##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
 For the quarterly period ended March 31, 2007.
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transitional period from  to
 Commission file number 0-29100
 eResearchTechnology, Inc.
  Delaware
    
    22-3264604(State or other jurisdiction of incorporation 
or organization)
    
    (I.R.S. Employer Identification No.)30 South 17th Street 
Philadelphia, PA
    
    19103(Address of principal executive offices)
    
    (Zip code)
 
 þ o
  o þ o
  o þ




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##### 



INDEX
 PagePart I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets-December 31, 2006 and March 31, 2007 (unaudited)
    
    
    3Consolidated Statements of Operations (unaudited)Three Months
Ended March 31, 2006 and 2007
    
    
    4Consolidated Statements of Cash Flows (unaudited)Three Months
Ended March 31, 2006 and 2007
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    611Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    1220Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    21Part II. Other InformationItem 6.
    
    Exhibits
    
    
    22Signatures
    
    
    23Exhibit Index
    
    
    242007 Bonus PlanAmended and Restated 2003 Equity Incentive Plan, as amendedConsultant AgreementCertification of Chief Executive OfficerCertification of Chief Financial OfficerStatement of Chief Executive OfficerStatement of Chief Financial Officer
  2




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##### Table of Contents



Part 1. Financial Information
 
 Item 1. Financial Statements
 
 
 December 31, 2006
    
    
    March 31, 2007(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    15,497
    
    
    $
    18,345Short-term investments
    
    
    41,416
    
    
    
    43,203Accounts receivable, net
    
    
    17,866
    
    
    
    16,217Prepaid income taxes
    
    
    2,819
    
    
    
    1,499Prepaid expenses and other
    
    
    2,761
    
    
    
    3,439Deferred income taxes
    
    
    912
    
    
    
    912Total current assets
    
    
    81,271
    
    
    
    83,615Property and equipment, net
    
    
    31,129
    
    
    
    33,649Goodwill
    
    
    1,212
    
    
    
    1,212Long-term investments
    
    
    928
    
    
    
    932Other assets
    
    
    524
    
    
    
    530Total assets
    
    $
    115,064
    
    
    $
    119,938Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    4,360
    
    
    $
    2,153Accrued expenses
    
    
    3,445
    
    
    
    3,528Income taxes payable
    
    
    781
    
    
    
    781Current portion of capital lease obligations
    
    
    40
    
    
    
    2,831Deferred revenues
    
    
    11,325
    
    
    
    10,931Total current liabilities
    
    
    19,951
    
    
    
    20,224Capital lease obligations, excluding current portion
    
    
    
    
    
    
    778Deferred income taxes
    
    
    1,491
    
    
    
    1,574Total liabilities
    
    
    21,442
    
    
    
    22,576Commitments and contingenciesStockholders Equity:Preferred stock  $10.00 par value, 500,000 shares authorized,
none issued and outstanding
    
    
    
    
    
    
    Common stock  $.01 par value, 175,000,000 shares authorized,
58,356,546 and 58,576,225 shares issued, respectively
    
    
    584
    
    
    
    586Additional paid-in capital
    
    
    83,493
    
    
    
    84,962Accumulated other comprehensive income
    
    
    1,510
    
    
    
    1,531Retained earnings
    
    
    70,225
    
    
    
    72,473Treasury stock, 8,247,119 shares at cost
    
    
    (62,190
    )
    
    
    (62,190
    )Total stockholders equity
    
    
    93,622
    
    
    
    97,362Total liabilities and stockholders equity
    
    $
    115,064
    
    
    $
    119,938
  3




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##### Table of Contents



Three Months Ended March 31,2006
    
    
    2007Net revenues:Licenses
    
    $
    638
    
    
    $
    782Services
    
    
    14,725
    
    
    
    13,968Site support
    
    
    6,036
    
    
    
    6,334Total net revenues
    
    
    21,399
    
    
    
    21,084Costs of revenues:Cost of licenses
    
    
    76
    
    
    
    66Cost of services
    
    
    6,156
    
    
    
    6,790Cost of site support
    
    
    4,153
    
    
    
    4,195Total costs of revenues
    
    
    10,385
    
    
    
    11,051Gross margin
    
    
    11,014
    
    
    
    10,033Operating expenses:Selling and marketing
    
    
    3,038
    
    
    
    2,538General and administrative
    
    
    3,839
    
    
    
    3,469Research and development
    
    
    1,314
    
    
    
    925Total operating expenses
    
    
    8,191
    
    
    
    6,932Operating income
    
    
    2,823
    
    
    
    3,101Other income, net
    
    
    390
    
    
    
    550Income before income taxes
    
    
    3,213
    
    
    
    3,651Income tax provision
    
    
    1,289
    
    
    
    1,403Net income
    
    $
    1,924
    
    
    $
    2,248Basic net income per share
    
    $
    0.04
    
    
    $
    0.04Diluted net income per share
    
    $
    0.04
    
    
    $
    0.04Shares used to calculate basic net income per share
    
    
    49,102
    
    
    
    50,198Shares used to calculate diluted net income per share
    
    
    51,685
    
    
    
    51,431
  4




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Three Months Ended March 31,2006
    
    
    2007Operating activities:Net income
    
    $
    1,924
    
    
    $
    2,248Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,819
    
    
    
    3,215Cost of sales of equipment
    
    
    420
    
    
    
    383Non-cash share-based compensation
    
    
    730
    
    
    
    483Changes in operating assets and liabilities:Accounts receivable
    
    
    301
    
    
    
    1,654Prepaid expenses and other
    
    
    (1,171
    )
    
    
    (681
    )Accounts payable
    
    
    607
    
    
    
    (2,209
    )Accrued expenses
    
    
    (1,030
    )
    
    
    84Income taxes
    
    
    (2,070
    )
    
    
    1,395Deferred revenues
    
    
    (2,135
    )
    
    
    (398
    )Net cash provided by operating activities
    
    
    395
    
    
    
    6,174Investing activities:Purchases of property and equipment
    
    
    (4,923
    )
    
    
    (2,490
    )Purchases of investments
    
    
    (7,436
    )
    
    
    (26,633
    )Proceeds from sales of investments
    
    
    4,266
    
    
    
    24,842Net cash used in investing activities
    
    
    (8,093
    )
    
    
    (4,281
    )Financing activities:Repayment of capital lease obligations
    
    
    (37
    )
    
    
    (40
    )Proceeds from exercise of stock options
    
    
    1,099
    
    
    
    879Stock option income tax benefit
    
    
    1,493
    
    
    
    109Repurchase of common stock for treasury
    
    
    (5,803
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (3,248
    )
    
    
    948Effect of exchange rate changes on cash
    
    
    32
    
    
    
    7Net
(decrease) increase in cash and cash equivalents
    
    
    (10,914
    )
    
    
    2,848Cash and cash equivalents, beginning of period
    
    
    18,432
    
    
    
    15,497Cash and cash equivalents, end of period
    
    $
    7,518
    
    
    $
    18,345
  5




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##### Table of Contents



eResearchTechnology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
 Note 1. Basis of Presentation
  Note 2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Use of Estimates
  Property and Equipment
    Long-lived Assets
  6




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Software Development Costs
  Stock-Based Compensation
 Accounting for Stock-Based Compensation
  7




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##### Table of Contents



Valuation Assumptions for Options Granted
  2006
    
    2007Risk-free interest rate
    
    
    4.66
    %
    
    
    4.70
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected life
    
    3.5 years
    
    3.5 yearsExpected volatility
    
    
    60.83
    %
    
    
    56.19
    %
  Stock Option Plans
    8




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##### Table of Contents



Weighted
    
    Remaining
    
    IntrinsicAverage
    
    Contractual
    
    ValueShares
    
    Exercise Price
    
    Term
    
    (in thousands)Outstanding as of January 1, 2007
    
    
    4,387,033
    
    
    $
    8.56Granted
    
    
    509,900
    
    
    
    7.41Exercised
    
    
    (219,679
    )
    
    
    4.00Cancelled/forfeited
    
    
    (210,251
    )
    
    
    14.16Outstanding as of March 31, 2007
    
    
    4,467,003
    
    
    
    8.39
    
    
    
    5.1
    
    
    $
    11,551Options exercisable or expected to vest at March 31, 2007
    
    
    4,259,560
    
    
    
    8.32
    
    
    
    5.0
    
    
    $
    11,467Options exercisable at March 31, 2007
    
    
    3,084,049
    
    
    
    7.71
    
    
    
    4.6
    
    
    $
    10,990
   Tax Effect Related to Stock-based Compensation Expense
  Note 3. Net Income per Common Share
   9




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Net
    
    
    
    
    
    
    Per ShareThree Months Ended March 31,
    
    Income
    
    
    Shares
    
    
    Amount2006Basic net income
    
    $
    1,924
    
    
    
    49,102
    
    
    $
    0.04Effect of dilutive shares
    
    
    
    
    
    
    2,583
    
    
    
    Diluted net income
    
    $
    1,924
    
    
    
    51,685
    
    
    $
    0.042007Basic net income
    
    $
    2,248
    
    
    
    50,198
    
    
    $
    0.04Effect of dilutive shares
    
    
    
    
    
    
    1,233
    
    
    
    Diluted net income
    
    $
    2,248
    
    
    
    51,431
    
    
    $
    0.04
  Note 4. Comprehensive Income
  Three Months Ended March 31,2006
    
    
    2007Net income
    
    $
    1,924
    
    
    $
    2,248Other comprehensive income:Currency translation adjustment
    
    
    133
    
    
    
    21Comprehensive income, net of tax
    
    $
    2,057
    
    
    $
    2,269
 Note 5. Recent Pronouncements
    10




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##### Table of Contents



Note 6. Income Taxes
  Note 7. Operating Segments / Geographic Information
   Three Months Ended March 31, 2006NorthAmerica
    
    
    Europe
    
    
    TotalLicense revenues
    
    $
    638
    
    
    $
    
    
    
    $
    638Service revenues
    
    
    12,203
    
    
    
    2,522
    
    
    
    14,725Site support revenues
    
    
    4,521
    
    
    
    1,515
    
    
    
    6,036Net revenues from external customers
    
    $
    17,362
    
    
    $
    4,037
    
    
    $
    21,399Operating income
    
    $
    2,541
    
    
    $
    282
    
    
    $
    2,823Long-lived assets
    
    $
    21,228
    
    
    $
    9,233
    
    
    $
    30,461Identifiable assets
    
    $
    87,389
    
    
    $
    14,346
    
    
    $
    101,735
 Three Months Ended March 31, 2007NorthAmerica
    
    
    Europe
    
    
    TotalLicense revenues
    
    $
    782
    
    
    $
    
    
    
    $
    782Service revenues
    
    
    11,384
    
    
    
    2,584
    
    
    
    13,968Site support revenues
    
    
    4,254
    
    
    
    2,080
    
    
    
    6,334Net revenues from external customers
    
    $
    16,420
    
    
    $
    4,664
    
    
    $
    21,084Operating income
    
    $
    2,665
    
    
    $
    436
    
    
    $
    3,101Long-lived assets
    
    $
    25,243
    
    
    $
    8,407
    
    
    $
    33,650Identifiable assets
    
    $
    102,329
    
    
    $
    17,610
    
    
    $
    119,939
 11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statement for Forward-Looking Information
  Overview
 ®
  EXPeRT® Cardiac Safety ® ®
 eClinical.
 
    
    eResearch Community(eRC) is an easy to use portal application that provides
real-time information related to monitoring clinical trial activities, data quality and
safety.
 12




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
    
    eData Entry (eDE) technology provides a comprehensive electronic data capture (EDC)
system comprised of technology and consulting services formulated to deliver rapid time to
benefit for electronic trial initiatives.
    
    eData Management (eDM) is a clinical data management application for collecting,
cleaning and managing clinical trial data.
    
    eSafety Net (eSN ) is an adverse event management system enabling the
generation of key regulatory reports, including CIOMS and Medwatch.
    
    eStudy Conduct (eSC) is a clinical trial management technology that can be used to
set up clinical trials, establish standards, track study activities, plan resources,
distribute supplies, manage the financial aspects of a trial and electronically view
clinical trial data.
 Project Assurance/Implementation Assurance
      13




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##### Table of Contents



Results of Operations
 Executive Overview
  ®
  14




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Three Months Ended March 31,2006
    
    2007Net revenues:Licenses
    
    
    3.0
    %
    
    
    3.7
    %Services
    
    
    68.8
    %
    
    
    66.3
    %Site support
    
    
    28.2
    %
    
    
    30.0
    %Total net revenues
    
    
    100.0
    %
    
    
    100.0
    %Costs of revenues:Cost of licenses
    
    
    0.3
    %
    
    
    0.3
    %Cost of services
    
    
    28.8
    %
    
    
    32.2
    %Cost of site support
    
    
    19.4
    %
    
    
    19.9
    %Total costs of revenues
    
    
    48.5
    %
    
    
    52.4
    %Gross margin
    
    
    51.5
    %
    
    
    47.6
    %Operating expenses:Selling and marketing
    
    
    14.2
    %
    
    
    12.0
    %General and administrative
    
    
    17.9
    %
    
    
    16.5
    %Research and development
    
    
    6.2
    %
    
    
    4.4
    %Total operating expenses
    
    
    38.3
    %
    
    
    32.9
    %Operating income
    
    
    13.2
    %
    
    
    14.7
    %Other income, net
    
    
    1.8
    %
    
    
    2.6
    %Income before income taxes
    
    
    15.0
    %
    
    
    17.3
    %Income tax provision
    
    
    6.0
    %
    
    
    6.6
    %Net income
    
    
    9.0
    %
    
    
    10.7
    %
 15




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Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006.
  Three Months Ended March 31,2006
    
    
    2007
    
    
    Increase (Decrease)Licenses:Net revenues
    
    $
    638
    
    
    $
    782
    
    
    $
    144
    
    
    
    22.6
    %Costs of revenues
    
    
    76
    
    
    
    66
    
    
    
    (10
    )
    
    
    (13.2
    %)Gross margin
    
    $
    562
    
    
    $
    716
    
    
    $
    154
    
    
    
    27.4
    %Services:Cardiac SafetyNet revenues
    
    $
    13,112
    
    
    $
    12,432
    
    
    $
    (680
    )
    
    
    (5.2
    %)Costs of revenues
    
    
    5,425
    
    
    
    6,164
    
    
    
    739
    
    
    
    13.6
    %Gross margin
    
    $
    7,687
    
    
    $
    6,268
    
    
    $
    (1,419
    )
    
    
    (18.5
    %)Technology consulting and trainingNet revenues
    
    $
    586
    
    
    $
    660
    
    
    $
    74
    
    
    
    12.6
    %Costs of revenues
    
    
    476
    
    
    
    410
    
    
    
    (66
    )
    
    
    (13.9
    %)Gross margin
    
    $
    110
    
    
    $
    250
    
    
    $
    140
    
    
    
    127.3
    %Software maintenanceNet revenues
    
    $
    1,027
    
    
    $
    876
    
    
    $
    (151
    )
    
    
    (14.7
    %)Costs of revenues
    
    
    255
    
    
    
    216
    
    
    
    (39
    )
    
    
    (15.3
    %)Gross margin
    
    $
    772
    
    
    $
    660
    
    
    $
    (112
    )
    
    
    (14.5
    %)Total servicesNet revenues
    
    $
    14,725
    
    
    $
    13,968
    
    
    $
    (757
    )
    
    
    (5.1
    %)Costs of revenues
    
    
    6,156
    
    
    
    6,790
    
    
    
    634
    
    
    
    10.3
    %Gross margin
    
    $
    8,569
    
    
    $
    7,178
    
    
    $
    (1,391
    )
    
    
    (16.2
    %)Site support:Net revenues
    
    $
    6,036
    
    
    $
    6,334
    
    
    $
    298
    
    
    
    4.9
    %Costs of revenues
    
    
    4,153
    
    
    
    4,195
    
    
    
    42
    
    
    
    1.0
    %Gross margin
    
    $
    1,883
    
    
    $
    2,139
    
    
    $
    256
    
    
    
    13.6
    %TotalNet revenues
    
    $
    21,399
    
    
    $
    21,084
    
    
    $
    (315
    )
    
    
    (1.5
    %)Costs of revenues
    
    
    10,385
    
    
    
    11,051
    
    
    
    666
    
    
    
    6.4
    %Gross margin
    
    
    11,014
    
    
    
    10,033
    
    
    
    (981
    )
    
    
    (8.9
    %)Operating expenses:Selling and marketing
    
    
    3,038
    
    
    
    2,538
    
    
    
    (500
    )
    
    
    (16.5
    %)General and administrative
    
    
    3,839
    
    
    
    3,469
    
    
    
    (370
    )
    
    
    (9.6
    %)Research and development
    
    
    1,314
    
    
    
    925
    
    
    
    (389
    )
    
    
    (29.6
    %)Total operating expenses
    
    
    8,191
    
    
    
    6,932
    
    
    
    (1,259
    )
    
    
    (15.4
    %)Operating income
    
    
    2,823
    
    
    
    3,101
    
    
    
    278
    
    
    
    9.8
    %Other income, net
    
    
    390
    
    
    
    550
    
    
    
    160
    
    
    
    41.0
    %Income before income taxes
    
    
    3,213
    
    
    
    3,651
    
    
    
    438
    
    
    
    13.6
    %Income tax provision
    
    
    1,289
    
    
    
    1,403
    
    
    
    114
    
    
    
    8.8
    %Net income
    
    $
    1,924
    
    
    $
    2,248
    
    
    $
    324
    
    
    
    16.8
    %
 16




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Three Months Ended March 31,
    
    Increase2006
    
    2007
    
    (Decrease)Cost of licenses
    
    
    11.9
    %
    
    
    8.4
    %
    
    
    (3.5
    %)Cost of services:Cardiac Safety
    
    
    41.4
    %
    
    
    49.6
    %
    
    
    8.2
    %Technology consulting and training
    
    
    81.2
    %
    
    
    62.1
    %
    
    
    (19.1
    %)Software maintenance
    
    
    24.8
    %
    
    
    24.7
    %
    
    
    (0.1
    %)Total cost of services
    
    
    41.8
    %
    
    
    48.6
    %
    
    
    6.8
    %Cost of site support
    
    
    68.8
    %
    
    
    66.2
    %
    
    
    (2.6
    %)Total costs of revenues
    
    
    48.5
    %
    
    
    52.4
    %
    
    
    3.9
    %Operating expenses:Selling and marketing
    
    
    14.2
    %
    
    
    12.0
    %
    
    
    (2.2
    %)General and administrative
    
    
    17.9
    %
    
    
    16.5
    %
    
    
    (1.4
    %)Research and development
    
    
    6.2
    %
    
    
    4.4
    %
    
    
    (1.8
    %)
      ®
   17




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18




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Liquidity and Capital Resources
    ® ® ® ® ® ® ®
   Related
    
    
    TotalLabor and
    
    
    Direct Costs
    
    
    Capitalized
    
    
    Monthly
    
    
    AccumulatedAmortization Period
    
    Consulting
    
    
    of Materials
    
    
    Costs
    
    
    Amortization
    
    
    AmortizationEXPeRT® enhancements
    
    October 2005-September 2007
    
    
    463
    
    
    
    
    
    
    
    463
    
    
    
    20
    
    
    
    347Semi-automated ECG processing softwareInitial costs
    
    February 2004-January 2008
    
    
    449
    
    
    
    361
    
    
    
    810
    
    
    
    17
    
    
    
    641Enhancements
    
    October 2004-September 2008
    
    
    380
    
    
    
    
    
    
    
    380
    
    
    
    8
    
    
    
    238Additional enhancements
    
    April 2005-March 2009
    
    
    376
    
    
    
    
    
    
    
    376
    
    
    
    8
    
    
    
    188EXPeRT® 2Initial costs
    
    January 2007-December 2011
    
    
    9,412
    
    
    
    1,139
    
    
    
    10,551
    
    
    
    176
    
    
    
    528Enhancements
    
    To be determined
    
    
    599
    
    
    
    
    
    
    
    599
    
    
    
    
    
    
    
    Data warehouse
    
    January 2007-December 2011
    
    
    722
    
    
    
    
    
    
    
    722
    
    
    
    12
    
    
    
    36Total
    
    
    
    
    
    $
    12,401
    
    
    $
    1,500
    
    
    $
    13,901
    
    
    $
    241
    
    
    $
    1,978
 19




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##### Table of Contents



Inflation
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  20




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##### Table of Contents



Foreign Currency Risk
   
 Item 4. Controls and Procedures
  21




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##### Table of Contents



Part II. Other Information
 
 Item 6. Exhibits
 10.12
    
    2007 Bonus Plan10.31
    
    Amended and Restated 2003 Equity Incentive Plan, as amended.10.43
    
    Consultant Agreement effective January 1, 2007 between Dr. Joel Morganroth and the Company.31.1
    
    Certification of Chief Executive Officer.31.2
    
    Certification of Chief Financial Officer.32.1
    
    Statement of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the United States Code.32.2
    
    Statement of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the United States Code.
 22




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##### Table of Contents



eResearchTechnology, Inc.
(Registrant)Date: May 4, 2007
    By:
    /s/        Michael J. McKelveyMichael J. McKelveyPresident and Chief Executive Officer,
Director (Principal executive officer)Date: May 4, 2007
    By:
    /s/        Richard A. BaronRichard A. BaronExecutive Vice President, Chief Financial
Officer and Secretary (Principal financial and accounting officer) 23




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Exhibit10.12
    
    2007 Bonus Plan.10.31
    
    Amended and Restated 2003 Equity Incentive Plan, as amended.10.43
    
    Consultant Agreement effective January 1, 2007 between Dr. Joel Morganroth and the Company.31.1
    
    Certification of Chief Executive Officer.31.2
    
    Certification of Chief Financial Officer.32.1
    
    Statement of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the United States
Code.32.2
    
    Statement of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the United States
Code.
 24