-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O88Mfy/82pB1T8cnarAkOxoiWooDd8bw3LKjQ2e3s43uoGrOkaLW7eiAAytQ4t3P /YwWwUx5Bxg8UBsmYYGHlA== 0000912057-97-031988.txt : 19970930 0000912057-97-031988.hdr.sgml : 19970930 ACCESSION NUMBER: 0000912057-97-031988 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: METRA BIOSYSTEMS INC CENTRAL INDEX KEY: 0000888999 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 330408436 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26234 FILM NUMBER: 97687427 BUSINESS ADDRESS: STREET 1: 265 N WHISMAN RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 4159039100 MAIL ADDRESS: STREET 1: 265 NORTH WHISMAN RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 940433911 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June Commission file Number 0-26234 30, 1997 ------------------------ METRA BIOSYSTEMS, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 33-0408436 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 265 NORTH WHISMAN ROAD, MOUNTAIN VIEW, CA 94043-3911 (Address of Registrant's principal executive offices) (650) 903-9100 (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE PREFERRED SHARE PURCHASE RIGHTS 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. /X/ Yes / / No. Indicate by 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 the 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 / / At August 30, 1997 there were 12,633,059 shares of Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant was $22,161,706 based upon the closing price of the Common Stock at August 30, 1997. Shares of Common Stock held by each officer and director and each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement of Registrant for the 1997 Annual Meeting of Shareholders are incorporated in Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- METRA BIOSYSTEMS, INC. INDEX PART I. Item 1. Business.................................................................... 3 Item 2. Properties.................................................................. 21 Item 3. Legal Proceedings........................................................... 21 Item 4. Submission of Matters to a Vote of Security Holders......................... 21 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 22 Item 6. Selected Financial Data..................................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation................................................................. 23 Item 8. Financial Statements and Supplementary Data................................. 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................ 48 PART III. Item 10. Directors and Executive Officers of the Registrant.......................... 48 Item 11. Executive Compensation...................................................... 48 Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 48 Item 13. Certain Relationships and Related Transactions.............................. 49 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 49 Signatures.................................................................. 53
2 INTRODUCTORY STATEMENT EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, THE MATTERS DISCUSSED HEREIN ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE RISK THAT THE COMPANY'S PRODUCTS WILL NOT ACHIEVE MARKET ACCEPTANCE, THE COMPANY'S RELIANCE UPON COLLABORATIVE RELATIONSHIPS AND THE INTENSE COMPETITION IN THE MARKET FOR BIOCHEMICAL MARKERS, AS WELL AS THE OTHER RISKS AND UNCERTAINTIES DESCRIBED HEREIN, UNDER THE HEADING "RISK FACTORS" IN THE COMPANY'S PROSPECTUSES DATED APRIL 23, 1996 AND JUNE 30, 1995, RESPECTIVELY, DELIVERED IN CONNECTION WITH THE COMPANY'S PUBLIC OFFERINGS, AND AS DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1996, AND OTHER RISKS INCLUDED FROM TIME TO TIME IN THE COMPANY'S OTHER SEC REPORTS AND PRESS RELEASES, COPIES OF WHICH ARE AVAILABLE FROM THE COMPANY UPON REQUEST. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. THIS REPORT ON FORM 10-K INCLUDES TRADEMARKS OF COMPANIES OTHER THAN THE COMPANY. PART I ITEM 1. BUSINESS Metra Biosystems, Inc. (the "Company" or "Metra") is a leader in developing and commercializing diagnostic products for the detection and management of metabolic bone diseases and disorders. The Company's strategy is to offer a portfolio of diagnostic products that will provide physicians with comprehensive clinical information regarding the metabolism of bone and other connective tissues. The Company has developed and is currently marketing for either research use or clinical use two immunodiagnostic tests to assess bone resorption, two immunodiagnostic tests to assess bone formation and one immunodiagnostic test to assess bone growth disorders. In addition, the Company is currently developing a portable ultrasound device designed to assess bone fragility, a bone-resorption test for use in the physicians offices, a biochemical test to detect bone cartilage disorders, serum versions of its Pyrilinks-Registered Trademark--D and Pyrilinks-Registered Trademark- bone resorption tests (currently urine based), and other biochemical tests to detect bone and joint disorders. BUSINESS STRATEGY The Company is a leader in developing and commercializing innovative diagnostic products for the detection and management of metabolic bone diseases and disorders. The Company's general business strategy is comprised of certain key elements: first, the continual development of new diagnostic products to complement the Company's existing products; second, the establishment of collaborative relationships with corporate partners for co-promotion (medical education and awareness); third, the development of partnerships to maximize distribution capabilities with established diagnostic companies; and fourth, the expansion of the Company's own direct sales and distribution capabilities. During fiscal 1997 a number of significant events which support the execution of the four basic elements of the Company's business strategy occurred, including: - The establishment of a marketing and co-promotion alliance in the United States with Berlex Laboratories ("Berlex"), a provider of female healthcare products including hormone replacement products, and Norland Medical Systems, a provider of imaging systems for bone density measurement. This alliance will utilize the detail pharmaceutical sales force of Berlex to promote all three companies' products to OB/GYNs. - The establishment of a marketing alliance in the United States with Mission Pharmacal, a provider of calcium supplements; and a national supplier of laboratory services. The alliance will focus on educating consumers about Metra's bone resorption products and Mission Pharmacal's calcium supplements as well as provide information regarding where to obtain laboratory testing. 3 - The worldwide launch of the Company's lead product for bone resorption, Pyrilinks-D, on the automated immunoassay testing systems of Chiron Diagnostics and Diagnostic Products Corporation. - One of the Company's diagnostic partners in Japan, Sumitomo Pharmaceuticals, obtained regulatory approval for clinical use of the Company's Pyrilinks-D test for bone resorption in the Japanese market. - In January 1997, the American Medical Association ("AMA") published a CPT code to facilitate the reimbursement of the Company's Pyrilinks-D test. Subsequently, certain medical carriers are starting to establish reimbursement levels. The key elements of the Company's strategy are based upon a premise that currently only a small percentage of the population at risk for certain bone and connective tissue diseases and disorders, such as osteoporosis, rheumatoid arthritis (RA), and osteo arthritis (OA), are diagnosed early enough for preventative treatment to be effective. The Company believes that the historical lack of consistent therapeutic intervention can be traced in part to the limited availability of timely, cost-effective and accurate methods to detect and monitor these diseases. The Company believes the demand for its products will be driven in part by physicians' need to easily, inexpensively and accurately (i) identify those persons most at risk before significant onset of these diseases, (ii) quantify the parameters of each patient's disease progression, (iii) determine therapeutic dosage and duration of therapy and (iv) monitor the effectiveness of, and compliance with, prescribed therapies. OSTEOPOROSIS The most widespread metabolic bone disease is osteoporosis, a disorder characterized by a decrease in bone mass that leads to increased susceptibility to fractures, particularly those of the hip, spine and wrist. There are two major types of osteoporosis. The most common type is primary osteoporosis, which includes post-menopausal osteoporosis, resulting from an estrogen deficiency in women, and senile osteoporosis, an age-related condition primarily affecting men and women over age 75. Secondary osteoporosis occurs as a side effect of some medications, or as a consequence of another disease that causes a decrease in bone mass. Osteoporosis is often called the "silent disease" because the process of bone loss causes no physical symptoms. In many cases, doctors and patients are not aware of the problem until certain bones in the skeletal system have become so weak that a sudden strain, bump, or fall causes a fracture. If diagnosed early enough, the rate of bone loss can be reduced using one or a combination of drug therapies, dietary supplements, or changes in lifestyle. Consequently, diagnosis of bone loss and preventive intervention is important for a physician to develop an effective care plan for the patient. According to the National Osteoporosis Foundation ("NOF"), osteoporosis afflicts over 25 million Americans and over 200 million people worldwide. In the United States, approximately 1.5 million osteoporosis-related fractures occur each year, including more than 250,000 hip fractures, 500,000 vertebral fractures and 240,000 wrist fractures. For Caucasian women, it is estimated that the risk of hip fractures approximates the combined risks of breast, endometrial and ovarian cancers. In addition, approximately one in three women over age 65 will suffer vertebral fractures. By age 75, approximately one-third of all men will also be affected by osteoporosis. Industry studies estimate that the lifetime risk of hip fracture in men approximates the risk of prostate cancer. In the United States, annual cost to the Medicare system to treat fractures among older adults in 1995 was $13.8 billion. The most severe osteoporosis-related fracture is that of the hip. Over 95% of osteoporosis-related hip fractures require hospitalization, between 12% and 20% result in fatality from other health complications arising from the fractures and half of the patients who survive are unable to walk 4 unassisted for the rest of their lives. Another 25% are confined to long-term care under supervised conditions. OTHER BONE-RELATED DISEASES In addition to developing diagnostic tests to assess osteoporosis, assays for a number of other diseases that can adversely affect bone remodeling (a metabolic process which consists of bone formation and resorption or loss), including Paget's disease of bone, cancers that metastasize to bone, hyperthyroidism, hyperparathyroidism, osteoarthritis, and growth hormone deficiency are also being developed. Unlike osteoporosis, these diseases do have physical symptoms that may alert a physician to the possibility of bone loss and, accordingly, the need to monitor the bone remodeling process with diagnostic tests. THERAPIES FOR OSTEOPOROSIS During the past several decades, a number of therapies have been developed to address bone diseases and disorders. Most of these are prescription therapies, including hormone replacement therapy ("HRT"), calcitonins and bisphosphonates, and are focused on preventing further bone loss rather than systemically forming new bone. Other products include dietary supplements that are available over-the-counter, such as calcium and vitamin D. The Company believes the market for drugs to treat osteoporosis will grow as a result of several factors, including worldwide aging of the population, heightened public awareness of osteoporosis, FDA approval of new therapeutics, and the development and availability of effective diagnostic tests. HORMONE REPLACEMENT THERAPY. Hormone replacement therapies, such as estrogen and progestin, are the most frequently prescribed drugs given to alleviate symptoms in post-menopausal women. HRT products act to decrease bone loss (are anti-resorptive) and are also approved for preventive treatment of osteoporosis. There are a number of estrogen products currently approved by the FDA and available worldwide for use in preventing or managing osteoporosis, including Berlex Laboratories' Climara, Wyeth-Ayerst Laboratories' Premarin, Ciba-Geigy Ltd.'s Estraderm, and Bristol-Myers Squibb Company's Estrace. In 1994, total sales of hormone replacement therapies, including oral, transdermal, and other formulations, were in excess of $1.5 billion in the United States. CALCITONINS. Calcitonin acts to slow bone resorption and may be a viable substitute for estrogen as an anti-resorptive drug, especially in male patients or in those female patients who do not take hormone replacement therapy. In the United States, Sandoz Ltd.'s Miacalcin and Rhone-Poulenc Rorer Inc.'s Calcimar are FDA-approved calcitonin products. BISPHOSPHONATES. Bisphosphonates are approved for the prevention and treatment of osteoporosis. Fosamax, a bisphosphonate from Merck & Co., Inc. was approved in late 1995 for the treatment of patients with low bone mineral density, and in 1997 expanded the claims to prevention of bone loss. Additionally, Didronel, a bisphosphonate from The Procter & Gamble Company, is currently approved for use in treating Paget's disease. Several next generation bisphosphonates are in various stages of development. OTHERS. Other products used for the prevention of bone loss include vitamin D and calcium supplements such as Citracal, a leading calcium supplement from Mission Pharmacal. In addition, injectible vitamin D metabolites are a prescribed therapy for preventing bone loss that are widely used in Japan but are not approved in the United States. There are a number of other new therapies under development, including estrogen analogs designed to minimize the side effects of HRT and slow release sodium fluoride, which is believed to increase bone mineral density. 5 OSTEOPOROSIS-RELATED DIAGNOSTICS Diagnostics for bone health are based upon two paradigms; first, imaging technologies which provide a primary assessment of bone density, commonly referred to as the STATE of bone health; and second, biochemical tests which provide real time information on the metabolic process of bone resorption and formation, or RATE of change. The Company believes that as the medical profession becomes more aware of the diagnostics and therapies available for bone health, and consumers understand the benefits of early assessment of bone health, the two types of diagnostics will provide highly complementary information referred to as the "rate and state". IMAGING TECHNOLOGIES Imaging technologies provide varying degrees of sensitivity for the assessment of bone density and have traditionally been based on x-ray technology. The most advanced imaging technique currently available is Dual Energy X-ray Absorptiometry (DXA) and can be performed in whole body scans or in partial or peripheral measurements (such as the forearm, wrists, heel bone, etc). Recently, additional technologies, such as ultrasound, have been developed that have the potential to be less expensive than DXA, do not involve radiation, and may provide additional diagnostic information concerning bone structure and quality. BIOCHEMICAL TESTS Biochemical tests have been developed that can be used to assess the dynamic rates of bone resorption and bone formation. Specifically, they measure certain by-products of the bone remodeling process and through clinical trials, the manufacturers of such tests have established normal and abnormal ranges. The Company believes its biochemical tests can be particularly useful at the early stages of accelerated bone loss for determining individuals "at risk", and upon the initiation of therapeutic intervention, to monitor the effectiveness of the particular therapy. ARTHRITIS Arthritis is generally characterized by joint pain and swelling. There are more than 100 types of arthritis affecting approximately 40 million people in the United States. The two most prevalent forms of arthritis are osteoarthritis ("OA") and rheumatoid arthritis ("RA"). Although the causes of OA and RA are very different, both diseases result in the common problem of joint destruction. Osteoarthritis is the most common form of arthritis. The prevalence of osteoarthritis among individuals aged 45 to 50 is estimated to be approximately 30%, and approaches a 60% prevalence rate for individuals over 65 years of age. Osteo, or degenerative, arthritis is a disease believed to result from the breakdown of cartilage in a specific joint or joints and bone proximate to joints. Osteoarthritis can affect any type of joint, but the disease most commonly occurs in weight bearing joints such as the hips, knees and spine. Rheumatoid arthritis is the second most common form of arthritis. In North America, it is estimated that two million people are afflicted with this condition, and in excess of $200 million dollars is spent each year for the care and treatment of the disease. Rheumatoid arthritis can occur at any age, but the onset of the disease typically peaks between ages 35 and 45. This disease is thought to be a systemic autoimmune disorder in which the synovium becomes inflamed, causing hot, tender, and swollen joints. Only the freely mobile joints such as hands, feet and knees are affected by this form of arthritis. As the disease progresses, the cartilage and eventually the bone are destroyed by various autoimmune-mediated enzymatic responses. This process results in continuous pain, progressive deformity, and disability. 6 ARTHRITIS THERAPIES No approved treatments stop or reverse osteoarthritis. Current treatment for OA is primarily focused on reducing pain, minimizing inflammation, and improving joint function. Physicians most commonly recommend analgesics to reduce pain and non-steroidal anti-inflammatory drugs ("NSAIDs") such as ibuprofen to reduce inflammation. In advanced OA, more invasive measures such as injection of steroids into the joint space, arthroscopic surgery, and partial or total joint replacement are examples of treatment options. For treatment of RA, physicians commonly prescribe NSAIDs in an effort to reduce inflammation. Additionally, doctors often prescribe other non-specific drugs designed to reduce the body's immune response and associated inflammation. The effectiveness of these therapies is variable from patient to patient, and may involve various side effects and complications. There are numerous pharmaceutical companies working to develop more effective therapies which include the ability to regenerate cartilage to treat OA and RA. During the early stages of arthritis, the patient is not necessarily aware of the progression of the disease until the associated pain and swelling occurs accompanied by reduced joint mobility. In certain patients who are experiencing pain, there may be little correlation between the severity of active disease and the amount of pain. The Company believes that if a biochemical marker test were introduced and integrated into the overall health care of a patient, it might help improve early detection of arthritis and enable more effective treatments with emerging therapies along with subsequent therapeutic drug monitoring. ARTHRITIS DIAGNOSTICS Many non-specific diagnostic tools for OA and RA exist, but are not disease specific enough for arthritis to confirm a diagnosis of either type of disease, or accurately assess disease progression. Current diagnosis of arthritis is based on: - Medical history and a physical examination; - Symptoms, i.e., swelling, red and hot joints, nodules under the skin, and stiffness; - X-rays (which are not designed for detection of soft tissue disorders) which can detect a pattern of visible damage only after multiple exposures; and - In the case of RA, laboratory tests for anemia, low white-blood-cell count, rheumatoid factor ("RF") and erythrocyte sedimentation rate ("ESR"). Anemia can be an accompanying symptom of rheumatoid arthritis but is not caused by or otherwise necessarily correlated to arthritis. RF is present in 85% of people with rheumatoid arthritis, but also does not necessarily indicate rheumatoid arthritis. ESR indicates a systemic inflammatory condition but not necessarily rheumatoid arthritis. MARKET FOR IMMUNODIAGNOSTIC TESTS Diagnostic tests are widely used for both research and routine clinical use. Academic and clinical researchers in universities, teaching hospitals, pharmaceutical companies and government research units, such as the National Institutes of Health, use research products routinely. However, not all research products are introduced for routine clinical use for many reasons, including a lack of clinical utility or cost of obtaining regulatory approval. Immunodiagnostic tests are performed in a variety of manual or automated formats. A common format for research and clinical testing is the microtiter plate format utilizing enzyme immunoassay ("EIA") detection. EIA utilizes an immune reaction, that is, an antibody reacting with an antigen, and the detection of the reaction using enzymes which are attached to the reactants as indicators. Although this technology is considered an established industry standard, a manual format is relatively slow, has low 7 throughput, and requires skilled technicians. Instrument systems are in routine use that automate tests to increase throughput and decrease the cost per test. Most of the widely used immunodiagnostic tests have been adapted to automated systems. These formats are used in hospitals and clinical laboratories throughout the world. The Company believes that, in addition to the automated systems, more convenient and faster formats are required for physicians' offices or for home use. PRODUCTS The Company has developed and is currently marketing for research and clinical use four immunodiagnostic tests to assess bone resorption and formation and one immunodiagnostic test to assess certain bone growth disorders. In guidelines to pharmaceutical companies developing new osteoporosis drugs, the FDA recommends using a combination of three biochemical markers that together detect both resorption and bone formation to assess efficacy as part of their pre-clinical and clinical testing. Metra has developed immunoassays which meet all three of these requirements. Metra's immunoassays are (i) pyridinium crosslinks, (ii) osteocalcin and (iii) bone-specific alkaline phosphatase. The Company currently offers tests for each of these biochemical markers. The Company's Pyrilinks tests are proprietary and measure specific biochemical markers. Although the Company's other tests such as Alkphase-B, NovoCalcin, and Prolagen-C measure markers that are not proprietary, and similar tests are available from other companies, these tests allow the Company to offer a more complete line of relevant clinical and research use tests to measure different aspects of bone metabolism. The following table identifies the Company's products, their application, and their current regulatory status in most major markets throughout the world.
MARKETED PRODUCTS MARKETING STATUS - ----------------------------------- ------------------------------------------------------------ BONE RESORPTION Pyrilinks-Registered Trademark--D - Cleared for clinical use in US*, Europe, Japan and Asia/Pacific - Available in automated formats through Chiron Diagnostics (ACS:180 DPD) and Diagnostic Products Corporation (IMMULITE-Registered Trademark- PYRILINKS-D) - Cleared for clinical use in Japan as Osteolinks-DPD for marketing by Sumitomo Pharmaceuticals Ltd. Pyrilinks-Registered Trademark- - Cleared for clinical use in US*, Europe, and Asia/Pacific - Research use only in Japan BONE FORMATION Alkphase-B-Registered Trademark- - Cleared for clinical use in US*, Europe, and Asia/Pacific - Research use only in Japan NovoCalcin-Registered Trademark- - Cleared for clinical use Europe and Asia/Pacific - Research use only in US and Japan GROWTH DISORDERS Prolagen-C-Registered Trademark- - Cleared for clinical use in Europe and Asia/Pacific - Research use only in US and Japan PRODUCTS IN DEVELOPMENT STATUS - ----------------------------------- ------------------------------------------------------------ Chondrex-TM- immunoassay for - Development--Expected to be available for research use only arthritis in calendar 1998 Portable ultrasound device to - Development--Expected to be launched internationally in assess bone fragility calendar 1998 Point-of-care version of - Development--Expected to be available for clinical use in Pyrilinks-D on Cholestech's L-D-X calendar 1998 Immunoassay System Serum Pyrilinks - Development--Expected to be available for research use in calendar 1998 Serum Pyrilinks-D - Development--Expected to be available for research use in calendar 1998
- ------------------------ * Received 510(k) clearance from US Food and Drug Administration 8 SALES AND MARKETING The Company's products are currently being marketed internationally for both clinical and research use. The market for the Company's products consists of clinical and reference laboratories, academic and clinical researchers in universities, and physicians. The Company's approach is to initially market the tests for research purposes to academic and clinical researchers in universities, teaching hospitals, pharmaceutical companies and government institutions. As regulatory clearances are obtained for clinical use, clinical reference laboratories, hospital laboratories, and physicians are also targeted as customers. The Company's marketing and sales strategy for its manual tests is to provide its products on a worldwide basis either through its direct sales force in selected countries or through established country specific distributors. The Company currently has direct operations in the United States, United Kingdom, and Italy and works with over 30 distributors of diagnostic products throughout the rest of the world that have established distribution channels. The Company's distribution alliances include Hoechst Behring (France), DPC Biermann (Germany), Dade Diagnostics (Australia) and Sumitomo Pharmaceuticals, Inc. (Japan). Product revenues from one distributor constituted 15%, 12% and 11% of total revenues for the years ended June 30, 1997, 1996 and 1995, respectively. Product revenues from another distributor constituted 12% of total revenues for the year ended June 30, 1995. The loss (or poor performance) of one or more of these distributors or the inability to find new distributors could have a material effect on the Company's business, financial condition and results of operations. The Company has limited experience in sales, marketing and distribution of its products. The Company intends to expand its marketing staff and direct sales force, and there can be no assurance the Company will do so cost-effectively, or that the Company's direct sales and marketing efforts will be successful. International product sales accounted for approximately 77%, 78% and 78% of product revenues for the fiscal years ended June 30, 1997, 1996, and 1995, respectively. The Company expects that such sales will continue to account for a significant portion of the Company's revenues in the future. In order to successfully manage international sales, the Company may need to establish additional foreign operations, hire additional personnel and recruit additional international distributors and commissioned representatives. This will require significant management attention and financial resources and could adversely affect the Company's operating margins. In addition, to the extent the Company is unable to effect these additions in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, financial condition and results of operations could be materially adversely affected. In addition, there can be no assurance that the Company will be able to maintain or increase international sales of the Company's products. The Company's international sales to distributors are currently denominated in United States dollars. As a result, increases in the value of the United States dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in markets served by such distributors. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings, and the burdens of complying with a wide variety of foreign laws. There can be no assurance such factors will not have a material adverse effect on the Company's future international sales and consequently, the Company's business, financial condition and results of operations. The Company provides its products to the market in a microtiter plate format, commonly referred to as a manual kit, through the Company's direct sales force or distribution network throughout the world. In order to promote a broad acceptance of its technology and, in particular, its lead product for bone resorption, Pyrilinks-D, the Company has established collaborations with a number of diagnostic companies that have an existing installed base of high speed, automated laboratory testing systems. These partners include Abbott Laboratories, Bayer Corporation, Chiron Diagnostics, and Diagnostic Products Corporation (DPC). Together, these partners represent up to 80% of the installed base of high throughput, automated immunoassay testing systems. In late fiscal 1997, both Chiron Diagnostics and DPC launched 9 the Company's Pyrilinks-D technology on their automated systems and commenced marketing and selling efforts. The Company expects Abbott Laboratories and Bayer Corporation to launch the Pyrilinks-D technology on their automated systems after their 510(k) clearances are received. The Company receives a royalty on sales from each of these automated partners. The Company will increasingly depend on its partners to sell the Company's tests in automated formats. In particular, the Company relies on collaborative partners to adapt the Company's technology to high-volume automated instruments such as those sold by Abbott, Bayer, Chiron and DPC. Substantially all of the Company's collaborative agreements are non-exclusive, and therefore such partners are free to enter into similar agreements with third parties, including the Company's competitors. In addition, the Company has not developed physician office or home-use adaptations of its products and there can be no assurance that the Company or its collaborative partners will either develop such formats, obtain regulatory approvals, and sell the Company's tests on their formats. There can be no assurance that any of these partners will perform their contractual obligations or that such partners will not terminate their agreements. The failure to adapt the Company's products to different formats and instruments, or commercialize or co-promote such products, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects to enter into additional collaborative agreements in the future to develop, commercialize and sell its products. There can be no assurance that the Company will be able to negotiate acceptable agreements in the future, or that such new agreements or existing agreements will be successful. In addition, there can be no assurance that the Company's collaborative partners will not pursue alternative competing technologies. The Company believes that educating patients and physicians about the long-term health benefits and cost-effectiveness of diagnosis and treatment of bone diseases and disorders at an early stage is critical to market acceptance for the Company's products. The Company believes the trend toward management of health care costs in the United States will lead to increased awareness of and emphasis on disease prevention, and as a result, will increase demand for cost-effective diagnostic tests. The Company has developed a number of proprietary marketing programs aimed at educating both patients and physicians including, but not limited to: establishing collaborative relationships with other pharmaceutical, diagnostic, and laboratory testing companies; the establishment of a speakers bureau which is comprised of nationally and regionally recognized physicians and researchers who serve to educate their local communities; the sponsorship of a clinical summit and director of medical education program on bone health in which leading physicians and researchers from around the world discuss the current state of assessing all elements of bone health; and numerous other programs managed within the Company's marketing and sales organization all aimed at educating patients and physicians. In the second half of fiscal 1997, the Company entered into two alliances in the United States which the Company believes will further extend Metra's medical educational focus. First, a three-way co-promotion agreement with Berlex Laboratories, a provider of female healthcare products and in particular Climara, a seven-day estrogen patch currently approved for marketing by the FDA in the US, and, Norland Medical Systems ("Norland"), a distributor of imaging systems that provide the current state of bone health. Under the terms of this agreement, the companies will market to the OB/GYN physicians a suite of products for the management of the symptoms and problems of menopause for women. To reach the OB/ GYNs, the companies will utilize the direct detail pharmaceutical force of Berlex Laboratories that call on over 30,000 OB/GYNs. The Company will pay Berlex approximately $3.0 million for promotional activities over the first year of the promotional agreement, record an expense for the fair value of warrants issued of approximately $0.5 million, and pay commissions on increased sales of the Company's Pyrilinks-D product. To the extent Norland sells any scanning systems as a result of this promotional alliance, Metra will receive a commission on such sales. 10 Second, the Company entered into an alliance with two parties, Mission Pharmacal and a leading provider of laboratory testing services, focused on generating demand through consumers. Under the terms of this agreement the companies will work together to educate consumers about assessing the current rate of bone loss (Metra's Pyrilinks-D), the use of Citracal, which is the second largest calcium supplement sold over the counter in the United States and manufactured by Mission Pharmacal, and where to obtain the laboratory testing to assess the effectiveness of the calcium supplement. One feature of the program is to include information in every box of Citracal sold in the United States that discusses the elements of the program as outlined. There are no material financial commitments between the parties to this agreement. The Company will need to rely on current and any future collaborative partners to help build market awareness and acceptance of the Company's products. The Company, together with its partners, will continue to originate research and clinical studies to demonstrate and explain how the Company's products relate to improvements in early detection, disease management and drug compliance. The commercial success of the Company's products will depend upon their acceptance by the medical community and third-party payers as clinically useful, cost-effective and safe. Market acceptance will depend on several factors, including the establishment of clinical utility of these biochemical tests, the receipt of regulatory clearances where required, the development of diagnostic tests that can be processed using commercially available automated systems, the availability of third-party reimbursement, extensive physician education and the approval and commercial acceptance of therapies for the treatment of osteoporosis. There can be no assurance that the Company's products will gain market acceptance. Failure to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. RESEARCH AND DEVELOPMENT The Company's research and development efforts are currently focused in four principal areas: (i) discovery and development of new biochemical marker tests focused in the area of bone and cartilage diseases, (ii) conducting clinical studies designed to broaden the clinical claims for its existing products; (iii) formatting of Metra's existing tests in alternative formats to address different segments of the diagnostic testing market; and (iv) development of its ultrasound technology. The Company's expense for the increasing research and development efforts for the years ended June 30, 1997, 1996, and 1995 was $5.7 million, $4.3 million, and $3.7 million, respectively. NEW BONE AND CARTILAGE TESTS The Company has entered into a license agreement with NovaDx Inc. to develop and manufacture a microtiter plate assay for the measurement of YKL-40 ("Chondrex"), a novel glycoprotein which has been shown to be significantly elevated in OA and RA patients. The Company believes that YKL-40 may provide the basis for a diagnostic test for the detection and management of OA and RA. The Company is funding internal and third-party research and development efforts designed to identify additional markers for bone and other connective tissue conditions and develop new immunoassays to measure markers that it believes will have clinical utility. As new immunodiagnostic tests are developed, the Company intends to offer them first to researchers, and to the extent such researchers in the medical community validate the clinical utility of the new tests, the Company will further develop and commercialize the new tests based on existing immunodiagnostic testing formats. The Company currently sponsors research at institutions including The Rowett Research Institute and Sheffield University in the United Kingdom. 11 CLINICAL STUDIES The Company is conducting clinical studies designed to gather data to submit to the FDA for clearance to market the Company's existing products for broader clinical claims. The Company is investigating use of its products in applications including therapeutic drug monitoring, and fracture risk assessment. ALTERNATIVE TEST FORMATS The Company has a collaborative agreement to develop and manufacture its Pyrilinks-D test in a radioimmunoassay ("RIA") format which was launched for clinical use in France in May, 1996. Reimbursement was recently established in France for both RIA and EIA formats. The Company believes that less complicated and capital intensive formats may be more suitable for decentralized testing in physician office laboratories, small clinics, satellite laboratories and for home use. Metra is also reformatting its lead bone resorption product, Pyrilinks-D, for the Cholestech point-of-care analyzer (L-D-X) for use in the physicians' offices. ULTRASOUND TECHNOLOGY In order to offer a broader portfolio of products to provide physicians with more comprehensive clinical information regarding bone, Metra acquired Osteo Sciences Corporation, a company developing applications of ultrasound technology to bone based on proprietary algorithms and product designs. The Company is developing a portable ultrasound device designed to evaluate certain characteristics of bone that are associated with bone weakness and bone quality. The target market for the device will be for physicians' offices or small group practices. The Company expects this device will provide physicians and patients with a convenient and cost effective alternative to the currently available imaging techniques for assessing bone. There can be no assurance that Metra will be successful in developing new products or that new products developed by the Company will receive necessary government approval or, if approved, will gain market acceptance. Any failure by the Company to successfully develop and introduce new products could have a material adverse effect on the Company's business, financial condition and results of operations. MANUFACTURING The Company's manufacturing operations are fully integrated and consist of antibody production, reagent purification, reagent and microtiter plate processing, filling, labeling, packaging and distribution. If the Company experiences significant demand for its products, the Company will have to manufacture its products in commercial quantities in compliance with regulatory requirements at acceptable costs, and expend significant capital resources to develop large-scale manufacturing capabilities. If the Company is unable to develop large-scale manufacturing capabilities, the Company's competitive position and financial condition would be adversely affected. Failure to increase production volumes, if required, in a cost-effective manner or lower than anticipated yields or production constraints encountered as a result of changes in the manufacturing process could result in shipment delays as well as increased manufacturing costs, which could have a material adverse effect on the Company's business, financial condition and results of operations. The majority of raw materials and purchased components used to manufacture the Company's products are readily available. However, certain of these materials are obtained from a sole supplier or a limited group of suppliers. The Company does not maintain long-term agreements with any of its suppliers. The reliance on sole or limited suppliers and the failure to maintain long-term agreements with suppliers involves several risks, including the inability to obtain an adequate supply of required raw materials and components and reduced control over pricing, quality and timely delivery. Although the Company attempts to minimize its supply risks by maintaining an inventory of raw materials and continuously evaluating other 12 sources, any interruption in supply could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's business, financial condition and results of operations would be adversely affected by the inability to obtain working capital, satisfactory manufacturing facilities, equipment and qualified manufacturing personnel. In addition, the Company's manufacturing facilities and its operations are subject to periodic inspections conducted by the FDA and equivalent inspections conducted by State of California officials, and its operations undergo current good manufacturing practices compliance inspections conducted by the FDA and equivalent inspections conducted by state officials. Because the Company has received FDA clearance to market certain of its products for clinical use, the Company expects that its facilities will be inspected by the FDA and by state authorities. Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspension or withdrawal of clearances or approvals, seizures or recalls of products, operation restrictions and criminal prosecutions. Furthermore, changes in existing regulations or adoption of new regulations could prevent the Company from obtaining, or affect the timing of, future clearances or approvals. There can be no assurance that the Company will be able to obtain necessary regulatory clearances or approvals on a timely basis or at all. Delays in receipt of or failure to receive such clearances or approvals or loss of previously received clearances or approvals could have a material adverse effect on the Company's business, financial condition and results of operations. In September 1996, the Company received ISO 9001 certification for its quality management systems. The Company's certification is officially recognized by European and North American authorities and is accepted worldwide, and will become a requirement for doing business in some countries in the future. The Company faces an inherent risk of exposure to product liability claims in the event that the use of its products is alleged to have resulted in adverse effects to a patient. The Company maintains a general insurance policy which includes coverage for product liability claims. The policy is limited to a maximum of $1.0 million per product liability claim and an annual aggregate policy limit of $1.0 million. There can be no assurance that liability claims will not exceed the coverage limits of such policy or that such insurance will continue to be available on commercially reasonable terms or at all. Consequently, a product liability claim or other claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION Competition in the market for products that diagnose and monitor bone and other connective tissue diseases and disorders is intense and expected to increase. The Company currently competes with other medical technology companies, biotechnology companies, pharmaceutical companies and research and academic institutions, both in the United States and abroad. Metra believes that its most significant competitors in the area of biochemical tests include Bio-Rad Laboratories, a life sciences company, DSL, a diagnostic company that in 1996 received 510(k) clearance from the FDA to market Osteometer's bone resorption product in the United States; IncStar, a diagnostic company; Quest Diagnostics, a research laboratory and diagnostic company; Orion, a diagnostic and pharmaceutical company in Finland; Osteometer, a diagnostic company in Denmark; Hybritech, a division of Beckman Instruments, a diagnostic company that in 1996 received 510(k) clearance from the FDA to market its test for bone specific alkaline phosphatase; and Ostex International, Inc., a diagnostic company that in 1995 received 510(k) clearance from the FDA to market an immunoassay for bone resorption. In addition, the Company will compete with companies that measure the same biochemical markers as Metra using different testing methods. The most established of these are companies manufacturing high pressure liquid chromatography (HPLC) assays, including Quest Diagnostics and Bio-Rad Laboratories. The Company believes that although the HPLC method for measuring pyridinium crosslinks is extremely accurate, it is primarily a research tool and is unsuitable for routine clinical use because it has low throughput, is expensive and labor intensive, and requires skilled technicians. There can be no assurance, however, that competitors have not developed, or are not developing, less expensive, more clinically useful HPLC products. In addition, as the Company 13 licenses its technology to diagnostic companies for use in alternative formats, tests sold by these licensees will compete with the Company's products. Certain diseases and disorders targeted by the Company's products can also be diagnosed and monitored using existing imaging technologies, such as DXA. Although DXA may be considered more expensive and less convenient than tests for biochemical markers, there can be no assurance that competitors have not developed, or are not developing, less expensive, more clinically convenient imaging devices. The Company believes that, at least in their present forms, current imaging systems and tests for biochemical markers are complementary because one of Metra's tests can identify a patient's rate of bone resorption, as compared to imaging analysis, which measures a patient's existing bone density. The market for the Company's ultrasound product under development is expected to be highly competitive and subject to rapid technological change and evolving industry requirements and standards. The Company believes that these trends will continue into the foreseeable future. The Company's ultrasound-based diagnostic product currently under development could experience competition from companies with DXA products, companies with biochemical markers, and makers of ultrasound systems. Several companies, including Aloka Company Ltd., Hitachi Instruments, Inc., Hologic, Inc., Lunar Corporation, Norland Medical Systems, and Osteometer MediTech AS have developed systems to measure bone density which may compete with the Company's ultrasound product under development. The Company believes that competition in the field of bone densitometry is based upon price, precision, speed of measurement, patient radiation dose, size, ease of operation, product versatility, product reliability and quality of service. There can be no assurance that the Company's product, if commercialized, will compete effectively with respect to these criteria. Several companies, including Hologic, Inc., IGEA S.r.l., McCue PLC, Lunar Corporation, Myriad Ultrasound Systems, Ltd., and Osteometer MediTech AS, have developed ultrasound systems to assess bone fragility. The Company believes that competition in the field of ultrasound systems is based on price, precision, speed of measurement, size and ease of operation, product reliability and quality of service. No ultrasound bone analyzer has been approved for commercial sale in the United States although in August 1997, Hologic received a recommendation for approval by an FDA advisory committee for its ultrasound product, Sahara. When and if the Company's competitors obtain FDA clearance or approval for ultrasound bone analyzers in the United States before the Company, it could have a material adverse effect on the Company's ability to introduce its ultrasound device (if developed), which in turn could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, other companies have developed ultrasound technology for uses unrelated to measurement of bone characteristics. There can be no assurance that such companies will not successfully adapt their technology to the bone field, and obtain significant market share. The entry of such companies into the market for the Company's ultrasound product under development could have a material adverse effect on its business, financial condition and results of operations. Many of the Company's competitors have substantially greater financial, technical and human resources than the Company. In addition, many of these competitors have substantially greater experience than the Company in research and development, undertaking clinical trials, obtaining regulatory approvals and third-party reimbursement and manufacturing, marketing and selling diagnostic products. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with larger companies. Furthermore, academic institutions, governmental agencies, and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for product development and marketing and therefore could become significant competitors. A number of diagnostic tests and procedures for measuring bone metabolism and other connective tissue diseases and disorders currently exist and others are in development by other companies. These products, as well as products that may be developed in the future, may be available for sale prior to the 14 Company's products, or at a lower cost, or with better technical characteristics, rendering the Company's products less competitive or obsolete. In addition, as the Company licenses its technology to diagnostic companies for use in alternative formats, tests sold by these licensees will compete with the Company's products. Any product that the Company succeeds in developing and for which it gains regulatory approval must then compete for market acceptance and market share. There can be no assurance that competitors' products will not be found more competitive, either for general use or in specific applications such as patients with particular medical conditions, or those who are receiving certain therapies. The Company believes that for all of its immunoassay products important competitive factors include the relative speed with which companies can develop products, establish clinical utility, complete the clinical testing and regulatory approval processes, obtain reimbursement and supply commercial quantities of the product to the market. The Company's inability to compete favorably with respect to any of these factors could have a material adverse effect on its business, financial condition and results of operations. PATENTS, PROPRIETARY RIGHTS AND RELATED LITIGATION RISKS The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. The Company owns five United States patents for biochemical tests, two United States patents for ultrasound, six pending United States patent applications, and corresponding foreign patent applications, all in the area of biomedical diagnostics. The Company is the exclusive licensee from The Rowett Research Institute in Scotland of patents and patent applications directed to certain diagnostic methods of detecting metabolic bone disorders, including a United States patent, four pending United States patent applications, two European Patent Office patents, a related Australian patent, a related Canadian patent and ten related foreign patent applications. The Company pays The Rowett Research Institute royalties upon sales of the Company's Pyrilinks products. The Company's ability to protect its proprietary position is in part dependent on the issuance of patents on current and future applications. The Company currently has applications pending in the United States, Europe, Japan, Canada and Australia. The validity and breadth of claims covered in medical technology patents involve complex legal and factual questions, and therefore, are highly uncertain. Not all patent applications covering the technology underlying the Company's products have been issued to date and no assurance can be given that such and other pending patent applications or any future patent applications will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to the Company, that any of the Company's patents will be held valid if subsequently challenged or that others will not claim rights in or ownership to the patents and other proprietary rights held by the Company. The failure of the Company to obtain issuances of patents that cover the technology underlying the Company's products or any other outstanding patent applications, could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, there can be no assurance that others have not developed or will not develop similar products, duplicate any of the Company's products or design around the Company's patents. In addition, others may hold or receive patents or file patent applications that contain claims having a scope that covers products developed by the Company. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents or could be required to obtain licenses from the patent owners of each of such patents or to redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. The Company also relies upon unpatented trade secrets to protect its proprietary technology, and no assurance can be given that others will not independently develop or otherwise acquire substantially equivalent techniques or otherwise gain access to the Company's proprietary technology or that the Company can ultimately protect meaningful rights to such unpatented proprietary technology. 15 There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry, and although the Company is not currently engaged in litigation regarding intellectual property matters, from time to time the Company sends and receives communications to and from third parties regarding such matters. Litigation, which would result in substantial cost to and diversion of effort by the Company, may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, to defend the Company against claimed infringement of the rights of others or to determine the ownership, scope or validity of the proprietary rights of the Company and others. An adverse determination in any such litigation could subject the Company to significant liability to third parties, could require the Company to seek licenses from third parties, which licenses may not be available or, if available, may not be on terms acceptable to the Company, and ultimately could prevent the Company from manufacturing, selling or using its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Metra also relies on trade secrets and proprietary know-how in its manufacturing processes. The Company requires each of its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of any employment, consulting or advisory relationship with the Company. Each agreement provides that all confidential information developed or made known to the individual during the course of the relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived of by an individual shall be the exclusive property of the Company, other than inventions unrelated to the Company and developed entirely on the employee's own time. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for misappropriation of the Company's trade secrets in the event of unauthorized use or disclosure of such information. REIMBURSEMENT The Company's ability to successfully commercialize its products depends in part on the availability of, and the Company's ability to obtain, adequate levels of third-party reimbursement for use of its diagnostic tests. Although the Company's products are available for clinical use in many European countries, reimbursement is currently available in only certain of those countries. In the United States, the Company has received FDA clearance for Alkphase-B, Pyrilinks and Pyrilinks-D. Reimbursement for the Company's FDA cleared tests is in part determined by CPT codes and may vary by state. Reimbursement under a specific CPT code is available for Alkphase-B and as of January 1997, for both Pyrilinks and Pyrilinks-D. In the United States, the cost of medical care is funded, in substantial part, by government insurance programs, such as Medicare and Medicaid, and private and corporate health insurance plans. The Company's ability to commercialize its products successfully will depend in part on the extent to which appropriate reimbursement levels for the cost of such products and related treatment are obtained from government authorities, private health insurers and other organizations, such as health maintenance and organizations ("HMOs"). In certain states, reimbursement levels have been established which the Company believes are favorable to continued market acceptance for Pyrilinks and Pyrilinks-D. The trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for the Company's products. The cost containment measures that health care providers are instituting and the impact of any health care reform could have an adverse effect on the Company's ability to sell its products and may have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that reimbursement in the United States or foreign countries will be available for any of the Company's products, or if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, the Company's products. The 16 unavailability of third-party reimbursement or the inadequacy of the reimbursement for medical procedures using the Company's tests could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company is unable to forecast what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on the Company's business. GOVERNMENT REGULATION The manufacturing, testing, labeling, distribution, marketing, advertising and promotion of the Company's products are subject to extensive and rigorous regulation by the FDA and, to varying degrees of regulation, by state and foreign regulatory agencies. The Company's products are regulated by the FDA under the Federal Food, Drug and Cosmetic Act (the "Act"), as amended by the Medical Device Amendments of 1976 and the Safe Medical Devices Act of 1990, among other laws. Under the Act, the FDA regulates the clinical testing, manufacturing, labeling, distribution, sale, advertising and promotion of medical devices in the United States. In addition, various foreign countries in which the Company's products are or may be sold, including, Germany, France, Japan and Canada, impose local regulatory requirements. The testing for, preparation of and subsequent FDA and foreign regulatory review of required applications is expensive, lengthy and uncertain. Failure to comply with FDA and similar foreign requirements could result in civil monetary penalties or criminal sanctions, restrictions on or injunction against marketing of the Company's products, as well as seizure or recall of the Company's products, or other regulatory action. There can be no assurance the Company will obtain necessary regulatory approvals or clearances on a timely basis or at all, and delays in receipt of or failure to receive such approvals or clearances, the loss or limitation of previously received approvals or clearances, adoption of future regulations which may further restrict the production or sales of the Company's products, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. The Act, among other things, classifies medical devices into three categories over which the FDA maintains increasing levels of regulation: Class I (general controls), II (special controls) and III (premarket approval). Although most devices new to the marketplace after May 1976 are automatically classified as Class III, the Company believes that many of Metra's products should be classified as Class I or II devices and hence, not subject to the requirement of premarket approval by the FDA. Prior to marketing any of these devices, the Company is required to submit a 510(k) premarket notification to the FDA and await the FDA's determination that the product may be marketed. In any 510(k) premarket notification the Company must, among other things, demonstrate the product to be marketed is substantially equivalent in performance, formula, design and intended use to a legally marketed Class I or Class II predicate device or to a Class III device for which the FDA has not required premarket approval. Test data from clinical trials may be required to demonstrate substantial equivalence and that the products are safe and effective, which may delay the 510(k) premarket notification review period. Following submission of a 510(k) premarket notification, a company may not market the device for clinical use until an order is issued by the FDA finding the product to be substantially equivalent. The FDA has no specific time limit by which it must respond to a 510(k) premarket notification. The FDA may agree that the product is substantially equivalent to a predicate device and allow the product to be marketed in the United States. The FDA, however, may (i) determine that the new device is not substantially equivalent and require a premarket approval application ("PMA"), or (ii) require further information, such as additional test data, including data from clinical studies, before it is able to make a determination regarding substantial equivalence. By requesting additional information the FDA can further delay market introduction of a Company's products. In August 1995, Metra received FDA clearance of its 510(k) premarket notification for Alkphase-B for use as an aid in the management of patients diagnosed with Paget's disease. In November 1995, Metra 17 received FDA clearance of its 510(k) premarket notification for Pyrilinks as a measure of type I collagen degradation, especially bone collagen. In December 1995, Metra received FDA clearance of its 510(k) premarket notification for Pyrilinks-D as a measure of bone resorption. There can be no assurance that the FDA will act favorably or quickly in its review of the Company's future 510(k) submissions, if any, and significant difficulties and costs may be encountered by the Company in its efforts to obtain FDA clearance that could delay or preclude the Company from selling its products in the United States. Furthermore, there can be no assurance that the FDA will not request additional data, require that the Company conduct further clinical studies or require a PMA, causing the Company to incur further cost and delay. In addition, there can be no assurance that the FDA will not limit the intended use of the Company's products as a condition of 510(k) clearance or PMA approval. Further, if a company wishes to propose modifications to a product after FDA clearance of a 510(k) premarket notification or approval of a PMA, including changes in indications or other significant modifications to labeling or manufacturing, additional clearances or approvals will be required from the FDA. Failure to receive or delays in receipt of FDA clearances or approvals, including the need for extensive clinical trials or additional data as a prerequisite to approval, or any FDA limitations on the intended use of the Company's products, could have a material adverse effect on the Company's business, financial condition and results of operations. If the FDA indicates that a PMA is required for any of the Company's products, the application will require the results of extensive clinical studies, manufacturing information and likely review by a panel of medical experts outside the FDA. Clinical studies would need to be conducted in accordance with FDA requirements. Failure to comply with FDA requirements could result in the FDA's refusal to accept the data or the imposition of regulatory sanctions. FDA review of a PMA application can take significantly longer than that for a 510(k) premarket notification. There can be no assurance that the Company will be able to meet the FDA's PMA requirements or that any necessary approvals will be received. Failure to obtain necessary regulatory approvals, the restriction, suspension or revocation of regulatory approvals, if obtained, or any other failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The Act and California laws also require the Company to be licensed and to manufacture its products in compliance with current good manufacturing practices ("GMP") regulations. These regulations require that the Company manufacture its products and maintain related documentation in a prescribed manner with respect to manufacturing, testing and control activities. The Company is also required to comply with various FDA requirements for labeling and marketing, and the FDA prohibits a device, whether or not cleared under a 510(k) premarket notification or approved under a PMA, from being marketed for unapproved clinical uses. If the FDA believes that a company is not in compliance with the regulations, it can institute proceedings to detain or seize a product, issue a recall, prohibit marketing and sale of the company's products and assess civil and criminal penalties against the company, its officers or its employees. There can be no assurance that Metra will receive marketing clearance or approval for any of its future products or that its manufacturing facility will satisfy GMP or California manufacturing requirements. The Company's facilities and manufacturing processes have been periodically inspected by the State of California and other agencies, but remain subject to audit from time to time. The Company believes that it is in substantial compliance with all applicable federal and state regulations. Nevertheless, there can be no assurance that the FDA or a state agency will agree with the Company's position, or that its GMP compliance will not be challenged at some subsequent point in time. Enforcement of the GMP regulations has increased significantly in the last several years and the FDA has publicly stated that compliance will be more strictly scrutinized. In the event that the Company is determined to be in noncompliance with FDA regulations, to the extent that the Company is unable to convince the FDA or state agency of the adequacy of its compliance, the FDA or state agency has the power to assert penalties or remedies, including injunction or temporary suspension of shipment until compliance is achieved. Noncompliance may also lead to a recall of product. Such penalties or remedies could have a materially 18 adverse effect on the Company's business, financial condition and results of operations. In addition, the manufacture, sale or use of the Company's products are also subject to regulation by other federal entities, such as the Occupational Safety and Health Agency and the Environmental Protection Agency, and by various state agencies, including the California Environmental Protection Agency. Federal and state regulations regarding the manufacture, sale or use of the Company's products are subject to future change, which changes could have a material adverse effect on the Company's business, financial condition and results of operations. Distribution of the Company's products outside the United States may be subject to FDA export and extensive foreign government regulation. These regulations, including the requirements for approvals or clearance to market, the time required for regulatory review and the sanctions imposed for violations, vary from country to country. There can be no assurance that the Company will obtain regulatory approvals in such countries or that it will not be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. In addition, the export by the Company of certain of its products which have not yet been cleared for domestic commercial distribution may be subject to FDA export restrictions. Failure to obtain necessary regulatory approvals, the restriction, suspension or revocation of existing approvals or any other failure to comply with regulatory requirements outside the United States could have a material adverse effect on the Company's business, financial condition and results of operations. Many of Metra's customers using its diagnostic devices for clinical use in the United States may also be regulated under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). CLIA is intended to ensure the quality and reliability of all medical testing in laboratories in the U.S. by requiring that any health care facility in which testing is performed meet specified standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations have established three levels of regulatory control based on test complexity ; "waived," "moderately complex" and "highly complex". Metra's Alkphase-B test is categorized as a highly complex test for clinical use in the United States, and the Company believes that its other tests will also be categorized as highly complex. Laboratories that perform either moderately or highly complex tests must meet certain standards with the major difference in requirements being quality control and personnel standards. Personnel requirements for highly complex tests are more rigorous than those for moderately complex tests, requiring that personnel have more education and experience than personnel conducting moderately complex tests. Under the CLIA regulations, all laboratories performing high or moderately complex tests are required to obtain either a registration certificate or certification of accreditation from the Health Care Financial Administration ("HCFA"). As a result of the CLIA requirements, physician office laboratories and small volume test sites may be dissuaded from initiating, continuing or expanding patient testing, particularly if the tests are classified as moderately or highly complex tests. There can be no assurance that the CLIA regulations and future administrative interpretations of CLIA will not have an adverse impact on the potential market for the Company's products. EMPLOYEES As of June 30, 1997, the Company had 70 full-time employees, 11 of whom were engaged in, or directly supported, the Company's research and development activities, 26 of whom were in sales and marketing, 23 of whom were in manufacturing operations, and 10 of whom were in administration. The Company also employs several part-time employees and uses outside consultants. The Company considers relations with its employees to be good. None of the Company's employees is covered by a collective bargaining agreement. 19 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information with respect to the executive officers and certain other officers of the Company as of June 30, 1997:
NAME AGE POSITION - ---------------------------------------- --- --------------------------------------------- George W. Dunbar, Jr.................... 50 President, Chief Executive Officer and Director Ronald T. Steckel....................... 44 Senior Vice President Gerald J. Allen, Ph.D................... 46 Vice President, Research and Development Kurt E. Amundson........................ 44 Vice President and Chief Financial Officer John F. Coombes......................... 53 Vice President, Sales & Marketing Debby R. Dean........................... 41 Vice President, Human Resources and Administration
The officers of the Company are appointed by the Board of Directors and serve at the discretion of the Board. There are no family relationships among the directors or officers of the Company. MR. DUNBAR joined the Company as President, Chief Executive Officer and Director in July 1991. Prior to joining the Company, he was the Vice President Licensing and Business Development of The Ares-Serono Group ("Ares-Serono"), a Swiss health care company that markets pharmaceutical, diagnostic and veterinary products worldwide, from 1988 until 1991, where he established a licensing and acquisition group for its health care divisions. From 1974 until 1987, he held various senior management positions with Amersham International ("Amersham"), a health care and life sciences company, where he most recently served as Vice President for its Life Sciences business in North America. Mr. Dunbar also served as Amersham's General Manager of Pacific Rim markets and Eastern Regional operations and, prior to that, he managed the international marketing of Amersham's medical and industrial radioisotopes. Mr. Dunbar also serves as a director of DepoTech, a public biotechnology company, LJL Biosystems, a life sciences systems company and Metra Biosystems (U.K.) Ltd., the Company's wholly owned subsidiary. Mr. Dunbar holds a B.S. in electrical engineering and an M.B.A. from Auburn University, and sits on the Auburn School of Business M.B.A. Advisory Committee. MR. STECKEL joined the Company as Vice President, Development and Operations, in February 1992. He was promoted to Senior Vice President in August 1996. From 1990 until 1992, he was Vice President of Operations of Leeco Diagnostics, a medical diagnostics company, where he was responsible for manufacturing, quality assurance, materials management and facilities. Prior to his employment at Leeco, Mr. Steckel worked for Ares-Serono from 1986 to 1990, in various positions including Director, Corporate Projects and Vice President, Operations of Serono Baker Diagnostics ("Serono"). At Serono, Mr. Steckel managed the successful launches of immunoassay analyzers and hematology instruments to the international marketplace. Mr. Steckel holds a B.S. in biology from Blackburn University and an M.B.A. from Lake Forest College. DR. ALLEN joined the Company as Vice President Research and Development in June 1997. Dr. Allen has worked in the commercial immunoassay industry since 1975 with various companies including Amersham International, Serono Diagnostics, and G.D. Searle. From 1991 to 1997, Dr. Allen was Vice President Diagnostics at R & D Systems, Inc. in Minneapolis. Dr. Allen received his B.S. and Ph.D. degrees from The University of Bristol. MR. AMUNDSON joined the Company as Vice President and Chief Financial Officer in January 1996. From 1994 until 1996, Mr. Amundson was Vice President and Chief Financial Officer of Shaman 20 Pharmaceuticals, Inc., a biopharmaceutical company ("Shaman"). Prior to his employment with Shaman, he was Chief Financial Officer at Abaxis, Inc., a biomedical instrumentation company. From 1986 to 1991, Mr. Amundson was Vice President, Finance at Proxim, Inc., a maker of wireless network products. Mr. Amundson is a Certified Public Accountant and received a B.A. in Graphic Communications from California Polytechnic University, San Luis Obispo. MR. COOMBES joined the Company in November 1993 as Director European Sales. Mr. Coombes was appointed Vice President Sales and Marketing in June 1997 after serving as Vice President International since August 1996 and previously as Director--European Operations and Managing Director of Metra Biosystems (U.K) from November 1994 to August 1996. From 1992 to 1993, Mr. Coombes was European Sales Manager of T Cell Diagnostics, a division of T Cell Sciences, a biotechnology company. Prior to his employment at T Cell Diagnostics, Mr. Coombes established Digen Limited, a distributor for Gene Trak Systems. From 1989 to 1991, Mr. Coombes was Director of European Operations for Gene Trak Systems, a human diagnostics, food industry and industrial biotechnology company. Mr. Coombes received an Ordinary National Diploma in chemistry from Bromsgrove College in Worcestershire, England and Higher National Diplomas in chemistry and analytical chemistry from Lanchester Polytechnic in Coventry, England. MS. DEAN joined the Company as Senior Director of Human Resources and Administration in September 1995, and was appointed Vice President Human Resources and Administration July 1997. From 1992 to 1995, Ms. Dean worked at DNX Corporation, a biopharmaceutical company, in the positions of Vice President, Corporate Administration & Communications. Prior to DNX, Ms. Dean worked with Serono, from 1988 to 1992 as Director, Human Resources. Ms. Dean received a B.S. in Management from Allentown College, and an M.B.A. from Lehigh University. ITEM 2. PROPERTIES Metra currently leases approximately 30,600 square feet of laboratory and office space at two facilities in Mountain View, California. The Company leases these facilities under operating leases which last through May 2001, each with a renewal option that, if exercised, would extend the term of the lease through May 2003. In addition, the Company leases approximately 1,600 square feet of office space in Lake Oswego, Oregon under an operating lease which lasts until February 1998. The Company also leases space in England, Italy and Germany under operating leases which expire at various times. The Company believes that its existing facilities will be sufficient for its operational purposes through 1998. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol MTRA. The range of reported high and low bid quotations for the shares of the Company's Common Stock, as reported by the Nasdaq National Market, are set forth below for the periods indicated:
FISCAL 1997 HIGH LOW FISCAL 1996 HIGH LOW - -------------- --------- --------- -------------- --------- --------- 1st Quarter... $ 7.25 $ 4.50 1st Quarter $ 21.75 $ 12.38 2nd Quarter... $ 6.00 $ 3.75 2nd Quarter $ 21.88 $ 16.75 3rd Quarter... $ 6.75 $ 3.75 3rd Quarter $ 18.25 $ 13.50 4th Quarter... $ 5.00 $ 2.63 4th Quarter $ 14.50 $ 4.50
The above quotations represent prices quoted between dealers, do not include retail markup, markdown or commissions and may not represent actual transactions. On September 15, 1997, the closing price of the Company's Common Stock was $3.75. HOLDERS As of September 15, 1997 the Company had approximately 141 shareholders of record, including several holders who are nominees for an undetermined number of beneficial owners. DIVIDENDS The Company has never declared or paid any cash dividends or made any other cash distribution on its Common Stock, and the Company anticipates that in the foreseeable future it will follow a policy of retaining any earnings for use in its business. Any future determination as to declaration and payment of dividends will be made at the discretion of the Board of Directors. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data are derived from consolidated financial statements of Metra Biosystems, Inc. The consolidated balance sheet as of June 30, 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended June 30, 1997 have been audited by Ernst & Young LLP, independent auditors. The consolidated balance sheets ended June 30, 1996, 1995, 1994 and 1993 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the four-year period ended June 30, 1996 have been audited by other 22 independent auditors. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.
1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Product sales.......................................... $ 6,405 $ 4,413 $ 2,552 $ 1,439 $ 617 Partner revenue........................................ 320 2,057 744 2,032 2,062 ---------- ---------- ---------- ---------- --------- Total revenues......................................... 6,725 6,470 3,296 3,471 2,679 Total operating expenses(1)............................ 22,035 29,670 10,436 7,211 6,349 Net loss(1)............................................ $ (13,127) $ (21,399) $ (6,803) $ (3,575) $ (3,583) Net loss per share..................................... $ (1.04) $ (2.04) $ (1.08) $ (0.69) $ (0.87) Shares used to compute net loss per share.............. 12,610 10,515 6,303 5,156 4,119 CONSOLIDATED BALANCE SHEET DATA: Working capital........................................ $ 30,729 $ 44,231 $ 2,759 $ 9,803 $ 2,749 Total assets........................................... 47,768 60,193 7,400 12,807 4,431 Long-term portion of capital lease obligations......... 1,574 1,367 40 93 293 Redeemable preferred stock............................. -- -- 23,260 23,260 11,616 Total shareholders' equity (deficit)................... 42,077 54,424 (17,856) (11,650) (8,092)
- ------------------------ (1) The fiscal 1996 total operating expenses and net loss include $11,291 of acquired in-process research and development associated with the acquisition of Osteo Sciences Corporation in January, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its commencement of operations in March 1990, Metra has been engaged in the development and commercialization of diagnostic products for the detection and management of metabolic bone diseases and disorders. The Company has developed and is currently marketing for research and clinical use four immunodiagnostic tests to assess bone resorption and formation and one immunodiagnostic test to assess bone growth disorders. In the United States, three of these tests have received 510(k) clearance from the FDA for clinical use and two of these tests are being marketed for research use only. The Company is currently marketing its products for clinical as well as research use on a world-wide basis. The Company's principal sources of revenue are product sales and partner revenues. Product sales are principally derived from sales of the Company's biochemical tests for research and clinical use. Partner revenues result from certain collaborative relationships and primarily consist of milestone payments and licensing fees received from these partners and revenues from sales to these partners of proprietary reagents for use with the test formats of these partners. The Company's revenues from product sales have historically resulted from worldwide sales for clinical and research use. In November and December of 1995, the Company received 510(k) clearance from the FDA for its Pyrilinks and Pyrilinks-D products. Revenues from clinical sales in the United States will be dependent, in part, upon the rate at which the Company can increase awareness and acceptance of its products among clinicians. The Company commenced its marketing efforts in the United States upon receiving 510(k) clearance, and does not anticipate significant revenues from clinical sales of its products in the United States unless and until the results of its marketing efforts are realized and overall consumer awareness of management of bone and joint health increases. There can be no assurance that the Company can successfully increase market awareness or acceptance of the Company's products in a timely manner or at all, and failure to do so would have a material adverse effect on the Company's business, 23 financial condition and results of operations. Due to seasonal factors such as customer and distributor vacations, the Company expects reduced product sales during the summer months, particularly in Europe. As a result of this seasonal effect, the Company's revenues could be lower in the quarter ending September 30 than in the other quarters. In April 1997, the Company entered into a Co-Promotion Agreement with Berlex Laboratories, Inc. ("Berlex") which includes the utilization of the direct detail pharmaceutical force of Berlex. Over the first year of the promotional agreement, which begins July 1, 1997, the Company will pay Berlex approximately $3,000,000 for promotional activities, record an expense for the fair value of warrants issued to Berlex of approximately $506,000, and pay commissions on increased sales of the Company's Pyrilinks-D product. After the first promotional year, the future continuance of the promotional agreement and the associated financial cost to Metra is, in part, dependent upon the achievement of certain milestones and the mutual consent of both parties. Historically, the Company's quarterly revenues have fluctuated significantly. Partner revenues have fluctuated primarily as a result of the timing of milestone payments received from corporate collaborations. Product sales have fluctuated primarily as a result of the introduction of new products, seasonal variations in demand, the rate of acceptance of the Company's products and variations in the timing and volume of distributor purchases. The Company expects that total revenues will fluctuate as a result of these and other factors and that international sales will continue to account for a significant portion of its revenues in the future. The Company expects to incur increased costs related to sales and marketing, clinical studies, manufacturing, research and development and general and administrative expenses. As a result, the Company expects its results from operations will vary significantly from quarter to quarter and from year to year and will depend on, among other things, gaining regulatory clearances in the United States and elsewhere, the rate of acceptance of the Company's products in the marketplace, the availability of reimbursement, the timing of fees and milestone payments from its partners in collaborative relationships, the execution of new collaborative relationships, costs associated with the development of the Company's products and costs associated with and the financial impact of acquisitions. The Company's gross margin is affected by a number of factors, including product mix, product pricing, the extent of diagnostic test sales compared to reagent sales and royalty revenue, the percentage of direct sales compared to distributor sales and manufacturing costs, including overhead and material costs. RESULTS OF OPERATIONS FISCAL YEARS ENDED JUNE 30, 1997 AND 1996 Product sales for the year ended June 30, 1997 increased to $6,405,000 from $4,413,000 for the year ended June 30, 1996. The increase in product sales was due to increasing volume from broader adoption of the Company's biochemical tests for clinical and research use worldwide. The Company's bone resorption products were cleared for marketing in the U.S. by the FDA in the second fiscal quarter of 1996. International product sales accounted for 77% and 78% of product revenues the fiscal years ended June 30, 1997 and 1996, respectively. The adoption rate in the U.S. (post clearance) has been slower than anticipated and the Company is focused on increasing marketing efforts for medical education. Partner revenues for the fiscal year ended June 30, 1997 decreased to $320,000 from $2,057,000 for the fiscal year ended June 30, 1996. This decrease resulted primarily from a decrease in non-recurring milestone payments from corporate partners, earned upon receipt of FDA clearance of Pyrilinks (November 1995) and Pyrilinks-D (December 1995), which were received in fiscal year 1996. Cost of product sales for the fiscal year ended June 30, 1997 increased to $3,982,000 from $3,276,000 for the fiscal year ended June 30, 1996, reflecting the increased volume of products sold and associated production costs. The gross margin on product sales for the fiscal year ended June 30, 1997 was 38%, 24 compared to 26% for the prior fiscal year. The increase in the gross margin was due to production volume increases and efficiency gains in the production process. Research and development expenses for the fiscal year ended June 30, 1997 increased to $5,670,000 from $4,308,000 for the fiscal year ended June 30, 1996. This increase resulted from increased internal product development, collaborative programs, and the on-going research costs of the ultrasound program which was acquired in January 1996. Until the completion of the development of the ultrasound system, the Company expects research and development expenses to approximate current levels. Sales and marketing expenses for the fiscal year ended June 30, 1997 increased to $8,838,000 from $7,725,000 for the fiscal year ended June 30, 1996. The increase is due to increased expenses associated with medical education programs, and sales related spending increases at international locations. The Company believes that sales and marketing expenses will increase in subsequent periods due to fees and commissions payable to Berlex in connection with the Co-Promotion agreement entered into between the Company and Berlex in April 1997. General and administrative expenses for the fiscal year ended June 30, 1997 increased to $3,545,000 from $3,070,000 for the fiscal year ended June 30, 1996, due to increased personnel costs as well as additional legal and consulting expenses necessary to support the Company's expanded operations. The Company expects future general and administrative expenses to approximate current levels. Net interest and other income for the fiscal year ended June 30, 1997 increased to $2,183,000 from $1,801,000 for the fiscal year ended June 30, 1996 primarily as a result of the interest earned on the investment of the proceeds from the Company's follow-on offering in April 1996. FISCAL YEARS ENDED JUNE 30, 1996 AND 1995 Product sales for the year ended June 30, 1996 increased to $4,413,000 from $2,552,000 for the year ended June 30, 1995. The increase in product sales was due to increasing volume from broader adoption of the Company's biochemical tests for clinical use internationally and in the United States. The Company's bone resorption products were cleared for marketing by the FDA in the U.S. in the second fiscal quarter of 1996. International product sales accounted for 78% of product revenues for both the fiscal years ended June 30, 1996 and 1995. Partner revenues for the fiscal year ended June 30, 1996 increased to $2,057,000 from $744,000 for the fiscal year ended June 30, 1995. This increase resulted primarily from an increase in non-recurring milestone payments from corporate partners, earned upon receipt of FDA clearance of Pyrilinks (November 1995) and Pyrilinks-D (December 1995), and to a lesser extent an increase in reagent sales to collaborative partners. Cost of product sales for the fiscal year ended June 30, 1996 increased to $3,276,000 from $1,987,000 for the fiscal year ended June 30, 1995, reflecting the increased volume of products sold and associated production costs. Research and development expenses for the fiscal year ended June 30, 1996 increased to $4,308,000 from $3,717,000 for the fiscal year ended June 30, 1995. This increase resulted from increased product development and collaborative programs and the on-going research costs of the ultrasound program which was acquired in January 1996. Sales and marketing expenses for the fiscal year ended June 30, 1996 increased to $7,725,000 from $2,881,000 for the fiscal year ended June 30, 1995. The increase is due to increased staffing in domestic and international locations, the costs of additional marketing programs which were implemented to support the clinical launch of the Company's products in the United States following the clearance by the FDA, and the addition of a direct sales force in the United States. 25 General and administrative expenses for the fiscal year ended June 30, 1996 increased to $3,070,000 from $1,851,000 for the fiscal year ended June 30, 1995, due to increased personnel costs and additional expenses associated with being a public company for all of fiscal 1996. Acquired in-process research and development costs for the fiscal year ended June 30, 1996 resulted from a one-time charge of $11,291,000. This charge was primarily composed of the purchase price of approximately $10,017,000, with the balance related to costs and expenses associated with the acquisition, the fair value of liabilities assumed including reserves for future costs related to the acquisition, less the fair value of tangible assets acquired. The value of the research and development acquired from Osteo Sciences was determined based upon an analysis of the present value of expected future cash flows related to the technology. At the date of acquisition, technical feasibility of the acquired technology had not yet been established and the technology had no foreseeable future alternative uses. The Company expects product development of the ultrasound system to be completed in calendar 1998. However, due to the inherent uncertainty of the development process and of obtaining approval to market the proposed products from the FDA and comparable regulatory bodies internationally, the Company cannot precisely predict the timing of completion or the total expenditures necessary to complete product development. Net interest and other income for the fiscal year ended June 30, 1996 increased to $1,801,000 from $337,000 for the fiscal year ended June 30, 1995 primarily as a result of the interest earned on the investment of the proceeds from the Company's initial public offering in July, 1995 and the Company's follow-on offering in April, 1996. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations from inception primarily through the sale of preferred and common stock, payments received under to collaborative research and development agreements, sales of the Company's diagnostic products for research and clinical use and, to a lesser extent, through equipment financing. In July 1995, the Company completed its initial public offering of 3,450,000 shares of common stock. All preferred stock was automatically converted into shares of common stock upon closing of the offering. The cash proceeds from the initial public offering, net of underwriters discounts were $32,085,000. Total additional expenses associated with the offering were $727,000, resulting in net proceeds from the offering of $31,358,000. In April, 1996, the Company had a follow-on offering of 2,300,000 shares of Common Stock. The cash proceeds from the Company's follow-on offering completed April 22, 1996, net of underwriters' discounts were $29,187,000. Total additional expenses associated with the follow-on offering were $450,000, resulting in net proceeds to the Company from the follow-on offering of $28,737,000. As of June 30, 1997, the Company had cash and investments of $39,140,000. During the fiscal year ended June 30, 1997 the Company's use of cash in operating activities was $12,516,000 compared to $10,730,000 for the fiscal year ended June 30, 1996. The increase in cash used in operating activities was primarily due to the increased net loss (excluding the write-off of in-process research in development in fiscal 1996 as a result of the acquisition of Osteo Science Corporation for consideration which primarily consisted of stock). The Company has historically utilized leasing arrangements to finance capital purchases. As of June 30, 1997, $2,140,000 was outstanding in conjunction with these leases. The leases are classified as capital leases and expire in fiscal years 2000 and 2001. The Company's leasing agreements include negative covenants which require an irrevocable letter of credit in the event of non-compliance of the covenants. The Company's future capital requirements depend upon, among other things, the costs of research and development programs, the funding of clinical and regulatory related studies, the expansion of marketing and selling activities, costs involved in filing, prosecuting and enforcing patent claims, and the time and costs associated with obtaining regulatory approvals for future products. Funds may also be used for investments in, or acquisitions of, complementary businesses, products or technologies; in expanding 26 the Company's manufacturing capacity; or in improving its existing facilities. Although the Company believes that its current cash, cash equivalents and investment securities will be sufficient to meet the Company's operating expenses and capital requirements through at least fiscal 1999, the Company's future liquidity and capital requirements will depend on numerous factors, including regulatory actions by the FDA and other international regulatory bodies, market acceptance of its products, expansion of the Company's marketing and sales activities, the cost of intellectual property protection and the costs associated with any company or product acquisitions . The Company may, however, seek additional equity or debt financing to fund further expansion of its operations, other projects or acquisitions. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for the Company's products, product mix changes, industry conditions and competitive factors. There can be no assurance that if it becomes necessary to raise additional capital, that such capital will be available on acceptable terms, if at all. 27 ITEM 8. FINANCIAL STATEMENTS REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Metra Biosystems, Inc. We have audited the accompanying consolidated balance sheet of Metra Biosystems, Inc. as of June 30, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended June 30, 1997 listed in the index at Item 14(a)(2). The consolidated financial statements and schedule of the Company as of June 30, 1996 and for the two years then ended, were audited by other auditors whose report dated July 18, 1996, expressed an unqualified opinion on those statements and schedule. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Metra Biosystems, Inc. as of June 30, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein for the year ended June 30, 1997. ERNST & YOUNG LLP Palo Alto, California July 16, 1997 28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Metra Biosystems, Inc. We have audited the accompanying consolidated balance sheet of Metra Biosystems, Inc. and subsidiaries (the Company) as of June 30, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 Metra Biosystems, Inc. and subsidiaries as of June 30, 1996, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP San Francisco, California July 18, 1996 29 METRA BIOSYSTEMS, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1997 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 11,709 $ 19,217 Short-term investments.................................................................. 18,876 26,283 Accounts receivable, net of allowance for doubtful accounts of $147 and $101 at June 30, 1997 and 1996, respectively........................................................... 1,576 1,266 Interest receivable..................................................................... 503 578 Inventories............................................................................. 1,446 1,040 Prepaid expenses and other current assets............................................... 736 249 ---------- ---------- Total current assets.................................................................. 34,846 48,633 Property and equipment, net............................................................... 4,182 4,314 Long-term investments..................................................................... 8,555 6,747 Other assets.............................................................................. 185 499 ---------- ---------- $ 47,768 $ 60,193 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 1,068 $ 2,185 Accrued expenses........................................................................ 2,483 1,810 Current portion of capital lease obligations............................................ 566 407 ---------- ---------- Total current liabilities............................................................. 4,117 4,402 Long-term portion of capital lease obligations............................................ 1,574 1,367 Commitments and contingencies Shareholders' equity: Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding........................................................................... -- -- Common stock, $0.001 par value, 50,000,000 shares authorized; 12,628,618 and 12,598,768 shares issued and outstanding at June 30, 1997 and 1996, respectively................. 13 13 Additional paid-in capital.............................................................. 95,219 94,539 Notes receivable from shareholders...................................................... (40) (90) Deferred compensation................................................................... (70) (79) Unrealized loss on investments.......................................................... (13) (83) Cumulative translation adjustment....................................................... (16) 13 Accumulated deficit..................................................................... (53,016) (39,889) ---------- ---------- Total shareholders' equity............................................................ 42,077 54,424 ---------- ---------- $ 47,768 $ 60,193 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 30 METRA BIOSYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996, AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 ---------- ---------- --------- Revenues: Product sales................................................................ $ 6,405 $ 4,413 $ 2,552 Partner revenue.............................................................. 320 2,057 744 ---------- ---------- --------- Total revenues............................................................. 6,725 6,470 3,296 ---------- ---------- --------- Operating expenses: Cost of product sales........................................................ 3,982 3,276 1,987 Research and development..................................................... 5,670 4,308 3,717 Sales and marketing.......................................................... 8,838 7,725 2,881 General and administrative................................................... 3,545 3,070 1,851 Acquired in-process research and development................................. -- 11,291 -- ---------- ---------- --------- Total operating expenses................................................... 22,035 29,670 10,436 ---------- ---------- --------- Loss from operations......................................................... (15,310) (23,200) (7,140) Interest income................................................................ 2,430 1,947 367 Interest expense............................................................... (214) (106) (30) Other expense.................................................................. (33) (40) -- ---------- ---------- --------- Net loss................................................................... $ (13,127) $ (21,399) $ (6,803) ---------- ---------- --------- ---------- ---------- --------- Net loss per share............................................................. $ (1.04) $ (2.04) $ (1.08) ---------- ---------- --------- ---------- ---------- --------- Shares used to compute net loss per share...................................... 12,610 10,515 6,303 ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to consolidated financial statements. 31 METRA BIOSYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) YEARS ENDED JUNE 30, 1997, 1996, AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES COMMON STOCK ADDITIONAL RECEIVABLE ------------------ PAID-IN FROM DEFERRED SHARES AMOUNT CAPITAL SHAREHOLDERS COMPENSATION ---------- ------ ---------- ------------ ------------ Balances as of June 30, 1994............ 729,510 $ 1 $ 95 $ (59) $-- Issuance of common stock under stock option plan........................... 111,253 -- 120 (110) -- Issuance of common stock under agreement for licensed technology............... 33,332 -- 200 -- -- Deferred compensation related to granting of stock options............. -- -- 575 -- (575) Amortization of deferred compensation... -- -- -- -- 388 Unrealized loss on investments.......... -- -- -- -- -- Net loss................................ -- -- -- -- -- ---------- ------ ---------- ----- ----- Balances as of June 30, 1995............ 874,095 1 990 (169) (187) Issuance of common stock under employee stock option and purchase plans....... 98,927 -- 205 79 -- Issuance of common stock related to acquisition of Osteo Sciences Corporation........................... 541,072 1 10,000 -- -- Conversion of preferred stock into common stock.......................... 5,324,685 5 23,255 -- -- Conversion of warrants into common stock................................. 9,989 -- -- -- -- Issuance of common stock related to public offerings...................... 5,750,000 6 60,089 -- -- Amortization of deferred compensation... -- -- -- -- 108 Translation adjustment.................. -- -- -- -- -- Unrealized loss on investments.......... -- -- -- -- -- Net loss................................ -- -- -- -- -- ---------- ------ ---------- ----- ----- Balances as of June 30, 1996............ 12,598,768 13 94,539 (90) (79) Issuance of common stock under employee stock option and purchase plans....... 46,344 -- 157 50 -- Repurchase of common stock.............. (16,494) -- (20) -- -- Deferred compensation relating to granting of stock options............. -- -- 37 -- (37) Amortization of deferred compensation... -- -- -- -- 46 Issuance of warrants.................... -- -- 506 -- -- Translation adjustment.................. -- -- -- -- -- Unrealized gain on investments.......... -- -- -- -- -- Net loss................................ -- -- -- -- -- ---------- ------ ---------- ----- ----- Balances as of June 30, 1997............ 12,628,618 $ 13 $95,219 $ (40) $ (70) ---------- ------ ---------- ----- ----- ---------- ------ ---------- ----- ----- TOTAL UNREALIZED CUMULATIVE SHAREHOLDERS' LOSS ON TRANSLATION ACCUMULATED EQUITY INVESTMENTS ADJUSTMENT DEFICIT (DEFICIT) ----------- ------------ ----------- ------------- Balances as of June 30, 1994............ -$- -$- $(11,687) $(11,650) Issuance of common stock under stock option plan........................... -- -- -- 10 Issuance of common stock under agreement for licensed technology............... -- -- -- 200 Deferred compensation related to granting of stock options............. -- -- -- -- Amortization of deferred compensation... -- -- -- 388 Unrealized loss on investments.......... (1) -- -- (1) Net loss................................ -- -- (6,803) (6,803) ----- ----- ----------- ------------- Balances as of June 30, 1995............ (1) -- (18,490) (17,856) Issuance of common stock under employee stock option and purchase plans....... -- -- -- 284 Issuance of common stock related to acquisition of Osteo Sciences Corporation........................... -- -- -- 10,001 Conversion of preferred stock into common stock.......................... -- -- -- 23,260 Conversion of warrants into common stock................................. -- -- -- -- Issuance of common stock related to public offerings...................... -- -- -- 60,095 Amortization of deferred compensation... -- -- -- 108 Translation adjustment.................. -- 13 -- 13 Unrealized loss on investments.......... (82) -- -- (82) Net loss................................ -- -- (21,399) (21,399) ----- ----- ----------- ------------- Balances as of June 30, 1996............ (83) 13 (39,889) 54,424 Issuance of common stock under employee stock option and purchase plans....... -- -- -- 207 Repurchase of common stock.............. -- -- -- (20) Deferred compensation relating to granting of stock options............. -- -- -- -- Amortization of deferred compensation... -- -- -- 46 Issuance of warrants.................... -- -- -- 506 Translation adjustment.................. -- (29) -- (29) Unrealized gain on investments.......... 70 -- -- 70 Net loss................................ -- -- (13,127) (13,127) ----- ----- ----------- ------------- Balances as of June 30, 1997............ $(13) $(16) $(53,016) $ 42,077 ----- ----- ----------- ------------- ----- ----- ----------- -------------
See accompanying notes to consolidated financial statements. 32 METRA BIOSYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996, AND 1995 (IN THOUSANDS)
1997 1996 1995 ---------- ---------- --------- Cash flows from operating activities: Net loss...................................................................... $ (13,127) $ (21,399) $ (6,803) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................................... 1,295 610 543 Compensation expenses paid in stock......................................... 46 108 588 Forgiveness of notes receivable from officers............................... 37 29 57 Loss on disposition of property and equipment............................... 52 19 16 Write-off of in-process research and development............................ -- 11,291 -- Changes in operating assets and liabilities: Trade accounts and interest receivable.................................... (235) (1,284) (187) Inventories............................................................... (406) (402) (267) Other current assets and other assets..................................... 265 (1,046) (777) Accounts payable and accrued expenses..................................... (442) 1,344 1,000 ---------- ---------- --------- Net cash used in operating activities................................... (12,515) (10,730) (5,830) Cash flows from investing activities: Purchases of investments...................................................... (28,111) (46,837) (1,571) Maturities of investments..................................................... 33,780 14,725 2,109 Purchases of property and equipment, net...................................... (1,215) (3,048) (657) Proceeds from sale of property and equipment.................................. -- -- 15 Issuance of notes receivable to officers...................................... -- -- (170) Repayment of notes receivable from officers................................... 50 79 -- ---------- ---------- --------- Net cash provided by (used in) investing activities..................... 4,504 (35,081) (274) Cash flows from financing activities: Proceeds from capital lease financing......................................... 847 1,922 -- Repayment of capital lease obligations........................................ (481) (240) (201) Proceeds from sales of common stock, net...................................... 137 61,029 120 ---------- ---------- --------- Net cash provided by (used in) financing activities..................... 503 62,711 (81) ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents............................ (7,508) 16,900 (6,185) Cash and cash equivalents at beginning of year.................................. 19,217 2,317 8,502 ---------- ---------- --------- Cash and cash equivalents at end of year........................................ $ 11,709 $ 19,217 $ 2,317 ---------- ---------- --------- ---------- ---------- --------- Supplemental disclosure of cash flow information: Cash paid during the year for interest........................................ $ 214 $ 106 $ 30 Supplemental disclosure of noncash investing and financing activities: Assets acquired from purchase of Osteo Sciences Corporation................... $ -- $ (605) $ -- Liabilities assumed from purchase of Osteo Sciences........................... $ -- $ 686 $ -- Issuance of warrants under Co-Promotion agreement (Note 10)................... $ 506 $ -- $ --
See accompanying notes to consolidated financial statements. 33 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) THE COMPANY Metra Biosystems, Inc. ("Metra" or the "Company"), a California corporation, is engaged in the development and commercialization of diagnostic products for the detection and management of metabolic bone diseases and disorders. The Company primarily markets its products for clinical and research use in Europe, the United States and Pacific Rim countries. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The operations of Osteo Sciences Corporation are included in the Company's results of operations beginning February 1, 1996 (see note 14). (c) CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity of less than three months to be cash equivalents. (d) INVESTMENTS The Company accounts for investments in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's policy is to protect the value of its investment portfolio and to minimize principal risk by earning returns based on current interest rates. The Company, by policy, invests primarily in highly rated debt instruments and limits the amount of investment with any one issuer. The Company's marketable investments are classified as available-for-sale as of the balance sheet date and are reported at fair value, with unrealized gains and losses recorded as a separate component of shareholders' equity. The cost of securities sold is based on the specific identification method. Realized gains or losses and declines in value, if any, judged to be other that temporary on available-for-sale securities are reported in other income or expense. Fair values of cash and cash equivalents approximate cost due to the short period of time to maturity. Fair values of long-term and short-term investments are based on quoted market prices. (e) MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to a concentration of credit risk consist primarily of investments and trade accounts receivable. As of June 30, 1997, no single customer accounted for greater than 10% of accounts receivable. As of June 30, 1996, approximately 14% of recorded trade receivables were concentrated with one customer. To reduce credit risk, the Company performs ongoing credit evaluations of its customers' financial condition. The Company does not generally require collateral on credit sales to its customers. The Company earns revenues primarily through product sales to distributors and through collaborative agreements with partners. Product revenues from one distributor constituted 15% of total revenues for the year ended June 30, 1997. Product revenues from one distributor constituted 12% of total revenues for the year ended June 30, 1996. Product revenues from two distributors constituted 12% and 11%, respectively, of total revenues for the year ended June 30, 1995. For the year ended June 30, 1997, no 34 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) corporate partner constituted greater than 10% of total revenues. Revenues related to milestone payments from one corporate partner constituted 16% and 13% of total revenues for the years ended June 30, 1996 and 1995, respectively. (f) INVENTORIES Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. (g) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, which generally range from three to five years. Assets under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. (h) REVENUE RECOGNITION Revenue from development contracts is recognized as the relevant technical milestones are attained. Revenue from licensing is recognized when the nonrefundable fees are received and the license is executed. Revenue from product sales, net of estimated product returns, is recognized upon product shipment when title passes to the buyer. (i) PARTNER REVENUE Partner revenue consists principally of milestone payments, licensing fees and proceeds from sales of reagents to collaborative partners for research purposes. (j) ADVERTISING COSTS All costs related to marketing and production costs of advertising the Company's products are expensed in the period incurred. (k) FOREIGN CURRENCY Foreign currency transactions and financial statements are translated into U.S. dollars at current rates, except that revenue, costs and expenses are translated at average rates during each reporting period. Gains and losses resulting from foreign currency transactions and intercompany balances expected to be paid in the foreseeable future are included in results of operations. Gains and losses resulting from translation of financial statements are excluded from results of operations and are reflected as a cumulative translation adjustment, which is reported as a separate component of shareholders' equity. The Company has sales denominated in foreign currencies, primarily the British pound and the Italian lira. The Company offsets the foreign currency exposure of these sales with expenses denominated in local currencies. The Company does not utilize foreign currency forwards or option contracts to manage its foreign currency exposure. As of June 30, 1997, the Company has not experienced material gains or losses from foreign currency fluctuations. 35 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) STOCK SPLIT In April 1995, the Company's Board of Directors approved a one-for-six reverse split of the Company's common and preferred stock. All references in the accompanying financial statements to the number of shares of common stock and per share amounts have been retroactively restated to reflect this stock split. (m) NET LOSS PER SHARE Except as noted below, net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is anti-dilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock issued for consideration below the Company's initial public offering (IPO) price and stock options granted with exercise prices below the IPO price during the 12-month period preceding the date of the initial filing of the IPO Registration Statement, even when anti-dilutive, have been included in the calculation of common equivalent shares for all periods prior to the closing of the Company's IPO (using the treasury stock method for stock options based on the initial public offering price). Furthermore, pursuant to Securities and Exchange Commission staff policy, common equivalent shares from convertible preferred stock and warrants that were converted upon the completion of the Company's IPO are included (using the as if-converted method) for all periods prior to the closing of the Company's IPO. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which the Company is required to adopt in the second quarter of fiscal 1998. At that time, the Company will be required to change the method currently used to compute earnings per share. Since the Company has reported losses since inception, SFAS No. 128 will not result in a change in the reported earnings per share. (n) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from those estimates. (o) STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation". As permitted by SFAS No. 123, the Company accounts for stock options under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company does not record compensation expense for stock option grants to employees and directors when the exercise price equals or exceeds the market price of the Company's common stock on the date of grant. The Company recognizes compensation expense for options granted to consultants and other non-employees based upon the fair value of the options granted at the grant date. Such amounts have not been material in any period presented. 36 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (2) INVESTMENTS Investments consisted of the following at June 30:
1997 1996 -------------------------------------------- -------------------------------------------- UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE -------- ---------- ---------- -------- -------- ---------- ---------- -------- (IN THOUSANDS) Corporate bonds and notes................ $ 18,635 $ 13 $ (4) $ 18,644 $ 12,188 $-- $ (14) $ 12,174 Commercial paper....... 3,492 -- -- 3,492 7,640 -- -- 7,640 U.S. government securities........... 4,499 5 -- 4,504 8,527 -- (11) 8,516 Mortgaged-backed securities........... 6,284 -- (5) 6,279 12,148 1 (17) 12,132 State and municipal obligations.......... 3,327 1 -- 3,328 2,400 -- -- 2,400 Other debt securities........... 2,461 -- 2,461 4,434 -- -- 4,434 -------- ----- ----- -------- -------- ----- ----- -------- 38,698 19 (9) 38,708 47,337 1 (42) 47,296 Marketable equity securities........... 2,450 -- (23) 2,427 4,750 -- (42) 4,708 -------- ----- ----- -------- -------- ----- ----- -------- Total available-for-sale securities........... 41,148 19 (32) 41,135 52,087 1 (84) 52,004 Less amounts classified as cash equivalents.......... (13,704) -- -- (13,704) (18,974) (18,974) -------- ----- ----- -------- -------- ----- ----- -------- Total investments...... $ 27,444 $ 19 $ (32) $ 27,431 $ 33,113 $ 1 $ (84) $ 33,030 -------- ----- ----- -------- -------- ----- ----- -------- -------- ----- ----- -------- -------- ----- ----- --------
There were no material proceeds or gross realized gains or losses in the years ended June 30, 1997, 1996 or 1995. The cost and estimated fair value of securities available-for-sale as of June 30, 1997, by contractual maturity, consisted of the following:
FAIR COST VALUE --------- --------- (IN THOUSANDS) Due in one year or less................................................. $ 23,870 $ 23,874 Due in one to three years............................................... 8,544 8,555 --------- --------- 32,414 32,429 Marketable equity securities............................................ 2,450 2,427 Mortgage-backed securities.............................................. 6,284 6,279 --------- --------- $ 41,148 $ 41,135 --------- --------- --------- ---------
37 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (3) INVENTORIES Inventories consist of the following:
JUNE 30, -------------------- 1997 1996 --------- --------- (IN THOUSANDS) Raw materials............................................... $ 224 $ 216 Work in process............................................. 95 -- Finished goods.............................................. 1,127 824 --------- --------- $ 1,446 $ 1,040 --------- --------- --------- ---------
(4) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
JUNE 30, -------------------- 1997 1996 --------- --------- (IN THOUSANDS) Machinery and equipment................................... $ 4,023 $ 3,014 Furniture and fixtures.................................... 171 164 Leasehold improvements.................................... 2,999 2,987 --------- --------- 7,193 6,165 Less accumulated depreciation and amortization............ (3,011) (1,851) --------- --------- $ 4,182 $ 4,314 --------- --------- --------- ---------
Included in property and equipment is approximately $2,770,000 and $2,063,000 of equipment recorded under capital lease agreements at June 30, 1997 and 1996, respectively. Accumulated amortization related to this equipment was approximately $1,083,000, and $367,000 as of June 30, 1997 and 1996, respectively. During the years ended June 30, 1997 and 1996, the Company disposed of and retired fully depreciated property and equipment having a historical cost of $135,000 and $247,000, respectively. (5) ACCRUED EXPENSES A summary of accrued expenses follows:
JUNE 30, -------------------- 1997 1996 --------- --------- (IN THOUSANDS) Promotional and educational marketing expenses.............. $ 19 $ 422 Payroll-related............................................. 525 363 Contract manufacturing...................................... 400 -- Other....................................................... 1,539 1,025 --------- --------- $ 2,483 $ 1,810 --------- --------- --------- ---------
38 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (6) LEASE COMMITMENTS The Company leases certain equipment and its facilities under leases classified as capital and operating leases, respectively. These leases expire at various dates through 2002. Future minimum lease payments relating to these non-cancelable leases are as follows:
CAPITAL OPERATING YEAR ENDED JUNE 30: LEASES LEASES - ------------------------------------------------------------------------- --------- ----------- (IN THOUSANDS) 1998................................................................. $ 767 $ 581 1999................................................................. 767 341 2000................................................................. 768 341 2001................................................................. 245 315 2002................................................................. -- 13 --------- ----------- Total minimum lease payments............................................. 2,547 $ 1,595 ----------- ----------- Less amount representing interest........................................ (407) --------- Present value of minimum lease payments.................................. 2,140 Less current portion of capital lease obligations........................ (566) --------- Long-term portion of capital lease obligations........................... $ 1,574 --------- ---------
Interest expense related to capital leases was $210,000, $106,000 and $30,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Rent expense for the years ended June 30, 1997, 1996, and 1995 was approximately $317,000, $322,000 and $169,000, respectively. (7) SHAREHOLDERS' EQUITY (a) COMMON STOCK SUBJECT TO REPURCHASE Since inception, 289,165 shares of common stock have been issued to certain individuals under stock purchase agreements that permit the Company to repurchase, at the original issuance price, a portion of such shares in the event an individual shareholder ceases to be associated with the Company. The shares subject to repurchase generally expire on a pro-rata basis over a four-year period. As of June 30, 1997 and 1996, there were approximately 15,626 and 51,563 shares, respectively, subject to repurchase. (b) SHAREHOLDER RIGHTS PLAN Under the Company's Shareholder Rights Plan, adopted in August 1996, one preferred share purchase right (a "Right") is attached to each share of common stock of the Company. Each Right will entitle shareholders to purchase 1/1000 of a share of Series A participating preferred stock of the Company, a designated series of preferred stock for which each 1/1000 of a share has economic attributes and voting rights equivalent to one share of the Company's common stock, at an exercise price of $50. The Rights only become exercisable in certain limited circumstances involving acquisitions of 20% or tender offers for 30% or more of the Company's common stock. For a limited period of time after the announcement of any such acquisition or offer, the Rights are redeemable at a price of $.01 per Right. After becoming exercisable, in certain more limited circumstances, each Right entitles its holder to 39 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (7) SHAREHOLDERS' EQUITY (CONTINUED) purchase for $50 an amount of common stock of the Company, or in certain circumstances, securities of the acquiror, having a then current market value equal to $100. The Rights expire in August, 2006. (c) NOTES RECEIVABLE FROM SHAREHOLDERS At June 30, 1997, the Company had one note receivable from a shareholder totaling $40,000 for a purchase of common stock at an interest rate of 7.60%. At June 30, 1996, the Company had two notes receivable outstanding from shareholders totaling $90,000 for purchases of common stock at an interest rate of 7.60%. At June 30, 1995, the Company had five notes receivable outstanding from shareholders totaling $169,000 for purchases of common stock at interest rates ranging from 5.47% to 7.60%. Full payment of principal and accrued interest on the notes is due four years from the date of purchase of the common stock. (8) STOCK OPTION AND PURCHASE PLANS (a) 1990 INCENTIVE STOCK PLAN The Company has reserved 700,000 shares for issuance under its 1990 Incentive Stock Plan which provided for stock options to be granted to employees (including consultants, officers, and directors). Upon the adoption of the Company's 1995 Stock Option Plan, the Company's Board of Directors determined to make no future grants under the 1990 Incentive Stock Plan. Options available for grant and options outstanding as of June 30, 1997 under the 1990 Incentive Stock Plan were 81,131 and 161,372, respectively. The Company has recorded deferred compensation of $575,000 related to certain of the Company's common stock options granted for the year ended June 30, 1995 under the 1990 Incentive Stock Plan. This amount is being amortized over the relevant period of benefit. For the years ended June 30, 1997, 1996 and 1995, $38,000, $108,000 and $388,000, respectively, was amortized. (b) 1995 STOCK OPTION PLAN The Company's 1995 Stock Option Plan (the "1995 Option Plan") was adopted by the Board of Directors in April 1995 and was approved by the Company's shareholders in June 1995. An aggregate of 1,000,000 shares of the Company's common stock were initially reserved for issuance under the 1995 Option Plan. An additional 500,000 shares were reserved for issuance in December 1996. The 1995 Option Plan provides for the granting to employees of incentive stock options and for the granting to consultants of nonstatutory stock options. The exercise price of all incentive stock options granted under the 1995 Option Plan must be at least equal to the fair market value of the common stock of the Company on the date of grant (at least 85% of the fair market value for nonstatutory stock options). The exercise price of any incentive stock option granted to an optionee who owns stock representing more than 10% of the voting power of the Company's outstanding capital stock must equal at least 110% of the fair market value of the common stock on the date of grant. Options generally become exercisable over 4 years and have a ten year term. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the maximum term of the option must not exceed five years. If not terminated earlier, the 1995 Stock Option Plan will terminate in 2005. Options available for grant and options outstanding as of June 30, 1997 under the 1995 Option Plan were 502,073 and 993,709, respectively. 40 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (8) STOCK OPTION AND PURCHASE PLANS (CONTINUED) (c) 1995 DIRECTOR STOCK OPTION PLAN The 1995 Director Stock Option Plan (the Directors' Plan) was adopted by the Board of Directors in April 1995 and was approved by the Company's shareholders in June 1995. A total of 200,000 shares of common stock has been reserved for issuance under the Directors' Plan. The Directors' Plan provides for the grant of nonstatutory stock options to nonemployee directors of the Company. The Directors' Plan provides that each person who was a nonemployee director of the Company on the date of the Company's IPO and each person who first becomes a nonemployee director of the Company after the date of the Company's IPO shall be granted a nonstatutory stock option to purchase 10,000 shares of common stock (the First Option) on the effective date of the Company's IPO or on the date on which the optionee first becomes a nonemployee director of the Company. Thereafter, on the date of each annual meeting of the Company's shareholders at which such director is elected, each such nonemployee director shall be granted an additional option to purchase 5,000 shares of common stock (a Subsequent Option) if, on such date, he or she shall have served on the Company's Board of Directors for at least six months. The Directors' Plan provides that the First Option shall become exercisable in installments as to 25% of the total number of shares subject to the First Option on each of the first, second, third and fourth anniversaries of the date of grant of the First Option; each Subsequent Option shall become exercisable in full on the first anniversary of the date of grant of that Subsequent Option. The exercise price of all stock options granted under the Directors' Plan shall be equal to the fair market value of a share of the Company's common stock on the date of grant of the option. Options granted under the Directors' Plan have a term of ten years. Options available for grant and options outstanding as of June 30, 1997 under the Directors' Plan were 95,000 and 105,000, respectively. 41 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (8) STOCK OPTION AND PURCHASE PLANS (CONTINUED) (d) SUMMARY STOCK OPTION INFORMATION The following table summarizes option activity under the stock option plans:
OPTIONS TOTAL RANGE OF WEIGHTED AVAILABLE FOR OPTIONS EXERCISE AVERAGE PRICE GRANT OUTSTANDING PRICES PER SHARE ------------- ----------- ------------- ------------- Balances as of June 30, 1994........................... 262,489 164,682 $0.03-$1.20 $ 0.44 Options authorized................................... 200,000 -- -- -- Options granted...................................... (342,707) 342,707 1.20-10.00 3.73 Options exercised.................................... -- (111,253) 0.24-1.20 1.08 Options canceled..................................... 24,477 (24,477) 0.24-9.00 1.88 ------------- ----------- Balances as of June 30, 1995........................... 144,259 371,659 0.03-10.00 3.18 Options authorized................................... 1,000,000 -- -- -- Options granted...................................... (937,733) 937,733 0.46-20.88 14.29 Options exercised.................................... -- (79,813) 0.03-14.50 1.07 Options canceled..................................... 349,529 (349,529) 0.48-20.88 15.34 ------------- ----------- Balances as of June 30, 1996........................... 556,055 880,050 0.24-19.81 10.38 Options authorized................................... 500,000 -- -- -- Options granted...................................... (1,115,165) 1,115,165 4.50-5.88 5.00 Options exercised.................................... -- (14,314) 0.46-6.00 1.86 Options canceled..................................... 720,820 (720,820) 0.46-15.50 11.93 Shares repurchased................................... 16,494 -- -- -- ------------- ----------- Balances as of June 30, 1997........................... 678,204 1,260,081 $0.24-$19.81 4.83 ------------- ----------- ------------- -----------
The following table summarizes information about options outstanding as of June 30, 1997:
OUTSTANDING EXERCISABLE ----------------------------------------- ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF NUMBER OF CONTRACTUAL LIFE EXERCISE NUMBER OF EXERCISE EXERCISE PRICES SHARES (IN YEARS) PRICE SHARES PRICE - --------------------------------- --------- ----------------- ----------- ----------- ----------- $0.24-$2.29...................... 154,221 5.8 $ 0.83 124,948 $ 0.76 $4.50-$6.00...................... 1,018,363 8.7 $ 4.99 171,987 $ 5.10 $9.00-$19.81..................... 87,497 8.0 $ 10.05 29,418 $ 10.33 --------- ----------- Total.......................... 1,260,081 8.3 $ 4.83 326,353 $ 3.91 --------- ----------- --------- -----------
At June 30, 1997, 1996 and 1995 options for 326,353, 139,389 and 119,169 shares, respectively, were exercisable under the stock options plans. In 1995, 19,343 options were issued at prices ranging from $0.46-$2.29 per share due to the conversion of options held by Osteo Science option in connection with the Osteo Sciences acquisition. On January 31, 1996, the Company's Board of Directors approved an option exchange, subject to election by the option holders, whereby options to purchase 272,400 shares of the Company's common stock at prices ranging from $17.00 to $20.88 per share were canceled and reissued at $15.25 per share which was the fair market 42 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (8) STOCK OPTION AND PURCHASE PLANS (CONTINUED) value of the Company's common stock on that date. The new options generally vest over four years beginning January 31, 1996. On August 21, 1996, the Company's Board of Directors approved an option exchange, subject to election by the option holders, whereby options to purchase 550,485 shares of the Company's common stock at prices ranging from $6.50 to $15.50 per share were canceled and reissued at $5.00 per share which was the fair market value of the Company's common stock on that date. The new options generally vest over four years beginning August 21, 1996. (e) PRO FORMA INFORMATION If the Company had elected to recognize compensation cost based on the fair value of stock options granted, as prescribed under SFAS No. 123, net loss and net loss per share would have been increased to the pro forma amounts indicated in the table below:
1997 1996 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Loss--as reported.............................................. $ (13,127) $ (21,399) Net loss--pro forma................................................ $ (14,471) $ (22,152) Net loss per share--as reported.................................... $ (1.04) $ (2.04) Net loss per share--pro forma...................................... $ (1.15) $ (2.11)
The fair value of each option grant, for purposes of calculating the pro forma net loss above was estimated using the Black-Scholes option-pricing model with the following assumptions: Expected stock price volatility................................. .67 Risk-free interest rate range................................... 5.5-6.5% Expected life of options........................................ 1-4 years Dividend yield.................................................. 0%
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair value of employee stock options granted during 1997 and 1996 computed using the Black-Scholes method was $2.13 and $5.75 per share, respectively. Because SFAS No. 123 is applicable only to options granted subsequent to June 30, 1995, its pro forma effect will not be fully reflected until 1999. (f) 1995 EMPLOYEE STOCK PURCHASE PLAN The Company's 1995 Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Board of Directors in April 1995 and was approved by the shareholders in June 1995. A total of 200,000 shares of common stock has been reserved for issuance under the Purchase Plan. The Purchase Plan has two six- month offering periods each year. The Purchase Plan is administered by the Board of Directors. 43 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (8) STOCK OPTION AND PURCHASE PLANS (CONTINUED) Employees (including officers and employee directors) of the Company, or of any majority owned subsidiary designated by the Board, are eligible to participate if they are customarily employed by the Company or any such subsidiary for at least 20 hours per week and more than five months per year. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 5% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of the Company's common stock at the beginning or end of the offering period. Common stock purchased under the Purchase Plan must be held for a period of six months before it may be sold. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. Purchases of shares made under the Purchase Plan were 32,030 and 19,114 for the years ended June 30, 1997 and 1996, respectively. (9) DEVELOPMENT AND LICENSE AGREEMENTS The Company has a significant number of development and license agreements, most of which relate to the use of the Company's technology on the automated diagnostic testing systems of the partner. Revenues earned from milestone and licensing fees under development and license agreements were $100,000, $1,670,000 and $414,000 for the years ended June 30, 1997, 1996 and 1995, respectively. No royalty payments have been received by the Company. Other partner revenues were earned for sales of reagents to customers. Significant development and license agreements include the following: SUMITOMO PHARMACEUTICALS CO., LTD. In March 1993, the Company entered into a research and development agreement with Sumitomo Pharmaceuticals Co., Ltd. (Sumitomo). Under the terms of the agreement, the Company will update existing, and develop new, diagnostic assay kits for the detection and management of bone and other connective tissue diseases. The marketing and distribution rights resulting from this agreement will be held by Sumitomo in Japan. Under certain circumstances, Sumitomo will also have the right to acquire marketing and distribution rights in certain Asian markets. Under the agreement, the Company will also manufacture and supply the products at formula prices which are subject to periodic renegotiation. The term of the agreement is for an initial ten-year period with options to extend the term upon mutual consent. Sumitomo has the right to terminate the agreement upon six months written notice. Payments for certain ongoing costs of research and development incurred by the Company are payable to the Company under the agreement upon the achievement of certain milestones and regulatory approvals. In June 1994 and February 1995, the Company entered into two additional agreements with Sumitomo, granting Sumitomo certain additional marketing and distribution rights. These agreements call for Sumitomo to pay the Company certain amounts upon the achievement of certain milestones and regulatory approvals. THE ROWETT RESEARCH INSTITUTE In May 1990, the Company licensed certain technology from The Rowett Research Institute (Rowett) in exchange for 25,000 shares of common stock, an obligation to pay royalties on a percentage of net sales 44 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (9) DEVELOPMENT AND LICENSE AGREEMENTS (CONTINUED) for a period of approximately 10 years and an obligation to issue additional common stock upon attainment of certain milestones. In February 1994, the first milestone was attained in the United Kingdom. Accordingly, in September 1994, the Company issued 16,666 shares of common stock to Rowett valued at $3.00 per share. In May, 1995, the other milestone was attained and the Company issued the second 16,666 shares of common stock to Rowett valued at $9.00 per share. (10) OTHER AGREEMENTS In April 1997, the Company entered into a Co-Promotion Agreement with Berlex Laboratories, Inc. ("Berlex"). The Company will pay Berlex approximately $3 million in December 1997 for promotional activities performed by Berlex over the first year of the promotional agreement, starting on July 1, 1997. The $3 million will be recognized as expense ratably over the initial one year term. In connection with this agreement, the Company issued Berlex warrants to acquire 413,233 shares of common stock at an exercise price of $4.84 per share. The warrant has a four year term. The fair value of the warrants issued to Berlex, as measured using the Black-Scholes pricing method, of $506,000 will also be amortized over the initial one year service period. In addition, the Company will pay Berlex additional commissions based upon increased sales of the Company's products to the extent such sales are above previously established levels. After the first promotional year, the future continuance of the promotional agreement and the associated financial cost to Metra is, in part, dependent upon the achievement of certain milestones and the mutual consent of both parties. (11) INCOME TAXES Due to the operating losses incurred since inception, income tax expense for all periods has consisted only of minimum state taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% of pretax losses as a result of the following:
JUNE 30, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Computed "expected" tax benefit................... $ (4,193) $ (7,276) $ (2,313) Losses and credits for which no benefit has been recognized...................................... 4,145 3,139 1,988 Purchased research and development................ -- 3,839 -- Change in the beginning of the year valuation allowance, including use of net operating loss carryforwards and foreign losses................ 23 280 315 Other............................................. 25 18 10 --------- --------- --------- $ -- $ -- $ -- --------- --------- --------- --------- --------- ---------
45 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (11) INCOME TAXES (CONTINUED) The tax effect of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities is presented below:
YEAR ENDED JUNE 30, -------------------- 1997 1996 --------- --------- (IN THOUSANDS) Deferred tax assets: Employee benefit reserves, including accrued vacation............................................ $ 152 $ 64 Other operating reserves.............................. 314 173 Amortization of deferred compensation................. -- 199 Inventory capitalization.............................. 146 162 Start-up and other capitalization..................... 52 140 Patent and licensed technology amortization........... 203 113 Capitalized research and development.................. 285 -- Book depreciation in excess of tax.................... 269 -- Charitable contribution............................... 27 19 Net operating loss carryforwards...................... 13,771 10,090 Research and development credits...................... 844 631 --------- --------- Total gross deferred tax assets..................... 16,063 11,591 Less valuation allowance.............................. (16,042) (11,569) --------- --------- Net deferred tax assets............................. 21 22 Deferred tax liabilities: Tax depreciation in excess of books................... -- (22) Other................................................. (21) -- --------- --------- Deferred tax assets (liabilities)................... $ -- $ -- --------- --------- --------- ---------
Management believes significant uncertainty exists regarding the ability to realize the Company's deferred tax assets and accordingly, a valuation allowance has been established. The valuation allowance for deferred tax assets as of July 1, 1995 was $7,214,000. The net change in the valuation allowance for the years ended June 30, 1997, 1996 and 1995 was an increase of $4,473,000, $4,355,000 and $2,531,000 respectively. If realized, approximately $231,000 of deferred tax assets will be credited to paid-in-capital. As of June 30, 1997 and 1996, the Company had federal tax net operating loss carryforwards of approximately $38,174,000, and $27,193,000, respectively, which expire in 2004 through 2011. The Company also had foreign loss carryforwards of $1,070,000 and $806,000 at June 30, 1997 and 1996, respectively, which extend indefinitely. The Company also has federal research and development credit carryforwards of approximately $572,000 and $436,000 at June 30, 1997 and 1996, respectively, which will expire in 2004 through 2011. State tax net operating loss carryforwards were approximately $13,572,000 and $13,206,000 and research and development credit carryforwards were $370,000 and $295,000 at June 30, 1997 and 1996, respectively. The state losses expire in 1997 through 2001 and the credits expire in 2004 through 2011. 46 METRA BIOSYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (11) INCOME TAXES (CONTINUED) The Company's ability to utilize federal and state net operating loss carryforwards and research credits may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating loss carryforwards and credits before utilization. (12) EMPLOYEE BENEFITS The Company has a deferred savings 401(k) plan for its domestic employees. The Company may make matching contributions to the plan at its discretion. To date, no contributions have been made by the Company to the plan. (13) INDUSTRY AND GEOGRAPHIC INFORMATION The Company markets its products in the United States and in foreign countries through its sales personnel and distributors. Export sales account for a significant portion of the Company's product sales which are summarized by geographic area as follows:
YEAR ENDED JUNE 30, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) United States....................................... $ 1,480 $ 987 $ 569 Export sales: Europe............................................ 3,581 2,279 1,231 Pacific Rim....................................... 993 917 624 Other international............................... 351 230 128 --------- --------- --------- Total export sales.............................. 4,925 3,426 1,983 --------- --------- --------- Total product sales............................. $ 6,405 $ 4,413 $ 2,552 --------- --------- --------- --------- --------- ---------
(14) ACQUISITION OF OSTEO SCIENCES CORPORATION On January 31, 1996, the Company purchased Osteo Sciences Corporation ("Osteo") in a tax free exchange which resulted in shareholders of Osteo exchanging all of their shares of preferred and common stock for shares of the Company's common stock. The Company issued 541,072 shares of common stock to Osteo shareholders valued at approximately $9,672,000 and assumed options to purchase 19,343 shares of the Company's common stock valued at approximately $345,000. The transaction was recorded using the purchase method of accounting and resulted in the Company incurring a one-time charge of $11,291,000 for acquired in-process research and development. The operations of Osteo were included in the Company's results of operations beginning February 1, 1996. The value of the research and development acquired from Osteo Sciences was determined based upon an analysis of the present value of expected future cash flows related to the technology. At the date of acquisition, technical feasibility of the acquired technology had not yet been established and the technology had no foreseeable future alternative uses. 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective May 2, 1997, the Board of Directors of the Company engaged the accounting firm of Ernst & Young LLP as independent public accountants for the Company. The Company's former independent public accountants, KPMG Peat Marwick LLP, were dismissed effective May 2, 1997. The Company's audit committee recommended, and the Company's Board of Directors approved, these actions. During the two most recent fiscal years and subsequent interim periods prior to May 2, 1997, there were no disagreements with KPMG Peat Marwick LLP on any matter of accounting principles or practices, financial statement disclosure, auditing scope or procedure, or any reportable events, which disagreements, if not resolved to the satisfaction of KPMG Peat Marwick LLP, would have caused it to make reference to the subject matter of such disagreements in connection with its reports. The reports of KPMG Peat Marwick LLP on the financial statements of the Company for the past two years contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. The Company did not consult with Ernst & Young LLP during the two years prior to their appointment as independent accountants of the Company regarding either (i) the application of accounting principles to a specified transaction or transactions, either completed or proposed, or (ii) the type of audit opinion Ernst & Young LLP might render on the Company's financial statements. The Company requested that KPMG Peat Marwick LLP furnish a letter addressed to the SEC stating whether they agree with the above statements. A copy of the KPMG Peat Marwick LLP letter to the SEC, dated May 8, 1997 was filed as an exhibit to the Form 8-K filed by the Company on May 9, 1997. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding Registrant's directors will be set forth under the caption "Election of Directors--Nominees" in Registrant's proxy statement for use in connection with the 1997 Annual Meeting of Shareholders ("1997 Proxy Statement") and is incorporated herein by reference. The 1997 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year. Information regarding Registrant's executive and other officers is set forth in this Form 10-K in Part I, Item 1. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference into this Form 10-K from the information set forth under the caption "Compensation of Executive Officers" in the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The caption "Common Stock Ownership of Certain Beneficial Owners and Management" in the information required by this item is incorporated by reference into this Form 10-K from the information set forth under the 1997 Proxy Statement. 48 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference into this Form 10-K from the information set forth under the caption "Certain Relationships and Related Transactions" in the 1997 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) CERTAIN DOCUMENTS FILED AS PART OF THE FORM 10-K
1. Financial Statements PAGE ----- Reports of Independent Auditors................................................... 28 Consolidated Balance Sheets....................................................... 30 Consolidated Statements of Operations............................................. 31 Consolidated Statement of Shareholders' Equity (Deficit).......................... 32 Consolidated Statements of Cash Flows............................................. 33 2. Financial Statement Schedules
SCHEDULE II. VALUATION ACCOUNTS
BALANCE AT PROVISION BEGINNING CHARGED AMOUNTS BALANCE AT OF YEAR TO OPERATIONS UTILIZED END OF YEAR ---------- ---------------- ----------- ----------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended June 30, 1995............................... $ 18,385 $ 22,000 $ (7,197) $ 33,188 Year ended June 30, 1996............................... 33,188 70,500 (3,000) 100,688 Year ended June 30, 1997............................... 100,688 55,410 (8,754) 147,344 INVENTORY RESERVES: Year ended June 30, 1995............................... $ 91,696 $ 236,597 $ (64,248) $ 264,045 Year ended June 30, 1996............................... 264,045 177,979 (112,105) 329,919 Year ended June 30, 1997............................... 329,919 166,553 (148,472) 348,000
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (b) REPORTS ON FORM 8-K The Company filed a Report on Form 8-K, dated January 23, 1997, reporting the approval of an amendment to the Rights Agreement to increase the ownership threshold required to trigger the Rights Agreement from 15% to 20%. The Company filed a Report on Form 8-K, dated May 5, 1997, reporting the change in certifying accountants from KPMG Peat Marwick LLP to Ernst & Young LLP effective May 2, 1997. 49 (C) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ----------- ----------------------------------------------------------------------------------------------------- 3.1* Articles of Incorporation of Registrant 3.2* Form of Amended and Restated Articles of Incorporation of Registrant 3.3* Bylaws of Registrant 4.2* Rights Agreement among the Registrant and certain security holders of the Registrant, dated as of January 11, 1994 4.99(b) Amendment No. 1 to Preferred Shares Rights Agreement, dated as of January 17, 1997, between Metra Biosystems, Inc. and the First National Bank of Boston 10.1* Form of Indemnification Agreement 10.2* 1990 Incentive Stock Plan 10.2a* Forms of agreements under 1990 Incentive Stock Plan 10.3* 1995 Stock Option Plan 10.3a* Form of Option Agreement under 1995 Stock Option Plan 10.4* 1995 Employee Stock Purchase Plan 10.4a* Form of Subscription Agreement under 1995 Employee Stock Purchase Plan 10.5* 1995 Directors' Stock Option Plan 10.5a* Form of Option Agreement under 1995 Directors' Stock Option Plan 10.6+* Industrial Real Estate Lease (Single-Tenant Facility) and Lease Addendum, dated November 1, 1993, between the Registrant and State Teachers Retirement System, and First Amendment, dated as of July 26, 1994, thereto 10.7+* License Agreement between the Registrant and The Rowett Research Institute, dated as of April 30, 1990 10.8+* License Agreement between the Registrant and Collagen Corporation, dated as of June 30, 1990 10.9+* Distribution and License Agreement between the Registrant and Haematologic Technologies, Inc., dated as of September 1, 1992 10.10+* Product Research and Development Agreement between the Registrant and Sumitomo Pharmaceuticals Co., Ltd., dated as of March 29, 1993 10.11+* License Agreement between the Registrant and Celtrix Pharmaceuticals, Inc., dated as of July 28, 1993 10.12+* License, Supply and Development Agreement between the Registrant and Hybritech Incorporated, dated as of September 15, 1993 10.13+* Development and License Agreement between the Registrant and Ciba-Geigy Limited, dated as of June 26, 1990, as amended by the Agreement between Registrant and Ciba-Geigy Limited, dated as of November 5, 1993 10.14+* License, Supply and Development Agreement between the Registrant and Ciba Corning Diagnostics Corp., dated as of November 5, 1993 10.15+* OEM Agreement between the Registrant and Diagnostic Products Corporation, dated December 22, 1993
50
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ----------- ----------------------------------------------------------------------------------------------------- 10.16*(c) Product Research and Development Agreement between the Registrant and Sumitomo Pharmaceuticals Co., Ltd., dated as of June 29, 1994 10.17+* IDS OEM Agreement between the Registrant and Immunodiagnostic Systems Ltd., dated as of January 19, 1995 10.18+* License Agreement between the Registrant and BioQuant, Inc., dated as of February 15, 1995 10.19+* Product Research and Development Agreement between the Registrant and Sumitomo Pharmaceuticals Co., Ltd., dated as of February 28, 1995 10.20*(c) International Distributor Agreement between the Registrant and Amersham K.K., dated as of April 8, 1993 10.21+* International Distributor Agreement between the Registrant and DPC Biermann GmbH, dated as of January 1, 1995 10.22* Series D Preferred Stock Purchase Agreement, dated as of January 17, 1992, among the Registrant and certain Investors listed on Exhibit A thereto 10.23* Series E Preferred Stock Purchase Agreement, dated as of January 11, 1994, among the Registrant and certain Investors listed on Exhibit A thereto 10.24* Letter Agreement, dated as of May 24, 1991, between the Registrant and George W. Dunbar, Jr. 10.25* Letter Agreement, dated as of February 1, 1992, between the Registrant and Ronald T. Steckel 10.26* Promissory Note, dated as of September 11, 1991, executed by George W. Dunbar, Jr. and Lucy H. Dunbar in favor of the Registrant 10.27* Promissory Note, dated as of June 24, 1992, executed by Ronald T. Steckel and Laurie A. Steckel in favor of the Registrant 10.28* Promissory Note, dated as of July 16, 1992, executed by Ronald T. Steckel in favor of the Registrant 10.29* Promissory Note, dated as of July 18, 1993, executed by George W. Dunbar, Jr. in favor of the Registrant 10.30* Promissory Note, dated as of November 1, 1994, executed by Colette Z. Andrea in favor of the Registrant 10.31* Promissory Note, dated as of December 30, 1994, executed by George W. Dunbar, Jr. in favor of the Registrant 10.32* Promissory Note, dated as of December 30, 1994, executed by Colette Z. Andrea in favor of the Registrant 10.33* Promissory Note, dated as of December 30, 1994, executed by Ronald T. Steckel in favor of the Registrant 10.34+ License and Supply Agreement between the Registrant and Bayer Corporation dated as of July 26, 1995 10.43(a) Separation and Mutual Release, dated September 18, 1996, between the Company and Colette Z. Andrea 10.44+ Co-Promotion Agreement, dated April 25, 1997, between the Company and Berlex Laboratories, Inc.
51
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ----------- ----------------------------------------------------------------------------------------------------- 10.45 Form of Change in Control Agreement 11.1 Computation of Earnings Per Share 22.1* List of Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of KPMG Peat Marwick LLP, Independent Auditors and Report on Schedules 27.1 Financial Data Schedule
- ------------------------ * Incorporated by reference to identically numbered exhibits filed with the Company's Registration Statement (No. 33-92452) filed on May 18, 1995, or with Amendments No. 1 or Amendment No. 2 thereto, which became effective on June 30, 1995. + Confidential treatment granted or requested as to a portion of this Exhibit. (a) Incorporated by reference to identically numbered exhibit filed with the Company's Form 10-Q/A filed on February 10, 1997. (b) Incorporated by reference to identically numbered exhibit filed with the Company's Form 8-A/A filed on January 24, 1997. (c) Incorporated by reference to identically numbered exhibit refiled with the Company's Form 10-Q filed on May 14, 1997. 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. METRA BIOSYSTEMS, INC. By: /s/ GEORGE W. DUNBAR, JR. ----------------------------------------- Date: September 24, 1997 PRESIDENT AND CHIEF EXECUTIVE OFFICER KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints George W. Dunbar and Kurt E. Amundson and each of them, his attorneys-in-fact and agents, each with the power of substitution and resubstitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully as to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitute or substitutes, may do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- President and Chief /s/ GEORGE W. DUNBAR, JR. Executive Officer - ------------------------------ (Principal Executive September 24, 1997 George W. Dunbar, Jr. Officer) Vice President and Chief /s/ KURT E. AMUNDSON Financial Officer - ------------------------------ (Principal Financial and September 24, 1997 Kurt E. Amundson Accounting Officer) /s/ CLAUDE D. ARNAUD, M.D. - ------------------------------ Director September 24, 1997 Claude D. Arnaud, M.D. /s/ MARY LAKE POLAN, M.D., PH.D. - ------------------------------ Director September 24, 1997 Mary Lake Polan, M.D., Ph.D. /s/ LEONARD D. SCHAEFFER - ------------------------------ Director September 24, 1997 Leonard D. Schaeffer
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SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ COSTA G. SEVASTOPOULOS, PH.D. - ------------------------------ Director September 24, 1997 Costa G. Sevastopoulos, Ph.D. /s/ CRAIG C. TAYLOR - ------------------------------ Director September 24, 1997 Craig C. Taylor /s/ SAMUEL URCIS - ------------------------------ Director September 24, 1997 Samuel Urcis
54 EX-10.44 2 EXHIBIT 10.44 METRA CO-PROMOTION AGREEMENT by and between METRA BIOSYSTEMS, INC. and BERLEX LABORATORIES, INC April 25, 1997 [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. METRA CO-PROMOTION AGREEMENT This METRA CO-PROMOTION AGREEMENT (the "AGREEMENT") is entered into as of this 25th day of April, 1997 (the "EFFECTIVE DATE") by and between: METRA BIOSYSTEMS, INC., a California corporation ("METRA") with its principal offices at 265 North Whisman Road, Mountain View, California 94043; and, BERLEX LABORATORIES, INC., ("BERLEX"), with offices at 300 Fairfield Road, Wayne, New Jersey 07470; with reference to the following: RECITALS A. Metra is a biomedical company in the business of developing and marketing diagnostics, including biochemical markers and reagents, for connective tissue disease. B. Berlex is a pharmaceutical company doing business in the U.S. having female health care as one of its business focuses. C. The Berlex female health care hormone replacement therapy business currently includes one estrogen replacement therapy product marketed under the trademark Climara-Registered Trademark-. D. Berlex promotes its Climara-Registered Trademark- product to the OB/GYN market (which includes general physicians who are identified by Berlex from time to time as high prescribers of women's heath care therapeutics and shall be referred to as the "OB/GYN Market" and the "OB/GYN physicians") which promotion involves detail calls by Berlex salespersons on OB/GYN physicians and other appropriate health care providers such as nurse-practitioners; advertisements in professional publications; and appearances at medical conferences and industry trade shows aimed at OB/GYN physicians. E. Metra desires to have the Metra Products promoted to the OB/GYN Market in the U.S. that Berlex targets for Berlex's Climara-Registered Trademark- product. F. Berlex desires to promote the Metra Products to the OB/GYN Market in the U.S. through the mechanisms by which Berlex promotes Berlex's Climara-Registered Trademark product to such market. G. Upon the terms and conditions set forth below, Berlex, for a consideration paid by Metra as provided below, will include the Metra promotional message for the Metra Products and under certain conditions, additional Metra products, in Berlex's promotional endeavors directed toward the OB/GYN market in the U.S. [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE 1: DEFINITIONS; RULES OF CONSTRUCTION 1.1 DEFINITIONS. For purposes of this Agreement, in addition to the capitalized terms defined elsewhere in this Agreement, the following terms shall have the meanings ascribed to them below: 1.2 "AFFILIATE" shall mean any corporation, partnership or other entity (collectively, an "ENTITY" ): (1) that is controlled by or controls a party (collectively, a "CONTROLLED ENTITY" ); or (2) that is controlled by or controls any such Controlled Entity, in each instance of clause (1) or (2) for so long as such control continues. For purposes of this definition, "CONTROL" shall mean the possession, directly or indirectly, of a majority of the voting power of such entity (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). 1.3 "CONFIDENTIAL INFORMATION" shall mean any information disclosed pursuant to the Metra/Berlex nondisclosure agreement dated March 7, 1997 and disclosed in the course of this Agreement, which is identified as or should be reasonably understood to be confidential or proprietary to the disclosing party, including, but not limited to know-how, trade secrets, data, technical processes and formulas, product features, sales, cost and other unpublished financial information, product and business plans, projections, and marketing data. "Confidential Information" shall not include information which: (i) is known or becomes known to the recipient on the Effective Date directly or indirectly from a third party source other than one having an obligation of confidentiality to the providing party; (ii) hereafter becomes known (independently of disclosure by the providing party) to the recipient directly or indirectly from a source other than one having an obligation of confidentiality to the providing party; (iii) becomes publicly known or available or otherwise ceases to be secret or confidential, except through a breach of this Agreement by the recipient; or (iv) is or was independently developed by the recipient without use of or reference to the providing party's Confidential Information, as shown by evidence in the recipient's possession. 1.4 "GROSS REVENUES" shall mean (i) all amounts invoiced by Metra and its Affiliates to unrelated third parties in connection with sales of the Metra Products in the U.S.; and (ii) all royalties received by Metra and its Affiliates from unrelated third parties in connection with the sale or use of the Metra Products in the U.S., less in the case of (i) and (ii), any royalty payments made by Metra to third party licensors, but in no event shall such royalty exceed [XXXX]. 1.5 "INTELLECTUAL PROPERTY RIGHTS" shall mean trade secrets, patents, copyrights, trademarks, know-how, moral rights and similar rights of any type under the laws of any -2- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. governmental authority, domestic or foreign including all applications and registrations relating to any of the foregoing. 1.6 RULES OF CONSTRUCTION. As used in this Agreement, all terms used in the singular shall be deemed to include the plural, and vice versa, as the context may require. The words "hereof," "herein" and "hereunder" and other words of similar import refer to this Agreement as a whole, including any exhibits hereto, as the same may from time to time be amended or supplemented. The word "including" when used herein is not intended to be exclusive and means "including, without limitation." The descriptive headings of this Agreement are inserted for convenience of reference only and do not constitute a part of and shall not be utilized in interpreting this Agreement. The terms "party" and "parties" shall refer to Metra and Berlex, individually or collectively. This Agreement has been negotiated by the parties hereto and their respective counsel and shall be fairly interpreted in accordance with its terms and without any rules of construction relating to which party drafted the Agreement being applied in favor of or against either party. 1.7 "U.S." shall mean the United States of America, including its territories and possessions, and Puerto Rico. 1.8 DEFINED TERMS. The following terms are defined in the body of the Agreement at the locations specified: Defined Term Location ------------ -------- Agreement Introduction Berlex Introduction Berlex Indemnified Parties Section 10.3.1 Claim Section 10.3.1 Effective Date Introduction Metra Introduction Metra Indemnified Parties Section 10.3.4 Metra Products Section 2.1(i) Metra Trademarks Section 2.1 (iii) OB/GYN Market Recitals Promotional Year Section 6.2.1 Short Promotional Year Section 6.2.1 Term Section 7.1 Third Anniversary Date Section 7.1 -3- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. ARTICLE 2: GRANT OF RIGHTS 2.1 LICENSE GRANT TO BERLEX. Subject to all of the terms and conditions of this Agreement, Metra hereby grants to Berlex, during the Term of this Agreement: (i) subject to Metra's marketing programs existing as of the Effective Date (which shall be made known to the Commercialization Committee and insofar as reasonably possible conducted synergistically with the promotional activities overseen by the Commercialization Committee) an exclusive right and license to promote and detail (which shall not include the right to sell or distribute) to the OB/GYN Market in the U.S. the Metra products set forth on EXHIBIT A (hereinafter referred to as the "Metra Products"). The license granted to Berlex in this section means that Metra will not enter into any other agreement with any other pharmaceutical company to promote, detail or sell the Metra Products to the OB/GYN Market in the U.S.; (ii) Notwithstanding anything contained herein to the contrary, Metra shall be under no obligation to continue the production of any Metra Product. If at any time Metra decides to discontinue commercial support of a Metra Product, then upon sixty (60) days advance written notice to Berlex (which advance notice shall not be required if discontinuance is due to safety reasons), such Metra Product shall no longer be included on EXHIBIT A and shall no longer be subject to the provisions of this Agreement. If Metra discontinues commercial support of a Metra Product, but commercializes another product which provides substantially the same diagnostic information as the discontinued Metra Product, then Metra shall promptly inform Berlex of the replacement product and provide Berlex with such information about the replacement product as Berlex shall reasonably request. At Berlex's option the replacement product shall become a Metra Product listed on EXHIBIT A, at the same commission as the discontinued Metra Product; and (iii) a non-exclusive right to promote the Metra Products under the trademarks, marks, and trade names that Metra may adopt from time to time ("Metra's Trademarks"). Except as set forth in this Section 2.1(iii), nothing contained in this Agreement shall grant to Berlex any right, title or interest in Metra's Trademarks. At no time during or after the term of this Agreement shall Berlex challenge or assist others to challenge Metra's Trademarks or the registration thereof or attempt to register any trademarks, marks or trade names confusingly similar to those of Metra. All representations of Metra's Trademarks that Berlex intends to use shall first be submitted to Metra for approval, which shall not be unreasonably withheld and which shall be conveyed promptly to Berlex, of design, color, and other details or shall be exact copies of those used by Metra. If any of Metra's Trademarks are to be used in conjunction with another trademark, then Metra's mark shall be presented equally legibly, equally prominently, and of equal or greater size than the other but nevertheless separated from the other so that each appears to be a mark in its own right, distinct from the other mark. Except as set forth in this Section 2, no rights or licenses are granted by Metra to Berlex. 2.2 CONFLICT OF INTEREST. Berlex warrants to Metra that Berlex does not currently represent or promote any product lines or products that compete with the Metra Products. -4- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. During the Term of this Agreement, Berlex shall not, without Metra's prior written consent, represent, promote, detail or otherwise try to sell any product lines or products that compete with products that are deemed or perceived to be competitive in the OB/GYN Market with the Metra Products covered by this Agreement or any densitometry products. If a Berlex Affiliate acquires rights to competitive products, Berlex agrees that Berlex will not represent, promote, detail or otherwise try to sell any such product lines or products. Further, for a period of [XXXX] from the commencement of the first Promotional Year for the Pyrilinks-Registered Trademark--D Product, Berlex and Metra will not detail and/or promote bone measurement systems to the OB/GYN Market in the U.S. 2.3 RIGHT TO PROMOTE INTERNATIONALLY. From time to time the parties shall consider whether it would be appropriate for Berlex or a Berlex Affiliate to promote the Metra Products internationally. Berlex acknowledges and agrees that Metra shall have the sole right to determine whether Metra will grant Berlex any international promotional rights. 2.4 PROMOTION OF METRA'S QUS-2 ULTRASOUND PRODUCT. In the event Metra identifies a distribution partner for the QUS-2 product and said distribution partner desires to promote and sell the product to the OB/GYN Market, Berlex agrees that Metra may appoint one distributor so long as said distributor does not and will not during the period that Berlex is promoting the QUS-2 Ultrasound Product distribute menopausal and/or osteoporosis products that compete with Berlex's own products that are marketed to the OB/GYN Market; PROVIDED, FURTHER, that if the one distributor Metra will appoint is a distinct business unit of a pharmaceutical company and the distinct business unit does not distribute or promote menopausal and/or osteoporosis products that compete with Berlex's own products that are marketed to the OB/GYN Market, then Metra shall have the right to appoint the distinct business unit as the distributor so long as the agreement with the distributor does not impair Berlex's rights hereunder and precludes the distinct business unit from promoting menopausal and/or osteoporosis products to the OB/GYN Market in connection with any Metra Products. In addition, Metra agrees to work with Berlex and the distributor to make the marketing messages synergistic. Prior to executing a definitive agreement with a distributor, Metra agrees to inform Berlex of the identity of the distributor and afford Berlex an opportunity to discuss with Metra the appointment of the distributor. 2.5 RIGHT TO PROMOTE ADDITIONAL METRA PRODUCTS. Metra agrees to provide Berlex with semi-annual updates concerning its clinical and regulatory progress with its [XXXX] and future bone resorption products. Metra will notify Berlex of the submission for FDA clearance for each product within thirty (30) days thereof. Subject to Section 2.1(ii) above, Berlex shall have the right, upon ninety (90) days prior written notice to Metra, to add the above referenced Metra products to EXHIBIT A, so long as Berlex commits to provide reasonable promotional efforts equivalent to those required for existing Metra Products. 2.6 METRA OWNERSHIP. Metra shall retain all ownership rights in and to the Metra Intellectual Property Rights (including Metra Trademarks). Berlex will assist Metra in every reasonable way, at Metra's expense, to obtain, secure, perfect, maintain, defend and enforce for Metra's benefit all Metra's Intellectual Property Rights, provided that Berlex shall not be required to become a party to litigation. -5- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. ARTICLE 3: OBLIGATIONS OF BERLEX 3.1 PROMOTION. Berlex shall use reasonable commercial efforts to promote the Metra Products in the U.S., commencing as soon as feasible after the Effective Date. In carrying out the promotion of the Metra Products, Berlex shall use the same channels and methods, exercise the same diligence, and adhere to be same standards that Berlex employs with respect to Berlex's own female health care products accorded the same promotional/detailing position set forth in Section 3.1.1 below. Berlex's promotion of the Metra Products will be directed toward the same audience as Berlex's promotional message for its Climara-Registered Trademark- product (for purposes of this Agreement, references to Climara-Registered Trademark- shall always include any subsequent or replacement product that has an estrogen replacement therapy indication). Unless agreed to by the Commercialization Committee, Berlex is not required by this Agreement to design novel promotional efforts or materials for the Metra Products, or address promotional efforts toward any audience or by any mechanism that Berlex would not otherwise address or utilize in the ordinary course of promoting Berlex's Climara-Registered Trademark- product. 3.1.1 PROMOTION [XXXX]. During the [XXXX] following commencement by Berlex of the promotion of Metra Products, Berlex shall promote and "detail" to the OB/GYN Market in the U.S. the Metra Products other than the QUS-2 Ultrasound Product [XXXX]. During the [XXXX] following commencement by Berlex of the promotion of the QUS-2 Ultrasound Product, Berlex shall promote and "detail" to the OB/GYN Market in the U.S. the QUS-2 Ultrasound Product [XXXX]. For purposes of this Agreement, "detailing" [XXXX] and [XXXX] shall mean using the qualified Berlex direct pharmaceutical detailing personnel assigned to conduct detailing in the OB/GYN Market in the ordinary course of Berlex's business to conduct face-to-face meetings with individual physicians or other appropriate health care provider users of the Metra Products in the OB/GYN Market, which physicians and other appropriate healthcare providers Berlex would call on in the ordinary course of Berlex's business in promoting Berlex's Climara-Registered Trademark- product, where the Metra Products and their diagnostic use are presented [XXXX]. Following the [XXXX] referred to above, Berlex shall continue to use reasonable commercial efforts to promote and detail Metra's Products to the audience described above as appropriate to support the expanding market opportunity. If Berlex's direct pharmaceutical detailing personnel assigned to the OB/GYN Market as of the Effective Date has a reduction in force of greater than fifteen percent (15%) for any reason whatsoever (which may include reassignment, loss due to unforeseen business events, etc.), then Berlex shall immediately notify Metra of such and the parties shall meet within thirty (30) days of Metra's receipt of such notice to discuss revisions to this Agreement, including, but not limited to the financial terms of the Agreement. 3.1.2 PUBLICATIONS, TRADE SHOWS AND PHYSICIAN GROUPS. Subject to obtaining necessary FDA clearances, if any, (a) Berlex shall promote the Metra Products in OB/GYN market trade publications within the U.S., provided that (i) the clinical information relating to the applicable Metra Product that is included in the trade publication was developed using the Metra Product together with a Berlex product; (ii) Berlex would place the promotional message in the applicable trade publication in the ordinary course of Berlex's business as part of its promotional efforts for the Berlex Climara-Registered Trademark- product; and (iii) the Commercialization Committee, determines -6- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. that the inclusion of information relating to one or more of the Metra Products is appropriate from a marketing standpoint for inclusion in the promotional message for the Berlex product; (b) Subject to obtaining necessary FDA clearances, if any, Berlex shall promote Metra Products at trade shows and introduce the Metra Products to hospitals, medical centers, physician groups and other appropriate health care provider users in the OB/GYN Market in the U.S. where Metra may want to establish education programs with respect to one or more Metra Products, provided that Berlex is present at such trade shows or calls upon such hospitals, medical centers, physician groups, and other appropriate health care provider users in the ordinary course of Berlex's business as part of its promotional efforts for the Berlex Climara-Registered Trademark- product. 3.1.3 DETAILING MATERIALS. Berlex shall prepare materials to be used by Berlex direct pharmaceutical detailing personnel for use in detailing the Metra Products to the OB/GYN Market. Berlex shall not be required to create novel promotional material for use in promoting the Metra Products. Subject to obtaining necessary FDA clearances, if any, Berlex's obligations under this Section shall be satisfied by (i) the addition of existing Metra promotional claims and other existing Metra material (including any claims added from time to time and any future Metra material), as the Commercialization Committee determines to be appropriate, to Berlex promotional materials created in the ordinary course of Berlex's business for Berlex's promotional efforts for the Berlex Climara-Registered Trademark- product; or (ii) the use of existing or future Metra promotional material. Berlex shall submit promotional materials containing information on Metra Products to the Commercialization Committee for review and discussion. It is the intent of the parties that such review and discussion will be concluded promptly so as not to delay production and use of Berlex promotional materials. Disagreements concerning the content of promotional material relating to Metra Products shall be resolved by the Commercialization Committee accepting the Metra position. Disagreements concerning the content of promotional material relating to Berlex products shall be resolved by the Commercialization Committee accepting the Berlex position. Information in Berlex promotional materials relating to Metra Products shall be consistent with applicable law and promotional materials used by Metra in connection with such Metra Products. Berlex shall deliver to Metra copies of all final promotional materials used in connection with the detailing of Metra Products. Metra shall not refer to Berlex or Berlex products in Metra product advertising without the express consent of Berlex, which shall not be unreasonably withheld. 3.1.4 CUSTOMER REPORTING. Consistent with Berlex's own detailing reporting practices, Berlex shall (i) assist Metra in assessing requirements of customers of Metra Products, including modifications and improvements thereto, in terms of quality, design, functional capability, and other features; and (ii) as reasonably requested by Metra, share with Metra on a quarterly basis, market research information that Berlex collects and generates in the ordinary course of its business for Berlex's female health care products and which provides useful market information about competition and changes in the market for one or more of the Metra Products, provided, however, that Berlex shall not be required to collect data or generate reports for Metra that Berlex does not collect or generate for itself in the ordinary course of Berlex's business; purchase market research or reports for Metra; or provide to Metra market research information on any Berlex product. -7- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. 3.1.5 AUDITS. Metra shall have the right, through an independent firm reasonably acceptable to Berlex, at Metra's expense, to audit Berlex's promotional and detailing activities in regard to the Metra Products (including to confirm that Metra Products are being promoted and detailed [XXXX] when required by the terms of this Agreement), by the following methods: (i) to accompany from time to time, upon reasonable advance notice to Berlex, a representative sample of Berlex direct pharmaceutical detailing personnel assigned to the OB/GYN Market on physician/office visits; and (ii) to have the independent firm interview randomly selected OB/GYN physicians. Berlex shall be supplied with a copy of any report issued by such independent firm in regard to Berlex's activities pursuant to this Agreement (so long as Metra is not contractually prohibited from providing said materials to Berlex). Berlex shall not be required to make available to Metra a list of physicians called on by Berlex representatives; PROVIDED, HOWEVER, that once per year Berlex shall provide Metra access to any detailing reports prepared by Berlex direct pharmaceutical detailing personnel assigned to the OB/GYN Market. To the extent Berlex receives in the ordinary course of business any market survey, market spending analysis or promotional audits in each case, relating to the OB/GYN Market, and Berlex is not contractually prohibited from providing said materials to Metra, then Berlex shall do so (such materials may from time to time require a financial contribution from Metra with the prior consent of Metra). ARTICLE 4. ADDITIONAL OBLIGATIONS OF METRA 4.1 METRA SUPPORT. Metra shall promptly provide Berlex with Metra's core materials relating to promotion of the Metra Products. Metra shall promptly respond to all reasonable inquiries from Berlex concerning matters pertaining to this Agreement. In addition, Metra shall provide and participate in the development of the following: (i) assistance with strategic marketing through the development, together with Berlex, of co-promotion programs; (ii) access, as appropriate, to clinical studies results for the Metra Products; (iii) development with Berlex of a managed care organization marketing plan; (iv) assistance with access to Metra's automated partners and central laboratory partners for market development; (v) access to Metra's proprietary marketing programs (such access may from time to time require a financial contribution from Berlex with the prior consent of Berlex); and (vi) access to Metra training materials which Berlex shall have right to adapt and duplicate at Berlex's expense (if adapted, only after the consent of Metra, which shall not be unreasonably withheld). All of these activities and obligations of Metra will be administrated via the Commercialization Committee. ARTICLE 5: COMMERCIALIZATION COMMITTEE 5.1 COMMERCIALIZATION COMMITTEE. Metra and Berlex shall form a Commercialization Committee which shall meet to oversee the promotion of the Metra Products by Berlex and to review the overall success of the relationship. During the first three (3) years following the Effective Date, the Commercialization Committee shall meet at least quarterly and thereafter shall meet as agreed to by Metra and Berlex. Notwithstanding the preceding sentence, the parties currently contemplate that during the initial training phase, the Commercialization Committee may meet monthly. Whenever possible, meetings will be scheduled in conjunction with trade shows attended by both parties. The Commercialization Committee will be composed -8- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. of up to two (2) representatives from each of Metra and Berlex. Each party may have additional attendees as appropriate in view of the subject matter to be discussed. At least one (1) of the representatives from each of Metra and Berlex shall have authority to resolve issues on the agenda. Each party shall retain the rights, powers, and discretion granted to it under this Agreement, and the Commercialization Committee shall not be delegated or vested with any such rights, powers or discretion. The Commercialization Committee shall not have the power to amend or modify this Agreement, which may only be amended or modified as provided in Section 11.2. If the parties cannot reach agreement as to any issue coming before the Commercialization Committee, the issue shall be referred to senior executives of each party designated to decide Commercialization Committee issues and if such executives cannot reach agreement, then to the chief executive officers of Metra and Berlex, who (in the case of either the senior executives or the chief executive officers) shall meet within five (5) business days to resolve the issue. In addition, so long as EXHIBIT A includes product(s) from Norland Medical Systems, Inc., an individual from Norland will be a member of the Commercialization Committee and Norland will have the right to vote on decisions that relate to the Norland products. 5.2 COSTS. Each party shall pay its own travel and lodging expenses incurred in connection with the meetings of the Commercialization Committee, which meetings shall alternate between locations so as to balance travel requirements and expenses. Each party shall use reasonable efforts to cause its respective representatives to attend all meetings. ARTICLE 6: BERLEX COMPENSATION 6.1 PROMOTIONAL FEES. In connection with the promotional activities to be performed by Berlex pursuant to the terms of this Agreement, Metra shall pay Berlex the following amounts by wire transfer with same day funds: (i) $3,000,000 on December 31, 1997; for the first Promotional Year, and (ii) [XXXX] on December 31, 1998; and for the second Promotional Year, and (iii) [XXXX] on December 31, 1999; for the third Promotional Year. If Berlex does not commence active detailing, on a national level, of the Pyrilinks-Registered Trademark--D Product by September 30, 1997, then each of the fees set forth above shall be delayed by one full calendar quarter, provided such delay is not due to any material act or material omission of Metra. In addition, the payments set forth in this Section 6.1(ii) and 6.1(iii) shall not be paid if, in the case of 6.1(ii), either party has terminated the Agreement within five (5) business days following completion of the first Promotional Year (defined below), and in the case of 6.1(iii), if either party has terminated the Agreement within five (5) business days following the completion of the second Promotional Year. -9- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. 6.2 COMMISSION. Metra shall pay Berlex the following commissions: 6.2.1 BASELINE REVENUE. For purposes of this Article 6, "Baseline Revenue" shall mean the Gross Revenues during the twelve (12) months preceding the month in which Berlex commences active detailing, on a national level, of a particular Metra Product. Only Metra Gross Revenues in any given Promotional Year in excess of the Baseline Revenue shall be subject to the applicable commission set forth in this Article 6. "Promotional Year" shall mean the twelve (12) month period commencing on the first day of the month in which Berlex commences active detailing, on a national level, of the applicable Metra Product being promoted by Berlex, and each consecutive twelve (12) month period thereafter during which Berlex promotion continues. After the commencement of the first Promotional Year, each subsequent Promotional Year is deemed to start on the anniversary of the first Promotional Year. If any product added to EXHIBIT A has Gross Revenues of less than twelve (12) months prior to the Berlex detailing launch, then the Baseline Revenue shall be the actual Gross Revenues for such shorter period. The Baseline Revenue shall be applied to each successive Promotional Year of the contract such that in year two of the contract and each year thereafter, Berlex's right to receive commissions under this Article 6 shall not commence until the applicable Baseline Revenue has been exceeded. For purposes of Sections 6.2.3, 6.2.4 and 6.2.5, the Baseline Revenue shall be deemed to be zero ($0) if Berlex commences active detailing, on a national level, of a particular Metra Product within sixty (60) days of Metra's launch of said Metra Product in the U.S. (Metra shall give Berlex thirty (30) days advance notice of its launch date). The parties anticipate that the first Metra Product promoted by Berlex will be the Pyrilinks-Registered Trademark--D Product. If Berlex initiates promotional efforts for any Metra Product other than the Pyrilinks-Registered Trademark--D Product in any month that is not the first month of the Promotional Year for the Pyrilinks-Registered Trademark--D Product, then the first year of promotion shall be considered a Short Promotional Year for that Metra Product which shall terminate at the end of the month preceding the first month of the next Promotional Year for the Pyrilinks-Registered Trademark--D Product and for which the following adjustment to the commission calculation shall occur; (1) if there is no Baseline Revenue, then the applicable commission shall be applied at the end of the Short Promotional Year; or (2) if there is a Baseline Revenue, and such Baseline Revenue is for a period of months longer than the Short Promotional Year, then the Baseline Revenue shall be adjusted by dividing the number of months in the Baseline Revenue by the number of months in the Short Promotional Year, with the resulting percentage applied to the Baseline Revenue to develop a short period Baseline Revenue. Thereafter the Promotional Year for the applicable Metra Product shall be the same as the Promotional Year for the Pyrilinks-Registered Trademark--D Product. 6.2.2 PYRILINKS-Registered Trademark--D. A commission equal to [XXXX] of Metra's Gross Revenues for Pyrilinks-Registered Trademark--D in excess of Baseline Revenue. 6.2.3 METRA'S POINT-OF-CARE CASSETTE. A commission equal to [XXXX] of Metra's Gross Revenues for Metra's point-of-care cassette (which incorporates the Pyrilinks-Registered Trademark--D technology) product in excess of the Baseline Revenue. -10- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. 6.2.4 QUS-2 ULTRASOUND PRODUCT. A commission equal to [XXXX] of Metra's Gross Revenues for the QUS-2 product in excess of the Baseline Revenue. 6.2.5 OTHER PRODUCTS. If other products are added to EXHIBIT A, a commission equal to [XXXX] of Metra's Gross Revenues for such other product in excess of the Baseline Revenue. With respect to [XXXX] and future bone resorption markers that Metra may from time-to-time license from third parties, the parties agree to discuss at that time any necessary adjustment to the definition of Gross Revenues for these products, to the extent that deductions for technology license royalties by Metra may be required to exceed [XXXX]. 6.2.6 COMMISSION PAYMENTS. Commissions shall be calculated on an annual basis and shall be paid no later than sixty (60) days after Metra year end close. Upon completion of the third Promotional Year and when all Metra obligations concerning the fixed payments in Section 6.1 have been fulfilled, for subsequent Promotional Years the commission shall be calculated on a quarterly basis and paid within sixty (60) days after the end of the quarter. 6.2.7 REPORTS. Metra shall furnish to Berlex a quarterly written report (within 60 days following the end of the quarter) which includes: (i) Metra Products sold; (ii) the gross revenues of each Metra Product; (iii) any payments made by Metra to third-party licensors relating to the Metra Products. Such reports shall be due together with any commissions then due. All information provided by the parties under this Section 6.2.6 shall be Confidential Information. 6.2.8 RECORDS AND AUDIT. Upon reasonable notice to Metra but no more than once per year, Berlex shall have the right to have an independent certified public accountant, selected by Berlex and acceptable to Metra, audit Metra's records, during normal business hours, to verify the commissions payable pursuant to this Agreement; PROVIDED, HOWEVER, that such audit shall not cover such records for more than the preceding three (3) years. Such audit shall be at the expense of Berlex. Metra shall preserve and maintain all such records and accounts required for audit for a period of two (2) years after the year to which such records and accounts apply. In any event, the auditor shall only disclose to Berlex the results of such audit and none of the data upon which such audit results are based, which audit results shall be treated by the auditor and Berlex as Confidential Information subject to the provisions of this Agreement. If the audit shows an underpayment, the difference plus ten percent (10%) shall be promptly remitted to Berlex. If the underpayment is greater than one-hundred thousand dollars ($100,000), then Metra shall pay Berlex's reasonable out-of-pocket audit fees. 6.3 WARRANT(S). On the Effective Date, Metra shall issue to Berlex a Common Stock Purchase Warrant in the form set forth on EXHIBIT B. In the event this Agreement has not been terminated by either party within five (5) business days following completion of the first Promotional Year of the Pyrilinks-Registered Trademark--D Product, then on the sixth (6th) business day of the second -11- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. Promotional Year of the Pyrilinks-Registered Trademark--D Product, Metra shall issue to Berlex an additional Common Stock Purchase Warrant in the form set forth on EXHIBIT C. ARTICLE 7: TERM 7.1 TERM. The Term of this Agreement shall commence as of the Effective Date and shall continue in effect until terminated by one of the parties by providing written notice of such termination to the other party in accordance with this Section 7.1 or Sections 7.2, 7.3, or 7.4. Either party shall have the right to terminate this Agreement pursuant to this Section 7.1 by providing ninety (90) days advance written notice of such termination to the other party; PROVIDED, HOWEVER, that Berlex shall not exercise its right to terminate this Agreement pursuant to this Section 7.1 prior to the completion of the third Promotional Year of the Pyrilinks-Registered Trademark--D Product (the "Third Anniversary Date"); and FURTHER PROVIDED that Metra shall not exercise its right to terminate this Agreement pursuant to this Section 7.1 prior to the expiration of the later to expire of the following periods: (i) the completion of the Third Anniversary Date; or (ii) the completion of the second full Promotional Year of the QUS-2 Ultrasound Product. Section 7.1(ii) shall cease to be a binding obligation of Metra if either of the following events shall occur: U.S. development and approval efforts for the QUS-2 Ultrasound Product (or a replacement product) permanently cease without such product having been approved for commercial sale in the U.S.; or Metra shall make a [XXXX] payment to Berlex by wire transfer within five (5) days of the delivery by Metra to Berlex of Metra's notice terminating the Agreement. If, following the Third Anniversary Date, Metra terminates this Agreement pursuant to this Section 7.1, then for [XXXX] following such termination Metra shall not enter into an agreement with a pharmaceutical company permitting a pharmaceutical company to promote any of the Metra Products to the OB/GYN Market in the U.S. except as provided hereafter. If Metra wishes, during this [XXXX] period to enter into an agreement with a pharmaceutical company relating to the promotion of Metra Products to the OB/GYN Market in the U.S., Berlex shall have a right of first refusal to promote the Metra Products to the OB/GYN Market in the U.S. if Berlex agrees to execute a binding commitment to meet or exceed the business terms offered by the pharmaceutical company. Berlex shall be required to make a binding commitment to Metra within fifteen (15) business days following receipt from Metra of a summary of the material business terms offered by the pharmaceutical company (Metra shall not be obligated to disclose to Berlex the name of the pharmaceutical company but Metra shall inform Berlex whether the pharmaceutical company distributes menopausal and/or osteoporosis products that compete with Berlex's own products that are marketed to the OB/GYN Market). If Berlex does not execute a binding commitment within said fifteen (15) business days, Metra shall thereafter be free to enter into an agreement with a pharmaceutical company on business terms no less favorable to Metra than those disclosed to Berlex. Berlex's right of first refusal shall not apply if Metra enters into a promotion agreement with a distinct business unit of a pharmaceutical company and the distinct business unit does not and will not during the [XXXX] period referred to above in this paragraph distribute or promote products that compete with Berlex's own products marketed to the OB/GYN Market. -12- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. 7.2 EARLY TERMINATION. Either party may terminate this Agreement upon written notice in the event of (i) any material breach of any warranty, representation or covenant of this Agreement by the other party which remains uncured thirty (30) days after notice of such breach, or (ii) in the event of any bankruptcy, insolvency, receivership or similar proceeding of the other party which continues for sixty (60) days from filing. 7.3 TERMINATION BY METRA. Metra may terminate this Agreement upon written notice delivered to Berlex within five (5) business days following completion of the first Promotional Year for the Pyrilinks-Registered Trademark--D Product if, during the four calendar quarters of the first Promotional Year (the parties expect that the fourth quarter shall end on approximately June 30, 1998), (i) Metra's Gross Revenues of Pyrilinks-Registered Trademark--D for the four quarters do not equal or exceed [XXXX]; and (ii) Metra's Gross Revenues of Pyrilinks-Registered Trademark--D for any individual quarter do not equal or exceed [XXXX]. In addition, Metra may terminate this Agreement upon written notice delivered to Berlex within five (5) business days following completion of the second Promotional Year for the Pyrilinks-Registered Trademark--D Product if, during the second Promotional Year (the parties expect that the second Promotional Year shall end on approximately June 30, 1999), Metra's Gross Revenues of Pyrilinks-Registered Trademark--D for the four quarters do not equal or exceed [XXXX]. For purposes of this paragraph and calculating the dollar thresholds referred to above, if Metra is providing Metra Products to the OB/GYN Market in the U.S. at no charge and in quantities not in Metra's ordinary course of business, the parties shall meet to review this practice and discuss whether these marketing units should be considered in the dollar thresholds. Metra and Berlex agree to meet during the third quarter and, if this Agreement is not sooner terminated, the seventh quarter following the commencement of the first Promotional Year for the Pyrilinks-Registered Trademark--D Product, to discuss the sales performance of the Metra Products and Metra agrees that if it is possible that Metra will have the right to terminate this Agreement pursuant to this Section 7.3, then Metra will notify Berlex in writing of Metra's intent to terminate the Agreement. Berlex shall have thirty (30) days from receipt of the notice from Metra to inform Metra that either (i) Berlex accepts the Metra termination notice, in which case this Agreement will terminate; or (ii) Berlex rejects the Metra termination notice, in which case (a) this Agreement will not terminate pursuant to this Section 7.3; and (b) any payments for the upcoming Promotional Year due from Metra to Berlex pursuant to Section 6.1 shall be reduced in the same proportion that Metra's total sales for the applicable period of four full quarters bears to the sales target for such period, as set forth above in this Section 7.3. In addition, Metra shall have the right to terminate this Agreement upon written notice to Berlex if Berlex has not begun active detailing of the Pyrilinks-Registered Trademark--D product within twelve (12) months of the Effective Date, provided that such failure to detail on the part of Berlex is not due in whole or in part to any material act or material omission of Metra. In the event that Metra terminates this Agreement pursuant to this Section 7.3, then for [XXXX] following such termination Metra shall not enter into an agreement with a pharmaceutical company permitting a pharmaceutical company to promote any of the Metra Products to the OB/GYN Market in the U.S. except as provided hereafter. If Metra wishes, during this [XXXX] period to enter into an agreement with a pharmaceutical company relating to the promotion of Metra Products to the OB/GYN Market in the U.S., Berlex shall have a right of -13- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. first refusal to promote the Metra Products to the OB/GYN Market in the U.S. if Berlex agrees to execute a binding commitment to meet or exceed the business terms offered by the pharmaceutical company. Berlex shall be required to make a binding commitment to Metra within fifteen (15) business days following receipt from Metra of a summary of the material business terms offered by the pharmaceutical company (Metra shall not be obligated to disclose to Berlex the name of the pharmaceutical company). If Berlex does not execute a binding commitment within said fifteen (15) business days, Metra shall thereafter be free to enter into an agreement with a pharmaceutical company on business terms no less favorable than those disclosed to Berlex. Berlex's right of first refusal shall not apply if Metra enters into a promotion agreement with a distinct business unit of a pharmaceutical company and the distinct business unit does not and will not during the [XXXX] period referred to above in this paragraph distribute or promote products that compete with Berlex's own products marketed to the OB/GYN Market. 7.4 TERMINATION BY BERLEX. Berlex may terminate this Agreement upon ninety (90) days prior written notice: (i) if, after completion of the first Promotional Year for the Pyrilinks-Registered Trademark--D Product, Berlex acquires rights to a pharmaceutical product that is marketed primarily to the OB/GYN Market and Berlex desires to devote its personnel to that product rather that the Metra Products; or (ii) if (A) Cholestech Corporation has not achieved U.S. 510(k) clearance to market Metra's point-of-care cassette by [XXXX] or (B) Cholestech Corporation has not received CLIA waiver for Metra's point-of-care cassette by [XXXX]; or (iii) if, within thirty (30) days of the Effective Date, Metra has not entered into an agreement with Norland Medical Systems, Inc. pursuant to which Berlex has the right to promote the Norland products set forth in EXHIBIT A on the terms set forth in this Agreement. 7.5 RETURN OF INFORMATION. Within thirty (30) calendar days after the termination or expiration of this Agreement, each party hereto shall either deliver to the other, or destroy, all copies of any tangible Confidential Information of the other party provided hereunder in its possession or under its control, and shall furnish to the other party an affidavit signed by an officer of its company certifying that to the best of its knowledge, such delivery or destruction has been fully effected. Each parties' outside counsel may retain one copy of the Confidential Information in a sealed file. 7.6 REMAINING PAYMENT. Within forty-five (45) calendar days of the expiration or termination of this Agreement, each party shall pay to the other all sums, if any, due and owing as of the date of expiration or termination. Such sums shall include any Berlex commissions then earned and unpaid. 7.7 SURVIVAL. The respective rights and obligations of the parties under Sections 6.2.8 (which shall only survive six (6) months), 7.1, 7.3, 7.5, 7.6, 7.7, Article 8, Article 10 and Article 11 shall survive expiration or termination of this Agreement. No termination or expiration of this Agreement shall relieve any party for any liability for any breach of or liability accruing under this Agreement prior to termination. -14- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. ARTICLE 8: CONFIDENTIAL INFORMATION 8.1 PROTECTION OF CONFIDENTIAL INFORMATION. The parties recognize that, in connection with the performance of this Agreement, each of them may disclose to the other its Confidential Information. The party receiving any Confidential Information agrees to maintain the confidential status of such Confidential Information and not to use any such Confidential Information for any purpose other than the purpose for which it was originally disclosed to the receiving party, and not to disclose any of such Confidential Information to any third party. Neither party shall disclose the other's Confidential Information to its employees and agents except on a need-to-know basis. 8.2 PERMITTED DISCLOSURE. The parties acknowledge and agree that each may disclose Confidential Information: (i) as required by law; (ii) to their respective directors, officers, employees, attorneys, accountants, advertising agencies, medical education providers, public relations agencies and other advisors, who are under an obligation of confidentiality, on a "need-to-know" basis; (iii) to partners, who are under an obligation of confidentiality, on a "need-to-know" basis; or (iv) in connection with disputes or litigation between the parties involving such Confidential Information and each party shall endeavor to limit disclosure to that purpose and to ensure maximum application of all appropriate judicial safeguards (such as placing documents under seal). In the event a party is required to disclose Confidential Information as required by law, such party will, to the extent practical, in advance of such disclosure, provide the other party with prompt notice of such requirement. Such party also agrees, to the extent legally permissible, to provide the other party, in advance of any such disclosure, with copies of any information or documents such party intends to disclose (and, if applicable, the text of the disclosure language itself) and to cooperate with the other party to the extent the other party may seek to limit such disclosure. 8.3 APPLICABILITY. The foregoing obligations of confidentiality shall apply to directors, officers, employees and representatives of the parties and any other person to whom the parties have delivered copies of, or permitted access to, such Confidential Information in connection with the performance of this Agreement, and each party shall advise each of the above of the obligations set forth in this Article 8. 8.4 THIRD PARTY CONFIDENTIAL INFORMATION. Any Confidential Information of a third party disclosed to either party shall be treated by Berlex or Metra, as the case may be, in accordance with the terms under which such third party Confidential Information was disclosed; PROVIDED, HOWEVER, that the party disclosing such third party Confidential Information shall first notify the other party that such information constitutes third party Confidential Information and the terms applicable to such third party Confidential Information and provided further that either party may decline, in its sole discretion, to accept all or any portion of such third party Confidential Information. 8.5 CONFIDENTIALITY OF AGREEMENT. Except as required by law or generally accepted accounting principles, and except to assert its rights hereunder or for disclosures to its own officers, directors, employees and professional advisers on a need-to-know basis or in confidence -15- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. to investment bankers, financial institutions or other lenders or acquirers, each party hereto agrees that neither it nor its directors, officers, employees, consultants or agents shall disclose the terms of this Agreement or specific matters relating hereto without the prior consent of the other party, which consent shall not be unreasonably withheld or delayed. Berlex and Metra shall mutually agree to the form of a joint press release to be issued on the Effective Date. 8.6 USE OF NAME. Neither party shall use the name of the other or the name of the Affiliates of the other party or the names of the products of the other party in any public announcement, without the consent of the other party. Metra will not use the name of Berlex's Affiliate, Schering AG Germany in any public announcement without the consent of Schering AG Germany. ARTICLE 9: REPRESENTATIONS AND WARRANTIES 9.1 MUTUAL REPRESENTATIONS AND WARRANTIES. Each party represents and warrants to the other party that: (i) such party has been duly incorporated and is validly existing under the laws of the state in which such party is incorporated; (ii) such party has the full corporate right, power and authority to enter into this Agreement and to perform the acts required of it hereunder; (iii) the execution of this Agreement by such party, and the performance by such party of its obligations and duties hereunder, do not and will not violate any agreement to which such party is a party or by which it is otherwise bound; (iv) when executed and delivered by such party, this Agreement will constitute the legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms; and (v) such party acknowledges that the other party makes no representations, warranties or agreements related to the subject matter hereof that are not expressly provided for in this Agreement. 9.2 BERLEX REPRESENTATIONS AND WARRANTIES. In addition to the representations and warranties of Section 9.1 hereto, Berlex further represents and warrants: (i) the non Metra promotional materials which Berlex includes in or associates with Metra Products do not and shall not, to the best of Berlex's knowledge, infringe on or violate any copyright, U.S. patent or any other proprietary right of any third party; and (ii) Berlex's performance of this Agreement shall comply in all material respects with, and shall neither contravene, breach nor infringe, any laws or regulations of the U.S. -16- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. 9.3 METRA REPRESENTATIONS AND WARRANTIES. In addition to the representations and warranties of Section 9.1 hereto, Metra further represents and warrants: (i) the Metra promotional materials do not and shall not, to the best of Metra's knowledge, infringe on or violate any copyright, U.S. patent or any other proprietary right of any third party; (ii) Metra has sufficient right, title and ownership of all Metra Trademarks being licensed to Berlex pursuant to this Agreement, without infringement of the rights of third parties; (iii) the Metra Products (for purposes of subparagraphs (iii), (iv) and (v) Metra Products means only those products set forth under subparagraph A of EXHIBIT A) (a) will conform to the claims set forth in applicable FDA clearances; (b) will not be adulterated or misbranded by Metra within the meaning of the U.S. Food, Drug and Cosmetic Act, or be an article which may not be introduced into U.S. interstate commerce pursuant to such act; and (c) that Metra will comply in all material respects with all applicable laws and regulations in the manufacture, storage, distribution and sale of the Metra Products, including without limitation compliance with applicable current good manufacturing practices regulations, and laws relating to the generation, storage, shipment and disposal of waste; (iv) to the best of Metra's knowledge there are no claims or actions at law or equity of any nature pending or threatened against Metra by any third party (including without limitation any governmental authority) affecting any of the Metra Products or Metra's ability to perform this Agreement; and (v) except for existing rights granted to Wyeth-Ayerst Laboratories and Mission Pharmacal, Metra has not granted to any third party the right to promote or detail to the OB/GYN market in the U.S. any Metra Products. (vi) Metra's performance of this Agreement shall comply in all material respects with, and shall neither contravene, breach nor infringe, any laws or regulations of the U.S. ARTICLE 10: LIMITATION OF LIABILITY; DISCLAIMER; INDEMNIFICATION 10.1 LIABILITY. EXCEPT AS PROVIDED IN SECTION 10.3, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM ANY PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS. 10.2 NO ADDITIONAL WARRANTIES. EXCEPT AS SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, -17- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. REGARDING THE PRODUCTS AND SERVICES CONTEMPLATED BY THIS AGREEMENT, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. 10.3 INDEMNIFICATION. 10.3.1 METRA INDEMNITY. Subject to the limitations set forth below, Metra, at its own expense, shall indemnify, defend and hold Berlex and any Berlex Affiliates and their officers, directors, employees and agents (the "BERLEX INDEMNIFIED PARTY(IES)") harmless from and against any judgments, losses, deficiencies, damages, liabilities, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses), whether required to be paid to a third party or otherwise incurred in connection with or arising from any claim, suit, action or proceeding (collectively, a "CLAIM") asserted by a third party (having no direct or indirect (including via an Affiliate) relationship with Berlex), against a Berlex Indemnified Party to the extent the basis of such Claim is that: (i) the Metra Trademarks infringe any Intellectual Property Rights of a third party; (ii) Metra does not have the right to license the Metra Trademarks as set forth herein; and (iii) a material act or material omission of Metra (including without limitation the design, testing, manufacture, regulatory approval, sale, detailing (by Berlex or Metra), promoting (by Berlex or Metra), or distribution of any of the Metra Products), is alleged to have caused damage or injury to any third party. Any Claim requiring Berlex to indemnify the Metra Indemnitees pursuant to Section 10.3.4 shall be excluded from Metra's indemnity undertaking set forth in this Section. 10.3.2 NO METRA TRADEMARK LIABILITY. Notwithstanding Section 10.3.1, Metra assumes no liability for infringement claims arising from: (i) a combination of the Metra Trademarks or Metra promotional materials or any part thereof with other Berlex or other third party materials not provided by Metra where such infringement would not have arisen from the use of the Metra Trademarks or materials or portion thereof absent such combination, and where the combination was not approved by Metra pursuant to Section 3.1.3; or (ii) modification of the Metra Trademarks or materials or portion thereof by anyone other than Metra or on its behalf where such infringement would not have occurred but for such modifications, and where such modification was not approved by Metra pursuant to Section 3.1.3. 10.3.3 METRA TRADEMARK LIABILITY. If Metra receives notice of an alleged infringement relating to the Metra Trademarks, Metra, at its option and expense, shall use all reasonable efforts to: (i) obtain a license at no cost to Berlex permitting continued use of the Metra Trademarks on terms and conditions consistent with the rights granted to Berlex hereunder, (ii) modify the infringe portion of the Metra Trademarks so that it does not infringe third party rights; or (iii) provide a substitute for such infringing portion. If none of the foregoing options are reasonably available to Metra, then upon written notice by Metra to Berlex, Berlex shall thereupon take the necessary action to discontinue further distribution of the Metra Trademarks to the extent that and only for so long as such use would be infringing. -18- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. 10.3.4 BERLEX INDEMNIFICATION. Subject to the limitations set forth below, Berlex, at its own expense, shall indemnify, defend and hold Metra and any Metra Affiliates and their officers, directors, employees and agents (the "METRA INDEMNIFIED PARTY(IES)" harmless from and against any judgment, losses, deficiencies, damages, liabilities, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses), whether required to be paid to a third party or otherwise incurred in connection with or arising from any Claim asserted by a third party (having no direct or indirect (including via an Affiliate) relationship with Metra) against a Metra Indemnified Party to the extent the basis of such Claim is that: (i) a third party Claim arising from any promotional or detailing performed by Berlex in regard to any Berlex product, or in regard to any Metra Product if the information relating to the Metra Product was not approved by Metra pursuant to Section 3.1.3; or (ii) a Claim relating to any Berlex statements and/or claims regarding Metra Products different from those made by Metra in Metra's own promotional materials and/or in Metra's FDA clearances or Metra Product specifications unless the Berlex statements and/or claims were approved by Metra pursuant to Section 3.1.3. 10.3.5 ASSERTION OF CLAIMS. Each indemnified party agrees to give the indemnifying party prompt written notice of any Claim or discovery of fact upon which such indemnified party intends to base a request for indemnification under Sections 10.3.1 or 10.3.4. Each party shall furnish promptly to the other, copies of all papers and official documents received in respect of any Claim. With respect to any Claim relating solely to the payment of money damages and which will not result in the indemnified party becoming subject to injunctive or other relief or otherwise adversely affecting the business of the indemnified party in any manner, and as to which the indemnifying party shall have acknowledged in writing the obligation to indemnify the indemnified party hereunder, the indemnifying party shall have the sole right to defend, settle or otherwise dispose of such Claim, on such terms as the indemnifying party, in its sole discretion, shall deem appropriate. The indemnifying party shall obtain the written consent of the indemnified party, which shall not be unreasonably withheld, prior to ceasing to defend, settling or otherwise disposing of any Claim if as a result thereof the indemnified party would become subject to injunctive or other equitable relief or any remedy other than the payment of money, which payment would be the responsibility of the indemnifying party. The indemnifying party shall not be liable for any settlement or other disposition of a Claim by the indemnified party which is reached without the written consent of the indemnifying party. Except as provided above, the reasonable costs and expenses, including reasonable fees and disbursements of counsel incurred by any indemnified party in connection with any Claim, shall be reimbursed on a quarterly basis by the indemnifying party, without prejudice to the indemnifying party's right to contest the indemnified party's right to indemnification and subject to refund in the event the indemnifying party is ultimately held not to be obligated to indemnify the indemnified party. ARTICLE 11: MISCELLANEOUS 11.1 GOVERNING LAW. This Agreement shall be interpreted and construed in accordance with the laws of the State of California, with the same force and effect as if fully executed and performed therein. Each of Berlex and Metra hereby consents and submits to the personal jurisdiction in the state courts of the State of California, and expressly agrees that the venue for -19- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. any action arising under this Agreement shall be the appropriate court sitting within the Northern District of California. 11.2 AMENDMENT OR MODIFICATION. This Agreement may not be amended, modified or supplemented by the parties in any manner, except by an instrument in writing signed on behalf of each of the parties by a duly authorized officer or representative. 11.3 NO ASSIGNMENT. Neither party shall transfer or assign any rights or delegate any obligations hereunder, in whole or in part, whether voluntarily or by operation of law, without the prior written consent of the other party. Any purported transfer, assignment or delegation by either party without the appropriate prior written approval shall be null and void and of no force or effect. Notwithstanding the foregoing, without securing such prior consent, each party shall have the right to assign this Agreement or any of its rights or obligations to any successor of such party by way of merger or consolidation or the acquisition of substantially all of the business and assets of the assigning party relating to the Agreement. 11.4 NOTICES. Except as otherwise provided herein, any notice or other communication to be given hereunder shall be in writing and shall be (as elected by the party giving such notice): (i) personally delivered; (ii) transmitted by postage prepaid registered or certified airmail, return receipt requested; (iii) deposited prepaid with a nationally recognized overnight courier service; or (iv) sent via facsimile, with a confirmation copy sent via first class mail. Unless otherwise provided herein, all notices shall be deemed to have been duly given on: (x) the date of receipt (or if delivery is refused, the date of such refusal) if delivered personally, by courier, or by facsimile; or (y) five (5) days after the date of posting if transmitted by mail. Either party may change its address for notice purposes hereof on not less than five (5) days prior notice to the other party. Notice hereunder shall be directed to a party at the address for such party which is set forth below: To Metra: Metra Biosystems, Inc. 265 North Whisman Road Mountain View, California 94043 Attention: George W. Dunbar, Jr., President and CEO Fax: (415) 903-0500 Copy to: Mark B. Weeks Venture Law Group 2800 Sand Hill Road Menlo Park, California 94025 Fax: (415) 233-8386 To Berlex: Berlex Laboratories, Inc. 300 Fairfield Road Wayne, New Jersey 07470 Attention: H. Joseph Reiser, Vice President Fax: (201) 942-1610 -20- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. Copy to: Berlex Laboratories, Inc. 300 Fairfield Road Wayne, New Jersey 07470 Attention: General Counsel Fax: (201) 305-4405 11.5 ENTIRE AGREEMENT. Except for the nondisclosure agreement dated March 7, 1997, this Agreement represents the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and/or contemporaneous agreements and understandings, written or oral between the parties with respect to the subject matter hereof. 11.6 WAIVER. Any of the provisions of this Agreement may be waived by the party entitled to the benefit thereof. Neither party shall be deemed, by any act or omission, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by the waiving party, and then only to the extent specifically set forth in such writing. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. 11.7 FEES AND EXPENSES. Each party shall be responsible for the payment of its own costs and expenses, including attorneys' fees and expenses, in connection with the negotiation and execution of this Agreement. 11.8 RECOVERY OF COSTS AND EXPENSES. If either party to this Agreement brings an action against the other party to enforce its rights under this Agreement, the prevailing party shall be entitled to recover its costs and expenses, including, without limitation, attorneys' fees and costs incurred in connection with such action, including any appeal of such action. 11.9 SEVERABILITY. If the application of any provision or provisions of this Agreement to any particular facts of circumstances shall be held to be invalid or unenforceable by any court of competent jurisdiction, then: (i) the validity and enforceability of such provision or provisions as applied to any other particular facts or circumstances and the validity of other provisions of this Agreement shall not in any way be affected or impaired thereby; and (ii) such provision or provisions shall be reformed without further action by the parties hereto and only to the extent necessary to make such provision or provisions valid and enforceable when applied to such particular facts and circumstances. 11.10 OTHER AGREEMENTS. Neither party shall agree to any contractual provision or term in any agreement with any third party which contains a provision or term which causes such party to be in breach of or violates this Agreement. 11.11 NO DISCLOSURE. Without the prior written consent of the other party, neither party shall, in any manner, disclose, advertise, or publish the terms of, or any information concerning, this Agreement; PROVIDED, HOWEVER, that either party may disclose such portions of this Agreement as may be required by law, subject to the provisions of Article 8 hereto. -21- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. 11.12 NO THIRD PARTY BENEFICIARIES. Nothing express or implied in this Agreement is intended to confer, nor shall anything herein confer, upon any person other than the parties and the respective successors or assigns of the parties, any rights, remedies, obligations or liabilities whatsoever. 11.13 INDEPENDENT CONTRACTORS. The relationship of Metra and Berlex established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed to give either party the power to direct and control the day-to-day activities of the other or allow one party to create or assume any obligation on behalf of the other for any purpose whatsoever. All financial obligations associated with Berlex's business are the sole responsibility of Berlex. All sales and other agreements between Berlex and Berlex's customers are Berlex's exclusive responsibility and shall have no effect on Berlex's obligations under this Agreement. All financial obligations associated with Metra's business are the sole responsibility of Metra. All sales and other agreements between Metra and Metra's customers are Metra's exclusive responsibility and shall have no effect on Metra's obligations under this Agreement. 11.14 COUNTERPARTS; FACSIMILES. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one and the same instrument. Each party shall receive a duplicate original of the counterpart copy or copies executed by it. For purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, shall be deemed to be an original. Notwithstanding the foregoing, the parties shall each deliver original execution copies of this Agreement to one another as soon as practicable following execution thereof. -22- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. IN WITNESS WHEREOF, the parties to this Agreement by their duly authorized representatives have executed this Agreement as of the date first above written. METRA BIOSYSTEMS, INC. BERLEX LABORATORIES, INC. By: /s/ Kurt E. Amundson By: /s/ John Nicholson --------------------------- ------------------------------ Name: Kurt E. Amundson Name: John Nicholson Title: Vice President & CFO Title: Treasurer -23- [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. EXHIBIT A METRA PRODUCTS A. PRODUCTS SUBJECT TO ARTICLE 6 COMMISSIONS. 1. Pyrilinks-Registered Trademark--D (all formats). 2. Metra's point-of-care cassette (manufactured pursuant to Metra's agreement with Cholestech Corporation). 3. QUS-2 Ultrasound product. B. PRODUCTS NOT SUBJECT TO ARTICLE 6 COMMISSIONS. 1. Norland Medical Systems, Inc.'s pDEXA and OsteoAnalyzer products. [X] CONFIDENTIAL TREATMENT REQUESTED. OMITTED PORTIONS FILED SEPARATELY WITH THE COMMISSION. EXHIBIT B FORM OF COMMON STOCK WARRANT THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT. Warrant No. WC-1 Number of Shares: 413,223 Date of Issuance: April 25, 1997 (subject to adjustment) METRA BIOSYSTEMS, INC. COMMON STOCK PURCHASE WARRANT Metra Biosystems, Inc. (the "COMPANY"), for value received, hereby certifies that Berlex Laboratories, Inc., or its registered assigns (in accordance with Section 4 below) (the "REGISTERED HOLDER"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time after the Date of Issuance (set forth above) and on or before the Expiration Date (as defined in Section 6 below), up to that number of shares of Common Stock of the Company as shall be determined pursuant to Section 2 below, at an exercise price per share as shall also be determined pursuant to Section 2. The shares purchasable upon exercise of this Warrant are hereinafter referred to as the "WARRANT STOCK." The exercise price per share of Warrant Stock is hereinafter referred to as the "PURCHASE PRICE." 1. EXERCISE. (a) MANNER OF EXERCISE. This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as EXHIBIT A duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney-in-fact, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full by cash, check or wire transfer of the Purchase Price payable in respect of the number of shares of Warrant Stock purchased upon such exercise. (b) EFFECTIVE TIME OF EXERCISE. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company, with payment of the applicable Purchase Price, as provided in Section 1(a) above; provided, however, that if this Warrant is exercised in connection with or in contemplation of an Acquisition (as defined in Section 6 below), such exercise may be conditioned upon the closing of such Acquisition, in which case this Warrant shall be deemed to have been exercised immediately prior to such closing and, if such closing does not occur, this Warrant shall be deemed to not have been exercised. At such time, the person or persons in whose name or names any certificates for Warrant Stock shall be issuable upon such exercise as provided in Section 1(c) below shall be deemed to have become the holder or holders of record of the Warrant Stock represented by such certificates. (c) DELIVERY TO REGISTERED HOLDER. As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within twenty (20) days thereafter, the Company at its expense will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of shares of Warrant Stock to which such Registered Holder shall be entitled, and (ii) in case such exercise is in part only, a new warrant (dated the date hereof) of like tenor, calling in the aggregate on the face thereof for the number of shares of Warrant Stock equal to the number of such shares called for on the face of this Warrant minus the number of such shares purchased by the Registered Holder upon such exercise as provided in Section 1(a) above. 2. PURCHASE PRICE AND NUMBER OF SHARES ISSUABLE UPON EXERCISE. The number of shares of Warrant Stock issuable upon exercise of this Warrant and the Purchase Price therefor shall be determined as follows: (a) If the average closing price of the Company's Common Stock as quoted on the Nasdaq National Market (the "NASDAQ") over the thirty (30) trading days ending on the close of business on the last trading day before the Date of Issuance of this Warrant (set forth above) (the "AVERAGE CLOSING PRICE") is less than $6.00 per share, (i) the Purchase Price shall be one hundred twenty percent (120%) of the Average Closing Price, and (ii) the number of shares of Warrant Stock issuable hereunder shall be determined by dividing $2,000,000 by the Purchase Price determined pursuant to Section 2(a)(i) above; or (b) If the Average Closing Price is greater than or equal to $6.00 per share, (i) the Purchase Price shall be the Average Closing Price, and the number of shares of Warrant Stock issuable hereunder shall be determined by dividing $2,000,000 by the Average Closing Price. 3 The number of shares of Warrant Stock and the Purchase Price shall be subject to adjustment as provided herein. 3. CERTAIN ADJUSTMENTS. (a) MERGERS OR CONSOLIDATIONS. If at any time there shall be a capital reorganization (other than a combination or subdivision of Warrant Stock otherwise provided for herein), or a merger or consolidation of the Company with another corporation other than an Acquisition (as defined in Section 6), then, as a part of such reorganization, merger or consolidation, lawful provision shall be made so that the Registered Holder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified in this Warrant and upon payment of the Purchase Price, the number of shares of stock or other securities or property of the Company or the successor corporation resulting from such reorganization, merger or consolidation, to which a holder of the Common Stock deliverable upon exercise of this Warrant would have been entitled under the provisions of the agreement in such reorganization, merger or consolidation if this Warrant had been exercised immediately before that reorganization, merger or consolidation. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Registered Holder after the reorganization, merger or consolidation to the end that the provisions of this Warrant (including adjustment of the Purchase Price then in effect and the number of shares of Warrant Stock) shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. (b) SPLITS AND SUBDIVISIONS; DIVIDENDS. In the event the Company should at any time or from time to time fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of the holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as the "COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder for the additional shares of Common Stock or Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such distribution, split or subdivision if no record date is fixed), the per share Purchase Price shall be appropriately decreased and the number of shares of Warrant Stock shall be appropriately increased in proportion to such increase (or potential increase) of outstanding shares. (c) COMBINATION OF SHARES. If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, the per share purchase price shall be appropriately increased and the number of shares of Warrant Stock shall be appropriately decreased in proportion to such decrease in outstanding shares. 4 (d) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. In the event the Company shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends paid out of net profits) or options or rights not referred to in Section 3(b), then, in each such case for the purpose of this Section 3(d), upon exercise of this Warrant the holder hereof shall be entitled to a proportionate share of any such distribution as though such holder was the holder of the number of shares of Common Stock of the Company into which this Warrant may be exercised as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution. (e) When any adjustment is required to be made in the securities issuable upon exercise of this Warrant, the Company shall promptly mail to the Registered Holder a certificate setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following the occurrence of any of the events specified in this Section 3. 4. REPRESENTATIONS; TRANSFER RESTRICTIONS. (a) The Registered Holder of this Warrant acknowledges that this Warrant and the Warrant Stock have not been registered under the Securities Act, and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Warrant or any Warrant Stock issued upon its exercise in the absence of (i) an effective registration statement under the Securities Act as to this Warrant or such Warrant Stock and registration or qualification of this Warrant or such Warrant Stock or (ii) an opinion of counsel, reasonably satisfactory to the Company, that such registration and qualification are not required. Further, the Registered Holder agrees that this Warrant, and the rights hereunder may only be sold, pledged, distributed, offered for sale, transferred or otherwise disposed of to Schering A.G. or another wholly owned subsidiary of Schering A.G. Other than as provided in this Section 4(a), this Warrant is not transferable without the prior written consent of the Company. It is understood and agreed that the immediately preceding two sentences do not apply to, or limit the sale, pledge, distribution, offers for sale, transfer or other disposition of, Warrant Stock. (b) The Registered Holder hereby further represents and warrants to the Company with respect to the issuance of the Warrant and the purchase of the Warrant Stock as follows: (i) PURCHASE ENTIRELY FOR OWN ACCOUNT. This Warrant is issued to the Registered Holder in reliance upon such Registered Holder's representation to the Company, which by such Registered Holder's execution of this Warrant such Registered Holder hereby confirms, that the Warrant and the Warrant Stock will be acquired for investment for such Registered Holder's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Registered Holder has no present intention of selling, granting any participation in, or otherwise distributing the same. 5 (ii) KNOWLEDGE AND EXPERIENCE; ABILITY TO BEAR ECONOMIC RISKS. The Registered Holder has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Warrant and such party is able to bear the economic risk of its investment in the Company (including a complete loss of its investment). (iii) RESALE. The Registered Holder understands that the Warrant being issued hereunder and the Warrant Stock to be purchased hereunder are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations, such securities may be resold without registration under the Securities Act only in certain circumstances. In this regard, the Registered Holder represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. (iv) LEGENDS. The Registered Holder acknowledges that all stock certificates representing shares of stock issued to the Registered Holder upon exercise of this Warrant may, if such Warrant Stock is not registered under the Securities Act, have affixed thereto a legend substantially in the following form: (x) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH SECURITIES ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO AN EXEMPTION TO SUCH SECURITIES ACT." (y) Any legend required by the laws of any state in which the securities will be issued. (c) Subject to the provisions of Section 4(a) hereof, this Warrant and all rights hereunder are transferable in whole or in part upon surrender of the Warrant with a properly executed assignment (in the form of EXHIBIT B hereto) at the principal office of the Company. (d) The Company may treat the Registered Holder of this Warrant as the absolute owner hereof for all purposes; PROVIDED, HOWEVER, that if and when this Warrant is properly assigned in blank, the Company may (but shall not be required to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. (e) The Company will maintain a register containing the names and addresses of the Registered Holders of this Warrant. Any Registered Holder may change such Registered Holder's address as shown on the warrant register by written notice to the Company requesting such change. 6 (f) The Company hereby represents and warrants to the Registered Holder as follows: (i) The Company is a corporation validly existing and in good standing under the laws of the State of California. (ii) The Company has full corporate right, power and authority (including the due authorization by all necessary corporate action) to enter into this Warrant and the Registration Rights Agreement referred to in Section 18 hereof (the "REGISTRATION RIGHTS AGREEMENT") and to perform its obligations hereunder and thereunder without the need for the consent of any other person; and this Warrant and the Registration Rights Agreement have been duly authorized, executed and delivered and constitute legal, valid and binding obligations of the Company enforceable against it in accordance with the terms hereof and thereof. The execution, delivery and performance of this Warrant and the Registration Rights Agreement by the Company does not contravene or violate any laws, rules or regulations applicable to it. (iii) The Company has taken such corporate action as is necessary or appropriate to enable it to perform its obligations hereunder, including, but not limited to, the issuance, sale and delivery of the Warrant. (iv) The Warrant Stock, when issued and paid for in compliance with the provisions of this Warrant, will be validly issued, fully paid and non-assessable. 5. NO IMPAIRMENT. The Company will not, by amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 6. TERMINATION. This Warrant (and the right to purchase securities upon exercise hereof) shall terminate upon the earliest to occur of the following (the "EXPIRATION DATE"): (i) April 25, 2001, or (ii) the closing of the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or other transaction as a result of which shareholders of the Company immediately prior to such acquisition possess a minority of the voting power of the acquiring entity immediately following such acquisition (an "ACQUISITION"); provided, however, that the Company shall give the Registered Holder at least ten (10) days prior written notice of the closing of any such Acquisition, including a statement that the Registered Holder's right to exercise this Warrant shall terminate upon the occurrence of such Acquisition. 7. NOTICES OF CERTAIN TRANSACTIONS. In case: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or any right to 7 subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company, or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is expected to take place, and the record date for determining shareholders entitled to vote thereon. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. 8. RESERVATION OF STOCK. The Company will at all times reserve and keep available, solely for the issuance and delivery upon the exercise of this Warrant, such shares of Warrant Stock or other stock or securities, as from time to time shall be issuable upon the exercise of this Warrant. 9. EXCHANGE OF WARRANTS. Upon the surrender by the Registered Holder of any Warrant, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 4 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered. 10. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 11. MAILING OF NOTICES. Any notice required or permitted by this Warrant shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by a nationally-recognized delivery service (such as Federal Express or UPS) or confirmed facsimile, or forty-eight (48) hours after being deposited in the U.S. mail as certified or registered mail with 8 postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below or as subsequently modified by written notice. 12. NO RIGHTS AS SHAREHOLDER. Until the exercise of this Warrant, the Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a shareholder of the Company (including without limitation the right to notification of shareholder meetings or the right to receive any notice or other communication concerning the business or affairs of the Company). 13. NO FRACTIONAL SHARES. No fractional shares of Common Stock will be issued in connection with any exercise hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 14. AMENDMENT OR WAIVER. Any term of this Warrant may be amended or waived only by an instrument in writing signed by the party against which enforcement of the amendment or waiver is sought. 15. HEADINGS. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 16. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the Registered Holder and their respective permitted successors and assigns (in the case of the Registered Holder, in accordance with Section 4). 17. GOVERNING LAW. This Warrant shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 9 18. REGISTRATION RIGHTS. Concurrently with the execution of this Warrant, the Company and the Registered Holder shall execute the Registration Rights Agreement attached hereto as EXHIBIT C, granting the Registered Holder certain rights regarding registration of the Warrant Stock. METRA BIOSYSTEMS, INC.: By:____________________________ (Signature) Name:__________________________ Title:_________________________ Address:_______________________ _______________________________ _______________________________ Facsimile:_____________________ REGISTERED HOLDER: By:_____________________________ (Signature) Name:___________________________ Title:__________________________ Address:________________________ ________________________________ ________________________________ Facsimile:______________________ 10 EXHIBIT A PURCHASE FORM To: METRA BIOSYSTEMS, INC. Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby irrevocably elects to purchase ___________ shares of the Common Stock covered by such Warrant and herewith makes payment of $___________, representing the full purchase price for such shares at the price per share provided for in such Warrant. The undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 4 of the Warrant and accepts such shares subject to the restrictions of the Warrant, copies of which are available from the Secretary of the Company. Signature:____________________________ Address:______________________________ EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, _________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant with respect to the number of shares of Common Stock covered thereby set forth below, unto: NAME OF ASSIGNEE ADDRESS NO. OF SHARES ---------------- ------- ------------- Dated:_________________ Signature:____________________________ ____________________________ Witness:______________________________ EXHIBIT C FORM OF REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of April 25, 1997, by and among Metra Biosystems, Inc., a California corporation (the "Company"), and Berlex Laboratories, Inc. ("Berlex"). RECITALS WHEREAS, the Company and Berlex have entered into a Co-Promotion Agreement of even date herewith (the "Co-Promotion Agreement"), which provides for the issuance to Berlex of certain warrants (the "Warrants") to purchase shares of Common Stock of the Company (the shares of Common Stock issuable upon exercise of the Warrants are referred to herein as the "Warrant Stock"); WHEREAS, as a condition to the execution of the Co-Promotion Agreement the Company has agreed to grant certain registration rights to Berlex with respect to the Warrant Stock; WHEREAS, the registration rights granted hereunder are subject to existing registration rights granted by the Company to certain of its investors pursuant to that certain Registration Rights Agreement dated as of January 11, 1994 between the Company and the other parties thereto (the "Existing Agreement"), a copy of which has been made available to Berlex; NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows: Section 1. REGISTRATION RIGHTS. 1.1 DEFINITIONS. As used in this Agreement: (a) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the subsequent declaration or ordering of the effectiveness of such registration statement. (b) The term "Registrable Securities" means: (i) the Warrant Stock; and (ii) any other shares of capital stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Warrant Stock, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his or her rights under this Agreement are not assigned; PROVIDED, HOWEVER, that Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale. (c) The number of shares of "Registrable Securities then outstanding" shall mean the number of shares of capital stock outstanding which are Registrable Securities, plus the number of shares of capital stock which are Registrable Securities issuable pursuant to then exercisable or convertible securities. (d) The term "Holder" means any holder of outstanding Registrable Securities who, subject to the limitations set forth in Section 1.8 below, acquired such Registrable Securities in a transaction or series of transactions not involving any registered public offering. (e) The term "Form S-3" means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the Securities and Exchange Commission ("SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (f) The term "Other Holders" means any persons other than Holders and persons with registration rights pursuant to the Existing Agreement who, by virtue of agreements with the Company, are entitled to include their securities in certain registrations hereunder. (g) The term "Other Registrable Securities" means the Common Stock or other securities issued to, or issuable pursuant to conversion of convertible securities held by, Other Holders, which securities may be entitled to be included in certain registrations hereunder. 1.2 DEMAND REGISTRATION. In case the Company shall receive from any Holder or Holders owning in the aggregate at least fifty percent (50%) of the Registrable Securities then outstanding a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: ii (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) promptly use its best efforts to effect such registration and all such qualifications and compliances as may be reasonably so requested and as would permit and facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 20 days after receipt of such written notice from the Company; provided, however, that all rights granted hereunder are subject to cutback pursuant to Section 3.6(b) of the Existing Agreement but the Holders' Registrable Securities shall not be subject to any reduction or exclusion pursuant to the rights of any Other Holders, and provided further that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.2: (i) if Form S-3 is not available for such offering by the Holders (except as provided in paragraph (d) below); (ii) if the Company shall furnish to the Holders a certificate signed by the president of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its Shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Section 1.2; provided, however, that the Company shall not utilize this right more than once in any twelve month period; (iii) if the Company has, within the four (4) month period preceding the date of such request, already filed one registration statement on Form S-3 for any other holders of Company Securities pursuant to the Existing Agreement; (iv) if the Company has already effected two (2) registrations on Form S-3 for the Holders; provided, however, that the Holders shall not be limited to two (2) registrations to the extent that any of the Holders' Registrable Securities are excluded from such registrations; or (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required under the Securities Act. (c) Subject to the foregoing, the Company shall file a registration statement on Form S-3 covering the Registrable Securities and other securities so requested to be registered promptly after receipt of the request or requests of the Holders. With respect to iii the first of such registrations, the Company and the Holders shall each pay one-half (1/2) of the expenses directly related to such registration; provided, however, that in no event shall the Company pay more than $15,000 of such expenses. All expenses incurred in connection with the second of such registrations, including (without limitation) all registration, filing, qualification, printer and accounting fees, as well as any underwriters' or brokers' fees, discounts or commissions relating to the Registrable Securities, or the fees or expenses of separate counsel to the selling Holders, shall be borne by such Holders. Notwithstanding anything above to the contrary, (i) the Holders shall be liable for expenses (other than those to be paid by the Company in accordance herewith) only in the proportion that the Registrable Securities being registered bear to the total of all securities being registered and any such expenses for which the Holders are not liable shall not be included in the Company's and the Holders' calculation of total expenses for purposes of determining those expenses to be paid by the Company in accordance herewith and (ii) it is understood and agreed that any fees or expenses of counsel to other parties and any brokers' fees, discounts or commissions relating to such other securities shall not be paid by the Holders and shall be paid by the Company or such other parties proposing to register securities. (d) Notwithstanding anything to the contrary herein, if Form S-3 is not available for such offering by the Holders, the Company shall use its best efforts to effect registrations on Form S-1, or any derivative or successor form thereto under the Securities Act, covering the Registrable Securities. In such event, all other provisions of this Section 1.2 shall apply with equal force to the requested registration; provided, however, that all registration, filing, qualification, printer and accounting fees, as well as any underwriters' or brokers' fees, discounts or commissions relating to the Registrable Securities, or the fees or expenses of separate counsel to the selling Holders, shall be borne by such Holders. Notwithstanding anything above to the contrary, (i) the Holders shall be liable for expenses (other than those to be paid by the Company in accordance herewith) only in the proportion that the Registrable Securities being registered bear to the total of all securities being registered and any such expenses for which the Holders are not liable shall not be included in the Company's and the Holders' calculation of total expenses for purposes of determining those expenses to be paid by the Company in accordance herewith and (ii) it is understood and agreed that any fees or expenses of counsel to other parties and any brokers' fees, discounts or commissions relating to such other securities shall not be paid by the Holders and shall be paid by the Company or such other parties proposing to register securities. (e) If the Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as part of their request made pursuant to Section 1.2(a) and the Company and the requesting Holders shall enter into an underwriting agreement in customary form (including, without limitation, such representations and warranties and indemnity and contribution provisions as the underwriter or underwriters customarily require) with the representative of the underwriter or underwriters selected for such underwriting by the Company, such underwriter or underwriters to be acceptable to the Holders. iv 1.3 COMPANY REGISTRATION. (a) NOTICE OF REGISTRATION. If at any time or from time to time the Company shall determine to register shares of its Common Stock, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans, or (ii) a registration relating solely to a Rule 145 transaction, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request, made within twenty (20) days after receipt of such written notice from the Company, by any Holder. (b) UNDERWRITING. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 1.3(a)(i). In such event the right of any Holder to registration pursuant to this Section 1.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 1.3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit to zero the Registrable Securities to be included in such registration; PROVIDED, that (i) any such limitation shall be applied to the Holders pro rata based upon the number of Registrable Securities held by them, (ii) that the shares of Registrable Securities proposed to be included in such registration shall be subject to exclusion pursuant to Section 3.6 of the Existing Agreement, and (iii) Other Registrable Securities shall be excluded entirely prior to any exclusion of Registrable Securities. The Company shall so advise all holders of securities requesting registration through such underwriting, and subject to the preceding sentence, the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder to the nearest one hundred (100) shares. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. v (c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 1.4 OBLIGATIONS OF THE COMPANY. Whenever required under Sections 1.2 or 1.3 to effect the registration of any Registrable Securities, the Company shall, as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and keep such registration statement effective for 180 days or such shorter period during which the Holders complete the distribution described in the registration statement relating thereto, whichever first occurs; and promptly notify the Holders (x) when such registration statement becomes effective, (y) when any amendment to such registration statement becomes effective and (z) of any request by the SEC for any amendment or supplement to such registration statement or any prospectus relating thereto or for additional information. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (d) Furnish to the Holders, prior to filing a registration statement, copies of such registration statement as proposed to be filed, and thereafter such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus, reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Company shall have filed with the SEC and financial statements, reports and proxy statements mailed to shareholders of the Company) as the Holders may reasonably request in order to facilitate the disposition of the Registrable Securities being offered by the Holders. (e) Make available, upon reasonable notice and during business hours, for inspection by the underwriter or underwriters, all financial and other records, pertinent corporate documents, agreements and properties of the Company as shall be necessary to enable such underwriters to exercise their due diligence responsibilities, and cause the Company's vi officers, directors and employees to supply all information reasonably requested by any such underwriters in connection with the registration statement. (f) If the securities covered by the registration statement are to be sold through one or more underwriters, obtain a comfort letter from the Company's independent public accountants dated within five business days prior to the effective date of the registration statement (and as of such other dates as the underwriter or underwriters for the Registrable Securities may reasonably request) in customary form and covering such matters of the type customarily covered by such comfort letters as such underwriter or underwriters reasonably request. (g) If the Securities covered by the registration statement are to be sold through one or more underwriters, obtain an opinion of counsel dated the closing of the sale of the Registrable Securities (and as of such other dates as the underwriter or underwriters for the Registrable Securities may reasonably request) in customary form and covering such matters of the type customarily covered by such opinions as counsel designated by such underwriter or underwriters reasonably requests. (h) If the securities covered by the registration statement are to be sold through one or more underwriters, provide to the underwriter or underwriters representations and warranties of the Company, dated the closing of the sale of the Registrable Securities (and as of such other dates as the underwriter or underwriters for the Registrable Securities may reasonably request) in customary form and covering such matters of the type customarily covered by such representations and warranties as counsel designated by such underwriter or underwriters reasonably request. (i) Cause such Registrable Securities to be listed for trading on each securities exchange on which similar securities of the same class issued by the Company are then traded. 1.5 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.6 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder and each person, if any, who controls such Holder within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), vii against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Securities Act, the 1934 Act or any state securities law; and the Company will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.6(a), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.6(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act or the 1934 Act, any other Holder selling securities in such registration statement and any controlling person of any such other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.6(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.6(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided that in no event shall any indemnity under this subsection 1.6(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying viii party under this Section 1.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.6. (d) If the indemnification provided in this Section 1.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) The obligations of the Company and Holders under this Section 1.6 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. (f) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in a negotiated underwriting agreement entered into in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall be controlling. 1.7 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company agrees to use its best efforts to: ix (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the 1934 Act; and (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the Securities Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration. 1.8 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned by a Holder to a transferee or assignee of at least the lesser of (a) all of such Holder's Registrable Securities, or (b) thirty percent (30%) of the total number of Warrant Stock (as adjusted for stock splits, combinations, dividends, or recapitalizations) provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assign-ment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. The foregoing share limitation shall not apply, however, to transfers by Berlex to any wholly-owned subsidiary or affiliate (if a corporation), provided that all such transferees or assignees agree in writing to appoint a single representative as their attorney in fact for the purpose of receiving any notices and exercising their rights under this Section 1. 1.9 TERMINATION OF REGISTRATION RIGHTS. The rights granted under this Section 1 shall terminate upon the earliest of (a) one (1) year following the date upon which a Warrant shall have been exercised, in whole or in part, by Berlex or its transferee, (b) if no Warrant shall have been so exercised, the expiration date of the last of such Warrants to expire, or (c) with respect to any Holder, at such time as such Holder may sell all of such Holder's Registrable Securities in any one three month period pursuant to Rule 144 (or such successor rule as may be adopted). Section 2. MISCELLANEOUS. 2.1 ASSIGNMENT. Subject to the provisions of Section 1.8 hereof, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. x 2.2 THIRD PARTIES. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 2.3 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California in the United States of America. 2.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2.5 NOTICES. (a) All notices, requests, demands and other communications under this Agreement or in connection herewith shall be given to or made upon the respective parties as follows: To the Company: Metra Biosystems, Inc. 265 N. Whisman Road Mountain View, CA 94043 fax: (415) 903-0500 Attention: Chief Financial Officer To Berlex: Berlex Laboratories, Inc. 300 Fairfield Road Wayne, New Jersey 07470 fax: (201) 303-4405 Attention: General Counsel (b) All notices, requests, demands and other communications given or made in accordance with the provisions of this Agreement shall be in writing, and shall be sent by airmail, return receipt requested, reputable overnight courier or by telex or telecopy (facsimile) with confirmation of receipt, and shall be deemed to be given or made when receipt is so confirmed. (c) Any party may, by written notice to the other, alter its address or respondent, and such notice shall be considered to have been given ten (10) days after the airmailing, telexing, telecopying or delivery thereof. 2.6 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, portions of such provisions, or such provisions in their xi entirety, to the extent necessary, shall be severed from this Agreement, and the balance of this Agreement shall be enforceable in accordance with its terms. 2.7 AMENDMENT AND WAIVER. Any provision of this Agreement may be amended with the written consent of the Company and the Holders of at least a majority of the outstanding Registrable Securities. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder of Registrable Securities, and the Company. In addition, the Company may waive performance of any obligation owing to it, as to some or all of the Holders of Registrable Securities, or agree to accept alternatives to such performance, without obtaining the consent of any Holder of Registrable Securities. 2.8 RIGHTS OF HOLDERS. Each holder of Registrable Securities shall have the absolute right to exercise or refrain from exercising any right or rights that such holder may have by reason of this Agreement, including, without limitation, the right to consent to the waiver or modification of any obligation under this Agreement, and such holder shall not incur any liability to any other holder of any securities of the Company as a result of exercising or refraining from exercising any such right or rights. 2.9 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party to this Agreement, upon any breach or default of the other party, shall impair any such right, power or remedy of such non-breaching party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 2.10 CONSTRUCTION. This Agreement shall not be construed to grant Berlex or any other Holder hereunder rights which are greater than PARI PASSU with those rights of the holders of registration rights under the Existing Agreement. 2.11 S-3 ELIGIBILITY. The Company covenants to use its best efforts to remain eligible to use the Form S-3 registration statement at all times. [Signature page follows] xii IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first above written. COMPANY: BERLEX: METRA BIOSYSTEMS, INC. BERLEX LABORATORIES, INC. By:____________________________ By:____________________________ Title:_________________________ Title:_________________________ xiii EXHIBIT C FORM OF ADDITIONAL COMMON STOCK WARRANT, IF ISSUED THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT. Warrant No. WC-______ Number of Shares: _________ Date of Issuance: ___________ (subject to adjustment) METRA BIOSYSTEMS, INC. COMMON STOCK PURCHASE WARRANT Metra Biosystems, Inc. (the "COMPANY"), for value received, hereby certifies that Berlex Laboratories, Inc., or its registered assigns (in accordance with Section 4 below) (the "REGISTERED HOLDER"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time commencing on the Date of Issuance (set forth above) and on or before the Expiration Date (as defined in Section 6 below), up to that number of shares of Common Stock of the Company as shall be determined pursuant to Section 2 below, at an exercise price per share as shall also be determined pursuant to Section 2. The shares purchasable upon exercise of this Warrant are hereinafter referred to as the "WARRANT STOCK." The exercise price per share of Warrant Stock is hereinafter referred to as the "PURCHASE PRICE." 1. EXERCISE. (a) MANNER OF EXERCISE. This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as EXHIBIT A duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney-in-fact, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full by cash, check or wire transfer of the Purchase Price payable in respect of the number of shares of Warrant Stock purchased upon such exercise. (b) EFFECTIVE TIME OF EXERCISE. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company, with payment of the applicable Purchase Price, as provided in Section 1(a) above; provided, however, that if this Warrant is exercised in connection with or in contemplation of an Acquisition (as defined in Section 6 below), such exercise may be conditioned upon the closing of such Acquisition, in which case this Warrant shall be deemed to have been exercised immediately prior to such closing and, if such closing does not occur, this Warrant shall be deemed to not have been exercised. At such time, the person or persons in whose name or names any certificates for Warrant Stock shall be issuable upon such exercise as provided in Section 1(c) below shall be deemed to have become the holder or holders of record of the Warrant Stock represented by such certificates. (c) DELIVERY TO REGISTERED HOLDER. As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within twenty (20) days thereafter, the Company at its expense will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of shares of Warrant Stock to which such Registered Holder shall be entitled, and (ii) in case such exercise is in part only, a new warrant (dated the date hereof) of like tenor, calling in the aggregate on the face thereof for the number of shares of Warrant Stock equal to the number of such shares called for on the face of this Warrant minus the number of such shares purchased by the Registered Holder upon such exercise as provided in Section 1(a) above. 2. PURCHASE PRICE AND NUMBER OF SHARES ISSUABLE UPON EXERCISE. The number of shares of Warrant Stock issuable upon exercise of this Warrant and the Purchase Price therefor shall be determined as follows: (a) If the average closing price of the Company's Common Stock as quoted on the Nasdaq National Market (the "NASDAQ") over the thirty (30) trading days ending on the close of business on the last trading day thirty (30) days before the Date of Issuance of this Warrant (set forth above) (the "AVERAGE CLOSING PRICE") is less than $11.00 per share, (i) the Purchase Price shall be one hundred ten percent (110%) of the Average Closing Price, provided such purchase price shall not be in excess of $11.00 per share, and (ii) the number of shares of Warrant Stock issuable hereunder shall be determined by dividing $3,000,000 by the Purchase Price determined pursuant to Section 2(a)(i) above; or (b) If the Average Closing Price is greater than or equal to $11.00 per share, (i) the Purchase Price shall be the Average Closing Price, and -15- (ii) the number of shares of Warrant Stock issuable hereunder shall be determined by dividing $3,000,000 by the Average Closing Price. The number of shares of Warrant Stock and the Purchase Price shall be subject to adjustment as provided herein. 3. CERTAIN ADJUSTMENTS. (a) MERGERS OR CONSOLIDATIONS. If at any time there shall be a capital reorganization (other than a combination or subdivision of Warrant Stock otherwise provided for herein), or a merger or consolidation of the Company with another corporation other than an Acquisition (as defined in Section 6), then, as a part of such reorganization, merger or consolidation, lawful provision shall be made so that the Registered Holder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified in this Warrant and upon payment of the Purchase Price, the number of shares of stock or other securities or property of the Company or the successor corporation resulting from such reorganization, merger or consolidation, to which a holder of the Common Stock deliverable upon exercise of this Warrant would have been entitled under the provisions of the agreement in such reorganization, merger or consolidation if this Warrant had been exercised immediately before that reorganization, merger or consolidation. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Registered Holder after the reorganization, merger or consolidation to the end that the provisions of this Warrant (including adjustment of the Purchase Price then in effect and the number of shares of Warrant Stock) shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. (b) SPLITS AND SUBDIVISIONS; DIVIDENDS. In the event the Company should at any time or from time to time fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of the holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as the "COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder for the additional shares of Common Stock or Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such distribution, split or subdivision if no record date is fixed), the per share Purchase Price shall be appropriately decreased and the number of shares of Warrant Stock shall be appropriately increased in proportion to such increase (or potential increase) of outstanding shares. (c) COMBINATION OF SHARES. If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, the per share purchase price shall be appropriately increased and the -16- number of shares of Warrant Stock shall be appropriately decreased in proportion to such decrease in outstanding shares. (d) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. In the event the Company shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends paid out of net profits) or options or rights not referred to in Section 3(b), then, in each such case for the purpose of this Section 3(d), upon exercise of this Warrant the holder hereof shall be entitled to a proportionate share of any such distribution as though such holder was the holder of the number of shares of Common Stock of the Company into which this Warrant may be exercised as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution. (e) When any adjustment is required to be made in the securities issuable upon exercise of this Warrant, the Company shall promptly mail to the Registered Holder a certificate setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following the occurrence of any of the events specified in this Section 3. 4. REPRESENTATIONS; TRANSFER RESTRICTIONS. (a) The Registered Holder of this Warrant acknowledges that this Warrant and the Warrant Stock have not been registered under the Securities Act, and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Warrant or any Warrant Stock issued upon its exercise in the absence of (i) an effective registration statement under the Securities Act as to this Warrant or such Warrant Stock and registration or qualification of this Warrant or such Warrant Stock or (ii) an opinion of counsel, reasonably satisfactory to the Company, that such registration and qualification are not required. Further, the Registered Holder agrees that this Warrant, and the rights hereunder may only be sold, pledged, distributed, offered for sale, transferred or otherwise disposed of to Schering A.G. or another wholly owned subsidiary of Schering A.G. Other than as provided in this Section 4(a), this Warrant is not transferable without the prior written consent of the Company. It is understood and agreed that the immediately preceding two sentences do not apply to, or limit the sale, pledge, distribution, offers for sale, transfer or other disposition of, Warrant Stock. (b) The Registered Holder hereby further represents and warrants to the Company with respect to the issuance of the Warrant and the purchase of the Warrant Stock as follows: (i) PURCHASE ENTIRELY FOR OWN ACCOUNT. This Warrant is issued to the Registered Holder in reliance upon such Registered Holder's representation to the Company, which by such Registered Holder's execution of this Warrant such Registered Holder hereby confirms, that the Warrant and the Warrant Stock will be acquired for investment for such Registered Holder's own account, not as a nominee or agent, and not with a view to the resale or -17- distribution of any part thereof, and that such Registered Holder has no present intention of selling, granting any participation in, or otherwise distributing the same. (ii) KNOWLEDGE AND EXPERIENCE; ABILITY TO BEAR ECONOMIC RISKS. The Registered Holder has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Warrant and such party is able to bear the economic risk of its investment in the Company (including a complete loss of its investment). (iii) RESALE. The Registered Holder understands that the Warrant being issued hereunder and the Warrant Stock to be purchased hereunder are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations, such securities may be resold without registration under the Securities Act only in certain circumstances. In this regard, the Registered Holder represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. (iv) LEGENDS. The Registered Holder acknowledges that all stock certificates representing shares of stock issued to the Registered Holder upon exercise of this Warrant may, if such Warrant Stock is not registered under the Securities Act, have affixed thereto a legend substantially in the following form: (x) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH SECURITIES ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO AN EXEMPTION TO SUCH SECURITIES ACT." (y) Any legend required by the laws of any state in which the securities will be issued. (c) Subject to the provisions of Section 4(a) hereof, this Warrant and all rights hereunder are transferable in whole or in part upon surrender of the Warrant with a properly executed assignment (in the form of EXHIBIT B hereto) at the principal office of the Company. (d) The Company may treat the Registered Holder of this Warrant as the absolute owner hereof for all purposes; PROVIDED, HOWEVER, that if and when this Warrant is properly assigned in blank, the Company may (but shall not be required to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. (e) The Company will maintain a register containing the names and addresses of the Registered Holders of this Warrant. Any Registered Holder may change such Registered -18- Holder's address as shown on the warrant register by written notice to the Company requesting such change. (f) The Company hereby represents and warrants to the Registered Holder as follows: (i) The Company is a corporation validly existing and in good standing under the laws of the State of California. (ii) The Company has full corporate right, power and authority (including the due authorization by all necessary corporate action) to enter into this Warrant and the Registration Rights Agreement referred to in Section 18 hereof (the "REGISTRATION RIGHTS AGREEMENT") and to perform its obligations hereunder and thereunder without the need for the consent of any other person; and this Warrant and the Registration Rights Agreement have been duly authorized, executed and delivered and constitute legal, valid and binding obligations of the Company enforceable against it in accordance with the terms hereof and thereof. The execution, delivery and performance of this Warrant and the Registration Rights Agreement by the Company does not contravene or violate any laws, rules or regulations applicable to it. (iii) The Company has taken such corporate action as is necessary or appropriate to enable it to perform its obligations hereunder, including, but not limited to, the issuance, sale and delivery of the Warrant. (iv) The Warrant Stock, when issued and paid for in compliance with the provisions of this Warrant, will be validly issued, fully paid and non-assessable. 5. NO IMPAIRMENT. The Company will not, by amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 6. TERMINATION. This Warrant (and the right to purchase securities upon exercise hereof) shall terminate upon the earliest to occur of the following (the "EXPIRATION DATE"): (i) the third anniversary of the Date of Issuance (set forth above), or (ii) the closing of the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or other transaction as a result of which shareholders of the Company immediately prior to such acquisition possess a minority of the voting power of the acquiring entity immediately following such acquisition (an "ACQUISITION"); provided, however, that the Company shall give the Registered Holder at least ten (10) days prior written notice of the closing of any such Acquisition, including a statement that the Registered Holder's right to exercise this Warrant shall terminate upon the occurrence of such Acquisition. 7. NOTICES OF CERTAIN TRANSACTIONS. In case: -19- (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company, or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is expected to take place, and the record date for determining shareholders entitled to vote thereon. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. 8. RESERVATION OF STOCK. The Company will at all times reserve and keep available, solely for the issuance and delivery upon the exercise of this Warrant, such shares of Warrant Stock or other stock or securities, as from time to time shall be issuable upon the exercise of this Warrant. 9. EXCHANGE OF WARRANTS. Upon the surrender by the Registered Holder of any Warrant, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 4 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered. 10. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. -20- 11. MAILING OF NOTICES. Any notice required or permitted by this Warrant shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by a nationally-recognized delivery service (such as Federal Express or UPS) or confirmed facsimile, or forty-eight (48) hours after being deposited in the U.S. mail as certified or registered mail with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below or as subsequently modified by written notice. 12. NO RIGHTS AS SHAREHOLDER. Until the exercise of this Warrant, the Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a shareholder of the Company (including without limitation the right to notification of shareholder meetings or the right to receive any notice or other communication concerning the business or affairs of the Company). 13. NO FRACTIONAL SHARES. No fractional shares of Common Stock will be issued in connection with any exercise hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 14. AMENDMENT OR WAIVER. Any term of this Warrant may be amended or waived only by an instrument in writing signed by the party against which enforcement of the amendment or waiver is sought. 15. HEADINGS. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 16. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the Registered Holder and their respective permitted successors and assigns (in the case of the Registered Holder, in accordance with Section 4). 17. GOVERNING LAW. This Warrant shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. -21- 18. REGISTRATION RIGHTS. The Warrant Stock shall be subject to the Registration Rights Agreement executed April ___, 1997 between the Company and the Registered Holder, the form of which is attached hereto as EXHIBIT C. METRA BIOSYSTEMS, INC.: By:______________________________ (Signature) Name:____________________________ Title:___________________________ Address:_________________________ _________________________________ _________________________________ Facsimile:_______________________ REGISTERED HOLDER: By:_____________________________ (Signature) Name:___________________________ Title:__________________________ Address:________________________ ________________________________ ________________________________ Facsimile:______________________ -22- EXHIBIT A PURCHASE FORM To: METRA BIOSYSTEMS, INC. Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby irrevocably elects to purchase ___________ shares of the Common Stock covered by such Warrant and herewith makes payment of $___________, representing the full purchase price for such shares at the price per share provided for in such Warrant. The undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 4 of the Warrant and accepts such shares subject to the restrictions of the Warrant, copies of which are available from the Secretary of the Company. Signature:___________________________ Address:_____________________________ EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, _________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant with respect to the number of shares of Common Stock covered thereby set forth below, unto: NAME OF ASSIGNEE ADDRESS NO. OF SHARES ---------------- ------- ------------- Dated:_________________ Signature:_________________________ _________________________ Witness:___________________________ EXHIBIT C FORM OF REGISTRATION RIGHTS AGREEMENT See Exhibit C to Exhibit B to the Co-Promotion Agreement. EX-10.45 3 EXHIBIT 10.45 CHANGE OF CONTROL AGREEMENT This Change of Control Agreement (the "Agreement") is made and entered into effective as of < < Date > >, by and between < < Employee > > (the "Employee") and Metra Biosystems, Inc., a California corporation (the "Company"). RECITALS A. It is expected that another company or other entity may from time to time consider the possibility of acquiring the Company or that a change in control may otherwise occur, with or without the approval of the Company's Board of Directors (the "Board"). The Board recognizes that such consideration can be a distraction to the Employee, an executive corporate officer of the Company, and can cause the Employee to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believes that it is in the best interests of the Company and its shareholders to provide the Employee with an incentive to continue his or her employment with the Company. C. The Board believes that it is imperative to provide the Employee with certain benefits upon a Change of Control and, under certain circumstances, upon termination of the Employee's employment in connection with a Change of Control, which benefits are intended to provide the Employee with financial security and provide sufficient income and encouragement to the Employee to remain with the Company notwithstanding the possibility of a Change of Control. D. To accomplish the foregoing objectives, the Board of Directors has directed the Company, upon execution of this Agreement by the Employee, to agree to the terms provided in this Agreement. E. Certain capitalized terms used in the Agreement are defined in Section 4 below. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Employee by the Company, the parties agree as follows: 1. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge that the Employee's employment is and shall continue to be at-will, as defined under applicable law. If the Employee's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, the Employee shall not be entitled -1- to any payments or benefits, other than as provided by this Agreement, or as may otherwise be available in accordance with the terms of Employee's offer letter from the Company dated < < Date > > (the "Offer Letter") and the Company's established employee plans and written policies at the time of termination. The terms of this Agreement shall terminate upon the earlier of (i) the date on which Employee ceases to be employed as corporate officer of the Company, other than as a result of an involuntary termination by the Company without Cause (ii) the date that all obligations of the parties hereunder have been satisfied, or (iii) two (2) years after a Change of Control. A termination of the terms of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement. 2. RESTRICTED STOCK AND STOCK OPTIONS. Subject to Sections 5 and 6 below, in the event of a Change of Control and regardless of whether the Employee's employment with the Company is terminated in connection with the Change of Control, each share of Common Stock held by Employee that is subject to the terms of a Restricted Stock Purchase Agreement ("Restricted Stock") and each stock option granted for the Company's securities (collectively referred to as the "Shares") held by the Employee shall become vested on the effective date of the transaction as to fifty percent (50%) of the Shares that have not otherwise vested as of such date. Thereafter, so long as Employee remains employed by the Company (or a successor Corporation), the remaining 50% of the Shares that have not otherwise vested as of the Change of Control shall vest as follows: (i) 25% of the Shares twelve (12) months after the Change of Control and (ii) 25% of the Shares eighteen (18) months after the Change of Control. Each stock option shall be exercisable to the extent so vested in accordance with the provisions of the Option Agreement and Plan pursuant to which such option was granted and each Share of Restricted Stock shall be freely transferable to the extent so vested in accordance with the provisions of the Stock Purchase Agreement pursuant to which such stock was purchased by Employee. 3. CHANGE OF CONTROL. (a) TERMINATION FOLLOWING A CHANGE OF CONTROL. Subject to Section 5 below, if the Employee's employment with the Company is terminated at any time within two (2) years after a Change of Control, then the Employee shall be entitled to receive severance benefits as follows: (i) VOLUNTARY RESIGNATION. If the Employee voluntarily resigns from the Company (other than as an Involuntary Termination (as defined below) or if the Company terminates the Employee's employment for Cause (as defined below)), then the Employee shall not be entitled to receive severance payments. The Employee's benefits will be terminated under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination or as otherwise determined by the Board of Directors of the Company. -2- (ii) INVOLUNTARY TERMINATION. If the Employee's employment is terminated as a result of an Involuntary Termination other than for Cause, the Employee shall be entitled to receive the following benefits: (i) severance payments during the period from the date of the Employee's termination until the date 12 months after the effective date of the termination (the "Severance Period") equal to the salary which the Employee was receiving at the time of such termination, which payments shall be paid during the Severance Period in accordance with the Company's standard payroll practices; (ii) a pro-rated amount of the Employee's "target bonus" for the fiscal year in which the termination occurs (or for the prior fiscal year if a target bonus has not yet been determined for the fiscal year in which the termination occurs), with such payment being made on the termination date; (iii) continuation of benefits through the end of the Severance Period substantially identical to those to which the Employee was entitled immediately prior to the termination, or to those being offered to officers of the Company, or a successor corporation, if the Company's benefit programs are changed during the Severance Period, unless Employee becomes eligible for comparable coverage through another employer, at which time the benefits coverage provided herein shall terminate; and (iv) full and immediate vesting of each unvested stock option granted for the Company's securities and each share of restricted stock held by the Employee on the date of termination so that each such option shall be exercisable in full on the termination date in accordance with the provisions of the Option Agreement and Plan pursuant to which such option was granted and each share of restricted stock shall be freely transferable by Employee. For purposes of this Agreement, the term "target bonus" shall mean the Employee's base salary in effect on the termination date multiplied by that percentage of such base salary that is prescribed by the Company under its Executive Bonus Program as the percentage of such base salary payable to the Employee as a bonus if the Company pays bonuses at one-hundred percent (100%) of its operating plan. (iii) INVOLUNTARY TERMINATION FOR CAUSE. If the Employee's employment is terminated for Cause, then the Employee shall not be entitled to receive severance payments. The Employee's benefits will be terminated under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (b) TERMINATION APART FROM A CHANGE OF CONTROL. In the event the Employee's employment terminates for any reason, either prior to the occurrence of a Change of Control or after the two year period following the effective date of a Change of Control, then the Employee shall not be entitled to receive any severance payments under this Agreement. The Employee's benefits will be terminated under the terms of the Offer Letter and the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination or as otherwise determined by the Board of Directors of the Company. 4. DEFINITION OF TERMS. The following terms referred to in this Agreement shall have the following meanings: -3- (a) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any of the following events: (i) MERGER AND CHANGE IN BOARD COMPOSITION. A merger or consolidation of the Company whether or not approved by the Board of Directors of the Company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation combined with a change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of March 3, 1997 or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company). (ii) LIQUIDATION; SALE OF ASSETS. A plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets was approved by the shareholders of the Company. (b) CAUSE. "Cause" shall mean (i) gross negligence or willful misconduct in the performance of the Employee's duties to the Company where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries (ii) repeated unexplained or unjustified absence from the Company, (iii) a material and willful violation of any federal or state law; (iv) commission of any act of fraud with respect to the Company; or (v) conviction of a felony or a crime involving moral turpitude causing material harm to the standing and reputation of the Company, in each case as determined in good faith by the Board of Directors of the Company. (c) INVOLUNTARY TERMINATION. "Involuntary Termination" shall include any termination by the Company other than for Cause and the Employee's voluntary termination, upon 30 days prior written notice to the Company, following (i) a material reduction or change in job duties, responsibilities and requirements inconsistent with the Employee's position with the Company and the Employee's prior duties, responsibilities and requirements; (ii) any reduction of the Employee's base compensation (other than in connection with a general decrease in base salaries for most officers of the Company and any successor corporation); or (iii) the Employee's refusal to relocate to a facility or location more than 50 miles from the Company's current location. -4- 5. LIMITATION ON PAYMENTS. In the event that the severance and other benefits provided for in this Agreement to the Employee (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the Code, then the Employee's severance benefits under Sections 2 and 3(a)(ii) shall be payable either: (a) in full, or (b) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Employee on an after-tax basis, of the greatest amount of severance benefits under Sections 2 and 3(a)(ii), notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and the Employee otherwise agree in writing, any determination required under this Section 5 shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Employee and the Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and the Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. 6. CERTAIN BUSINESS COMBINATIONS. In the event it is determined by the Board, upon consultation with Company management and the Company's independent auditors, that the enforcement of any Section of this Agreement, including, but not limited to, Section 2 hereof, which allows for the acceleration of vesting of Shares upon the effective date of a Change of Control would preclude accounting for any proposed business combination of the Company involving a Change of Control as a pooling of interests, and the Board otherwise desires to approve such a proposed business transaction which requires as a condition to the closing of such transaction that it be accounted for as a pooling of interests, then any such Section of this Agreement shall be null and void. For purposes of this Section 6, the Board's determination shall require the unanimous approval of the non-employee Board members. 7. SUCCESSORS. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such -5- obligations in the absence of a succession. The terms of this Agreement and all of the Employee's rights hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. NOTICE. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to the Employee shall be addressed to the Employee at the home address which the Employee most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. 9. MISCELLANEOUS PROVISIONS. (a) NO DUTY TO MITIGATE. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor, except as otherwise provided in this Agreement, shall any such payment be reduced by any earnings that the Employee may receive from any other source. (b) WAIVER. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) WHOLE AGREEMENT. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement supersedes any agreement of the same title and concerning similar subject matter dated prior to the date of this Agreement, and by execution of this Agreement both parties agree that any such predecessor agreement shall be deemed null and void. (d) CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without reference to conflict of laws provisions. (e) SEVERABILITY. If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, -6- and a suitable and equitable term or provision shall be substituted therefor to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision. (f) ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement may be settled at the option of either party by binding arbitration in the County of Santa Clara, California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Punitive damages shall not be awarded. (g) LEGAL FEES AND EXPENSES. The parties shall each bear their own expenses, legal fees and other fees incurred in connection with this Agreement. (h) NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (h) shall be void. (i) EMPLOYMENT TAXES. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (j) ASSIGNMENT BY COMPANY. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. (k) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. METRA BIOSYSTEMS, INC. < < EMPLOYEE > > By:______________________________ _______________________________ Title:___________________________ -7- EX-11.1 4 EXHIBIT 11.1 EXHIBIT 11.1 METRA BIOSYSTEMS, INC. COMPUTATION OF NET LOSS PER SHARE (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30, --------------------------------- 1997 1996 1995 ---------- ---------- --------- Net loss........................................................................ $ (13,127) $ (21,399) $ (6,803) ---------- ---------- --------- ---------- ---------- --------- Weighted average number of common shares outstanding............................ 12,610 10,515 738 Mandatorily redeemable convertible preferred stock.............................. -- -- 5,325 Number of common equivalents as a result of convertible warrants outstanding using the treasury stock method............................................... -- -- 10 Number of common shares issued and stock options granted in accordance with Staff Accounting Bulletin 83.................................................. -- -- 230 ---------- ---------- --------- Weighted average shares used to compute net loss per share...................... 12,610 10,515 6,303 ---------- ---------- --------- ---------- ---------- --------- Net loss per share.............................................................. $ (1.04) $ (2.04) $ (1.08) ---------- ---------- --------- ---------- ---------- ---------
The calculation includes the shares of mandatorily redeemable convertible preferred stock (Series A, Series B, Series C, Series D and Series E) and a convertible warrant as if they had converted to common stock on their respective original dates of issuance, because such shares automatically convert to common stock upon the closing of the initial public offering of the Company's common stock. EX-23.1 5 EXHIBIT23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-99200) pertaining to the 1990 Incentive Stock Plan, the 1995 Stock Option Plan, the 1995 Employee Stock Purchase Plan, and the 1995 Directors' Stock Option Plan of our report dated July 16, 1997, with respect to the consolidated financial statements and schedule of Metra Biosystems, Inc. included in the Annual Report (Form 10-K) for the year ended June 30, 1997. ERNST & YOUNG LLP Palo Alto, California September 26, 1997 EX-23.2 6 EXHIBIT 23.2 EXHIBIT 23.2 ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE The Board of Directors and Shareholders Metra Biosystems, Inc. The audits referred to in our report dated July 18, 1996, included the related financial statement schedule as of June 30, 1996 and 1995, and for each of the years in the two-year period ended June 30, 1996 included in the Form 10K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such 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. We consent to the incorporation by reference in the registration statement on Form S-8 No. 33-99200 of our report dated July 18, 1996, with respect to the consolidated balance sheet of Metra Biosystems, Inc. and subsidiaries as of June 30, 1996 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the years in the two-year period ended June 30, 1996, which report appears in the June 30, 1997 annual report on Form 10-K of Metra Biosystems, Inc. KPMG Peat Marwick LLP San Francisco, California September 26, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE METRA BIOSYSTEMS, INC. ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 11,709 18,876 1,576 0 1,446 34,846 4,182 0 47,768 4,117 0 0 0 13 42,064 47,768 6,405 6,725 3,982 22,035 0 0 0 (13,127) 0 (13,127) 0 0 0 (13,127) (1.04) (1.04)
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