UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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eResearchTechnology, Inc.

(Name of Registrant as Specified In Its Charter)

 

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eResearchTechnology, Inc.

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held April 29, 2009

 

Important Notice Regarding the Availability of Proxy Materials for the

Annual Meeting of Stockholders to Be Held on April 29, 2009

 

The Notice of Annual Meeting, proxy statement, annual report and proxy card

are available at http://proxydocs.com/eres.

 

To the stockholders of eResearchTechnology, Inc.:

 

We will hold our annual meeting of stockholders at our executive offices located at 1818 Market Street, Philadelphia, PA 19103, at 10:00 A.M. on April 29, 2009 for the following purposes:

 

1. To elect two directors to serve terms of three years and until their successors are elected.

 

2. To ratify the selection by our audit committee of our board of directors of the firm of KPMG LLP as our independent registered public accountants for 2009.

 

3. To transact any other business that may properly come before the meeting or any adjournment, postponement or continuation thereof.

 

Stockholders of record as of the close of business on March 9, 2009 are entitled to notice of and to vote at the meeting.

 

We are mailing our 2008 annual report, which is not part of our proxy soliciting material, to stockholders of record together with this notice.

 

It is important that you vote your shares at our annual meeting. Whether or not you plan to attend the meeting, please complete, date and sign the enclosed proxy card and return it in the enclosed envelope. Your proxy may be revoked at any time prior to the time it is voted.

 

By order of the Board of Directors,

 

 

JOEL MORGANROTH, MD

Chairman of the Board of Directors

 

March 13, 2009

Philadelphia, Pennsylvania

eResearchTechnology, Inc.

 

PROXY STATEMENT

 

These proxy materials are furnished in connection with solicitation of proxies by the board of directors (the “board of directors” or the “board”) of eResearchTechnology, Inc., a Delaware corporation, for the annual meeting of stockholders to be held at 10:00 A.M. on Wednesday, April 29, 2009 at our executive offices located at 1818 Market Street, Philadelphia, Pennsylvania 19103, and any adjournment, postponement or continuation of such meeting. These proxy materials are being mailed to stockholders on or about March 20, 2009. Unless the context indicates otherwise, all references in this proxy statement to “we,” “us,” “our,” “ERT” or the “Company” mean eResearchTechnology, Inc.

 

 

CONTENTS

 

At our annual meeting, stockholders will act upon the matters outlined in the notice of meeting on the cover page of this proxy statement, including:

 

 

In addition, our management will report on our performance during 2008 and respond to appropriate questions from stockholders.

 

You should first read this proxy statement carefully. After you have decided how you wish to vote your shares, you should complete, properly sign and return the accompanying proxy card to us in the enclosed postage-paid return envelope. The proxies will vote your shares as you direct. If your shares are registered in your name, you may also attend our annual meeting and either deliver your completed proxy in person or vote in person. If your shares are held in “street name” and you wish to vote them at the annual meeting, you will need to obtain a signed proxy from the nominee in whose name your shares are registered.

 

Holders of record of our common stock at the close of business on the record date, March 9, 2009, are entitled to receive notice of and to vote at our annual meeting, and any adjournment, postponement or continuation of our annual meeting. A complete alphabetical list of the record holders of our common stock entitled to vote at our annual meeting will be available for inspection at our principal executive offices during normal business hours for any purpose germane to our annual meeting for a period of ten days prior to the date of our annual meeting. As of the record date, there were 50,315,890 outstanding shares of our common stock.

 

Each share of common stock outstanding as of the record date is entitled to one vote on each matter that may be brought before the annual meeting.

 

All stockholders as of the record date, or their duly appointed proxies, may attend our annual meeting. Even if you currently plan to attend our annual meeting, we recommend that you also submit your proxy so that your vote will be counted if you later decide not to attend, or are unable to attend, our annual meeting.

 

If you hold your shares in “street name,” that is, through a broker or other nominee, you will need to bring a copy of a brokerage statement reflecting your stock ownership as of the record date and check in at the registration desk at our annual meeting.

 

The presence at our annual meeting, in person or by proxy, of the holders of a majority of the total votes entitled to be cast by the holders of our common stock outstanding on the record date on a particular issue will constitute a quorum for the purpose of considering such matter. Proxies received but marked as abstentions and broker non-votes will be included in the calculation of the number of shares present at our annual meeting.

 

If your shares are registered in your name and you attend our annual meeting and wish to vote in person, we will provide you with a ballot before voting commences at our annual meeting.

 

If you are not a stockholder of record, but you are a “beneficial owner,” meaning that your shares are registered in a name other than your own, such as a broker’s name, you must either direct the holder of record of your shares as to how you want to vote your shares or obtain a form of proxy from the holder of record that you may then vote.

 

Brokers normally have discretion to vote on routine matters, such as director elections and ratification of the appointment of independent registered public accounting firms, but not on non-routine matters. Because the proposals identified in this proxy statement involve only routine matters, your broker may either use its discretion to vote your shares on the matters described in this proxy statement or leave your shares un-voted. We encourage you to provide voting instructions to your broker by completing the voting instruction card or proxy that it sends to you.

 

Yes. Even after you have returned your proxy card, you may change your vote at any time before your proxy is exercised by filing either a notice of revocation or a duly executed proxy bearing a later date with our secretary. The proxy holders will not vote your proxy if you attend our annual meeting in person and request the revocation of your proxy, although your attendance at our annual meeting will not by itself revoke your proxy.

 

Unless you provide contrary instructions on your proxy card, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of our board of directors. Our board of directors recommends that you vote for the election of our two nominees for director and for the ratification of the selection by our audit committee of our board of directors of the firm of KPMG LLP as independent registered public accountants for 2009.

 

Election of Directors.  Election of directors will be by plurality of the votes cast. Accordingly, the two candidates who receive the highest number of “For” votes cast by the holders of our common stock will be elected as directors. A properly executed proxy card marked “Withhold Authority” will not be voted with respect to the nominee or nominees so indicated although the votes represented by the proxy card will be counted for the purposes of determining whether a quorum is present. Our certificate of incorporation and by-laws do not authorize cumulative voting in the election of directors.

 

Other Matters.  Any other proposal, including the proposal to ratify the appointment of KPMG LLP as our independent registered public accountants for 2009, will require the affirmative vote of a majority of the votes that the holders of shares present in person or by proxy are entitled to cast on such proposal.

 

Abstentions and shares held by brokers and nominees as to which we have not received voting instructions from the beneficial owner of, or other person entitled to vote, such shares and as to which the broker or nominee does not have discretionary voting power, i.e., broker non-votes, are considered shares of outstanding stock entitled to vote and such shares are counted in determining whether a quorum or a majority is present. An abstention or a broker non-vote will therefore have the practical effect of voting against approval of any matter that properly comes before our annual meeting other than the election of directors because each abstention or broker non-vote will not represent a vote for approval of the matter.

 

We will pay the entire cost of this proxy solicitation, including preparing and mailing this proxy statement on behalf of our board of directors. In addition, we may make arrangements with brokerage houses and other custodians, nominees and fiduciaries to send proxies and proxy materials to the beneficial owners of stock, and we may reimburse expenses for doing so. Our directors, officers or regular employees may solicit proxies in person or by telephone, but will not receive additional compensation for doing so.

 

 

 

The following table shows the amount and percentage, as of March 9, 2009, of our common stock that is beneficially owned by (i) each of our directors, director nominees and named executive officers; (ii) our directors and executive officers as a group; and (iii) each person whom we know to own beneficially more than 5% of our common stock.

 

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934, or the Exchange Act, requires that our officers and directors, as well as persons who own 10% or more of a class of our equity securities, file reports of their ownership of our securities, as well as statements of changes in such ownership, with us and the Securities and Exchange Commission. Based upon written representations we received from our officers, directors and 10% or greater stockholders, and our review of the statements of beneficial ownership changes our officers, directors and 10% or greater stockholders filed during 2008, we believe that all such filings required during 2008 were made on a timely basis except for a filing by one of our officers. David Laky, our former Senior Vice President, eClinical, filed one Form 4 report 18 days late reporting the exercise of options to purchase an aggregate of 29,062 shares and the sale of an aggregate of 12,446 shares acquired upon such exercise.

 

Our board of directors currently consists of nine members. Each director is elected for a three-year term and until the director’s successor has been duly elected. The current three-year terms of our directors expire in the years 2009, 2010 and 2011, respectively.

 

David D. Gathman, who will not be standing for reelection at the annual meeting, has served as a director since 2003. The governance and nominating committee determined not to nominate him for a new term due to his recent relocation to Florida and the demands of his position as Chief Financial Officer of SunGard Public Sector Group, Inc. The governance and nominating committee concluded that the interests of the stockholders would be appropriately represented by a board consisting of eight members and, as a result, at the governance and nominating committee’s recommendation, the board of directors decided at its meeting on December 9, 2008 not to nominate Mr. Gathman for a new term and to reduce the number of directors from nine to eight effective at the annual meeting.

 

In accordance with the policy of our governance and nominating committee, a stockholder desiring to propose a candidate for our board of directors to our governance and nominating committee should submit a written recommendation, together with biographical information concerning the individual, to our chairman of our governance and nominating committee at eResearchTechnology, Inc., 1818 Market Street, Philadelphia, PA 19103. While recommendations may be submitted for consideration at any time, we request that recommendations be received prior to November 15 in any year for consideration in connection with the nomination and election of directors at our next annual meeting of stockholders. Once our governance and nominating committee has identified a prospective nominee, including candidates proposed by stockholders, it makes an initial determination as to whether to conduct a full evaluation of the candidate. This initial determination is based on whatever information is provided to our governance and nominating committee with the recommendation of the prospective candidate, as well as our governance and nominating committee’s own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others. The preliminary determination is based primarily on the need for additional board members to fill vacancies or expand the size of our board and the likelihood that the prospective nominee can satisfy the evaluation factors described below. If our governance and nominating committee determines, in consultation with the chairman of our board and other board members as appropriate, that additional consideration is warranted, it will then evaluate the prospective nominee against the standards and qualifications it has established, including:

 

 

In connection with the evaluation of prospective nominees, our governance and nominating committee determines whether to interview the prospective nominee. If warranted, one or more members of our governance and nominating committee, and others as appropriate, interview prospective nominees in person or by telephone. After completing this evaluation and interview, our governance and nominating committee makes a recommendation to the full board as to the persons who should be nominated by our board, and our board determines the nominees after considering the recommendation and report of our governance and nominating committee. We do not currently employ an executive search firm, or pay a fee to any other third party, to locate qualified candidates for director positions.

 

In addition to evaluating nominees to fill vacancies, the governance and nominating committee annually reviews incumbent directors whose terms are expiring. The governance and nominating committee solicits feedback from members of the board and members of management in making its recommendations regarding board nominees, whether they be incumbent directors or new nominees.

 

Our governance and nominating committee met on December 9, 2008 for the purpose of evaluating the performance and qualifications of the members of our board of directors and nominating candidates for election as directors by our stockholders at our annual meeting. After considering the performance and qualifications of the members of our board of directors during 2008, our governance and nominating committee nominated, and our board of directors thereafter accepted and approved, the individuals named below.

 

Two directors are to be elected at our annual meeting. The nominees are Michael J. McKelvey, Ph.D and Stephen M. Scheppmann, both of whom currently serve on our board. Unless otherwise instructed, the proxies solicited by our board of directors will be voted for the election of the two nominees.

 

In the event either nominee is unable or declines to serve as a director at the time of our annual meeting, the proxies intend to vote for a substitute nominee designated by our board of directors. We have no reason to believe that either nominee is unable or will decline to serve as a director if elected. Any vacancy occurring on our board of directors for any reason may be filled by a majority of our directors then in office until the expiration of the term of the class of directors in which the vacancy exists.

 

OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE ELECTION OF DR. MCKELVEY AND MR. SCHEPPMANN.

 

The names of our nominees for director and directors who will continue in office after our annual meeting until the expiration of their respective terms, together with certain information regarding them, are as follows:

 

Dr. McKelvey has been nominated by our board of directors, with the recommendation of our governance and nominating committee, to serve as a member of our board for a three-year term beginning in April 2009. Dr. McKelvey has served as our President and Chief Executive Officer since June 2006 and has served on our board of directors since July 2006. Prior to joining us, Dr. McKelvey was employed for five years by PAREXEL International, one of the largest biopharmaceutical outsourcing organizations in the world, where he served as Corporate Senior Vice President, Clinical Research Services.

 

Mr. Scheppmann has been nominated by our board of directors, with the recommendation of our governance and nominating committee, to serve as a member of our board for a three-year term beginning in April 2009. Mr. Scheppmann has served on our board of directors since January 2006. Since September 2007, Mr. Scheppmann has served as Executive Vice President and Chief Financial Officer of Teradata Corporation, a data warehousing and enterprise analytics company. From May 2006 until May 2007, he served as Executive Vice President and Chief Financial Officer for Per-Se Technologies, Inc., a healthcare business services and information technology company and a wholly-owned subsidiary of McKesson Corporation. From May 2000 to May 2006, Mr. Scheppmann served as Executive Vice President and Chief Financial Officer for NOVA Information Systems, Inc., a leading payments processing company.

 

Mr. Bonovitz has served on our board of directors since 1999. Mr. Bonovitz is Chairman Emeritus of and counsel to Duane Morris LLP, having stepped down as Chairman and Chief Executive Officer in January 2008 after serving ten years in those positions. Mr. Bonovitz is also a director of Comcast Corporation. In addition, he serves on the advisory boards of several privately-held companies and on the Board of Trustees of The Curtis Institute of Music, The Philadelphia Museum of Art and The Barnes Foundation. He also serves on the Board of The Free Library of Philadelphia Foundation and as a Trustee of the Christian and Mary Lindbach Foundation and The Dolfinger-McMahon Foundation.

 

Mr. DeMane has served on our board of directors since July 2008. Effective April 2009, Mr. DeMane will serve as Senior Advisor with Thomas, McNerney & Partners, a health care venture capital firm. Mr. DeMane served as Chief Operating Officer of Medtronic, Inc. from August 2007 to April 2008. Prior to that, Mr. DeMane served Medtronic as Senior Vice President from May 2007 to August 2007, Senior Vice President and President of Europe, Canada, Latin America and Emerging Markets from August 2005 to May 2007 and Senior Vice President and President, Spinal, ENT and Navigation from February 2002 to August 2005.

 

Dr. Faich has served on our board of directors since 2004. Dr. Faich has served as Senior Vice President of UBC Epidemiology and Risk Management since June 2005. He served as the President of Pharmaceutical Safety Assessments, a consulting firm, from 1994 until June 2005. Dr. Faich co-chaired the original CIOMS International Adverse Reaction Working Group and was a founding board member of the International Society of Pharmacoepidemiology. Dr. Faich is a Fellow of the American Colleges of Physicians, Preventive Medicine and Epidemiology and has authored over 90 scientific papers and received numerous awards. He is currently an Adjunct Scholar for the Center for Clinical Epidemiology at the University of Pennsylvania.

 

Mr. Hitchner has served on our board of directors since 2004. Mr. Hitchner was a partner in the law firm of Pepper Hamilton LLP from May 1992 to June 1999, and returned to the firm in January 2001 as a partner and, subsequently, counsel through 2004. Commencing in 2005, Mr. Hitchner began providing consulting services to the firm. Mr. Hitchner is also a director of Mothers Work, Inc., for which he has served on the audit committee since 1993, including as chairman of that committee since 2000.

 

Dr. Morganroth has served as the chairman of our board of directors since 1999 and a member of our board of directors since 1997. He has served as our Chief Scientific Officer since April 2006. Prior to that, he served as our Chief Scientist from March 2001 to December 2005 and our Chief Executive Officer from 1993 to March 2001. In addition, Dr. Morganroth has consulted for us since 1977. Dr. Morganroth is a globally recognized cardiologist and clinical researcher. Dr. Morganroth served for over ten years as an external Medical Review Officer/Expert for the U.S. Food and Drug Administration.

 

Mr. Phillips has served on our board of directors since August 2002. Mr. Phillips has served as Special Counsel to Medtronic, Inc. since 1999. Mr. Phillips was the Executive Vice President, General Counsel and Secretary of Sofamor Danek Group, Inc., a manufacturer of spinal implants and cranial navigation systems used in neurosurgery,

before its acquisition in 1999 by Medtronic. Mr. Phillips serves on the advisory boards of several privately-held companies.

 

There are no family relationships among our directors, our director nominees and our executive officers.

 

Our board of directors held a total of seven meetings during 2008, and our independent directors met in executive session at the four regular quarterly meetings. Each director attended more than 75% of the meetings of our board of directors and of any committee of which he was a member. Our board has not adopted a formal policy regarding board member attendance at our annual meeting of stockholders, but our board highly encourages all board members to attend such meetings. In April 2008, all members of our board standing for reelection or continuing in office were present at the annual meeting of stockholders.

 

Our board of directors has a compensation committee, an audit committee and a governance and nominating committee.

 

Our compensation committee is currently composed of three members of our board of directors, all of whom, in the judgment of our board, (i) are independent in accordance with Rule 4200(a)(15) of the listing standards of Nasdaq; (ii) are “Non-employee Directors” for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and (iii) satisfy the requirements of an “outside director” for purposes of Section 162(m) of the Internal Revenue Code. Our compensation committee is primarily responsible for determining or making recommendations to our board of directors regarding the compensation payable to our executive officers and directors. In addition, our compensation committee is responsible for making recommendations to our board of directors regarding additions, deletions and alterations with respect to the various employee benefit plans and other fringe benefits that we provide. Our compensation committee also is primarily responsible for administering our equity compensation plans and making determinations or recommendations to our board of directors with respect to awards of equity compensation to our employees and the terms and conditions on which the equity compensation is awarded. See “Executive Compensation — Compensation Discussion and Analysis” for further information. Our compensation committee has the responsibility and authority described in its written charter, which has been adopted and approved by our board of directors and made available on our website at www.ERT.com. Our compensation committee, which currently consists of Messrs. Bonovitz, Hitchner and Phillips, held six meetings during 2008. Mr. Hitchner serves as chairman of our compensation committee.

 

Our audit committee, which was established in accordance with Section 3(a)(58)(A) of the Exchange Act, is currently composed of four members of our board of directors, all of whom, in the judgment of our board, are independent in accordance with Rule 4200(a)(15) of the Nasdaq listing standards and satisfy the criteria in Rule 4350(d)(2) of the Nasdaq listing standards. Our audit committee is primarily responsible for engaging and approving the services performed by our independent registered public accountants and reviewing and evaluating our accounting principles and reporting practices and its system of internal accounting controls. Our audit committee has the responsibility and authority described in its written charter, which has been adopted and approved by our board of directors and made available on our website at www.ERT.com. Our audit committee, which currently consists of Messrs. DeMane, Gathman, Hitchner and Scheppmann, held nine meetings during 2008. Messrs. Scheppmann and Gathman have each been determined by our board of directors to be an “audit committee financial expert” as defined in Item 407 of Regulation S-K. Mr. Scheppmann serves as the chairman of our audit committee.

 

Our governance and nominating committee is currently composed of three members of our board of directors, all of whom, in the judgment of our board, are independent in accordance with Rule 4200(a)(15) of the Nasdaq listing standards. Our governance and nominating committee is primarily responsible for recommending to our board governance policies for our Company, the appropriate size, function and needs of our board to perform that governance and qualified candidates for our board. Our governance and nominating committee has the responsibility and authority described in its written charter, which has been adopted and approved by our board and made available on our website at www.ERT.com. Our governance and nominating committee, which currently consists of Messrs. Bonovitz, Hitchner and Phillips, held four meetings during 2008. Mr. Phillips serves as chairman of our governance and nominating committee.

 

During 2008, Messrs. Bonovitz, Hitchner and Phillips and Dr. Faich all served on our compensation committee. None of these individuals is a current or former officer or employee of our Company or any of our subsidiaries, nor had they had any other relationship requiring disclosure by us under Item 404 of Regulation S-K.

 

Our board recognizes the importance of director independence. We are subject to the listing standards of Nasdaq, which require that a majority of our directors be independent. Under the Nasdaq listing standards, a director is independent if he is not an executive officer or employee of our Company and does not have any relationship that, in the opinion of our board of directors, would interfere with his exercise of independent judgment in carrying out his responsibilities as a director. The listing standards also identify a variety of relationships that, if they exist, prevent a director from being considered independent.

 

Our board has determined that seven of our nine directors are independent under these standards. The independent directors are as follows: Sheldon M. Bonovitz, Michael F. DeMane, Gerald A. Faich, MD, MPH, David D. Gathman, Elam M. Hitchner, Stephen S. Phillips and Stephen M. Scheppmann. The other two directors are Michael J. McKelvey, Ph.D, our current President and Chief Executive Officer, and Joel Morganroth, MD, our Chief Scientific Officer who currently serves as chairman of our board. In making the determination of independence, we considered Mr. Bonovitz’s status during 2008 as Chairman Emeritus of and counsel to the law firm of Duane Morris LLP, which performs legal services for us, but concluded that this relationship did not interfere with his exercise of independent judgment.

 

In addition, each of the directors serving on the audit, compensation and governance and nominating committees is one of the independent directors noted above.

 

On an annual basis, each director and executive officer is obligated to complete a director and officer questionnaire which requires disclosure of any transactions with us in which the director or executive officer, or any member of his or her immediate family, has a direct or indirect material interest. Directors have an affirmative obligation to notify our board of any material changes in their relationships, which may affect their independence status as determined by our board. The obligation encompasses all relationships between directors and us or members of senior management and their affiliates.

 

We have adopted a Code of Ethics and Business Conduct that applies to our Chief Executive Officer, Chief Financial Officer (who serves as our principal financial and principal accounting officer) and other employees and directors. The Code of Ethics and Business Conduct is available on our website at www.ERT.com. We intend to post amendments to or waivers of our Code of Ethics and Business Conduct, to the extent applicable to our Chief Executive Officer and Chief Financial Officer, at that location on our website.

 

Stockholders who wish to communicate with our board of directors or with a particular director may send a letter to our secretary at eResearchTechnology, Inc., 1818 Market Street, Philadelphia, PA 19103 or post a question via www.ethicspoint.com. Any communication should clearly specify that it is intended to be made to the entire board of directors or to one or more particular director(s). Our audit committee reviews all such correspondence submitted via www.ethicspoint.com. Our secretary reviews all other correspondence and will forward to our board of directors a summary of all such correspondence and copies of all correspondence that, in the opinion of the secretary, deals with the functions of our board of directors or committees thereof or that he otherwise determines requires their attention. If there is a question regarding an item of correspondence and the distribution of the communication to a member of our board, the secretary will consult with the chairman of our board or the chairman of the applicable committee to establish the appropriate distribution. Directors may at any time review a log of all correspondence received by us that is addressed to members of our board of directors and request copies of any such correspondence. Concerns relating to accounting, internal accounting controls or auditing matters are immediately brought to the attention of the chairman of our audit committee and handled in accordance with procedures established by our audit committee with respect to such matters. A copy of our audit committee’s procedures for the submission and handling of complaints or concerns regarding accounting, internal accounting controls or auditing matters is available within our Code of Ethics and Business Conduct on our website at www.ERT.com.

 

The following discussion and analysis focuses on the 2008 compensation of the individuals who served as our principal executive and financial officers during 2008, together with our three other most highly compensated executive officers. Throughout this proxy statement, we refer to these individuals as our named executive officers. You should read this discussion and analysis together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.

 

Richard A. Baron served as our Executive Vice President and Chief Financial Officer until June 17, 2008, at which time Steven M. Eisenstein was appointed interim Chief Financial Officer. Keith D. Schneck joined us as our Executive Vice President and Chief Financial Officer on July 28, 2008. For purposes of this discussion, all three of these individuals are named executive officers.

 

Our compensation philosophy was developed to balance and align the goals of executive management and our stockholders. The program is intended to attract, motivate, reward and retain the management talent required to achieve our corporate objectives and increase stockholder value, while at the same time making the most efficient use of stockholder resources. To this end, the compensation philosophy puts a strong emphasis on pay for performance, to correlate the long-term growth of stockholder value with management’s most significant compensation opportunities.

 

Periodically, as part of the annual review of compensation, we have engaged third party compensation consulting firms to establish guidelines for our executive officers. During 2006, the compensation committee engaged Mercer Human Resource Consulting LLC (“Mercer”), an outside global human resources consulting firm, to review our executive officer compensation policies and the material terms of the related employment agreements. Mercer compared the compensation of our executive officers with two different sources: (1) an established group of peer companies using publicly available proxy statement data to measure compensation value that Mercer

developed for the purpose of this survey, and (2) an analysis of broader published survey data based on functional responsibility. The companies Mercer included in our peer group were:

 

 

Our peer group consisted of 12 public Contract Research Organizations and other companies that had sales, net profit margins and market values in similar ranges to those of the company for 2006.

 

Mercer developed the survey data using two proprietary databases (the Mercer Americas Executive Remuneration Database and the Watson Wyatt Data Services Report on Top Management) and a library of published compensation sources, from which it compiled comparative compensation data for each of our named executive officers. For purposes of this discussion, we refer to the data Mercer developed from its review of the peer group compensation information and the survey data as market data.

 

Mercer reviewed the publicly available proxy data for our peer group to compare the compensation of our executive officers to their individual respective peers in the peer group. Mercer also used the survey data to make compensation comparisons for each executive in the study. In each case, Mercer analyzed the compensation elements that comprise the primary components of the compensation for our named executive officers as discussed further below: base salary, short-term non-equity incentive compensation (which, together with base salary, Mercer refers to as total cash compensation) and long-term equity incentives. Mercer analyzed this data for the three-year period 2003 to 2005 using the following financial metrics: sales percent change, EBITDA growth, return on invested capital, gross profit margin and total stockholder return. Mercer collected this data at the 25th, 50th and 75th percentiles and compared the officer positions to survey positions based upon similar position responsibilities. Where necessary, Mercer made adjustments to the market data to account for differences in the complexity and scope of our comparable executive officer’s position. Mercer advised us that these adjustments were consistent with its typical practice.

 

The results of both of these analyses indicated that, in 2007, our executive officers were generally in the range between the median and the 75th percentile of our peer group with respect to total cash compensation. For the peer group review, most executive officers were above the median but below the 75th percentile. For the survey data, the target total cash compensation was generally above the 75% target, with two positions — the president and chief executive officer and the executive vice president and chief financial officer — being below the 75% target. In addition, Mercer reported that the compensation of our executive officers was comparable at the same percentile level when normalized for the financial metrics presented above. Based on these results, our Compensation Committee concluded that the total cash compensation of our named executive officers was competitive with our peer group.

 

The information provided during this process helped establish guidelines for compensation within the performance levels of our company. For 2007, our compensation committee relied upon the prior Mercer analysis to conclude that no adjustments to compensation levels were necessary to respond to market conditions. Based on its conversations with representatives of Mercer and our chief executive officer, our compensation committee concluded that the Mercer analysis performed for 2007 compensation was sufficiently current and that it did not need further detailed analysis of our executive officer compensation to assist in establishing 2008 executive compensation. Accordingly, we set our compensation levels for our named executive officers for 2008 at levels consistent with 2007 compensation, with an increase commensurate with our performance and the performance of the individual executive officer and providing a cost of living adjustment.

 

In 2008, the basic components of named executive officer compensation continued to consist of base salary, a cash incentive bonus plan with both Company and individual performance objectives and long-term incentives in

the form of stock options. Dr. Morganroth’s compensation included each of these components. In addition, Dr. Morganroth’s professional corporation received consulting fees relating to Dr. Morganroth’s initiation of a company consulting practice through the transition of his historic consulting services to our Company. For more information on specific compensation elements for each named executive officer see “— Compensation of our Named Executive Officers” below.

 

The relative weighting of each of the three basic components is designed to reward both short-term and long-term performance. Excluding Dr. Morganroth’s consulting fees and, because he did not receive payment under the cash incentive plan, all compensation paid to Mr. Baron, base salary for 2008 represented approximately 38% to 55% of total compensation, the cash incentive plan component for 2008 represented approximately 15% to 33% of total compensation, and the long-term equity component for 2008 represented approximately 11% to 30% of total annual compensation.

 

Total Cash Compensation. This is a combination of both base salary plus annual cash incentives, and, in limited circumstances, bonus payments. We face competition for qualified employees, and our compensation committee believes it is important that executive officer compensation levels be competitive with contract research organizations and other comparable companies. We target the total cash compensation pay at the 75th percentile of our peer group. The total cash compensation is based upon the outcome of the various elements of the collection of external data described above.

 

In 2008, we continued to offer a cash incentive compensation program permitting our executive officers to earn cash bonuses based on achieving targeted financial goals as well as individual performance. We designed this program to reward participants for achieving financial, operating and individual goals that are key to the success of our business and aligned with the near- and long-term interests of our stockholders. Each executive officer was eligible to participate in the program. This element of the cash compensation program plus base salary, or total cash compensation, are targeted at the 75th percentile for our peer group.

 

At the beginning of each fiscal year, our board, at the recommendation of the compensation committee, working with our chief executive officer, sets the quantitative performance goals under our cash incentive compensation plan, sets goals for individual performance and finalizes each participant’s bonus opportunity. For 2008, we set the cash incentive compensation opportunities for all of our named executive officers, with the exception of Mr. Eisenstein and Dr. McKelvey, at 50% of base salary based on the market data described above and at the recommendation of our chief executive officer, with which our compensation committee concurred. Dr. McKelvey’s cash incentive compensation opportunity was set at 75% of base salary and Mr. Eisenstein’s cash incentive compensation opportunity was set at 25% of base salary. Each named executive officer had the potential to achieve between 50% and 150% of his or her cash incentive compensation opportunity noted in the table below that is allocable to each quantitative performance target category, based on the extent to which we achieved the various specified targets. The quantitative performance targets, as described below, included revenues, net income and contract bookings targets. In addition, each named executive officer had the potential to achieve between 0% and 100% of the cash incentive compensation opportunity noted in the table below that is allocable to individual performance, depending upon the extent to which each individual achieved his or her specific performance goals.

 

We identified revenues and net income as the primary quantitative performance targets because these were the two key measures which would influence our financial performance and on which we wanted our named executive officers to focus. Given the importance of managing our business to the bottom line profit goals, we gave greater weight to the net income target than to the revenue target. For 2008, the revenue target was $135.4 million and the net income target was $23.1 million, and we achieved 98.3% and 108.2%, respectively, of those targets. In addition, for each named executive officer, with the exception of Dr. Morganroth, 20% of the bonus opportunity was tied to individual performance objectives. These individual performance objectives generally included up to four specific objectives based on the officer’s area of responsibility as well as a subjective assessment of the officer’s overall performance. For executives with responsibilities which involve selling efforts, including Dr. Litwin, a portion of their bonus was tied to the achievement of predetermined contract revenue targets (“Contract Targets”).

The following table summarizes the bonus opportunity and related performance targets we set in 2008 for each of our named executive officers:

 

 

We establish financial and operating performance targets that we believe are reasonably attainable based on information available to us when the targets are approved. If our named executive officers and we perform as we expect, we anticipate that participants will achieve 100% of their bonus opportunity. Bonuses are payable based on the extent to which targets are achieved. Bonuses are normally payable within ninety days after the end of the year in which the bonuses are earned. Additionally, if minimum requirements for sales and net income are not met then no bonuses are paid for the year for any bonus categories. Our compensation committee retains the discretion to adjust the amount of any bonus paid under the plan, regardless of the extent to which any of the performance targets is achieved.

 

Dr. Litwin and Dr. Morganroth were entitled to additional compensation, which is not included in the discussion or table above. Dr. Morganroth’s professional corporation was entitled to an 80% share of the net amounts billed by the ERT Consulting Group for Dr. Morganroth’s services to our customers and additional bonuses as may be determined at the discretion of the Board of Directors. Dr. Litwin was entitled to an additional bonus equal to 10% of the gross profits (defined as revenue less direct payments made to providers of consulting) of the ERT Consulting Group, up to a maximum bonus of $70,000 annually. For more information on specific compensation elements for each named executive officer see “— Compensation of our Named Executive Officers” below.

 

Long-Term Incentive in Form of Stock Options.  Our compensation committee believes that appropriate management ownership of our stock is an effective tool to assist in the process of building stockholder value. Additionally, we use this compensation tool to assist in aligning the interests of management and our stockholders. Our compensation committee has used stock options, rather than other forms of long-term incentives, because they create value for the executive only if stockholder value is increased through an increased share price. In the future, equity-based compensation may include stock appreciation rights, restricted stock, restricted stock units or other long term performance awards as permitted by the Amended and Restated 2003 Equity Incentive Plan. Awards of options are typically approved in February of each year, with the grant date being set as the second business day following our announcement of results of operations for the preceding year in order to make sure that the exercise price takes into account any impact of the public disclosure of information regarding our results of operations for the prior year. In addition, new executive officers may receive a grant of long-term equity incentives as part of their negotiated compensation package. Options are granted at a per share exercise price equal to the market price of our common stock on the date of grant. All options typically become exercisable over four years, in equal annual increments beginning one year after the date of grant, contingent upon the officer’s continued employment with us.

 

Existing Equity Compensation Plans

 

The following table presents certain information as of December 31, 2008 regarding our equity compensation plans:

 

 

 

 

Other Benefits.  Our named executive officers also participated in benefit programs in which all of our employees, or all employees in certain categories of employees that included our named executive officers, were eligible to participate. All employees in the United States were eligible to participate in the 401K Retirement Savings Plan (the “401K Plan”). The 401K Plan is a tax-qualified retirement savings plan pursuant to which all United States-based employees were able to contribute the lesser of up to 25%, or in the case of highly compensated employees, which would include all of our named executive officers, up to 9% of their annual salary or the limit prescribed by the Internal Revenue Service to the 401K Plan on a before-tax basis. We matched 50% of the first 6% of pay that was contributed to the 401K Plan. Except for Dr. Morganroth, all of our named executive officers participated in the 401K Plan. All employee contributions to the 401K Plan vested immediately upon contribution and all Company matching contributions vest at a rate of 25% for each year of employment after the first full year of employment, such that 100% of the matching component is vested after five years of service with us. All employees at the level of vice president and higher, which included all of our named executive officers, received a monthly car allowance of $770 per month except for Dr. McKelvey and Dr. Morganroth, who each received a monthly car allowance of $1,000. All employees are offered life insurance at two times their respective salary, up to a maximum of $450,000, for which we pay the premium which, in 2008, amounted to an average of $0.105 per month per $1,000 of coverage for each employee. All employees are offered long-term disability insurance at 60% of monthly salary up to a maximum benefit of $10,000, for which we pay the premium which, in 2008 amounted to an average of $0.175 per $100 of monthly salary. All employees are offered short-term disability insurance at 60% of weekly salary up to a maximum benefit of $2,000, for which we pay 55% of the premium which, in 2008 amounted to $0.228 per month per $10 of coverage. All employees are offered health insurance for which we pay a portion of the premium. We have entered into employment agreements with all of our executive officers which include change of control and severance payments under certain circumstances that are designed to promote stability and continuity of senior management. For further information regarding amounts paid or payable under such agreements for the named executive officers, see “— Potential Payments Upon Termination or Change of Control.”

 

The compensation committee of our board of directors has the authority to determine, but may also recommend to our board for a final decision, the compensation for our executive officers, including our named executive officers. Our compensation committee also makes recommendations to our board of directors concerning compensation and benefit policies for our Company. In establishing or recommending compensation levels and policy, it is the belief of our compensation committee and our board that the most effective compensation program is one that provides executives competitive base salaries and significant incentives to achieve both current and long-term strategic business goals.

Both our chief executive officer and our compensation committee have utilized outside compensation consultants to assist in establishing base-lines for salary, bonuses and non-cash compensation for the executive officers. See “— Review of External Data” for more information about the role of compensation consultants in developing our compensation programs. Our chief executive officer annually reviews the performance of each named executive officer (other than his performance and that of our chairman and chief scientific officer, which are reviewed by our compensation committee). Our chief executive officer presents his conclusions and recommendations based on these reviews, including his proposed salary adjustments, incentive compensation and annual equity award amounts, to our compensation committee. After our compensation committee reviews the recommendations with the chief executive officer, our compensation committee exercises its discretion in accepting or modifying any recommended adjustments or awards to executives and either makes a final determination regarding the compensation of our executive officers or delivers its recommendations to our board for final determination.

 

The aforementioned process generally is performed annually in the November through February time frame. Toward the end of this time-frame, our compensation committee also assesses the extent to which the performance objectives under the bonus plan have been achieved for the prior year and either determines or makes a recommendation to the board with respect to the bonus to be paid, if any, for the prior year. As part of this process, the compensation committee reviews the extent to which our chief executive officer achieved his individual performance goals, and our chief executive officer reports to our compensation committee on the extent to which our other named executive officers achieved their respective individual performance goals.

 

After our compensation committee makes its final decisions with respect to salary, bonus and non-cash compensation recommendations, it presents them for our board’s consideration at the February board meeting. Salary adjustments approved in February are generally made retroactive to January first of the year of the meeting.

 

Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly held companies for compensation paid to certain of their executive officers, to the extent that compensation exceeds $1,000,000 per covered officer in any fiscal year. The limitation applies only to compensation that is not considered to be performance-based which, for purposes of Section 162(m), does not include the consulting fees we pay to Dr. Morganroth’s professional corporation that are included in his total compensation for purposes of this compensation discussion and analysis. Non-performance-based compensation paid to our executive officers for 2008 did not exceed the $1,000,000 limit per officer, and our compensation committee does not anticipate that the non-performance-based compensation to be paid to our executive officers in the foreseeable future will exceed that limit.

 

Our compensation committee has reviewed and discussed the compensation discussion and analysis that appears under the caption “Executive Compensation — Compensation Discussion and Analysis” with management and, based on such review and discussions, our compensation committee recommended to our board that the disclosure set forth above under the caption “Executive Compensation — Compensation Discussion and Analysis” be included in this proxy statement and incorporated by reference in our annual report on Form 10-K for the year ended December 31, 2008.

 

This report of our compensation committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other ERT filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate this report by reference therein.

 

Elam M. Hitchner (Chair)

Sheldon M. Bonovitz

Stephen S. Phillips

 

The table below summarizes the total compensation paid or earned by each of the named executive officers for the fiscal years ended December 31, 2008, 2007 and 2006.

 

 

 

 

The table below provides certain information with respect to stock options granted to our named executive officers during 2008.

 

 

 

 

As described above, the core components of 2008 compensation for each of our named executive officers consisted of base salary, cash incentive bonus and long-term incentive equity awards. The level for each of these components was determined by our compensation committee consistent with the principles described in this Compensation Discussion and Analysis.

 

Dr. McKelvey was our President and Chief Executive Officer for the year ended December 31, 2008. At the beginning of the year, Dr. McKelvey received a discretionary increase of 35.1% from his 2007 salary which increased his 2008 salary to $500,000. This increase was based upon a review of the market data which indicated Dr. McKelvey’s base salary was significantly below the 75th percentile and Dr. McKelvey’s performance during 2007 as recommended by the compensation committee and approved by the board of directors. For the year ended December 31, 2008, Dr. McKelvey received a bonus of $414,831 based upon achievement of the financial goals described above and the full achievement of his individual performance objectives, which included successfully integrating Covance Cardiac Safety Services, Inc. (“CCSS”), the centralized ECG business of Covance, Inc. that we acquired in November 2007, with ERT’s systems and business units, developing processes and procedures to ensure the successful establishment of a marketing agreement with a partner, continuously improving systems and processes to determine financial guidance and creating a 2009 strategic plan for approval by the board of directors.

Additionally, also based upon the compensation committee’s and the board’s review of the market data and his performance, we awarded Dr. McKelvey a grant of 110,000 stock options valued at $4.76 per share, or a total of $523,578 at the time of the grant based upon the Black-Scholes valuation method. Of the 110,000 stock options awarded, 10,000 stock options were awarded specific to Dr. McKelvey’s work related to the acquisition of CCSS.

 

Mr. Schneck was appointed our Executive Vice President and Chief Financial Officer effective July 28, 2008. At the time, his base annual salary was $290,000. During the approximately five months Mr. Schneck was with the Company in 2008, he was paid $117,115 in base salary. For the year ended December 31, 2008, Mr. Schneck received a bonus of $64,777 based upon achievement of the financial goals described above and the full achievement of his individual performance objectives, which included improving financial awareness within business units throughout the Company, continuously improving systems and processes to determine financial guidance and creating a 2009 budget for approval by the board of directors. Mr. Schneck’s cash incentive award was prorated based on the time he was employed by us during 2008. Additionally, at the time of his appointment, Mr. Schneck received a grant of 100,000 stock options valued at $5.68 per share, or a total of $568,480 at the time of the grant based upon the Black-Scholes valuation method.

 

Mr. Baron was our Executive Vice President and Chief Financial Officer from January 1, 2008 to June 17, 2008. At the beginning of the year, Mr. Baron received a discretionary increase of 5.0% from his 2007 salary which increased his 2008 salary to $288,750. This increase was based upon a review of the market data and Mr. Baron’s performance during 2007 as recommended by the compensation committee and approved by the board of directors. During the approximately six months Mr. Baron was with the Company in 2008, he was paid $154,925 in base salary. Additionally, also based upon the compensation committee’s and the board’s review of the market data and his performance, we awarded Mr. Baron a grant of 57,500 stock options valued at $4.76 per share, or a total of $273,689 at the time of the grant based upon the Black-Scholes valuation method. Of the 57,500 stock options awarded, 7,500 stock options were awarded specific to Mr. Baron’s work related to the acquisition of CCSS. For the year ended December 31, 2008, Mr. Baron did not receive a bonus due to his departure from the Company in June 2008.

 

Mr. Eisenstein was our Vice President, interim Chief Financial Officer, Secretary and Corporate Controller from June 17, 2008 to July 28, 2008. During 2008, Mr. Eisenstein earned a base salary of $152,246. For the year ended December 31, 2008, Mr. Eisenstein received a bonus of $42,104 based upon achievement of the financial goals described above and the full achievement of his individual performance objectives, which included continuously improving the internal and external financial reporting systems and financial metrics. Mr. Eisenstein was paid an additional bonus of $25,000 on July 28, 2008 upon Mr. Schneck’s appointment as our Chief Financial Officer. Additionally, based upon the compensation committee’s and the board’s review of the market data and his performance, we awarded Mr. Eisenstein a grant of 10,000 stock options valued at $4.76 per share, or a total of $47,598 at the time of the grant based upon the Black-Scholes valuation method. In addition, upon Mr. Eisenstein’s appointment to interim Chief Financial Officer, he was awarded a grant of 5,000 stock options valued at $6.57 per share, or a total of $32,866 at the time of grant based upon the Black-Scholes valuation method.

 

Dr. Morganroth was the chairman of our board and our Chief Scientific Officer for the year ended December 31, 2008. At the beginning of the year, Dr. Morganroth received a discretionary increase of 4.0% from his 2007 salary which increased his 2008 salary to $196,851. In addition, Dr. Morganroth received a stock option grant of 30,000 stock options valued at $4.76 per share, or a total of $142,794 at the time of the grant based upon the Black-Scholes valuation method. In addition, in 2007, we entered into a new consulting agreement with Joel Morganroth, MD, P.C., a professional corporation owned by Dr. Morganroth. Certain of our diagnostic testing and clinical research contracts require that specified medical professional services be provided. We retained Dr. Morganroth’s professional corporation to provide these and other services related to the successful operation, marketing and business development of our Cardiac Safety division, including the development of a new consulting product line, which was initially based on the transfer of substantially all of the consulting work previously done by Dr. Morganroth under his professional corporation. We paid the corporation 80% of the net amounts billed by the ERT Consulting Group for Dr. Morganroth’s services to our customers. The professional corporation received a total of $1,643,300 in fees under this agreement during 2008. The basis for this compensation was historical consideration for the efforts that Dr. Morganroth provides to our sales and business development organizations and the transfer of his historical consulting clientele to our new consulting business. Dr. Morganroth is an important part

of our efforts to market our services to our various clients, and his consultative skills and reputation in the marketplace are important factors in our ability to win new contracts and retain existing clients. In addition, Joel Morganroth MD, P.C., received a bonus of $110,069 based upon achievement of the financial goals described above.

 

Dr. Litwin was our Chief Medical Officer for the year ended December 31, 2008. At the beginning of the year, Dr. Litwin received a discretionary increase of 5.0% from his 2007 salary which increased his 2008 salary to $273,000. This increase was based upon a review of the market data and Dr. Litwin’s performance during 2007 as recommended by the compensation committee and approved by the board of directors. For the year ended December 31, 2008, Dr. Litwin received a bonus of $132,017 based upon achievement of the financial goals described above, 64.9% of the contract target goals and the full achievement of his individual performance objectives, which included growing ERT’s consulting business to more than $2,000,000 in revenue, continuing to assure ERT’s excellent performance in client audits and represent ERT at public meetings, sponsor related meetings and in interactions with regulatory authorities. Additionally, he received a bonus of $70,000 based on our 2008 consulting profits. Also based upon the compensation committee and the board’s review of the market data and his performance, we awarded Dr. Litwin a grant of 25,000 stock options valued at $4.76 per share, or a total of $118,995 at the time of the grant based upon the Black-Scholes valuation method.

 

Ms. Furlong was our Executive Vice President, Cardiac Safety for the year ended December 31, 2008. At the beginning of the year, Ms. Furlong received a discretionary increase of 10.0% from her 2007 salary which increased her 2008 salary to $242,000. This increase was based upon a review of the market data and Ms. Furlong’s performance during 2007 as recommended by the compensation committee and approved by the board of directors. For the year ended December 31, 2008, Ms. Furlong received a bonus of $133,852 based upon achievement of the financial goals described above and the full achievement of her individual performance objectives, which included successfully and timely integrating CCSS with ERT’s systems and operating business units including margin improvement, developing key reporting metrics, and defining hardware solutions to increase the demand for centralization of cardiac safety services. Additionally, also based upon the compensation committee’s and the board’s review of the market data and her performance, we awarded Ms. Furlong a grant of 32,500 stock options valued at $4.76 per share, or a total of $154,694 at the time of the grant based upon the Black-Scholes valuation method. Of the 32,500 stock options awarded, 7,500 stock options were awarded specific to Ms. Furlong’s work related to the acquisition of CCSS.

 

The table below provides certain information with respect to stock options held by our named executive officers at December 31, 2008.

 

 

 

 

The following table provides certain information with respect to stock options exercised by our named executive officers during 2008.

 

 

 

 

We have entered into employment agreements with each of our named executive officers under which we may be obligated to pay certain severance and other benefits under certain circumstances following termination of employment or changes of control of our Company.

 

For the named executive officers, the agreements provide two potential benefits: one payable in connection with terminations upon death or disability or other than for cause, and one payable under certain circumstances in connection with a change of control of our Company.

 

Termination Upon Death or Disability or Other than For Cause.  If any such officer’s employment is terminated upon death or disability or other than for cause, he will be entitled to a lump sum cash payment equal to a percentage of his then-applicable base salary plus bonus, if any, together with continuation of benefits for a period specified in his agreement. Dr. Morganroth’s employment agreement for 2008 does not provide for a bonus; he would be entitled to a payment equal to 230% of his base salary plus continuation of benefits for a period of 2.3 years. Dr. McKelvey and Mr. Schneck would be entitled to a payment equal to 100% of their respective base salaries and bonus plus continuation of benefits for a period of one year. Dr. Litwin and Ms. Furlong would be entitled to a payment equal to 50% of their respective base salaries and bonus plus continuation of benefits for a period of six months. Mr. Eisenstein would be entitled to a payment equal to 25% of his base salary and bonus plus continuation of benefits for a period of three months.

 

For purposes of these provisions, including the change of control benefits discussed below, “benefits” means our standard health, dental, disability, life and accident insurance benefits as in force at the time the benefit is calculated together with the executive’s automobile allowance. In addition, any bonus is calculated as if the executive’s entire bonus opportunity was achieved and then pro-rated based on the number of days of service during the applicable incentive period.

Change of Control.  Upon a change of control in our Company, the named executive officers are entitled to certain benefits only if one of three additional criteria is satisfied:

 

 

For purposes of these provisions, a change of control means any of the following:

 

 

Under those circumstances, each such executive would be entitled to a lump sum payment equal to a percentage of his salary and bonus, if any, plus continuation of benefits for a specified period of time and the acceleration of vesting for any stock options that were not otherwise exercisable. Dr. Morganroth’s employment agreement does not provide for a bonus; his benefit would be 230% of his base salary plus continuation of benefits for a period of six months. Dr. McKelvey would be entitled to a benefit equal to 100% of his base salary plus bonus plus continuation of benefits for a period of two years. Mr. Schneck would be entitled to a benefit equal to 100% of his base salary plus bonus plus continuation of benefits for a period of one year. Dr. Litwin and Ms. Furlong would be entitled to a benefit equal to 50% of their respective base salaries plus bonus plus continuation of benefits for a period of six months. Mr. Eisenstein would be entitled to a benefit equal to 25% of his base salary and bonus plus continuation of benefits for a period of three months.

 

Conditions on Payment.  Each named executive officer’s agreement includes a customary confidentiality covenant that survives termination of service together with a one-year (two-year for Dr. Morganroth) noninterference and nonsolicitation covenant with respect to vendors, customers, suppliers, employees and agents of our Company and a one-year (two-year for Dr. Morganroth) covenant not to compete with us in the United States or in any foreign country in which any customer to which we are providing services or technology is located. Under the terms of the agreements, any breach of these covenants results in the forfeiture of any payments we may be obligated to make as described above after the occurrence of the breach.

Tabular Presentation

 

The table below reflects the amount of compensation to each of our named executive officers in the event they become entitled to the benefits described above. The amounts shown assume that they became entitled to such benefits effective as of December 31, 2008. The amounts shown also assume that the criteria for earning a change of control benefit were satisfied as of December 31, 2008.

 

 

 

 

We do not compensate any director who is either (a) one of our employees, (b) the beneficial owner of 10% or more of our outstanding common stock (a “Significant Holder”) or (c) a stockholder, member or partner of any entity which itself is a Significant Holder. During 2008, each other director received a fee of $1,500 for each board meeting attended, $1,000 for each audit committee meeting attended and $500 for each compensation committee and governance and nominating committee meeting attended. In addition, each such director received an annual retainer of $7,500, the chairman of our audit committee received an additional annual retainer of $4,000 and the chairman of our governance and nominating committee and our compensation committee each received an additional annual retainer of $1,500.

 

Upon the initial election of any “outside director” (as defined), such individual was entitled to receive at the time of election an automatic one-time option grant to purchase 10,000 shares of common stock, and each outside director received a fixed annual option grant to purchase 10,000 shares of common stock. Each director is also

reimbursed for out-of-pocket expenses incurred in connection with attending meetings and providing other services as a director.

 

The table below summarizes the compensation paid by us to our directors who are not named executive officers for the fiscal year ended December 31, 2008.

 

Director Compensation

 

 

 

 

Under the terms of the charter of our audit committee, we require prior audit committee approval of all related party transactions because we recognize that they present a heightened risk of conflicts of interest and can create the appearance of a conflict of interest. We review for items in which an employee may be a related party. Our Code of Ethics and Business Conduct defines related parties to include the following: an organization of which an employee of the company is an officer or partner; the employee is a beneficial owner of ten percent (10%) or more; any trust in which the employee has a substantial interest, or serves as a trustee or in a similar fiduciary capacity; and any immediate family member of an employee who may significantly influence or be influenced by a business transaction with an organization of which he or she is an officer, director or partner. Such proposed transactions require disclosure to and approval of an executive officer or director and the audit committee. The audit committee reviews for related party transactions at each of its quarterly meetings.

 

Certain of our diagnostic testing and clinical research contracts require that specified medical professional services be provided by Joel Morganroth, MD, our Chairman and Chief Scientific Officer. We have retained Joel Morganroth, MD, P.C., a professional corporation owned by Dr. Morganroth, to provide these and other services related to the successful operation, marketing and business development of our Cardiac Safety division, which include consulting services that Dr. Morganroth’s professional corporation provides for us to our clients for which

he received 80% of the fees we received from our clients for such services. This professional corporation received fees for these services of $1,753,369 for 2008, which included a bonus award of $110,069. The consulting agreement continues on a year to year basis unless terminated. See “Executive Compensation — Compensation Discussion and Analysis — Compensation of Individual Named Executive Officers” for more information about Dr. Morganroth’s consulting agreement.

 

During 2008, Sheldon M. Bonovitz, one of our directors, was the Chairman Emeritus of and counsel to Duane Morris LLP, which performs legal services for us. We paid $475,501 in fees to Duane Morris LLP for their services performed for us in 2008.

 

Our audit committee has designated KPMG LLP to be our independent registered public accountants for the year ending December 31, 2009. Our board of directors will offer a resolution at our annual meeting to ratify this designation. KPMG LLP has served as our independent registered public accountants since July 2002. Our organizational documents do not require that our stockholders ratify the selection of KPMG LLP as our independent registered public accountants. We are doing so because our board of directors believe it is a matter of good corporate practice. If our stockholders do not ratify the selection, our audit committee will reconsider whether or not to retain KPMG LLP, but still may retain them. Even if the selection is ratified, our audit committee, in its discretion, may change the appointment at any time during the year if it determines that such a change would be in the best interests of us and our stockholders.

 

Approval of the proposal will require the favorable vote of a majority of the stockholders present in person or by proxy and entitled to vote at the annual meeting. OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” RATIFICATION OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FOR FISCAL 2009. We anticipate that representatives of KPMG LLP will be present at the meeting to respond to appropriate questions and, if they desire, to make a statement.

 

During 2007 and 2008, we retained KPMG LLP to provide professional services in the following categories and amounts:

 

 

Audit fees for 2007 and 2008 include fees incurred for professional services rendered in connection with the audit of our consolidated financial statements for the years ended December 31, 2007 and 2008 that are customary under auditing standards generally accepted in the United States or that are customary for the purpose of rendering an opinion on the consolidated financial statements, and for the review of the consolidated financial statements included in the quarterly reports on Form 10-Q required to be filed during fiscal years 2007 and 2008. In addition, audit fees for 2007 and 2008 include fees incurred for professional services rendered in connection with the audit of our internal control over financial reporting. In addition, the 2007 audit fees included $93,000 for services related to the CCSS acquisition. In 2007 and 2008, tax fees consisted of federal, state and local tax return preparation, including the preparation and work related to the determination and support of research and development tax credits

available to us for those years. All other fees in 2007 consisted primarily of services rendered in connection with due diligence procedures that we requested in relation to proposed transactions.

 

Our audit committee has considered all of the above services performed by KPMG LLP and has determined that the provision thereof is compatible with maintaining auditor independence. All services rendered by KPMG LLP were permissible under applicable laws and regulations and were pre-approved by our audit committee. In accordance with its charter, our audit committee pre-approves all audit and permissible non-audit services provided by our independent registered public accountants. In addition, it is our audit committee’s procedure to approve any engagement or accounting project involving the independent registered public accountants, and the related fees, prior to commencement of the engagement or project.

 

The audit committee of our board of directors assists our board with the oversight of our system of internal control, integrity of financial reporting, adequacy of disclosures and compliance with legal and regulatory requirements. Our audit committee is directly responsible for the engagement, compensation, oversight and evaluation of our independent registered public accountants and, once retained, consults with and reviews recommendations made by our independent registered public accountants with respect to our consolidated financial statements, financial records and financial controls.

 

Accordingly, our audit committee has (i) reviewed and discussed our audited consolidated financial statements with management and our independent registered public accountants; (ii) discussed with our independent registered public accountants the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (Communications with Audit Committees); (iii) received the written disclosures and the letter from our independent registered public accountants required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees); and (iv) discussed with our independent registered public accountants its independence from management and us, including the matters in the written disclosures required by the Independence Standards Board. Our audit committee also discussed with our independent registered public accountants the overall scope and plans for our audit. Our audit committee met both separately and jointly with management and our independent registered public accountants to discuss the results of our accountants’ examination, their evaluation of our internal control over financial reporting and the overall quality of our financial reporting.

 

Based on the review and discussions referred to above, and subject to the limitations of its role, our audit committee recommended to our board of directors that our audited consolidated financial statements be included in our annual report on Form 10-K for the year ended December 31, 2008.

 

This report of our audit committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other ERT filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except to the extent that we specifically incorporate this report by reference therein.

 

Stephen M. Scheppmann (Chair)
Michael F. DeMane
David D. Gathman
Elam H. Hitchner

 

Any stockholder who, in accordance with and subject to the provisions of Rule 14a-8 of the proxy rules of the Securities and Exchange Commission, wishes to submit a proposal for inclusion in our proxy statement for our 2010 annual meeting of stockholders must deliver such proposal in writing to our Secretary at our principal executive offices at 1818 Market Street, Philadelphia, PA 19103 no later than November 14, 2009. Such proposals may be included in next year’s proxy statement if they comply with certain rules and regulations promulgated by the Securities and Exchange Commission.

 

In accordance with Rule 14a-4(c) promulgated by the Securities and Exchange Commission pursuant to the Exchange Act, the holders of proxies solicited by our board of directors in connection with the 2010 annual meeting may vote such proxies in their discretion on certain matters as more fully described in such rule, including without limitation on any matter coming before the meeting as to which we do not have notice on or before February 3, 2010.

 

Our board knows of no other matters that may be presented for action at the 2009 annual meeting. However, if any other matter properly comes before the annual meeting, the proxy holders will vote in accordance with their judgment on such matter.

 

We urge you to vote, sign and return the enclosed form of proxy promptly in the enclosed envelope.

 

By order of our board of directors,

 

 

KEITH D. SCHNECK,

Executive Vice President, Chief Financial Officer

and Secretary