healthcare providers are under increased scrutiny by federal, state and foreign government agencies. Compliance with the Anti-Kickback Statute, False Claims Act, Physician Payments Sunshine Act and other healthcare related laws, as well as competition, data and patient privacy and export and import laws is under increased focus by the agencies charged with overseeing such activities.
U.S. and foreign governments have also increased their focus on the enforcement of the US Foreign Corrupt Practices Act (FCPA), and similar anti-bribery laws. We are expanding internationally into countries that have higher risk profiles for anti-bribery compliance. We have compliance programs in place, including policies, training and various forms of monitoring, designed to address these risks. However, these programs and policies may not always protect us from conduct by individual employees that violate these laws. Violations, or allegations of violations, of these laws may result in large civil and criminal penalties, debarment from participating in government programs, diversion of management time, attention and resources and may otherwise have an adverse effect on our business, financial condition and results of operations.
The industry and market segments in which we operate are highly competitive, and we may not be able to compete effectively with larger companies with greater financial resources than we have.
Our industry and the markets we operate in are highly competitive. Some of our competitors have greater financial resources than we do, making them better equipped to fund research and development, manufacturing and marketing efforts, or license technologies and intellectual property from third parties. We also face risks related to customers finding alternative methods of testing, which could result in lower demand for our products. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. Although we believe that we have certain technological and other advantages over our competitors, maintaining these advantages will require us to continue to invest in research and development, sales and marketing and customer service and support. Sufficient resources to continue to make such investments may not be available, or at such levels that would allow us to be successful in maintaining such advantages.
Increased competition in the U.S. could negatively impact our revenues and profitability.
We could face increased competition in the U.S. market, which historically has had a limited number of market participants. For fiscal 2014, approximately 62% of our revenues were generated in the U.S., and our U.S. operations have higher gross margins than our operations outside the U.S. Additional competition in the U.S. could negatively impact our revenues and/or our profitability.
Changes in government policy may have a material adverse effect on our business.
Changes in government policy could have a significant impact on our business by increasing the cost of doing business, affecting our ability to sell our products and negatively impacting our profitability. Such changes could include modifications to existing legislation, such as U.S. tax policy, or entirely new legislation.
We may be exposed to product liability claims resulting from the use of products we sell and distribute.
Although product liability claims in our industry are infrequent, the expansion of our business in an increasingly litigious business environment may expose us to product liability claims related to the products we sell. We maintain insurance that includes product liability coverage, and we believe our insurance coverage is adequate for our business. However, there can be no assurance that insurance coverage for these risks will continue to be available or, if available, that it will be sufficient to cover potential claims or that the present level of coverage will continue to be available at a reasonable cost. A partially or completely uninsured successful claim against us could have a material adverse effect on us.
Risks related to our indebtedness
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.
We have a significant amount of indebtedness outstanding. The major components of our debt financing consists of (i) the Senior Credit Facilities, as amended, comprised of: (a) a $100.0 million Revolving Credit Facility which matures in August 2017, and (b) a $663.3 million Term Loan Facility which matures in August 2018, and (ii) $400.0 million of unsecured 11.125% Notes due in August 2019. As of May 31, 2014, total principal indebtedness outstanding was $1,055.1 million and we had unused commitments of $100.0 million under our Revolving Credit Facility. The terms of the Senior Credit Facilities, as amended, also provide that we can borrow up to an additional $100.0 million (or a greater amount if we meet specified financial ratios), the availability of which is subject to certain conditions including bank approval.
Subject to the limits contained in the credit agreement governing our Senior Credit Facilities and the indenture that governs the Notes, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including:
• |
making it more difficult for us to satisfy our obligations with respect to our debt; |
• |
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes; |
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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements; |
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increasing our vulnerability to general adverse economic and industry conditions; |
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exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our Senior Credit Facilities, are at variable rates of interest; |
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limiting our flexibility in planning for and reacting to changes in the industry in which we compete; |
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placing us at a disadvantage compared to other, less leveraged competitors; |
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increasing our cost of borrowing; and |
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preventing us from raising the funds necessary to repurchase all the Notes tendered to us upon the occurrence of certain changes of control, which would constitute a default under the indenture governing the Notes and cause a cross-default under the Senior Credit Facilities. |
In addition, the indenture that governs the Notes and the credit agreement governing our Senior Credit Facilities contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to affect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreement governing our Senior Credit Facilities and the indenture governing the Notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.
In addition, we conduct a substantial portion of our operations through our subsidiaries, many of which are foreign legal entities and are not guarantors of our debt. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our non-guarantor subsidiaries do not have any obligation to pay amounts due on our debt or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture governing the Notes and the credit agreement governing our Senior Credit Facilities limit the ability of our subsidiaries to incur contractual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations under our indebtedness. If we cannot make scheduled payments on our debt, we will be in default and holders of the Notes could declare all outstanding principal and interest to be due and payable, the lenders under our Senior Credit Facilities could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation.
Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.
We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the indenture governing the Notes and the credit agreement governing our Senior Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. In addition, as of May 31, 2014, our Senior Credit Facilities had unused revolving debt commitments of $100.0 million, which amount could increase up to an additional $100.0 million (or a greater amount if we meet specified financial ratios), the availability of which is subject to certain conditions, including bank approval. All of those borrowings would be secured indebtedness. If new debt is added to our current debt levels, the risks that we face could intensify.
The terms of the credit agreement governing our Senior Credit Facilities and the indenture governing the Notes restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The indenture governing the Notes and the credit agreement governing our Senior Credit Facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:
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incur additional indebtedness; |
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pay dividends or make other distributions or repurchase or redeem our capital stock; |
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prepay, redeem or repurchase certain debt; |
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make loans and investments; |
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sell assets; |
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incur liens; |
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enter into transactions with affiliates; |
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alter the businesses we conduct; |
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enter into agreements restricting our subsidiaries’ ability to pay dividends; and |
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consolidate, merge or sell all or substantially all of our assets. |
In addition, the restrictive covenants in the credit agreement governing the Revolving Facility portion of our Senior Credit Facilities requires us to maintain a senior secured net leverage ratio of less than 5.25 to 1.00 to be tested on the last day of each fiscal quarter. Our ability to meet this financial covenant can be affected by events beyond our control.
A breach of the covenants under the indenture governing the Notes or under the credit agreement governing our Senior Credit Facilities could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our Senior Credit Facilities would permit the lenders under our Senior Credit Facilities to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our Senior Credit Facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or note holders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:
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limited in how we conduct our business; |
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unable to raise additional debt or equity financing to operate during general economic or business downturns; or |
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unable to compete effectively or to take advantage of new business opportunities. |
These restrictions may affect our ability to grow in accordance with our strategy.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our Senior Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming that the entire Revolving Facility was fully drawn, each one-eighth point change in the LIBOR interest rate above the Term Loan Facility’s LIBOR floor of 1.25% would result in a $0.9 million change in annual interest expense on our indebtedness under our Senior Credit Facilities. We have entered into, and may continue to enter into, interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.
Item 1B. — Unresolved Staff Comments.
Not applicable.
Item 2. — Properties.
We own our Canadian manufacturing facility and Belgium sales office. We lease the remainder of our facilities.
Our owned properties are not encumbered as security for any loan. We believe that our current facilities are adequate for our current and anticipated needs and do not foresee any difficulty in renewing leases that expire in the near term.
Item 3. — Legal Proceedings.
In 2009, securities litigation was filed in the U.S. District Court of North Georgia against us and certain of our former directors and officers asserting federal securities fraud claims on behalf of a putative class of purchasers of our common stock between October 19, 2005 and June 25, 2009. In June 2011 the Court dismissed the complaint and closed the case and in September 2011 the plaintiffs appealed. We agreed to settle these actions in December 2012 and we received preliminary approval of the settlement in March 2013. Final approval was granted in June 2013. The settlement is covered under the Company’s insurance and did not impact our financial results.
And, from time to time, we are a party to certain legal proceedings in the ordinary course of business. However, we are not currently subject to any other legal proceedings expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 4. — [Reserved]
PART II
Item 5. — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Prior to the Immucor Acquisition, our common stock was traded on The NASDAQ Stock Market under the symbol BLUD. Following the Immucor Acquisition, our common stock is privately held. Therefore there is no established trading market.
IVD Intermediate Holdings B Inc. is the only owner of record of our common stock. The Parent is a wholly owned indirect subsidiary of IVD Holdings Inc. (“Holdings”) which was formed by investment funds affiliated with the Sponsor.
Dividend Policy
With the exception of certain limited circumstances, payment of dividends is restricted under our Senior Credit Facilities and the indenture governing our Notes. We have never declared cash dividends with respect to our common stock and do not expect to do so in the future. We presently intend to continue to reinvest our earnings in the business.
Item 6. – Selected Financial Data.
The following table sets forth selected consolidated financial data with respect to our operations. The data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto, located in “Item 8. Financial Statements and Supplementary Data.” The statement of operations data for each of the periods presented, and the related balance sheet data have been derived from the audited consolidated financial statements (in thousands).
Successor |
Predecessor |
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August 20, 2011 |
June 1, 2011 |
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Year Ended |
through |
through |
Year Ended |
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May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
May 31, 2011 |
May 31, 2010 |
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Net sales |
$ | 388,056 | 347,788 | 261,814 | 74,910 | 333,091 | 329,073 | |||||||||||||||||
Cost of sales (exclusive of amortization shown separately below) |
139,634 | 120,027 | 105,698 | 22,955 | 96,175 | 95,349 | ||||||||||||||||||
Gross margin |
248,422 | 227,761 | 156,116 | 51,955 | 236,916 | 233,724 | ||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Research and development |
29,070 | 21,313 | 13,929 | 4,895 | 15,900 | 15,437 | ||||||||||||||||||
Selling and marketing |
59,057 | 50,129 | 32,913 | 10,510 | 35,931 | 36,995 | ||||||||||||||||||
Distribution |
20,165 | 18,718 | 14,333 | 3,952 | 16,508 | 14,831 | ||||||||||||||||||
General and administrative |
41,603 | 42,801 | 36,954 | 19,312 | 37,747 | 36,841 | ||||||||||||||||||
Amortization expense |
52,965 | 50,765 | 39,224 | 931 | 4,333 | 4,278 | ||||||||||||||||||
Acquisition-related items |
(4,638 | ) | 2,616 | 1,362 | 18,863 | 500 | - | |||||||||||||||||
Impairment loss |
160,150 | 3,500 | - | - | - | - | ||||||||||||||||||
Certain litigation expenses |
- | - | 22,000 | - | - | - | ||||||||||||||||||
Loss on disposition of fixed assets |
- | 1,175 | - | - | - | - | ||||||||||||||||||
Total operating expenses |
358,372 | 191,017 | 160,715 | 58,463 | 110,919 | 108,382 | ||||||||||||||||||
(Loss) income from operations |
(109,950 | ) | 36,744 | (4,599 | ) | (6,508 | ) | 125,997 | 125,342 | |||||||||||||||
Non-operating (expense) income: |
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Interest income |
36 | 28 | 7 | 142 | 706 | 454 | ||||||||||||||||||
Interest expense |
(88,304 | ) | (90,830 | ) | (77,048 | ) | - | (70 | ) | (33 | ) | |||||||||||||
Loss on extinguishment of debt |
- | (9,111 | ) | - | - | - | - | |||||||||||||||||
Other, net |
45 | (539 | ) | 447 | 2,673 | 3,997 | (551 | ) | ||||||||||||||||
Total non-operating (expense) income |
(88,223 | ) | (100,452 | ) | (76,594 | ) | 2,815 | 4,633 | (130 | ) | ||||||||||||||
(Loss) income before income taxes |
(198,173 | ) | (63,708 | ) | (81,193 | ) | (3,693 | ) | 130,630 | 125,212 | ||||||||||||||
(Benefit) provision for income taxes |
(15,916 | ) | (24,566 | ) | (31,546 | ) | 2,681 | 41,303 | 42,629 | |||||||||||||||
Net (loss) income |
$ | (182,257 | ) | (39,142 | ) | (49,647 | ) | (6,374 | ) | 89,327 | 82,583 |
The following data is as of the dates indicated below: |
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Successor |
Predecessor |
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May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
May 31, 2011 |
May 31, 2010 |
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Working capital |
$ | 91,917 | 87,069 | 71,295 | 381,259 | 378,979 | 270,939 | |||||||||||||||||
Total assets |
1,824,414 | 2,000,970 | 1,949,153 | 652,395 | 633,127 | 519,834 | ||||||||||||||||||
Long-term debt, net of debt discounts |
1,037,183 | 1,039,278 | 986,361 | - | - | - | ||||||||||||||||||
Shareholders’ equity |
468,616 | 644,706 | 637,378 | 576,646 | 568,872 | 456,123 |
Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Our Business
We operate in the transfusion and transplantation in vitro diagnostics markets. Our products perform typing and screening of blood, organs or stem cells to ensure donor-recipient compatibility. Our offerings are targeted at hospitals, donor centers and reference laboratories around the globe.
We have manufacturing facilities in the United States (“U.S.”) and Canada and sell our products through both direct affiliate offices and third-party distribution arrangements.
We operate in a highly regulated industry and are subject to continuing compliance with multiple country-specific statutes, regulations and standards. For example, in the U.S. the Food and Drug Administration (“FDA”) regulates all aspects of the transfusion process, including the marketing of reagents and instruments used to determine compatibility. Additionally, we are subject to government legislation that governs the delivery of healthcare.
Our automated instrument-reagent systems operate on a “razor/razor blade” model, with our instruments serving as the “razors” and our reagents serving as the “razor blades.” For transfusion diagnostics, our instruments are “closed systems,” meaning our proprietary reagents can only be used on our instruments. For transplant diagnostics, our reagents run on Luminex instruments, which are open systems. The “razor/ razor blade” business model generates a recurring revenue stream for us.
Business Highlights of 2014
The following is a summary of significant factors affecting our business in fiscal 2014:
● |
Acquisitions – |
o |
LIFECODES – We completed the acquisition of LIFECODES in the fourth quarter of fiscal 2013. We included the results of operations, financial position and cash flows of the acquired business in our consolidated financial statements from their dates of acquisition. Therefore, LIFECODES’ operating results were included in our consolidated financial statements for all of fiscal 2014, but were only included for approximately 2 months of fiscal 2013. LIFECODES contributed $47.3 million and $9.5 million in net sales and reported operating loss before income tax of $1.4 million and $2.6 million for the fiscal 2014 and fiscal 2013 periods, respectively. These operating results include non-cash charges of approximately $2.4 million and $0.4 million for amortization expense of intangible assets for fiscal 2014 and fiscal 2013, respectively, and approximately $2.8 million and $1.7 million of amortization expense for fiscal 2014 and fiscal 2013, respectively, related to a fair value adjustment to inventory that was recorded as of the acquisition date. |
The LIFECODES purchase agreement included a potential earn-out totaling $10.0 million in cash if the LIFECODES business achieved a certain financial target in calendar 2013. During calendar year 2013, and our fiscal year 2014, management estimated, for accounting purposes, that the likelihood of achieving the financial performance target was lower than previously estimated and decreased the fair value of the related contingent consideration liability from $4.6 million to zero. This decrease in the contingent consideration liability is reflected as a gain in the acquisition-related items in the consolidated statements of operations for fiscal 2014.
o |
Distribution businesses – We completed the acquisition of two distribution businesses of LIFECODES products on January 31, 2014 for $6.4 million in cash, including acquired cash of $1.2 million. These acquisitions enable us to streamline the distribution of our LIFECODES products in Europe. The operating results of these two distribution businesses were included in fiscal 2014 after the date of acquisition, but were not included in the fiscal 2013. |
o |
Organ-i – On May 30, 2014, we completed the acquisition of Organ-i, Inc. a privately-held company focused on developing non-invasive tests to monitor and predict organ health for transplant recipients. This acquisition expands our product offering for post-transplant testing and directly complements our existing LIFECODES business. The total cash purchase price of this business was $12.0 million plus a potential earn-out of up to $18.0 million if certain product and financial targets during fiscal 2015 through fiscal 2020 periods are met. Management estimated that the fair value of the contingent consideration arrangement as of the acquisition date was approximately $11.3 million. |
● |
Goodwill Impairment – |
o |
Goodwill is evaluated on a reporting unit basis, therefore, while the overall aggregate value of the Company’s six reporting units exceeds the aggregate carrying amount of goodwill for these units, an impairment was generated for one of the six reporting units. Accordingly, a goodwill impairment charge was recorded for $160.0 million in the fourth quarter of fiscal 2014 for one of our reporting units. |
● |
Notice of Intent to Revoke Lifted – |
o |
During December 2013, the FDA conducted an inspection of our Norcross facility and found no significant deviations. As a result, the FDA lifted the notice of intent to revoke (“NOIR”) administrative action effective May 2014. |
● |
PreciseTypeTM FDA Approval – |
o |
In May 2014, the FDA approved our PreciseTypeTM HEA test, which is the first FDA-approved molecular immunohematology product on the market. Formerly marketed as the HEA BeadChip™ Test, PreciseType provides clinicians with detailed genetic matching information that can reduce the risk of alloimmunization (antibody production) and serious hemolytic reactions associated with transfusions, which can be especially problematic for patients receiving frequent blood transfusions. With its FDA in-vitro diagnostic approval, PreciseType is now the “test of record” in the U.S. for both patient and donor typing of red blood cells. The test has been CE-marked in Europe for IVD use since 2010. |
Results of Operations
On August 19, 2011, the Company was acquired through a merger transaction with IVD Acquisition Corporation (“Merger Sub”), a wholly owned subsidiary of IVD Intermediate Holdings B Inc. (the “Parent”). The Parent is a wholly owned indirect subsidiary of IVD Holdings Inc. (“Holdings”), which was formed by investment funds affiliated with the Sponsor. The Immucor Acquisition was accomplished through a merger of Merger Sub with and into the Company, with the Company being the surviving company. As a result of the Immucor Acquisition, the Company became a wholly owned subsidiary of the Parent. Prior to August 19, 2011, the Company operated as a public company with common stock traded on the NASDAQ Stock Market.
In the following financial tables, we have presented the results of operations for the twelve month periods ended May 31, 2014 (the fiscal 2014 period), and May 31, 2013 (the fiscal 2013 period), and have presented separately the results of operations for the period from August 20, 2011 to May 31, 2012 (the Successor fiscal 2012 period) and the period from June 1, 2011 to August 19, 2011 (the Predecessor fiscal 2012 period). We have prepared our discussion and analysis of the results of operations and cash flows by comparing the fiscal 2014 period, the fiscal 2013 period, and the results of the combined Predecessor fiscal 2012 period and the Successor fiscal 2012 period, all of which include twelve months of operating activity. We believe this approach provides the most meaningful basis for the analysis and discussion of our results. Combined changes in operating results (i) have not been prepared on a pro forma basis as if the Immucor Acquisition occurred on the first day of the period, (ii) may not reflect the actual results we would have achieved absent the Immucor Acquisition, and (iii) may not be predictive of future results of operations. The operating results presented in the table below are in thousands of dollars, except percentages.
Successor |
Predecessor |
Change |
||||||||||||||||||||||||||||||
August 20, 2011 |
June 1, 2011 |
|||||||||||||||||||||||||||||||
Year Ended |
through |
through |
||||||||||||||||||||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
Amount |
% |
Amount |
% |
|||||||||||||||||||||||||
Net sales |
$ | 388,056 | 347,788 | 261,814 | 74,910 | $ | 40,268 | 11.6 | $ | 11,064 | 3.3 | |||||||||||||||||||||
Cost of sales (*) |
139,634 | 120,027 | 105,698 | 22,955 | 19,607 | 16.3 | (8,626 | ) | (6.7 | ) | ||||||||||||||||||||||
Gross margin |
248,422 | 227,761 | 156,116 | 51,955 | 20,661 | 9.1 | 19,690 | 9.5 | ||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||
Research and development |
29,070 | 21,313 | 13,929 | 4,895 | 7,757 | 36.4 | 2,489 | 13.2 | ||||||||||||||||||||||||
Selling and marketing |
59,057 | 50,129 | 32,913 | 10,510 | 8,928 | 17.8 | 6,706 | 15.4 | ||||||||||||||||||||||||
Distribution |
20,165 | 18,718 | 14,333 | 3,952 | 1,447 | 7.7 | 433 | 2.4 | ||||||||||||||||||||||||
General and administrative |
41,603 | 42,801 | 36,954 | 19,312 | (1,198 | ) | (2.8 | ) | (13,465 | ) | (23.9 | ) | ||||||||||||||||||||
Amortization expense |
52,965 | 50,765 | 39,224 | 931 | 2,200 | 4.3 | 10,610 | 26.4 | ||||||||||||||||||||||||
Acquisition-related items |
(4,638 | ) | 2,616 | 1,362 | 18,863 | (7,254 | ) | ** | (17,609 | ) | (87.1 | ) | ||||||||||||||||||||
Impairment loss |
160,150 | 3,500 | - | - | 156,650 | ** | 3,500 | ** | ||||||||||||||||||||||||
Certain litigation expenses |
- | - | 22,000 | - | - | ** | (22,000 | ) | (100.0 | ) | ||||||||||||||||||||||
Loss on disposition of fixed assets |
- | 1,175 | - | - | (1,175 | ) | ** | 1,175 | ** | |||||||||||||||||||||||
Total operating expenses |
358,372 | 191,017 | 160,715 | 58,463 | 167,355 | 87.6 | (28,161 | ) | (12.8 | ) | ||||||||||||||||||||||
(Loss) income from operations |
(109,950 | ) | 36,744 | (4,599 | ) | (6,508 | ) | (146,694 | ) | ** | 47,851 | ** | ||||||||||||||||||||
Non-operating (expense) income: |
||||||||||||||||||||||||||||||||
Interest income |
36 | 28 | 7 | 142 | 8 | 28.6 | (121 | ) | (81.2 | ) | ||||||||||||||||||||||
Interest expense |
(88,304 | ) | (90,830 | ) | (77,048 | ) | - | 2,526 | (2.8 | ) | (13,782 | ) | 17.9 | |||||||||||||||||||
Loss on extinguishment of debt |
- | (9,111 | ) | - | - | 9,111 | ** | (9,111 | ) | ** | ||||||||||||||||||||||
Other, net |
45 | (539 | ) | 447 | 2,673 | 584 | ** | (3,659 | ) | ** | ||||||||||||||||||||||
Total non-operating (expense) income |
(88,223 | ) | (100,452 | ) | (76,594 | ) | 2,815 | 12,229 | (12.2 | ) | (26,673 | ) | 36.2 | |||||||||||||||||||
Loss before income taxes |
(198,173 | ) | (63,708 | ) | (81,193 | ) | (3,693 | ) | (134,465 | ) | 211.1 | 21,178 | (24.9 | ) | ||||||||||||||||||
(Benefit) provision for income taxes |
(15,916 | ) | (24,566 | ) | (31,546 | ) | 2,681 | 8,650 | (35.2 | ) | 4,299 | (14.9 | ) | |||||||||||||||||||
Net loss |
(182,257 | ) | (39,142 | ) | (49,647 | ) | (6,374 | ) | $ | (143,115 | ) | 365.6 | $ | 16,879 | (30.1 | ) |
(*) Cost of sales is exclusive of amortization expense which is shown separately within operating expenses.
(**) Calculation is not meaningful.
Years Ended May 31, 2014 and 2013:
Net sales were $388.1 million in fiscal 2014 as compared with $347.8 million in fiscal 2013, an increase of $40.3 million, or 11.6%. This increase in net sales is described in the discussion of net sales by product group below. Net sales by product group are presented in the following table (in thousands except percentages):
Year Ended |
Change | |||||||||||||||
May 31, 2014 |
May 31, 2013 |
Amount |
% |
|||||||||||||
Net sales by product group: |
||||||||||||||||
Transfusion |
$ | 330,547 | 330,931 | (384 | ) | (0.1 | ) | |||||||||
Transplant & Molecular |
57,509 | 16,857 | 40,652 | 241.2 | ||||||||||||
Total |
$ | 388,056 | 347,788 | 40,268 | 11.6 |
Transfusion: Net sales of our transfusion products in fiscal 2014 were $330.5 million as compared with $330.9 million in fiscal 2013, a decrease of $0.4 million, or 0.1%. The decrease in net sales was primarily due to fewer ship cycles partially offset by the favorable effect of changes in foreign currency exchange rates on our international operations in fiscal 2014 as compared with fiscal 2013. The increase in revenue generated from a higher number of instrument placements in fiscal 2014 as compared with fiscal 2013 was offset by the impact of a disruption in the production of certain transfusion products in fiscal 2014 resulting in lost sales. After adjusting for the impact of foreign currency exchange rate fluctuations and ship cycles, net sales in fiscal 2014 were comparable with the net sales of fiscal 2013.
Transplant & Molecular: Net sales of our transplant and molecular products for fiscal 2014 were $57.5 million as compared with $16.8 million for the fiscal 2013 periods, an increase of $40.7 million, or over 200%. This increase was primarily due to additional net sales from our newly acquired product lines from the LIFECODES acquisition completed on March 22, 2013.
Gross margin increased by $20.7 million for fiscal 2014 as compared with fiscal 2013, or 9.1%, mainly due to the higher net sales generated in 2014. Gross margin as a percentage of consolidated net sales was approximately 1.5% lower in fiscal 2014 as compared with fiscal 2013. The lower gross margin percentage was primarily due to a less favorable product mix, a lower gross margin percentage on our transfusion products, and additional amortization of the adjustment in fair value of inventory of $1.5 million related to recent acquisitions that was included in fiscal 2014 that was not included in fiscal 2013. The lower gross margin percentage on our transfusion products was mainly due to the production disruption in fiscal 2014 resulting in lost sales. Gross margin as a percentage of consolidated net sales was also lower due to the medical device excise tax that became effective in January 2013 which increased our production costs by approximately $1.2 million. These decreases in gross margin percentage were partially offset by lower depreciation expense of approximately $6.3 million in fiscal 2014 related to a change in the anticipated benefit period of our instrument equipment assets as discussed in the section entitled “Change in Estimates” below.
Research and development expenses were $29.1 million in fiscal 2014 as compared with $21.3 million in the fiscal 2013 periods. The overall increase of $7.8 million, or 36.4%, was primarily due to additional expenses related to LIFECODES and continued investment in development projects. One of the most significant projects underway is our new molecular blood typing assay (now marketed as the PreciseTypeTM HEA test). This new product is an in vitro diagnostic test and is our core molecular test for extended typing of red blood cell antigens which was approved by the FDA in May 2014. We anticipate introducing this new product to the market in the near term.
Selling and marketing expenses were $59.0 million in fiscal 2014 as compared with $50.1 million in fiscal 2013. The increase of $8.9 million, or 17.8%, was primarily due to additional costs related to LIFECODES.
Distribution expenses were $20.2 million in fiscal 2014 as compared with $18.7 million in fiscal 2013, an increase of $1.4 million, or 7.7%. The increase was primarily due to additional costs related to LIFECODES.
General and administrative expenses were $41.6 million in the fiscal 2014 period as compared with $42.8 million in the fiscal 2013 periods, a decrease of $1.2 million, or 2.8%. The decrease was primarily due to cost reduction efforts made by management in fiscal 2014, synergies achieve from our LIFECODES acquisition, and a reduction in bad debt expense of $1.9 million resulting from a change in estimate of the allowance for doubtful accounts as discussed in the section entitled “Change in Estimates” below. These decreases in costs were partially offset by additional expenses related to LIFECODES.
Amortization expense was $53.0 million for fiscal 2014 as compared with $50.8 million for fiscal 2013, an increase of $2.2 million, or 4.3%. The increase was primarily due to a full year of amortization of intangible assets related to the LIFECODES acquisition in fiscal 2014 as compared with two months of amortization in fiscal 2013.
Acquisition-related items was a gain of $4.6 million for fiscal 2014 resulting from a decrease in the contingent consideration liability related to the acquisition of LIFECODES. Based upon information available in fiscal 2014, management determined that the likelihood of the LIFECODES business achieving the financial performance target was lower than previously estimated and decreased the fair value of the related contingent consideration liability by $4.6 million to zero in fiscal 2014. See Note 2 to the consolidated financial statements for additional information related to the LIFECODES acquisition.
An impairment loss on goodwill of $160.0 million was recorded for one of our reporting units in the fourth quarter of fiscal 2014. The Company has six reporting units with goodwill from prior acquisitions reported on the balance sheet at May 31, 2014. The annual evaluation for impairment utilizes the financial projections of the next fiscal year and the five year strategic plans that are prepared in the fourth quarter and reflect Management’s continuing knowledge of the operations and the markets in which the reporting units operate. Because goodwill is evaluated on a reporting unit basis, an impairment was generated for one of the six reporting units, although the overall aggregate value of the Company’s six reporting units exceeds the aggregate carrying amount of goodwill for these units. (See Note 7 to the consolidated financial statements for additional information on the goodwill impairment). In addition, an impairment loss on an in-process research and development (“IPR&D”) project of $0.2 million was recorded in fiscal 2014. It was determined that a project related to our transplant and molecular diagnostics business was no longer economically feasible and therefore was abandoned and its costs were fully written-off.
Non-operating expense was $88.2 million in the fiscal 2014 period and $100.4 million in the fiscal 2013 periods, a decrease of $12.2 million. The most significant component of non-operating expense is interest expense from our long-term debt which was first issued at the time of the Immucor Acquisition, in August 2011. The decrease in non-operating net expense for fiscal 2014 as compared with fiscal 2013 was mainly due to a $9.1 million loss on the extinguishment of debt incurred from refinancing of our Senior Credit Facilities twice during fiscal 2013 that did not reoccur in fiscal 2014. Non-operating net expense was also lower in fiscal 2014 due to a decrease in interest expense of $2.5 million on our outstanding debt. The lower interest expense was mainly due to a lower interest rate, partially offset by a higher average long-term debt balance in fiscal 2014 as compared with fiscal 2013. The higher average debt balance was mainly a result of the acquisition of LIFECODES during the fourth quarter of fiscal 2013.
The effective tax rate for the fiscal 2014 period and the fiscal 2013 period was 8.0% and 38.6%, respectively. The effective tax rate for fiscal 2014 was lower as compared with the effective tax rate for the fiscal 2013 periods primarily because the impairment of goodwill is not deductible for tax purposes. Other items that impacted the lower rate are the fact that the acquisition-related items are not taxable, the impact of lower foreign income tax rates, discrete tax items recognized during the fiscal 2014 as compared to fiscal 2013 period, and the expiration of the statute of limitations of the benefits associated with uncertain tax positions.
Years Ended May 31, 2013 and 2012:
Net sales were $347.8 million in the fiscal 2013 period as compared with $336.7 million in the combined Successor and Predecessor fiscal 2012 periods, an increase of $11.1 million, or 3.3%. This increase in net sales is described in the discussion of net sales by product group below. Net sales by product group are presented in the following table (in thousands except percentages):
Successor |
Predecessor |
Change |
||||||||||||||||||
August 20, 2011 |
June 1, 2011 |
|||||||||||||||||||
Year Ended |
through |
through |
||||||||||||||||||
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
Amount |
% |
||||||||||||||||
Net sales by product group: |
||||||||||||||||||||
Transfusion |
$ | 330,931 | 257,046 | 73,632 | 253 | 0.1 | ||||||||||||||
Transplant & Molecular |
16,857 | 4,768 | 1,278 | 10,811 | 178.8 | |||||||||||||||
Total |
$ | 347,788 | 261,814 | 74,910 | 11,064 | 3.3 |
Transfusion: Net sales of our transfusion products for fiscal 2013 were $330.9 million as compared with $330.7 million for the combined Successor and Predecessor fiscal 2012 periods, an increase of $0.2 million, or 0.1%. This increase in net sales was mainly due to increased revenue generated from higher instrument placements partially offset by a lower number of ship cycles included in fiscal 2013 as compared with the combined Successor and Predecessor fiscal 2012 periods, and a lower industry demand for reagent products reflecting the challenging global economic climate. The year-over-year change in net sales also reflects the unfavorable effect of changes in foreign currency exchange rates on our international operations in fiscal 2013, and a reduction in deferred revenue of $0.9 million related to the Immucor Acquisition in the 2012 fiscal year. After adjusting for the impact of foreign currency exchange rate fluctuations, ship cycles, and the reduction in deferred revenue, revenue in fiscal 2013 increased by 2.0 % when compared with the combined Successor and Predecessor fiscal 2012 periods.
Transplant & Molecular: Net sales of our transplant and molecular products for fiscal 2013 were $16.8 million as compared with $6.0 million for the combined Successor and Predecessor fiscal 2012 periods, an increase of $10.8 million, or approximately 180%. This increase was primarily due to $9.5 million of additional net sales from our newly acquired product lines from the LIFECODES acquisition completed on March 22, 2013 as well as $1.3 million of organic growth in net sales in our existing product lines in fiscal 2013. Net sales of our existing molecular products increased in fiscal 2013 as compared with the combined Successor and Predecessor fiscal 2012 periods mainly due to increased market acceptance of those products in the U.S. and Latin America.
Gross margin as a percentage of consolidated net sales was approximately 3.7% higher in the fiscal 2013 period as compared with the combined Successor and Predecessor fiscal 2012 periods. The higher gross margin percentage in fiscal 2013 was mainly due to items recorded in fiscal 2012 related to the Immucor Acquisition that negatively impacted the overall gross margin percentage in the combined Successor and Predecessor fiscal 2012 periods that were not included in fiscal 2013 (primarily driven by the $24.4 million of amortization of the fair value of inventory) partially offset by a higher percentage of net sales generated from distributors in fiscal 2013, which have a lower gross margin than direct sales, and a less favorable product mix in fiscal 2013. The less favorable product mix was mainly a result of lower shipments of our reagent products coupled with a higher volume of instrument placements, which typically have a lower gross margin percentage than our reagent products. In addition, the gross margin percentage in fiscal 2013 also included net sales of $9.5 million from our LIFECODES product line, which has a lower margin than our existing product lines.
Research and development expenses were $21.3 million in the fiscal 2013 period as compared with $18.8 million in the combined Successor and Predecessor fiscal 2012 periods. The overall increase of $2.5 million, or 13.2%, was primarily due to additional expenses related to LIFECODES and continued investment in development projects.
Selling and marketing expenses were $50.1 million in the fiscal 2013 period as compared with $43.4 million in the combined Successor and Predecessor fiscal 2012 periods. The increase of $6.7 million, or 15.4%, was primarily due to additional costs related to LIFECODES, and investments in personnel and associated expenses in our commercial sales and marketing infrastructure in the U.S. and to develop an infrastructure in the emerging markets to drive future growth. These increases were partially offset by additional compensation expense in the combined Successor and Predecessor fiscal 2012 periods of $1.3 million related to the vesting of all share-based awards in conjunction with the Immucor Acquisition that is non-recurring.
Distribution expenses were relatively unchanged in the fiscal 2013 period as compared with the combined Successor and Predecessor fiscal 2012 periods.
General and administrative expenses were $42.8 million in the fiscal 2013 period as compared with $56.3 million in the combined Successor and Predecessor fiscal 2012 periods, a decrease of $13.5 million, or 23.9%. The decrease was primarily due to $10.2 million of compensation expense recognized in the Predecessor fiscal 2012 period related to the vesting of all share-based awards in conjunction with the Immucor Acquisition and reduced project costs partially offset by additional expenses related to LIFECODES.
Amortization expense was $50.8 million in the fiscal 2013 period as compared with $40.2 million in the combined Successor and Predecessor fiscal 2012 periods, an increase of $10.6 million, or 26.4%. The increase was due to a full year of amortization of intangible assets related to the Immucor Acquisition, as well as the additional amortization of intangible assets related to LIFECODES.
An impairment loss on in-process research and development (“IPR&D”) projects of $3.5 million was recorded in the fiscal 2013 period. In the fourth quarter of fiscal 2013, we decided that a certain IPR&D project related to our molecular immunohematology business was no longer economically feasible. The project was therefore abandoned and fully written-off.
Acquisition-related charges were $2.6 million in fiscal 2013. These charges were primarily for professional fees for legal, due-diligence, and valuation services for the acquisition of our LIFECODES business. Acquisition-related charges were $20.2 million in the combined Successor and Predecessor fiscal 2012 periods. These charges were primarily for professional fees for legal, due-diligence, and valuation services related to the Immucor Acquisition.
We recognized a disposition loss of $1.2 million in 2013 to reduce certain capital work-in-progress equipment assets associated with a high-speed filling project to its estimated salvage value. The project was determined to no longer be economically viable and management therefore decided to dispose of the equipment in fiscal 2013.
Non-operating expense was $100.5 million in the fiscal 2013 period and $73.8 million in the combined Successor and Predecessor fiscal 2012 periods, an increase of $26.7 million. The most significant component of non-operating expense is interest expense from our long-term debt which was first issued at the time of the Immucor Acquisition, in August 2011. The year-over-year increase in non-operating expense was mainly due to higher interest expense of $13.7 million resulting from the impact of outstanding debt for the full year of fiscal 2013 as compared to 9.5 months in fiscal 2012, a $9.1 million loss on the extinguishment of debt incurred from the refinancings of our Senior Credit Facilities, and a foreign exchange gain of $2.9 million related to the settlement of intercompany balances realized in the Predecessor fiscal 2012 period.
The effective tax rate for the fiscal 2013 period, the Successor fiscal 2012 period, and the Predecessor fiscal 2012 period was 38.6%, 38.9% and (72.6)%, respectively. The effective tax rate for fiscal 2013 was higher as compared with the effective tax rate for the combined Successor and Predecessor fiscal 2012 periods primarily due to the impact of lower foreign income tax rates, discrete tax items recognized during the fiscal 2013 period as a result of changes in enacted tax laws and the expiration of the statute of limitations of the benefits associated with uncertain tax positions.
Change in Estimates
Change in the Provision for Allowance for Doubtful Accounts
During fiscal 2014, we reviewed the valuation method used to determine the estimate of our allowance for doubtful accounts and determined that a change in estimate was needed to better reflect our actual bad debt experience. As a result, we revised our valuation method, effective November 30, 2013, and reduced the estimate of our allowance for doubtful accounts on uncollected receivables in the second quarter of fiscal 2014. The effect of this change in estimate was a reduction in bad debt expense of $1.9 million, and a decrease in net loss of approximately $1.1 million in fiscal 2014.
Change in Depreciable Lives of Property and Equipment
In accordance with our policy, we review the estimated useful lives of our fixed assets on an ongoing basis. During fiscal 2014, this review indicated that the actual lives of our instrument equipment were longer than the estimated useful lives used for depreciation purposes in our financial statements. As a result, we changed our estimates of the useful lives of our instrument equipment, effective June 1, 2013, to better reflect the estimated periods during which these assets will remain in service. As a result, the estimated useful lives of these assets increased from approximately 5 years to 10 years. The effect of this change in estimate was a reduction in depreciation expense of $6.3 million and a decrease in net loss of approximately $3.6 million for fiscal 2014, respectively.
Liquidity and Capital Resources
Cash flow
Our principal source of liquidity is our operating cash flow. This cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting our operating, investing and financing requirements.
In fiscal 2014, our cash and cash equivalents decreased by $5.8 million to $23.6 million as of May 31, 2014. The decrease was primary due to net cash used for acquisitions totaling $16.0 million, for the purchase of additional property and equipment of $9.2 million, and to repay $6.7 million of long-term debt. These decreases in cash and cash equivalents were partially offset by positive cash flow contributed by our operating activities. There were no borrowings from the Revolving Facility during fiscal 2014. The cash balance at May 31, 2014 includes cash of $19.2 million that is held by our subsidiaries outside of the United States. We are not permanently reinvested in our subsidiaries and can repatriate these funds, if needed, to support future debt payments.
Operating activities
Operating activities provided cash of $25.6 million in fiscal 2014 as compared with $24.5 in fiscal 2013. The increase was mainly due to improved operating results exclusive of non-cash adjustments, partially offset by higher working capital requirements. The higher working capital requirements in fiscal 2014 were primarily due to an increase in inventory levels partially offset by a decrease in collections of accounts receivable, and lower interest payments in fiscal 2014 as compared with fiscal 2013. Interest payments were lower in the fiscal 2014 as compared with fiscal 2013 due to the refinancing of our long-term debt twice during fiscal 2013 which reduced the interest rate of our Senor Credit Facilities; we made interest payments of $79.8 million in fiscal 2014 and $85.0 million in fiscal 2013. The favorable impact of a lower interest rate on our long-term debt was partially offset by the impact of higher average borrowings on our interest payments made in fiscal 2014. The higher average borrowings were primarily due to the acquisition of LIFECODES in the fourth quarter of fiscal 2013.
Investing activities
During the fiscal 2014, we used cash of $17.2 million to acquire new businesses as compared with using $84.8 million of cash in fiscal 2013 to acquire the LIFECODES business. We received cash of $1.1 million in fiscal 2014 from the seller of LIFECODES as a result of finalizing certain purchase price adjustments. We also used $9.2 million of cash to purchase property and equipment, including the upgrade of certain financial systems, in fiscal 2014 as compared with $9.6 million of cash used for property and equipment purchases in fiscal 2013.
Financing activities
In fiscal 2014, we used cash for financing activities of $6.7 million for repayments of our long-term debt and had no amounts outstanding under our Revolving Facility during fiscal 2014. In fiscal 2013, net cash provided by financing activities was $80.8 million. The LIFECODES acquisition in fiscal 2013 was funded by additional borrowings of $50.0 million under the Term Loan Facility and an equity investment of $42.5 million from our Parent. The excess of the cash received over the purchase price was used to pay transaction expenses and provided an additional $2.1 million of working capital.
In addition to the borrowings for the LIFECODES acquisition, we refinanced our Senior Credit Facilities twice in fiscal 2013. In connection with these refinancings, we received cash proceeds of $288.1 million including the $6.0 million of additional term loan debt, and we repaid long term debt of $282.1 million. We also made scheduled principal payments on the Term Loan Facility of $6.2 million and paid debt issuance costs of $11.4 million that resulted from the refinancing of our Senior Credit Facilities during fiscal 2013 and the LIFECODES acquisition.
The first refinancing arrangement completed in August 2012 lowered the interest rate on our Term Loan Facility by 1.50%, including lowering the LIBOR floor on the term debt from 1.50% to 1.25%, lowered the interest rate on the revolving debt and extended the maturity date of the Revolving Facility to August 2017. In February 2013, we refinanced our Senior Credit Facilities again which lowered our interest rates on the Term Loan Facility by 0.75%. The refinancing completed in February 2013 also lowered the interest rate on the Revolving Facility and modified the financial covenant per the Senior Credit Facilities to only apply to the Revolving Facility.
Contingencies
We record contingent liabilities resulting from asserted and unasserted claims against us when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. We are currently not involved in any material legal proceedings. (See Part I, Item 3 – Legal Proceedings for further discussion.) Although we believe we have meritorious defenses to the claims and other issues asserted in such matters, one or more of such matters or any future legal matters may have an adverse effect on the Company or our financial position. Contingent liabilities are described in Note 22 to the audited consolidated financial statements included herein.
Future Cash Requirements and Restrictions
Our Term Loan Facility requires quarterly principal payments equal to 0.25% of the original principal amount of the loan with the balance due and payable on August 19, 2018. Required principal and interest payments related to our Term Loan Facility are $6.6 million and $33.1 million, respectively, for the next 12 months. Required interest payments related to the Notes is $44.5 million for the next 12 months. The Senior Credit Facilities are secured by substantially all of the tangible and intangible assets of our U.S. subsidiaries and the pledge of 65% of the stock of our foreign subsidiaries. As of May 31, 2014, we had principal of $1,055.0 million of long-term borrowings outstanding under our Term Loan Facility and the Notes. Our net total available borrowings under our Revolving Facility was $100 million as of May 31, 2014.
We expect that recurring capital expenditures during fiscal 2015 will range from $10 million to $15 million. These expenditures will be used to purchase equipment that increases or enhances capacity and productivity, and to upgrade certain financial systems.
Management believes that existing cash and cash equivalent balances, cash provided from operations, and borrowings available under the Revolving Facility of our Senior Credit Facilities will provide sufficient liquidity to meet the operating and capital expenditure needs for existing operations during the next twelve months.
Contractual Obligations and Commercial Commitments
Contractual obligations and commercial commitments for the next five years are detailed in the table below:
Contractual Obligations |
Payments Due by Period |
|||||||||||||||||||
Total |
Less than 1 year |
1-3 years |
4 - 5 years |
After 5 years |
||||||||||||||||
Senior Credit Facilities (1) (2) |
$ | 655,044 | 6,632 | 13,264 | 635,148 | - | ||||||||||||||
Notes (2) |
400,000 | - | - | - | 400,000 | |||||||||||||||
Purchase obligations |
46,253 | 20,773 | 10,619 | 8,011 | 6,850 | |||||||||||||||
Operating and capital leases |
31,866 | 4,345 | 7,877 | 6,730 | 12,914 | |||||||||||||||
Acquisition costs for earn-out provision (4) |
11,300 | - | 4,490 | 6,797 | 13 | |||||||||||||||
Interest (3) |
390,816 | 78,985 | 156,108 | 133,473 | 22,250 | |||||||||||||||
Total contractual cash obligations |
$ | 1,535,279 | 110,735 | 192,358 | 790,159 | 442,027 |
(1) |
The Senior Credit Facilities are comprised of a $655.0 million Term Loan Facility and a $100.0 million Revolving Facility. These are minimum scheduled payments of the Term Loan Facility. |
(2) |
Amounts shown do not include interest. |
(3) |
Interest on the Term Loan Facility is computed based on the scheduled loan balance multiplied by the minimum rate currently required for a LIBOR loan under the credit agreement. Interest on the Notes is computed using the stated interest rate. |
(4) |
This earn-out provision is calculated using the present value of the expected (probability-weighted) payments based on the likelihood of achieving each of the financial performance targets. The total cash payments will total $18.0 million assuming that the full earn-out amount is achieved. |
In addition to the obligations in the table above, approximately $14.5 million of unrecognized tax benefits, including accrued interest of $1.6 million, have been recorded as liabilities in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes”, and we are uncertain as to if or when such amounts may be settled. However, as none of these amounts are expected to be settled within the current period, all amounts are classified as long-term. We recorded $4.1 million as an offset to long-term deferred tax liabilities and $10.4 million in other long-term liabilities.
The expected timing of payment of the obligations discussed above is estimated based on current information. The timing of payments and actual amounts paid may differ depending on the timing of receipt of services, or, for some obligations, changes to agreed-upon amounts.
Off-Balance Sheet Arrangements
We have no off-balance sheet financial arrangements as of May 31, 2014.
Non-GAAP Disclosures
EBITDA and Adjusted EBITDA are both non-GAAP financial measures and are presented in this report because we consider them important supplemental measures of our performance and believe that they are frequently used by interested parties in the evaluation of companies in the industry. EBITDA, as we use it, is net income (loss) before interest, taxes, depreciation and amortization. We believe that the presentation of EBITDA enhances an investor’s understanding of our financial performance. Adjusted EBITDA is calculated in a similar manner as EBITDA except that certain non-cash charges, unusual or non-recurring items and other items that we believe are not representative of our core business are excluded. We believe that Adjusted EBITDA is also a useful financial metric to assess our operating performance from period to period. EBITDA and Adjusted EBITDA do not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity or any other performance measure derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• |
EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments; |
• |
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs; |
• |
EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and |
• |
EBITDA and Adjusted EBITDA can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments, limiting its usefulness as a comparative measure. |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in our business. We compensate for these limitations by relying primarily on the GAAP results and using EBITDA and Adjusted EBITDA as supplemental information. Adjusted EBITDA for the fiscal year ended May 31, 2014, May 31, 2013 and for fiscal 2012 separated into the Successor and Predecessor periods is calculated as follows:
Successor |
Predecessor |
|||||||||||||||
Year Ended |
August 20, 2011 to |
June 1, 2011 to |
||||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
|||||||||||||
Net loss |
$ | (182,257 | ) | (39,142 | ) | (49,647 | ) | (6,374 | ) | |||||||
Interest expense (income), net |
88,268 | 90,802 | 77,041 | (142 | ) | |||||||||||
Income tax (benefit) expense |
(15,916 | ) | (24,566 | ) | (31,546 | ) | 2,681 | |||||||||
Depreciation and amortization* |
71,287 | 71,746 | 53,650 | 4,264 | ||||||||||||
EBITDA |
(38,618 | ) | 98,840 | 49,498 | 429 | |||||||||||
Adjustments to EBITDA: |
||||||||||||||||
Stock-based compensation (i) |
1,512 | 1,423 | 753 | 16,233 | ||||||||||||
Acquisition expenses, net (ii) |
(2,397 | ) | 3,072 | 665 | 15,906 | |||||||||||
Sponsor fee (iii) |
3,916 | 4,390 | 3,055 | 106 | ||||||||||||
Non-cash impact of purchase accounting (iv) |
3,284 | 2,119 | 22,183 | 2,379 | ||||||||||||
Impairments |
160,150 | 3,500 | - | - | ||||||||||||
Loss on extinguishment of debt |
- | 9,111 | - | - | ||||||||||||
Certain non-recurring expenses and other (v) |
13,903 | 17,368 | 32,953 | 2,771 | ||||||||||||
Adjusted EBITDA |
$ | 141,750 | 139,823 | 109,107 | 37,824 |
* Depreciation and amortization related to purchase accounting is reflected below on the line titled Non-cash impact of purchase accounting (v).
i. |
Represents non-cash stock-based compensation. |
ii. |
Represents non-recurring items related to acquisition activities including legal, accounting and other costs. The items included in fiscal 2014 also include the non-cash gains resulting from decreases in the contingent consideration liability related to the LIFECODES acquisition. |
iii. |
Represents management fees and other charges associated with a management services agreement with the Sponsor. |
iv. |
Represents non-cash expenses, such as inventory valuation adjustments, primarily incurred as a result of the LIFECODES acquisition. |
v. |
Represents non-recurring or non-cash items not included in captions above including personnel and business optimization costs, and the effect of the change in estimate in the allowance for doubtful accounts recorded in fiscal 2014 which decreased the adjustment for non-recurring expenses and non-cash items by $1.9 million for that period. |
In fiscal 2014, we revised the presentation of EBITDA and Adjusted EBITDA to include all of the depreciation and amortization expense on a single line and to exclude the adjustment for deferred revenue related to the acquisition of Immucor that was previously included in item v. of the calculation for all periods presented. The deferred revenue adjustment increased Adjusted EBITDA to reflect certain revenue items that were written-off in fiscal 2012 as a result of the acquisition of Immucor to increase the comparability of Adjusted EBITDA reported in fiscal 2012 with that reported in fiscal 2011. Management has determined that this adjustment is not as relevant for comparability purposes on a go-forward basis, and has therefore excluded it from the Adjusted EBITDA presentation. The following table is a reconciliation of Adjusted EBITDA that was previously reported and that presented in the table above for the fiscal year ended May 31, 2013 and for fiscal 2012 separated into the Successor and Predecessor periods are as follows (in thousands):
Successor |
Predecessor |
|||||||||||
Year Ended |
August 20, 2011 to |
June 1, 2011 to |
||||||||||
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
||||||||||
Adjusted EBITDA as previously presented |
$ | 142,656 | 112,093 | 37,969 | ||||||||
Less: Deferred revenue adjustment |
2,833 | 2,986 | 145 | |||||||||
Adjusted EBITDA as presented in the table above |
$ | 139,823 | 109,107 | 37,824 |
Under the Revolving Facility, the senior secured leverage ratio is the sole financial covenant. The senior secured leverage ratio is defined by our credit agreement governing the Senior Credit Facilities as consolidated senior secured net debt divided by the total of the last twelve months Adjusted EBITDA. Adjusted EBITDA used in this leverage ratio is calculated in a similar manner to that included in the table presented above, except that it includes certain additional adjustments such as projected cost savings and synergies calculated on a pro forma basis that we expect to realize in future periods related to actions already taken or expected to be taken within twelve months of the end of the applicable period, including the LIFECODES acquisition and related initiatives, and the deferred revenue adjustment described above. As of May 31, 2014, we were in compliance with our senior secured net leverage ratio covenant.
Critical Accounting Policies and Estimates
General
We have identified the policies below as critical to our business operations and the understanding of our financial statements. The impact and any associated risks related to these policies on our business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the notes to the consolidated financial statements included with this report. We believe that our most critical accounting policies and estimates relate to the following:
|
i. |
Revenue recognition |
|
ii. |
Trade accounts receivable and allowance for doubtful accounts |
|
iii. |
Inventories |
|
iv. |
Goodwill |
|
v. |
Income taxes |
i) Revenue Recognition
Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) Topic No. 605, “Revenue Recognition,” when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services are rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.
We enter into arrangements in which we commit to delivering multiple products or services to our customers. In these cases, total arrangement consideration is allocated to all deliverables, which primarily include the delivery of products such as reagents and part kits, instrument (sold and leased) and the performance of services such as training and general support services, based on their relative selling prices. The following hierarchy is used to determine the selling price to be used for allocating revenue to deliverables: (i) vendor specific objective evidence (“VSOE”) of fair value for reagents and general support services, (ii) third-party evidence of selling price (“TPE”), and (iii) management’s best estimate of selling price (“MBESP”) for all other deliverables. VSOE generally exists only when we sell the deliverable separately and it is the price actually charged by us for that deliverable. TPE represents the selling price of a similar product or service by another vendor. MBESPs reflect management’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.
ii) Trade Accounts Receivable and Allowance for Doubtful Accounts
The allowance for doubtful accounts represents a reserve for estimated losses resulting from the inability of our customers to pay their debts. The collectability of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns. If it is determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material events impacting its business, a specific allowance for doubtful accounts is recorded to reduce the related receivable to the amount expected to be recovered.
iii) Inventories
Typically inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value) net of reserves. We record adjustments to the carrying value of inventory based upon assumptions about historic usage, future demand, and market conditions.
In connection with the Acquisition of Immucor on August 19, 2011, a fair value adjustment of approximately $24.4 million increased inventory to fair value, which was greater than replacement cost. As of May 31, 2012, all of the fair value adjustment had been expensed through cost of sales in the Successor fiscal 2012 period, and the inventory was again stated at the lower of cost (first-in, first-out basis) or market (net realizable value) net of reserves.
In connection with the LIFECODES acquisition on March 22, 2013, a fair value adjustment of approximately $4.5 million increased inventory to fair value, which was greater than replacement cost. As of May 31, 2013, approximately $1.7 million of the fair value adjustment was expensed through cost of sales in the fiscal 2013 period. The remaining fair value adjustment was expensed through cost of sales by the end of the second quarter of fiscal 2014, at which time inventories were again stated at the lower of cost or market, net of reserves.
iv) Goodwill
Consistent with ASC 350, “Intangibles – Goodwill and Other,” goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually or more frequently if impairment indicators arise. Intangible assets that have finite lives are amortized over their useful lives.
We evaluate the carrying value of goodwill during the fourth quarter of each fiscal year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired we first assesses qualitative factors to determine if it is more likely than not (defined as 50% or more) that the fair value of the reporting unit is less than its carrying amount. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, no additional steps are taken. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we then compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using primarily the income, or discounted cash flows, approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
v) Income Taxes
Deferred income taxes are computed using the asset and liability method. We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. The value of our deferred tax assets assumes that we will be able to generate sufficient future taxable income in applicable tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against deferred tax assets resulting in additional income tax expense in our consolidated statements of operations. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, and we consider the Company’s history of taxable income (loss), the scheduled reversal of deferred tax liabilities, projected future taxable income, carry-back opportunities, and tax-planning strategies in making this assessment. Management assesses the need for additional valuation allowances quarterly.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Although ASC 740, “Income Taxes,” provides clarification on the accounting for uncertainty in income taxes recognized in the financial statements, the threshold and measurement attribute will continue to require significant judgment by management. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations.
Effective with the Immucor Acquisition, our taxable income or loss is included in the consolidated income tax returns of Holdings. Current and deferred income taxes are allocated to the members of the consolidated group as if each member were a separate taxpayer.
Recently Issued Accounting Standards
Accounting Changes Recently Adopted
In the first quarter of 2014, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210) (“ASU 2011-11”) which requires an entity to disclose information about offsetting and related arrangements to ensure that the users of our financial statements can understand the effect that offsetting has on our financial position. The adoption of ASU 2011-11 did not have a material impact on our consolidated financial statements.
In the first quarter of 2014, we adopted the FASB ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the FASB determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. The adoption of ASU 2013-01 did not have a material impact on our consolidated financial statements.
In the first quarter of 2014, we adopted the FASB ASU No. 2013-02: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”) which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements.
In the first quarter of 2014, we adopted the FASB ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes ("ASU 2013- 10"). ASU 2013-10 permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the United States Treasury rate and London Interbank Offered Rate ("LIBOR"). In addition, the restriction on using different benchmark rates for similar hedges is removed. The adoption of ASU 2013-10 did not have a material impact on our consolidated financial statements.
In the second quarter of 2014, we adopted the FASB ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). The amendments in ASU 2013-04 provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The adoption of ASU 2013-04 did not have a material impact on our consolidated financial statements.
In the second quarter of 2014, we adopted the FASB ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force) (“ASU 2013-05”). ASU 2013-05 clarifies that when a parent reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to apply the guidance in ASC 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The adoption of ASU 2013-05 did not have a material impact on our consolidated financial statements.
In the second quarter of 2014, we adopted the FASB ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 amends accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. This new guidance requires entities, if certain criteria are met, to present an unrecognized tax benefit, or portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The adoption of ASU 2013-11 did not have a material impact on our consolidated financial statements.
In the fourth quarter of 2014, we adopted the FASB ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The update revises the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. We elected early adoption of this standard for disposals subsequent to May 31, 2014. The adoption of ASU 2014-08 did not have a material impact on our consolidated financial statements.
Accounting Changes Not Yet Adopted
In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. We will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, which corresponds to our first quarter of fiscal 2018. No early adoption is permitted under this standard, and it is to be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the effect of the adoption of ASU 2014-09 on our consolidated financial statements.
Item 7A. — Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risks for foreign currency exchange rates. Our financial instruments that can be affected by foreign currency fluctuations and exchange risks consist primarily of cash and cash equivalents, and trade receivables and trade payables denominated in currencies other than the U.S. dollar. We attempt to manage our exposure primarily by balancing assets and liabilities and maintaining cash positions in foreign currencies only at levels necessary for operating purposes. It has not been our practice to actively hedge our foreign subsidiaries’ assets or liabilities denominated in foreign currencies. To manage these risks, we regularly evaluate our exposure and, if warranted, may enter into various derivative transactions when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes. As part of accumulated other comprehensive income in shareholders’ equity, we recorded a foreign currency translation gain of $4.3 million in fiscal 2014, gain of $1.6 million in fiscal 2013, and losses of $18.4 million in the Successor fiscal 2012 period, and $2.2 million in the Predecessor fiscal 2012 period.
We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate risk relates to the term loan outstanding under our Senior Credit Facilities. We have approximately $655.1 million outstanding under our Senior Credit Facilities, bearing interest at variable rates. A 0.125% increase in these floating rates applicable to the indebtedness outstanding under our Senior Credit Facilities would increase should interest rates exceed the 1.25% floor our pro forma annual interest expense by approximately $0.8 million, assuming there are no borrowings under the Revolving Credit Facility. The Senior Credit Facilities also allow up to an aggregate of $100.0 million (or a greater amount if we meet specified financial ratios) in uncommitted incremental facilities, the availability of which are subject to our meeting certain conditions, bearing interest at variable rates. We have interest rate swaps on approximately 37% of our outstanding Term Loan Facility. These swaps reduce the risk of variability in the interest rates by fixing a portion of the interest costs. We consider these swaps to be effective hedges and they are marked-to-market with the changes in other comprehensive income.
Item 8. — Financial Statements and Supplementary Data.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
Page |
|
|
|
|
Report of Grant Thornton LLP Independent Registered Public Accounting Firm |
35 |
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|
|
Consolidated Balance Sheets as of May 31, 2014 and as of May 31, 2013 |
36 |
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|
Consolidated Statements of Operations for the fiscal year ended May 31, 2014, fiscal year ended May 31, 2013, periods August 20, 2011 to May 31, 2012 (Successor), and June 1, 2011 to August 19, 2011 (Predecessor) |
37 |
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|
|
|
Consolidated Statements of Comprehensive (Loss) Income for the fiscal year ended May 31, 2014, fiscal year ended May 31, 2013, periods August 20, 2011 to May 31, 2012 (Successor), and June 1, 2011 to August 19, 2011 (Predecessor) |
38 |
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Consolidated Statements of Changes in Shareholders’ Equity for the fiscal year ended May 31, 2014, fiscal year ended May 31, 2013, periods August 20, 2011 to May 31, 2012 (Successor), and June 1, 2011 to August 19, 2011 (Predecessor) |
39 |
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|
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Consolidated Statements of Cash Flows for the fiscal year ended May 31, 2014, fiscal year ended May 31, 2013, periods August 20, 2011 to May 31, 2012 (Successor), and June 1, 2011 to August 19, 2011 (Predecessor) |
40 |
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Notes to Consolidated Financial Statements |
41 |
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Consolidated Financial Statement Schedule |
87 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholder
Immucor, Inc.
We have audited the accompanying consolidated balance sheets of Immucor, Inc. (a Georgia corporation) and subsidiaries (the “Company”) as of May 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for the years ended May 31, 2014, 2013, and the periods from August 20, 2011 through May 31, 2012 (Successor) and June 1, 2011 through August 19, 2011 (Predecessor). Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Immucor, Inc. and subsidiaries as of May 31, 2014 and 2013, and the results of their operations and their cash flows for the years ended May 31, 2014 and 2013, the periods from August 20, 2011 through May 31, 2012 (Successor) and June 1, 2011 through August 19, 2011 (Predecessor), in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Atlanta, Georgia
August 26, 2014
ITEM 1. Consolidated Financial Statements
IMMUCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
May 31, 2014 |
May 31, 2013 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ | 23,621 | 29,388 | |||||
Trade accounts receivable, net of allowance for doubtful accounts of $898 and $815 at May 31, 2014 and 2013, respectively |
69,629 | 68,086 | ||||||
Inventories |
49,151 | 45,941 | ||||||
Deferred income tax assets, current portion |
8,251 | 5,290 | ||||||
Prepaid expenses and other current assets |
12,582 | 11,577 | ||||||
Total current assets |
163,234 | 160,282 | ||||||
PROPERTY AND EQUIPMENT, net |
76,311 | 76,381 | ||||||
GOODWILL |
851,563 | 1,003,463 | ||||||
INTANGIBLE ASSETS, net |
692,870 | 714,603 | ||||||
DEFERRED FINANCING COSTS, net |
33,116 | 39,449 | ||||||
OTHER ASSETS |
7,320 | 6,792 | ||||||
Total assets |
$ | 1,824,414 | 2,000,970 | |||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
$ | 15,665 | 13,638 | |||||
Accrued interest and interest rate swap liability |
19,605 | 20,084 | ||||||
Accrued expenses and other current liabilities |
23,716 | 26,654 | ||||||
Income taxes payable |
4,927 | 3,873 | ||||||
Deferred revenue, current portion |
2,813 | 2,252 | ||||||
Current portion of long-term debt, net of debt discounts |
4,591 | 6,712 | ||||||
Total current liabilities |
71,317 | 73,213 | ||||||
LONG-TERM DEBT, net of debt discounts |
1,037,183 | 1,039,278 | ||||||
DEFERRED REVENUE |
86 | 161 | ||||||
DEFERRED INCOME TAX LIABILITIES |
223,379 | 231,040 | ||||||
OTHER LONG-TERM LIABILITIES |
23,833 | 12,572 | ||||||
Total liabilities |
1,355,798 | 1,356,264 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 22) |
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SHAREHOLDERS' EQUITY: |
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Common stock, $0.00 par value, 100 shares authorized, issued and outstanding as of May 31, 2014 and May 31, 2013, respectively |
- | - | ||||||
Additional paid-in capital |
753,147 | 751,635 | ||||||
Accumulated deficit |
(271,264 | ) | (89,007 | ) | ||||
Accumulated other comprehensive loss |
(13,267 | ) | (17,922 | ) | ||||
Total shareholders' equity |
468,616 | 644,706 | ||||||
Total liabilities and shareholders' equity |
$ | 1,824,414 | 2,000,970 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
IMMUCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Successor |
Predecessor |
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August 20, 2011 |
June 1, 2011 |
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Year Ended |
through |
through |
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May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
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NET SALES |
$ | 388,056 | 347,788 | 261,814 | 74,910 | |||||||||||
COST OF SALES (exclusive of amortization shown separately below) |
139,634 | 120,027 | 105,698 | 22,955 | ||||||||||||
GROSS MARGIN |
248,422 | 227,761 | 156,116 | 51,955 | ||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Research and development |
29,070 | 21,313 | 13,929 | 4,895 | ||||||||||||
Selling and marketing |
59,057 | 50,129 | 32,913 | 10,510 | ||||||||||||
Distribution |
20,165 | 18,718 | 14,333 | 3,952 | ||||||||||||
General and administrative |
41,603 | 42,801 | 36,954 | 19,312 | ||||||||||||
Amortization expense |
52,965 | 50,765 | 39,224 | 931 | ||||||||||||
Acquisition-related items |
(4,638 | ) | 2,616 | 1,362 | 18,863 | |||||||||||
Impairment loss |
160,150 | 3,500 | - | - | ||||||||||||
Certain litigation expenses |
- | - | 22,000 | - | ||||||||||||
Loss on disposition of fixed assets |
- | 1,175 | - | - | ||||||||||||
Total operating expenses |
358,372 | 191,017 | 160,715 | 58,463 | ||||||||||||
(LOSS) INCOME FROM OPERATIONS |
(109,950 | ) | 36,744 | (4,599 | ) | (6,508 | ) | |||||||||
NON-OPERATING (EXPENSE) INCOME |
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Interest income |
36 | 28 | 7 | 142 | ||||||||||||
Interest expense |
(88,304 | ) | (90,830 | ) | (77,048 | ) | - | |||||||||
Loss on extinguishment of debt |
- | (9,111 | ) | - | - | |||||||||||
Other, net |
45 | (539 | ) | 447 | 2,673 | |||||||||||
Total non-operating (expense) income |
(88,223 | ) | (100,452 | ) | (76,594 | ) | 2,815 | |||||||||
LOSS BEFORE INCOME TAXES |
(198,173 | ) | (63,708 | ) | (81,193 | ) | (3,693 | ) | ||||||||
(BENEFIT) PROVISION FOR INCOME TAXES |
(15,916 | ) | (24,566 | ) | (31,546 | ) | 2,681 | |||||||||
NET LOSS |
$ | (182,257 | ) | (39,142 | ) | (49,647 | ) | (6,374 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
IMMUCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Successor |
Predecessor |
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August 20, 2011 |
June 1, 2011 |
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Year Ended |
through |
through |
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May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
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NET LOSS |
$ | (182,257 | ) | (39,142 | ) | (49,647 | ) | (6,374 | ) | |||||||
OTHER COMPREHENSIVE INCOME (LOSS) , net of tax: |
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Foreign currency translation adjustment |
4,315 | 1,644 | (18,385 | ) | (2,153 | ) | ||||||||||
Changes in fair value of cash flow hedges: |
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Portion of cash flow hedges recognized in other comprehensive income |
(313 | ) | (535 | ) | (2,003 | ) | - | |||||||||
Less: reclassification adjustment for losses included in net income |
653 | 712 | 645 | - | ||||||||||||
Net changes in fair value of cash flow hedges |
340 | 177 | (1,358 | ) | - | |||||||||||
OTHER COMPREHENSIVE INCOME (LOSS) |
4,655 | 1,821 | (19,743 | ) | (2,153 | ) | ||||||||||
COMPREHENSIVE LOSS |
$ | (177,602 | ) | (37,321 | ) | (69,390 | ) | (8,527 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
IMMUCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Accumulated |
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Additional |
|
Other |
Total |
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Common Stock |
Paid-In |
Retained |
Comprehensive |
Shareholders’ |
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Shares |
Amount |
Capital |
Earnings |
Income (Loss) |
Equity |
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Predecessor: | ||||||||||||||||||||||||
BALANCE, MAY 31, 2011 |
70,367 | $ | 7,037 | 45,729 | 499,152 | 16,954 | 568,872 | |||||||||||||||||
Shares issued under employee stock plan |
415 | 41 | 485 | - | - | 526 | ||||||||||||||||||
Share-based compensation expense |
- | - | 16,233 | - | - | 16,233 | ||||||||||||||||||
Stock repurchases and retirements |
(103 | ) | (10 | ) | (448 | ) | - | - | (458 | ) | ||||||||||||||
Net loss |
- | - | - | (6,374 | ) | - | (6,374 | ) | ||||||||||||||||
Other comprehensive loss (net of taxes): |
||||||||||||||||||||||||
Foreign currency translation adjustments |
- | - | - | - | (2,153 | ) | (2,153 | ) | ||||||||||||||||
BALANCE, August 19, 2011 |
70,679 | $ | 7,068 | 61,999 | 492,778 | 14,801 | 576,646 | |||||||||||||||||
Successor: |
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BALANCE, AUGUST 20, 2011 |
- | $ | - | - | - | - | - | |||||||||||||||||
Capital contribution from Parent, net of costs (1) |
100 | - | 706,233 | - | 706,233 | |||||||||||||||||||
Other |
- | - | - | (218 | ) | - | (218 | ) | ||||||||||||||||
Share-based compensation expense |
- | - | 753 | - | - | 753 | ||||||||||||||||||
Net loss |
- | - | - | (49,647 | ) | - | (49,647 | ) | ||||||||||||||||
Other comprehensive loss (net of taxes): |
||||||||||||||||||||||||
Foreign currency translation adjustments |
- | - | - | - | (18,385 | ) | (18,385 | ) | ||||||||||||||||
Cash flow hedges, net of tax |
- | - | - | - | (1,358 | ) | (1,358 | ) | ||||||||||||||||
BALANCE, MAY 31, 2012 |
100 | - | 706,986 | (49,865 | ) | (19,743 | ) | 637,378 | ||||||||||||||||
Capital contribution from Parent, net of costs |
- | - | 42,500 | - | 42,500 | |||||||||||||||||||
Share-based compensation expense |
- | - | 1,423 | - | - | 1,423 | ||||||||||||||||||
Net loss |
- | - | - | (39,142 | ) | - | (39,142 | ) | ||||||||||||||||
Tax benefit from tax deduction contributed by Holdings |
- | - | 726 | - | - | 726 | ||||||||||||||||||
Other comprehensive loss (net of taxes): |
||||||||||||||||||||||||
Foreign currency translation adjustments |
- | - | - | - | 1,644 | 1,644 | ||||||||||||||||||
Cash flow hedges, net of tax |
- | - | - | - | 177 | 177 | ||||||||||||||||||
BALANCE, MAY 31, 2013 |
100 | - | 751,635 | (89,007 | ) | (17,922 | ) | 644,706 | ||||||||||||||||
Share-based compensation expense |
- | - | 1,512 | - | - | 1,512 | ||||||||||||||||||
Net loss |
- | - | - | (182,257 | ) | - | (182,257 | ) | ||||||||||||||||
Foreign currency translation adjustments |
- | - | - | - | 4,315 | 4,315 | ||||||||||||||||||
Cash flow hedges, net of tax |
- | - | - | - | 340 | 340 | ||||||||||||||||||
BALANCE, MAY 31, 2014 |
100 | $ | - | 753,147 | (271,264 | ) | (13,267 | ) | 468,616 |
(1) |
In connection with the Immucor Acquisition, the Sponsor incurred certain costs, aggregating to $28.9 million in fiscal 2012, which were either (i) paid for on behalf of the Sponsor or (ii) reimbursed to the Sponsor by the Company. The costs that were reimbursed to the Sponsor are reflected as a reduction of stockholders’ equity in the consolidated financial statements of the Company. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
IMMUCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Successor |
Predecessor |
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August 20, 2011 |
June 1, 2011 |
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Year Ended |
through |
through |
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May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
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OPERATING ACTIVITIES: |
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Net loss |
$ | (182,257 | ) | (39,142 | ) | (49,647 | ) | (6,374 | ) | |||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
71,287 | 71,746 | 54,745 | 4,321 | ||||||||||||
Noncash interest expense |
8,761 | 7,471 | 5,656 | - | ||||||||||||
Inventory fair value adjustment |
2,889 | 1,745 | 24,439 | - | ||||||||||||
Loss on disposition and retirement of fixed assets |
93 | 1,306 | 417 | 135 | ||||||||||||
Loss on extinguishment of debt |
- | 9,111 | - | - | ||||||||||||
Asset impairment loss |
160,150 | 3,500 | - | - | ||||||||||||
(Recoveries) provision for doubtful accounts |
(1,666 | ) | 203 | 612 | 185 | |||||||||||
Share-based compensation expense |
1,512 | 1,423 | 753 | 16,233 | ||||||||||||
Deferred income taxes |
(21,059 | ) | (28,573 | ) | (36,423 | ) | (3,976 | ) | ||||||||
Change in fair value of contingent consideration |
(4,638 | ) | 104 | - | - | |||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
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Accounts receivable, trade |
2,154 | 7,665 | (5,347 | ) | (3,938 | ) | ||||||||||
Income taxes |
(179 | ) | 1,976 | (414 | ) | 3,317 | ||||||||||
Inventories |
(15,589 | ) | (9,774 | ) | (12,220 | ) | (3,242 | ) | ||||||||
Other assets |
(1,301 | ) | 105 | (2,469 | ) | 6,459 | ||||||||||
Accounts payable |
1,700 | (305 | ) | 5,601 | (4,023 | ) | ||||||||||
Deferred revenue |
413 | (651 | ) | (910 | ) | (920 | ) | |||||||||
Accrued expenses and other liabilities |
3,331 | (3,376 | ) | 5,614 | 17,411 | |||||||||||
Cash provided by (used in) operating activities |
25,601 | 24,534 | (9,593 | ) | 25,588 | |||||||||||
INVESTING ACTIVITIES: |
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Purchases of property and equipment |
(9,193 | ) | (9,639 | ) | (5,964 | ) | (2,265 | ) | ||||||||
Receipt from acquisition of business related to finalizing certain working capital adjustments |
1,151 | - | - | - | ||||||||||||
Acquisitions of businesses, net of cash acquired |
(17,151 | ) | (84,762 | ) | - | - | ||||||||||
Acquisition of Immucor, Inc., net of cash acquired |
- | - | (1,939,387 | ) | - | |||||||||||
Purchase of licensing agreement |
- | - | (99 | ) | - | |||||||||||
Cash used in investing activities |
(25,193 | ) | (94,401 | ) | (1,945,450 | ) | (2,265 | ) | ||||||||
FINANCING ACTIVITIES: |
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Proceeds from long-term debt |
- | 338,076 | 991,406 | - | ||||||||||||
Proceeds from capital contributions, net of costs |
- | 42,500 | 706,233 | - | ||||||||||||
Payment of debt issuance costs |
- | (11,412 | ) | (42,474 | ) | - | ||||||||||
Repayments of long-term debt |
(6,674 | ) | (288,332 | ) | (3,075 | ) | - | |||||||||
Proceeds from Revolving Credit Facility |
- | 49,000 | 11,000 | - | ||||||||||||
Repayments of Revolving Credit Facility |
- | (49,000 | ) | (11,000 | ) | - | ||||||||||
Repurchase of common stock |
- | - | - | (458 | ) | |||||||||||
Proceeds from exercise of stock options |
- | - | - | 524 | ||||||||||||
Cash (used in) provided by financing activities |
(6,674 | ) | 80,832 | 1,652,090 | 66 | |||||||||||
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
499 | (155 | ) | (1,432 | ) | (3,029 | ) | |||||||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(5,767 | ) | 10,810 | (304,385 | ) | 20,360 | ||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
29,388 | 18,578 | 322,963 | 302,603 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 23,621 | 29,388 | 18,578 | 322,963 | |||||||||||
SUPPLEMENTAL INFORMATION: |
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Income taxes paid, net of refunds |
$ | 5,423 | 4,161 | 8,918 | 3,414 | |||||||||||
Interest paid |
79,762 | 85,033 | 50,366 | - | ||||||||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
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Movement from inventory to property and equipment of instruments placed on rental agreements |
$ | 10,383 | 12,037 | 12,392 | 1,618 | |||||||||||
Exchange of debt instruments due to debt amendment August 2012 |
- | 468,241 | - | - | ||||||||||||
Exchange of debt instruments due to debt amendment February 2013 |
- | 467,406 | - | - | ||||||||||||
Tax benefit from tax deductions contributed by IVD Holdings Inc. |
- | 726 | - | - |
The accompanying notes are an integral part of these Consolidated Financial Statements.
IMMUCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Business – Founded in 1982, Immucor, Inc., a Georgia corporation (“Immucor” or the “Company”), develops, manufactures and sells transfusion and transplantation diagnostics products used by hospitals, donor centers and reference laboratories around the world. Our products are used in a number of tests performed in the typing and screening of blood, organs or stem cells to identify certain properties of the cell and serum components of human blood and tissue to ensure donor-recipient compatibility for blood transfusion, and organ transplantations. The Company operates manufacturing facilities in North America with both direct affiliate offices and third-party distribution arrangements worldwide.
Basis of Presentation – The Company (Immucor, Inc. together with its wholly owned subsidiaries) was acquired on August 19, 2011 through a merger transaction with IVD Acquisition Corporation (“Merger Sub”), a wholly owned subsidiary of IVD Intermediate Holdings B Inc. (the “Parent”). The Parent is a wholly owned indirect subsidiary of IVD Holdings Inc. (“Holdings”) which was formed by investment funds affiliated with TPG Capital, L.P. (“the Sponsor”). The acquisition was accomplished through a merger of the Merger Sub with and into the Company, with the Company being the surviving company (the “Immucor Acquisition”). As a result of the merger, the Company became a wholly owned subsidiary of Parent. Prior to August 19, 2011, the Company operated as a public company with common stock traded on the NASDAQ Stock Market.
The Company continued as the same legal entity after the Immucor Acquisition, however, a new accounting basis was established upon accounting for the merger as a business combination. The accompanying consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows are presented for the fiscal year ended May 31, 2014, fiscal year ended May 31, 2013, and fiscal 2012 which is presented in two periods: the Predecessor fiscal 2012 period (June 1, 2011 to August 19, 2011) and the Successor fiscal 2012 period (August 20, 2011 to May 31, 2012), which relate to the period preceding the Immucor Acquisition and the period succeeding the Immucor Acquisition, respectively. Although the accounting policies followed by the Company are consistent for the Predecessor and Successor periods, financial information for such periods has been prepared under two different historical-cost bases of accounting and is therefore not comparable. The results of the periods presented are not necessarily indicative of the results that may be achieved for future periods. Certain reclassifications have been made to the fiscal 2013 consolidated financial statements to conform to the 2014 presentation. We have also performed an evaluation of subsequent events through the date the financial statements were issued.
Consolidation Policy – The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Share-Based Compensation – Consistent with the provisions of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation,” compensation cost for grants of all share-based payments is based on the estimated grant date fair value. The value of share-based compensation is attributed to expense over the requisite service period using the straight-line method.
The fair value of the Company’s share-based payment awards for the Successor periods is estimated using a Monte Carlo simulation approach. The Monte Carlo method is used to calculate the fair value of an option with multiple sources of uncertainty by creating random price paths for the underlying share and expected future value, then discounting the average of those paths to determine the fair value. Key input assumptions used to estimate the fair value of stock options and stock appreciation rights include the initial value of common stock, expected term until the exercise of the equity award, the expected volatility of the equity, risk-free rates of return and dividend yields, if any.
The fair value of the Company’s share-based payment awards for the Predecessor periods was estimated using the Black-Scholes option-pricing model (the “Black-Scholes model”). The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of certain assumptions, and changes in the assumptions could have materially affected the fair value estimates.
The Company calculated its additional paid in capital pool (“APIC pool”) based on the actual income tax benefits received from exercises of share-based compensation awards granted after the effective date of ASC 718 using the long method. As of the date of the Immucor Acquisition, the APIC pool was reset to zero.
Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. In order to mitigate the concentration of credit risk, the Company places its cash and cash equivalents with multiple financial institutions. Cash and cash equivalents were $23.6 million and $29.4 million at May 31, 2014 and 2013, respectively. Cash and cash equivalents located in the U.S. were approximately 19% and 38% at May 31, 2014 and 2013, respectively.
Concentrations of credit risk with respect to trade accounts receivable are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. At May 31, 2014, 2013 and 2012, no single customer represented more than 10% of total consolidated net sales or trade accounts receivable. The Company controls credit risk through credit limits and monitoring procedures. At May 31, 2014 and 2013, the Company’s net trade accounts receivable balances were $69.6 million and $68.1 million, respectively, with about 50% and 50% of these accounts being of foreign origin, respectively, predominantly European. Companies and government agencies in some European countries require longer payment terms as a part of doing business. This may subject the Company to a higher risk of uncollectibility. This risk is considered when the allowance for doubtful accounts is evaluated. The Company generally does not require collateral from its customers.
During fiscal 2014, the Company reviewed the valuation method used to determine the estimate of our allowance for doubtful accounts and determined that a change in estimate was needed to better reflect the actual bad debt experience. As a result, the Company revised its valuation method, effective November 30, 2013, and reduced the estimate of allowance for doubtful accounts on uncollected receivables. The effect of this change in estimate was a reduction in bad debt expense of $1.9 million, and a decrease in net loss of approximately $1.1 million in fiscal 2014.
Cash and Cash Equivalents – The Company considers deposits and investments with an original maturity of three months or less when purchased to be cash and cash equivalents. Generally, cash and cash equivalents held at financial institutions are in excess of insurance limit. The Company limits its exposure to credit loss by placing its cash and cash equivalents in liquid investments with high quality financial institutions.
Inventories, net – Typically inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value) net of reserves. The Company records adjustments to the carrying value of inventory based upon assumptions about historic usage, future demand, and market conditions.
In connection with the Immucor Acquisition on August 19, 2011, a fair value adjustment of approximately $24.4 million increased inventory to fair value which was greater than replacement cost. As of May 31, 2012, all of the fair value adjustment had been expensed through cost of sales in the Successor fiscal 2012 period, and the inventory was again stated at the lower of cost (first-in, first-out basis) or market (net realizable value) net of reserves.
In connection with the LIFECODES acquisition on March 22, 2013, a fair value adjustment of approximately $4.5 million increased inventory to fair value which was greater than replacement cost. As of May 31, 2013, approximately $1.7 million of the fair value adjustment has been expensed through cost of sales in the fiscal 2013 period. The remaining fair value adjustment was expensed through cost of sales by the end of the second quarter of fiscal 2014, at which time inventories were again stated at the lower of cost or market net of reserves.
Fair Value of Financial Instruments – The Company measures fair value using a three-level hierarchy that prioritizes the inputs used. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are explained in Note 15 of the Company’s consolidated financial statements. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable, accounts payable and other current liabilities approximate fair value because of their short-term nature.
Derivative Instruments – The Company may from time to time use derivatives as a risk management tool to mitigate the potential impact of interest rate and foreign exchange risk. All derivatives are carried at fair value in the Company’s consolidated balance sheets. The Company does not enter into speculative derivatives. The derivatives are cash flow hedges which are considered effective. Changes in fair value are recognized through other comprehensive income. Any portion considered ineffective is recognized directly into operating income.
Property and Equipment, net – Property and equipment is stated at cost less accumulated depreciation. Expenditures for replacements are capitalized, and the replaced items are retired. Normal maintenance and repairs are charged to operations. Major maintenance and repair activities that significantly enhance the useful life of the asset are capitalized. When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. Depreciation is computed using the straight-line method over the estimated lives of the related assets ranging from three to thirty years. Carrying values of these assets are evaluated if impairment indicators arise. On August 19, 2011, in connection with the Immucor Acquisition, property and equipment was adjusted to reflect fair value.
The Company reviews the estimated useful lives of its fixed asses on an ongoing basis. During fiscal 2014, this review indicated that the actual lives of the Company's instrument equipment were longer than the estimated useful lives for depreciation purposes in our financial statements. As a result, the Company changed its estimates of the useful lives of its instrument equipment, effective June 1, 2013, to better reflect the estimated periods during which these assets will remain in service. As a result, the estimated useful lives of these assets increased from approximately 5 years to 10 years. The effect of this change in estimate was a reduction in depreciation expense of $6.3 million and a decrease in net loss of approximately $3.6 million for fiscal 2014, respectively.
Deferred Financing Costs, net – Deferred financing costs are capitalized and are amortized over the life of the related debt agreements using the effective interest rate method, except the Revolving Facility which uses the straight line method. The amortization expense is included in interest expense in the consolidated statements of operations.
Goodwill – Consistent with ASC 350, “Intangibles – Goodwill and Other,” goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually or more frequently if impairment indicators arise. Intangible assets that have finite lives are amortized on a straight line basis over their useful lives.
The Company evaluates the carrying value of goodwill as of March 1st of each fiscal year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired the Company first assesses qualitative factors to determine if it is more likely than not (defined as 50% or more) that the fair value of the reporting unit is less than its carrying amount. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, no additional steps are taken. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company then compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using primarily the income, or discounted cash flows, approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company’s evaluation of goodwill and other intangible assets with indefinite lives completed during fiscal years 2013 and 2012 resulted in no impairment charges, and resulted in $160.0 million in impairment charges in fiscal 2014. Refer to Footnote 7 of the Company’s consolidated financial statements for additional information.
Other Intangible Assets, net – Other intangible assets primarily include customer relationships, deferred licensing costs, existing technology and trade names. These other intangible assets are amortized over their anticipated benefit period. Carrying values of these assets are evaluated when impairment indicators arise. There was no impairment charge related to other intangible assets in fiscal years 2014, 2013 or 2012.
In-process research and development (“IPR&D”) is also included in other intangible assets. IPR&D has an indefinite life until the completion or abandonment of the individual project. When a project is completed, its value will be amortized over the useful life. If a project is abandoned, its value is written off. The carrying value of IPR&D is tested for impairment annually or more frequently if impairment indicators arise. An impairment charge of $0.2 million and $3.5 million was recorded in fiscal 2014 and fiscal 2013, respectively, for IPR&D projects that were determined not to be economically feasible, and therefore were abandoned. There was no impairment charge related to IPR&D during fiscal 2012.
Foreign Currency Translation – The financial statements of foreign subsidiaries have been translated into U.S. Dollars in accordance with ASC 830-30, “Translation of Financial Statements”. The financial position and results of operations of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. Revenues and expenses of such subsidiaries have been translated into U.S. Dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments.
Gains and losses that result from foreign currency transactions are included in “other non-operating (expense) income” in the consolidated statements of operations.
Revenue Recognition — The Company recognizes revenue in accordance with ASC 605, “Revenue Recognition,” when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services are rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured.
The Company enters into arrangements in which the Company commits to delivering multiple products or services to its customers. In these cases, total arrangement consideration is allocated to all deliverables based on their relative selling prices. The following hierarchy is used to determine the selling price to be used for allocating revenue to deliverables: (i) vender specific objective evidence (“VSOE”) of fair value, (ii) third-party evidence of selling price (“TPE”), and (iii) management's best estimate of selling price (“MBESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. TPE represents the selling price of a similar product or service by another vendor. MBESPs reflect management's best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. In determining MBESP, the Company considers the following: (1) pricing practices as they relate to future price increases, (2) the overall economic conditions, and (3) competitor pricing.
The significant deliverables included in the Company's arrangements are the delivery of products such as reagents and part kits, instrument (sold and leased) and the performance of services such as training and general support services. Each of these significant deliverables qualify as separate units of accounting.
The Company recognizes revenue from product sales, such as reagents and part kits, when the goods are shipped or when the goods are delivered, title passes, and risk of loss passes to the customer. The products selling price, which is used to allocate the total arrangement consideration to each deliverable, is based on either VSOE or MBESP. The revenue from instrument sales or leases is recognized when the instrument has been installed and accepted by the customer. The selling price of instrument sales or leases is based on MBESP. Training revenue is recognized as the training services are provided. The selling price of training is based on MBESP. General support service revenue is recognized over the term of the agreement. The selling price of general support services is based on VSOE by reference to the price our customers are required to pay for the general support services when sold separately as renewal agreements.
Shipping and Handling Charges and Sales Tax – The amounts billed to customers for shipping and handling of orders are classified as revenue and reported in the statements of operations as net sales. The costs of handling and shipping customer orders are reported in the operating expense section of the consolidated statements of operations as distribution expense. For fiscal 2014, fiscal 2013, the Successor fiscal 2012 period, and the Predecessor fiscal 2012 period, these costs were $20.2 million, $18.7 million, $14.3 million, and $4.0 million, respectively. Sales taxes invoiced to customers and payable to government agencies are recorded on a net basis with the sales tax portion of a sales invoice directly credited to a liability account and the balance of the sales invoice credited to a revenue account.
Trade Accounts Receivable and Allowance for Doubtful Accounts –The allowance for doubtful accounts represents a reserve for estimated losses resulting from the inability of the Company’s customers to pay their debts. The collectability of trade accounts receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns. If it is determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material events impacting its business, a specific allowance for doubtful accounts is recorded to reduce the related receivable to the amount expected to be recovered. On August 19, 2011, in connection with the Immucor Acquisition, trade accounts receivables were written down to the amount expected to be recovered and the allowance for doubtful accounts was set to zero.
Research and Development costs – Research and development costs are expensed as incurred and are disclosed as a separate line item in the consolidated statements of operations.
Loss contingencies – Certain conditions may exist as of the date the financial statements are issued that may result in a loss to the Company, but which will only be determined and resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss is likely to occur and the amount of the liability can be estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not accrued or disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. Legal costs relating to loss contingencies are expensed as incurred.
Income Taxes – Effective with the Immucor Acquisition, the Company’s taxable income or loss is included in the consolidated income tax returns of Holdings. Current and deferred income taxes are allocated to the members of the consolidated group as if each member were a separate taxpayer.
Deferred income taxes are computed using the asset and liability method. The Company records the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. The value of the Company’s deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in applicable tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company’s consolidated statements of operations. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, and the Company considers the Company’s history of taxable income (loss), the scheduled reversal of deferred tax liabilities, projected future taxable income, carry-back opportunities, and tax-planning strategies in making this assessment. Management assesses the need for additional valuation allowances quarterly.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Although ASC 740, “Income Taxes,” provides clarification on the accounting for uncertainty in income taxes recognized in the financial statements, the threshold and measurement attribute will continue to require significant judgment by management. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on its results of operations.
Business Combinations – Transactions classified as an acquisition of a business are recognized in accordance with ASC 805, “Business Combinations.” Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the acquired assets and liabilities based on estimates of their fair values at the date of the acquisition. Contingent consideration is recognized at the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent payments are recognized in earnings. Any purchase price in excess of these acquired assets and liabilities is recorded as goodwill. The allocation of purchase price in certain circumstances may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.
Impact of Recently Issued Accounting Standards –
Adopted by the Company in fiscal 2014
In the first quarter of 2014, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210) (“ASU 2011-11”) which requires an entity to disclose information about offsetting and related arrangements to ensure that the users of the Company’s financial statements can understand the effect that offsetting has on the Company’s financial position. The adoption of ASU 2011-11 did not have a material impact on the Company’s consolidated financial statements.
In the first quarter of 2014, we adopted FASB ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that are not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the FASB determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. The adoption of ASU 2013-01 did not have a material impact on the Company’s financial position or results of operations.
In the first quarter of 2014, we adopted FASB ASU No. 2013-02: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”) which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements.
In the first quarter of 2014, we adopted FASB ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes ("ASU 2013- 10"). ASU 2013-10 permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the United States Treasury rate and London Interbank Offered Rate ("LIBOR"). In addition, the restriction on using different benchmark rates for similar hedges is removed. The adoption of ASU 2013-10 did not have a material impact on the Company’s consolidated financial statements.
In the second quarter of 2014, we adopted FASB ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). The amendments in ASU 2013-04 provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The adoption of ASU 2013-04 did not have a material impact on the Company’s consolidated financial statements.
In the second quarter of 2014, we adopted FASB ASU 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force) (“ASU 2013-05”). ASU 2013-05 clarifies that when a parent reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to apply the guidance in ASC 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The adoption of ASU 2013-05 did not have a material impact on the Company’s consolidated financial statements.
In the second quarter of 2014, we adopted FASB ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 amends accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. This new guidance requires entities, if certain criteria are met, to present an unrecognized tax benefit, or portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated financial statements.
In the fourth quarter of 2014, we adopted FASB ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The update revises the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The Company elected early adoption of this standard for disposals subsequent to May 31, 2014. The adoption of ASU 2014-08 did not have a material impact on the Company’s consolidated financial statements.
Accounting Changes Not Yet Adopted
In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue recognition, Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. The Company will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, which corresponds to the Company’s first quarter of fiscal 2018. No early adoption is permitted under this standard, and it is to be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the effect of the adoption of ASU 2014-09 on its consolidated financial statements.
2. |
BUSINESS COMBINATIONS |
Business combinations completed in fiscal 2014:
Acquisition of Organ-i – On May 30, 2014, the Company completed the acquisition of Organ-i, Inc. (“Organ-i”) a privately-held company focused on developing non-invasive tests to monitor and predict organ health for transplant recipients. This acquisition expands our product offering for post-transplant testing and directly complements our existing LIFECODES business. The total cash purchase price of this business was $12.0 million plus a potential earn-out of up to $18.0 million if certain product and financial targets during fiscal years 2015 through 2020 are met. Management estimated that the fair value of the contingent consideration arrangement as of the acquisition date was approximately $11.3 million. This was determined by applying a form of the income approach, based on the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the performance targets. The key assumptions were the earn-out period payment probabilities and an appropriate discount rate. These assumptions are considered to be level 3 inputs by ASC Topic 820, Fair Value Measurement, which is not observable in the market. Including the contingent consideration, the aggregate estimated fair value of the consideration paid was approximately $23.3 million. The other identifiable intangible assets including existing technology, IPR&D and non-competition agreements are valued at $26.7 million. Goodwill is valued at $5.8 million and the long-term deferred tax liability is valued at $9.1 million. The purchase price allocation for this acquisition is preliminary as of May 31, 2014 and is subject to material valuation adjustments or tax matters that may be identified within the measurement period. The goodwill arising from this acquisition is not deductible for tax purpose. The operating results of the acquired business are not reflected in the Company’s consolidated results of operations since the acquisition occurred on the last business day of fiscal 2014. The contingent consideration liability is considered long-term and is included in long-term liabilities in the Company’s consolidated balance sheet as of May 31, 2014.
Acquisition of LIFECODES distribution businesses – The Company completed the acquisition of both the LIFECODES distribution businesses in the United Kingdom (“UK”) and Italy on January 31, 2014. These acquisitions enable Immucor to streamline the distribution of its LIFECODES products in Europe.
The Company acquired the stock of the UK distribution business for a total cash purchase price of $4.0 million, including acquired cash of $1.2 million. The Company acquired the assets of the Italy distribution business for a total cash purchase price of $2.4 million. In total, the Company acquired other identifiable intangible assets of $3.5 million and $1.1 million of goodwill in these acquisitions. The other identifiable intangible assets are mainly customer relationships, which represent the fair value of the existing customer base. The tangible assets acquired in these acquisitions were not material to the Company’s consolidated financial statements. All of the goodwill arising from the Italy asset acquisition is deductible for income tax purposes. The goodwill arising from the UK acquisition is not deductible for tax purpose. The operating results of the acquired businesses have been included in the Company’s consolidated results of operations since their dates of acquisition.
Business combinations completed in fiscal 2013:
Acquisition of LIFECODES – The Company completed the acquisition of the LIFECODES business on March 22, 2013. This acquisition enables Immucor to enter the field of transplantation diagnostics – a close adjacency to our current business of transfusion medicine. The LIFECODES business specializes in pre-transplant human leukocyte antigen (HLA) typing and screening to ensure the most compatible match between patient and donor, as well as post-transplant patient monitoring to aid in the identification of graft rejection. LIFECODES also offers other immune-monitoring products.
Purchase Price Allocation
The total cash purchase price of the LIFECODES business was $86.2 million, of which $87.3 was paid in fiscal 2013, and $1.1 million was returned by the seller in the first quarter of fiscal 2014 as a result of finalizing certain purchase price adjustments. The purchase agreement included a contingent consideration arrangement for a potential earn-out totaling $10.0 million in cash based upon the LIFECODES business attaining certain operating targets for fiscal year 2013. Management estimated that the fair value of the contingent consideration arrangement as of the acquisition date was approximately $4.4 million. This was determined by applying a form of the income approach, based on the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the performance targets. The key assumptions were the earn-out period payment probabilities, and an appropriate discount rate. These assumptions are considered to be level 3 inputs which are not observable in the market. Including the contingent consideration, the aggregate estimated fair value of the consideration was approximately $90.6 million. The contingent consideration liability was included in current liabilities in the Company’s consolidated balance sheet as of May 31, 2013.
During fiscal 2013, the Company recognized accretion of $0.1 million of the fair value amount which increased the contingent consideration liability to $4.5 million as of May 31, 2013. This fair value adjustment was included in interest expense in the consolidated statement of operations.
During fiscal 2014, the fair value of the contingent consideration liability was decreased to zero to reflect a change in the earn-out payment probabilities, and the accretion of the fair value amount. These decreases in the contingent consideration liability are reflected as a gain of $4.6 million in the acquisition-related items in the consolidated statements of operations in fiscal 2014. The LIFECODES acquisition was recorded under the acquisition method of accounting by the Company and pushed-down to the acquired businesses by allocating the purchase consideration of $90.6 million to the cost of the assets acquired, including intangible assets, based on their estimated fair values at the acquisition date. The allocation of purchase price was based on management’s judgment after evaluating several factors including valuation assessments of tangible and intangible assets. The excess of the total purchase price over the fair value of assets acquired and the liabilities assumed of $36.9 million was recorded as goodwill. The goodwill resulting from the LIFECODES acquisition is largely attributable to the synergies it is expected to achieve with the existing Immucor business, future technologies management expects to develop, and the value of its assembled workforce.
The fair values of major classes of assets acquired and liabilities assumed along with the contingent consideration liability recorded at the date of acquisition is included in the reconciliation of the total consideration as follows (in thousands):
Cash on hand |
$ | 2,558 | ||
Accounts receivable |
7,697 | |||
Inventories |
16,800 | |||
Property and equipment |
13,432 | |||
Intangible assets |
33,240 | |||
Goodwill |
36,889 | |||
Current liabilities |
(4,669 | ) | ||
Deferred tax assets and liabilities - net |
(15,197 | ) | ||
Other assets and liabilities - net |
(146 | ) | ||
Total consideration paid |
90,604 | |||
Less: Contingent consideration liability |
(4,400 | ) | ||
Total cash purchase price |
$ | 86,204 |
The Company has acquired identifiable intangible assets, not including goodwill, totaling approximately $33.2 million in the LIFECODES acquisition. Identifiable intangible assets of $31.8 million are subject to amortization over their anticipated benefit period, as indicated in the table below. The Company did not incur costs to renew or extend the term of acquired intangible assets during the period ended May 31, 2013. IPR&D assets of $1.4 million are not subject to amortization until the projects are complete or abandoned. The amortization of these intangibles is not deductible for tax purposes and hence the Company recorded a deferred tax liability of approximately $12.7 million to offset the future book amortization related to these intangibles. Substantially all of the $36.9 million of goodwill resulting from the LIFECODES acquisition is not deductible for tax purposes.
The valuation method and assumptions used to determine fair value of major classes of assets acquired and liabilities assumed in accordance with ASC Topic 820 are as follows:
● |
Cash, receivables, current liabilities, and other assets and liabilities, net – The carrying amounts of each of these items approximated fair value because of the short-term maturity of these instruments. |
● |
Inventories were valued on the basis of estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance on the selling effort. The inventory values were established separately for raw materials and supplies (including instruments and genotyping inventories), work-in-process, and finished goods. |
● |
Property and equipment were valued based on a cost and market approach. The cost approach quantifies value by examining either the historical cost to reproduce or the estimated current cost to replace at a given level of functionality and estimated physical deterioration. A physical deterioration factor was considered for the loss in value brought about by wear and tear of the elements, disintegration, use in service, and physical factors that reduce the life and serviceability of the property. In addition to the cost approach, certain assets were valued through a market approach. The market approach measures the value of an asset through an analysis of recent sales. |
● |
Intangible assets were valued primarily through application of the income approach. The income approach is a valuation technique that provides an estimation of the fair value of an asset based on the cash flows that an asset can be expected to generate over its remaining useful life. The Company used a variation of the income approach called the Multi-Period Excess Earnings Method (the “Excess Earnings Method”) to estimate the fair value of the Customer Relationships and the IPR&D projects. In estimating the fair value of the Existing Technology and the Trade Name intangible assets, a variation of the income approach, the relief from royalty method, was applied. In addition, the analysis provides an estimate for the remaining useful life of acquired intangible assets. For intangible assets without any contractual terms, the employment of certain statistical approaches to the economic pattern of asset utilization and qualitative assessments was used. |
● |
Goodwill results from the application of ASC Topic 805 since it requires that the acquirer subsume into goodwill the value of any acquired intangible asset that is not identifiable and the value attributed to items that do not qualify for separate recognition as assets at the acquisition date. |
● |
Deferred tax assets and liabilities were determined in accordance with ASC Topic 740, Income Taxes. Since this business combination was a stock acquisition, the assets are not adjusted to fair value for income tax reporting purposes. Therefore, deferred tax assets and liabilities are reflected for the expected income tax effects of the difference in bases for financial reporting and income tax purposes that result from applying the acquisition method of accounting for financial reporting purposes. |
● |
Contingent consideration liability was calculated based on the expected (probability-weighted) payment based on the likelihood of achieving the financial performance target. Information as of March 22, 2013 was used to determine the likelihood of achievement. Assumptions included in the calculation were cumulative probability of success, discount rate and time of payment. The present value of the expected payment considers the time at which the obligation will be settled and a discount rate that reflects the risk associated with the performance payment. |
Identifiable Intangible Assets
In performing the purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analyses of historical financial performance and estimates of future performance. The following table sets forth the components of intangible assets as of the date of the LIFECODES acquisition (in thousands):
Useful Life |
||||||||
Intangible Asset |
Fair Value |
in Years |
||||||
Customer relationships |
$ | 16,000 | 20 | |||||
Existing technology |
13,250 | 10 | ||||||
Trade name |
2,250 | 22 | ||||||
Below market leasehold interests |
340 | 2 to 12 | ||||||
In-process research and development |
1,400 |
n/a |
||||||
$ | 33,240 |
Customer relationships represent the fair value of the existing customer base.
Existing technologies relate to existing intellectual property related to patents, trade secrets and accumulated know-how, from which LIFECODES derives a competitive advantage, market share and/or pricing margin.
Trade name represents the LIFECODES® company brand. LIFECODES is well recognized by customers as a company that provides a selection of quality products including products that are not available elsewhere in the marketplace.
Below market leasehold interests represents the Company’s interest in the current leases, which provide for payments below comparable leases obtainable contemporaneously with the LIFECODES acquisition.
Useful lives of the amortizable intangible assets were based on estimated economic useful lives and are being amortized using the straight-line method.
In-process research and development (“IPR&D”) relates primarily to the development of products that detect certain types of antibodies. IPR&D is not amortized, but will be evaluated on a periodic basis to determine which projects remain in process. When a project is completed, its value will be amortized over its useful life. If a project is abandoned, its value is written off.
Sources and Uses of Funds
The sources and uses of funds in connection with the LIFECODES acquisition are summarized below (in thousands):
Sources: |
||||
Proceeds from Term Loan |
$ | 50,000 | ||
Proceeds from equity contributions |
42,500 | |||
$ | 92,500 | |||
Uses: |
||||
Equity purchase price |
$ | 86,204 | ||
Transaction costs |
4,161 | |||
Additional working capital |
2,135 | |||
$ | 92,500 |
The acquisition was funded by additional borrowings of $50.0 million of Term B-2 Loans under the terms of the Amended and Restated Amendment No. 2 to the Senior Credit Facilities and an equity investment of $42.5 million from the Parent including a $39.0 million investment by the Sponsor. The incremental funding was used to fund transaction costs of $4.2 million and to provide additional working capital of $2.1 million.
Transaction costs include legal and accounting fees, deferred financing costs related to the additional borrowings, and other external costs directly related to the LIFECODES acquisition. Of the $4.2 million of transaction costs paid at closing, $1.6 million was deferred financing costs that were capitalized and the remaining $2.6 million was incurred by the Company and included in acquisition-related charges in the consolidated statement of operations in fiscal 2013.
Financial Information
The Company included the operating results of LIFECODES in the consolidated statement of operations since the acquisition date on March 22, 2013. The results for fiscal 2013 included net sales of $9.5 million and a loss before income taxes of $2.6 million.
Pro forma Financial Information
The financial information in the table below summarizes the results of operations of the Company on a pro forma basis, as though the LIFECODES acquisition had occurred at June 1, 2012. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the LIFECODES acquisition had taken place at the beginning of the earliest period presented. Such pro forma financial information is based on the historical financial statements of the Company. This pro forma financial information is based on estimates and assumptions, which have been made solely for purposes of developing such pro forma information, including, without limitation, purchase accounting adjustments. The pro forma financial information presented below also includes depreciation and amortization based on the valuation of the Company’s tangible assets and identifiable intangible assets, and interest expense resulting from the LIFECODES acquisition. The unaudited pro forma financial information presented below does not reflect any synergies or operating cost reductions that may be achieved, or pro forma financial information from the UK or Italy distribution businesses or the Organ-i business acquired in fiscal 2014. These businesses are not reflected in the unaudited pro forma financial information below because the impact of these businesses was not significant to the Company’s consolidated net sales or results of operations. Also included in the table below are our actual results for fiscal 2014 (in thousands):
Twelve Months Ended |
||||||||
May 31 |
||||||||
2013 |
2012 |
|||||||
(Unaudited) |
||||||||
Net sales |
$ | 385,916 | 382,368 | |||||
Net loss |
$ | (39,326 | ) | (61,121 | ) |
Business combinations completed in fiscal 2012:
Acquisition of Immucor – The Company was acquired on August 19, 2011 (the “Immucor Acquisition Date”) as described in Note 1.
Purchase Price Allocation
The Immucor acquisition was recorded under the acquisition method of accounting by the Parent and pushed-down to the Company by allocating the purchase consideration of $1.9 billion to the cost of the assets acquired, including intangible assets, based on their estimated fair values at the Immucor Acquisition Date. The allocation of purchase price is based on management’s judgment after evaluating several factors, including, but not limited to, valuation assessments of tangible and intangible assets. The excess of the total purchase price over the fair value of assets acquired and the liabilities assumed of $972.3 million is recorded as goodwill. The goodwill arising from the Immucor acquisition consists largely of the commercial potential of the Company and the value of the assembled workforce.
The following sets forth the Company’s purchase price allocation (in thousands):
Cash on hand |
$ | 322,963 | ||
Accounts receivable |
66,781 | |||
Inventories |
60,000 | |||
Property and equipment |
64,683 | |||
Intangible assets |
779,860 | |||
Goodwill |
972,295 | |||
Current liabilities |
(53,429 | ) | ||
Deferred revenue |
(4,107 | ) | ||
Deferred tax assets and liabilities - net |
(273,962 | ) | ||
Other assets and liabilities - net |
4,303 | |||
Total purchase price allocation: |
$ | 1,939,387 |
The Company has acquired intangible assets, not including goodwill, totaling approximately $779.9 million in the Immucor Acquisition. The amortization of these intangibles is not deductible for tax purposes and hence the Company has recorded a deferred tax liability of approximately $291.9 million as of the acquisition date to offset the future book amortization related to these intangibles. None of the goodwill of approximately $972.3 million resulting from the Immucor acquisition is deductible for tax purposes.
Identifiable Intangible Assets
In performing the purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analyses of historical financial performance and estimates of future performance. The following table sets forth the
components of intangible assets as of the date of the Immucor acquisition (in thousands):
Useful Life |
||||||||
Intangible Asset |
Fair Value |
in Years |
||||||
Customer relationships |
$ | 455,000 | 20 | |||||
Existing technology and trade names |
266,000 | 11 | ||||||
Corporate trade name |
40,000 | 15 | ||||||
Below market leasehold interests |
860 | 5 | ||||||
In-process research and development |
18,000 |
n/a |
||||||
$ | 779,860 |
Customer relationships represent the fair value of the existing customer base.
Existing technologies relate to the serology instrument platforms (Galileo, NEO, and Echo); the Company’s proprietary Capture reagent technology; and the molecular immunohematology testing technology.
Corporate trade name represents the Immucor® company brand. Immucor is well recognized by customers as a company that provides an extensive selection of quality products including products that are not available elsewhere in the marketplace.
Below market leasehold interests represents the Company’s interest in the current leases, which provide for payments below comparable leases obtainable contemporaneously with the Immucor acquisition.
Useful lives of the amortizable intangible assets were based on estimated economic useful lives and are being amortized using the straight-line method.
In-process research and development relates primarily to the molecular immunohematology business. The other projects valued relate to technological improvements for the serology instrument platforms, and generally are applicable to the current NEO and Echo instruments, and thus will be able to yield a cash flow impact relatively quickly upon approval and launch. In-process research and development is not amortized, but will be evaluated on a periodic basis to determine which projects remain in process. When a project is completed, its value will be amortized over its useful life. If a project is abandoned, its value is written off.
Sources and Uses of Funds
The sources and uses of funds in connection with the Immucor acquisition are summarized below (in thousands):
Sources: |
||||
Proceeds from Term Loan |
$ | 596,550 | ||
Proceeds from Notes |
394,856 | |||
Proceeds from equity contributions |
735,187 | |||
Company cash used in transaction |
301,053 | |||
$ | 2,027,646 | |||
Uses: |
||||
Equity purchase price |
$ | 1,939,387 | ||
Transaction costs |
88,259 | |||
$ | 2,027,646 |
Acquisition-related transaction costs include investment banking, legal and accounting fees, and other external costs directly related to the Immucor acquisition. Transaction costs paid at closing totaled $88.3 million and include $42.5 million that was capitalized as deferred financing costs and $16.9 million which was incurred by the Company and included in general and administrative expense in the Predecessor fiscal 2012 period. The remaining $28.9 million was incurred by the Parent but paid by the Company out of equity proceeds. These costs have been reflected on the balance sheet as a reduction of the capital contribution from the Parent. In addition, the Company paid $2.0 million of transaction costs prior to closing that is also included in general and administrative expense in the Predecessor fiscal 2012 period.
Pro forma Financial Information
The financial information in the table below summarizes the results of operations of the Company on a pro forma basis, as though the Immucor Acquisition had occurred at June 1, 2011. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Immucor Acquisition had taken place at the beginning of the earliest period presented. Such pro forma financial information is based on the historical financial statements of the Company. This pro forma financial information is based on estimates and assumptions, which have been made solely for purposes of developing such pro forma information, including, without limitation, purchase accounting adjustments. The pro forma financial information presented below also includes depreciation and amortization based on the valuation of the Company’s tangible assets and identifiable intangible assets, interest expense and management fee resulting from the Immucor Acquisition. The unaudited pro forma financial information presented below does not reflect any synergies or operating cost reductions that may be achieved.
Twelve Months Ended |
||||||||
May 31, 2012 |
May 31, 2011 |
|||||||
(in thousands) |
||||||||
Unaudited |
||||||||
Revenue |
$ | 336,724 | 333,091 | |||||
Net loss |
$ | (55,140 | ) | (3,858 | ) |
3. |
RELATED PARTY TRANSACTIONS |
In connection with the acquisition of Immucor in fiscal 2012, the Company entered into a management services agreement with TPG Capital, L.P. (the “Sponsor”) pursuant to which the Sponsor received on the closing date an aggregate transaction fee of $18.0 million in cash, of which $8.0 million was capitalized as deferred financing costs relating to the commercial banking services that the Sponsor provided in conjunction with negotiating the debt arrangements. The remaining $10.0 million was incurred by the Parent but paid by the Company out of equity proceeds. In addition, pursuant to such agreement, and in exchange for on-going consulting and management advisory services that will be provided to the Company, the Sponsor receives an aggregate annual monitoring fee of approximately $3.0 million. In the fiscal 2014 and 2013 periods, approximately $3.9 million, and $4.4 million, respectively, was recorded for monitoring fees, additional services provided by the Sponsor, and out-of-pocket expenses and is included in general and administrative expenses in the consolidated statements of operations. At May 31, 2014 and 2013, the Company owed $0.9 million and $0.6 million, respectively, to the Sponsor for these fees and expenses.
4. |
INVENTORIES |
Typically inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). However, in relation to the Immucor Acquisition on August 19, 2011, and the LIFECODES acquisition on March 22, 2013, fair value adjustments of approximately $24.4 million and $4.5 million, respectively, increased inventory to fair value as of those dates which was greater than replacement cost. As of May 31, 2012, the fair value adjustment related to the Immucor Acquisition had been expensed through cost of sales. As of May 31, 2013, approximately $1.7 million of the fair value adjustment related to the LIFECODES acquisition has been expensed through cost of sales in the fiscal 2013 period. As of May 31, 2014, the remaining fair value adjustment related to the LIFECODES acquisition had been expensed through cost of sales, and inventories were again stated at the lower of cost (first-in, first-out basis) or market (net realizable value). The following table is in thousands of dollars:
As of May 31 |
||||||||
2014 |
2013 |
|||||||
Raw materials and supplies |
$ | 12,110 | 14,880 | |||||
Work in process |
9,146 | 8,356 | ||||||
Finished goods |
27,895 | 22,705 | ||||||
$ | 49,151 | 45,941 |
5. |
PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consist of the following (in thousands):
As of May 31 |
||||||||
2014 |
2013 |
|||||||
Income tax prepayments |
$ | 5,736 | 4,899 | |||||
Prepaid expenses |
5,677 | 4,805 | ||||||
Other receivables |
1,169 | 1,873 | ||||||
Prepaid expenses and other current assets |
$ | 12,582 | 11,577 |
6. |
PROPERTY AND EQUIPMENT, net |
Property and equipment, net consists of the following (in thousands):
As of May 31 |
||||||||
2014 |
2013 |
|||||||
Land |
$ | 290 | 301 | |||||
Buildings and improvements |
2,966 | 3,034 | ||||||
Leasehold improvements |
24,693 | 20,170 | ||||||
Capital work-in-progress |
3,927 | 5,139 | ||||||
Furniture and fixtures |
3,656 | 3,282 | ||||||
Machinery, equipment and instruments |
88,057 | 75,388 | ||||||
123,589 | 107,314 | |||||||
Less accumulated depreciation |
(47,278 | ) | (30,933 | ) | ||||
Property and equipment, net |
$ | 76,311 | 76,381 |
Depreciation expense was $18.3 million in fiscal 2014, $21.0 million in fiscal 2013, $15.5 million in Successor fiscal 2012 period, and $3.4 million in the Predecessor fiscal 2012 period. Depreciation expense is primarily included in cost of sales in the consolidated statements of operations.
The Company reviews the estimated useful lives of its fixed assets on an ongoing basis. During fiscal 2014, this review indicated that the actual lives of the Company's instrument equipment were longer than the estimated useful lives used for depreciation purposes in our financial statements. As a result, the Company changed its estimates of useful lives of its instrument equipment, effective June 1, 2013, to better reflect the estimated periods during which these assets will remain in service. As a result, the estimated useful lives of these assets increased from approximately 5 years to 10 years. The effect of this change in estimate was a reduction in depreciation expense of $6.3 million and a decrease in net loss of approximately $3.6 million for fiscal 2014, respectively.
During fiscal 2013, the Company recognized a disposition loss of $1.2 million to reduce certain capital work-in-progress equipment associated with a high-speed filling project to its estimated salvage value. The project was determined to be no longer economically viable during fiscal 2013 and management therefore decided to dispose of the equipment.
For the year ended May 31, 2013, certain amounts within property and equipment have been reclassified to be consistent with the May 31, 2014 presentation. However, there has been no change in total property and equipment or accumulated depreciation.
7. |
GOODWILL |
Changes in the carrying amount of goodwill for the years ended May 31, 2014 and 2013 were as follows (in thousands):
For the Years Ended May 31 |
||||||||
2014 |
2013 |
|||||||
Balance at beginning of period |
$ | 1,003,463 | 966,338 | |||||
Additions: |
||||||||
Acquisition of businesses |
6,912 | 36,889 | ||||||
Foreign currency translation adjustment |
1,188 | 236 | ||||||
Impairment loss |
(160,000 | ) | - | |||||
Balance at end of period |
$ | 851,563 | 1,003,463 |
An impairment loss on goodwill is recognized to the extent that a reporting unit’s carrying amount of goodwill exceeds the implied fair value of goodwill of such reporting unit, determined in accordance with ASC Topic 350, Intangibles-Goodwill and Other (“ASC 350”). Goodwill is evaluated for impairment annually as of March 1st, and between annual tests if a triggering event or a change in circumstances indicates that the goodwill might be impaired.
ASC 350 requires that if the fair value of a reporting unit is less than its carrying amount, including goodwill, further analysis is required to measure the amount of the impairment loss, if any. The amount by which the reporting unit’s carrying amount of goodwill exceeds the implied fair value of the reporting unit’s goodwill, determined in accordance with ASC 350, is to be recognized as an impairment loss.
The Company has six reporting units with goodwill from prior acquisitions reported on the balance sheet at May 31, 2014. The annual evaluation for impairment utilizes the financial projections of the next fiscal year and the five year strategic plans that are prepared in the fourth quarter and reflects Management’s continuing knowledge of the operations and the markets in which the reporting units operate. During the fourth quarter of fiscal 2014, while completing the annual evaluation based on these plans and projections, the estimated fair value of five of the Company’s six reporting units with goodwill exceeded the carrying amount. For each of the five reporting units that passed step one as of March 1, 2014, the percentage by which the estimated fair value exceeded the carrying amount of the reporting units ranged from 45% to 123%.
For one of the Company’s reporting units, the estimated fair value that reflects Management’s continuing knowledge of the operations and the markets in which the reporting unit operates did not exceed the carrying amount. Therefore, the Company completed step two of the impairment testing process to measure the amount of the impairment loss. The impairment loss on goodwill was determined to be $160.0 million and was recorded in the fourth quarter of fiscal year 2014. This impairment loss represented 18% of the carrying amount of goodwill for this reporting unit. There were no accumulated impairment losses for the Company’s goodwill as of May 31, 2013. After the impairment loss recorded on one of the reporting unit’s goodwill in fiscal year 2014, the Company had $160.0 million of accumulated impairment losses on goodwill as of May 31, 2014.
The Company estimated the fair value of each of its reporting units in a manner similar to the method used in a business combination. The Company utilized the income approach in the determination of fair value. Under the income approach, estimated fair value is based on the discounted cash flow method. The key assumptions that drive the estimated fair value of the reporting units under the income approach are level 3 inputs and include future cash flows from operations and the discount rate applied to those future cash flows, determined from a weighted-average cost of capital calculation. The future cash flows include additional key assumptions relating to revenue growth rates, margins and costs.
8. |
OTHER INTANGIBLE ASSETS, net |
Other intangible assets consist of the following (in thousands):
As of May 31 |
||||||||||||||||||||||||||||
2014 |
2013 |
|||||||||||||||||||||||||||
Weighted Average Life (years) |
Cost |
Accumulated Amortization |
Net |
Cost |
Accumulated Amortization |
Net |
||||||||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||||||||||
Customer relationships |
20 | $ | 470,679 | (63,989 | ) | 406,690 | 465,909 | (40,392 | ) | 425,517 | ||||||||||||||||||
Existing technology / trade names |
11 | 314,350 | (71,246 | ) | 243,104 | 291,250 | (44,526 | ) | 246,724 | |||||||||||||||||||
Corporate trade name |
15 | 40,000 | (7,421 | ) | 32,579 | 40,000 | (4,754 | ) | 35,246 | |||||||||||||||||||
Below market leasehold interests |
7 | 1,200 | (449 | ) | 751 | 1,200 | (313 | ) | 887 | |||||||||||||||||||
Other intangibles |
4 | 399 | (53 | ) | 346 | 99 | (20 | ) | 79 | |||||||||||||||||||
Total amortizable assets |
826,628 | (143,158 | ) | 683,470 | 798,458 | (90,005 | ) | 708,453 | ||||||||||||||||||||
Intangible assets not subject to amortization: |
||||||||||||||||||||||||||||
In-process research and development |
9,400 | - | 9,400 | 6,150 | - | 6,150 | ||||||||||||||||||||||
Total non-amortizable assets |
9,400 | - | 9,400 | 6,150 | - | 6,150 | ||||||||||||||||||||||
Intangible assets, net |
$ | 836,028 | (143,158 | ) | 692,870 | 804,608 | (90,005 | ) | 714,603 |
The weighted average life for below market leasehold interests changed from 6 to 8 years as of August 31, 2013 as a result of the renewal of certain lease agreements which extended the lease terms of existing leases. The costs associated with the new leases were treated as operating expenses as incurred.
In fiscal 2014, it was determined that an in-process research and development (“IPR&D”) project related to our transplant and molecular diagnostics business was no longer economically feasible. And, in fiscal 2013, an IPR&D project related to our molecular immunohematology business was determined to no longer be economically feasible. These projects were therefore abandoned and fully written-off in those years. As a result, a loss of $0.2 million and $3.5 million was recorded in fiscal 2014 and fiscal 2013, respectively, and included in impairment loss on the Company’s consolidated statement of operations.
Also during the fourth quarter of fiscal 2013, certain IPR&D projects related to the development of products that detect certain types of antibodies in our serology business and a new software product suite designed specifically for transfusion medicine were completed and placed in service. As a result, $9.8 million of costs related to those projects were reclassed from the IPR&D category of other intangible assets to the existing technologies / trade names category in the table presented above. The Company began amortizing these costs over their anticipated benefit periods of approximately 10 years.
A portion of the Company’s customer relationships is held in functional currencies outside the U.S. Therefore, the stated cost as well as the accumulated amortization is affected by the fluctuation in foreign currency exchange rates. Amortization of other intangible assets amounted to $53.0 million in fiscal 2014, $50.8 million in fiscal 2013, $39.2 million in the Successor fiscal 2012 period, and $0.9 million in the Predecessor fiscal 2012 period. The following table presents an estimate of amortization expense for each of the next five fiscal years (in thousands):
Year Ending May 31: |
||||
2015 |
54,772 | |||
2016 |
54,736 | |||
2017 |
54,580 | |||
2018 |
54,464 | |||
2019 |
50,541 |
9. |
DEFERRED FINANCING COSTS, net |
Changes in deferred financing costs, net for the fiscal 2014 and 2013 periods were as follows (in thousands):
For the Years Ended May 31 |
||||||||
2014 |
2013 |
|||||||
Balance at beginning of period |
$ | 39,449 | 38,769 | |||||
Debt issuance costs |
- | 11,412 | ||||||
Loss on extinguishment of debt |
- | (5,625 | ) | |||||
Amortization |
(6,333 | ) | (5,107 | ) | ||||
Balance at end of period |
$ | 33,116 | 39,449 |
Deferred financing costs are capitalized and are amortized over the life of the related debt agreements using the effective interest rate method, except the Revolving Facility which uses the straight line method.
Debt issuance costs, loss on extinguishment of debt, and the Revolving Facility are further detailed in Note 12.
10. |
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consist of the following (in thousands):
As of May 31 |
||||||||
2014 |
2013 |
|||||||
Salaries and wages |
$ | 11,410 | 11,319 | |||||
Sales and other taxes payable |
4,880 | 5,080 | ||||||
Contingent consideration liability |
- | 4,504 | ||||||
Other accruals |
3,381 | 3,411 | ||||||
Royalties |
1,572 | 1,029 | ||||||
Pricing discount to dealers |
197 | 363 | ||||||
Professional fees and dealer commission |
1,389 | 948 | ||||||
Medical claims liability |
887 | - | ||||||
Accrued expenses and other current liabilities |
$ | 23,716 | 26,654 |
11. |
DEFERRED REVENUE |
The additions to and recognition of deferred revenue for the year ended May 31, 2014 and 2013 were as follows (in thousands):
For the Years Ended May 31 |
||||||||
2014 |
2013 |
|||||||
Balance at beginning of year |
$ | 2,413 | 3,037 | |||||
Additions to deferred revenue from new contracts |
8,658 | 7,843 | ||||||
Revenue recognized during the year |
(8,246 | ) | (8,496 | ) | ||||
Foreign currency translation adjustment |
74 | 29 | ||||||
Balance at end of year |
2,899 | 2,413 | ||||||
Less current portion |
(2,813 | ) | (2,252 | ) | ||||
Deferred revenue, net of current portion |
$ | 86 | 161 |
12. |
LONG-TERM DEBT |
Long-term debt consists of the following (in thousands):
As of May 31 |
||||||||
2014 |
2013 |
|||||||
Term Loan Facility, net of $9,435 and $11,384 debt discounts, respectively |
$ | 645,609 | 650,293 | |||||
Notes, net of $3,862 and $4,370 debt discounts, respectively |
396,138 | 395,630 | ||||||
Capital lease agreements |
27 | 67 | ||||||
1,041,774 | 1,045,990 | |||||||
Less current portion, net of discounts |
(4,591 | ) | (6,712 | ) | ||||
Long-term debt, net of current portion |
$ | 1,037,183 | 1,039,278 |
Senior Secured Credit Facilities, Security Agreement and Guaranty
In connection with the Immucor Acquisition on August 19, 2011, the Company entered into a credit agreement and related security and other agreements for (1) a $615.0 million senior secured term loan facility with Term B Loans (the “Original Term Loan Facility”) and (2) a $100.0 million senior secured revolving loan facility (the “Revolving Facility,” and together with the Original Term Loan Facility, the “Original Senior Credit Facilities”) with certain lenders, Citibank, N.A., as Administrative Agent and collateral agent (the “Administrative Agent”) and the other agents party thereto. In addition to borrowings upon prior notice, the Revolving Facility includes borrowing capacity in the form of letters of credit and borrowings on same-day notice, referred to as swing line loans, in each case, up to $25.0 million, and is available in U.S. dollars, Euros, British Pounds, Japanese Yen, Canadian dollars and in such other currencies as the Company and the Administrative Agent under the Revolving Facility may agree (subject to a sublimit for such non-U.S. currencies).
On August 21, 2012, the Company, the Administrative Agent and the various lenders party thereto modified the Original Senior Credit Facilities by entering into Amendment No. 1 which replaced the existing Term B Loans with a new class of Term B-1 Loans in an aggregate principal amount of $610.4 million and lowered the interest rate on the Original Senior Credit Facilities, as amended. Amendment No. 1 also extended the maturity date of the Revolving Facility to August 19, 2017.
As a result of Amendment No. 1, the Company recognized a $6.7 million loss on debt extinguishment in the first quarter of the 2013 fiscal year with regards to certain portions of the deferred financing costs ($4.0 million) and original issuance discount (“OID”) ($2.7 million) related to the Original Term Loan Facility. Amendment No. 1 had no significant impact related to the Revolving Facility, as there was no change in the lenders or decrease in the Revolving Facility borrowing capacity. In addition, the Company capitalized $2.5 million of deferred financing costs associated with Amendment No. 1.
On January 25, 2013, the Company, the Administrative Agent and the various lenders party thereto further modified the Original Senior Credit Facilities, as previously amended, by entering into Amendment No. 2 to the credit agreement governing the Original Senior Credit Facilities. Amendment No. 2 was to become effective on the date of the closing of the LIFECODES acquisition and provided for an incremental $50.0 million of Term B-1 Loans with the same terms as the original Term Loan Facility.
On February 19, 2013, the Company, the Administrative Agent and the various lenders party thereto modified the Original Senior Credit Facilities, as previously amended, by entering into Amendment No. 3 and Amendment No. 4 to the credit agreement governing the Original Senior Credit Facilities. Amendment No. 3 replaced the existing Term B-1 Loans with a new class of Term B-2 Loans in an aggregate principal amount of $613.3 million (the “Term Loan Facility”), including the issuance of an additional $6.0 million of Term B-2 Loans. Amendment No. 3 also lowered the interest rates on the Term B-2 Loans and removed the financial debt covenant requirement. The Term B-2 Loans mature August 19, 2018, the same maturity date as the previous Term B-1 Loans. Amendment No. 4 lowered the interest rates on the Revolving Facility. There were no other substantive changes to the Revolving Facility. The Term Loan Facility, as amended, together with the Revolving Facility, as amended, is referred to as the “Senior Credit Facilities.”
As a result of Amendment No. 3, the Company recognized a $2.4 million loss on debt extinguishment in the third quarter of the 2013 fiscal year with regards to certain portions of the deferred financing costs ($1.7 million) and OID ($0.7 million) related to the Original Term Loan Facility, as previously amended. Amendment No. 4 had no significant impact related to the Revolving Facility, as there was no change in the lenders or decrease in the Revolving Facility borrowing capacity. In addition, the Company capitalized $7.3 million of deferred financing costs associated with Amendments No. 3 and No. 4.
On February 19, 2013 and concurrent with Amendments No. 3 and No. 4, the Company, the Administrative Agent and the various lenders party thereto modified the Original Senior Credit Facilities, as previously amended, by entering into Amended and Restated Amendment No. 2. The Amended and Restated Amendment No. 2 became effective on March 22, 2013, the date of the closing of the LIFECODES Acquisition. On that date, the Company issued an additional $50.0 million in Term B-2 Loans with the same terms and maturity date as the existing Term Loan Facility. In addition, the Company capitalized $1.6 million of deferred financing costs associated with Amended and Restated Amendment No. 2.
The credit agreement governing the Senior Credit Facilities provides that, subject to certain conditions, the Company may request additional tranches of term loans and/or increase commitments under the Revolving Facility and/or the Term Loan Facility and/or add one or more incremental revolving credit facility tranches (provided there are no more than three such tranches with different maturity dates outstanding at any time) in an aggregate amount not to exceed (a) $100.0 million plus (b) an unlimited amount at any time, subject to compliance on a pro forma basis with a senior secured first lien net leverage ratio of no greater than 4.00 to 1.00. Availability of such additional tranches of term loans or revolving credit loans and/or increased commitments is subject to, among other conditions, the absence of any default under the credit agreement governing the Senior Credit Facilities and the receipt of commitments by existing or additional financial institutions.
The Company is required to make scheduled principal payments on the last business day of each calendar quarter equal to 0.25% of the original principal amount of loans under the Term Loan Facility as most recently amended with the balance due and payable on August 19, 2018. Currently scheduled principal payments are $1.7 million per quarter. The Company is also required to repay loans under the Term Loan Facility based on annual excess cash flows as defined in the credit agreement governing the Term Loan Facility and upon the occurrence of certain other events set forth in the Term Loan Facility.
Borrowings under the Senior Credit Facilities bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (a) in the case of borrowings in U.S. dollars, a base rate determined by reference to the highest of (1) the prime rate of Citibank, N.A., (2) the federal funds effective rate plus 0.50% and (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% or (b) in the case of borrowings in U.S. dollars or another currency, a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, which, in the case of the Term Loan Facility only, shall be no less than 1.25%. The applicable margin for borrowings under the Term Loan Facility is 2.75% with respect to base rate borrowings and 3.75% with respect to LIBOR borrowings. The applicable margin for borrowings under the Revolving Facility is 2.75% with respect to base rate borrowings and 3.75% with respect to LIBOR borrowings. The applicable margin for borrowings under the Revolving Facility is subject to a 0.25% step-down, when the Company’s senior secured net leverage ratio at the end of a fiscal quarter is less than or equal to 3:00 to 1:00. The interest rate on the Term Loan Facility was 5.00% as of May 31, 2014 and 2013. Including the amortization of deferred financing costs and the original issue discount, the effective interest rate on the Term Loan Facility is 6.0% for the year ended May 31, 2014. At May 31, 2014, there were no outstanding borrowings under the Revolving Facility and no outstanding letters of credit.
Prior to Amendment No. 1, the interest rates on the Original Term Loan Facility had a LIBOR floor of 1.50% and the applicable margin was 5.75%. The Revolving Facility’s interest rates had an applicable margin of 4.75% with respect to base rate loans and 5.75% with respect to LIBOR loans. The interest rate on the Original Term Loan Facility for all periods prior to the effective date of Amendment No. 1 was 7.25%.
Prior to Amendments No. 3 and No. 4, the interest rates on the Original Term Loan Facility, as amended, had a LIBOR floor of 1.25% and the applicable margin was 4.50%. The Revolving Facility’s interest rates had an applicable margin of 3.50% with respect to base rate loans and 4.50% with respect to LIBOR loans. The interest rates on the Original Term Loan Facility, as amended, for all periods after the effective date of Amendment No. 1 and prior to the effective date of Amendment No. 3 was 5.75%.
All obligations under the Senior Credit Facilities are unconditionally guaranteed by the Parent and certain of the Company’s existing and future wholly owned domestic subsidiaries (such subsidiaries collectively, the “Subsidiary Guarantors”), and are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Parent and Subsidiary Guarantors, including, in each case subject to customary exceptions and exclusions:
|
• |
a first-priority pledge of all of the Company’s capital stock directly held by Parent and a first-priority pledge of all of the capital stock directly held by the Company and Subsidiary Guarantors (which pledge, in the case of the capital stock of each (a) domestic subsidiary that is directly owned by the Company or by any Subsidiary Guarantor and that is a disregarded entity for United States federal income tax purposes and that has no material assets other than equity interests in one or more foreign subsidiaries that are controlled foreign corporations for United States federal income tax purposes or (b) foreign subsidiary, is limited to 65% of the stock of such subsidiary); and |
|
• |
a first-priority security interest in substantially all of the Parent’s, the Company’s and the Subsidiary Guarantor’s other tangible and intangible assets. Parent has no material operations or assets other than the capital stock of the Company. |
The Senior Credit Facilities include restrictions on the Company’s ability and the ability of certain of its subsidiaries to, among other things, incur or guarantee additional indebtedness, pay dividends (including to Parent) on or redeem or repurchase capital stock, make certain acquisitions or investments, materially change its business, incur or permit to exist certain liens, enter into transactions with affiliates or sell its assets to, or merge or consolidate with or into, another company or prepay or amend subordinated or unsecured debt.
Although the Parent is not generally subject to the negative covenants under the Senior Credit Facilities, the Parent is subject to a passive holding company covenant that limits its ability to engage in certain activities other than (i) owning equity interests in the Company and holding cash or property received by the Company, (ii) maintaining its legal existence and engaging in administrative matters related to being a holding company, (iii) performing its obligations under the Senior Credit Facilities, the Senior Notes due 2019 (“Notes”) and other financings not prohibited by the Senior Credit Facilities, (iv) engaging in public offerings of its securities and other equity issuances and financing activities permitted under the Senior Credit Facilities, (v) providing indemnifications to officers and directors and (vi) engaging in activities incidental to the activities described above.
Amendment No. 3 also modified the financial covenant of the Senior Credit Facilities such that the financial covenant is no longer applicable to the Term Loan Facility and is only applicable to the Revolving Facility. The Company is required to comply on a quarterly basis with a maximum senior secured net leverage ratio covenant of 5.25 to 1.00 only if there are amounts outstanding under the Revolving Facility. Remedies for default under such covenant may only be exercised by the lenders under the Revolving Facility.
Prior to Amendment No. 3, the covenant, which applied to the Term B Loans and subsequent Term B-1 Loans, required the Company to comply with a maximum senior secured net leverage ratio financial maintenance covenant of 5.25 to 1.00, tested on the last day of each fiscal quarter. A breach of this covenant was subject to certain equity cure rights. If an event of default had occurred, the lenders could have declared all amounts outstanding under the Senior Credit Facilities immediately due and payable. In such event, the lenders could have exercised any rights and remedies they may have had by law or agreement, including the ability to cause all or any part of the collateral securing the Senior Credit Facilities to be sold.
The credit agreement governing the Senior Credit Facilities also contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default, including upon change of control and a cross-default to any other indebtedness with an aggregate principal amount of $20 million or more.
Indenture and the Senior Notes Due 2019
On August 19, 2011, the Company (as successor by merger to the Merger Sub), issued $400 million in principal amount of Notes. The Notes bear interest at a rate of 11.125% per annum, and interest is payable semi-annually on February 15 and August 15 of each year. Including the amortization of deferred financing costs and the original issue discount, the effective interest rate on the Notes is 11.6% for the year ended May 31, 2014. The Notes mature on August 15, 2019.
Subject to certain exceptions, the Notes are guaranteed on a senior unsecured basis by each of the Company’s current and future wholly owned domestic restricted subsidiaries (and non-wholly owned subsidiaries if such non-wholly owned subsidiaries guarantee the Company’s or another guarantor’s other capital market debt securities) that is a guarantor of certain debt of the Company or another guarantor, including the Senior Credit Facilities. The Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future indebtedness that is not expressly subordinated in right of payment thereto. The Notes will be senior in right of payment to any future indebtedness that is expressly subordinated in right of payment thereto and effectively junior to (a) the Company’s existing and future secured indebtedness, including the Senior Credit Facilities described above, to the extent of the value of the collateral securing such indebtedness and (b) all existing and future liabilities of the Company’s non-guarantor subsidiaries.
The Indenture governing the Notes contains certain customary provisions relating to events of default and covenants, including without limitation, a cross-payment default provision and cross-acceleration provision in the case of a payment default or acceleration according to the terms of any indebtedness with an aggregate principal amount of $25 million or more, restrictions on the Company’s and certain of its subsidiaries’ ability to, among other things, incur or guarantee indebtedness; pay dividends on, redeem or repurchase capital stock; prepay, redeem or repurchase certain debt; sell or otherwise dispose of assets; make investments; issue certain disqualified or preferred equity; create liens; enter into transactions with the Company’s affiliates; designate the Company’s subsidiaries as unrestricted subsidiaries; enter into agreements restricting the Company’s restricted subsidiaries’ ability to (1) pay dividends, (2) make loans to the Company or any restricted subsidiary that is a guarantor or (3) sell, lease or transfer assets to the Company or any restricted subsidiary that is a guarantor; and consolidate, merge, or transfer all or substantially all of the Company’s assets. The covenants are subject to a number of exceptions and qualifications. Certain of these covenants, excluding without limitation those relating to transactions with the Company’s affiliates and consolidation, merger, or transfer of all or substantially all of the Company’s assets, will be suspended during any period of time that (1) the Notes have investment grade ratings and (2) no default has occurred and is continuing under the Indenture. In the event that the Notes are downgraded to below an investment grade rating, the Company and certain subsidiaries will again be subject to the suspended covenants with respect to future events.
The Company is not aware of any violations of the covenants pursuant to the terms of the indenture governing the Notes or the credit agreement governing the Senior Credit Facilities.
Future Commitments
The following is a summary of the combined principal maturities of all long-term debt and principal payments to be made under the Company’s capital lease agreements for each of the fiscal years presented in the table below (in thousands):
For the Year Ended May 31: |
||||
2015 |
$ | 6,653 | ||
2016 |
6,638 | |||
2017 |
6,632 | |||
2018 |
6,632 | |||
2019 |
628,516 | |||
Thereafter |
400,000 | |||
$ | 1,055,071 |
Interest Expense
The significant components of interest expense are as follows (in thousands):
Successor |
Predecessor |
|||||||||||||||
August 20, 2011 |
June 1, 2011 |
|||||||||||||||
Year Ended |
through |
through |
||||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
|||||||||||||
Notes, including OID amortization |
$ | 45,008 | 44,951 | 35,058 | - | |||||||||||
Term Loan Facility, including OID amortization |
35,298 | 38,780 | 37,108 | - | ||||||||||||
Amortization of deferred financing costs |
6,333 | 5,107 | 3,705 | - | ||||||||||||
Interest rate swaps |
1,018 | 1,021 | 751 | - | ||||||||||||
Revolving Facility fees and interest |
507 | 855 | 425 | - | ||||||||||||
Interest accreted on contingent consideration liability |
134 | - | - | - | ||||||||||||
Other interest |
6 | 116 | 1 | - | ||||||||||||
Interest expense |
$ | 88,304 | 90,830 | 77,048 | - |
13. |
OTHER LONG-TERM LIABILITIES |
Other long-term liabilities consist of the following (in thousands):
As of May 31 |
||||||||
2014 |
2013 |
|||||||
Unrecognized tax benefits |
$ | 10,399 | 10,178 | |||||
Contingent consideration liability |
11,300 | - | ||||||
Severance indemnity for employees |
1,384 | 1,222 | ||||||
Interest rate swap liability |
626 | 1,057 | ||||||
Deferred leasehold improvement incentive |
124 | 115 | ||||||
Other long-term liabilities |
$ | 23,833 | 12,572 |
14. |
DERIVATIVE FINANCIAL INSTRUMENTS |
Interest Rate Swaps
In August 2011, during the Successor Period, the Company entered into floating-to-fixed interest rate swap agreements for an aggregate notional amount of $320 million related to a portion of the Company’s floating rate indebtedness. The purpose of entering into these swaps was to eliminate all but small movements (due to possible differences in reset timing between the swap and the debt) in future debt interest payments and to protect the Company from variability in cash flows attributable to changes in LIBOR interest rates. The Company’s strategy is to use a pay fixed, receive floating swap to convert the current or any replacement floating rate credit facility where LIBOR is consistently applied into a USD fixed rate obligation. The only variable piece remaining is the difference in actual reset date when the swap and debt are not lined up. Consistent with the terms of the Original Term Loan Facility, these swaps included a LIBOR floor of 1.50%. These swap agreements, effective in August 2011, hedged a portion of contractual floating rate interest commitments through the expiration of the agreements in September of each year 2013 through 2016. As a result of entering into the swap agreements, the LIBOR rate associated with the hedged amount of the Company’s indebtedness was fixed at a weighted average rate of 1.80% through September 28, 2012.
In August 2012, the Company amended the interest rate swap agreements noted above effective on September 28, 2012. The purpose of entering into these swap agreements is to match the LIBOR floor in the swaps with the terms of the Term Loan Facility, as amended. Consistent with the terms of the Company’s Term Loan Facility, these amended swaps include a LIBOR floor of 1.25%. These swap agreements hedge a portion of contractual floating rate interest commitments through the expiration of the agreements in September of each year through 2016. As a result of the amended swap agreements, the LIBOR rate associated with the hedged amount of the Company’s indebtedness has been fixed at 1.59% after September 28, 2012.
As of May 31, 2014, the Company has interest rate swap agreements to hedge $240.0 million of its future interest commitments resulting from the Company’s Term Loan Facility, and to protect the Company from variability in cash flows attributable to changes in LIBOR interest rates. The purpose of entering into these swap agreements is to match the LIBOR floor in the swaps with the terms of the Term Loan Facility. Consistent with the terms of the Company’s Term Loan Facility, these swaps include a LIBOR floor of 1.25%. These swap agreements hedge a portion of contractual floating rate interest commitments through the expiration of the agreement in September of each year through 2016. As a result of these agreements, the LIBOR rate associated with the hedged amount of the Company’s indebtedness has been fixed at 1.67% until September 30, 2014.
The Company designated the interest rate swap agreements as cash flow hedges. As cash flow hedges, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The interest rate swap agreements are highly correlated to the changes in interest rates to which the Company is exposed. Unrealized gains and losses on these swaps are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses will be recorded as a component of interest expense. Future realized gains and losses in connection with each required interest payment will be reclassified from accumulated other comprehensive income or loss to interest expense.
The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income or loss and are reclassified into interest expense in the same period the hedged item affects earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in the fair values of derivatives that do not qualify as effective are immediately recognized in earnings.
The gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income or loss to current period earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. As of May 31, 2014, approximately $0.9 million of the deferred net loss on derivative instruments accumulated in other comprehensive income or loss is expected to be reclassified as interest expense during the next twelve months. This expectation is based on the expected timing of the occurrence of the hedged forecasted transactions.
The fair values of the interest rate swap agreements are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves (level 2). A summary of the recorded liabilities included in the consolidated balance sheets is as follows (in thousands):
As of May 31 |
||||||||
2014 |
2013 |
|||||||
Interest rate swaps (included in other liabilities) |
$ | (1,357 | ) | (1,906 | ) |
The loss from accumulated other comprehensive income (loss) (“OCI”) was reclassified to the consolidated statement of operations and appears as follows (in thousands):
Twelve Months Ended |
||||||||
|
2014 |
2013 |
||||||
Location of (loss) gain reclassified from AOCI into income | ||||||||
(Losses) gains on cash flow hedges: |
||||||||
Interest expense (effective portion) |
$ | (1,001 | ) | (1,017 | ) | |||
Interest income (expense) (ineffective portion) |
$ | (10 | ) | (9 | ) |
15. |
FAIR VALUE |
The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
• |
Level 1—Quoted prices in active markets for identical assets or liabilities. |
• |
Level 2—Observable inputs, other than quoted prices included in Level 1, such as quoted prices for markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
• |
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of May 31, 2014 |
||||||||||||||||
Fair Value Measurements of Assets (Liabilities) Using |
Carrying |
|||||||||||||||
(Level 1) |
(Level 2) |
(Level 3) |
Amount |
|||||||||||||
(in thousands of dollars) |
||||||||||||||||
Derivative instruments |
$ | - | (1,357 | ) | - | (1,357 | ) | |||||||||
Contingent consideration liability |
$ | - | - | (11,300 | ) | (11,300 | ) |
As of May 31, 2013 |
||||||||||||||||
Fair Value Measurements of Assets (Liabilities) Using |
Carrying |
|||||||||||||||
(Level 1) |
(Level 2) |
(Level 3) |
Amount |
|||||||||||||
(in thousands of dollars) |
||||||||||||||||
Derivative instruments |
$ | - | (1,906 | ) | - | (1,906 | ) | |||||||||
Contingent consideration liability |
$ | - | - | (4,504 | ) | (4,504 | ) |
The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short-term maturity of these instruments. Of the $23.6 million and $29.4 million of cash and cash equivalents at May 31, 2014 and 2013, respectively, approximately 19% and 38% was located in the U.S., respectively.
The Company uses derivative financial instruments, primarily in the form of floating-to-fixed interest rate swap agreements, in order to mitigate the risks associated with interest rate fluctuations on the Company’s floating rate indebtedness. The estimated fair value of the Company’s derivative instruments is based on quoted market prices for similar instruments (a level 2 input) and are reflected at fair value in the consolidated balance sheets. The level 2 inputs used to calculate fair value were interest rates, volatility and credit derivative markets. The Company’s current and long-term derivative financial instrument liabilities are included in accrued interest and interest rate swap liability and other long-term liabilities in the Company’s consolidated balance sheets.
The fair value of the Company’s Notes and the Term Loan Facility (collectively referred to as the Company’s debt instruments) is estimated to be $446.3 million and $656.7 million at May 31, 2014, respectively, based on recent trades of these instruments. The fair value of the Notes and the Term Loan Facility was estimated to be $452.3 million and $669.1 million at May 31, 2013, respectively, based on the fair value of these instruments at that time.
Management believes that these liabilities can be liquidated without restriction.
The Company had a contingent consideration liability for an earn-out provision resulting from the LIFECODES acquisition completed in the fourth quarter of fiscal 2013. The fair value of this contingent consideration liability was estimated to be $4.4 million as of the acquisition date, and was determined by applying a form of the income approach (a level 3 input), based upon the probability weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the financial performance target. Assumptions included in the calculation were the cumulative probability of success, discount rate and time of payment. The present value of the expected payment considers the time at which the obligation was expected to be settled and a discount rate that reflects the risk associated with the performance payment. Based upon information available during fiscal 2014, management determined that the likelihood of achieving the financial performance target was lower than previously estimated and therefore the fair value of this contingent consideration liability decreased by $4.4 million in fiscal 2014. The adjustment to the estimated fair value amounts is reflected as a gain in the acquisition related items on the Company’s consolidated statements of operations. The contingent consideration liability was included in accrued expenses and other current liabilities in the Company’s consolidated balance sheets as of May 31, 2013.
The Company has a contingent consideration liability for earn-out provisions resulting from the Organ-i acquisition completed on May 30, 2014. The fair value of this contingent consideration liability was estimated to be $11.3 million as of the acquisition date, and was determined by applying a form of the income approach (a level 3 input), based upon the probability weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the financial performance target. Assumptions included in the calculation were the cumulative probability of success, discount rate and time of payment. The present value of the expected payments considers the time at which the obligations are expected to be settled and a discount rate that reflects the risk associated with the performance payment. The contingent consideration is record as other long-term liabilities.
These changes in the contingent consideration liability are summarized in the following table:
Twelve Months Ended | ||||||||
May 31, 2014 |
May 31, 2013 |
|||||||
Balance at the beginning of the period |
$ | (4,504 | ) | - | ||||
Additions due to acquisitions |
(11,300 | ) | (4,400 | ) | ||||
Change in fair value |
4,638 | - | ||||||
Accretion of fair value |
(134 | ) | (104 | ) | ||||
Balance at the end of the period |
$ | (11,300 | ) | (4,504 | ) |
16. |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
Total accumulated other comprehensive income (loss) is included in the Consolidated Statement of Shareholders’ Equity. The changes in accumulated other comprehensive income (loss) are as follows (in thousands):
Pretax |
Tax |
After Tax |
||||||||||
Year Ended May 31, 2014 |
||||||||||||
Foreign exchange translation adjustment |
$ | 4,528 | 213 | 4,315 | ||||||||
Changes in fair value of cash flow hedges |
550 | 210 | 340 | |||||||||
$ | 5,078 | 423 | 4,655 | |||||||||
Year Ended May 31, 2013 |
||||||||||||
Foreign exchange translation adjustment |
$ | 1,644 | - | 1,644 | ||||||||
Changes in fair value of cash flow hedges |
287 | 110 | 177 | |||||||||
$ | 1,931 | 110 | 1,821 | |||||||||
Sucessor: |
||||||||||||
Period August 20, 2011 through May 31, 2012 |
||||||||||||
Foreign exchange translation adjustment |
$ | (18,717 | ) | (332 | ) | (18,385 | ) | |||||
Changes in fair value of cash flow hedges |
(2,198 | ) | (840 | ) | (1,358 | ) | ||||||
$ | (20,915 | ) | (1,172 | ) | (19,743 | ) | ||||||
Predecessor: |
||||||||||||
Period June 1, 2011 through August 19, 2012 |
||||||||||||
Foreign exchange translation adjustment |
$ | (2,153 | ) | - | (2,153 | ) | ||||||
$ | (2,153 | ) | - | (2,153 | ) |
At August 19, 2012, the foreign exchange translation amount included within accumulated other comprehensive income (loss) was eliminated as a result of the Immucor Acquisition.
The components of accumulated other comprehensive loss are as follows (in thousands):
Successor |
Predecessor |
|||||||||||||||
As of |
As of |
As of |
As of |
|||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
|||||||||||||
Cumulative foreign currency translation adjustment |
$ | (12,427 | ) | (16,742 | ) | (18,385 | ) | 14,801 | ||||||||
Change in fair value of cash flow hedges, net of tax |
(840 | ) | (1,180 | ) | (1,358 | ) | - | |||||||||
Accumulated other comprehensive (loss) income |
$ | (13,267 | ) | (17,922 | ) | (19,743 | ) | 14,801 |
17. |
SHARE–BASED COMPENSATION |
Successor share-based compensation
Plan summary
The IVD Holdings Inc. 2011 Equity Incentive Plan (the “2011 Plan”) was established in December 2011 by Holdings. Under the 2011 Plan, awards of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, performance awards and any other awards that are convertible into or based on stock can be granted as incentive or compensation to employees, non-employee directors, consultants or advisors of the Company and Holdings. The share-based compensation expense relating to awards to those persons has been pushed down from Holdings to the Company.
A maximum of 514,631 shares of Holdings stock may be delivered in satisfaction of, or may underlie, awards under the 2011 Plan. Stock option awards are granted with service-based vesting conditions, and performance-based or market-based vesting conditions. The service-based vesting options typically vest over a five year period (20% per year). The performance-based or market-based options vest in tranches upon the achievement of certain performance or market objectives, which are measured over a three or four year period. The stock appreciation rights vest only on the occurrence of a liquidity event. These awards have a 10 year term. Restricted stock unit awards typically vest over a two year period (50% per year) and do not expire. Upon vesting, restricted stock units are settled in shares of Holdings’ common stock.
Valuation method used and assumptions
The Company estimates the fair value of stock options and stock appreciation rights using a Monte Carlo simulation approach. Key input assumptions used to estimate the fair value of stock options and stock appreciation rights include the initial value of common stock, expected term until the exercise of the equity award, the expected volatility of the equity value, risk-free rates of return and dividend yields, if any. The Company estimated the fair value of options and stock appreciation rights at the grant date using the following weighted average assumptions:
Year Ended May 31, 2014 |
Year Ended May 31, 2013 |
Year Ended May 31, 2012 |
||||||||||
Risk-free interest rate (1) |
0.42% | 0.24% | 0.24% | |||||||||
Expected volatility (2) |
45.00% | 50.00% | 50.00% | |||||||||
Expected life (years) (3) |
3.50 | 4.70 | 4.70 | |||||||||
Expected dividend yield (4) | None | None | None |
|
1. |
Based on the U.S. Constant Maturity Treasury (CMT) curve in effect at the time of award. |
2. |
Expected stock price volatility is based on the average historical volatility of the Company when it was publicly traded and weekly stock returns of comparable companies during the period corresponding to the expected life of the options and stock appreciation rights. |
3. |
Represents the period of time options are expected to remain outstanding. |
4. |
The Company has not paid dividends on its common stock and does not expect to pay dividends on its common stock in the near future. |
Stock options
Service-based vesting conditions
The Company has granted awards that contain service-based vesting conditions. These awards contain tiered vesting terms over the service period. The compensation cost for these options is recognized on a straight-line basis over the vesting periods. Activity for the service-based vesting options was as follows for the year ended May 31, 2014:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (years) |
Aggregate Intrinsic Value (1) |
|||||||||||||
Service-based options outstanding at June 1, 2014 |
148,429 | $ | 100.00 | |||||||||||||
Granted |
4,250 | 100.00 | ||||||||||||||
Exercised |
- | - | ||||||||||||||
Forfeited |
(7,200 | ) | 100.00 | |||||||||||||
Expired or cancelled |
(4,200 | ) | 100.00 | |||||||||||||
Service-based options outstanding at May 31, 2014 |
141,279 | 100.00 | 7.8 | $ | - | |||||||||||
Exercisable at May 31, 2014 |
51,661 | 100.00 | 7.6 | - |
(1) |
The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal year. Options that are underwater are not included in the intrinsic value amount. |
The weighted-average grant-date fair value of share options granted during the fiscal years ended May 31, 2014, 2013, and 2012 were $26.93, $27.73, and $27.73, respectively.
As of May 31, 2014, there was $2.0 million of total unrecognized compensation cost related to nonvested service-based stock option awards. This compensation cost is expected to be recognized over a weighted average period of approximately 2.7 years.
Performance-based or market-based vesting conditions
The Company has granted awards that contain either performance-based or market-based conditions. Compensation cost for the performance-based or market-based stock options is recognized based on either the achievement of the performance conditions, if they are considered probable, or if they are not considered probable, on the achievement of the market based condition. Awards granted which vest upon either the satisfaction of the performance or market conditions were measured based upon the achievement of the market condition during fiscal 2014 since the Company believes that the achievement of the performance conditions are not probable. Activity for the performance-based or market-based options was as follows for the year ended May 31, 2014:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (years) |
Aggregate Intrinsic Value (1) |
|||||||||||||
Performance or market-based options outstanding at June 1, 2014 |
141,529 | $ | 100.00 | |||||||||||||
Granted |
4,250 | 100.00 | ||||||||||||||
Exercised |
- | - | ||||||||||||||
Forfeited |
(9,500 | ) | 100.00 | |||||||||||||
Expired or cancelled |
- | - | ||||||||||||||
Performance or market-based options outstanding at May 31, 2014 |
136,279 | 100.00 | 7.8 | $ | - | |||||||||||
Exercisable at May 31, 2014 |
- | - | - | - |
(1) |
The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal year. Options that are underwater are not included in the intrinsic value amount. |
The weighted-average grant-date fair value of share options granted during the fiscal years ended May 31, 2014, 2013, and 2012 were $16.79, $20.59, and $20.59, respectively.
As of May 31, 2014, there was $1.5 million of total unrecognized compensation cost related to nonvested performance-based or market-based stock option awards. This compensation cost is expected to be recognized over a weighted average period of approximately 2.2 years.
Restricted stock units
The fair value of restricted stock is estimated using the Monte Carlo simulation approach described above and is then discounted due to non-marketability. The following is a summary of the changes in unvested restricted stock units for the fiscal year ended May 31, 2014:
Number of Shares |
Weighted-Average Grant-Date Fair Value |
|||||||
Nonvested restricted stock units outstanding at June 1, 2014 |
2,900 | $ | 78.64 | |||||
Granted |
1,600 | 90.72 | ||||||
Vested |
(2,100 | ) | 78.64 | |||||
Forfeited |
- | - | ||||||
Nonvested restricted stock units outstanding at May 31, 2014 |
2,400 | 86.93 |
As of May 31, 2014, there was $0.2 million of total unrecognized compensation cost related to nonvested restricted stock awards. This compensation cost is expected to be recognized over the weighted average period of approximately 1.4 years.
Stock appreciation rights
The stock appreciation rights granted contain both a performance and a market condition and are cash settled so require liability classification. The market condition is a defined return to investors and was incorporated into the grant date fair value calculation. The performance condition is only met upon a liquidity event. As of May 31, 2014, management has determined that the satisfaction of that performance condition is not considered probable. Therefore, no expense or liability has been recognized.
The following is a summary of the changes in cash-settled stock appreciation rights for the fiscal year ended May 31, 2014:
Number of Shares |
Weighted-Average Grant-Date Fair Value |
|||||||
Stock appreciation rights outstanding at June 1, 2014 |
127,300 | $ | 20.59 | |||||
Granted |
47,200 | 16.79 | ||||||
Vested |
- | - | ||||||
Forfeited |
(27,300 | ) | 16.79 | |||||
Cancelled/Expired |
- | - | ||||||
Stock appreciation rights outstanding at May 31, 2014 |
147,200 | 16.79 |
As of May 31, 2014, the fair value of the liability relating to cash settled stock appreciation rights was $2.5 million.
Shares available for future grants
As of May 31, 2014, a total of 84,573 shares were available for future grants under the 2011 Plan.
Predecessor share-based compensation
Plan summary
The Company had a Long-Term Incentive Plan that was approved by the shareholders in 2005 (the “2005 Plan”). Under the 2005 Plan, the Company was able to award stock options, stock appreciation rights, restricted stock, deferred stock, and other performance-based awards as incentive and compensation to employees and directors. The 2005 Plan provided for accelerated vesting of option and restricted stock awards if there was a change in control, as defined in the 2005 Plan. The 2005 Plan was terminated effective upon the Immucor Acquisition and no awards are currently outstanding or may be granted in the future under the 2005 Plan.
Plan activity
In an annual group grant in June 2011, the Company issued 162,535 performance based units and 228,890 restricted stock units with a grant date fair value of $19.85. These units had an original vesting period of three years.
Compensation expense of predecessor and successor
Share-based compensation of the Predecessor reflects the fair value of employee share-based awards, including options, restricted stock, restricted stock units and performance units, which were typically recognized as expense on a straight line basis over the requisite service period of the award.
Immediately prior to the Immucor Acquisition, all outstanding awards became fully vested and the unrecognized compensation expense was recognized.
Share-based compensation of the Successor reflects the fair value of employee share-based awards, including both performance and service vested. For service- vested awards, the expense is typically recognized on a straight line basis over the requisite service period. For performance-vested awards, the expense is recognized when the achievement of the performance conditions is considered probable.
A summary of share-based compensation recorded in the Successor and Predecessor statements of operations is as follows (in thousands):
Successor |
Predecessor |
|||||||||||||||
August 20, 2011 |
June 1, 2011 |
|||||||||||||||
Year Ended |
Through |
Through |
||||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
|||||||||||||
Share-based compensation |
$ | 1,512 | $ | 1,423 | 753 | 16,233 | ||||||||||
Tax benefit |
(584 | ) | (549 | ) | (264 | ) | (5,682 | ) | ||||||||
Share-based compensation, net |
928 | 874 | 489 | 10,551 |
18. |
INCOME TAXES |
As a result of the Immucor Acquisition, effective on August 20, 2011, the Company is included in the consolidated income tax returns of Holdings. In accordance with GAAP, allocation of the consolidated income tax expense (benefit) is necessary when separate financial statements are prepared for affiliates. The Company uses a method that allocates current and deferred taxes to members of the consolidated group by applying the liability method to each member as if it were a separate taxpayer. As of May 31, 2014 and 2013, the Company had no amounts due to or from Holdings related to income taxes.
Also, as a result of the Immucor Acquisition, the Company had a short tax year that coincided with the Predecessor period ending August 19, 2011. As such, the income tax provision for the Predecessor period reflects the income tax results that were expected to be reported on the short period income tax returns for the tax year ending August 19, 2011.
The following is a geographic breakdown of (loss) income before income taxes (in thousands):
Successor |
Predecessor |
|||||||||||||||
August 20, 2011 |
June 1, 2011 |
|||||||||||||||
Year Ended |
Year Ended |
through |
through |
|||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
|||||||||||||
Domestic operations |
$ | (210,354 | ) | (74,451 | ) | (69,012 | ) | (10,820 | ) | |||||||
Foreign operations |
12,181 | 10,743 | (12,181 | ) | 7,127 | |||||||||||
(Loss) income before income taxes |
$ | (198,173 | ) | (63,708 | ) | (81,193 | ) | (3,693 | ) |
The (benefit) provision for income taxes is summarized as follows (in thousands):
Successor |
Predecessor |
|||||||||||||||
August 20, 2011 |
June 1, 2011 |
|||||||||||||||
Year Ended |
Year Ended |
through |
through |
|||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
|||||||||||||
Current: |
||||||||||||||||
Federal |
$ | 321 | 403 | 700 | 3,161 | |||||||||||
State and Local |
914 | 69 | 143 | 673 | ||||||||||||
Foreign |
4,107 | 4,434 | 3,706 | 2,823 | ||||||||||||
5,342 | 4,906 | 4,549 | 6,657 | |||||||||||||
Non-Current: |
||||||||||||||||
Federal |
(298 | ) | (899 | ) | 328 | - | ||||||||||
State and Local |
- | - | - | - | ||||||||||||
Foreign |
- | - | - | - | ||||||||||||
(298 | ) | (899 | ) | 328 | - | |||||||||||
Deferred: |
||||||||||||||||
Federal |
(19,030 | ) | (26,319 | ) | (31,946 | ) | (3,429 | ) | ||||||||
State and Local |
(1,092 | ) | (1,522 | ) | (1,639 | ) | (494 | ) | ||||||||
Foreign |
(838 | ) | (732 | ) | (2,838 | ) | (53 | ) | ||||||||
(20,960 | ) | (28,573 | ) | (36,423 | ) | (3,976 | ) | |||||||||
(Benefit) provision for income taxes |
$ | (15,916 | ) | (24,566 | ) | (31,546 | ) | 2,681 |
The Company’s effective tax rate differs from the federal statutory rate as follows:
Successor |
Predecessor |
|||||||||||||||
August 20, 2011 |
June 1, 2011 |
|||||||||||||||
Year Ended |
Year Ended |
through |
through |
|||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
|||||||||||||
Federal statutory tax rate |
35.0 | % | 35.0 | 35.0 | 35.0 | |||||||||||
State income taxes, net of federal tax benefit |
0.8 | 3.7 | 1.5 | 1.5 | ||||||||||||
Foreign taxes |
(0.1 | ) | (0.9 | ) | (0.9 | ) | (37.2 | ) | ||||||||
Incremental U.S. benefit related to foreign dividends |
0.4 | 0.8 | 3.5 | (9.8 | ) | |||||||||||
Tax Credits |
0.2 | 1.9 | 0.4 | 3.1 | ||||||||||||
Permanent items |
(0.3 | ) | (1.3 | ) | (0.2 | ) | (66.7 | ) | ||||||||
Impairment of Goodwill |
(28.3 | ) | - | - | - | |||||||||||
Acquistion-related items |
0.8 | - | - | - | ||||||||||||
Change in analysis of uncertain income tax positions |
(0.1 | ) | 0.9 | (0.3 | ) | 1.5 | ||||||||||
Valuation Allowance |
(0.4 | ) | (1.5 | ) | - | - | ||||||||||
Other |
- | - | (0.1 | ) | - | |||||||||||
Effective tax rate |
8.0 | % | 38.6 | 38.9 | (72.6 | ) |
The difference between the federal statutory rate of 35% and the effective tax rate for fiscal 2014 primarily relates to the following: (1) the impairment of Goodwill is not deductible for income tax purposes, (2) the gain on acquisition-related item is not taxable, (3) a portion of the Company’s income is subject to tax in various tax jurisdictions with tax rates which differ from the U.S. statutory tax rate, (3) the impact of recording U.S. income taxes associated with current and future distributions of foreign earnings, (4) changes in discrete tax items recognized during the period based on enacted tax laws, and (5) the expiration of the statute of limitations for the benefits associated with uncertain tax positions.
The difference between the federal statutory rate of 35% and the effective tax rate for fiscal 2013 primarily relates to state income taxes and tax credits net of the changes in the valuation allowance.
The difference between the federal statutory rate of 35% and the effective tax rate for the Successor fiscal 2012 period primarily relates to state income taxes, foreign dividends and foreign tax credits. The difference between the federal statutory rate and the effective tax rate for the Predecessor fiscal 2012 period primarily relates to the income taxes associated with the repatriation of foreign earnings in excess of foreign tax credits earned, the non-deductibility of certain transaction costs, and state income taxes.
Deferred income taxes reflect the net tax effects of: (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes; and (b) net operating losses and tax credit carry-forwards. In accounting for the Immucor Acquisition, the Company recorded deferred tax liabilities of approximately $291.9 million associated with acquired intangible assets that have no income tax basis. These liabilities were offset by deferred tax assets primarily associated with net operating losses and tax credit carry-forwards. In accounting for LIFECODES acquisition, the Company recorded deferred tax liabilities of approximately $12.7 million associated with acquired intangible assets that have no income tax basis. These liabilities were offset by deferred tax assets primarily associated with reserves and state tax credit carry-forwards. In accounting for the Organ-i acquisition, the Company recorded deferred tax liabilities of approximately $10.2 million primarily associated with acquired intangible assets that have no income tax basis. These liabilities were offset by deferred tax assets primarily associated with net operating loss carry-forwards.
The significant items comprising the Company’s net deferred tax assets (liabilities) as of May 31, 2014 and 2013 are as follows (in thousands):
Years Ended May 31 |
||||||||
2014 |
2013 |
|||||||
Deferred tax liabilities: |
||||||||
Intangibles |
$ | (260,981 | ) | (269,972 | ) | |||
Interest expense |
(11,291 | ) | (13,685 | ) | ||||
Property and equipment |
(2,224 | ) | (4,765 | ) | ||||
Transfer pricing |
(238 | ) | (2,022 | ) | ||||
Prepaids and other |
(492 | ) | (309 | ) | ||||
Deferred tax assets: |
||||||||
Tax credit carry-forwards |
32,632 | 30,797 | ||||||
Capitalized research |
15,122 | - | ||||||
Net operating loss carry-forwards |
6,793 | 27,532 | ||||||
Compensation expense |
3,543 | 3,002 | ||||||
Inventory |
3,351 | 1,894 | ||||||
Reserves not currently deductible |
1,110 | 1,194 | ||||||
Other |
1,526 | 3,640 | ||||||
(211,149 | ) | (222,694 | ) | |||||
Valuation Allowance |
(3,962 | ) | (3,234 | ) | ||||
Net deferred tax assets (liabilities) |
$ | (215,111 | ) | (225,928 | ) |
As of May 31, 2014 and 2013, net deferred tax liabilities located in countries outside the U.S. were $10.7 million and $10.9 million, respectively.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company’s largest foreign tax jurisdictions are Canada, Germany and Italy. The Company’s U.S. tax returns for all fiscal years beginning after May 31, 2009 remain subject to examination by various tax authorities. As of May 31, 2014, $8.7 million of Federal net operating loss carry-forwards were available to reduce future U.S. Federal taxable income. These net operating loss carry-forwards begin to expire in fiscal 2025. The Company has $25.7 million of foreign tax credit carry-forwards which expire between fiscal 2018 and fiscal 2024. The Company has $4.1 million of research and development credits which expire between fiscal 2019 and fiscal 2034. Certain portions of the Federal net operating loss and certain tax credit carry-forwards are subject to annual limitations on their usage resulting from the BioArray acquisition in fiscal 2008 and the Organ-i acquisition in fiscal 2014.
In September 2013, the U.S. Department of the Treasury and the IRS issued final regulations addressing the acquisition, production and improvement of tangible property, and also proposed regulations addressing the disposition of property. These regulations are effective for tax years beginning after January 1, 2014. The Company has analyzed the expected impact of these regulations on the Company and concluded that the expected impact is minimal. The Company will continue to monitor the impact of any future changes to these regulations and any changes will be reported prospectively.
In the Predecessor period, the Company considered its investment in foreign subsidiaries to be permanently invested. Accordingly, no deferred tax liabilities were provided for its investments in foreign subsidiaries. Subsequent to the Immucor Acquisition, the Company no longer considers itself to be permanently reinvested with respect to its accumulated and unrepatriated earnings as well as the future earnings of each foreign subsidiary. During fiscal 2014, the Company recorded a deferred tax liability associated with unremitted foreign earnings of certain subsidiaries. At May 31, 2013, the Company’s unremitted foreign earnings resulted in a net deferred tax asset. Accordingly, the Company did not provide for any deferred income taxes related to unremitted foreign earnings during fiscal 2013. The Company considers its equity investment in each foreign subsidiary to be permanently reinvested and thus has not recorded a deferred tax liability on such amounts.
The Company has net operating loss carry-forwards of $3.4 million in Belgium and $1.2 million in France. The net operating loss carry-forwards for Belgium and France do not expire. Prior to August 19, 2011, the Company had provided a full valuation allowance against these net operating loss carry-forwards. As a result of the Immucor Acquisition, deferred tax liabilities were recorded in both Belgium and France for certain intangible assets that are deductible for accounting purposes but not for income tax purposes. As a result, a portion of the valuation allowance in Belgium and the full valuation allowance in France was released through purchase accounting.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company’s valuation allowances are primarily related to deferred tax assets generated from certain foreign net operating losses, state net operating losses and tax credit carry-forwards. Current evidence does not suggest the Company will realize sufficient taxable income of the appropriate character within the carry-forward period to allow us to realize these deferred tax benefits. If the Company were to identify tax planning strategies that become available in the future to recover these deferred tax assets or generate sufficient income of the appropriate character in these jurisdictions in the future, it could lead to the reversal of these valuation allowances and a reduction of income tax expense. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets.
An analysis of the Company’s deferred tax asset valuation allowance is as follows (in thousands):
Years Ended May 31 |
||||||||
2014 |
2013 |
|||||||
Balance, beginning of period |
$ | 3,234 | 1,888 | |||||
Change due to acquisitions |
- | 362 | ||||||
Additions |
1,111 | 984 | ||||||
Reductions |
(367 | ) | - | |||||
Other |
(16 | ) | - | |||||
Balance, end of period |
$ | 3,962 | 3,234 |
The following is a tabular reconciliation of the total tax liability for unrecognized tax benefits for the years ended May 31, 2014 and 2013 (in thousands):
Years Ended May 31 |
||||||||
2014 |
2013 |
|||||||
Balance, beginning of period |
$ | 12,729 | 13,597 | |||||
Change due to Acquisitions |
- | 324 | ||||||
Gross (decreases)increases in unrecognized tax benefits as a result of tax positions taken during a prior period |
(35 | ) | 172 | |||||
Gross increases(decreases) in unrecognized tax benefits as a result of tax positions taken during current period |
788 | 1,690 | ||||||
Reductions to unrecognized tax benefits as a result of the applicable statute of limitations |
(619 | ) | (3,054 | ) | ||||
Balance, end of period |
$ | 12,863 | 12,729 |
The Company does not anticipate that within the next twelve months the total amount of unrecognized tax benefits will significantly increase or decrease. The total balance of unrecognized tax benefits at May 31, 2014 is $14.5 million, including accrued interest. Of this amount, the amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, is $14.2 million.
Approximately $10.4 million of the unrecognized tax benefit is reflected as a non-current liability as it is unlikely to require payment during the twelve-month period ending May 31, 2015. The remaining $4.1 million is included in non-current deferred tax liabilities. At May 31, 2013, the liability for unrecognized tax benefits, including accrued interest, of $10.2 million was included as a non-current liability and $3.8 million was included in non-current deferred tax liabilities.
As of May 31, 2014 and 2013, the Company had recorded accrued interest related to the unrecognized tax benefits of $1.6 million and $1.3 million, respectively. During fiscal 2014, fiscal 2013, the Successor period ended May 31, 2012 and the Predecessor period ended August 19, 2011, the Company recognized income tax expense of $0.3 million, $0.1 million, $0.3 million and $0.1 million, respectively, due to the increase in the reserves for interest. The Company has not accrued penalties since adoption of the update to ASC 740, “Income Taxes.”
At May 31, 2014 and 2013, other assets in the consolidated balance sheets include $6.7 million and $6.2 million, respectively, of competent authority offsets related to transfer pricing. Competent authority offsets represent anticipated refunds from bilateral agreements between the taxing authorities of two countries which eliminates double taxation by treaty. For Immucor, this competent authority offset represents anticipated refunds by taxing authorities that will offset potential uncertain tax positions related to transfer pricing.
19. |
SEGMENT AND GEOGRAPHIC INFORMATION |
The Company determines operating segments in accordance with its internal operating structure, which is organized based upon product groups. Each segment is separately managed and is evaluated primarily upon operating results. The Company has two operating segments, the Transfusion segment and the Transplant & Molecular segment, which have been aggregated into one reportable segment.
The Company manufactures and markets a complete line of diagnostics products and automated systems used primarily by hospitals, donor centers and reference laboratories in a number of tests performed to detect and identify certain properties of human blood and human tissue to ensure the most compatible match between patient and donor. These tests are performed for the purpose of blood transfusion, pre-transplant human leukocyte antigen (HLA) typing and screening processes as well as post-transplant patient monitoring to aid in the identification of graft rejection.
The Company operates in various geographies. These geographic markets are comprised of the United States, Europe, Canada and other international markets. Major international markets include the BRIC region (countries of Brazil, Russia, India and China), the Asia Pacific region, and Mexico. These products are marketed globally, both directly to the end user and through established distributors.
Accounting policies for segments are the same as those described in the summary of significant accounting policies.
The following segment data is presented for the twelve months ended May 31, 2014, May 31, 2013, and May 31, 2012 (separated into Predecessor and Successor periods) as follows (in thousands):
Successor |
Predecessor |
|||||||||||||||
August 20, 2011 |
June 1, 2011 |
|||||||||||||||
Year Ended |
through |
through |
||||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
|||||||||||||
Net sales by product group: |
||||||||||||||||
Transfusion |
$ | 330,547 | 330,931 | 257,046 | 73,632 | |||||||||||
Transplant & Molecular |
57,509 | 16,857 | 4,768 | 1,278 | ||||||||||||
Total |
$ | 388,056 | 347,788 | 261,814 | 74,910 |
Following is a summary of enterprise-wide information (in thousands):
Successor |
Predecessor |
|||||||||||||||
August 20, 2011 |
June 1, 2011 |
|||||||||||||||
Year Ended |
through |
through |
||||||||||||||
May 31, 2014 |
May 31, 2013 |
May 31, 2012 |
August 19, 2011 |
|||||||||||||
Net sales to customers by geography are as follows: |
||||||||||||||||
United States |
$ | 239,204 | 229,944 | 173,918 | 50,988 | |||||||||||
Europe (A) |
79,219 | 63,643 | 49,486 | 14,180 | ||||||||||||
Canada |
19,127 | 19,985 | 14,349 | 3,907 | ||||||||||||
Other |
50,506 | 34,216 | 24,061 | 5,835 | ||||||||||||
Total |
$ | 388,056 | 347,788 | 261,814 | 74,910 |
Net sales are attributed to individual countries based on the customer's country of origin at the time of the sale and where the Company has an operating entity.
As of May 31 |
||||||||
2014 |
2013 |
|||||||
Long-lived assets (excluding goodwill and intangibles) by geography: |
||||||||
United States |
$ | 54,066 | 57,184 | |||||
Europe (B) |
15,725 | 13,399 | ||||||
Canada |
4,517 | 4,511 | ||||||
Other (C) |
2,003 | 1,287 | ||||||
Total |
$ | 76,311 | 76,381 |
As of May 31 |
||||||||
2014 |
2013 |
|||||||
Concentration of net assets by geography: |
||||||||
United States |
$ | 299,948 | 485,968 | |||||
Europe |
123,095 | 114,740 | ||||||
Canada |
32,802 | 32,910 | ||||||
Other (C) |
12,771 | 11,088 | ||||||
Total |
$ | 468,616 | 644,706 |
(A) – Net sales to any individual country within Europe were not material to the Company’s consolidated net sales.
(B) – Long-lived assets located in any individual country within Europe were not material to the Company's consolidated long-lived assets.
(C) – Primarily Japan and India.
Sales to an individual customer did not exceed more than 10% of our annual net sales during any of the years ended May 31, 2014, May 31, 2013, or the Successor and Predecessor fiscal 2012 periods.
20. |
RETIREMENT PLAN |
The Company maintains a 401(k) retirement plan covering its U.S. employees who meet the plan requirements. The Company matches a portion of employee contributions, which vest immediately. The Company matched contributions to the plan of $1.9 million during fiscal 2014, $1.6 million during fiscal 2013, $1.0 million during the Successor fiscal 2012 period, and $0.4 million during the Predecessor fiscal 2012 period.
The Company’s Canadian affiliate maintains a defined contribution pension plan covering all Canadian employees, except temporary employees. The Company matches a portion of employee contributions to the plan, and each employee vests in the Company’s matching contributions once they have been a participant continuously for two years. The Company’s matching contributions to the plan were $0.1 million for fiscal 2014, $0.1 million for fiscal 2013, and less than $0.1 million for each of the Successor fiscal 2012 period and the Predecessor fiscal 2012 period.
21. |
CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES |
The Company has certain outstanding indebtedness that is guaranteed by its U.S. subsidiaries. However, the indebtedness is not guaranteed by the Company’s foreign subsidiaries. The guarantor subsidiaries are all wholly owned and the guarantees are made on a joint and several basis and are full and unconditional. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information is presented. The condensed consolidating financial information of the Company is as follows:
Balance Sheets
IMMUCOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
May 31, 2014
(in thousands)
Immucor, Inc. |
Guarantors |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
ASSETS |
||||||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 4,863 | (409 | ) | 19,167 | - | 23,621 | |||||||||||||
Accounts receivable, net |
29,558 | 5,137 | 34,934 | - | 69,629 | |||||||||||||||
Intercompany receivable |
57,167 | 15,058 | 6,548 | (78,773 | ) | - | ||||||||||||||
Inventories |
20,733 | 17,358 | 13,184 | (2,124 | ) | 49,151 | ||||||||||||||
Deferred income tax assets, current portion |
4,160 | 2,807 | 464 | 820 | 8,251 | |||||||||||||||
Prepaid expenses and other current assets |
6,228 | 470 | 5,884 | - | 12,582 | |||||||||||||||
Total current assets |
122,709 | 40,421 | 80,181 | (80,077 | ) | 163,234 | ||||||||||||||
PROPERTY AND EQUIPMENT, net |
37,963 | 16,103 | 22,245 | - | 76,311 | |||||||||||||||
INVESTMENT IN SUBSIDIARIES |
247,567 | 5,021 | 3,114 | (255,702 | ) | - | ||||||||||||||
GOODWILL |
743,512 | 47,877 | 60,174 | - | 851,563 | |||||||||||||||
OTHER INTANGIBLE ASSETS, net |
586,243 | 63,474 | 43,153 | - | 692,870 | |||||||||||||||
DEFERRED FINANCING COSTS, net |
33,116 | - | - | - | 33,116 | |||||||||||||||
OTHER ASSETS |
6,721 | 260 | 339 | - | 7,320 | |||||||||||||||
Total assets |
$ | 1,777,831 | 173,156 | 209,206 | (335,779 | ) | 1,824,414 | |||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||||||
Accounts payable |
$ | 6,805 | 5,945 | 2,915 | - | 15,665 | ||||||||||||||
Intercompany payable |
99 | 69,999 | 8,675 | (78,773 | ) | - | ||||||||||||||
Accrued interest and interest swap liability |
19,605 | - | - | - | 19,605 | |||||||||||||||
Accrued expenses and other current liabilities |
8,681 | 4,950 | 10,085 | - | 23,716 | |||||||||||||||
Income taxes payable |
30,785 | (29,698 | ) | 3,840 | - | 4,927 | ||||||||||||||
Deferred revenue, current portion |
1,269 | 12 | 1,532 | - | 2,813 | |||||||||||||||
Current portion of long-term debt, net of debt discounts |
4,580 | 11 | - | - | 4,591 | |||||||||||||||
Total current liabilities |
71,824 | 51,219 | 27,047 | (78,773 | ) | 71,317 | ||||||||||||||
LONG-TERM DEBT, net of debt discounts |
1,037,168 | 15 | - | - | 1,037,183 | |||||||||||||||
DEFERRED REVENUE |
14 | - | 72 | - | 86 | |||||||||||||||
DEFERRED INCOME TAX LIABILITIES |
201,184 | 10,157 | 12,038 | - | 223,379 | |||||||||||||||
OTHER LONG-TERM LIABILITIES |
11,025 | 11,425 | 1,383 | - | 23,833 | |||||||||||||||
Total liabilities |
1,321,215 | 72,816 | 40,540 | (78,773 | ) | 1,355,798 | ||||||||||||||
SHAREHOLDERS' EQUITY: |
||||||||||||||||||||
Total shareholders' equity |
456,616 | 100,340 | 168,666 | (257,006 | ) | 468,616 | ||||||||||||||
Total liabilities and shareholders' equity |
$ | 1,777,831 | 173,156 | 209,206 | (335,779 | ) | 1,824,414 |
IMMUCOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
May 31, 2013
(in thousands)
Immucor, Inc. |
Guarantors |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
ASSETS |
||||||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 6,971 | 4,107 | 18,310 | - | 29,388 | ||||||||||||||
Accounts receivable, net |
26,517 | 5,552 | 36,017 | - | 68,086 | |||||||||||||||
Intercompany receivable |
54,443 | 7,961 | 4,313 | (66,717 | ) | - | ||||||||||||||
Inventories |
18,551 | 15,897 | 12,978 | (1,485 | ) | 45,941 | ||||||||||||||
Deferred income tax assets, current portion |
3,098 | 1,097 | 533 | 562 | 5,290 | |||||||||||||||
Prepaid expenses and other current assets |
6,360 | 483 | 4,734 | - | 11,577 | |||||||||||||||
Total current assets |
115,940 | 35,097 | 76,885 | (67,640 | ) | 160,282 | ||||||||||||||
PROPERTY AND EQUIPMENT, net |
40,124 | 17,060 | 19,197 | - | 76,381 | |||||||||||||||
INVESTMENT IN SUBSIDIARIES |
248,150 | 5,743 | 4 | (253,897 | ) | - | ||||||||||||||
GOODWILL |
903,802 | 41,763 | 57,898 | - | 1,003,463 | |||||||||||||||
OTHER INTANGIBLE ASSETS, net |
634,194 | 39,523 | 40,886 | - | 714,603 | |||||||||||||||
DEFERRED FINANCING COSTS, net |
39,449 | - | - | - | 39,449 | |||||||||||||||
OTHER ASSETS |
6,203 | 184 | 405 | - | 6,792 | |||||||||||||||
Total assets |
$ | 1,987,862 | 139,370 | 195,275 | (321,537 | ) | 2,000,970 | |||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||||||
Accounts payable |
$ | 7,587 | 3,315 | 2,736 | - | 13,638 | ||||||||||||||
Intercompany payable |
424 | 59,347 | 7,440 | (67,211 | ) | - | ||||||||||||||
Accrued interest and interest rate swap liability |
20,084 | - | - | - | 20,084 | |||||||||||||||
Accrued expenses and other current liabilities |
11,653 | 5,290 | 9,711 | - | 26,654 | |||||||||||||||
Income taxes payable |
30,879 | (30,457 | ) | 3,451 | - | 3,873 | ||||||||||||||
Deferred revenue, current portion |
1,086 | 6 | 1,160 | - | 2,252 | |||||||||||||||
Current portion of long term debt, net of debt discounts |
6,673 | 39 | - | - | 6,712 | |||||||||||||||
Total current liabilities |
78,386 | 37,540 | 24,498 | (67,211 | ) | 73,213 | ||||||||||||||
LONG TERM DEBT, net of debt discounts |
1,039,250 | 28 | - | - | 1,039,278 | |||||||||||||||
DEFERRED REVENUE |
62 | - | 99 | - | 161 | |||||||||||||||
DEFERRED INCOME TAX LIABILITIES |
214,222 | 4,861 | 11,957 | - | 231,040 | |||||||||||||||
OTHER LONG-TERM LIABILITIES |
11,236 | 114 | 1,222 | - | 12,572 | |||||||||||||||
Total liabilities |
1,343,156 | 42,543 | 37,776 | (67,211 | ) | 1,356,264 | ||||||||||||||
SHAREHOLDERS' EQUITY: |
||||||||||||||||||||
Total shareholders' equity |
644,706 | 96,827 | 157,499 | (254,326 | ) | 644,706 | ||||||||||||||
Total liabilities and shareholders' equity |
$ | 1,987,862 | 139,370 | 195,275 | (321,537 | ) | 2,000,970 |
Statements of Operations Year to Date
IMMUCOR, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended May 31, 2014
(in thousands)
Immucor, Inc. |
Guarantors |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
NET SALES |
$ | 251,079 | 55,457 | 149,725 | (68,205 | ) | 388,056 | |||||||||||||
COST OF SALES (exclusive of amortization shown separately below) |
82,485 | 32,936 | 92,418 | (68,205 | ) | 139,634 | ||||||||||||||
GROSS MARGIN |
168,594 | 22,521 | 57,307 | - | 248,422 | |||||||||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Research and development |
13,514 | 15,180 | 376 | - | 29,070 | |||||||||||||||
Selling and marketing |
24,701 | 9,188 | 25,168 | - | 59,057 | |||||||||||||||
Distribution |
11,199 | 1,484 | 7,482 | - | 20,165 | |||||||||||||||
General and administrative |
25,412 | 7,362 | 8,829 | - | 41,603 | |||||||||||||||
Amortization expense |
47,883 | 2,700 | 2,382 | - | 52,965 | |||||||||||||||
Acquisition-related items |
(4,638 | ) | - | - | - | (4,638 | ) | |||||||||||||
Impairment loss |
160,000 | 150 | - | - | 160,150 | |||||||||||||||
Total operating expenses |
278,071 | 36,064 | 44,237 | - | 358,372 | |||||||||||||||
(LOSS) INCOME FROM OPERATIONS |
(109,477 | ) | (13,543 | ) | 13,070 | - | (109,950 | ) | ||||||||||||
NON-OPERATING (EXPENSE) INCOME: |
||||||||||||||||||||
Interest income |
- | 8 | 84 | (56 | ) | 36 | ||||||||||||||
Interest expense |
(88,314 | ) | - | (46 | ) | 56 | (88,304 | ) | ||||||||||||
Other, net |
819 | 153 | (927 | ) | - | 45 | ||||||||||||||
Total non-operating (expense) income |
(87,495 | ) | 161 | (889 | ) | - | (88,223 | ) | ||||||||||||
(LOSS) INCOME BEFORE INCOME TAXES |
(196,972 | ) | (13,382 | ) | 12,181 | - | (198,173 | ) | ||||||||||||
(BENEFIT) PROVISION FOR INCOME TAXES |
(14,381 | ) | (5,060 | ) | 3,525 | - | (15,916 | ) | ||||||||||||
NET (LOSS) INCOME BEFORE EARNINGS OF CONSOLIDATED SUBSIDIARIES |
(182,591 | ) | (8,322 | ) | 8,656 | - | (182,257 | ) | ||||||||||||
Net (loss) income of consolidated subsidiaries |
334 | - | - | (334 | ) | - | ||||||||||||||
NET (LOSS) INCOME |
$ | (182,257 | ) | (8,322 | ) | 8,656 | (334 | ) | (182,257 | ) |
IMMUCOR, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended May 31, 2013
(in thousands)
Immucor, Inc. |
Guarantors |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
NET SALES |
$ | 256,676 | 15,835 | 124,465 | (49,188 | ) | 347,788 | |||||||||||||
COST OF SALES (exclusive of amortization shown separately below) |
84,320 | 11,056 | 73,839 | (49,188 | ) | 120,027 | ||||||||||||||
GROSS MARGIN |
172,356 | 4,779 | 50,626 | - | 227,761 | |||||||||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Research and development |
13,428 | 7,850 | 35 | - | 21,313 | |||||||||||||||
Selling and marketing |
25,611 | 3,632 | 20,886 | - | 50,129 | |||||||||||||||
Distribution |
11,599 | 421 | 6,698 | - | 18,718 | |||||||||||||||
General and administrative |
26,143 | 6,673 | 9,985 | - | 42,801 | |||||||||||||||
Amortization expense |
47,820 | 663 | 2,282 | - | 50,765 | |||||||||||||||
Acquisition-related items |
2,616 | - | - | - | 2,616 | |||||||||||||||
Impairment loss |
3,500 | - | - | - | 3,500 | |||||||||||||||
Loss on disposition of fixed assets |
1,175 | - | - | - | 1,175 | |||||||||||||||
Total operating expenses |
131,892 | 19,239 | 39,886 | - | 191,017 | |||||||||||||||
(LOSS) INCOME FROM OPERATIONS |
40,464 | (14,460 | ) | 10,740 | - | 36,744 | ||||||||||||||
NON-OPERATING (EXPENSE) INCOME: |
||||||||||||||||||||
Interest income |
- | - | 97 | (69 | ) | 28 | ||||||||||||||
Interest expense |
(90,875 | ) | (2 | ) | (22 | ) | 69 | (90,830 | ) | |||||||||||
Loss on extinguishment of debt |
(9,111 | ) | - | - | - | (9,111 | ) | |||||||||||||
Other, net |
(1,043 | ) | (84 | ) | 588 | - | (539 | ) | ||||||||||||
Total non-operating (expense) income |
(101,029 | ) | (86 | ) | 663 | - | (100,452 | ) | ||||||||||||
(LOSS) INCOME BEFORE INCOME TAXES |
(60,565 | ) | (14,546 | ) | 11,403 | - | (63,708 | ) | ||||||||||||
(BENEFIT) PROVISION FOR INCOME TAXES |
(23,783 | ) | (4,773 | ) | 3,990 | - | (24,566 | ) | ||||||||||||
NET (LOSS) INCOME BEFORE EARNINGS OF CONSOLIDATED SUBSIDIARIES |
(36,782 | ) | (9,773 | ) | 7,413 | - | (39,142 | ) | ||||||||||||
Net (Loss) Income of consolidated subsidiaries |
(2,360 | ) | - | - | 2,360 | - | ||||||||||||||
NET (LOSS) INCOME |
$ | (39,142 | ) | (9,773 | ) | 7,413 | 2,360 | (39,142 | ) |
IMMUCOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
August 20, 2011 through May 31, 2012
(in thousands)
Successor |
||||||||||||||||||||
Immucor, Inc. |
Guarantor |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
NET SALES |
$ | 195,377 | 4,087 | 97,528 | (35,178 | ) | 261,814 | |||||||||||||
COST OF SALES (exclusive of amortization shown separately below) |
73,109 | 3,844 | 63,923 | (35,178 | ) | 105,698 | ||||||||||||||
GROSS MARGIN |
122,268 | 243 | 33,605 | - | 156,116 | |||||||||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Research and development |
7,724 | 6,113 | 92 | - | 13,929 | |||||||||||||||
Selling and marketing |
17,868 | 1,654 | 13,391 | - | 32,913 | |||||||||||||||
Distribution |
8,697 | 137 | 5,499 | - | 14,333 | |||||||||||||||
General and administrative |
26,850 | 1,682 | 9,784 | - | 38,316 | |||||||||||||||
Amortization of intangibles |
37,173 | 161 | 1,890 | - | 39,224 | |||||||||||||||
Certain litigation expenses |
22,000 | - | - | - | 22,000 | |||||||||||||||
Total operating expenses |
120,312 | 9,747 | 30,656 | - | 160,715 | |||||||||||||||
INCOME (LOSS) FROM OPERATIONS |
1,956 | (9,504 | ) | 2,949 | - | (4,599 | ) | |||||||||||||
NON-OPERATING (EXPENSE) INCOME: |
||||||||||||||||||||
Interest income |
- | - | 89 | (82 | ) | 7 | ||||||||||||||
Interest expense |
(77,066 | ) | - | (64 | ) | 82 | (77,048 | ) | ||||||||||||
Other, net |
406 | - | 41 | 447 | ||||||||||||||||
Total non-operating (expense) income |
(76,660 | ) | - | 66 | - | (76,594 | ) | |||||||||||||
(LOSS) INCOME BEFORE INCOME TAXES |
(74,704 | ) | (9,504 | ) | 3,015 | - | (81,193 | ) | ||||||||||||
(BENEFIT) PROVISION FOR INCOME TAXES |
(29,426 | ) | (3,275 | ) | 1,155 | - | (31,546 | ) | ||||||||||||
NET (LOSS) INCOME BEFORE EARNINGS OF CONSOLIDATED SUBSIDIARIES |
(45,278 | ) | (6,229 | ) | 1,860 | - | (49,647 | ) | ||||||||||||
Net (Loss) Income of consolidated subsidiaries |
(4,369 | ) | - | - | 4,369 | - | ||||||||||||||
NET (LOSS) INCOME |
$ | (49,647 | ) | (6,229 | ) | 1,860 | 4,369 | (49,647 | ) |
IMMUCOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
June 1, 2011 through August 19, 2011
(in thousands)
Predecessor |
||||||||||||||||||||
Immucor, Inc. |
Guarantor |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
NET SALES |
$ | 55,063 | 980 | 26,648 | (7,781 | ) | 74,910 | |||||||||||||
COST OF SALES (exclusive of amortization shown separately below) |
17,070 | 722 | 12,944 | (7,781 | ) | 22,955 | ||||||||||||||
GROSS MARGIN |
37,993 | 258 | 13,704 | - | 51,955 | |||||||||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Research and development |
2,390 | 2,471 | 34 | - | 4,895 | |||||||||||||||
Selling and marketing |
5,321 | 568 | 4,621 | - | 10,510 | |||||||||||||||
Distribution |
2,331 | 34 | 1,587 | - | 3,952 | |||||||||||||||
General and administrative |
33,903 | 657 | 3,615 | - | 38,175 | |||||||||||||||
Amortization of intangibles |
117 | 757 | 57 | - | 931 | |||||||||||||||
Total operating expenses |
44,062 | 4,487 | 9,914 | - | 58,463 | |||||||||||||||
(LOSS) INCOME FROM OPERATIONS |
(6,069 | ) | (4,229 | ) | 3,790 | - | (6,508 | ) | ||||||||||||
NON-OPERATING (EXPENSE) INCOME: |
||||||||||||||||||||
Interest income |
46 | - | 117 | (21 | ) | 142 | ||||||||||||||
Interest expense |
- | - | (21 | ) | 21 | - | ||||||||||||||
Other, net |
(246 | ) | 14 | 2,905 | - | 2,673 | ||||||||||||||
Total non-operating (expense) income |
(200 | ) | 14 | 3,001 | - | 2,815 | ||||||||||||||
(LOSS) INCOME BEFORE INCOME TAXES |
(6,269 | ) | (4,215 | ) | 6,791 | - | (3,693 | ) | ||||||||||||
(BENEFIT) PROVISION FOR INCOME TAXES |
1,497 | (1,598 | ) | 2,782 | - | 2,681 | ||||||||||||||
NET (LOSS) INCOME BEFORE EARNINGS OF CONSOLIDATED SUBSIDIARIES |
(7,766 | ) | (2,617 | ) | 4,009 | - | (6,374 | ) | ||||||||||||
Net (Loss) Income of consolidated subsidiaries |
1,392 | - | - | (1,392 | ) | - | ||||||||||||||
NET (LOSS) INCOME |
$ | (6,374 | ) | (2,617 | ) | 4,009 | (1,392 | ) | (6,374 | ) |
Statements of Cash Flows
IMMUCOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the Year Ended May 31, 2014
(in thousands)
Successor |
||||||||||||||||||||
Immucor, Inc. |
Guarantors |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 15,530 | (1,540 | ) | 12,221 | (610 | ) | 25,601 | ||||||||||||
Net cash provided by (used in) investing activities |
1,209 | (14,972 | ) | (11,233 | ) | (197 | ) | (25,193 | ) | |||||||||||
Net cash used in financing activities |
(6,633 | ) | (40 | ) | (786 | ) | 785 | (6,674 | ) | |||||||||||
Effect of exchange rate changes on cash and cash equivalents |
(179 | ) | - | 656 | 22 | 499 | ||||||||||||||
Increase (decrease) in cash and cash equivalents |
9,927 | (16,552 | ) | 858 | - | (5,767 | ) | |||||||||||||
Cash and cash equivalents at beginning of period |
6,971 | 4,107 | 18,310 | - | 29,388 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 16,898 | (12,445 | ) | 19,168 | - | 23,621 |
IMMUCOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the Year Ended May 31, 2013
(in thousands)
Successor |
||||||||||||||||||||
Immucor, Inc. |
Guarantors |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 4,690 | 6,423 | 13,534 | (113 | ) | 24,534 | |||||||||||||
Net cash used in investing activities |
(86,490 | ) | (2,164 | ) | (5,747 | ) | - | (94,401 | ) | |||||||||||
Net cash provided by ( used in) financing activities |
80,840 | (8 | ) | - | - | 80,832 | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
(162 | ) | - | (106 | ) | 113 | (155 | ) | ||||||||||||
(Decrease) increase in cash and cash equivalents |
(1,122 | ) | 4,251 | 7,681 | - | 10,810 | ||||||||||||||
Cash and cash equivalents at beginning of period |
8,093 | (144 | ) | 10,629 | - | 18,578 | ||||||||||||||
Cash and cash equivalents at end of period |
$ | 6,971 | 4,107 | 18,310 | - | 29,388 |
IMMUCOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
August 20, 2011 through May 31, 2012
(in thousands)
Successor |
||||||||||||||||||||
Immucor, Inc. |
Guarantor |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (15,073 | ) | 903 | 18,080 | (13,503 | ) | (9,593 | ) | |||||||||||
Net cash used in investing activities |
(1,943,229 | ) | (814 | ) | (1,407 | ) | - | (1,945,450 | ) | |||||||||||
Net cash provided by (used in) financing activities |
1,652,091 | - | (14,003 | ) | 14,002 | 1,652,090 | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
- | - | (789 | ) | (643 | ) | (1,432 | ) | ||||||||||||
(Decrease) increase in cash and cash equivalents |
(306,211 | ) | 89 | 1,881 | (144 | ) | (304,385 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
314,304 | (89 | ) | 8,748 | - | 322,963 | ||||||||||||||
Cash and cash equivalents at end of period |
$ | 8,093 | - | 10,629 | (144 | ) | 18,578 |
IMMUCOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
June 1, 2011 through August 19, 2011
(in thousands)
Predecessor |
||||||||||||||||||||
Immucor, Inc. |
Guarantor |
Non-Guarantors |
Eliminations |
Total |
||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 64,243 | 144 | (13,821 | ) | (24,978 | ) | 25,588 | ||||||||||||
Net cash used in investing activities |
(393 | ) | (153 | ) | (1,719 | ) | - | (2,265 | ) | |||||||||||
Net cash provided by (used in) financing activities |
68 | - | (25,085 | ) | 25,083 | 66 | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
- | - | (2,924 | ) | (105 | ) | (3,029 | ) | ||||||||||||
Increase (decrease) in cash and cash equivalents |
63,918 | (9 | ) | (43,549 | ) | - | 20,360 | |||||||||||||
Cash and cash equivalents at beginning of period |
250,386 | (80 | ) | 52,297 | - | 302,603 | ||||||||||||||
Cash and cash equivalents at end of period |
$ | 314,304 | (89 | ) | 8,748 | - | 322,963 |
22. |
COMMITMENTS AND CONTINGENCIES |
Lease Commitments
In the U.S., the Company leases office, warehousing and manufacturing facilities under several operating lease agreements expiring at various dates through fiscal 2026 with a right to renew for an additional term in the case of most of the leases. Certain of these leases contain escalation clauses. Outside the U.S., the Company leases foreign office and warehouse facilities under operating lease agreements expiring at various dates through fiscal 2020. The total leasing expense for the Company was $5.5 million in fiscal 2014, $5.8 million in fiscal 2013, $3.1 million in the Successor fiscal 2012 period, and $0.9 million in the Predecessor fiscal 2012 period.
The following is a schedule of approximate future annual lease payments under all operating leases that have initial or remaining non-cancelable lease terms as of May 31, 2014 (in thousands):
Year Ended May 31: |
||||
2015 |
$ | 4,345 | ||
2016 |
4,102 | |||
2017 |
3,774 | |||
2018 |
3,601 | |||
2019 |
3,129 | |||
Thereafter |
12,915 | |||
$ | 31,866 |
Purchase Commitments
Purchase commitments made in the normal course of business were $46.3 million as of May 31, 2014. These purchases were primarily for inventory items. The following is a schedule of approximate future payments for purchase commitments as of May 31, 2014 (in thousands):
Year Ended May 31: |
||||
2015 |
$ | 21,640 | ||
2016 |
6,823 | |||
2017 |
3,799 | |||
2018 |
3,928 | |||
2019 |
4,083 |
Legal Proceedings
In 2009, securities litigation was filed in the U.S. District Court of North Georgia against the Company and certain of the Company’s former directors and officers asserting federal securities fraud claims on behalf of a putative class of purchasers of our common stock between October 19, 2005 and June 25, 2009. In June 2011 the Court dismissed the complaint and closed the case and in September 2011 the plaintiffs appealed. The Company agreed to settle these actions in December 2012 and has received preliminary approval of the settlement in March 2013. Final approval was granted in June 2013. The settlement is covered under the Company’s insurance and did not impact our financial results.
And, from time to time, the Company is a party to certain legal proceedings in the ordinary course of business. However, the Company is not subject to any other legal proceedings expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Self-Insurance Costs
In fiscal 2014, the Company entered into a program to self-insure its costs related to U.S. medical employee benefits. Liabilities are recognized based on claims filed and an estimate of claims incurred but not reported. The liabilities for medical claims are accounted for on an undiscounted basis. The Company has purchased stop-loss coverage to limit its exposure on a per claim basis. The Company is insured for covered costs in excess of these per claim limits. As of May 31, 2014 the self-insured liability was approximately is $0.9 million and was included in accrued expenses and other current liabilities on the Company’s consolidated balance sheet.
23. |
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) |
The quarterly financial data included in the tables below are in thousands:
Income |
||||||||||||||||
Fiscal Year |
Net |
Gross |
from |
Net |
||||||||||||
Ended |
Sales |
Margin |
Operations |
Loss |
||||||||||||
May 31, 2014 |
||||||||||||||||
First Quarter |
$ | 96,044 | 59,993 | 9,990 | (7,760 | ) | ||||||||||
Second Quarter |
100,203 | 65,521 | 20,030 | (787 | ) | |||||||||||
Third Quarter |
90,979 | 58,620 | 8,834 | (7,355 | ) | |||||||||||
Fourth Quarter |
100,830 | 64,288 | (148,804 | ) | (166,355 | ) | ||||||||||
$ | 388,056 | 248,422 | (109,950 | ) | (182,257 | ) |
Income |
||||||||||||||||
Fiscal Year |
Net |
Gross |
from |
Net |
||||||||||||
Ended |
Sales |
Margin |
Operations |
Loss |
||||||||||||
May 31, 2013 |
||||||||||||||||
First Quarter |
$ | 85,154 | 58,053 | 13,942 | (10,635 | ) | ||||||||||
Second Quarter |
82,056 | 54,890 | 8,299 | (10,399 | ) | |||||||||||
Third Quarter |
86,192 | 56,195 | 12,844 | (5,913 | ) | |||||||||||
Fourth Quarter |
94,386 | 58,623 | 1,659 | (12,195 | ) | |||||||||||
$ | 347,788 | 227,761 | 36,744 | (39,142 | ) |
Item 8. — Financial Statements and Supplementary Data
B. |
Supplementary Financial Information |
Consolidated Financial Statement Schedule
Schedule II – Valuation and Qualifying Accounts
Years ended May 31, 2014, 2013 and 2012
(in thousands)
Beginning Balance |
Additions to Expense |
Deductions (1) |
Other (2) |
Ending Balance |
||||||||||||||||
2014 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 815 | 268 | (1,934 | ) | 1,749 | 898 | |||||||||||||
Deferred income tax valuation allowance |
3,234 | 1,111 | (383 | ) | - | 3,962 | ||||||||||||||
2013 |
||||||||||||||||||||
Allowance for doubtful accounts |
612 | 180 | 23 | - | 815 | |||||||||||||||
Deferred income tax valuation allowance |
1,888 | 984 | 362 | - | 3,234 | |||||||||||||||
Successor |
||||||||||||||||||||
2012 |
||||||||||||||||||||
Allowance for doubtful accounts |
- | 689 | (77 | ) | - | 612 | ||||||||||||||
Deferred income tax valuation allowance |
2,312 | - | (424 | ) | - | 1,888 | ||||||||||||||
Predecessor |
||||||||||||||||||||
2012 |
||||||||||||||||||||
Allowance for doubtful accounts |
2,157 | 183 | (52 | ) | - | 2,288 | ||||||||||||||
Deferred income tax valuation allowance |
2,467 | - | (155 | ) | - | 2,312 |
(1) |
Includes deductions, allowances written-off during the period less recoveries of accounts previously written-off, as well as the effects of changes in foreign exchange rates and changes in estimates. In 2013, the $362,000 of deferred income tax valuation allowance represents the beginning balances acquired in the LIFECODES acquisition. |
(2) | Represents valuation allowance to show gross receivables and related allowances at their net fair value at the time of acquisition, now reversed as the related receivables have been collected. |
Item 9. — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. — Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of May 31, 2014, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
(b) Changes in Internal Control
There were no changes in our internal control over financial reporting during the quarter ended May 31, 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
(c) Management’s Report on Internal Control over Financial Reporting
The management of Immucor is responsible for establishing and maintaining adequate internal control over financial reporting, as such is defined in Rules 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended, and for performing an assessment of the effectiveness of internal control over financial reporting as of May 31, 2014. The Company’s internal control over financial reporting is a process that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Immucor’s management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of May 31, 2014, using the criteria described in “Internal Control—1992 Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The objective of this assessment is to determine whether the Company’s internal control over financial reporting was effective as of May 31, 2014. Immucor’s management has concluded that, as of May 31, 2014, its internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of its financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Item 9B. — Other Information.
Not applicable.
PART III
Item 10. — Directors, Executive Officers and Corporate Governance.
Board of Directors
The board of directors of IVD Holdings Inc. (“Holdings”), the indirect parent of the Company, manages the affairs of the Company. All references to the “Board of Directors” refer to the board of directors of Holdings. Set forth below are the names, ages and biographical information of the current directors of Holdings. William Hawkins, Jeffrey Rhodes and Todd Sisitsky are also directors of the Company.
Name of Director |
Age |
Position and Biographical information | |
Jeffrey K. Rhodes |
39 |
Mr. Rhodes has been a director of Holdings and the Company since August 2011. Mr. Rhodes was a Principal at the Sponsor beginning 2005 and became a Partner in 2014. He serves on the board of directors of Biomet, EnvisionRX, Par Pharmaceutical Companies, IMS Health and Surgical Care Affiliates. We believe Mr. Rhodes is qualified to serve on our Board of Directors because of his financial expertise as well as his experience as a director of other privately held companies in the healthcare industry. | |
Todd B. Sisitsky |
42 |
Mr. Sisitsky has been a director of Holdings and the Company since August 2011. Mr. Sisitsky has been a Partner of the Sponsor since 2007 and was an Investor at the Sponsor from 2003 to 2007. Mr. Sisitsky serves on the board of directors of Biomet, Healthscope, IASIS Healthcare Corp., Surgical Care Affiliates, IMS Health, Aptalis Pharma and Par Pharmaceuticals. Mr. Sisitsky also serves on the board of directors of the Campaign for Tobacco Free Kids and on the Dartmouth Medical School Board of Overseers. We believe Mr. Sisitsky is qualified to serve on our Board of Directors because of his financial expertise as well as his experience as a director of other privately held companies in the healthcare industry. | |
William A. Hawkins |
60 |
Mr. Hawkins, a director of Holdings and the Company since October 2011, has served as the Company’s President and Chief Executive Officer since he joined the Company in October 2011. From 2002 to June 2011, Mr. Hawkins served in a variety of executive capacities, including Chairman and CEO, at Medtronic, Inc. Mr. Hawkins serves on the board of KeraNetics, Thoratec and AdvaMedDx. Mr. Hawkins also serves on the Duke University Board of Trustees and the board of the Duke University Health System. We believe Mr. Hawkins is qualified to serve on our Board of Directors because of his extensive experience, executive leadership and management experience in other companies in the healthcare industry. | |
Scott Garrett |
64 |
Mr. Garrett has been a director of Holdings since January 2012. Mr. Garrett is a Senior Operating Partner with Water Street Healthcare Partners, a strategic private equity firm focused exclusively on the healthcare industry. From 2005 to 2010 Mr. Garrett was the Chief Executive Officer of Beckman Coulter, a leading biomedical testing company. Mr. Garrett currently serves on the boards of Hologic, Inc., Oregentec, Inc., MarketLab, Inc. and AdvaMedDx. Until 2010 Mr. Garrett served on the boards of Beckman Coulter, AdvaMed and InHealth. We believe Mr. Garrett is qualified to serve as a director given his extensive healthcare and industry experience. | |
David A. Kessler, M.D. |
63 |
Dr. Kessler has been a director of Holdings since January 2012. Dr. Kessler is currently Professor of Pediatrics and Epidemiology and Biostatistics at the School of Medicine, University of California, San Francisco (UCSF). Dr. Kessler was Commissioner of the FDA from 1990-1997. He was Dean of the School of Medicine and the Vice Chancellor for Medical Affairs at UCSF from 2003 through 2007. Dr. Kessler has served on the board of directors of Tokai Pharmaceuticals, Inc. since 2009. We believe Dr. Kessler is qualified to serve on our Board of Directors because of his extensive healthcare and regulatory experience. |
Sean Murphy |
61 |
Mr. Murphy, a director of Holdings since January 2012, serves as a senior advisor to Evercore Partner, a New York based investment bank. Mr. Murphy served in a variety of executive capacities, including Vice President of Strategy and Business Development at Abbott from 1979 to 2010. Mr. Murphy serves on the board of directors for Nordion. We believe Mr. Murphy is qualified to serve on our Board of Directors because of his extensive healthcare experience and because of his background in finance and accounting. | |
Sharad Mansukani |
45 |
Dr. Mansukani, a Director of Holdings since January 2012, serves as a senior advisor of the Sponsor, and serves on the faculty at both the University of Pennsylvania and Temple University School of Medicine. Dr. Mansukani previously served as a senior advisor to the Administrator of CMS from 2003 to 2005. Dr. Mansukani serves on the board of directors of Envision RX, Iasis Healthcare, Surgical Care Affiliates and IMS Health. We believe Dr. Mansukani is qualified to serve on our Board of Directors because of his medical expertise and leadership experience. | |
Audit Committee Financial Expert
Mr. Murphy and Mr. Rhodes are the current members of the Company’s Audit Committee. In light of our status as a privately held company and the absence of a public listing or trading market for our common stock, we are not required to have an “audit committee financial expert.” However, we have determined that Messrs. Murphy and Rhodes are each an “audit committee financial expert” as defined by applicable SEC rules. Although the Board of Directors has not made an official determination, Mr. Murphy would likely be considered independent under the listing standards of the NASDAQ Stock Market. The Audit Committee performs its duties pursuant to a written Audit Committee Charter adopted by the Board of Directors.
Code of Business Conduct and Ethics
We have adopted a Code of Conduct that applies to all our employees, including our executive officers. A copy of the Code of Conduct is available on the Company’s website at www.immucor.com. Certain amendments to or waivers of the Code of Conduct will be promptly posted on the Company’s website or in a report on Form 8-K, as required by applicable laws.
Executive Officers
Set forth below are the names, ages, existing positions and biographical information of the current executive officers.
Name of Executive Officer |
Age |
Position and Biographical information |
Since | ||
William (Bill) Hawkins |
60 |
Mr. Hawkins has served as President and Chief Executive Officer since October 2011. Please see biography above under “Board of Directors.” |
2011 | ||
Dominique Petitgenet |
52 |
Mr. Petitgenet has served as Chief Financial Officer and Vice President and of the Company since February 2012. In May 2014, Mr. Petitgenet’s role was expanded to include oversight of the international operations for the Company’s Transfusion Diagnostics business as well as the finance function for the Company. From 2008 to 2012, Mr. Petitgenet was the Chief Financial Officer of Merial, Inc. Mr. Petitgenet was the Executive Director of Planning & Financial Evaluations at Merial, Inc. from 2005 to 2008. |
2012 |
Section 16(a) Beneficial Ownership Reporting Compliance
None.
Item 11. — Executive Compensation.
Compensation Discussion and Analysis
This Compensation Discussion and Analysis describes the material elements of compensation awarded to Named Executive Officers for our 2014 fiscal year. It should be read in conjunction with the Summary Compensation Table, related tables and the narrative disclosure under the heading “Executive Compensation.” The compensation committee of the Board of Directors (the “Committee”) consists primarily of representatives from the Sponsor.
The Named Executive Officers for fiscal 2014 were:
● |
William (Bill) Hawkins, President and Chief Executive Officer from October 2011 to the present; |
● |
Dominique Petitgenet, Vice President and Chief Financial Officer from March 2012 to the present; |
Overview
The Committee has responsibility over matters relating to compensation of executives, including cash incentive and other benefit plans, including reviewing the performance of management in achieving the Company’s goals and objectives and for setting the annual compensation of the Company’s executive officers. The Committee also has responsibility over the administration of the Holdings’ equity incentive plan.
Cash bonuses paid to executive officers for fiscal year 2014 were conditioned on the achievement of certain revenue and Adjusted EBITDA targets and Company objectives and on meeting individual goals. Long-term equity incentives are awarded to executive officers when they are hired, but are not generally awarded on an annual basis.
No independent executive compensation consultants advised the Committee on fiscal year 2014 compensation matters. The Committee has sought input from management, but no executive officer has participated directly in any Committee meetings relating to his or her compensation.
Our Compensation Philosophy
Immucor Executive Compensation Philosophy and Objectives
Immucor’s executive compensation program is designed to help achieve superior performance of Immucor’s executive officers and management team by accomplishing the following objectives:
|
• |
Attracting, retaining and rewarding highly-qualified employees; |
|
• |
Relating compensation to both company and individual performance; |
|
• |
Encouraging and rewarding the achievement of our short and long-terms goals and operating plans |
|
• |
Establishing compensation levels that are internally equitable and externally competitive; and |
|
• |
Aligning the interest of our executives with the financial strategic objectives of our shareholders. |
Total Compensation
We seek to achieve the objectives of our executive compensation program by offering a compensation package that uses three key elements: (1) base salary, (2) annual cash incentives, and (3) long-term equity incentives.
|
• |
|
Base Salaries. We seek to provide competitive base salaries factoring in the responsibilities associated with the executive’s position, the executive’s skills and experience, and the executive’s performance as well as other factors |
|
• |
|
Annual Cash Incentives. The aim of this element of compensation is to reward individual and group contributions to the Company’s annual operating performance based upon the achievement of pre-established performance standards in the most recent completed fiscal year. |
|
• |
|
Long-Term Equity Incentives. The long-term element of our compensation program consists of the opportunity for our executive officers to participate directly as equity owners of the Company, combined with an up-front grant of stock options. The equity component is the most significant element of our executive compensation program because we believe that a meaningful equity interest by our executive officers and management team will provide a strong incentive to drive top line growth, increase margins and pursue growth opportunities, which we believe will lead to increased equity value and returns to our Sponsors. |
Elements of Compensation for Fiscal 2014
The following section outlines the components of compensation and how we established pay levels for each of these components in fiscal 2014.
Base Salary
The base salary paid to Mr. Hawkins for fiscal 2014 was governed by the terms of his employment agreement with us. The base salary paid to Mr. Petitgenet was governed by the terms of the Offer Letter between Mr. Petitgenet and the Company dated February 12, 2012. These agreements contain the general terms of each Named Executive Officer’s employment and establish the minimum compensation that such Named Executive Officers are entitled to receive, but do not prohibit, limit or restrict our ability to pay additional compensation, whether in the form of base salary, bonus, stock options or otherwise. The Committee reviews base salaries of our executive officers annually.
The table below shows the base salary for each Named Executive Officer for fiscal 2014.
William Hawkins |
President and Chief Executive Officer |
$800,000 |
Dominique Petitgenet |
Vice President, Chief Financial Officer |
$400,000 |
Annual Cash Incentives --- Annual Bonus Plan
The purpose of our annual cash bonus plan is to motivate and reward executives for achieving our shorter-term financial goals and strategic goals, and to provide competitive total compensation opportunities. Each executive’s annual bonus opportunity has been designed with reference to the bonus opportunities of comparable positions at our peer companies, while also balancing the cost implications to us.
The Compensation Committee approved the Annual Bonus Plan in August 2013. Under the terms of the Annual Bonus Plan, the Compensation Committee may establish performance goals and award opportunities at its discretion. For fiscal 2014, the Compensation Committee determined that the Company’s executive officers were eligible for bonuses based on four components:
● | Revenue Component (25%): actual revenue compared to fiscal 2014 target net revenue; | |
● | Adjusted EBITDA Component (35%): actual Adjusted EBITDA compared to fiscal 2014 target Adjusted EBITDA; | |
● |
Corporate Goals Component (20%): the achievement of corporate goals established by the Compensation Committee for fiscal 2014; and | |
● |
Individual Component (20%): individual goals to support key corporate objectives. |
The Committee retains the ability to provide for bonuses for outstanding individual performance even when targeted metrics for overall Company performance are not achieved. Annual bonuses can increase if we exceed targeted revenue, Adjusted EBITDA and corporate or individual goals.
The table below shows the performance factors that could be applied depending on the extent to which each of the components listed above are achieved. Executive officers can earn bonus awards on a prorated basis for levels of achievement in between the performance factors listed below. No awards are paid if achievement of the bonus components is less than 50% of target.
Below Minimum |
Minimum
|
Target |
Maximum
| ||
Performance Factor |
0% |
50% |
100% |
200% |
The applicable performance factor will be applied to a percentage of each Named Executive Officer’s base compensation as follows:
William Hawkins |
100% |
Dominique Petitgenet |
50% |
For fiscal 2014, Target Revenue was $402.2 million and Target Adjusted EBITDA was $154.3 million. Our actual revenue for fiscal 2014 was approximately $385.9 million and actual Adjusted EBITDA was approximately $142.2 million. We therefore achieved below the minimum for each of our revenue and Adjusted EBITDA targets. We achieved approximately 22.5% of the corporate goals component. Mr. Hawkins and Mr. Petitgenet each achieved 100% of their individual goals component. If they are employed by the Company at the time of payment, Messrs. Hawkins and Petitgenet will be eligible to receive the bonuses (including discretionary amounts) listed below under the Annual Bonus Plan.
William Hawkins |
$ 340,000 |
Dominique Petitgenet |
$ 105,000 |
Stock-Based Long-Term Incentives --- 2011 Stock Incentive Plan
Our Named Executive Officers’ compensation is heavily weighted in long-term equity because we believe that a meaningful equity interest by our executive officers and management team will provide a strong incentive to drive top line growth, increase margins and pursue growth opportunities, which we believe will lead to increased equity value and returns to our Sponsors.
On December 12, 2011 Holdings adopted the 2011 Equity Incentive Plan (the “2011 Plan”) pursuant to which shares of the stock of Holdings were reserved for issuance to senior management of the Company, the non-employee directors of Holdings and other consultants or advisors to the Company. Consistent with the Board’s view of long-term equity incentives as an important part of an ownership culture that encourages a focus on long-term performance by our Named Executive Officers and other key associates, each of the Named Executive Officers were awarded stock options when they joined the Company. The number of options awarded to each individual was “front-loaded” and intended to represent a long-term equity opportunity. The options will vest upon meeting certain time- and performance-based conditions. The Committee does not expect to make equity awards on an annual basis, but the Committee has discretion to grant awards at any time. The grant date fair value of these options is shown in the Grants of Plan-Based Awards table below.
Investment Opportunity
We believe that executive officers should have a meaningful ownership stake in the Company to underscore the importance of linking executive and investor interests, and to encourage an owner-manager and long-term perspective in managing the business. This ownership stake has been achieved through the award of Holdings stock options and the opportunity for additional equity investment in Holdings. Our executive officers and certain key members of management were provided the opportunity to purchase shares of Holdings. As a result, Mr. Hawkins purchased 10,000 shares of Holdings at $100 per share, 5,000 shares in both January 2012, and July 2012.
Benefits
Our executives receive benefits consistent with our general employee population.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of the board of directors of the Company who served during fiscal year 2014 are Messrs. Sisitsky, Murphy, Garrett and Hawkins. Other than Mr. Hawkins, none of these committee members were officers or employees of the Company during fiscal year 2014, were formerly Company officers or had any relationship otherwise requiring disclosure. There were no interlocks or insider participation between any member of the Board of Directors or compensation committee and any member of the Board or compensation committee of another company.
Report of the Compensation Committee
The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed it with management. Based on its review and discussions with management, the Committee recommended to our Board that the Compensation Discussion and Analysis be included in this report for filing with the SEC.
Submitted by the Compensation Committee of the Board of Directors:
Todd Sisitsky
Scott Garrett
Sean Murphy
William Hawkins
Executive Compensation
Compensation Summary
The following table sets forth the compensation earned by the Named Executive Officers for services rendered in all capacities to the Company for each of the fiscal years presented.
Name and Principal Position |
Year |
Salary |
Bonus |
Stock Award |
Option Awards (1) |
Non-Equity Incentive Plan Compensation (2) |
All Other Compensation (3) |
Total |
|||||||||||||||||||||
($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||
William A. Hawkins |
2014 |
808,146 | - | - | - | 340,000 | 158,597 | 1,306,743 | |||||||||||||||||||||
Executive Vice President |
2013 |
830,769 | - | - | - | 312,000 | 265,415 | 1,408,184 | |||||||||||||||||||||
Chief Executive Officer |
2012 |
516,621 | - | - | 3,108,377 | 317,600 | 7,931 | 3,950,529 | |||||||||||||||||||||
Dominique G. Petitgenet |
2014 |
412,468 | - | - | - | 105,000 | 175,334 | 692,802 | |||||||||||||||||||||
Vice President |
2013 |
389,423 | - | - | 60,400 | 90,625 | 22,117 | 562,565 | |||||||||||||||||||||
Chief Financial Officer |
2012 |
75,000 | - | - | 483,200 | 94,438 | 2,308 | 654,946 |
(1) |
The amounts in these columns reflect the aggregate grant date fair value, as computed in accordance with Accounting Standards Codification 718, of awards pursuant to the Company’s equity incentive plans. Assumptions used in the calculation of these amounts for awards granted in fiscal year 2014 are included in Note 16, “Share-Based Compensation”, to the Company’s audited financial statements for the fiscal year ended May 31, 2014, included in the this Annual Report on Form 10-K filed. All the awards listed above were equity awards and consequently aggregate grant date fair value is fixed. |
(2) |
Represents the discretionary bonus and annual cash incentive awards earned under the Annual Bonus Plan. We will pay bonuses for fiscal 2014 at the beginning of fiscal 2015 based on the achievement of financial, corporate and individual goals established under the Company’s Annual Bonus Plan. The Annual Bonus Plan is described in greater detail in the Compensation Discussion and Analysis section of this report. | |
(3) |
All Other Compensation consisted of the following: |
Name |
Year |
Perquisites and Other Personal Benefits (1) |
Insurance Premiums |
Company Contributions to Retirement and 401(k) Plans |
Severance Payments / Accruals |
Total |
||||||||||||||||
($) | ($) | ($) | ($) | ($) | ||||||||||||||||||
William A. Hawkins (1) |
2014 |
140,000 | 7,797 | 10,800 | - | 158,597 | ||||||||||||||||
Executive Vice President |
2013 |
239,820 | 5,795 | 19,800 | - | 265,415 | ||||||||||||||||
Chief Executive Officer |
2012 |
7,931 | - | - | - | 7,931 | ||||||||||||||||
Dominique G. Petitgenet |
2014 |
155,855 | 8,856 | 10,623 | - | 175,334 | ||||||||||||||||
Vice President |
2013 |
- | 8,079 | 14,038 | - | 22,117 | ||||||||||||||||
Chief Financial Officer |
2012 |
- | - | 2,308 | - | 2,308 |
(1) |
Mr. Hawkins is a party to an agreement with our Sponsors dated December 12, 2011, pursuant to which Mr. Hawkins is entitled to at least $140,000 per calendar year from the Sponsor or its portfolio companies. The Company paid Mr. Hawkins $140,000 for calendar year 2012 in August 2013. Mr. Petitgenet is entitled to at least $150,000 per calendar year from the Sponsor or its portfolio companies. The Company paid Mr. Petitgenet $150,000 for calendar year 2012 in August 2013. In addition, the Company reimbursed Mr. Petitgenet relocation expenses. |
Grants of Plan-Based Awards
The following table includes information with respect to grants of plan-based awards to our Named Executive Officers during the fiscal year ended May 31, 2014.
All Other | All Other | |||||||||||||||||||||||||||||||||||||||||||
Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) |
Stock Awards: Number of Shares of |
Option Awards: Number of Securities |
Exercise or Base Price |
Closing Price on |
Grant Date Fair Stock |
|||||||||||||||||||||||||||||||||||||||
Name |
Grant Date |
Threshold |
Target |
Maximum |
Target | Maximum |
Stock or Units (2) |
Underlying Options |
of Option Awards |
Grant Date |
and Option Awards | |||||||||||||||||||||||||||||||||
($) | ($) | ($) | (#) | (#) | (#) | (#) | ($ / Sh) | ($ / Sh) | ($ / Sh) | |||||||||||||||||||||||||||||||||||
William A. Hawkins |
- | 800,000 | 1,600,000 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
Executive Vice President Chief Executive Officer |
||||||||||||||||||||||||||||||||||||||||||||
Dominique G. Petitgenet |
- | 400,000 | 800,000 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
Vice President Chief Financial Officer |
(1) |
Actual payouts in fiscal 2015 to the Named Executive Officers under the Annual Bonus Plan are reported under the Non-Equity Incentive Plan Compensation column in the Summary Compensation Table. The Compensation Discussion and Analysis section of this report explains in greater detail the methodology used for calculating bonuses. |
(2) |
Represents options granted under the 2011 Stock Incentive Plan. Service-based options are vested 20% annually beginning on the second anniversary date of the grant date. Performance-based options are vested upon achievement of certain performance objectives.
|
Outstanding Equity Awards at Fiscal Year-End
The following table shows outstanding equity awards to the Named Executive Officers at May 31, 2014:
Option Awards (1) |
Stock Awards |
||||||||||||||||||||||||
|
Number of Securities Underlying Unexercised Options |
Number of Securities Underlying Unexercised Options |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned |
Option Exercise |
Option Expiration |
Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not |
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not |
||||||||||||||||||
Name |
Exercisable |
Unexercisable |
Options | Price | Date | Vested | Vested | ||||||||||||||||||
(#) | (#) | (#) | ($) | (#) | ($) | ||||||||||||||||||||
William A. Hawkins |
25,731 | 38,598 | - | 100.00 |
12/12/2021 |
- | - | ||||||||||||||||||
Executive Vice President | - | - | 64,329 | 100.00 |
12/12/2021 |
- | - | ||||||||||||||||||
Chief Executive Officer | |||||||||||||||||||||||||
Dominique G. Petitgenet |
4,000 | 6,000 | - | 100.00 |
3/1/2022 |
- | - | ||||||||||||||||||
Vice President | - | - | 10,000 | 100.00 |
3/1/2022 |
- | - | ||||||||||||||||||
Chief Financial Officer | 250 | 1,000 | - | 100.00 |
4/25/2023 |
- | - | ||||||||||||||||||
- | - | 1,250 | 100.00 |
4/25/2023 |
- | - |
(1) |
Option awards vest 20% annually beginning on the second anniversary of the grant date. |
Option Exercises and Stock Vested
There were no options exercised or restricted shares vested during the 2014 fiscal year for any of the Named Executive Officers.
Option Awards |
Stock Awards |
|||||||||||||||
Name |
Number of Shares Acquired on Exercise |
Value Realized on Exercise |
Number of Shares Acquired on Vesting |
Value Realized on Vesting |
||||||||||||
(#) | ($) | (#) | ($) | |||||||||||||
William A. Hawkins |
||||||||||||||||
Executive Vice President | ||||||||||||||||
Chief Executive Officer | - | $ | - | - | $ | - | ||||||||||
Dominique G. Petitgenet |
||||||||||||||||
Vice President | ||||||||||||||||
Chief Financial Officer | - | $ | - | - | $ | - |
Employment Agreements
We have a written employment agreement with Mr. Hawkins that provides for severance benefits in the event of termination without cause or by the employee for good reason in connection with a change in control. Mr. Petitgenet does not have a written employment agreement with the Company, but is a participant in the Company’s Key Employee Severance Plan.
Mr. Hawkins
Mr. Hawkins entered into an employment agreement with the Company on October 17, 2011.
If Mr. Hawkins’s employment is terminated prior to the end of the initial five year term or any subsequent one year extension term without cause or by Mr. Hawkins for good reason (each as defined in the agreement), Mr. Hawkins will receive, among other things (i) a payment equal to any accrued but unpaid base salary as of the date of termination, the value of any accrued vacation pay, and the amount of any expenses properly incurred by Mr. Hawkins prior to the termination date and not yet reimbursed, (ii) a payment equal to two years’ base salary, (iii) a payment equal to Mr. Hawkins’ annual bonus for the prior fiscal year to the extent then unpaid, (iv) a payment equal to the pro-rated annual bonus that Mr. Hawkins would have earned for the year in which his termination occurs, based on the actual achievement of applicable performance objectives in the performance year in which the termination date occurs; and (v) the immediate vesting of all equity awards previously granted to Mr. Hawkins that remain outstanding as of the termination date. In addition, if Mr. Hawkins’s employment is terminated within two years after a change of control, Mr. Hawkins will also receive a payment equal to two times his target annual bonus.
Mr. Petitgenet
Mr. Petitgenet is a participant in the Company’s Key Employee Severance Plan (the “Severance Plan”). The Severance Plan provides that if the Company terminates the employee’s employment without cause or the employee terminates his employment for good reason (each, a “qualifying termination”), then the Company must pay the employee an amount equal to his base salary plus the employee cost of twelve (12) months of health benefits. Upon a qualifying termination, the portion of the severance that meets the requirements of Treasury Regulation 1.409A-1(b)(9)(iii)(A) will be paid in approximately equal monthly installments over the one year following a qualifying termination and the excess will be paid in a lump sum within sixty (60) days after the qualifying termination.
If a qualifying termination occurs within two (2) years after a change in control and the employee was not a party to an employment agreement with the Company on the date of the Immucor Acquisition, then the Company must pay the employee a lump sum cash payment equal to two times his base salary plus twelve (12) months of health benefits.
The Severance Plan includes a “best net” provision, pursuant to which benefits will be reduced or “cut back” to the extent necessary to avoid an excise tax, if that would result in a better net after-tax benefit for the employee (taking into account the excise taxes the employee would pay on an unreduced benefit).
A release of claims is required to receive the payments under the Severance Plan. The release of claims must include an 18 month post-employment non-solicitation and non-competition restriction.
Quantification of Potential Amounts Payable on Termination
The table below sets forth the estimated payments that would be made to each of the Named Executive Officers upon involuntary termination before or after a change of control based on each person’s base salary as of May 31, 2014 and cash bonus paid with respect to fiscal 2014. The actual amounts to be paid out can only be determined at the time of such Named Executive Officer’s separation from the Company. The information set forth in the table assumes, as necessary:
● |
The termination and/or the qualified change in control event occurred on May 31, 2014 (the last business day of our last completed fiscal year); |
● |
The price per share of our common stock on the date of termination is less than $100. |
Before Change in Control |
After Change in Control |
|||||||||
Name |
Benefit |
Termination w/o Cause |
Termination w/o Cause |
|||||||
William A. Hawkins |
Severance |
$ | 1,920,000 | $ | 3,520,000 | |||||
Executive Vice President |
Stock Options (1) |
- | - | |||||||
Chief Executive Officer | ||||||||||
TOTAL |
$ | 1,920,000 | $ | 3,520,000 | ||||||
Dominique G. Petitgenet |
Severance |
$ | 421,105 | $ | 821,105 | |||||
Vice President |
Stock Options (1) |
- | - | |||||||
Chief Financial Officer | ||||||||||
TOTAL |
$ | 421,105 | $ | 821,105 |
(1) As of May 31, 2014 all stock options were underwater and therefore would have no value when vested upon termination.
Compensation of Directors
The following table provides information concerning the compensation of the Company’s non-employee directors for fiscal 2014. Directors who are employees of the Company receive no compensation for their services as directors.
Name |
Fees Earned or Paid in Cash (1) |
Stock Awards (2) (3) |
All Other Compensation (1) |
Total |
||||||||||||
($) | ($) | ($) | ($) | |||||||||||||
Scott Garrett |
40,000 | 36,288 | 2,394 | 78,682 | ||||||||||||
David Kessler |
40,000 | 36,288 | 3,476 | 79,764 | ||||||||||||
Sharad Mansukani |
40,000 | 36,288 | - | 76,288 | ||||||||||||
Sean Murphy |
40,000 | 36,288 | 1,670 | 77,958 | ||||||||||||
Jeffrey Rhodes (4) |
- | - | - | - | ||||||||||||
Todd Sisitsky (4) |
- | - | - | - |
(1) |
Non-employee directors receive an annual retainer of $40,000 and are reimbursed for all travel expenses to and from meetings of the Board of Directors. |
(2) |
Non-employee directors receive an annual grant of 400 restricted stock units. |
(3) |
The amounts in these columns reflect the aggregate grant date fair value, as computed in accordance with Accounting Standards Codification 718, of awards pursuant to the Company’s equity incentive plans. Assumptions used in the calculation of these amounts for awards granted in fiscal year 2014 are included in Note 16, “Share-Based Compensation”, to the Company’s audited financial statements for the fiscal year ended May 31, 2014, included in this Annual Report on Form 10-K. All the awards listed above were equity awards and consequently aggregate grant date fair value is fixed. |
(4) |
Our Board includes representatives from our Sponsors and these directors are not individually compensated by the Company. |
Item 12. — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
All outstanding shares of common stock of the Company are held indirectly by Holdings.
The following table describes the beneficial ownership of Holdings’ common stock as of May 31, 2014 by (i) each director, (ii) each Named Executive Officer of the Company, (iii) each person known to the Company to own more than 5% of the outstanding shares, and (iv) all of the executive officers and directors of the Company as a group. This information provided is as of May 31, 2014, and the beneficial ownership percentages are based on a total of 7,781,016 shares issued and outstanding on May 31, 2014.
Name of Beneficial Owner (and address for those owning more than five percent) |
Amount and Nature of Beneficial Ownership (1) |
Percent of Class | |||
5% Shareholders |
|||||
TPG Partners VI, L.P. |
6,217,231 |
79.9% | |||
Affiliates of TPG |
1,524,635 |
19.6% | |||
Directors and Executive Officers |
|||||
Scott Garrett |
5,000 |
* | |||
David Kessler |
- |
* | |||
Sharad Mansukani |
- |
* | |||
Sean Murphy |
2,500 |
* | |||
Jeffrey Rhodes |
- |
(2) |
* | ||
Todd Sisitsky |
- |
(2) |
* | ||
Dominique Petitgenet |
- |
* | |||
William A. Hawkins |
10,000 |
* | |||
All Directors and Executive Officers as a Group |
21,650 |
* | |||
* Represents less than one percent of the Company's outstanding Common Stock |
(1) |
Unless otherwise indicated, the address of each of our directors and executive officers is c/o Immucor, Inc., 3130 Gateway Drive, Norcross, Georgia, 30071. A person is considered to beneficially own any shares: (a) over which the person exercises sole or shared voting or investment power, or (b) of which the person has the right to acquire beneficial ownership at any time within 60 days (such as through the exercise of stock options). Unless otherwise indicated, voting and investment power relating to the above shares is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children. Amounts include restricted shares, both vested and unvested, which have voting rights. | |||||
(2) |
Jeffrey K. Rhodes is a Principal and Todd Sisitsky is a Partner of TPG Capital, L.P., an affiliate of the TPG Funds. Neither Mr. Rhodes nor Mr. Sisitsky has voting or investment power over and disclaims beneficial ownership of the shares held by the TPG Funds. The business address of each of Messrs. Rhodes and Sisitsky is c/o TPG Capital, L.P., 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. |
Item 13. — Certain Relationships and Related Transactions, and Director Independence.
Related Party Transactions
The Audit Committee of the Board of Directors monitors the occurrence of related party transactions in connection with its general responsibility to oversee the adequacy and effectiveness of the Company’s accounting, financial controls and internal controls over financial reporting, including the Company’s systems to monitor and manage business risk and legal and ethical compliance programs. The Committee relies principally on the Company’s management to identify transactions that are related party transactions. Any such transactions identified are considered not later than the Audit Committee’s next regularly-scheduled meeting, at which meeting the Audit Committee will determine what, if any, action may be warranted. The Audit Committee’s responsibilities are generally stated in its Charter, although its practices concerning potentially-reportable transactions are not specifically stated in the Charter.
The Company’s Code of Conduct requires that employees avoid conflicts of interest, which are defined broadly to include transactions between the Company and the employee, a family member or an affiliated company. Any conflict of interest is required to be brought to the immediate attention of the Company’s General Counsel. A violation of the Code of Conduct may result in disciplinary action up to and including dismissal. A copy of the Code of Conduct is available on the Company’s website at www.immucor.com.
Management Services Agreement
In connection with the Immucor Acquisition, we entered into a management services agreement with the Sponsor (the “Manager”), pursuant to which the Manager will provide us with certain management services until December 31, 2021, with evergreen one year extensions thereafter. The management services agreement provides that the Manager will receive an aggregate annual retainer fee equal to approximately $3 million. The management services agreement provides that the Manager will be entitled to receive fees in connection with certain subsequent financing, acquisition, disposition and change of control transactions equal to customary fees charged by internationally-recognized investment banks for serving as financial advisor in similar transactions. The management agreement also provides for reimbursement for out-of-pocket expenses incurred by the Manager or its designees after the consummation of the Immucor Acquisition. Additional services may also be provided by the Sponsor and charged to the Company.
The management services agreement includes customary exculpation and indemnification provisions in favor of the Manager, its designees and its affiliates. The management services agreement may be terminated by the Manager, the board of directors of Holdings or upon an initial public offering or change of control unless the Manager determines otherwise. In the event the management services agreement is terminated, we expect to pay the Manager or its designees all unpaid fees plus the sum of the net present values of the aggregate annual retainer fees that would have been payable with respect to the period from the date of termination until the expiration date in effect immediately prior to such termination.
Management Stockholders’ Agreement
In connection with the Immucor Acquisition, Holdings entered into a Management Stockholders’ Agreement with management stockholders, including all of the current executive officers. The stockholders’ agreement contains certain restrictions on such stockholders’ transfer of Holdings’ equity securities, contains rights of first refusal upon disposition of shares, contains standard tag-along and drag-along provisions, and generally sets forth the respective rights and obligations of the stockholders who are parties to that agreement.
Director Independence
Messrs. Sisitsky, Rhodes, Hawkins and Dr. Mansukani are not independent because Messrs. Sisitsky and Rhodes are employees of the Sponsor, Mr. Hawkins is an employee of the Company and Dr. Mansukani is an advisor to the Sponsor. Although the Board of Directors has not made an official determination, Messrs. Garrett and Murphy and Dr. Kessler would likely be considered independent under the listing standards of the NASDAQ Stock Market.
Item 14. — Principal Accountant Fees and Services.
Audit Fees and Services
The following table summarizes certain fees billed by Grant Thornton, LLP for the fiscal years 2014 and 2013:
Fee Category: |
2014 |
2013 |
||||||
Audit fees |
$ | 1,298,155 | 1,348,460 | |||||
Audit-related fees |
16,110 | 16,568 | ||||||
Tax fees |
— |
— |
||||||
All other fees |
— |
— |
||||||
Total fees |
$ | 1,314,265 | 1,365,028 |
Set forth below is a description of the nature of the services that Grant Thornton provided to us in exchange for such fees.
Audit Fees
Audit fees represent fees Grant Thornton billed us for the audit of our annual financial statements and the review of our quarterly financial statements and for services normally provided in connection with statutory and regulatory filings.
Audit-Related Fees
Audit-related fees represent fees Grant Thornton billed us for audit-related services, including services relating to the audit of employee benefit plan financial statements.
The Audit Committee pre-approved all of the above audit and audit-related fees of Grant Thornton, as required by the pre-approval policy described below. The Audit Committee concluded that the provision of the above services by Grant Thornton was compatible with maintaining Grant Thornton’s independence.
Tax Fees
During fiscal 2014 and fiscal 2013, there were no fees billed to us for professional services rendered by Grant Thornton for tax compliance, tax advice and tax planning.
All Other Fees
During fiscal 2014 and fiscal 2013, there were no fees billed to us for professional services rendered by Grant Thornton for other products or services.
Policy for Pre-Approval of Independent Registered Public Accounting Firm
Pursuant to our policy on Pre-Approval of Audit and Non-Audit Services, we discourage the retention of our independent registered public accounting firm for non-audit services. We will not retain our independent registered public accounting firm for non-audit work unless:
● |
In the opinion of senior management, the independent registered public accounting firm possesses unique knowledge or technical expertise that is superior to that of other potential providers; |
● |
The approval of the Chair of the Audit Committee is obtained prior to the retention; and |
● |
The retention will not affect the status of the independent registered public accounting firm as “independent accountants” under applicable rules of the SEC, PCAOB and NASDAQ Stock Market. |
During fiscal 2014 and 2013, all of the services provided by Grant Thornton for the services described above under the heading “Audit-Related Fees” were pre-approved using the above procedures, and none were provided pursuant to any waiver of the pre-approval requirement.
PART IV
Item 15. — Exhibits and Financial Statement Schedules.
(a) |
Documents filed as part 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. |
|
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. |
|
|
See Item 15(b) below. |
(b) |
Exhibits |
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
2.1 |
Stock Purchase Agreement by and between the Company and Gen-Probe Incorporated dated January 3, 2013 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on January 3, 2013). |
3.1.1 |
Amended and Restated Articles of Incorporation dated August 19, 2011 (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on August 25, 2011). |
3.2.1 |
Amended and Restated Bylaws dated August 19, 2011 (incorporated by reference to Exhibit 3.2 to the Form 8-K filed on August 25, 2011). |
|
4.1 |
Indenture, dated as of August 19, 2011 among IVD Acquisition Corporation, which on August 19, 2011 was merged with and into the Company and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011). |
4.2 |
Supplemental Indenture, dated as of August 19, 2011 among the Company, BioArray Solutions Ltd. and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011). |
4.4 |
Form of 11.125% Senior Notes due 2019 (included in Exhibit 4.1) (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011). |
4.5 |
Registration Rights Agreement, dated as of August 19, 2011 among IVD Acquisition Corporation, which on August 19, 2011 was merged with and into the Company, J.P. Morgan Securities LLC, as representative of the several Initial Purchasers listed in Schedule 1 to the Purchase Agreement (as defined therein) (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011). |
4.6 |
Registration Rights Agreement Joinder, dated as of August 19, 2011 among the Company, BioArray Solutions Ltd. and J.P. Morgan Securities LLC, as representative of the several Initial Purchasers listed in Schedule 1 to the Purchase Agreement (as defined therein) (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011). |
10.1 |
Credit Agreement dated as of August 19, 2011 among IVD Acquisition Corporation, which on August 19, 2011 was merged with and into the Company, with the Company surviving such merger as the Borrower, IVD Intermediate Holdings B Inc., as Holdings, Citibank, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other Lenders and Agents party thereto (incorporated by reference to Exhibit 10.1 of the Form S-4 filed November 22, 2011). |
10.2 |
Amendment No. 1 to Amended and Restated Credit Agreement, dated as of August 21, 2012, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on August 24, 2012). |
10.3 |
Amendment No. 2 to Amended and Restated Credit Agreement, dated as of January 25, 2013, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on January 31, 2013). |
10.4 |
Amended and Restated No. 2 to Amended and Restated Credit Agreement, dated as of February 19, 2013, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on February 22, 2013). |
10.5 |
Amendment No. 3 to Amended and Restated Credit Agreement, dated as of February 19, 2013, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on February 22, 2013). |
10.6 |
Amendment No. 4 to Amended and Restated Credit Agreement, dated as of February 19, 2013, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.3 to the Form 8-K filed on February 22, 2013). |
10.7 |
Security Agreement dated as of August 19, 2011 among IVD Acquisition Corporation, which on August 19, 2011 was merged with and into the Company, with the Company surviving such merger as the Borrower, IVD Intermediate Holdings B Inc., as Holdings, the subsidiary guarantors party thereto from time to time, and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of the Form S-4 filed November 22, 2011). |
10.9 |
Guaranty dated as of August 19, 2011 among IVD Intermediate Holdings B Inc., as Holdings, the other guarantors party thereto from time to time, and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 of the Form S-4 filed November 22, 2011). |
10.11 |
Management Services Agreement, entered into as of August 19, 2011, between IVD Acquisition Corporation, IVD Intermediate Holdings A Inc., IVD Intermediate Holdings B Inc., IVD Holdings Inc. and TPG Capital, L.P. (incorporated by reference to Exhibit 10.4 of the Form S-4 filed November 22, 2011). |
10.12-1** |
Amended and Restated Office Lease Agreement [2990 Building], dated January 26, 2007, between the Company and Business Park Investors Group, successor in interest to AP-Southeast Realty LP, successor by name change to Crocker Realty Trust, L.P., successor in interest to Connecticut General Life Insurance Company (incorporated by reference to Exhibit 10.1-11 to the Annual Report on Form 10-K for the fiscal year ended May 31, 2007), as amended by the Seventh Amendment to Office Lease Agreement dated July 1, 2013, between the Company and MLCFC 2007-7 Norcross Park Limited Partnership . |
10.12-2** |
Lease Agreement dated August 1, 2013 between the Company and Kennesaw Wall I, LLC. |
10.13* |
Employment Agreement by and among the Company, IVD Holdings Inc. and William Hawkins, executed as of December 8, 2011 and effective as of October 17, 2011 (incorporated by reference to Exhibit 10.11 to Amendment No. 1. to Form S-4 filed on December 9, 2011). |
10.14* |
Letter Agreement between TPG Capital, L.P. and William Hawkins, dated December 12, 2011. |
10.15* |
Offer Letter between Immucor, Inc. and Dominique Petitgenet dated February 12, 2012 (incorporated by reference to the Quarterly Report on Form 10-Q filed on April 11, 2012). |
10.16* |
Form of Management Stockholders’ Agreement, by and among the Company, Holdings and the Managers and Investors named therein (incorporated by reference to Exhibit 10.11 to Amendment No. 1. to Form S-4 filed on December 9, 2011). |
10.17* |
2012 Key Employee Severance Plan (incorporated by reference to Exhibit 10.5 to Form 10-K filed on July 27, 2012. |
10.18* |
Annual Bonus Plan for fiscal year 2014, executed as of August 6, 2013 and effective as of June 1, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on August 6, 2013). |
14 |
Immucor Code of Conduct (available at Immucor.com/compliancehotline). |
21** |
Subsidiaries of the Registrant. |
31.1** |
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2** |
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
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. |
101.INS |
XBRL Instance Document ** |
101.SCH |
XBRL Taxonomy Extension Schema ** |
101.CAL |
XBRL Taxonomy Extension Calculation ** |
101.DEF |
XBRL Taxonomy Extension Definition ** |
101.LAB |
XBRL Taxonomy Extension Label ** |
101.PRE |
XBRL Taxonomy Extension Presentation ** |
* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
* |
Denotes a management contract or compensatory plan or arrangement. |
** |
Filed or furnished herewith |
(c) |
Financial Statement Schedule |
No financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in Item 8 of this annual report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
IMMUCOR, INC.
By: |
/s/ William A. Hawkins |
|
|
William Hawkins, President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
August 26, 2014 |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ William A. Hawkins |
|
William A. Hawkins, President and Chief Executive Officer |
|
August 26, 2014 |
|
|
|
/s/ Dominique Petitgenet |
|
Dominique Petitgenet, Chief Financial Officer and Vice President, International, Transfusion Diagnostics | |
(Principal Financial and Accounting Officer) |
|
August 26, 2014 |
|
|
|
/s/ Jeffrey K. Rhodes |
|
Jeffrey K. Rhodes, Director |
|
August 26, 2014 |
|
|
|
/s/Todd B. Sisitsky |
|
Todd B. Sisitsky, Director |
|
August 26, 2014 |
|
107
Exhibit 10.12-1
SEVENTH AMENDMENT TO OFFICE LEASE AGREEMENT
THIS SEVENTH AMENDMENT TO OFFICE LEASE AGREEMENT (“Amendment”) is made and entered into as of the 1st day of July, 2013 (the “Effective Date”), by and between MLCFC 2007-7 NORCROSS PARK LIMITED PARTNERSHIP, a Georgia limited partnership (“Landlord”), and IMMUCOR, INC., a Georgia corporation (“Tenant”).
W I T N E S S E T H:
WHEREAS, Tenant and Landlord's predecessor-in-interest entered into that certain Office Lease Agreement, dated as of February 2, 1996 (the "Original Lease"), as amended by that certain First Amendment to Lease Agreement dated as of March 8, 1998 (the "First Amendment"), as amended by that certain Second Amendment to Lease Agreement dated as of August 18, 1998 (the "Second Amendment"), as amended by that certain Third Amendment to Lease Agreement dated as of August 19, 1999 (the "Third Amendment"), as amended by that certain Fourth Amendment to Lease Agreement dated as of August 8, 2002 (the "Fourth Amendment"), as further amended by that certain Amended and Restated Fifth Amendment to Lease Agreement dated as of January 18, 2005 (the “Fifth Amendment”), and as further amended by that certain Sixth Amendment to Lease Agreement dated as of March 31, 2006 (the "Sixth Amendment"), with respect to therein described space (the “Original Premises”) located in the buildings known as 2990 Gateway Drive, Norcross, Georgia (the "2990 Building"), 2975 Gateway Drive, Norcross, Georgia, 3130 Gateway Drive, Norcross, Georgia, 3150 Gateway Drive, Norcross, Georgia, and 7000 Peachtree Industrial Boulevard, Norcross, Georgia (collectively, the “Buildings”) located in that certain office park known as Colony Center Business Park (the “Building Project”); and
WHEREAS, Tenant and Landlord's predecessor-in-interest entered into that certain Amended and Restated Office Lease Agreement dated as of January 26, 2007 (the "Separation Amendment") pursuant to which the 2990 Building was separated from the remainder of the Buildings and, as it relates to the 2990 Building, all references in the Lease to the term "Premises" shall mean only the Premises in the 2990 Building, all references to the term "Building" or "Building Project" shall mean only the 2990 Building, and all references to the term "Lease" shall mean only the lease with respect to the Premises in the 2990 Building;
WHEREAS, the Original Lease, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment and the Separation Amendment are collectively referred to as the "Lease"; and
WHEREAS, Landlord and Tenant desire to amend the Lease pursuant to the terms and conditions hereinafter set forth in this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual premises and covenants contained herein and in the Lease, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby agree as follows:
1. |
Premises. | |
The Premises consist of Suites 100, 300 and 500 of the 2990 Building containing 29,793 square feet. |
2. |
Term of Lease. | |
The term of the Lease shall be extended through December 31, 2024. Tenant has no remaining options to extend or renew the term of the Lease. |
3. |
Base Rent. | |
From the Effective Date through the end of the term of the Lease (as extended by this Amendment), notwithstanding anything in the Lease to the contrary, Tenant shall pay the following Base Rent: |
Time Period Base Rent psf Annual Base Rent Monthly Base Rent
Effective Date – 12/31/14 $7.10 $211,530.30 $17,627.53
01/01/15 – 12/31/15 $7.10 $211,530.30 $17,627.53
01/01/16 – 12/31/16 $7.10 $211,530.30 $17,627.53
01/01/17 – 12/31/17 $7.10 $211,530.30 $17,627.53
01/01/18 – 12/31/18 $7.10 $211,530.30 $17,627.53
01/01/19 – 12/31/19 $7.60 $226,426.80 $18,868.90
01/01/20 – 12/31/20 $7.60 $226,426.80 $18,868.90
01/01/21 – 12/31/21 $7.60 $226,426.80 $18,868.90
01/01/22 – 12/31/22 $7.60 $226,426.80 $18,868.90
01/01/23 – 12/31/23 $7.60 $226,426.80 $18,868.90
01/01/24 – 12/31/24 $7.60 $226,426.80 $18,868.90
4. |
Additional Rent. | |
From the Effective Date through the end of the term of the Lease (as extended by this Amendment), notwithstanding anything in the Lease to the contrary, Tenant shall pay, as Additional Rent, Tenant's Share of Common Area Costs, Real Estate Taxes and Landlord's Insurance Costs and there shall no longer be a Base Year. Tenant's Share shall mean 43.5%. |
5. |
As Is Condition | |
Tenant accepts the Premises in "As Is" condition. |
6. |
Brokers. | |
Each of Landlord and Tenant warrants and represents to the other that except for Newmark Grubb Knight Frank ("Tenant's Broker") and NAI Brannen/Goddard, LLC ("Landlord's Broker"), no broker, finder, real estate agent or other person has represented it in any negotiations in connection with or as a result of this Amendment or the transactions contemplated hereby or hereunder or is entitled to a commission, fee or other compensation in connection with or as a result of this Amendment or the transactions contemplated hereby or hereunder. Landlord's Broker shall be paid a commission by Landlord per a separate agreement between Landlord and Landlord's Broker and Tenant's Broker shall be paid a commission by Landlord's Broker per a separate agreement between Landlord's Broker and Tenant's Broker. |
7. |
Authority. |
Landlord and Tenant affirm and covenant that each has the authority to enter into this Amendment, to abide by the terms hereof, and that the signatories hereto are authorized representatives of their respective entities empowered by their respective entities to execute this Amendment. Upon Landlord's request, Tenant shall provide evidence of the foregoing to Landlord.
8. |
Ratification. |
Except as expressly amended by this Amendment, the Lease remains unchanged and is hereby ratified and confirmed by Landlord and Tenant. All other terms, covenants and conditions of the Lease shall remain in full force and effect, and this Amendment shall be binding upon the parties hereto and their respective successors and assigns. In the event of a conflict between the terms and conditions of the Lease and those set forth in this Amendment, the terms and conditions of this Amendment shall control.
9. |
Miscellaneous. |
This Amendment shall be governed by the laws of the State in which the Building is located. Any terms used in this Amendment as defined terms, but which are not defined herein, shall have the meanings attributed to them in the Lease. The submission of this Amendment to Tenant for examination and consideration does not constitute an offer to amend the Lease, and this Amendment shall become effective only upon the execution and delivery thereof by both Landlord and Tenant. The Lease, as amended hereby, contains the entire agreement between the parties, and no representations, inducements, promises, agreements, oral or otherwise, between the parties not embodied in the Lease, as amended hereby, shall be of any force or effect. Time is of the essence as to all of the obligations of Tenant under the Lease and this Amendment. This Amendment has been negotiated "at arms length" by Landlord and Tenant, each having the opportunity to be represented by legal counsel. Therefore, this Amendment shall not be strictly construed against either party by reason of the fact that one party may have drafted this Amendment. This Amendment may be executed by the parties signing different counterparts of this Amendment, which counterparts together shall constitute the agreement of the parties.
[Signatures on the Next Page]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date set forth above.
LANDLORD:
MLCFC 2007-7 Norcross Park Limited Partnership
a Georgia limited partnership
BY: MLCFC 2007-7 Norcross Park GP, LLC
a Georgia limited liability company, its general partner
BY: LNR Partners, LLC
a Florida limited liability company, its manager
BY:
NAME:
TITLE:
TENANT:
BY: IMMUCOR, INC.
a Georgia corporation
BY:
NAME:
TITLE:
Exhibit 10.12-2
LEASE
This LEASE (this “Lease”), is made and entered into effective as of the 1st day of August, 2013 (the “Effective Date”), by and between KENNESAW WALL I, LLC, a Delaware limited liability company (“Landlord”), and IMMUCOR, INC., a Georgia corporation (“Tenant”).
I. GENERAL.
1.1 Consideration. Landlord enters into this Lease in consideration of the payment by Tenant of the rents herein reserved and the keeping, observance and performance by Tenant of the covenants and agreements herein contained.
1.2 Exhibits and Addenda to Lease. The Exhibits and Addenda listed below shall be attached to this Lease and be deemed incorporated in this Lease by this reference. In the event of any inconsistency between such Exhibits and Addenda and the terms and provisions of this Lease, the terms and provisions of the Exhibits and Addenda shall control. The Exhibits and Addenda to this Lease are:
Exhibit A – Depiction of the Premises
Exhibit B – Description of the Land
Exhibit C – Schedule of Rent
Exhibit D – Rules and Regulations
Exhibit E – Special Stipulations
Exhibit F – Tenant’s Ledger
Exhibit G – Tenant Improvement Work Letter
II. DEMISE OF PREMISES.
2.1 Demise. Subject to the provisions, covenants and agreements herein contained, Landlord hereby leases and demises to Tenant, and Tenant hereby leases from Landlord, the Premises as hereinafter defined, together with a non-exclusive right to use the Parking Area, as hereinafter defined, for the Term (as hereinafter defined) of this Lease, subject to existing covenants, restrictions, easements and encumbrances affecting the same.
2.2 Premises and Building Address. The "Premises" shall mean the space to be occupied by Tenant within Landlord’s Building, which is located on the Land, as the terms “Building” and “Land” are hereinafter defined. The address of the Building is 3130 Gateway Drive, Norcross, Georgia (“3130 Building”), 3150 Gateway Drive, Norcross, Georgia (“3150 Building”), and 7000 Peachtree Industrial Boulevard, Norcross, Georgia (“7000 Building”).The Premises is more particularly described and shown on Exhibit A attached hereto.
2.3 Square Footage of Premises. The Premises contains approximately 67,997 rentable square feet (“rsf”) in the aggregate within the Building as follows:
3130 Building 37,931 rsf
3150 Building 15,759 rsf
7000 Building 14,307 rsf
2.4 Building and Square Footage. "Building" shall mean collectively the 3130 Building, the 3150 Building, and the 7000 Building constructed on the Land, as depicted on Exhibit “A”, in the development commonly known and referred to as Colony Center. The Building contains approximately 67,997 rentable square feet in the aggregate.
2.5 Improvements. "Improvements" shall mean the Building, the Parking Area (as hereinafter defined), and all other improvements on the Land, including landscaping thereon.
2.6 Land. “Land” shall mean that certain tract or parcel of land in the City of Norcross, County of Gwinnett, and State of Georgia, more specifically described on Exhibit “B” attached hereto.
2.7 Property. "Property" shall mean the Land, the Building and the Improvements and any fixtures and personal property used in operation and maintenance of the Land, Building and Improvements, other than fixtures and personal property of Tenant and other users of space in the Building.
2.8 Common Facilities. "Common Facilities" shall mean all of the Property except the Premises and other space in the Building leased or held for lease to other tenants. Common Facilities shall include the Parking Area and any walks or driveways designated for common use by Tenant and other users of space in the Building. Common Facilities associated with the Property shall not be reduced without Tenant’s written consent, not to be unreasonably withheld, if such reduction would materially impair Tenant’s use of the Premises.
2.9 Parking Area. "Parking Area" shall mean that portion that of the Property which is for the parking of motor vehicles. The Parking Area is to be shared by Tenant in common with other users of space in the Building.
2.10 Park. The Property is located in and is part of the development commonly known as Colony Center containing approximately 218,766 rentable square feet.
2.11 Use of Common Facilities. Tenant is hereby granted the non-exclusive right to use, in common with other users of space in the Building, so much of the Common Facilities as are needed for the use of the Premises.
2.12 Covenant of Quiet Enjoyment. If Tenant promptly and punctually complies with each of its obligations hereunder, it shall peacefully have and enjoy the possession of the Premises during the Term hereof, provided that no action of Landlord or other tenants working in other space in the Building, or in repairing or restoring the Premises, shall be deemed a breach of this covenant, or give to Tenant any right to modify this Lease either as to term, rent payable, or other obligations to be performed.
2.13 Condition of Premises. Except as may be set forth on Exhibit G attached hereto and made a part hereof, Tenant agrees to accept the Premises in its “AS-IS” condition without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements thereto, and Tenant waives any warranty of condition or habitability, suitability for occupancy, use of habitation, fitness for a particular purpose, or of merchantability, express or implied, relating to the Premises.
III. TERM OF LEASE.
3.1 Lease Term. Subject to the terms and conditions of this Section 3, Tenant shall have and hold the Premises for a term ("Term") commencing on the Effective Date ("Commencement Date"), and continuing regularly and monthly thereafter until the Expiration Date. The Lease shall expire (unless sooner terminated or extended as herein provided) at midnight on December 31, 2024 ("Expiration Date").
3.2 Delivery of Possession. Landlord will deliver possession of the Premises to Tenant on the Commencement Date. If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant on the Commencement Date, then this Lease shall not be void or voidable, no obligation of Tenant shall be affected thereby, and neither Landlord nor Landlord's agents shall be liable to Tenant for any loss or damage resulting from the delay in delivery of possession; provided, however, that in such event, the Commencement Date and Expiration Date of this Lease, and all other dates that may be affected by their change, shall be revised to conform to the date of Landlord's delivery of possession to Tenant. The above, however, is subject to the provision that delays in the delivery of possession of the Premises for causes beyond Landlord's control, including, without limitation, those encompassed in the meaning of the term "force majeure", or delays caused by Tenant (the "Delays") shall be excluded in calculating such period. Unless expressly otherwise provided herein, Rent (as hereinafter defined) shall commence on the earlier of: (i) the Commencement Date; or (ii) occupancy of the Premises by Tenant. Unless the context otherwise so requires, the term "Rent" as used herein includes both Base Rent and Additional Rent as set forth in Section 4.
3.3 Adjustment of Expiration Date. If the Expiration Date, as determined herein, does not occur on the last day of a calendar month, then Landlord, at its option, may extend the Term by the number of days necessary to cause the Expiration Date to occur on the last day of the last calendar month of the Term. Tenant shall pay Base Rent and Additional Rent for such additional days at the same rate payable for the portion of the last calendar month immediately preceding such extension. The Commencement Date, Term (including any extension by Landlord pursuant to this Section 3) and Expiration Date may be set forth in a commencement letter prepared by Landlord and executed by Tenant.
IV. RENT AND OTHER AMOUNTS PAYABLE.
4.1 Base Rent. Except as otherwise expressly provided herein, Tenant covenants and agrees to pay to Landlord, without prior demand and without offset, deduction or abatement, base rent for the Term based on an annual Base rental rate of $6.50 per rentable square foot ($36,831.71 per month) ("Base Rent"). Monthly Base Rent shall be due in the amounts set forth in Exhibit C. The first month’s installment of Monthly Base Rent shall be due and payable to Landlord upon the date of execution hereof.
4.2 Monthly Rent. Base Rent shall be payable monthly in advance, according to the schedule as set forth in Exhibit C, commencing on the first day of the first month of the Term and continuing on the same day of each month thereafter for the balance of the Term, unless the Commencement Date of the Term is other than the first day of a calendar month, in which event Base Rent shall be payable on the Commencement Date for the remaining number of days in that month prorated for such partial month, and thereafter as provided above.
4.3 Place of Payments. Base Rent and all other sums payable by Tenant to Landlord under this Lease shall be paid to Landlord at the place for payments specified for notices in Section 13.8, or such other place as Landlord may, from time to time, designate in writing. In addition to such remedies as may be provided under the default provisions of this Lease, Landlord shall be entitled to collect a late charge of one percent (1%) of the amount of each monthly payment not received within ten (10) business days of the date when due, and a charge of the lower of the maximum lawful returned check fee or five percent (5%) of the amount of any check given by Tenant and not paid when first presented by Landlord.
4.4 Lease a Net Lease and Rent Absolute. It is the intent of the parties that the Base Rent provided in this Lease shall be a net payment to Landlord; that the Lease shall continue for the full Term notwithstanding any occurrence preventing or restricting use and occupancy of the Premises, including any damage or destruction affecting the Premises, and any action by governmental authority relating to or affecting the Premises, except as otherwise specifically provided in this Lease; that the Base Rent shall be absolutely payable without offset, reduction or abatement for any cause except as otherwise specifically provided in this Lease; that Landlord shall not bear any costs or expenses relating to the Premises or provide any services or do any act in connection with the Premises except as otherwise specifically provided in this Lease; and that Tenant shall pay, in addition to Base Rent, Additional Rent to cover costs and expenses relating to the Premises, the Common Facilities, and the Property.
4.5 Additional Rent. Tenant covenants and agrees to pay, as additional rent, Tenant’s Proportionate Share (as hereinafter defined), adjusted to reflect an occupancy rate in the Building of one hundred percent (100%), of the following costs and expenses: (i) all costs and expenses incurred by Landlord relating to the Premises; (ii) all costs and expenses relating to the Common Facilities; and (iii) if applicable, certain costs and expenses relating to the Property and the Park, all as hereinafter provided and to pay all other amounts payable by Tenant under the terms of this Lease ("Additional Rent"), including, without limitation, (a) Taxes and Assessments (as defined in Article V below); (b) insurance costs (as provided in Article VI below); (c) operating expenses (as provided in Section 7.2 below); (e) maintenance and repair expenses (as provided in Section 7.3 below); and, (f) other costs and expenses relating to the Premises, the Common Facilities, the Property, and, if applicable, the Park during or attributable to the Term, all as hereinafter provided in this Lease.
Landlord shall notify Tenant in writing, giving calculations of the amount of Additional Rent, which Additional Rent shall be payable at the same time as, and in addition to, the Base Rent, but the minimum Base Rent may never be less than that stated in this Section 4. Tenant shall further pay as Additional Rent any sales or use tax imposed on rents collected by Landlord or any tax on rents in lieu of ad valorem taxes on the Building, even though laws imposing such taxes may attempt to require Landlord to pay the same. If any such sales or use tax shall be imposed upon Landlord, and Landlord shall be prohibited by applicable law from collecting the amount of such tax from Tenant as Additional Rent, then Landlord, upon sixty (60) days prior written notice to Tenant, may terminate this Lease, unless Tenant legally can and does in fact reimburse Landlord for such tax.
4.6 Tenant's Proportionate Share. "Tenant's Proportionate Share" shall mean the percentage derived by dividing the rentable square footage of the Premises (67,997 rsf) by the rentable square footage within the Building (67,997 rsf), and with respect to the Park, if applicable, by the rentable square footage within the Park (218,766 rsf). As of the date hereof, Tenant's Proportionate Share is 100% of the Building and 31.082% of the Park, as applicable. Tenant’s Proportionate Share shall be adjusted for the expansion of the rentable square footage of the Premises resulting solely from a re-measurement of the Premises subsequent to the date of this Lease, but shall not be increased unless Tenant leases additional expansion space during the Term.
4.7 Monthly Deposits for Costs and Expenses Payable as Additional Rent. Tenant covenants and agrees to pay to Landlord, monthly in advance, without notice, on each day that payment of Base Rent is due, amounts as hereinafter specified (the "Monthly Deposits") for: (i) payment of Taxes and Assessments (as hereinafter defined); (ii) insurance premiums payable with respect to the Property ("Insurance Premiums"); and (iii) utility charges, operating expenses and maintenance and repair expenses (as specified in Article VII below), and other costs and expenses relating to the Common Facilities and the Park (other than the Premises) ((i), (ii) and (iii) collectively, the "Expenses"), and, if the Monthly Deposits are insufficient to pay the Expenses, to pay to Landlord, within ten (10) days after demand by Landlord, amounts necessary to provide Landlord with funds to pay the same. The Monthly Deposits shall each be equal to Tenant’s Proportionate Share of 1/12 of the amount, as reasonably estimated by Landlord, of the annual Expenses. Beginning on the first day of the first month of the Term, Tenant agrees to pay an initial estimated Monthly Deposit of approximately $0.22 per rentable square foot per month ($1.73/rsf attributable to operating expenses; $0.86/rsf attributable to Taxes and Assessments; and $0.06/rsf attributable to Insurance Premiums or approximately $2.65/rsf on an annualized basis) ($15,016.00 per month). After the end of each calendar year and after receipt by Landlord of all necessary information and computations, Landlord shall promptly furnish Tenant with a statement of the Expenses for the year, and an adjustment shall be made between Landlord and Tenant with payment to or repayment by Landlord, as the case may require to the end that Landlord shall receive the entire amount actually owed by Tenant for Expenses for such year. Any payment adjustment owed by Tenant will be due forthwith. To the extent the Monthly Deposits exceed the Expenses, the excess amount shall, at Landlord's option, except as may be otherwise provided by law, either be paid to Tenant or credited against future Monthly Deposits or against Base Rent, or other amounts payable by Tenant under this Lease. The amount of Expenses payable by Tenant for the years in which the Term commences and expires shall be subject to the provisions hereinafter contained in this Lease for proration of such amounts in such years. Prior to the dates on which payment becomes delinquent for Expenses, Landlord shall make payment of such amounts to the extent of funds from Monthly Deposits available therefor and, upon request by Tenant, shall furnish Tenant with a copy of any receipt for such payments. Except for Landlord's obligation to make payments out of funds available from Monthly Deposits, the making of Monthly Deposits by Tenant shall not limit or alter Tenant's obligation to pay any part of the Expenses, as elsewhere provided in this Lease.
4.8 Park Expenses. In addition to all other amounts payable by Tenant pursuant to the terms of this Lease, Tenant shall pay, as Additional Rent payable pursuant to the provisions hereinabove for Monthly Deposits, Tenant's Proportionate Share of the Park Expenses which are deemed allocated to the Property. "Park Expenses" shall mean all items listed in paragraph 4.5 hereof as Additional Rent which relate to the Park and which are not separately attributable to the Property or any other portion of the Park.
4.9 Proration at Commencement and Expiration of Term. Expenses shall be prorated between Landlord and Tenant for the year in which the Term commences and for the year in which the Term expires as of, respectively, the date of commencement of the Term and the date of expiration of the Term, except as hereinafter provided. Tenant shall be liable without proration for the full amount of any Taxes and Assessments relating to improvements, fixtures, equipment or personal property installed by or on behalf of Tenant which are levied, assessed, or attributable to the Term. Proration of Expenses shall be made on the basis of the actual Expenses, billed during the calendar years of the Term. The Tenant's Proportionate Share of Expenses for the years in which the Term commences and expires shall be paid and deposited with the Landlord through Monthly Deposits as hereinabove provided, but, in the event actual Expenses for either year are greater or less than as estimated for purposes of Monthly Deposits, appropriate adjustment and payment shall be made between the parties, at the time the actual amounts are known, as may be necessary to accomplish payment or proration, as herein provided.
4.10 Audit. Tenant shall have the right no more than once annually upon request to perform or have performed an audit to confirm Landlord’s calculation of Rent and Additional Rent, and each element thereof, as well as any other charge under the Lease, such audit to be performed at reasonable times and places upon reasonable notice. If Tenant’s calculation following the audit differs from Landlord’s the parties agree to discuss in good faith an appropriate resolution. If the parties are unable to reach resolution, Tenant may at its expense request review by an independent, nationally recognized accounting firm. If the independent firm substantially confirms Tenant’s calculation, Landlord shall make an appropriate adjustment to Rent, Additional Rent, or other charge, and reimburse Tenant for its reasonable expenses incurred in engaging such firm not to exceed $2,500.
4.11 General Provisions as to Monthly Deposits. Landlord shall be free to commingle the Monthly Deposits with Landlord's own funds and Landlord shall not be obligated to pay interest to Tenant on account of the Monthly Deposits. In the event of a transfer by Landlord of Landlord's interest in the Premises, Landlord may deliver the Monthly Deposits to the transferee of Landlord's interest and Landlord shall thereupon be discharged from any further liability to Tenant with respect to such Monthly Deposits. In the event of a transfer by Tenant of Tenant's interest in the Premises (Tenant's right to do being limited by Section 8.17), Landlord shall be entitled to deliver the Monthly Deposits to Tenant's successor in interest and Landlord shall thereafter have no liability with respect to the Monthly Deposits.
V. TAXES AND ASSESSMENTS.
5.1 Covenant to Pay Taxes and Assessments. Tenant covenants and agrees to pay, as Additional Rent, Tenant's Proportionate Share of Taxes and Assessments, which are billed during any calendar year falling partly or wholly within the Term, payable pursuant to the provisions hereinabove for Monthly Deposits. "Taxes and Assessments" shall mean all taxes, assessments or other impositions, general or special, ordinary or extraordinary, of every kind or nature, which may be levied, assessed or imposed upon or with respect to the Property or any part thereof.
5.2 Special Assessments. In the event any Taxes or Assessments are payable in installments over a period of years, Tenant shall be responsible only for installments billed during the calendar years within the Term, with proration, as above provided, of any installment payable prior to or after expiration of the Term.
5.3 New or Additional Taxes. Tenant's obligation to pay Tenant's Proportionate Share of Taxes and Assessments shall include any Taxes and Assessments of a nature not presently in effect but which may hereafter be levied, assessed or imposed upon Landlord or upon the Property if such tax shall be based upon or arise out of the ownership, use or operation of, or the rents received from, the Property, other than income taxes of Landlord.
5.4 Right to Contest Taxes. To the extent permitted by law, Landlord or Tenant with Landlord’s consultation and approval not to be unreasonably withheld shall have the right to contest any Taxes or Assessments. Landlord shall pay to or credit Tenant with Tenant's Proportionate Share of any abatement, reduction or recovery of any Taxes and Assessments attributable to the Term, less Tenant's Proportionate Share of all costs and expenses incurred by Landlord, including attorneys' fees, in connection with such abatement, reduction or recovery.
5.5 Tax Abatement Credits. Landlord shall use commercially reasonable, good faith efforts to make application from time to time for any state or local tax abatement credits for which the Property may qualify. To the extent permitted by law, Tenant in its discretion may also make such application with Landlord’s consultation and approval not to be unreasonably withheld. Landlord shall credit Tenant with Tenant's Proportionate Share of any reduction of any Taxes and Assessments attributable to the Term resulting from such tax abatement credits as and when applied, less Tenant's Proportionate Share of all costs and expenses incurred by Landlord, including attorneys' fees, in connection with such tax abatement credit.
VI. INSURANCE. Tenant shall comply with all applicable laws, ordinances and regulations affecting the Premises, now existing or hereafter adopted.
6.1 Casualty Insurance. Landlord covenants and agrees to obtain and keep in full force and effect during the Term, Casualty Insurance as hereinafter defined. "Casualty Insurance" shall mean fire and extended coverage insurance with respect to the Property, in an amount equal to the full replacement cost thereof, with coinsurance clauses of no less than eighty percent (80%), and with coverage, at Landlord's option, by endorsement or otherwise, for all risks, vandalism and malicious mischief, sprinkler leakage, boilers, and rental loss and with a deductible in an amount for each occurrence as Landlord, in its sole discretion, may determine from time to time. Casualty Insurance obtained by Landlord need not name Tenant as an insured party but may, at Landlord's option, name any mortgagee or holder of a deed of trust as an insured party as its interest may appear. Tenant covenants and agrees to pay its Proportionate Share of the cost of Casualty Insurance obtained by Landlord as Additional Rent, payable pursuant to the provisions hereinabove for Monthly Deposits.
6.2 Liability Insurance. Throughout the Term, Tenant, at its sole cost and expense, shall keep or cause to be kept for the mutual benefit of Landlord, Landlord's managing agent, Jackson Corporate Real Estate, LLC, and Tenant, Commercial General Liability Insurance (1986 ISO Form or its equivalent) with a combined single limit, each occurrence of at least One Million Dollars ($1,000,000) and general aggregate-per location of at least Two Million Dollars ($2,000,000), which policy shall insure against liability of Tenant, arising out of and in connection with Tenant's use of the Premises, and which shall insure the indemnity provisions contained herein. Landlord may require the limits to be increased if in its reasonable judgment (or that of its mortgagee) the coverage is insufficient. Tenant shall also carry the equivalent of ISO Special Form Property Insurance on its personal property and fixtures located in the Premises and any improvements made by Tenant for their full replacement value and with coinsurance waived, and Tenant shall neither have, nor make, any claim against Landlord for any loss or damage to the same, regardless of the cause thereof.
Prior to taking possession of the Premises, and upon request thereafter, but no more than annually or in connection with the potential sale of the Property, Tenant shall deliver to Landlord certificates or other evidence of insurance satisfactory to Landlord. All such policies shall be non-assessable and shall contain language to the extent obtainable that: (i) any loss shall be payable notwithstanding any act or negligence of Landlord or Tenant that might otherwise result in forfeiture of the insurance, (ii) that the policies are primary and non-contributing with any insurance that Landlord may carry, and (iii) that the policies cannot be canceled, non-renewed, or coverage reduced except after thirty (30) days' prior written notice to Landlord. If Tenant fails to provide Landlord with such certificates or other evidence of insurance coverage, Landlord may obtain such coverage and Tenant shall reimburse the cost thereof on demand.
With respect to all policies of insurance carried or maintained pursuant to this Lease and to the extent permitted under such policies, Tenant and Landlord each waive the insurance carriers’ rights of subrogation. Subject to the foregoing, Tenant shall indemnify and hold Landlord harmless from and against any and all claims arising out of (i) Tenant's use of the Premises or any part thereof, (ii) any activity, work, or other thing done, permitted or suffered by Tenant in or about the Premises or the Building, or any part thereof, (iii) any breach or default by Tenant in the performance of any of its obligations under this Lease, or (iv) any act or negligence of Tenant, or any officer, agent, employee, contractor, servant, invitee or guest of Tenant; and in each case from and against any and all damages, losses, liabilities, lawsuits, costs and expenses (including attorneys' fees at all tribunal levels) arising in connection with any such claim or claims as described in (i) through (iv) above, or any action brought thereon.
If such action is brought against Landlord, Tenant upon notice from Landlord shall defend the same through counsel selected by Tenant's insurer, or other counsel reasonably acceptable to Landlord. Tenant assumes all risk of damage or loss to its property or injury or death to persons in, on, or about the Premises, from all causes except for Landlord’s negligence or willful misconduct or with respect to any claims for which Landlord’s insurance is primary, and Tenant hereby waives such claims in respect thereof against Landlord. The provisions of this paragraph shall survive the termination of this Lease.
6.3 Other Requirements. Insurance policies required by this Lease shall: (i) be issued by insurance companies licensed to do business in the state in which the Premises are located with a general policyholder's ratings of at least A- and a financial rating of at least VI in the most current Best's Insurance Reports available on the Commencement Date, or if the Best's ratings are changed or discontinued, the parties shall agree to a comparable method of rating insurance companies; (ii) name the non-procuring party as an additional insured as its interest may appear [other landlords or tenants may be added as additional insureds in a blanket policy]; (iii) provide that the insurance not be canceled, non-renewed or coverage materially reduced unless thirty (30) days advance notice is given to the non-procuring party; (iv) be primary policies; (v) provide that any loss shall be payable notwithstanding any gross negligence of Landlord or Tenant which might result in a forfeiture thereunder of such insurance or the amount of proceeds payable; (vi) have no deductible exceeding $10,000.00 unless accepted in writing by Landlord; and (vii) be maintained during the entire Term and any extension terms.
VII. SERVICES AND UTILITIES, OPERATING, MAINTENANCE AND REPAIR EXPENSES.
7.1 Service and Utility Charges. Tenant covenants and agrees to pay all charges for water, sewage disposal, gas, electricity, light, heat, power, telephone, janitorial, vermin and pest control, trash removal (including container removal) or other utility services used, rendered or supplied to or for the Premises and to contract for the same in Tenant's own name. In no event shall Landlord be liable for any interruption or failure in the supply of any such utilities to the Premises except to the extent of Landlord’s negligence or in cases where such interruption was caused by a force majeure event or other occurrence beyond Landlord’s reasonable control.
7.2 Operating Expenses. Tenant covenants and agrees to pay all costs and expenses of operations on or relating to the Property and the Park, including costs and expenses for common area utilities, gardening and landscaping services. Tenant also covenants and agrees to pay to Landlord the cost of personnel to implement such service, to police or secure the common areas and property management fees and expenses. All Landlords expenses and costs associated with the operation, management, repairs or maintenance of the Property and, if applicable, the Park shall be included as operating expenses. Tenant's Proportionate Share of any such costs and expenses incurred by Landlord relating to the Property and Park or which are not separately allocated to premises in the Building leased or held for lease to tenants, such costs and expenses shall be payable pursuant to the provisions hereinabove for Monthly Deposits.
The costs for capital equipment and capital expenditures may be included within the definition of operating expenses (x) if incurred to comply with laws or other governmental requirements, (y) if incurred to achieve savings or reductions in other operating expenses, provided Tenant shall only pay for these said costs only to the extent of the actual savings realized and (z) if incurred to make a replacement with respect to any equipment or component with respect to which Landlord reasonably determines that repairs are no longer commercially reasonable. The annual amortization of such capital costs shall be included in operating expenses for the year in which the costs are incurred and subsequent years. Any such includable capital costs shall be deemed amortized, in equal monthly installments over the useful life of the item in question, as reasonably determined GAAP. If Landlord leases any item of capital equipment designed to result in savings or reductions in operating expenses, then the rentals and other costs paid under the leasing arrangement shall be included in operating expenses for the year in which they are incurred, but only to the extent of such savings or reductions.
Landlord further agrees to competitively bid out all Landlord’s expenses and costs associated with the operation, management, repairs or maintenance of the Property and Park if the total contracted amount equals or exceeds $10,000.00 on a cumulative, annual basis. Landlord will accept the lowest qualifying bid unless Landlord determines in its sole reasonable discretion that the lowest bidder’s proposal is unsatisfactory for any monetary or nonmonetary factors Landlord deems relevant notwithstanding the potential cost savings that would be realized.
7.3 Maintenance and Repair Expenses. Tenant covenants and agrees to maintain, repair, replace and keep the Premises and all improvements, fixtures and personal property thereon in good, safe and sanitary condition, order and repair and in accordance with all applicable laws, ordinances, orders, rules and regulations (including, without limitation, the Americans with Disabilities Act "ADA") of governmental authorities having jurisdiction, now existing or hereafter enacted; to pay all costs and expenses in connection therewith; and to contract for the same in Tenant's own name; and to pay to Landlord, pursuant to the provisions hereinabove for Monthly Deposits, Tenant's Proportionate Share of any such costs and expenses incurred by Landlord relating to the Property and Park or which are not separately allocated to premises in the Building leased or held for lease to tenants. Such costs and expenses as to the Property and Park may include, without limitation, the costs and expenses of maintenance and upkeep of grass, trees, shrubs and landscaping, including replanting where necessary; keeping parking areas, landscaped areas, sidewalks and driveways safe and secure (with guards or watchmen where Landlord deems necessary) and free from litter, dirt, debris, snow, and obstructions; and ordinary maintenance and repair of the Property and Park. All maintenance and repairs by Tenant or Landlord shall be done promptly, in a good and workmanlike fashion, and without diminishing the original quality of the Premises or the Property.
Tenant shall be obligated to repair, maintain and replace at its own expense the heating, air conditioning and ventilation equipment and systems (the “HVAC Systems”) serving the Premises. In furtherance of Tenant’s maintenance and repair obligations hereunder, Tenant shall obtain upon occupancy and keep current and in force during the Term, or any extension, or renewal thereof, a contract, in a form and with a dealer-authorized contractor reasonably acceptable to Landlord, providing for the service and maintenance of the HVAC Systems serving the Premises. The contract shall at a minimum provide for an inspection, necessary repairs, filter, and lubrication services each calendar quarter and tune-up service each spring and fall season. Said contract shall provide that it shall not be canceled by either Tenant or contractor except upon thirty (30) days' prior-written notice to Landlord. A copy of the contract shall be delivered to Landlord upon the commencement of the Term, as shall any modification, extension, renewal, cancellation, or replacement within ten (10) days thereof.
VIII. OTHER COVENANTS OF TENANT.
8.1 Limitation on Use by Tenant. Tenant covenants and agrees to use the Premises only for the following use or uses: Tenant shall use and occupy the Premises for general office, warehouse, light manufacturing to the extent permitted by applicable zoning and land use laws and regulations, laboratory and administrative use in support of Tenant’s business and for no other purposes, except with the prior written consent of Landlord.
8.2 Compliance with Laws. Tenant covenants and agrees that nothing shall be done or kept on the Premises in violation of any law, ordinance, order, rule or regulation of any governmental authority having jurisdiction, and that the Premises shall be used, kept and maintained in compliance with any such law, ordinance, order, rule or regulation (now existing or hereafter enacted) and with the certificate of occupancy issued for the Building and the Premises.
8.3 Compliance with Insurance Requirements. Tenant covenants and agrees that nothing shall be done or kept on the Premises which might make unavailable insurance maintained with respect to the Premises or the Property or which might result in cancellation of any such insurance.
8.4 No Waste or Impairment of Value. Tenant covenants and agrees that nothing shall be done or kept on the Premises or the Property which might impair the value of the Premises or the Property, or which would constitute waste.
8.5 No Hazardous Use. Except as disclosed to Landlord in writing and only then in commercially reasonable quantities and as permitted by applicable environmental laws, Tenant covenants and agrees that nothing shall be done or kept on the Premises or the Property and that no improvements, changes, alterations, additions, maintenance or repairs shall be made to the Premises, which might be unsafe or hazardous to any person or property. Tenant shall at all times comply with its representations, warranties and covenants as set forth in Exhibit D.
8.6 No Structural or Overloading. Tenant covenants and agrees that nothing shall be done or kept on the Premises or the Building and that no improvements, changes, alterations, additions, maintenance or repairs shall be made to the Premises which might impair the structural soundness of the Building, which might result in an overload of the weight capacity of floors or of electricity lines serving the Building, or which might interfere with electric or electronic equipment in the Building or on any adjacent or nearby property. In the event of violations hereof, Tenant covenants and agrees to remedy immediately the violation at Tenant's expense and in compliance with all requirements of governmental authorities and insurance underwriters.
8.7 No Nuisance, Noxious or Offensive Activity. Tenant covenants and agrees that no noxious or offensive activity shall be carried on upon the Premises or the Property; nor shall anything be done or kept on the Premises or the Property which may be or become a public or private nuisance or which may cause embarrassment, disturbance, or annoyance to others in the Building or on adjacent or nearby property.
8.8 No Annoying Lights, Sounds or Odors. Tenant covenants and agrees that no light shall be emitted from the Premises which is unreasonably bright or causes unreasonable glare; no sound shall be emitted from the Premises which is unreasonably loud or annoying; and no odor shall be emitted from the Premises which is or might be noxious or offensive to others in the Building or on adjacent or nearby property.
8.9 No Unsightliness. Tenant covenants and agrees that no unsightliness shall be permitted on the Premises or the Property. Without limiting the generality of the foregoing, all unsightly conditions, equipment, objects and conditions shall be kept enclosed within the Premises; hallways adjoining the Premises may not be used for discarding or storing any materials; no refuse, scrap, debris, garbage, trash, bulk materials or waste shall be kept, stored or allowed to accumulate on the Premises or the Property except as may be enclosed within the Premises; all pipes, wires, poles, antenna and other facilities for utilities or the transmission or reception of audio or visual signals or electricity shall be kept and maintained underground or enclosed within the Premises or appropriately screened from view; and no temporary structure shall be placed or permitted on the Premises or the Property without the prior written consent of Landlord.
8.10 No Animals. Tenant covenants and agrees that no animals shall be permitted or kept on the Premises or the Property.
8.11 Restriction on Signs and Exterior Lighting. Tenant may not erect, install or display any sign or advertising material upon the Building exterior, the exterior of the Premises (including any exterior doors), or the exterior walls thereof, or in any window therein, and no exterior lighting shall be permitted on the Premises or the Property except as permitted by the local governing authorities and approved in writing by Landlord, which approval shall not be unreasonably withheld.
8.12 No Violation of Covenants. Tenant covenants and agrees not to commit, suffer or permit any violation of any covenants, conditions or restrictions affecting the Premises or the Property.
8.13 Restriction on Changes and Alterations. Tenant shall make no structural alterations of the Premises without Landlord’s prior written consent, which consent shall not be unreasonably withheld. If Landlord is consent is obtained for an alteration, Tenant shall provide Landlord’s managing agent with a complete set of construction drawings, and such agent shall then determine the actual cost of the work to be done (to include a construction supervision fee of three percent (3%) to be paid to Landlord’s managing agent). Tenant may then either agree to pay Landlord to have the work done, or with Landlord’s consent, engage their own contractor, approved by Landlord to perform the alterations. If requested by Landlord at the termination of this Lease or vacation of the Premises by Tenant, Tenant shall restore (at Tenant's sole cost and expense) the Premises to the same condition as existed at the commencement of the term, ordinary wear and tear and damage by insured casualty only excepted. However, Landlord may elect to require Tenant to leave alterations performed for it unless at the time of such alterations Landlord agreed in writing that Tenant could remove them on expiration or termination of this Lease, and if Tenant does so remove Tenant shall repair any damage occasioned by such removal.
8.14 No Mechanics Liens. Tenant and Landlord each covenants and agrees not to permit or suffer, and to cause to be removed and released, any mechanics, materialmen or other lien on account of supplies, machinery, tools, equipment, labor or material furnished or used in connection with the construction, alteration, improvement, addition to or repair of the Premises.
TENANT SHALL NOTIFY ANY CONTRACTOR PERFORMING ANY CONSTRUCTION WORK IN THE PREMISES ON BEHALF OF TENANT THAT THIS LEASE SPECIFICALLY PROVIDES THAT THE INTEREST OF LANDLORD IN THE PREMISES SHALL NOT BE SUBJECT TO LIENS FOR IMPROVEMENTS MADE BY TENANT, AND NO MECHANIC’S LIEN OR OTHER LIEN FOR ANY SUCH LABOR, SERVICES, MATERIALS, SUPPLIES, MACHINERY, FIXTURES OR EQUIPMENT SHALL ATTACH TO OR AFFECT THE STATE OR INTEREST OF LANDLORD IN AND TO THE PREMISES, THE BUILDING, OR ANY PORTION THEREOF. IN ADDITION, LANDLORD SHALL HAVE THE RIGHT TO POST AND KEEP POSTED AT ALL REASONABLE TIMES ON THE PREMISES ANY NOTICES WHICH LANDLORD SHALL BE REQUIRED TO POST FOR THE PROTECTION OF LANDLORD AND THE PREMISES FROM ANY SUCH LIEN.
8.15 No Other Encumbrances. Tenant covenants and agrees not to obtain any financing secured by Tenant's interest in the Premises and not to encumber the Premises, or Landlord or Tenant's interest therein, without the prior written consent of Landlord, and to keep the Premises free from all liens and encumbrances except those created by Landlord.
8.16 Subordination to Landlord Mortgages. The Lease, as the same may hereafter be modified, amended or extended, is, shall be, and shall at all times remain, subject and subordinate to the terms, conditions and provisions of any mortgage now existing or later placed upon the premises by Landlord, the lien imposed by such mortgage; and all advanced made under such mortgage. Such subordination is and shall be effective and self-operative without any need for any successor to landlord’s interest in the premises by foreclosure or deed in lieu thereof (a “Successor Landlord”) or Tenant to execute any further document. Tenant shall, however, confirm such subordination in writing upon request by Landlord and any Successor Landlord within ten (10) days of such request. In the event of foreclosure of such mortgage, Tenant shall not be disturbed in its possession of the Premises so long as Tenant is not in default under this Lease and, subsequent to such foreclosure, Tenant attorns to the party acquiring title by virtue of the foreclosure, and this Lease shall continue in full force and effect as a direct lease, in accordance with its terms, between the Successor Landlord and Tenant. Tenant agrees to give any mortgagee of Landlord which has provided a non-disturbance agreement to Tenant, notice of, and a reasonable opportunity (which shall in no event be less than thirty (30) days after written notice thereof is delivered to mortgagee as herein provided) to cure, any Landlord default hereunder; and Tenant agrees to accept such cure if effected by such mortgagee. No termination of this Lease by Tenant for Landlord’s default shall be effective until such notice has been given and the cure period has expired without the default having been cured.
8.17 Assignment. Tenant may not assign or sublet this Lease to any third party without the express prior written consent of Landlord, which consent will not be unreasonably withheld; provided, however that Tenant may transfer or assign this Lease to any parent, direct or indirect subsidiary or affiliate, or to a purchaser of all or substantially all of its business or assets if such purchaser has agreed in writing to be bound by the terms of this Lease. Tenant shall pay all reasonable out-of-pocket costs and expenses incurred by Landlord in connection with assignments or sublease transactions, including Landlord's attorney fees not to exceed $1,500. Any assignment or sublease to which Landlord may consent (one consent not being any basis that Landlord should grant any further consent) shall not relieve Tenant of any or all of its obligations hereunder. Acceptance of Rent by Landlord after any non-permitted assignment shall not constitute approval thereof by Landlord.
Except as set forth in the immediately preceding paragraph, in no event shall this Lease be assignable by operation of any law. Tenant's rights hereunder may not become, and shall not be listed by Tenant as an asset under any bankruptcy, insolvency or reorganization proceedings. Tenant is not, may not become, and shall never represent itself to be an agent of Landlord, and Tenant acknowledges that Landlord's title is paramount, and that it can do nothing to affect or impair Landlord's title.
If this Lease shall be assigned or the Premises or any portion thereof sublet by Tenant at a rental that exceeds the rentals to be paid to Landlord hereunder, attributable to the Premises or portion thereof so assigned or sublet, then 50% of any such excess shall be paid over to Landlord by Tenant.
8.18 Annual Financial Statements. If at any time Tenant’s audited financial statements are not publicly available at www.sec.gov, then Tenant covenants and agrees to furnish to Landlord annually, within ninety (90) days after the end of each fiscal year of Tenant, copies of financial statements of Tenant, audited if requested by Landlord, by a certified public accountant, and agrees that Landlord may deliver any such financial statements to any existing or prospective mortgagee or purchaser of the Property. The financial statements shall include a balance sheet as of the end of, and a statement of profit and loss for, the preceding fiscal year of Tenant.
8.19 Payment of Income and Other Taxes. Tenant covenants and agrees to pay promptly when due all property taxes on personal property of Tenant on the Premises and all federal, state and local income taxes, sales taxes, use taxes, Social Security taxes, unemployment taxes and taxes withheld from wages or salaries paid to Tenant's employees, the nonpayment of which might give rise to a lien on the Premises or Tenant's interest therein, and to furnish, if requested by Landlord, written evidence of such payments.
8.20 Estoppel Certificates. Tenant covenants and agrees to execute, acknowledge and deliver to Landlord, within five (5) days of Landlord's written request, a written statement certifying that this Lease is unmodified (or, if modified, stating the modifications) and in full force and effect; stating the dates to which Base Rent has been paid; stating the amount of the Security Deposit held by Landlord; stating the amount of Monthly Deposits held by Landlord for the then tax and insurance year; and stating whether or not Landlord is in default under this Lease (and, if so, specifying the nature of the default). Tenant agrees that such statement may be delivered to and relied upon by any existing or prospective mortgagee or purchaser of the Property. Tenant agrees that a failure to deliver such a statement within twenty (20) days after written request from Landlord shall be conclusive upon Tenant that this Lease is in full force and effect without modification except as may be represented by Landlord; that there are no uncured defaults by Landlord under this Lease; and that any representation by Landlord with respect to Base Rent, the Security Deposit and Monthly Deposits are true.
8.21 Landlord Right to Inspect and Show Premises and to Install For Sale Signs. Tenant covenants and agrees that Landlord and authorized representatives of Landlord shall have the right to enter the Premises accompanied by Tenant’s designated personnel upon at least 24 hour prior notice (except in case of emergencies) during ordinary business hours for the purposes of inspecting or maintaining the same, and making such repairs, alterations or changes as Landlord deems necessary, or for the purposes of showing the Premises to any existing or prospective mortgagee, purchaser or lessee of the Property or the Premises. Tenant covenants and agrees that Landlord may at any time and from time to time place on the Property or the Premises a sign advertising the Property or the Premises for sale or for lease.
8.22 Landlord Title to Fixtures, Improvements and Equipment. Tenant covenants and agrees that all fixtures, improvements, equipment, and personal property relating to the use and operation of the Premises (as distinguished from operations incident to the business of Tenant), including all plumbing, heating, lighting, electrical and air conditioning fixtures and equipment, whether or not attached to or affixed to the Premises, and whether now or hereafter located upon the Premises, shall be and remain the property of the Landlord upon expiration of the Term.
8.23 Removal of Tenant's Equipment. Tenant covenants and agrees to remove, not later than the Expiration Date of the Term, all of Tenant's Equipment, as hereinafter defined. "Tenant's Equipment" shall mean all equipment, apparatus, machinery, signs, furniture, furnishings and personal property used in the operation of the business of Tenant (as distinguished from the use and operation of the Premises). If such removal shall injure or damage the Premises, Tenant covenants and agrees, at its sole cost and expense, at or prior to the expiration of the Term, to repair such injury and damage in good and workmanlike fashion and to place the Premises in the same condition as the Premises would have been in if such Tenant's Equipment had not been installed. If Tenant fails to remove any Tenant's Equipment by the expiration of the Term, Landlord may, at its option, keep and retain any such Tenant's Equipment or dispose of the same and retain any proceeds thereof and Landlord shall be entitled to recover from Tenant any costs or expenses of Landlord in removing the same and in restoring the Premises in excess of the actual proceeds, if any, received by Landlord from disposition thereof.
8.24 Indemnification. (a) Except to the extent of Landlord’s negligence or willful misconduct, Tenant covenants and agrees to protect, indemnify and save Landlord harmless from and against all liability, obligations, claims, damages, penalties, causes of action, costs and expenses, including attorneys' fees at all tribunal levels, imposed upon, incurred by or asserted against Landlord by reason of (a) any accident, injury to or death of any person or loss of or damage to any property occurring on or about the Premises; (b) any act or omission of Tenant or Tenant's officers, employees, agents, guests or invitees or of anyone claiming by, through or under Tenant; (c) any use which may be made of, or condition existing upon, the Premises; (d) any improvements, fixtures or equipment upon the Premises; (e) any failure on the part of Tenant to perform or comply with any of the provisions, covenants or agreements of Tenant contained in this Lease; (f) any violation of any law, ordinance, order, rule or regulation of governmental authorities having jurisdiction by Tenant or Tenant's officers, employees, agents, guests or invitees or by anyone claiming by, through or under Tenant; and (g) any repairs, maintenance or changes to the Premises by, through or under Tenant. Tenant further covenants and agrees that, in case any action, suit or proceeding, is brought against Landlord by reason of any of the foregoing, Tenant will, at Tenant's sole cost and expense, defend Landlord in any such action, suit or proceeding, with counsel acceptable to Landlord.
(b) Landlord covenants and agrees to protect, indemnify and save Tenant harmless from and against all liability, obligations, claims, damages, penalties, causes of action, costs and expenses, including attorneys' fees at all tribunal levels, imposed upon, incurred by or asserted against Tenant by reason of Landlord’s negligence or willful misconduct.
8.25 Waiver by Tenant. Tenant waives and releases any claims Tenant may have against Landlord or Landlord's officers, agents or employees for loss, damage or injury to person or property sustained by Tenant or Tenant's officers, agents, employees, guests, invitees or anyone claiming by, through or under Tenant resulting from any cause whatsoever other than Landlord's gross negligence or willful misconduct.
8.26 Release upon Transfer by Landlord. In the event of a transfer by Landlord of the Property or of Landlord's interest as Landlord under this Lease, Landlord's successor or assign shall take subject to and be bound by this Lease and, in such event, Tenant covenants and agrees, but solely to the extent Landlord’s successor or assign has expressly assumed such obligations, that: Landlord shall be released from all obligations of Landlord under this Lease; that Tenant shall thereafter look solely to Landlord's successor or assign for satisfaction of the obligations of Landlord under this Lease; and that Tenant shall attorn to such successor or assign, and provided that Tenant has received a commercially reasonable form of Subordination, Non-Disturbance and Attornment Agreement.
8.27 Compliance with ADA. Tenant covenants and agrees that nothing shall be done or kept by Tenant on the Premises or in the Common Facilities in violation of ADA, and that Tenant shall maintain, repair, replace, keep and use the Premises and all improvements, fixtures and personal property therein and thereon, and conduct its business within the Premises, in accordance with the requirements of ADA. If any improvements, alterations or repairs to the Premises are required by governmental authority under ADA or its implementing regulations or guidelines, Tenant shall be solely responsible for all non-structural items and any structural items due to Tenant's specific use of the Premises. Tenant covenants and agrees to pay all costs and expenses in connection with the performance of its obligations under this Section 8.27. Nothing contained in this Section 8.27 shall be construed to limit the generality of the provisions of Section 8.2 respecting Tenant's obligation to comply with applicable laws and of the provisions of Section 8.13 respecting Tenant's obligation to comply with ADA and other applicable laws in connection with any Change.
IX. DAMAGE OR DESTRUCTION.
9.1 Tenant's Notice of Damage. If any portion of the Premises shall be damaged or destroyed by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord (“Tenant's Notice of Damage").
9.2 Options to Terminate if Damage Substantial. Upon receipt of Tenant's Notice of Damage, Landlord shall promptly proceed to determine the nature and extent of the damage or destruction and to estimate the time necessary to repair or restore the Premises. As soon as reasonably possible, but no later than 60 days after receipt of Tenant’s Notice of Damage, Landlord shall give written notice to Tenant stating Landlord's estimate of the time necessary to repair or restore the Premises ("Landlord's Notice of Repair Time"). If Landlord reasonably estimates that repair or restoration of the Premises cannot be completed within one hundred eighty (180) days from the time of Tenant's Notice of Damage, Landlord or Tenant shall have the option to terminate this Lease. In the event either Landlord exercises its option to terminate this Lease, then the Term shall expire ten (10) days following the date of such notice by Landlord exercising its option to terminate this Lease, but Tenant shall have a reasonable time not to exceed 30 days to recover its property and otherwise vacate the Premises. In the event of termination of this Lease under the provisions hereof, Landlord shall refund to Tenant such amounts of Base Rent and Additional Rent theretofore paid by Tenant as may be applicable to the period subsequent to the time of Tenant's Notice of Damage less the reasonable value of any use or occupation of the Premises by Tenant subsequent to the time of Tenant's Notice of Damage.
9.3 Obligations to Repair and Restore. In the event there are sufficient funds, and such funds are available to Landlord to repair and restore and repair of the Premises, and restoration can be completed within the period specified in Section 9.2, in Landlord's reasonable estimation, this Lease shall continue in full force and effect and Landlord shall proceed forthwith to cause the Premises to be repaired and restored with reasonable diligence and there shall be abatement of Base Rent and Additional Rent proportionate to the extent of the space and period of time that Tenant is unable to use and enjoy the Premises. Landlord may, at its option, require Tenant to arrange for and handle the repair and restoration of the Premises, in which case Landlord shall furnish Tenant with sufficient funds for such repair and restoration, at the time or times such funds are needed, utilizing any proceeds from insurance and any additional funds necessary to cover the costs of repair or restoration.
9.4 Application of Insurance Proceeds. The proceeds of any Casualty Insurance maintained on the Premises, other than casualty insurance maintained by Tenant on fixtures and personal property of Tenant, shall be paid to and become the property of Landlord, subject to any obligation of Landlord to cause the Premises to be repaired and restored, which obligation is contingent on casualty insurance proceeds adequate to complete the repair or restoration being available to Landlord.
X. CONDEMNATION.
10.1 Taking - Substantial Taking - Insubstantial Taking. A "Taking" shall mean the taking of all or any portion of the Premises as a result of the exercise of the power of eminent domain or condemnation for public or quasi-public use or the sale of all or part of the Premises under the threat of condemnation. A "Substantial Taking" shall mean a Taking of so much of the Premises that Tenant cannot thereafter reasonably use the Premises for carrying on, at substantially the same level or scope, the business theretofore conducted by Tenant on the Premises. An "Insubstantial Taking" shall mean a Taking such that the Premises can thereafter continue to be used by Tenant, in Tenant’s commercially reasonable judgment, for carrying on, at substantially the same level or scope, the business theretofore conducted by Tenant on the Premises.
10.2 Termination on Substantial Taking. If there is a Substantial Taking with respect to the Premises, the Term shall expire on the date of vesting of title pursuant to such Taking. In the event of termination of this Lease under the provisions hereof, Landlord shall refund to Tenant such amounts of Base Rent and Additional Rent theretofore paid by Tenant as may be applicable to the period subsequent to the time of termination of this Lease.
10.3 Restoration on Insubstantial Taking. In the event of an Insubstantial Taking, this Lease shall continue in full force and effect, Landlord shall proceed forthwith to cause the Premises to be restored as near as may be to the original condition thereof and there shall be abatement of Base Rent and Additional Rent proportionate to the extent of the space so taken. Landlord may, at its option, require Tenant to arrange for and handle the restoration of the Premises, in which case Landlord shall furnish Tenant with sufficient funds for such restoration, at the time or times such funds are needed, utilizing the proceeds of any awards or consideration received as a result of the Taking and any additional funds necessary to cover the costs of restoration.
10.4 Right to Award. The total award, compensation, damages or consideration received or receivable as a result of a Taking ("Award") shall be paid to and be the property of Landlord, whether the Award shall be made as compensation for diminution of the value of the leasehold or the fee of the Premises or otherwise, except to the extent that any portion of the Award is expressly made attributable to Tenant’s interests, and Tenant hereby assigns to Landlord, all of Tenant's right, title and interest in and to any such Award, except to the extent that any portion of the Award is expressly made attributable to Tenant’s interests. Tenant covenants and agrees to execute, immediately upon demand by Landlord, such documents as may be necessary to facilitate collection by Landlord of any such Award. Tenant shall be entitled to apply for compensation, if available, for its relocation and for any of its personal property taken.
XI. DEFAULTS BY TENANT.
11. Default. If Tenant: (i) fails to pay when due any Rent, or any other sum of money which Tenant is obligated to pay, as provided in this Lease, and such failure continues for a period of ten (10) days after notice of default from Landlord to Tenant; provided, however, chronic delinquency by Tenant in the payment of Rent for any two (2) months (consecutive or non-consecutive) during any period of twelve (12) months, shall constitute an event of default; or (ii) breaches any other agreement, covenant or obligation herein set forth and such breach shall continue and not be remedied within thirty (30) days after Landlord shall have given Tenant written notice specifying the breach, or if such breach cannot, with due diligence, be cured within said period of thirty (30) days and Tenant does not within said thirty (30) day period commence and thereafter with reasonable diligence completely cure the breach within sixty (60) days after notice; or (iii) files (or has filed against it and not stayed or vacated within sixty (60) days after filing) any petition or action for relief under any creditor's law (including bankruptcy, reorganization, or similar action), either in state or federal court; or (iv) makes any transfer in fraud of creditors as defined in Section 548 of the United States Bankruptcy Code (11 U.S.C. 548, as amended or replaced), has a receiver appointed for its assets (and appointment shall not have been stayed or vacated within thirty (30) days), or makes an assignment for benefit of creditors; then Tenant shall be in default hereunder, and, in addition to any other lawful right or remedy which Landlord may have, Landlord at its option, in addition to such other remedies as may be available under Georgia law, may do the following: (1) terminate this Lease and Tenant’s right of possession; or (2) terminate Tenant’s right to possession but not this Lease and/or proceed in accordance with any and all of the following remedies:
(a) Landlord may, upon reasonable further notice, re-enter the Premises in accordance with applicable law and dispossess Tenant by summary proceedings or otherwise, as well as the legal representative(s) of Tenant and/or other occupant(s) of the Premises, and remove their effects and hold the Premises as if this Lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end; and/or at Landlord’s option,
(b) Base Rent and all Additional Rent for the balance of the Term will, at the election of Landlord, shall be accelerated and the present worth of same (calculated using a discount equal to the yield then obtainable from the Unites States Treasury Bill or Note with a maturity date closes to the Expiration Date) for the balance of the Term, net of amounts actually collected by Landlord, shall become immediately due thereupon and be paid, together with all expenses of any nature which Landlord may incur such as (by way of illustration and not limitation) those for attorneys’ fees, brokerage, advertising, and refurbishing the Premises in good order or preparing them for re-rental; and/or at Landlord’s option,
(c) Landlord may re-let the Premises, or any part thereof, either in the name of Landlord or otherwise, for a term or terms which may at Landlord’s option be less than or exceed the period which would otherwise have constituted the balance of the Term, and may grant concessions or free rent or charge a higher rental than that reserved in this Lease; provided, however, Landlord shall be required to use commercially reasonable efforts to mitigate its damages, including through re-letting the Premises, or any part thereof, and if Landlord is successful in re-letting the Premises then Tenant shall be liable to Landlord only for any net deficiency in rent and other charges, together with Landlord’s reasonable costs incurred in re-letting the Premises;,
(d) Tenant or its legal representative(s) will also pay to Landlord as agreed upon damages, in addition to such other damages that Landlord may be legally entitled to, any deficiency between the Base Rent and all Additional Rent hereby charged and/or agreed to be paid and the net amount, if any, of the rents collected on account of this Lease or Leases of the Premises for each month of the period which would otherwise have constituted the balance of the Term.
Tenant acknowledges that the Premises are to be used for commercial purposes, and Tenant expressly waives the protections and rights set forth in Official Code of Georgia Annotated Section 44-7-52.
All rights and remedies of Landlord are cumulative, and the exercise of any one shall not be an election excluding Landlord at any other time from exercise of a different or inconsistent remedy. No exercise by Landlord of any right or remedy granted herein shall constitute or effect a termination of this Lease unless Landlord shall so elect by written notice delivered to Tenant.
The failure of Landlord to exercise its rights in connection with this Lease or any breach or violation of any term, or any subsequent breach of the same or any other term, covenant or condition herein contained shall not be a waiver of such term, covenant or condition or any subsequent breach of the same or any other covenant or condition herein contained.
No acceptance by Landlord of a lesser sum than the Base Rent, administrative charges, Additional Rent and other sums then due shall be deemed to be other than on account of the earliest installment of such payments due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed as accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such installment or pursue any other remedy provided in this Lease.
In addition, no payments of money by Tenant to Landlord after the expiration or termination of this Lease after the giving of any notice by Landlord to Tenant shall reinstate or extend the Term, or make ineffective any notice given to Tenant prior to the payment of such money. After the service of notice or the commencement of a suit, or after final judgment granting Landlord possession of the Premises, Landlord may receive and collect any sums due under this Lease, and the payment thereof shall not make ineffective any notice or in any manner affect any pending suit or any judgment previously obtained.
11.2. Multiple Defaults.
(a) Tenant acknowledges that any rights or options of first refusal, or to extend the Term, to expand the size of the Premises, to purchase the Premises or the Building, or other such or similar rights or options which have been granted to Tenant under this Lease are conditioned upon the prompt and diligent performance of the terms of this Lease by Tenant. Accordingly, Tenant shall have no right to exercise any of the foregoing rights or options while in default under this Lease.
(b) Should Tenant default in the payment of Base Rent, Additional Rent, or any other sums payable by Tenant under this Lease on two (2) or more occasions during any twelve (12) month period, regardless of whether any such default is cured, then, in addition to all other remedies otherwise available to Landlord, Tenant shall, within ten (10) days after demand by Landlord, post a security deposit in, or increase the existing Security Deposit by, a sum equal to three (3) months’ installments of Base Rent. Any security deposit posted pursuant to the foregoing sentence shall be governed by Section 4.10.
XII. SURRENDER AND HOLDING OVER.
12.1 Surrender Upon Lease Expiration. Upon the expiration or earlier termination of this Lease, or on the date specified in any demand for possession by Landlord after any Default by Tenant, Tenant covenants and agrees to surrender possession of the Premises to Landlord in the same condition as when Tenant first occupied the Premises, ordinary wear and tear, incomplete repairs by Landlord, and damage by fully insured casualty excepted.
12.2 Holding Over. If Tenant shall hold over after the expiration of the Term or other termination of this Lease, such holding over shall not be deemed to be a renewal of this Lease but shall be deemed to create a tenancy-at-sufferance and by such holding over Tenant shall continue to be bound by all of the terms and conditions of this Lease except that during such tenancy-at-sufferance, Tenant shall pay to Landlord (a) Rent at the rate equal to one hundred twenty-five percent (125%) of the then-current Base Rent, and (b) any and all operating expenses and other forms of Additional Rent payable under the terms of this Lease. The increased Rent during such holding over is intended to partially compensate Landlord for losses, damages and expenses, including frustrating and delaying Landlord's ability to secure a replacement tenant. If Landlord loses a prospective tenant because Tenant fails to vacate the Premises on expiration of this Lease after notice to do so, Tenant will be liable for such damages as Landlord can prove because of Tenant's wrongful failure to vacate.
12.3 Property of Tenant. Tenant shall pay, timely, any and all taxes levied or assessed against or upon Tenant's equipment, fixtures, furniture, leasehold improvements and personal property located in the Premises. Provided Tenant is not in default hereunder, Tenant may, prior to the Expiration Date, remove all fixtures and equipment which it has placed in the Premises; provided, however, Tenant repairs all damages caused by such removal; and provided further, however, any statutory lien for Rent is not waived, the contractual lien herein granted being in addition thereto. If Tenant does not remove its property from the Premises upon termination (for whatever cause) of this Lease, such property shall be deemed abandoned by Tenant, and Landlord may dispose of the same in whatever manner Landlord may elect without any liability to Tenant.
12.4 Intentionally Deleted.
XIII. MISCELLANEOUS.
13.1 No Implied Waiver. No failure by Landlord to insist upon the strict performance of any term, covenant or agreement contained in this Lease, no failure by Landlord to exercise any right or remedy under this Lease, and no acceptance of full or partial payment during the continuance of any Default by Tenant, shall constitute a waiver of any such term, covenant or agreement or a waiver of any such right or remedy or a waiver of any such Default by Tenant.
13.2 Survival of Provisions. Notwithstanding any termination of this Lease, the same shall continue in force and effect as to any provisions hereof which require observance or performance by Landlord or Tenant subsequent to termination.
13.3 Intentionally Deleted.
13.4 Covenants Independent. This Lease shall be construed as if the covenants herein between Landlord and Tenant are independent, and not dependent.
13.5 Covenants as Conditions. Each provision of this Lease performable by Tenant shall be deemed both a covenant and a condition.
13.6 Tenant’s Remedies. Tenant may bring a separate action against Landlord for any claim Tenant may have against Landlord under this Lease, provided Tenant shall first give written notice thereof to Landlord and shall afford Landlord a reasonable opportunity to cure any such default. In addition Tenant shall send notice of such default by certified or registered mail, postage prepaid, to the holder of any mortgage covering the Premises, the Property or any portion thereof of whose address Tenant has been notified in writing, and shall afford such holder a reasonable opportunity to cure any default on Landlord's behalf. In no event will Landlord be responsible to Tenant for any consequential damages as a result of any default by Landlord hereunder.
13.7 Binding Effect. This Lease shall extend to and be binding upon the heirs, executors, legal representative, successors and assigns of the respective parties hereto. The terms, covenants, agreements and conditions in this Lease shall be construed as covenants running with the Land.
13.8 Notices and Demands. All notices, demands and requests which may be given or which are required to be given by either party to the other must be in writing. All notices, demands and requests by Landlord or Tenant shall be addressed as follows (or to such other address as a party may specify by duly given notice):
RENT PAYMENT
ADDRESS: KENNESAW WALL I,
c/o Jackson Corporate Real Estate
101 Marietta Street, Suite 3110
Atlanta, Georgia 30303
Attn: Scott Jackson
Fax: (404) 751.3282
LEGAL NOTICE
ADDRESS FOR
LANDLORD: KENNESAW WALL I,
c/o Jackson Corporate Real Estate
101 Marietta Street, Suite 3110
Atlanta, Georgia 30303
Attn: Scott Jackson
Fax: (404) 751.3282
TENANT: IMMUCOR, INC.
3150 Gateway Dr.
Norcross, GA 30071
Attn: Vice President, Operations
Fax: (770) 242-8930
With a copy to: IMMUCOR, Inc.
3150 Gateway Dr.
Norcross, GA 30071
Attn: General Counsel
Fax: (770) 242-8930
Notices, demands or requests which Landlord or Tenant are required or desire to give the other hereunder shall be deemed to have been properly given for all purposes if (i) delivered against a written receipt of delivery, (ii) mailed by express, registered or certified mail of the United States Postal Service, return receipt requested, postage prepaid, or (iii) delivered to a nationally recognized overnight courier service for next business day delivery, to its addressee at such party's address as set forth above or (iv) delivered via telecopier or facsimile transmission to the facsimile number listed above, provided, however, that if such communication is given via telecopier or facsimile transmission, an original counterpart of such communication shall be sent concurrently in either the manner specified in section (ii) or (iii) above and written confirmation of receipt of transmission shall be provided. Each such notice, demand or request shall be deemed to have been received upon the earlier of the actual receipt or refusal by the addressee or three (3) business days after deposit thereof at any main or branch United States post office if sent in accordance with section (ii) above, and the next business day after deposit thereof with the courier if sent pursuant to section (iii) above. The parties shall notify the other of any change in address, which notification must be at least fifteen (15) days in advance of it being effective.
Tenant agrees to give any mortgagee of Landlord which has provided a non-disturbance agreement to Tenant, notice of, and a reasonable opportunity (which shall in no event be less than thirty (30) days after written notice thereof is delivered to mortgagee as herein provided) to cure, any Landlord default hereunder; and Tenant agrees to accept such cure if effected by such mortgagee.
Notices may be given on behalf of any party by such party's legal counsel.
13.9 Time of the Essence. Time is of the essence under this Lease, and all provisions herein relating thereto shall be strictly construed.
13.10 Captions for Convenience. The headings and captions hereof are for convenience only and shall not be considered in interpreting the provisions hereof.
13.11 Severability. If any provision of this Lease shall be held invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and there shall be deemed substituted for the affected provisions a valid and enforceable provision as similar as possible to the affected provision.
13.12 Governing Law. This Lease shall be interpreted and enforced according to the laws of the state in which the Premises are located.
13.13 Entire Agreement. This Lease and any exhibits and addenda referred to herein, constitute the final and complete expression of the parties' agreements with respect to the Premises and Tenant's occupancy thereof. Each party agrees that it has not relied upon or regarded as binding any prior agreements, negotiations, representations, or understandings, whether oral or written, except as expressly set forth herein. Both parties have participated in the preparation of this Lease and in resolving any ambiguities there shall be no presumption that they are construed against the drafting party.
13.14 No Oral Amendment or Modifications. No amendment or modification of this Lease, and no approvals, consents or waivers by Landlord under this Lease, shall be valid or binding unless in writing and executed by the party to be bound.
13.15 Real Estate Brokers. Each party represents and warrants to the other that it has not dealt with any real estate broker, finder or other person with respect to this Lease in any manner except as set forth in this Section 13.15. Tenant represents and warrants that Tenant has dealt with no broker, finder, agent or other person in connection with this Lease except Jackson Corporate Real Estate, LLC (“Landlord’s Leasing Agent”) and Newmark Grubb Knight Frank (“Tenant’s Leasing Agent”). Landlord shall be responsible for paying Landlord’s Leasing Agent and Tenant’s Leasing Agent a commission pursuant to separate written agreements. Each party shall indemnify and hold the other party harmless from any and all damages resulting from claims that may be asserted against the other party by any other broker, finder or other person (including, without limitation, any substitute or replacement broker claiming to have been engaged by indemnifying party in the future), claiming to have dealt with the indemnifying party in connection with this Lease or any amendment or extension hereto, or which may result in Tenant leasing other or enlarged space from Landlord. The provisions of this Section shall survive the termination of this Lease.
13.16 Relationship of Landlord and Tenant. Nothing contained herein shall be deemed or construed as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereof, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant.
13.17 Authority of Tenant. Each individual executing this Lease on behalf of Tenant represents and warrants that such individual is duly authorized to deliver this Lease on behalf of Tenant and that this Lease is binding upon Tenant in accordance with its terms, and agrees to document such authorization to Landlord's satisfaction if requested to do so.
13.18 Exculpation. Any provision of this Lease to the contrary notwithstanding Landlord shall have no personal liability for payment of any damages or performance of any term, provision or condition under this Lease or under any other instrument in connection with this Lease, and Tenant shall look for such payment or performance to the property, the rents, issues and profits thereof, in satisfaction of any claim, order or judgment Tenant may at any time obtain against Landlord in connection with this Lease.
13.19 Bankruptcy. Landlord and Tenant understand that, notwithstanding certain provisions to the contrary contained herein, a trustee or debtor in possession under the United States Bankruptcy Code, as amended, (the "Code") may have certain rights to assume or assign this Lease. Landlord and Tenant further understand that, in any event, pursuant to the Code, Landlord is entitled to adequate assurances of future performance of the provisions of this Lease. The parties agree that, with respect to any such assumption or assignment, the term “adequate assurance” shall include at least the following:
(a) In order to assure Landlord that the proposed assignee will have the resources with which to pay all Rent payable pursuant to the provisions of this Lease, any proposed assignee must have, as demonstrated to Landlord’s satisfaction, a net worth (as defined in accordance with generally accepted accounting principles consistently applied) of not less than the net worth of Tenant on the Effective Date (as hereinafter defined), increased by seven percent (7%), compounded annually, for each year from the Effective Date through the date of the proposed assignment. It is understood and agreed that the financial condition and resources of Tenant were a material inducement to Landlord in entering into this Lease.
(b) Any proposed assignee must have been engaged in the conduct of business for the five (5) years prior to any such proposed assignment, which business does not violate the Permitted Use allowed under Section 8 above and such proposed assignee shall continue to engage in the Permitted Use. It is understood that Landlord’s asset will be substantially impaired if the trustee in bankruptcy or any assignee of this Lease makes any use of the Premises other than the Permitted Use.
(c) Any proposed assignee of this Lease must assume and agree to be personally bound by the provisions of this Lease.
13.20 No Estate in Land. This Lease shall create the relationship of landlord and tenant between the parties hereto. No estate shall pass out of Landlord. Tenant has only a usufruct not subject to levy and sale, and not assignable by Tenant except as provided for herein. Tenant’s rights to use the Premises are solely contractual.
13.21 |
Environmental Compliance. |
(a) Tenant's Responsibility. Tenant shall not (either with or without negligence) cause or permit the unlawful escape or release of any biologically active or other hazardous substances, or materials. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or in compliance with the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Building any such materials or substances except to use in the ordinary course of Tenant's business. Tenant covenants and agrees that the Premises will at all times during its use or occupancy thereof be kept and maintained so as to comply with all now existing or hereafter enacted or issued statutes, laws, rules, ordinances, orders, permits and regulations of all state, federal, local and other governmental and regulatory authorities, agencies and bodies applicable to the Premises, pertaining to environmental matters or regulating, prohibiting or otherwise having to do with asbestos and all other toxic, radioactive, or hazardous wastes or material including, but not limited to, the Federal Clean Air Act, the Federal Water Pollution Control Act, and the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as from time to time amended (all hereafter collectively called "Laws"). Tenant shall execute affidavits, representations and the like, from time to time, at Landlord's request, concerning Tenant's best knowledge and belief regarding the presence of hazardous substances or materials on the Premises.
(b) Tenant's Liability. Tenant shall hold Landlord free, harmless, and indemnified from any penalty, fine, claim, demand, liability, cost, or charge whatsoever which Landlord shall incur, or which Landlord would otherwise incur, by reason of Tenant's failure to comply with this Section 13.21 including, but not limited to: (i) the cost of bringing the Premises into compliance with all Laws and in a non-contaminated state, the same condition as prior to occupancy; (ii) the reasonable cost of all appropriate tests and examinations of the Premises to confirm that the Premises have been brought into compliance with all Laws; and (iii) the reasonable fees and expenses of Landlord's attorneys, engineers, and consultants incurred by Landlord in enforcing and confirming compliance with this Section 13.21.
(c) Property. For the purposes of this Section 13.21, the Premises shall include the real estate covered by this Lease; all improvements thereon; all personal property used in connection with the Premises (including that owned by Tenant); and the soil, ground water, and surface water of the Premises, if the Premises includes any ground area.
(d) Inspections by Landlord. Landlord and its engineers, technicians, and consultants (collectively the "Auditors") may, from time to time as Landlord deems appropriate, conduct periodic tests and examinations ("Audits") of the Premises to confirm and monitor Tenant's compliance with this Section 13.21. Such Audits shall be conducted in such a manner as to minimize the interference with Tenant's Permitted Use; however in all cases, the Audits shall be of such nature and scope as shall be reasonably required by then existing technology to confirm Tenant's compliance with this Section 13.21. Tenant shall fully cooperate with Landlord and its Auditors in the conduct of such Audits. The cost of such Audits shall be paid by Landlord unless an Audit shall disclose a material failure of Tenant to comply with this Section 13.21, in which case, the cost of such Audit, and the cost of all subsequent Audits made during the Term and within thirty (30) days thereafter (not to exceed two (2) such Audits per calendar year), shall be paid for on demand by Tenant.
(e) Landlord's Liability. Provided, however, the foregoing covenants and undertakings of Tenant contained in this Section 13.21 shall not apply to any condition or matter constituting a violation of any Law: (i) which existed prior to the commencement of Tenant's use or occupancy of the Premises; (ii) which was not caused, in whole or in part, by Tenant or Tenant's agents, employees, officers, partners, contractors or invitees; or (iii) to the extent such violation is caused by, or results from the acts or neglects of Landlord or Landlord's agents, employees, officers, partners, contractors, guests, or invitees.
(f) Tenant's Liability After Termination of Lease. The covenants contained in this Section 13.21 shall survive the expiration or termination of this Lease, and shall continue for so long as Landlord and its successors and assigns may be subject to any expense, liability, charge, penalty, or obligation against which Tenant has agreed to indemnify Landlord under this Section 13.21.
13.22 Jury Trial Waver. Landlord and Tenant each hereby irrevocably, knowingly and voluntarily waive trial by jury in any action, proceeding or counterclaim brought by either of the parties against the other or their successors in respect to any matter arising out of or in connection with this Lease, the relationship of Landlord and Tenant, Tenant’s use or occupancy of the Premises, and/or any claim for injury or damage, or any emergency or statutory remedy.
13.23 No Recording of Lease. This Lease may not be recorded without Landlord’s prior written consent, but Tenant agrees on request of Landlord to execute a memorandum hereof for recording purposes.
13.24 Attorneys’ Fees. In the event of any action or proceeding brought by either party against the other under this Lease, the prevailing party shall be entitled to recover court costs and the fees and disbursements of its attorneys in such action or proceeding (whether at the administrative, trial or appellate levels) in such amount as the court or administrative body may judge reasonable.
13.25 Effective Date. The Effective Date shall mean August 1, 2013.
13.26 Anti-Terrorism Statute Compliance. Tenant hereby represents and warrants to Landlord that Tenant is not: (1) in violation of any Anti-Terrorism Law; (2) conducting any business or engaging in any transaction or dealing with any Prohibited Person, including the making or receiving or any contribution of funds, goods or services to or for the benefit of any Prohibited Person; (3) dealing in, or otherwise engaging in any transaction relating to, any property or interest in property blocked pursuant to Executive Order No. 13224; (4) engaging in or conspiring to engage in any transaction that evades or avoids, or had the purpose of evading or avoiding, or attempts to violate any of the prohibitions set forth in any Anti-Terrorism Law; or (5) a Prohibited Person, nor are any of its partners, members, managers, officers or directors a Prohibited Person. As used herein, "Antiterrorism Law" is defined as any law relating to terrorism, anti-terrorism, money laundering or anti-money laundering activities, including Executive Order No. 13224 and Title 3 of the USA Patriot Act. As used herein "Executive Order No. 13224" is defined as Executive Order No. 13224 on Terrorist Financing effective September 24, 2001, and relating to "Blocking Property and Prohibiting Transactions With Persons Who Commit, or Support Terrorism" "Prohibited Person" is defined as (1) a person or entity that is listed in the Annex to Executive Order 13224; (ii) a person or entity with whom Tenant or Landlord is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law, or (iii) a person or entity that is named as a "specially designated national and blocked person" on the most current list published by the U.S. Treasury Department Office Of Foreign Assets Control as its official website, http://www.treas.gov/ofac/t11sdn.pdf or at any replacement website or other official publication of such list. "USA Patriot Act" is defined as the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001" (Public Law 107-56). Tenant hereby agrees to defend, indemnify, and hold harmless Landlord from and against any and all claims, damages, losses, risks, liabilities, and expenses (including attorney's fees and costs) arising from or related to any breach of the foregoing representations and warranties.
13.27 Submission of Electronic Document. In the event Landlord electronically transmits this Lease to Tenant in a digital format, then Tenant’s act of printing, executing and returning multiple originals of the Lease to Landlord, shall constitute Tenant’s representation and warranty to Landlord that Tenant has not altered or modified any of the terms set forth in the digital document transmitted by Landlord and that the original documents signed by Tenant and returned to Landlord for Landlord’s execution are identical to the document transmitted by Landlord to Tenant for Tenant’s execution. Tenant further acknowledges that Landlord is relying on the foregoing representation and warranty of Tenant in entering into this Lease. In the event Tenant breaches such representation and warranty, Landlord may exercise any remedies available to it at law or in equity, in any order it deems appropriate in its sole and absolute discretion, including but not limited to, electing to declare the Lease void ab initio.
13.28 Special Stipulations. In the event of a conflict between the provisions set forth in the body of this Lease and the provisions of the Special Stipulations set forth in Exhibit E attached hereto, if any, the terms of the Special Stipulations shall control.
13.29 Global Reasonableness Standard. Landlord acknowledges and agrees that where Landlord requires Tenant to gain approval or consent from Landlord, Landlord shall not unreasonably withhold such approval or consent to Tenant for such request unless otherwise expressly provided herein.
SIGNATURES APPEAR ON FOLLOWING PAGE
IN WITNESS WHEREOF, Landlord and Tenant have executed this lease in multiple originals, all as of the day and year first above written.
WITNESSES
___________________________________ Print:_______________________________
___________________________________ Print:_______________________________
|
TENANT:
IMMUCOR, INC., a Georgia corporation
By: ______________________________ Name: Title:
|
WITNESSES
___________________________________ Print:_______________________________
___________________________________ Print:_______________________________
|
LANDLORD:
KENNESAW WALL I, a Delaware limited liability company
By: ______________________________ Name: Title: |
Exhibit 21
Subsidiaries of Registrant
Subsidiary |
|
Jurisdiction of Organization |
|
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Immucor Medizinische Diagnostik GmbH | Germany | |||
Immucor Italia S.p.A. | Italy | |||
Immucor Diagnosticos Medicos Lda. | Portugal | |||
Dominion Biologicals Limited | Canada | |||
Immucor, S.L. | Spain | |||
Immucor Gamma Benelux SPRL | Belgium | |||
Immucor K. K. | Japan | |||
Immucor France S.A.S. | France | |||
IBG Immucor Limited | United Kingdom | |||
BioArray Solutions Limited | United States (Delaware) | |||
Immucor India Private Ltd | India | |||
Immucor Holdings Inc. | United States (Delaware) | |||
Immucor GTI Diagnostics Holdings Company | United States (Delaware) | |||
Immucor Transplant Diagnostics, Inc. | United States (Delaware) | |||
Immucor GTI Diagnostics, Inc. | United States (Wisconsin) | |||
Immucor LIFECODES BVBA | Belgium | |||
GTI Diagnostics GmbH | Germany | |||
Quest Biomedical Ltd | United Kingdom | |||
Immucor Ltd | United Kingdom | |||
Organ-i, Inc. | United States (Delaware) |
The Company owns, directly or indirectly, 100% of each of the above entities.
Exhibit 31.1
I, William A. Hawkins, certify that:
1. I have reviewed this annual report on Form 10-K of Immucor, Inc.;
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: August 26, 2014
/s/ William A. Hawkins
William A. Hawkins
President and Chief Executive Officer
Exhibit 31.2
I, Dominique Petitgenet, certify that:
1. I have reviewed this annual report on Form 10-K of Immucor, Inc.;
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-l5(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: August 26, 2014
/s/ Dominique Petitgenet
Dominique Petitgenet,
Chief Financial Officer (Principal Financial Officer)
Exhibit 32.1
Certification Pursuant to 18 U.S.C. 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K for the period ended May 31, 2014 (the “Report”) of Immucor, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
August 26, 2014 |
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/s/ William A. Hawkins |
|
|
|
William A. Hawkins |
|
|
|
President and Chief Executive Officer |
|
Exhibit 32.2
Certification Pursuant to 18 U.S.C. 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K for the period ended May 31, 2014 (the “Report”) of Immucor, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
August 26, 2014 |
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/s/ Dominique Petitgenet |
|
|
|
Dominique Petitgenet |
|
|
|
Chief Financial Officer |
|
Note 9 - Deferred Financing Costs, Net (Tables)
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2014
|
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Deferred Financing Costs [Text Block] [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Table Text Block] |
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Note 2 - Business Combinations (Details) (USD $)
|
12 Months Ended | 3 Months Ended | 0 Months Ended | 0 Months Ended | 12 Months Ended | 0 Months Ended | 0 Months Ended | 3 Months Ended | 12 Months Ended | 0 Months Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2014
|
May 31, 2013
|
May 31, 2012
|
Aug. 19, 2011
Predecessor [Member]
General and Administrative Expense [Member]
Paid Prior to Closing [Member]
Immucor Inc [Member]
|
Aug. 19, 2011
Predecessor [Member]
General and Administrative Expense [Member]
Immucor Inc [Member]
|
Aug. 19, 2011
Predecessor [Member]
|
Jan. 31, 2014
UNITED KINGDOM
LIFECODES [Member]
|
Jan. 31, 2014
UNITED KINGDOM
LIFECODES [Member]
|
Jan. 31, 2014
ITALY
LIFECODES [Member]
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May 31, 2013
Contingent Consideration [Member]
LIFECODES [Member]
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Mar. 22, 2013
Deferred Financing Costs [Member]
LIFECODES [Member]
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Aug. 19, 2011
Deferred Financing Costs [Member]
Immucor Inc [Member]
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May 30, 2014
Organ-i [Member]
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May 30, 2014
Organ-i [Member]
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Mar. 22, 2013
LIFECODES [Member]
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Aug. 31, 2013
LIFECODES [Member]
|
May 31, 2014
LIFECODES [Member]
|
May 31, 2013
LIFECODES [Member]
|
Jan. 31, 2014
LIFECODES [Member]
|
Mar. 22, 2013
LIFECODES [Member]
|
Aug. 19, 2011
Immucor Inc [Member]
|
Aug. 19, 2011
Immucor Inc [Member]
|
Mar. 22, 2013
In Process Research and Development [Member]
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Note 2 - Business Combinations (Details) [Line Items] | |||||||||||||||||||||||
Payments to Acquire Businesses, Gross | $ 12,000,000 | $ 86,204,000 | $ 87,300,000 | ||||||||||||||||||||
Business Combination, Contingent Consideration Arrangements, Range of Outcomes, Value, High | 18,000,000 | 10,000,000 | |||||||||||||||||||||
Business Combination, Contingent Consideration, Liability | 11,300,000 | 4,504,000 | 11,300,000 | 0 | 4,500,000 | 4,400,000 | |||||||||||||||||
Business Combination, Consideration Transferred | 4,000,000 | 2,400,000 | 23,300,000 | 90,604,000 | 1,939,387,000 | ||||||||||||||||||
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Intangible Assets, Other than Goodwill | 26,700,000 | 3,500,000 | 33,240,000 | 779,860,000 | |||||||||||||||||||
Goodwill | 851,563,000 | 1,003,463,000 | 966,338,000 | 5,800,000 | 1,100,000 | 36,889,000 | 972,295,000 | ||||||||||||||||
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Deferred Tax Liabilities Noncurrent | 9,100,000 | 12,700,000 | 291,900,000 | ||||||||||||||||||||
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Cash and Equivalents | 1,200,000 | 2,558,000 | 322,963,000 | ||||||||||||||||||||
Proceeds from Previous Acquisition | 1,100,000 | ||||||||||||||||||||||
Accretion Expense | 100,000 | ||||||||||||||||||||||
Business Combination, Contingent Consideration Arrangements, Change in Amount of Contingent Consideration, Liability | (4,638,000) | 104,000 | (4,600,000) | ||||||||||||||||||||
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Finite-Lived Intangibles | 31,800,000 | ||||||||||||||||||||||
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Indefinite-Lived Intangible Assets | 1,400,000 | ||||||||||||||||||||||
Other Borrowings | 50,000,000 | ||||||||||||||||||||||
Proceeds from Contributions from Parent | 42,500,000 | ||||||||||||||||||||||
Proceeds from Contributions from Affiliates | 39,000,000 | ||||||||||||||||||||||
Business Acquisition, Transaction Costs | 1,600,000 | 42,500,000 | 4,200,000 | 88,300,000 | |||||||||||||||||||
Other Additional Capital | 2,100,000 | ||||||||||||||||||||||
Business Combination, Acquisition Related Costs | (4,638,000) | 2,616,000 | 2,000,000 | 16,900,000 | 18,863,000 | 2,600,000 | 28,900,000 | ||||||||||||||||
Business Combination, Pro Forma Information, Revenue of Acquiree since Acquisition Date, Actual | 9,500,000 | ||||||||||||||||||||||
Business Combination, Pro Forma Information, Earnings or Loss of Acquiree since Acquisition Date, Actual | $ 2,600,000 |
Note 18 - Income Taxes (Tables)
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2014
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Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Income before Income Tax, Domestic and Foreign [Table Text Block] |
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Schedule of Components of Income Tax Expense (Benefit) [Table Text Block] |
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Schedule of Effective Income Tax Rate Reconciliation [Table Text Block] |
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Schedule of Deferred Tax Assets and Liabilities [Table Text Block] |
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Summary of Income Tax Contingencies [Table Text Block] |
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