SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 12(g) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1996 OR [ ] Transition Report Pursuant to Section 13 or 12(g) of the Securities Exchange Act of 1934 For the Transition Period from _____ to _____ Commission File Number 0-26144 International Murex Technologies Corporation (Exact name of registrant as specified in its charter) Province of British Columbia, Canada N/A (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3075 Northwoods Circle, Norcross, Georgia 30071 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 770-662-0660 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 12(g) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of common shares outstanding as of May 8, 1996 was 16,164,647, excluding treasury shares. Page 1 of 20 Exhibits begin on Page ____ INTERNATIONAL MUREX TECHNOLOGIES CORPORATION Quarterly Report on Form 10-Q For the Three Months Ended March 31, 1996 Table of Contents Item Page Number PART I -- FINANCIAL INFORMATION Number 1 Financial Statements Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 3 Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1995 5 Consolidated Statements of Changes in Shareholders' Equity for the Period January 1, 1995 to March 31, 1996 6 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 7 Notes to Consolidated Financial Statements 9 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II -- OTHER INFORMATION 1 Legal Proceedings 19 6 Exhibits and Reports on Form 8-K 19 SIGNATURES 20 International Murex Technologies Corporation Consolidated Balance Sheets (In Thousands of U. S. Dollars) March 31, December 31, 1996 1995 ASSETS CURRENT ASSETS Cash and cash equivalents $ 7,621 $15,771 Accounts receivable, net of allowance for doubtful accounts of $3,363 and $3,410, respectively 33,362 34,836 Inventories 17,836 16,941 Amounts due from affiliate 17,416 Prepaid and other 2,645 2,851 Total current assets 78,880 70,399 PROPERTY, PLANT AND EQUIPMENT- at cost less accumulated depreciation and amortization 9,413 9,231 PATENTS, TRADEMARKS AND LICENSES- at cost less accumulated amortization 3,676 229 OTHER ASSETS 5,593 5,889 TOTAL $97,562 $85,748 See notes to consolidated financial statements. March 31 December 31, 1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings under line of credit $ 30 $ 44 Trade accounts payable 8,195 7,586 Accrued expenses: Professional fees 2,449 2,502 Royalty payments 9,380 13,397 Employee related compensation 3,386 3,963 Income taxes payable 1,193 1,709 Litigation settlements 2,819 2,910 Amounts due to affiliate 17,126 Other 3,424 3,551 Current portion of capitalized lease obliga 212 229 Total current liabilities 48,214 35,891 DEFERRED RENT 62 80 CAPITALIZED LEASE OBLIGATIONS 222 246 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common shares, without par value, 200,000,000 shares authorized; 16,404,677 and 16,688,931 shares issued, respectively 83,084 84,136 Additional paid-in capital 13,906 13,906 Accumulated deficit (44,613) (43,504) Less cost of 244,143 and 532,243 common shares held in treasury, respectively (451) (1,514) Accumulated currency translation adjustment (2,862) (3,493) Shareholders' equity 49,064 49,531 TOTAL $ 97,562 $ 85,748 See notes to consolidated financial statements. International Murex Technologies Corporation Consolidated Statements of Operations (In Thousands of U.S. Dollars, except per share data) Three Months Ended March 31, 1996 1995 REVENUES: Product sales $26,023 $23,478 Total revenues 26,023 23,478 COSTS AND EXPENSES: Cost of products sold 9,853 6,773 Research and development 1,840 2,056 General and administrative 5,304 5,442 Sales and marketing 7,004 6,368 Foreign exchange loss (gain) 9 (365) Royalty expense 1,967 1,972 Total costs and expenses 25,977 22,246 Income From Operations 46 1,232 Interest income 64 267 Interest (expense) (748) (26) Gain (loss) on asset disposals 18 Settlement of litigation (3,123) Equity in (loss) of investee (408) Other income (expense) 95 (34) Income (loss) before income taxes (951) (1,666) Income taxes 158 508 NET INCOME (LOSS) $ (1,109) $ (2,174) Net income (loss) per common share $ (0.07) $ (0.13) Weighted average shares outstanding (in thousands 16,160 16,569 See notes to consolidated financial statements. International Murex Technologies Corporation Consolidated Statements of Changes in Shareholders' Equity (In Thousands of U.S. Dollars, except share data) Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit January 1, 1995 16,778,646 $84,082 $13,906 ($36,894) Issued pursuant to employee stock purchase plan 17,375 54 Shares repurchased for treasury Retirement of escrowed share (107,144) Issued in exchange for subsidiary shares 54 Net (loss) (6,610) Foreign currency translation December 31, 1995 16,688,931 $84,136 $13,906 ($43,504) Issued pursuant to employee stock purchase plan 3,846 11 Retirement of treasury share (288,100) (1,063) Net (loss) (1,109) Foreign currency translation March 31, 1996 16,404,677 $83,084 $13,906 ($44,613) Accumulated Currency Total Treasury TranslatiShareholders' Shares Adjustmen Equity (5) ($4,585) $56,504 54 (1,509) (1,509) (6,610) 1,092 1,092 (1,514) ($3,493) $49,531 11 1,063 0 (1,109) 631 631 (451) ($2,862) $49,064 See notes to consolidated financial statements. International Murex Technologies Corporation Consolidated Statements of Cash Flows (In Thousands of U.S. Dollars) Three Months Ended March 31, 1996 1995 Operating Activities: Net income (loss) $(1,109) $(2,174) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,437 503 (Gain) loss on sale of property and equipment (18) Changes in working capital: Accounts receivable 1,487 (1,558) Inventories (895) (1,725) Prepaid expenses and other assets 199 1,357 Trade accounts payable 609 2,671 Accrued expenses (5,370) 2,057 Net cash (used in) operating activities (3,642) 1,113 Investing Activities: Additions to property and equipment (1,814) (725) Additions to patents and licenses (3,499) Proceeds from sale of property and equipment 247 18 Net cash (used in) investing activities (5,066) (707) Financing Activities: Increase (decrease) in borrowings under line of credit (14) Reduction of other long-term liabilities (70) (98) Proceeds from issuance of common shares 11 17 Repurchase of shares for treasury (788) Net cash (used in) financing activities (73) (869) Effect of Exchange Rate Changes on Cash 631 1,088 Net Increase (Decrease) in Cash and Cash Equivalent (8,150) (7,693) Cash and Cash Equivalents at Beginning of Period 15,771 19,213 Cash and Cash Equivalents at End of Period $ 7,621 $ 11,520 Supplemental Disclosure of Cash Flow Information: Cash paid for interest $748 $26 Cash paid for income taxes $674 $593 International Murex Technologies Corporation Consolidated Statements of Cash Flows (Continued) (In Thousands of U.S. Dollars) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES During the quarter ended March 31, 1996, IMTC retired $1,063 of shares held in treasury. During the quarter ended March 31, 1996, a subsidiary of the Company, Specialist Diagnostics Limited ("SDL"), entered voluntary liquidation. Therefore, its financial statements were deconsolidated. This resulted in the recognition of a $17,416 amount due from affiliate, a $17,126 amount due to affiliate and a reduction of other assets of $290. Unpaid acquisition costs totalled $750 and $750 at March 31, 1996 and 1995, respectively. During the quarter ended March 31, 1995, the Company entered into capital lease obligations of approximately $53. International Murex Technologies Corporation Notes to Consolidated Financial Statements (In Thousands of U.S. Dollars) 1. Nature of The Company and Basis of Presentation: International Murex Technologies Corporation ("IMTC"), has many separately incorporated subsidiaries operating throughout the world under the Murex Diagnostics' name (the "Murex Group"). The Murex Group develops, manufactures and markets medical diagnostic products and provides medical services for the screening, diagnosis and monitoring of infectious diseases and other medical conditions. (IMTC and the Murex Group are collectively referred to herein for consolidated financial purposes only as the "Company".) The accompanying financial statements include IMTC and its wholly-owned, separately incorporated subsidiaries doing business in various territories generally under the name Murex Diagnostics; Murex Holdings Corporation ("MHC"), a Delaware corporation; MHC's majority owned subsidiary Murex Corporation ("Murex"), a Delaware corporation; and Murex's wholly owned subsidiaries. Subsequent to December 31, 1995, IMTC's United Kingdom ("UK") operating business was restructured into two companies, Murex Diagnostics Limited ("MDL") and Murex Biotech Limited ("MBL"). MDL subsequently changed its name to Specialist Diagnostics Limited ("SDL") (see Note 5) and entered voluntary liquidation. Co-liquidators have been appointed. IMTC, through its subsidiary MHC, purchased additional shares of Murex from Murex's minority shareholders from July 1993 through August 1995, bringing its total ownership percentage to greater than 95%. During August 1995, Murex was merged with MHC and MHC was merged with Murex Diagnostics, Inc. The previous minority interest's portion of Murex's continued losses in excess of their basis has not been recorded because management considers that it is not currently realizable. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Such financial statements do not include all disclosures required by generally accepted accounting principles for annual financial statement reporting purposes. However, there has been no material change in the information disclosed in the Company's annual consolidated financial statements dated December 31, 1995, except as disclosed herein. Accordingly, the information contained herein should be read in conjunction with such annual consolidated financial statements and related disclosures. The accompanying financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. Results of operations for the quarter ended March 31, 1996 are not necessarily indicative of results expected for an entire year. 2. Inventories: March 31, December 31, 1996 1995 Raw materials and supplies . . $5,074 $4,842 Work in process. . . . . . . . 3,712 4,292 Finished goods . . . . . . . . 9,050 7,807 Total inventories. . . . . . . $17,836 $16,941 3. Contingencies: (a) Class Actions: Four class action lawsuits have been instituted on behalf of all persons who had purchased IMTC's securities between May 21, 1992 and August 19, 1992 against IMTC, two executive officers of IMTC, and Messrs. DeBartolo, Sr. (now deceased) and DeBartolo, Jr., in the Southern District of Texas, Houston Division. In January 1993, the class actions were voluntarily transferred to the United States District Court, Eastern District of New York. The complaints allege that the defendants omitted and/or misrepresented material facts about IMTC which resulted in artificially inflating the market price of IMTC's securities permitting, in part, Messrs. DeBartolo, Sr. and DeBartolo, Jr. to sell their IMTC securities in violation of the federal and Texas securities laws. One further action alleges violations of insider trading rules under the federal securities laws. The amounts of alleged damages are not specified. The defendants answered denying the allegations in the complaints. Discovery has been undertaken and the plaintiffs have moved for class certification, which move has been opposed by the defendants and the motion is pending. On May 2, 1995, IMTC announced an agreement among the parties to settle all outstanding claims for $5.4 million, a portion of which is to be paid by IMTC. The settlement agreement is subject to court approval, which IMTC anticipates will occur during 1996. Accordingly, IMTC has accrued costs related to this settlement, including its portion of the settlement payment, during the first quarter of 1995. (b) HCV Patent Infringement: The Murex Group's business utilizes newly developed technologies that include patents on processes and devices. These types of technologies are the focal point for the biotechnology industry. The ownership and patentability of such processes or devices has become increasingly complex, resulting in competitive claims of ownership within the industry. Several subsidiaries of the Murex Group are involved against Chiron Corporation ("Chiron") and Ortho Diagnostics, Inc. ("Ortho") in patent infringement litigation related to their hepatitis C (HCV) test in several countries. The UK action is against MDL. The UK High Court ruled against MDL and upheld the validity of Chiron's patent. However, the Chiron/Ortho license agreement violated a UK law prohibiting restricted supply arrangements in patent licenses and provided MDL a complete defense for patent infringement through October 1993. Chiron appealed this decision and a ruling upholding the defense related to the restricted supply arrangement was announced on November 2, 1995. However, the license between Chiron and Ortho's UK affiliate was found not to be a restricted supply arrangement. The Chiron/Ortho agreement was amended effective October 1993 to eliminate the restricted supply arrangement. The UK High Court has also ruled that MDL is responsible for a portion of Chiron/Ortho's legal cost, net of certain adjustments. In November 1994, the UK High Court issued an injunction against MDL terminating its right to manufacture and sell its HCV test in the UK. An appeal of the UK High Court ruling upholding the validity of the Chiron patent was held during October 1995, with a ruling announced on November 2, 1995. Chiron's HCV patent was found to be only partially valid. Chiron had sought to patent products that had "no relevance to the existence or otherwise of HCV" and had no industrial usefulness. For this reason the Appeal Court invalidated certain claims. Chiron subsequently re-amended their patent to remove the irrelevant items. On February 16, 1996 the UK High Court ruled that an interim cash security of $9.3 million be posted by MDL for its infringement of Chiron's patent. The interim cash security is not a final judgment of the infringement damages. The final damages amount may exceed or fall below the interim cash security and will be determined at a full damage inquiry scheduled for November 1996. During the first quarter of 1996, MDL was restructured, changed its name to SDL and entered voluntary liquidation. Co-liquidators have been appointed. Chiron has also brought suit against several other Murex Group subsidiaries. In Germany hearings were held and an injunction was granted in December 1994. Chiron also initiated an action that prevents the Belgium subsidiary from selling HCV tests effective from November 1994. Chiron sought an injunction against the Italian subsidiary prohibiting it from selling the HCV test. In April 1995, the Italian court denied Chiron's request for an injunction. In March 1994, the Australian subsidiary filed an action in an Australian Federal District Court to seek revocation of Chiron's Australian patent. Chiron has filed a countersuit and has been granted leave to file a Motion to join IMTC in these proceedings. IMTC is disputing Chiron's ability to join them in the matter. The main trial is currently scheduled to commence during June 1996. In February 1995, Chiron initiated a proceeding with The District Court of The Hague, in The Netherlands. During April 1995, the Court held a preliminary injunction hearing regarding the Murex Group's European subsidiaries' alleged infringement of Chiron's European patent based on their involvement in the production, marketing and distribution of the HCV test kits. The judgement was given on May 8, 1995 and imposed an injunction against the Murex Group in Holland, France and Spain which becomes effective if Chiron posts a bond. Sale of the Murex Serotyping HCV product is excluded from the injunction. Management has addressed the financial aspects of the HCV disputes, and has recorded provisions for estimates of possible future payments based on the best currently available information. There is a possibility that the ultimate resolution of this matter, which is expected to occur within one year, could result in a loss significantly in excess of the amount accrued. (c) United Kingdom Tax Disputes: During October 1995, Her Majesty's Customs and Excise Tax required MDL to pay approximately $900,000 in Value Added Tax ("VAT") related to its central cost allocation agreements with its subsidiaries. Management believes that this assessment is incorrect, has lodged an appeal and believes it has meritorious defenses against the assessment. Therefore, no provision for losses related to this matter have been recorded. During February 1996, a preliminary hearing was held and the judge ruled that this case must be heard by a UK Tribunal. During 1995, the UK Inland Revenue questioned the tax basis of inventory, accounts receivable and property, plant and equipment related to the 1992 purchase of assets from The Wellcome Foundation Limited ("Wellcome".) If Inland Revenue is successful in its argument, a tax charge of up to $4.2 million could arise. Management believes it has meritorious defenses against the claims of Inland Revenue and, therefore, has not recorded a provision for losses related to this matter. (d) Other Matters: In August 1992, Allen F. Campbell, as trustee for two trusts, instituted an action against IMTC, Murex, an executive officer of IMTC, Edward J. DeBartolo, Jr., and others in the District Court for Montgomery County, Texas. In January 1993, the Court transferred the action to the U.S. District Court, Northern District of Texas, and dismissed the other defendants from the proceedings. The plaintiffs sought substantial damages, and other relief, including rescission of certain transactions, based upon, among other charges, alleged subrogation rights to receive payments due under certain promissory notes payable by Murex to Edward J. DeBartolo, Jr., and alleged violations of state securities and corporation laws and common law fraud. A similar suit was filed in Gwinnett County, Georgia in June 1994. On March 24, 1995, the parties entered into a settlement agreement whereby Allen F. Campbell, et al, dismissed both actions with prejudice, released all parties and relinquished all shares of stock held in Murex in return for payments over four years. Reserves have been recorded for such payments. In November 1992, Deacon Barclays de Zoete Wedd Limited ("DBZW")filed a lawsuit in Ontario, Canada against IMTC alleging that IMTC has refused or neglected to pay a contractual fee to DBZW for its assistance in the 1992 purchase of the diagnostics division of Wellcome. The plaintiff sought payment of approximately $1 million plus expenses. IMTC has filed a statement of Defense and Counterclaim and discovery was completed. The matter was scheduled for trial during April 1996. On April 12, 1996 the parties agreed to settle all outstanding claims against one another in return for payment by IMTC of approximately $750,000 during 1996. This amount was accrued as a cost of the acquisition during 1992. 4. Innogenetics Agreement During February 1996, Murex Diagnostics Corporation ("MDC") entered into an exclusive distribution, development and license agreement with Innogenetics N.V. ("Innogenetics") to develop and market gene probe products for the monitoring of patients and the classification of viral diseases. Under the terms of the agreement, MDC will pay $5.9 million during 1996 and $1.6 million during 1997 to Innogenetics for the rights to distribute Innogenetics' products for 15 years. MDC will also pay Innogenetics a royalty of 10% of the Murex Group's net sales of Innogenetics' products. Also under this agreement, MDC shall fund agreed-upon research and development programs, beginning in 1998 and for each of the following 13 years under this Agreement, in an amount equal to 20% of the Murex Group's projected net sales of Innogenetics' products. MDC has begun negotiations with current Innogenetics' distributors to expedite the transfer of business. 5. Restructuring, Renaming, and Voluntary Liquidation of Murex Diagnostics Limited During the first quarter of 1996, one of IMTC's UK subsidiaries, MDL was restructured to maximize tax and operational efficiencies. MDL retained the business encompassing the sale in the UK of all HCV products and the manufacturing of the HCV serotyping test. All other MDL business was sold to another of IMTC's UK subsidiaries, MBL. Subsequent to the restructuring, MDL was renamed SDL. SDL entered voluntary liquidation following the British High Court ruling that an interim cash security of $9.3 million be posted by SDL relating to its ongoing patent litigation with Chiron and Ortho (see Note 3 (b)). Co-liquidators have been appointed. 6. Reconciliation of Canadian and U.S. Generally Accepted Accounting Principles ("Canadian GAAP" and U.S. GAAP") There were no differences between Canadian GAAP and U.S. GAAP during the year ended December 31, 1995 and the quarter ended March 31, 1996. International Murex Technologies Corporation Form 10-Q for the Three Months Ended March 31, 1996 Part I - Financial Information ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts expressed in U.S. Dollars) FINANCIAL CONDITION During the three months ended March 31, 1996, IMTC and the Murex Group (collectively referred to herein for consolidated financial purposes only as the "Company"), earned income from operations and maintained positive working capital. Litigation and Technology Disputes As discussed in the notes to the financial statements, IMTC and several of the Murex Group are currently involved in several lawsuits and technology patent issues, which are either being vigorously defended or are presently being settled. For more complete information on each of the actions described below refer to Note 3 of the Consolidated Financial Statements. Several subsidiaries of the Murex Group are involved against Chiron in patent infringement litigation related to their HCV test in several countries. On February 16, 1996 the UK High Court ruled that an interim cash security of $9.3 million be posted by MDL for its infringement of Chiron's patent. The interim cash security deposit is not a final judgment of the infringement damages. The final damages amount may exceed or fall below the interim cash security and and will be determined at a full damage enquiry scheduled for November 1996. During the first quarter of 1996, MDL was restructured, changed its name to SDL and entered voluntary liquidation. Co-liquidators have been appointed. Chiron has also brought suit agains several of the other Murex Group subsidiaries. In Germany, hearings were held and an injunction was granted in December 1994. Chiron also initiated an action that prevents the Belgium subsidiary from selling HCV tests effective from November 1994. Chiron sought an injunction against the Italian subsidiary prohibiting it from selling the HCV test. In April 1995, the Italian court denied Chiron's request for an injunction. In March 1994, the Australian subsidiary filed an action in an Australian Federal District Court to seek revocation of Chiron's Australian patent. Chiron has filed a countersuit and has been granted leave to file a Motion to join IMTC in these proceedings. IMTC is disputing Chiron's ability to join them in the matter. The main trial is currently scheduled to commence during June 1996. In February 1995, Chiron initiated a proceeding with The District Court of The Hague, in The Netherlands. During April 1995, the Court held a preliminary injunction hearing regarding the Murex Group's European subsidiaries' alleged infringement of Chiron's European patent based on their involvement in the production, marketing and distribution of the HCV test kits. The judgement was given on May 8, 1995 and imposed an injunction against the Murex Group subsidiaries in Holland, France and Spain which becomes effective if Chiron posts a bond. Sale of the Murex Serotyping HCV product is excluded from the injunction. A lawsuit involves class actions filed on behalf of IMTC shareholders. On May 2, 1995, IMTC announced an agreement among the parties to settle all outstanding claims for $5.4 million, a portion of which is to be paid by IMTC. This settlement agreement is subject to court approval, which IMTC anticipates will occur during 1996. Accordingly, IMTC has accrued costs related to this settlement, including its portion of the settlement payment, during the first quarter of 1995. One lawsuit involved Allen F. Campbell and related parties. On March 24, 1995, the parties entered into a settlement agreement whereby Allen F. Campbell, et al, dismissed both actions with prejudice and relinquished all shares of stock held in Murex in return for payments over four years. Another lawsuit involves a dispute between DBZW and IMTC alleging IMTC neglected to pay a contractual fee to DBZW. On April 12, 1996 the parties agreed to settle all outstanding claims against one another in return for payment by IMTC of approximately $750,000 during 1996. This amount was accrued as a cost of the acquisition during 1992. During October 1995, Her Majesty's Customs and Excise Tax required MDL to pay approximately $900,000 in Value Added Tax ("VAT") related to its central cost allocation agreements with its subsidiaries. Management believes that this assessment is incorrect, has lodged an appeal and believes it has meritorious defenses against the assessment. Therefore, no provision for losses related to this matter have been recorded. During February 1996, a preliminary hearing was held and the judge ruled that the case must be heard by a UK Tribunal. During 1995, UK Inland Revenue questioned the tax basis of inventory, accounts receivable and property, plant and equipment related to the 1992 purchase of assets from Wellcome. If Inland Revenue is successful in its argument, a tax charge of up to $4.2 million could arise. Management believes it has meritorious defenses against the claims of Inland Revenue and, therefore, has not recorded a provision for losses related to this matter. Management has addressed the financial aspects of all of these items, and has recorded provisions for estimates of possible future payments based on the best currently available information. However, it is possible that significant adjustments could be required upon the ultimate resolution of this matter. The extent of these adjustments, if any, cannot be determined at this time. Liquidity and Capital Resources The Company has sufficient cash resources and adequate working capital to carry on its current business and meet existing capital requirements. The Company earned income from operations of $46,000 during the quarter ended March 31, 1996. Working capital totalled $30,666,000 at March 31, 1996. The Company's working capital and capital requirements will depend upon numerous factors, including future costs of the Murex Group for defending and/or settling the HCV related litigation, the results of research and development, the levels of resources devoted to the establishment and expansion of marketing and manufacturing, technological developments, and the timing and costs of obtaining approvals for new products. Depending on the outcome of these factors, the Company may need to raise additional funds in the future for use to fund acquisitions, complete products in development, and for general purposes. There are no assurances that such funds will be available on favorable terms, if at all. As discussed above, a subsidiary of IMTC, SDL, formerly MDL, entered voluntary liquidation in the first quarter of 1996 following a British High Court ruling that an interim cash security of $9.3 million be posted by MDL for infringement of Chiron Corporation's U.K. Hepatitis C (HCV) patent. The interim cash security, payable to Chiron Corporation and Ortho Diagnostics Systems is not a final judgment of the infringement damages. The final damage amount may exceed or fall below the interim cash security and will be determined at a full Damages Enquiry scheduled for November, 1996. As a result of the liquidation, SDL is no longer consolidated in the financial statements of IMTC. Therefore IMTC's interest in SDL is accounted for as an "equity investment" on the consolidated balance sheet and, accordingly, SDL's operating loss, primarily due to litigation costs, is reported as "equity in loss of investee" in the consolidated statements of operations. As discussed above, IMTC has agreed to settle the class action and Campbell litigations during the first quarter of 1995. These settlements will result in future payments of approximately $2,800,000. In November 1992, Deacon Barclays de Zoete Wedd Limited filed a lawsuit in Ontario, Canada against IMTC alleging that IMTC has refused or neglected to pay a contractual fee to Deacon Barclays de Zoete Wedd Limited for its assistance in the 1992 purchase of the diagnostics division of Wellcome. The plaintiff sought payment of approximately $1 million plus expenses. IMTC has filed a statement of Defense and Counterclaim and discovery was completed. The matter was scheduled for trial during April 1996. On April 12, 1996 the parties agreed to settle all outstanding claims against one another in return for payment by IMTC of approximately $750,000 during 1996. This amount was accrued for as a cost of the acquisition during 1992. During the first quarter of 1995, IMTC commenced a stock repurchase program to acquire up to 5% of its outstanding common shares. Pursuant to the program, IMTC purchased shares until January 1996 in the open market and through other transactions, subject to share availability at prices deemed appropriate. IMTC purchased 431,200 shares prior to the termination of this program. During February 1996, MDC entered into an exclusive distribution, development and license agreement with Innogenetics to develop and market gene probe products for the monitoring of patients and the classification of viral diseases. Under the terms of the agreement, MDC will pay $5.9 million during 1996 and $1.6 million during 1997 to Innogenetics for the rights to distribute Innogenetics' products for 15 years. MDC will also pay Innogenetics a royalty of 10% of the Murex Group's net sales of Innogenetics' products. Also under this agreement, MDC shall fund agreed-upon research and development programs, beginning in 1998 and for each of the following 13 years under this agreement, in an amount equal to 20% of the Murex Group's projected net sales of Innogenetics' products. The Company anticipates that its current capital resources will enable it to maintain planned operations for the foreseeable future subject to management's ability to acquire new technologies and continue innovations to reduce the impact of the loss of certain HCV sales. The various subsidiaries in the Murex Group plan to continue to utilize their assets, the anticipated profitable financial results of operations and the proceeds from the MDC licensing agreement to provide access to additional working capital financing and to obtain equipment lease financing, as and when required. The United States and United Kingdom operating subsidiaries established working capital lines of credit in early 1995 for an aggregate $2.2 million borrowing capacity. The establishment of the local currency credit facilities in countries where IMTC subsidiaries operate will provide a natural foreign exchange rate fluctuation hedge by reducing the net asset investment in Pounds Sterling. Management Outlook The Murex Group's litigation set-backs described above regarding HCV are significant to the Company's future. The key to growth is the ability to identify new needs in the marketplace, and to expeditiously meet these needs through access to appropriate innovations and technologies, and to rapidly incorporate them into the Murex Group's product line. However, there can be no assurance that Murex Group will successfully add a significant number of new products to its product line. The Innogenetics distribution, developing and licensing agreement discussed above gives the Murex Group access to the rapidly growing gene probe market for monitoring patients and the classification of viral diseases. The DNA probe technology provided by Digene Diagnostics under the 1993 and 1994 agreements is beginning to yield new products which may contribute to future growth as the Murex Group have certain distribution rights for these products. Recent Murex Group product innovations, such as SAM and ICE technologies should also contribute to future sales growth. In addition to relying on research and development and licensing of core technologies, management's operation strategy will focus on quality, customer service, reducing costs and improving cash flows to help offset reductions in HCV test sales. Results of Operations Product sales for the quarter ended March 31, 1996 were $26,023,000 versus $23,478,000 for the comparable prior year quarter. The increase in product sales during the first quarter of 1996 was a result of the newly-acquired Innogenetics' product line, dramatic growth of sales in Eastern Europe and the acquisition of the Company's Canadian distributor. Gross profit on product sales for the quarter ended March 31, 1996 was 62.1%, as compared with 71.2% for 1995. Cost of products sold grew $3,080,000 because of increased use of direct distributors, especially for the newly-acquired Innogenetics' products, which caused an erosion of the Company's gross profit margin and increased product sales of purchased-in products which have lower gross profit margins. Margins will improve as the Innogenetics sales by direct distributors are replaced with direct Company sales which produce and support stronger margins. Total costs and expenses, excluding cost of products sold, of $16,124,000 for the quarter ended March 31, 1996 reflect a net increase of $651,000 over the quarter ended March 31, 1995. Sales and marketing expenses of $7,004,000 reflects a $636,000 increase over the first quarter of 1995. This increase was a result of increased presence by the Murex Group in the German, Eastern European, African, Middle Eastern and South American markets. Foreign exchange loss was $9,000 for the quarter ended March 31, 1996 versus a gain of $365,000 reported for the first quarter of 1995. The 1995 foreign exchange gain was a result of the weakening of the Italian Lira versus other European currencies. The Company's Italian subsidiary billed other European customers in their local currencies. As the Lira weakened against these currencies, the Italian subsidiary recognized a gain on its receivables from its European customers. The increase in interest expense from $26,000 for the quarter ended March 31, 1995 to $748,000 for the quarter ended March 31, 1996 was due to the factoring of Italian receivables to fund the agreement with Innogenetics. The equity in loss of investee represents SDL's net loss for the quarter ended March 31, 1996. International Murex Technologies Corporation Form 10-Q for the Three Months Ended March 31, 1996 Part II - Other Information ITEM 1 - LEGAL PROCEEDINGS See Note 3 to the financial statements for information regarding current legal proceedings. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 1. Exhibits Exhibit 11 Statement Regarding Computation of Per Share Earnings 2. Reports on Form 8-K Current Report on Form 8-K dated February 22, 1996 announcing the voluntary liquidation of a subsidiary of IMTC. SIGNATURE Pursuant to the requirements 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. INTERNATIONAL MUREX TECHNOLOGIES CORPORATION (Registrant) Date: May 9, 1996 By: /s/ C. Robert Cusick Vice Chairman and Chief Financial Officer Date: May 9, 1996 By: /s/ Jill A. Gilmer Secretary