UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549







FORM 10-Q









ýQuarterly Report Under Section 13 or 15(d) of

the Securities Exchange Act of 1934.



For the quarterly period ended: March 31, 2004



Commission File No. 1-16119





SFBC INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)





|Delaware                                                       | 59-2407464                       
|-------------------------------------------------------------- | ---------------------------------
|(State or other jurisdiction of
incorporation or organization) | (IRS Employer
Identification No.)
|                                                              



11190 Biscayne Blvd., Miami, FL 33181

(Address of principal executive offices) (Zip code)



(305) 895-0304

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes  ̈ No



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ý Yes  ̈ No



The registrant has 10,029,606 shares of common stock outstanding as of April 30, 2004







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INDEX



|                                                                                                      | Page 
|----------------------------------------------------------------------------------------------------- | -----
|PART I - FINANCIAL INFORMATION                                                                       
|                                                                                                      |      
|ITEM 1.
Financial Statements                                                                          |      
|                                                                                                      |      
|Condensed Consolidated Balance Sheets
as of March 31, 2004 and December 31, 2003                      | 1    
|                                                                                                      |      
|Condensed Consolidated Statements of Earnings
for the three months ended March 31, 2004 and 2003      | 2    
|                                                                                                      |      
|Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2004 and 2003    | 3-4  
|                                                                                                      |      
|Notes to Condensed Consolidated Financial
Statements                                                  | 5-11 
|                                                                                                      |      
|ITEM 2.
Managements Discussion and Analysis of Interim Financial
Condition and Results of Operations | 12-23
|                                                                                                      |      
|ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk                                    | 23-24
|                                                                                                      |      
|ITEM 4.
Controls and Procedures                                                                       | 24-25
|                                                                                                      |      
|PART II - OTHER INFORMATION                                                                          
|                                                                                                      |      
|ITEM 1.
Legal Proceedings                                                                             | 26   
|                                                                                                      |      
|ITEM 2.
Change in Securities and Use of Proceeds                                                      | 26   
|                                                                                                      |      
|ITEM 3.
Defaults upon Senior Securities                                                               | 26   
|                                                                                                      |      
|ITEM 4.
Submission of Matters to a Vote of Security Holders                                           | 26   
|                                                                                                      |      
|ITEM 5.
Other Information                                                                             | 26   
|                                                                                                      |      
|ITEM 6.
Exhibits and Reports on Form 8-K                                                              | 27   
|                                                                                                      |      
|SIGNATURES                                                                                            | 28   















i



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PART I - FINANCIAL INFORMATION



Item 1. Financial Statements



SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2004 AND DECEMBER 31, 2003





|                                                                                                                                                                        |  | (Unaudited)
March 31,
2004 |             | December 31,
2003 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | ----------------- | -
|ASSETS                                                                                                                                                                  |  |                            |             |                   |  
|                                                                                                                                                                        |  |                            |             |                   |  
|Current Assets                                                                                                                                                          |  |                            |             |                   |  
|Cash and cash equivalents                                                                                                                                               |  | $                          | 52,409,792  |                   | $
|Investment in marketable securities                                                                                                                                     |  |                            | 5,420,980   |                   |  
|Accounts receivable, net                                                                                                                                                |  |                            | 33,670,915  |                   |  
|Income tax receivable                                                                                                                                                   |  |                            | 490,466     |                   |  
|Loans receivable from stockholders                                                                                                                                      |  |                            | 223,509     |                   |  
|                                                                                                                                                                        |  |                            |             |                   |  
|Deferred income taxes                                                                                                                                                   |  |                            | 121,565     |                   |  
|Prepaids and other current assets                                                                                                                                       |  |                            | 4,148,732   |                   |  
|Total current assets                                                                                                                                                    |  |                            | 96,485,959  |                   |  
|Loans receivable from stockholders                                                                                                                                      |  |                            | 400,000     |                   |  
|Property and equipment, net                                                                                                                                             |  |                            | 37,278,689  |                   |  
|Goodwill, net                                                                                                                                                           |  |                            | 52,305,274  |                   |  
|Other intangibles, net                                                                                                                                                  |  |                            | 1,801,273   |                   |  
|Deferred income taxes                                                                                                                                                   |  |                            | 20,492      |                   |  
|Other assets, net                                                                                                                                                       |  |                            | 231,547     |                   |  
|Total assets                                                                                                                                                            |  | $                          | 188,523,234 |                   | $
|                                                                                                                                                                        |  |                            |             |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                    |  |                            |             |                   |  
|                                                                                                                                                                        |  |                            |             |                   |  
|Current liabilities                                                                                                                                                     |  |                            |             |                   |  
|Accounts payable                                                                                                                                                        |  |                            | 4,164,663   |                   |  
|Accrued liabilities                                                                                                                                                     |  |                            | 5,542,659   |                   |  
|Purchase consideration due to stockholders                                                                                                                              |  |                            | 4,462,498   |                   |  
|Advance billings                                                                                                                                                        |  |                            | 5,149,251   |                   |  
|                                                                                                                                                                        |  |                            |             |                   |  
|                                                                                                                                                                        |  |                            |             |                   |  
|Line of credit, current portion                                                                                                                                         |  |                            | 336,723     |                   |  
|Notes payable, current portion                                                                                                                                          |  |                            | 2,088,763   |                   |  
|Total current liabilities                                                                                                                                               |  |                            | 21,744,557  |                   |  
|Deferred income taxes                                                                                                                                                   |  |                            |            |                   |  
|Line of credit                                                                                                                                                          |  |                            | 8,663,277   |                   |  
|Notes payable                                                                                                                                                           |  |                            | 4,190,606   |                   |  
|                                                                                                                                                                        |  |                            |             |                   |  
|Commitments                                                                                                                                                             |  |                            |            |                   |  
|Stockholders' equity                                                                                                                                                    |  |                            |             |                   |  
|Preferred stock. $0.10 par value, 5,000,000 shares authorized, none issued                                                                                              |  |                            |            |                   |  
|Common stock, $0.001 par value, 20,000,000 shares authorized,
15,031,659 shares and 14,985,832 shares issued and outstanding
as of March 31, 2004 and December 31, 2003 |  |                            | 15,032      |                   |  
|Additional paid-in capital                                                                                                                                              |  |                            | 124,257,005 |                   |  
|Retained earnings                                                                                                                                                       |  |                            | 27,949,447  |                   |  
|Deferred compensation                                                                                                                                                   |  |                            | (690,26     | )                 |  
|Accumulated other comprehensive earnings                                                                                                                                |  |                            | 2,393,578   |                   |  
|                                                                                                                                                                        |  |                            |             |                   |  
|Total stockholders' equity                                                                                                                                              |  | $                          | 153,924,794 |                   | $
|Total liabilities and stockholders' equity                                                                                                                              |  | $                          | 188,523,234 |                   | $



The accompanying notes are an integral part of these financial statements.



1



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2004





|                                             | Three Months Ended
March 31,* |           
|-------------------------------------------- | ----------------------------- | ----------
|                                             | 2004                          |           
|                                             |                               |           
|Net revenue                                  | $                             | 33,485,539
|Costs and expenses                           |                               |           
|Direct costs                                 |                               | 18,763,948
|Selling, general and administrative expenses |                               | 10,034,111
|Total costs and expenses                     |                               | 28,798,059
|Earnings from operations                     |                               | 4,687,480 
|Other income (expense)                       |                               |           
|Interest income                              |                               | 172,686   
|Interest expense                             |                               | (105,548  
|Total other income (expense)                 |                               | 67,138    
|Earnings before taxes                        |                               | 4,754,618 
|Income tax expense                           |                               | 1,028,310 
|Net earnings                                 | $                             | 3,726,308 
|Earnings per share:                          |                               |           
|Basic                                        | $                             | 0.25      
|Diluted                                      | $                             | 0.24      
|Shares used in computing earnings per share: |                               |           
|Basic                                        |                               | 14,982,494
|Diluted                                      |                               | 15,743,943



*

The numbers reported above give retroactive effect to the recently declared three-for-two stock split which is effective at the close of business on May 10, 2004. As a result of this split, the number of shares outstanding as of March 31, 2004 and 2003 have been adjusted so that 15,031,659 and 14,985,832 are reflected as outstanding at March 31, 2004, and 2003, respectively. Based upon the actual number of shares outstanding at March 31, 2004 and 2003, the earnings per share would have been $0.37 basic and $0.36 diluted for 2004, and $0.27 basic and $0.26 diluted for 2003. This approach reflects how earnings per share would have been reported if the stock split was announced after the filing of this report.

The accompanying notes are an integral part of these financial statements.



2



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003





|                                                                                    |  | 2004 |              | 2003 |  
|----------------------------------------------------------------------------------- |  | ---- | ------------ | ---- | -
|                                                                                    |  |      |              |      |  
|Cash flows from operating activities                                                |  |      |              |      |  
|Net earnings                                                                        |  | $    | 3,726,308    |      | $
|Adjustments to reconcile net earnings to net cash provided
by operating activities: |  |      |              |      |  
|Depreciation and amortization                                                       |  |      | 1,427,191    |      |  
|Provision for bad debt                                                              |  |      |             |      |  
|                                                                                    |  |      |              |      |  
|Common stock options issued as compensation                                         |  |      | 42,112       |      |  
|                                                                                    |  |      |              |      |  
|                                                                                    |  |      |              |      |  
|Changes in assets and liabilities                                                   |  |      |              |      |  
|Accounts receivable                                                                 |  |      | (813,384     | )    |  
|Income tax receivable                                                               |  |      | 860,041      |      |  
|Prepaid expenses and other current assets                                           |  |      | (90,246      | )    |  
|Other assets                                                                        |  |      | (189,796     | )    |  
|Accounts payable                                                                    |  |      | (1,600,702   | )    |  
|Accrued liabilities                                                                 |  |      | 179,327      |      |  
|Advance billings                                                                    |  |      | 415,432      |      |  
|Income taxes payable                                                                |  |      |             |      |  
|Deferred income taxes                                                               |  |      | (324,213     | )    |  
|Total adjustments                                                                   |  |      | (94,238      | )    |  
|Net cash provided by operating activities                                           |  |      | 3,632,070    |      |  
|Cash flows from investing activities                                                |  |      |              |      |  
|Cash consideration - acquisitions, net of cash acquired                             |  |      |             |      |  
|Additional purchase price consideration                                             |  |      | (1,343,070   | )    |  
|Purchase of property and equipment                                                  |  |      | (14,404,181  | )    |  
|Change in marketable securities                                                     |  |      | (1,509,434   | )    |  
|Loans to officers/stockholders                                                      |  |      | (12,639      | )    |  
|Repayment on loans to officers/stockholders                                         |  |      |             |      |  
|Net cash used in investing activities                                               |  |      | (17,269,324) |      |  
|Cash flows from financing activities                                                |  |      |              |      |  
|Borrowings against bank line of credit                                              |  |      | 10,000,000   |      |  
|Payments on bank line of credit                                                     |  |      | (1,000,000   | )    |  
|Principal additions to and payments on notes payable                                |  |      | 627,953      |      |  
|Proceeds from the issuance/exercise of warrants and common stock                    |  |      | 402,616      |      |  
|Net cash provided by (used in) financing activities                                 |  |      | 10,030,569   |      |  
|Net effect of exchange rate changes on cash                                         |  |      | (3,975       | )    |  
|Net decrease in cash and cash equivalents                                           |  |      | (3,61,660    | )    |  
|Cash and cash equivalents at beginning of period                                    |  |      | 56,020,452   |      |  
|Cash and cash equivalents at end of period                                          |  | $    | 52,409,792   |      | $







The accompanying notes are an integral part of these financial statements.



3



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003





|                                                                                            |  | 2004 |           | 2003
|------------------------------------------------------------------------------------------- |  | ---- | --------- | ----
|                                                                                            |  |      |           |     
|Supplemental disclosures:                                                                   |  |      |           |     
|Interest paid                                                                               |  | $    | 105,548   |     
|Income taxes paid                                                                           |  | $    |          |     
|Supplemental disclosures of non-cash investing and financing activities:                    |  |      |           |     
|Fair value of net assets (liabilities) assumed in connection with
acquisition of businesses |  | $    |          |     
|                                                                                            |  |      |           |     
|                                                                                            |  |      |           |     
|                                                                                            |  |      |           |     
|                                                                                            |  |      |           |     
|                                                                                            |  |      |           |     
|                                                                                            |  |      |           |     
|                                                                                            |  |      |           |     
|Additional purchase consideration related to the acquisition of businesses                  |  | $    | 4,095,462 |     

The accompanying notes are an integral part of these financial statements.



4



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)





NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION



Principles Of Consolidation And Organization



The consolidated financial statements include the accounts of SFBC International, Inc. (the Company) and its wholly-owned subsidiaries, South Florida Kinetics, Inc. (SFBC Miami), Clinical Pharmacology International, Inc. (CPI), Clinical Pharmacology of Florida, Inc. (Clinical Pharmacology), SFBC New Drug Services, Inc., (which includes the operations of SFBC Charlotte, Inc. effective April 1, 2003), SFBC Ft. Myers, Inc., SFBC Analytical Laboratories, Inc., SFBC Canada Inc., Anapharm Inc., SFBC New Drug Services Canada, Inc. (NDS Canada) (formerly Danapharm Clinical Research Inc.), 11190 Biscayne LLC (the holding company which owns the SFBC Miami property), and Synfine Research Inc. Additionally, the Company owns 49% of a joint venture, SFBC Anapharm Europe S.L. (Anapharm Europe) which operates a bioanalytic laboratory in Barcelona, Spain, which commenced operations in November 2003. The accounts of this joint venture are included in the Companys consolidated accounts as of December 31, 2003 and March 31, 2004. All financial information presented in this report relating to Canadian and Spanish subsidiaries has been converted to United States dollars. All intercompany transactions and balances have been eliminated in consolidation.



During the three month period ended March 31, 2003, Anapharm owned a 49% interest in NDS Canada located in London, Ontario Canada. For these periods NDS Canadas results, which were not material, were reported on the equity method of accounting. On July 7, 2003, Anapharm purchased the remaining 51% interest of NDS Canada and accordingly since July 7, 2003 the operations of NDS Canada have been included in the consolidated results of the Company. See Note 3 to the Condensed Consolidated Financial Statements.



On August 4, 2003, the Company acquired CPI, which owns real estate, and Clinical Pharmacology, merging Clinical Pharmacology into SFBC Miami. See Note 3 to the Condensed Consolidated Financial Statements.



Unless the context otherwise requires, all references in this Report to we, us, our, SFBC International, SFBC, or the Company refer to SFBC International, Inc. and its subsidiaries and predecessors as a combined entity.



Basis Of Presentation



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have

5



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)





been made. Operating results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the remaining quarters and for the year ending December 31, 2004.



As described in Note 5, effective as of the close of business on May 10, 2004 we will effect a three-for-two stock split. All historical earnings per share numbers, references to numbers of shares outstanding, reference to our shares of common stock used in acquisitions, and other references, appearing in this Report have been retroactively adjusted as required by applicable accounting standards, except where we disclose that no adjustment has been made.



Certain prior period amounts have been reclassified to conform to the current years presentation.



NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The accompanying condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the Companys Annual Report Form 10-K for the year ended December 31, 2003, and should be read in conjunction with the consolidated financial statements and notes which appear in that Report. These statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.



The preparation of the Companys financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to our financial statements. Management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under the circumstances. These estimates and the Companys actual results are subject to the risk factors referred to and incorporated by reference listed in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  Forward-Looking Statements.



Net Earnings Per Share



The Company applies Statement of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128) which requires dual presentation of net earnings per share: Basic and Diluted. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period adjusted for incremental shares attributed to outstanding options and warrants to purchase approximately 1,494,106 shares of common stock for the three-month period ended March 31, 2004, and 1,235,092 shares for the

6



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)





three-month period ended March 31, 2003, respectively; less the assumed repurchase of shares in accordance with the treasury stock method of 732,657 shares for the three-month period ended March 31, 2004, and 690,544 shares for the three- month period ended March 31, 2003.



Stock Based Compensation



At March 31, 2004, the Company had one stock based compensation plan and had entered into a limited number of stock option agreements, which have been disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2003 and its Proxy Statement for the 2004 annual meeting filed with the Securities and Exchange Commission. The Company accounts for stock-based compensation using the intrinsic value method. Accordingly, compensation cost for stock options issued is measured as the excess, if any, of the fair value of the Companys common stock at the date of grant over the exercise price of the options. The Companys net earnings and earnings per share would have been changed to the pro forma amounts indicated below had compensation cost for the stock option plans and non-qualified options issued to employees been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123.



| |                             |  | Three Months Ended
March 31, |          
| | --------------------------- |  | ---------------------------- | ---------
| |                             |  | 2004                         |          
| |                             |  |                              |          
| | Net earnings:               |  |                              |          
| |                             |  |                              |          
| | As reported                 |  | $                            | 3,726,308
| | Pro forma                   |  | $                            | 2,961,934
| |                             |  |                              |          
| | Basic earnings per share:   |  |                              |          
| | As reported                 |  | $                            | 0.25     
| | Pro forma                   |  | $                            | 0.20     
| | Diluted earnings per share: |  |                              |          
| | As reported                 |  | $                            | 0.24     
| | Pro forma                   |  | $                            | 0.19     



The above pro forma disclosures may not be representative of the effects on reported net earnings for future years as options vest over several years and the Company may continue to grant options to employees. In accordance with the requirements of SFAS 123, the fair value of each option grant was estimated on the date of grant using a binomial option-pricing model with the following weighted-average assumptions used for grants in 2004 and 2003, respectively: no dividend yield for all years; expected volatility of 75% for 2004 and 2003; risk-free interest rates of 3% in 2004 and 2003; and expected holding periods of three years in 2004 and 2003.



See Note 5 for information concerning proposals to change our stock-based incentives, subject to stockholder approval, and our recently declared three-for-two stock split.





7



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)





New Accounting Pronouncements



In January 2003, the FASB issued Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities, which establishes criteria to identify variable interest entities (VIE) and the primary beneficiary of such entities. An entity that qualifies as a VIE must be consolidated by its primary beneficiary. All other holders of interests in a VIE must disclose the nature, purpose, size and activity of the VIE as well as their maximum exposure to losses as a result of involvement with the VIE. FIN 46 was revised in December 2003 and is effective for financial statements of public entities that have special-purpose entities, as defined, for periods ending after December 15, 2003. For public entities without special-purpose entities, it is effective for financial statements for periods ending after March 15, 2004. The Company does not have any special-purpose entities, as defined. The adoption of FIN 46 did not have a material effect on the Companys financial statements.



On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a proposed statement, Share-Based Payment, that addresses the accounting for share-based payment transactions (for example, stock options and awards of restricted stock) in which an employer receives employee-services in exchange for equity securities of the company or liabilities that are based on the fair value of the companys equity securities. This proposal, if finalized as proposed, would eliminate use of APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require such transactions be accounted for using a fair-value-based method and recording compensation expense rather than optional pro forma disclosure of what expense amounts might be. The proposal, if approved, would substantially amend FASB Statement No. 123, Accounting for Stock-Based Compensation. If implemented, SFBC may reduce its reliance on issuing stock options and begin to use other stock based compensation. The exact nature of future compensation awards will be determined by our Compensation Committee.



A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to SFBCs consolidated financial statements.



NOTE 3. ACQUISITIONS



For the year ended December 31, 2003 and the three months ended March 31, 2004, our acquisitions consisted of the following:



•

Our March 2003 acquisition of substantially all of the assets of Synfine Research Inc., an Ontario corporation, a provider of chemical synthesis products used by bioanalytical laboratories, for which we paid $1.6 million in cash.

•

Our July 2003 acquisition of the remaining 51% of NDS Canada which Anapharm did not own, for which we paid an initial amount of approximately $480,000 consisting of $336,000 in cash and our issuance of 12,213 shares of common stock, with additional consideration of approximately $1.12 million comprised of approximately $785,000 in notes payable and our issuance of 28,506 shares of

8



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)





common stock payable in four equal payments over the next four years. Danapharm is a London, Ontario-based Phase III clinical trials management company. The first cash installment of approximately $200,000 plus accrued interest was paid in advance in April 2004 to reduce interest costs; and



•

Our August 2003 acquisition of Clinical Pharmacology, a Miami, Florida company specializing in Phase I clinical trials, as well as CPI, for which we paid approximately $7.5 million in cash and issued 664,608 shares of common stock. Of such amounts, we have deposited approximately $1.0 million and 81,000 shares of common stock in escrow for subsequent delivery to the sellers. On each February 1st and August 1st, effective February 1, 2004, we deliver from escrow a total of approximately $167,000 and approximately 9,000 shares. In addition, the shareholders of Clinical Pharmacology will have an opportunity during the three 12-month periods ending June 30, 2004, 2005 and 2006, respectively, to earn up to an aggregate of $9.0 million in additional consideration, one-half payable in cash and one-half in common stock, based upon attaining agreed revenue milestones. Based upon Clinical Pharmacologys and Miamis revenue levels for the period July 1, 2003 through March 31, 2004, the Company believes that Clinical Pharmacology will attain the maximum earn-out of $4,000,000 for the first measurement period ending June 30, 2004. Accordingly, the Company has recorded a current liability of $4,000,000 on its balance sheet. The amount is payable one half in cash and one half is stock in August 2004.

•

In November 2003, we acquired a 49% joint venture interest in a Spanish bioanalytical laboratory, Anapharm Europe. Our initial capital contribution was approximately $354,000.



Unaudited Pro Forma Results



Unaudited pro forma results of operations after giving effect to certain adjustments resulting from the 2003 acquisitions were as follows for the three month periods ended March 31, 2004 and 2003 as if the business combinations had occurred at the beginning of each period presented. The pro forma results do not include the operations of Synfine or the operations of Anapharm Europe, which commenced operations in November 2003.



| |                              |  | Three Months Ended
March 31 |           
| | ---------------------------- |  | --------------------------- | ----------
| |                              |  | 2004                        |           
| |                              |  |                             |           
| | Net revenue                  |  | $                           | 33,485,539
| | Net earnings                 |  | $                           | 3,726,308 
| | Earnings per share - basic   |  | $                           | 0.25      
| | Earnings per share - diluted |  | $                           | 0.24      





9



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)





The pro forma data is provided for information purposes only and does not purport to be indicative of results which actually would have been obtained if the combinations had been effected at the beginning of each period presented, or of those results which may be obtained in the future.



NOTE 4. GOODWILL AND INTANGIBLE ASSETS



In connection with adopting SFAS 142, the Company also reassessed the useful lives and the classifications of its identifiable intangible assets and determined that they continue to be appropriate. The components of the Companys intangible assets subject to amortization are approximately as follows:



|                      |  |                          | Weighted
Average
Life
(Years) |  | March 31, 2004           |           | December 31, 2003 |  
|--------------------- |  | ------------------------ | ----------------------------- |  | ------------------------ | --------- | ----------------- | -
|Gross
Carrying
Amount |  | Accumulated
Amortization | Gross
Carrying
Amount         |  | Accumulated
Amortization
|                      |  |                          |                               |  |                          |           |                   |  
|Methodologies         |  |                          | 4                             |  | $                        | 1,721,000 |                   | $
|Employment Agreement  |  |                          | 5                             |  |                          | 824,000   |                   |  
|Subject Database      |  |                          | 4                             |  |                          | 900,000   |                   |  
|Client backlog        |  |                          | 1                             |  |                          | 662,000   |                   |  
|                      |  |                          |                               |  |                          |           |                   |  
|                      |  |                          |                               |  | $                        | 4,107,000 |                   | $



Amortization expense for intangible assets during the three month period ended March 31, 2004 was approximately $311,000, and $303,000 for the three month period ending March 31, 2003. The following table provides information regarding estimated amortization expense for each of the following years ended December 31:



| | 2004 |  | $ | 1,086,000
| | ---- |  | - | ---------
| | 2005 |  |   | 769,000  
| | 2006 |  |   | 182,000  
| | 2007 |  |   | 47,000   
| | 2008 |  |   | 28,000   
| |      |  |   |          
| |      |  | $ | 2,112,000



As of March 31, 2004, all intangible assets except goodwill were subject to amortization expense.



The Company assesses its goodwill for impairment annually as of the 1st of January of each year. If we determine that there is an impairment, we would incur a charge to our earnings and reduce goodwill on our balance sheet as of the prior December 31st. No impairment was recorded for the years-ended 2003 and 2002 or for the quarter ended March 31, 2004.





10



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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)





NOTE 5. SUBSEQUENT EVENTS



In February 2004, we purchased the real property which houses our principal Miami, Florida Phase I clinical trials facility for approximately $12.1 million. Pending the closing of a $9 million first mortgage loan with Wachovia Bank National Association, we borrowed $10 million under our line of credit with Wachovia. In March 2004, we repaid $1 million. We purchased both of the existing buildings and a portion of the land; the balance of the land is subject to a long-term land lease. On May 6, 2004, we paid off the line of credit and entered into a five year $9 million variable rate, first mortgage loan encumbering the property we purchased.



The terms on the $9 million mortgage note are as follows:



•

60 monthly principal and interest payments are required assuming a 15-year amortization;

•

A balloon payment, required to pay off the unpaid principal, is due in May 2009;

•

The mortgage note can be prepaid an any time without penalty;

•

The interest rate on the five-year loan is variable, calculated as LIBOR plus 150 basis points, which equaled approximately 2.6% as of the date of this Report;

•

The LIBOR rate usually changes proportionally with the prime borrowing rate in the U.S.



We have no borrowings on the $25 million line of credit as of the date of filing this Report. The total Credit Facility including the mortgage is $34,000,000.



In April 2004, subject to stockholder approval at our annual meeting scheduled for June 21, 2004, our board of directors approved an increase in our Amended and Restated 1999 Stock Option Plan by 200,000 shares and also approved converting this Plan by permitting us to issue grants of restricted stock, restricted stock units and stock appreciation rights. In addition, also subject to stockholder approval, our board of directors adopted a 2004 Employee Stock Purchase Plan permitting our employees who are not executive officers to purchase up to a total of 100,000 shares of our common stock through payroll deductions at a 15% discount during offering periods.



In April 2004, our board of directors declared a three-for-two stock split in the nature of a stock dividend payable to stockholders of record effective at the close of business on May 10, 2004. The shares will be delivered on or about June 11, 2004. As a result, the number of shares of the Company's common stock issued and outstanding will increase from 10,021,106 to 15,031,659. Earnings per share in the financial statements in this Report reflect the three-for-two split for all periods presented.



Neither the 200,000 proposed shares for Stock Option Plan, nor the proposed 100,000 shares for the Employee Stock Purchase Plan reflect the three-for-two split.



11



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Item 2.

Managements Discussion And Analysis Of Financial Condition And Results Of Operations



The following discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2003.

The following discussion and other information in this Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In many cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, intend, potential or continue or the negative of these terms or other comparable terminology. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors, as more fully discussed herein under the heading Forward-Looking Statements and in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ─ Special Factors Relating to our Business and Common Stock” contained in our Form 10-K for the year ending December 31, 2003 filed with the Securities and Exchange Commission. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date made and carefully consider the Special Factors. We do not assume any obligation to update the forward-looking statements after the date hereof.



Overview



As described in Note 5, effective as of the close of business on May 10, 2004 we will effect a three-for-two stock split. All historical earnings per share numbers, references to numbers of shares outstanding, reference to our shares of common stock used in acquisitions, and other references, appearing in this Report have been retroactively adjusted as required by applicable accounting standards, except where we disclose that no adjustment has been made.



We are a contract research organization, providing a broad range of specialized drug development services to branded pharmaceutical, biotechnology and generic drug companies. We are a leading provider of early clinical development services, specializing primarily in the areas of Phase I and Phase II clinical trials and bioanalytical laboratory services. We also provide a range of complementary services to our clients, including early clinical pharmacology research, biostatistics and data management, and regulatory and drug submission as well as Phase III and Phase IV clinical trial management services in select therapeutic areas. Our clients include many of the largest pharmaceutical, biotechnology and generic drug companies in the world. We have conducted Phase I and Phase II clinical trials for many leading drugs, including Ambien, Celebrex, Claritin, Vioxx, Zithromax and Zoloft.



We have grown significantly through organic growth and acquisitions. In 2003, we made one material acquisition in the third quarter. See Note 3 to our consolidated financial statements. This acquisition of Clinical Pharmacology affects a comparison of our results of operations for the first quarter of 2004 versus 2003. Additionally, we acquired a 49% interest in a Spanish joint venture, Anapharm Europe, which commenced operations in November 2003. Its revenue and net income also affect a comparison of the first quarter of 2004 versus 2003.



12



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The table below reflects the length of time each of our principal operating subsidiaries or business units operated during the comparable three-month periods ended March 31, 2004 and March 31, 2003.



Number of months each subsidiary or business unit is included in operating results:



| |                           | Quarter-ended March 31,
| | ------------------------- | -----------------------
| |                           | 2004                   
| |                           |                        
| | SFBC Miami                | 3                      
| | SFBC Ft. Myers            | 3                      
| | SFBC Analytical           | 3                      
| | Anapharm                  | 3                      
| | SFBC Charlotte(1)         | 3                      
| | SFBC New Drug Services(1) | 3                      
| | Clinical Pharmacology     | 3                      
| | NDS Canada(2)             | 3                      
| | Anapharm Europe(4)        | 3                      



(1)

We merged SFBC Charlotte into SFBC New Drug Services in April 2003.



(2)

NDS Canada was a 49% subsidiary of Anapharm Inc. from March 15, 2002 through July 7, 2003 and its results were reported using the equity method.



(3)

Synfine, which commenced operations in March 2003, is not considered material.



(4)

The Company owns 49% of a joint venture, Anapharm Europe, which operates a bioanalytical laboratory in Barcelona, Spain and commenced operations in November 2003.



Highlights for the first quarter of 2004 include:

•

Our revenue increased to approximately $33.5 million from approximately $18.7 million;

•

Our earnings increased to approximately $3.7 million from approximately $1.9 million;

•

Both the revenue and net earnings were records for the first quarter;

•

Our foreign operations continued to show strong growth accounting for approximately $16.1 million of our revenue;

•

In February, we purchased the property which houses our principal Miami clinical trials facility and our executive offices. We paid approximately $12.1 million, and without materially increasing our occupancy costs, we increased our capacity from approximately 73,000 square feet to approximately 160,000 square feet; and

•

We increased our line of credit with Wachovia Bank National Association to $25 million from $15 million. We borrowed $10 million under the line to purchase the property, and in early May paid off this loan with a $9 million permanent mortgage loan from Wachovia. This increased our total Credit Facility to $34,000,000.



Our revenue consists primarily of fees earned for services performed under contracts with branded pharmaceutical, biotechnology and generic drug company clients. Typically, a portion

13



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of our contract fee is due upon signing of the contract, and the majority of the contract fee is generally paid in installments upon the achievement of certain agreed upon performance milestones. Our contracts are typically terminable immediately or after a specified period following notice by the client. These contracts usually require payment to us of expenses to wind down a study, payment to us of fees earned to date, and in some cases a termination fee. Historically, since most of our contracts have been Phase I and Phase II trials which are of short duration, we have not experienced any significant terminations of contracts in progress.



We record our recurring operating expenses in two primary categories, (1) direct costs, and (2) selling, general and administrative expenses. Direct costs consist primarily of participant fees and associated expenses, direct labor and benefits, facility costs, depreciation associated with facilities and equipment used in conducting trials, and other costs and materials directly related to contracts. Direct costs as a percentage of net revenue vary from period to period, due to the varying mix of contracts and services performed and to the percentage of revenue arising from our Canadian operations which have higher direct costs. Selling, general and administrative costs consist primarily of administrative payroll and overhead, advertising and public relations expense, legal and accounting expense, travel, depreciation and amortization related to amortizable intangibles.



The gross profit margins on our contracts vary depending upon the nature of the services we perform for our client. Gross margins for our Phase I and Phase II clinical trials and bioanalytical services generally tend to be higher than those for our Phase III trials management and other services that we perform. Within our Phase I and Phase II business, our gross profit margins are generally higher for trials which involve a larger number of participants, a longer period of study time and the performance of more tests. Gross margins for our services to branded drug clients generally tend to be higher than those for generic drug clients. In addition, our gross profit margins will vary based upon our mix of domestic and international business. Gross margins are calculated by subtracting direct costs from net revenue. Gross profit margins are calculated by dividing the gross margin by net revenue.



Due to the nature of Anapharms operations, which develops assays through its bioanalytic laboratory, on an annualized basis it has incurred higher selling, general and administrative expenses as a percentage of revenue than our United States operations. This trend did not occur in the first quarter of 2004. Anapharms SGA expenses, as a percentage of sales, were less than U.S. operations. The Canadian government subsidizes a portion of Anapharms expenses through tax credits. Under United States generally accepted accounting principles or GAAP, these credits are applied against income tax expense rather than against the underlying selling, general and administrative expenses or direct costs that generated the credit.



As a result of the acquisition of Anapharm, which occurred in March 2002, we expect our future effective tax rate to be permanently lower, as compared to our historical tax rate which was 37.4% prior to the Anapharm acquisition. Our effective tax rate was 21.6% in the first quarter of 2004 and 14.2% in the first quarter of 2003. Our future effective tax rate will be dependent on the amount of the tax credits we receive in connection with Anapharm and the relative contribution of Anapharm to our consolidated pre-tax income.



14



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Critical Accounting Estimates

The preparation of our financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenue and expenses during the applicable period. Future events and their effects cannot be determined with certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to our financial statements. Our management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that we believe to be reasonable under the circumstances. These estimates and our actual results are subject to known and unknown risks and uncertainties, including those discussed in the Risk factors section of our prospectus for our recent public offering dated October 31, 2003 and in the Special Factors Relating to Our Business and Common Stock section of Item 7 of our Form 10-K for the period ending December 31, 2003, both of which are filed with the Securities and Exchange Commission. There have been no material changes in our critical accounting estimates or our application of these estimates in 2004.



Results of Operations



The following table summarizes our results of operations as a percentage of net revenue for the quarter ended March 31, 2004 and 2003.



|                      |  | Quarter Ended March 31,
|--------------------- |  | -----------------------
|                      |  | 2004                   
|                      |  |                        
|Net revenue           |  | $                      
|                      |  |                        
|Gross profit margins  |  |                        
|                      |  |                        
|Earnings before taxes |  |                        
|                      |  |                        
|Income tax expense    |  |                        
|                      |  |                        
|Net earnings          |  | $                      
|                      |  |                        
|Earnings per share    |  |                        
|Basic                 |  | $                      
|Diluted               |  | $                      



The basic and diluted earnings per share for both quarters give retroactive effect to the three-for-two stock split effective at the close of business on May 10, 2004. If this adjustment had not been made, our earnings per share would have been:



|                   |  | Quarter Ended March 31,
|------------------ |  | -----------------------
|                   |  | 2004                   
|                   |  |                        
|Earnings per share |  |                        
|Basic              |  | $                      
|Diluted            |  | $                      



15



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We are providing this supplemental information because we believe it helps avoid investor confusion by reflecting the events as they existed on March 31, 2004 and 2003.



Net Revenue



Our revenue was approximately $33.5 for the quarter ended March 31, 2004, which is an increase of 79.4% from approximately $18.7 million for the corresponding quarter ended March 31, 2003. The increase is primarily attributable to:

•

An exceptional increase in foreign (which includes Anapharm, our other Canadian operations and Anapharm Europe) revenue to approximately $16.1 million from $8.8 million;

•

A material increase in United States Phase I and Phase II revenues at SFBC Miami, SFBC Analytical and SFBC Ft. Myers; and

•

The inclusion of approximately $1.9 million of revenue from Clinical Pharmacology which we acquired in August 2003.

Our revenue increased as a result of performing more clinical trials, and a general increase in the size of our trials.

For the quarter ended March 31, 2004 net revenue was approximately $17.4 million from United States operations and approximately $16.1 million from foreign operations.



Direct Costs



Direct costs as a percentage of net revenue decreased to 56.0% from 56.6% for the quarter ended March 31, 2004 compared to the same period in the prior year. This decrease in our direct costs for the first quarter of 2004 is primarily attributable to a decrease in direct costs at Anapharm, offset by an increase in direct costs in our Phase III operations. Direct costs in our Phase III business increased in 2004 because of the size of the contracts we entered into and due to a higher element of pass through costs included in direct costs than in 2003.



Gross Profit Margins



Our gross profit margins increased to 44.0% from 43.4% for the quarter ended March 31, 2004 as compared to the corresponding period in the prior year. This increase in our gross profit margins is primarily attributable to an improvement in Anapharms gross profit margins due to the mix of contracts, offset by a decrease in gross margins in our Phase III business due to an increase in the size and percentage of pass through costs.



Since we perform a wide variety of services, all of which carry different gross margins, our future margins will vary from quarter-to-quarter, and year to year based upon the mix of these contracts, our capacity levels at the time we begin the projects and the amount of revenue generated for each type of service we perform. Even within category types, the amount of gross margins generated might vary due to the unique nature and size of each contract and project we undertake. This could impact our future profit margins and profit comparisons to historical levels. For the remainder of 2004, we anticipate our gross profit margins will be between 41 and 44%.



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Selling, General and Administrative Expenses



Our selling, general and administrative expenses or SG&A expenses increased to $10,034,111 for the quarter ended March 31, 2004 from $5,814,860 as compared to the first quarter of 2003, an increase of 72.6%. As a percentage of net revenues, our SG&A expenses decreased to 30.0% for the quarter ended March 31, 2004 from 31.1% for the quarter ended March 31, 2003.



The increase in total SG&A expenses for both periods is primarily due to the expansion of our business, increased payroll, our increased sales, marketing, and business development efforts, depreciation expenses consistent with our growth over prior year levels, and the inclusion of Clinical Pharmacologys, NDS Canadas and Anapharm Europes SG&A expenses for three months in 2004. As a result of the purchase of our principal Miami facility in February 2004 the Companys rent expense will be reduced by approximately $660,000 on an annualized basis offset by an increase in depreciation of approximately $300,000 on an annualized basis. During the quarter, Anapharms SG&A expenses as a percentage of net revenue decreased and was less than our United States subsidiaries SG&A expenses as compared to net revenue.



Additionally, we are amortizing approximately $190,000 per year over a four-year period as the result of issuance of our restricted common stock to two new employees including our senior vice president at the end of 2003.



We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 under which management must report and our independent auditor attest on our internal controls. We expect to fully comply by the December 31, 2004 deadline. In order to comply, we have retained an independent consulting firm to assist us in evaluating and improving our internal controls. During 2004 we expect to incur approximately $600,000 in additional costs including training costs related to the installation of our new accounting software, consulting fees and additional independent auditor fees. We anticipate incurring most of these expenses in the second and third quarters. During the quarter ended March 31, 2004, we incurred approximately $35,000 in Sarbanes-Oxley compliance related expenses.



Interest income and expense



Our interest expense increased for quarter ended March 31, 2004 compared to the same period in 2003 as a result of increased borrowings under our Credit Facility due to the borrowing to finance the purchase of the Miami headquarters and the acquisition of additional equipment at Anapharm.



On February 27, 2004, we borrowed $10 million to purchase our principal Miami facility. In March 2004, we repaid $1 million on Credit Facility reducing the principal balance to $9 million at March 31, 2004. We replaced this $9 million of borrowings with a permanent mortgage loan in May 2004.



Anapharm acquires its equipment under capital leases in order to take advantage of favorable Canadian tax credits which exceed our interest expense. For the quarter ended March 31, Anapharm incurred $81,000 in interest expense in 2004 compared to $72,000 in 2003.



17



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In 2004, we expect to incur up to $700,000 in interest expense primarily as the result of our real estate mortgage and increased equipment purchases by Anapharm. Our additional per year interest expense, real estate taxes, occupancy costs and non-cash expenses resulting from our purchase of our principal Miami facility will be substantially offset by reduced rent expense.



During the period ended March 31, 2004 we recorded $172,686 in interest income compared to $52,015 for the same period ended March 31, 2003. The increase in interest income is attributable to our higher on hand cash balances due to the proceeds from our public offering in November 2003.



Income tax expense



Our effective tax rate for the quarter ended March 31, 2004 was 21.6% compared to 14.2% for 2003. This increase in the effective tax rate is primarily attributable to a higher contribution of earnings from United States entities in 2004. On an overall basis the Companys effective tax rate is significantly lower than United States tax rates. Anapharm, which is based in Quebec Canada, receives significant tax credits from the government of Canada for incurring research and development expenses. These credits lower our effective tax rate. We expect the nature of Anapharm's business and the generation of significant tax credits to continue; however, there can be no assurance on the future amount of these credits on a quarterly or annual basis.



If commercially practical, we may refer Phase I and Phase II studies and bioanalytical contracts to Anapharm to benefit from the lower operating costs and lower tax rates in Canada, and the availability of tax credits. Excluding the impact of tax credits, our effective tax rate in Canada is approximately 32.0% compared to approximately 40.5% in the United States. There will be some practical limitations which prevent us from referring some studies to Anapharm, including differing areas of expertise, the availability of special population groups or client preferences on where the work should be performed.



Our future effective tax rate will be dependent on the amount of the tax credits we receive in connection with Anapharms operations and the relative contribution of Anapharms operations to our consolidated pre-tax income. For the remainder of 2004, we expect our average effective tax rate to be between 22 and 25%. The higher tax rate we anticipate for the balance of the year gives effect to the fact that our Phase I and II business in the United States historically is stronger in the second half of the year.



Earnings Per Share



Effective for stockholders of record at the close of business on May 10, 2004, we recently declared a three-for-two stock split in the nature of a stock dividend. This stock split has been given retroactive effect for each of the quarters in the table presented below.



|                   |  | Quarter Ended March 31,
|------------------ |  | -----------------------
|                   |  | 2004                   
|                   |  |                        
|Earnings per share |  |                        
|Basic              |  | $                      
|Diluted            |  | $                      



18



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If the above retroactive adjustment had not been made, our earnings per share would have been:



|                   |  | Quarter Ended March 31,
|------------------ |  | -----------------------
|                   |  | 2004                   
|                   |  |                        
|Earnings per share |  |                        
|Basic              |  | $                      
|Diluted            |  | $                      



Net earnings increased from $1,943,284 to $3,726,308 for the quarter ended March 31, 2004 as compared to the first quarter of 2003, an increase of 91.8%. On a fully diluted basis, our earnings per share increased to $0.25 from $0.18 for the quarter ended March 31, 2004. As of March 31, 2004 we had 15,031,659 shares of common stock outstanding compared to 10,838,991 at the end of March 31, 2003. The weighted average number of shares outstanding used in computing earnings per share on a fully diluted basis increased from 11,373,884 to 15,743,943 for the quarter ended March 31, 2004 as compared to the corresponding period in the prior year. The increase in the number of shares resulted primarily from the additional issuance of shares of common stock in connection with our secondary offering in November 2003 and the issuance of 664,608 shares related to our acquisition of Clinical Pharmacology in August 2003.



Liquidity and Capital Resources



For the three months ended March 31, 2004, net cash provided by operating activities was $3,632,070 in contrast to $323,414 of net cash provided by operations for the corresponding period in 2003. The change is primarily due to the substantial increase in net earnings, depreciation and amortization.



For the three months ended March 31, 2004, net cash used in investing activities was $17,269,324 compared to $2,450,441 used in investing activities for the corresponding period in 2003. During the quarter, we used approximately $14.4 million to purchase property and equipment, including approximately $12.1 million to purchase our principal Miami facility; approximately $1.5 million to purchase marketable securities; and approximately $1.3 million relating to prior acquisitions.



During the first quarter of 2004, net cash provided by financing activities was $10,030,569 compared to net cash used in financing activities of $80,366 in the corresponding period of 2003. The increase is primarily attributable to the net borrowing of $9.0 million against our Credit Facility to secure the purchase of our principal Miami facility and the receipt of approximately $400,000 from the exercise of stock options.



We have a $25 million Revolving Credit and Security Agreement with Wachovia Bank. The interest rate on this Credit Facility is LIBOR based and variable. This Credit Facility enables SFBC to borrow for general working capital purposes and for the purpose of financing acquisitions of companies in related industries. This Credit Facility is secured by substantially all of our assets. We used $10 million of this Credit Facility to purchase our principal Miami facility in February 2004. On May 6, 2004, we paid off the Credit Facility and entered into a five year

19



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$9 million variable rate, first mortgage loan encumbering the property we purchased. The terms on the $9 million mortgage note are follows:



•

60 monthly principal and interest payments are required assuming a 15-year amortization;

•

A balloon payment is required to pay off the unpaid principal is due in May 2009;

•

The mortgage note can be prepaid an any time without penalty;

•

The interest rate on the five-year loan is variable, calculated as LIBOR plus 150 basis points, which equaled approximately 2.6% as of the date of this Report;

•

The LIBOR rate usually changes proportionally with the prime borrowing rate in the U.S.



As of March  31, 2004, our average interest rate on the entire $34,000,000 Credit Facility was approximately 2.6%.



On May 3, 2004, we had approximately $55,643,000 in cash and marketable securities on hand. Based upon our cash balances and our positive cash flows from operations, we believe we have enough working capital to meet our operational needs within the next 12 months. If we consummate any acquisitions of which there can be no assurance, we expect to use our cash on hand and Credit Facility and, if necessary, obtain additional debt or equity financing (or a combination thereof). We expect to issue $2 million of our common stock to the shareholders of Clinical Pharmacology in the third quarter of 2004 resulting from meeting an earn-out. Except for the possibility of issuing stock related to potential earn-outs described in Commitments below or a potential accretive acquisition, should one arise, and except in the case of our recently declared 50% stock dividend, or upon the exercise of stock options issued or to be issued, or otherwise arising from employee benefit plans, we do not anticipate issuing any of our common stock during 2004.



Capital Expenditures and Commitments



During the quarter ended March 31, 2004 we incurred approximately $14.4 million of capital expenditures, of which $12.1 million was related to the purchase of our Miami facility, and approximately $1.8 million was for equipment purchases at Anapharm. For the remainder of 2004, we expect to incur between $5 and $6 million in capital expenditures primarily to purchase additional equipment and to make leasehold improvements to the newly purchased Miami facility. We expect to pay the Clinical Pharmacology shareholders the earn-out payment for the first 12-month period ended June 30, 2004, as described below under Off-Balance Sheet Arrangements.



Off-Balance Sheet Arrangements



In the normal course of business, we enter into contractual commitments to purchase materials and services from suppliers in exchange for favorable pricing arrangements or more beneficial terms. At March 31, 2004, these non-cancelable purchase obligations were not materially different than those disclosed in the Contractual Commitments table contained in our Annual Report on Form 10-K for the year ended December 31, 2003.



Under the terms of the asset purchase agreement, New Drug Services, Inc. (NDS) had the opportunity to achieve additional earn-out payments aggregating up to approximately $7.3 million contingent on NDS meeting annual pre-tax income targets over the next three,

20



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12-month periods beginning on October 1, 2002. An additional $675,000 was guaranteed to be paid over the three-year period ($225,000 each year commencing September 2003), of which $450,000 was due at December 31, 2003.



In March 2004, the Company and NDS modified the earn-out. The Company agreed to pay NDS $550,000 and reduced the maximum contingent earn-out by approximately $900,000, thereby reducing the contingent earn-out to approximately $6.4 million from $7.3 million. Of the $550,000 to be paid to NDS, $150,000 was part of the $450,000 of guaranteed earn-out which was due at December 31, 2003.



Under the terms of the acquisition agreement, we may pay the shareholders of Clinical Pharmacology additional merger consideration of up to $4 million per year, subject to a maximum of $9 million over the three years of the earn-out period which are the 12 months ended June 30, 2004, 2005 and 2006. These contingent payments are based upon meeting agreed-upon revenue milestones. If paid, the additional merger consideration will be in equal amounts of cash and SFBC common stock. We expect that we will pay $4 million for the 12-month period ended June 30, 2004.



Forward-Looking Statements



The statements in this Report relating to our expectations about anticipated Sarbanes-Oxley compliance costs, 2004 gross profit margins, 2004 interest expenses, our future acquisitions, our effective tax rate for the balance of 2004, the adequacy of our working capital, and anticipated capital expenditures for the balance of 2004, the payment of future earn-outs, and our entering into hedging activities for Canadian operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). Additionally, words such as expects, anticipates, intends, believes, will and similar words are used to identify forward-looking statements within the meaning of the Act.



The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include (1) an unanticipated decision to make an acquisition of a substantially larger competitor, which would require us to re-allocate our intended uses of our cash resources; (2) our ability to successfully implement our plans for operational and geographical expansion; (3) our ability to successfully achieve and manage the technical requirements of specialized clinical trial services, while maintaining compliance with applicable rules and regulations; (4) our ability to compete nationally in attracting pharmaceutical companies in order to develop additional business; (5) our continued ability to recruit participants for clinical studies; (6) the economic climate nationally and internationally as it affects drug development operations, (7) our ability to integrate and absorb our most recent acquisition and any future acquisitions into our current operational structure, (8) the changing mix of, and the amount contracts and laboratory services offered, (9) future legislation in Canada which may affect our ability to continue to generate tax credits at Anapharm to lower the effective tax rate, (10) our future stock price, and (11) a variety of economic factors that may affect the relative values of the United States and Canadian currencies as well as the results of any hedging strategies should we employ such strategies.



We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see our prospectus dated October 31, 2003 and our Form 10-K for the year ending December 31, 2003 we filed with the Securities and Exchange Commission.

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Pro Forma Disclosure



The following table reflects the application of $1,057,743 for the three-month period ended March 31, 2004 in Canadian tax credits, to the costs which generated the credit. Under United States generally accepted accounting principles or GAAP, the tax credits are required to be applied as a credit to Income tax expense on our income statement. As a result, in our financial statements net income before taxes is reduced by the amount of all of the direct costs and SG&A expenses. Under the pro forma approach, we reduce the expenses which generated the credit by the amount of the credit, and increase income tax expense by a corresponding amount. The end result under the pro forma approach is that our direct costs and SG&A expenses are lower, and our income tax expense is higher. Net income is identical under both the actual and pro forma approaches.



This unaudited pro forma presentation, which is not in conformity with GAAP, assists our management in comparing our operating margins and income tax rates to those of other companies in our sector. For this reason, we believe the pro forma table is useful to investors, but it is presented only for informational purposes and should not be considered as a substitute for our GAAP results.



SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

SELECTED PROFORMA QUARTERLY  DISCLOSURES

FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2004 (all in $USD)



Recast proforma income statement to reflect the impactof Canadian tax credits



|                                             |  | Reported
Actual
Results For
The Quarter
Ended
3/31/2004 |            |  |  |        | Canadian
Tax
Credit
Reclass
For The
Quarter Ended
3/31/2004 |   | Adjusted
Proforma
Income
Reflecting
Canadian
Tax Credits
For The
Quarter Ended
3/31/2004 |  |   |            | 
|-------------------------------------------- |  | ------------------------------------------------------- | ---------- |  |  | ------ | ----------------------------------------------------------- | - | ---------------------------------------------------------------------------------------- |  | - | ---------- | 
|                                             |  |                                                         |            |  |  |        |                                                             |   | (A)                                                                                      |  |   | (B)        | 
|                                             |  |                                                         |            |  |  |        |                                                             |   |                                                                                          |  |   |            | 
|Net revenue                                  |  | $                                                       | 33,485,539 |  |  | 100.0% |                                                             |   |                                                                                          |  | $ | 33,485,539 | 
|                                             |  |                                                         |            |  |  |        |                                                             |   |                                                                                          |  |   |            | 
|Costs and expenses                           |  |                                                         |            |  |  |        |                                                             |   |                                                                                          |  |   |            | 
|Direct costs                                 |  | $                                                       | 18,763,948 |  |  | 56.0%  |                                                             | $ | (886,258)                                                                                |  |   | 17,877,690 | 
|Selling, general and administrative expenses |  | $                                                       | 10,034,111 |  |  | 30.0%  |                                                             | $ | (171,485)                                                                                |  |   | 9,862,626  | 
|Total costs and expenses                     |  |                                                         | 28,798,059 |  |  | 86.0%  |                                                             |   | (1,057,743)                                                                              |  |   | 27,740,316 | 
|Earnings from operations                     |  |                                                         | 4,687,480  |  |  | 14.0%  |                                                             |   | 1,057,743                                                                                |  |   | 5,745,223  | 
|Other income (expense)                       |  |                                                         |            |  |  |        |                                                             |   |                                                                                          |  |   |            | 
|Interest income                              |  | $                                                       | 172,686    |  |  |        |                                                             |   |                                                                                          |  |   | 172,686    | 
|Interest expense                             |  | $                                                       | (105,548)  |  |  |        |                                                             |   |                                                                                          |  |   | (105,548)  | 
|Total other income (expense)                 |  |                                                         | 67,138     |  |  |        |                                                             |   |                                                                                         |  |   | 67,138     | 
|Earnings before taxes                        |  |                                                         | 4,754,618  |  |  |        |                                                             |   | 1,057,743                                                                                |  |   | 5,812,361  | 
|Income tax expense                           |  | $                                                       | 1,028,310  |  |  | 21.6%  |                                                             | $ | 1,057,743                                                                                |  |   | 2,086,053  | 
|Net earnings                                 |  | $                                                       | 3,726,308  |  |  | 11.1%  |                                                             | $ |                                                                                         |  | $ | 3,726,308  | 
|Earnings per share:                          |  |                                                         |            |  |  |        |                                                             |   |                                                                                          |  |   |            | 
|Basic                                        |  | $                                                       | 0.25       |  |  |        |                                                             |   |                                                                                          |  | $ | 0.25       | 
|Diluted                                      |  | $                                                       | 0.24       |  |  |        |                                                             |   |                                                                                          |  | $ | 0.24       | 
|Shares used in computing earnings per share: |  |                                                         |            |  |  |        |                                                             |   |                                                                                          |  |   |            | 
|Basic                                        |  |                                                         | 14,982,494 |  |  |        |                                                             |   |                                                                                          |  |   | 14,982,494 | 
|Diluted                                      |  |                                                         | 15,743,943 |  |  |        |                                                             |   |                                                                                          |  |   | 15,743,943 | 

22



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

(A)

The Canadian government encourages research and development activities by partially offsetting their costs through taxcredits.  Under United States GAAP, these credits are applied against Income tax expense on the income statement rather than against the underlying Direct costs or Selling, general and administrative expenses that generated the credit. Our current statutory rate on profits for United States operations is approximately 40.5%. The statutory tax rate in Quebec, Canada, where our principal Canadian operations are located, is approximately 32% (before the application of the tax credits).

(B)

During the three-month period ended March 31, 2004, our Canadian operations generated approximately $1.1 million in tax credits. This column shows the pro forma impact on our operating results and ratios as if these credits were applied against the underlying expense line items that generated the credit rather than applying the credits against Income tax expense.



Net revenue by geographic region



|                                           |  | The Three
Month Period
Ended
3/31/2004
|------------------------------------------ |  | --------------------------------------
|                                           |  |                                       
|Net revenue from foreign operations        |  | $                                     
|Net revenue from US operations             |  |                                       
|                                           |  |                                       
|Total for the period ended March, 31, 2004 |  | $                                     



Item 3. Quantitative and Qualitative Disclosures About Market Risk



We are subject to market risks in some of our financial instruments. These instruments are carried at fair value on our financial statements. We are subject to currency risk due to our Canadian operations. We are also subject to interest rate risk on our credit facility if we borrow under it as described below. We have not entered into market risk sensitive instruments for trading purposes.



Market Risk



In 2003, we purchased certain debt securities. We classify our investments in debt securities as available-for-sale in accordance with Statement No. (SFAS) 115, Accounting for Certain Investments in Debt Managements discussion and analysis of financial condition and results of operations and Equity Securities. Investments classified as available-for-sale are carried at fair value based on quoted market prices. The unrealized holding gain (loss) on available-for-sale securities is reported as a component of accumulated other comprehensive earnings, net of applicable deferred income taxes. As of March 31, 2004, the unrealized gain on investments in marketable securities was insignificant. Cost is determined on the actual purchase price of the marketable security for determining realized gains and losses. In the first three months of 2003, there were no realized gains or losses.



Financial instruments that potentially subject us to credit risk consist principally of trade receivables. We perform services and extend credit based on an evaluation of the clients financial condition without requiring collateral. Exposure to losses on receivables is expected to vary by client due to the financial condition of each client. We monitor exposure to credit losses and maintain allowances for anticipated losses considered necessary under the circumstances. Additionally, we, from time to time, maintain cash balances with financial institutions in amounts that exceed federally insured limits.

23



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Our financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, notes receivable, accounts payable, and notes payable. At March 31, 2004, the fair value of these instruments approximates their carrying amounts.



Currency Risk



At our Canadian operations where the local currency is the functional currency, assets and liabilities are translated into United States dollars at the exchange rate in effect at the end of the applicable reporting period. Revenue and expenses of our Canadian operations is translated at the average exchange rate during the period. The aggregate effect of translating the financial statements of our Canadian operations is included in a separate component of stockholders equity entitled Accumulated Other Comprehensive Earnings. For the quarter ended March 31, 2004, included in SG&A expenses, we had a loss of $149,288 from foreign currency transactions compared to a loss of $180,239 for the period ended March 31, 2003. Currency translation risks arise primarily from our Canadian operations at Anapharm. We currently do not hedge our foreign currency risks, but expect to begin engaging in hedging activities by June 30, 2004.



Interest rate risk



We have a $34 million Credit Facility with Wachovia. The interest rate on the Credit Facility is LIBOR based and variable. As of March 31, 2004, our average interest rate on the entire Credit Facility was 2.6%. This Credit Facility enables us to borrow for general working capital purposes and for the purpose of financing acquisitions of companies in related industries. Borrowings under this Credit Facility are secured by substantially all of our assets, including the common stock and assets of our United States subsidiaries. As of March 31, 2004, we had borrowed approximately $9 million on this Credit Facility. We repaid the outstanding balance of the Credit Facility in May 2004 when we borrowed an additional $9 million from Wachovia, secured by a first mortgage loan on our principal Miami facility and headquarters. The interest rate on this loan is also LIBOR based and variable. See Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources.



Item 4. Controls and Procedures



(a) Evaluation of Disclosure Controls and Procedures



As of March 31, 2004, we performed an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in SEC Rule 13a-15(e) or 15d-15(e)). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to SFBC and its consolidated subsidiaries required to be included in our reports filed or submitted under the Securities Exchange Act of 1934, as amended. Due to the inherent limitations of the effectiveness of any established disclosure controls and procedures, our management cannot provide absolute assurance that the objectives of our disclosure controls and procedures will be met.

24



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(b) Changes in Internal Controls



There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, during the quarter we purchased state-of-the-art accounting software as part of our undertaking to be compliant with Section 404 of Sarbanes-Oxley by December 31, 2004. This software will be installed at all of our United States subsidiaries by the end of the second quarter ending June 30, 2004. Anapharm, our Canadian subsidiary, has been using a version of the same software since we acquired them in March 2002.

























[Balance of page intentionally left blank]



25



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PART II - OTHER INFORMATION



Item 1. Legal Proceedings



Not applicable.



Item 2. Change in Securities



(a) Not applicable.



(b) Not applicable.



(c) During the three months ended March 31, 2004, we did not issue shares of our common stock except for the exercise of options covered by an effective registration statement under the Securities Act of 1933.



(d) Not applicable.



(e) The following table provides information about purchases by SFBC and its affiliated purchasers during the quarter ended March 31, 2004 of equity securities that are registered by SFBC pursuant to Section 12 of the Exchange Act:



ISSUER PURCHASES OF EQUITY SECURITIES



|Period            | (a)
Total Number of
Shares (or Units)
Purchased) | (b)
Average Price
Paid per Share
(or Unit) | (c)
Total Number of Shares (or Units)
Purchased as Part of
Publicly Announced Plans
or Programs | (d)
Maximum Number (or Approximate
Dollar Value) of Shares (or Units)
That May Yet Be Purchased Under the
Plans or Programs
|----------------- | ------------------------------------------------ | ------------------------------------------ | ----------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------
|01/01/04-01/31/04 | 0                                                | $0                                         | 0                                                                                               | 814,832                                                                                                                    
|02/01/04-02/29/04 | 0                                                | 0                                          | 0                                                                                               | 814,832                                                                                                                    
|03/01/04-03/31/04 | 0                                                | 0                                          | 0                                                                                               | 814,832                                                                                                                    



Item 3. Defaults Upon Senior Securities



Not applicable.



Item 4. Submission of Matters to a Vote of Security Holders



Not applicable.



Item 5. Other Information



Not applicable.

26



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Item 6. Exhibits and Reports on Form 8-K.



(a) Exhibit Index



Exhibit

Number

Description



3.1

Certificate of Incorporation (1)

3.2

First Amendment to Certificate of Incorporation (1)

3.3

Certificate of Correction to Certificate of Incorporation (2)

3.4

Bylaws (1)

3.5

First Amendment to the Bylaws (2)

3.6

Second Amendment to the Bylaws (3)

3.7

Third Amendment to the Bylaws (4)

10.1

Second Amended Credit Agreement (4)

10.2

Post-Closing Agreement regarding the acquisition of 11190 Biscayne Boulevard, Miami, Florida (4)

10.3

Amendment to Asset Purchase Agreement (SFBC New Drug Services, Inc.) (4)

21

Subsidiaries

31.1

Certification of Chief Executive Officer

31.2

Certification of Chief Financial Officer

32.1

Section 1350 Certification of Chief Executive Officer

32.2

Section 1350 Certification of Chief Financial Officer



(1)

Contained in Form SB-2 filed on August 17, 1999.

(2)

Contained in Form SB-2 filed on October 5, 2000.

(3)

Contained in Form 10-KSB filed on March 31, 2003.

(4)

Contained in Form 10-K filed on March 15, 2004.



(b) Reports on Form 8-K.



On January 14, 2004, we filed Form 8-K/A-4 which amended the report originally filed on September 23, 2002 in order to report supplementary financial information and to correct the unaudited Pro Forma Statement of Earnings of New Drug Services, Inc. in connection with our prior acquisition thereof.







27



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SIGNATURES



In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf on May 10, 2004 by the undersigned, thereunto duly authorized.



| | SFBC INTERNATIONAL, INC.               
| | ---------------------------------------
| |                                        
| | /s/ ARNOLDHANTMAN                      
| | Arnold Hantman, Chief Executive Officer
| |                                        
| | /s/ DAVIDNATAN                         
| | David Natan, Chief Financial Officer   



28



---

EXHIBIT INDEX



Exhibit

Number

Description



3.1

Certificate of Incorporation (1)

3.2

First Amendment to Certificate of Incorporation (1)

3.3

Certificate of Correction to Certificate of Incorporation (2)

3.4

Bylaws (1)

3.5

First Amendment to the Bylaws (2)

3.6

Second Amendment to the Bylaws (3)

3.7

Third Amendment to the Bylaws (4)

10.1

Second Amended Credit Agreement (4)

10.2

Post-Closing Agreement regarding the acquisition of 11190 Biscayne Boulevard, Miami, Florida (4)

10.3

Amendment to Asset Purchase Agreement (SFBC New Drug Services, Inc.) (4)

21

Subsidiaries

31.1

Certification of Chief Executive Officer

31.2

Certification of Chief Financial Officer

32.1

Section 1350 Certification of Chief Executive Officer

32.2

Section 1350 Certification of Chief Financial Officer



(1)

Contained in Form SB-2 filed on August 17, 1999.

(2)

Contained in Form SB-2 filed on October 5, 2000.

(3)

Contained in Form 10-KSB filed on March 31, 2003.

(4)

Contained in Form 10-K filed on March 15, 2004.