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 June 30, 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 August 9, 1996 was 16,168,675,
excluding treasury shares.
Page 1 of 20
Exhibits begin on Page ____
INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
Quarterly Report on Form 10-Q
For the Six Months Ended June 30, 1996
Table of Contents
Item Page
Number PART I -- FINANCIAL INFORMATION Number
1 Financial Statements
Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations
for the Three and Six Months Ended
June 30, 1996 and 1995 5
Consolidated Statement of Changes in
Shareholders' Equity for the
Period January 1, 1995 to June 30, 1996 6
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 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)
June 30, December 31,
1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,321 $ 15,771
Accounts receivable, net of allowance
for doubtful accounts of $3,364
and $3,410, respectively 32,656 34,836
Inventories 19,135 16,941
Amounts due from affiliate 16,737
Prepaid and other 2,564 2,851
Total current assets 80,413 70,399
PROPERTY, PLANT AND EQUIPMENT-
at cost less accumulated depreciation
and amortization 9,079 9,231
PATENTS, TRADEMARKS AND LICENSES-
at cost less accumulated amortization 4,450 229
OTHER ASSETS 5,607 5,889
TOTAL $ 99,549 $ 85,748
See notes to consolidated financial statements.
June 30, December 31,
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under line of credit $ 21 $ 44
Trade accounts payable 9,106 7,586
Accrued expenses:
Professional fees 1,343 2,502
Royalty payments 9,543 13,397
Employee related compensation 3,677 3,963
Income taxes payable 1,255 1,709
Litigation settlements 3,202 2,910
Amounts due to affiliate 18,146
Other 3,886 3,551
Current portion of capitalized
lease obligations 183 229
Total current liabilities 50,362 35,891
DEFERRED RENT 88 80
CAPITALIZED LEASE OBLIGATIONS 192 246
SHAREHOLDERS' EQUITY
Common shares, without par value,
200,000,000 shares authorized;
16,267,114 and 16,688,931 shares
issued, respectively 82,654 84,136
Additional paid-in capital 13,906 13,906
Accumulated deficit (44,787) (43,504)
Less cost of 101,043 and 532,243
common shares held in treasury,
respectively (5) (1,514)
Accumulated currency translation adjustment (2,861) (3,493)
Shareholders' equity 48,907 49,531
TOTAL $ 99,549 $ 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 Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
REVENUES:
Product sales $24,351 $24,045 $50,374 $47,523
Total revenues 24,351 24,045 50,374 47,523
COSTS AND EXPENSES:
Cost of products sold 8,502 8,078 18,355 14,851
Research and development 1,574 1,918 3,414 3,974
General and administrative 5,001 5,862 10,305 11,304
Sales and marketing 7,724 6,880 14,728 13,248
Foreign exchange loss(gain) 715 (417) 724 (782)
Royalty expense 825 2,411 2,792 4,383
Total costs and expenses 24,341 24,732 50,318 46,978
Income From Operations 10 (687) 56 545
Interest income 245 263 309 530
Interest expense (218) (37) (966) (63)
Gain on asset disposals 4 24 4 42
Settlement of litigation (3,123)
Equity in loss of investee (79) (487)
Other income (expense) 9 (109) 104 (143)
Loss before income taxes (29) (546) (980) (2,212)
Income taxes 145 463 303 971
NET LOSS $ (174) $(1,009) $(1,283) $(3,183)
Net loss per common share $(0.01) $(0.06) $ (0.08) $ (0.19)
Weighted average shares
outstanding (in thousands)16,165 16,483 16,162 16,569
See notes to consolidated financial statements.
International Murex Technologies Corporation
Consolidated Statement of Changes in Shareholders' Equity
(In Thousands of U.S. Dollars, except share data)
Additional
Common Stock Paid-In
Shares Amount Capital
January 1, 1995 16,778,646 $84,082 $13,906
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)
Foreign currency translation
December 31, 1995 16,688,931 84,136 13,906
Issued pursuant to employee
stock purchase plan 9,383 27
Retirement of treasury share (431,200) (1,509)
Net (loss)
Foreign currency translation
June 30, 1996 16,267,114 $82,654 $13,906
Accumulated
Currency
Accumulated Treasury Translation
Deficit Shares Adjustment
($36,894) ($5) ($4,585)
(1,509)
(6,610)
1,092
(43,504) (1,514) (3,493)
1,509
(1,283)
632
($44,787) ($5) ($2,861)
Total
Shareholders'
Equity
$49,431,114
32,572,976
(1,509)
(6,610)
1,092
81,997,063
85,064
88,055
88,687
$82,258,869
See notes to consolidated financial statements.
International Murex Technologies Corporation
Consolidated Statements of Cash Flows
(In Thousands of U.S. Dollars)
Six Months Ended June 30,
1996 1995
Operating Activities:
Net loss $(1,283) $(3,183)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,118 2,109
Gain on sale of property and equipment (4) (42)
Changes in working capital:
Accounts receivable 2,180 (2,793)
Inventories (2,194) (685)
Prepaid expenses and other assets 1,978 1,128
Trade accounts payable 1,520 (435)
Accrued expenses (5,115) 4,355
Net cash provided by (used in) operating
activitiES (800) 454
Investing Activities:
Additions to property and equipment (1,839) (2,543)
Additions to patents and licenses (4,374) (103)
Proceeds from sale of property and equipment 30 57
Net cash (used in) investing activities (6,183) (2,589)
Financing Activities:
Increase in borrowings under line of credit 20
Reduction of other long-term liabilities (126) (169)
Proceeds from issuance of common shares 27 34
Repurchase of shares for treasury (889)
Net cash (used in) financing activities (99) (1,004)
Effect of Exchange Rate Changes on Cash 632 1,180
Net (Decrease) in Cash and Cash Equivalents (6,450) (1,959)
Cash and Cash Equivalents at Beginning of Period 15,771 19,213
Cash and Cash Equivalents at End of Period $ 9,321 $ 17,254
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $309 $524
Cash paid for income taxes $757 $296
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 six months ended June 30, 1996, IMTC retired $1,509 of shares
held in treasury.
During the six months ended June 30, 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 $16,737 amount due from affiliate, a $18,146 amount due to
affiliate and a reduction of other assets of $1,409.
Unpaid acquisition costs totaled $385 and $750 at June 30, 1996 and 1995,
respectively.
During the six months ended June 30, 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 generally under
the name Murex Diagnostics (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 and six
months ended June 30, 1996 are not necessarily indicative of results
expected for an entire year.
2. Inventories:
June 30, December 31,
1996 1995
Raw materials and supplies . . $5,319 $4,842
Work in process. . . . . . . . 3,920 4,292
Finished goods . . . . . . . . 9,896 7,807
Total inventories. . . . . . . $19,135 $16,941
3. Contingencies:
(a) 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 commenced
during June 1996 and is likely to continue into late August 1996.
Management anticipates a ruling in or before the fourth quarter of
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.
(b) Abbott Patent Infringement: On July 2, 1996, MDC filed a patent
infringement suit against Abbott Laboratories. The action, filed in
the Northern District Court of Georgia, seeks injunctive relief
against Abbott and damages for infringement of a patent held by MDC
for a particle bound binding component immunoassay. The suit alleges
that two Abbott systems, the Abbott IMx Immunoassay and the Abbott
AxSYM System, infringe one or more claims of the patent.
(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 believed this assessment
was incorrect and lodged an appeal. During February 1996, a
preliminary hearing was held and the judge ruled that this case must
be heard by a UK Tribunal. In July 1996, the UK Tribunal ruled in the
Company's favor and this assessment has been withdrawn. In addition to
receiving a refund of the $900,000 assessment, the Company is entitled
to compound interest and expenses related to defending its position.
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 the 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 the Inland
Revenue and, therefore, has not recorded a provision for losses
related to this matter.
(d) Class Actions: Four class action lawsuits were 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 alleged
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 alleged
violations of insider trading rules under the federal securities laws.
The defendants answered denying the allegations in the complaints. 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 was preliminarily approved by
the court in June 1996, with the final hearing scheduled for November
1996. Accordingly, IMTC has accrued costs related to this settlement,
including its portion of the settlement payment.
(e) 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. 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. At June 30, 1996, $385,000
remained accrued for payment. The $750,000 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 identification of
viral and bacterial mutations and species. 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 certain
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 is negotiating 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 (a)). 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 and six months ended June 30,
1996.
International Murex Technologies Corporation
Form 10-Q for the Six Months Ended June 30, 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 and six months ended June 30, 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 pursued or defended, as the case may
be, 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 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 against 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 commenced in June 1996 and is likely to
continue into late August 1996. Management anticipates a ruling in or before the
fourth quarter of 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.
On July 2, 1996, Murex Diagnostics Corporation ("MDC"), a subsidiary of the
Company, filed a patent infringement suit against Abbott Laboratories. The
action, filed in the Northern District Court of Georgia, seeks injunctive relief
against Abbott and damages for infringement of a patent held by MDC for a
particle bound binding component immunoassay. The suit alleges that two Abbott
systems, the Abbott IMx Immunoassay and the Abbott AxSYM System, infringe one or
more claims of the patent.
A lawsuit involved 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 was preliminarily approved by the court in June 1996,
with the final hearing scheduled for November 1996. Accordingly, IMTC has
accrued costs related to this settlement, including its portion of the
settlement payment.
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 Deacon Barclays de Zoete Wedd
Limited ("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 of the
diagnostics' division of Wellcome 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 believed this
assessment incorrect, and lodged an appeal. 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. In July 1996, the UK Tribunal ruled in the Company's favor and this
assessment has been withdrawn. In addition to receiving a refund of the $900,000
assessment, the Company is entitled to compound interest and expenses related to
defending its position.
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 Wellcome. If the 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 the 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 during the quarter and six months ended
June 30, 1996. Working capital totaled $30,051,000 at June 30, 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, which amounts have been accrued.
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. 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. At June 30,
1996, $385,000 was accrued for payment. The $750,000 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 identification of viral
and bacterial mutations and species. 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 certain 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 1994 MDC
licensing agreement to provide access to additional working capital financing
and to obtain equipment lease financing, as and when required. The United
States operating subsidiary established a $1 million working capital line of
credit in early 1995. 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, development and licensing agreement
discussed above gives the Murex Group access to the rapidly growing gene probe
market for monitoring patients and the identification of viral and bacterial
mutations and species. The DNA probe technology provided by Digene under the
1993 and 1994 agreements has yielded a new CMV product which may contribute to
future earnings. Recent Murex Group product innovations, such as SAM(TM) and
ICE(TM) 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 and six months ended June 30, 1996 were
$24,351,000 and $50,374,000 versus $24,045,000 and $47,523,000 for the
comparable prior year periods. The increase in product sales during the first
six months of 1996 was a result of the newly-acquired Innogenetics' product
line, growth of sales in Eastern Europe and the acquisition of the Company's
Canadian distributor. These increases were partially offset by unfavorable
foreign exchange rates.
Gross profit on product sales for the six months ended June 30, 1996 was
63.6%, as compared with 68.7% for 1995. Cost of products sold grew $3,504,000
because of increased sales, 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 stronger margins.
Total costs and expenses, excluding cost of products sold, of $15,839,000
and $31,963,000 for the quarter and six months ended June 30, 1996, respectively
reflect net decrease of $815,000 and $164,000 over the quarter and six months
ended June 30, 1995. General and administrative expenses have decreased $861,000
and $999,000 from the quarter and six months ended June 30, 1995, respectively,
to $5,001,000 and $10,305,000 for the corresponding 1996 periods. These
decreases are due to diminishing legal expenses associated with the Company's
HCV patent litigation. Sales and marketing expenses of $7,724,000 and
$14,728,000 reflect increases of $844,000 and $1,480,000 over the second quarter
and first six months 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. Furthermore, the Company is preparing to launch several
new products, including a test for HIV reverse transcription mutations. Foreign
exchange loss was $715,000 and $724,000 for the quarter and six months ended
June 30, 1996, respectively, versus gains of $417,000 and $782,000 reported for
the comparable prior year periods. The 1996 foreign exchange losses were caused
predominately by the strengthening of the British pound in relation to United
States' and German currencies as well as the weakening of the South African
rand. 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.
Interest expense increased $181,000 and $903,000 from the second quarter
and first six months of 1995 to $218,000 and $966,000 for the quarter and six
months ended June 30, 1996, respectively, 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 and six months ended June 30,
1996.
International Murex Technologies Corporation
Form 10-Q for the Six Months Ended June 30, 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
None
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: August 13, 1996 By: /s/ C. Robert Cusick
C. Robert Cusick, Vice Chairman
and Chief Financial Officer
Date: August 13, 1996 By: /s/ Jill A. Gilmer
Jill A. Gilmer, Secretary