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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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ý Quarterly Report Under Section 13 or 15(d) of

the Securities Exchange Act of 1934.

For the quarterly period ended: June 30, 2004

Commission File No. 1-16119

SFBC INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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 15,509,778 shares of common stock outstanding as of August 2, 2004.

INDEX

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2004 AND DECEMBER 31, 2003

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

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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003

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

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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

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

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SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

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

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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., 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, through SFBC Europe B.V., a wholly-owned subsidiary,  ow ns 49% of a joint venture, SFBC Anapharm Europe S.L. (“Anapharm Europe”) which operates a bioanalytical laboratory in Barcelona, Spain, which commenced operations in November 2003. The accounts of this joint venture are included in the Company’s consolidated accounts. The minority interest represents the 51% non-controlling interest in Anapharm Europe. 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 and six month periods ended June 30, 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 been made. Operating results for the three month and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the remaining quarters and for the year ending December 31, 2004.

Effective as of the close of business on May 19, 2004 we effected 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. In addition, we have increased our authorized number of shares of common stock to 40,000,000 from 20,000,000. This increase was approved by our stockholders on June 21, 2004.

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 on 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.

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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 s ubject 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 1,035,051 and 993,488 shares of common stock for the three and six month periods ended June 30, 2004, respectively, and 1,200,300 and 1,165,766 shares for the three and six month periods ended June 30, 2003, respectively; less the assumed repurchase of shares in accordance with the treasury stock method of 715,900 and 742,887 shares for the three and six month periods ended June 30, 2004, respectively, and 691,064 and 638,753 shares for the three and six month periods ended June 30, 2003, respectively.

Stock Based Compensation

At June 30, 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  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 opt ions at the grant dates consistent with the method of SFAS 123.

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.

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During the quarter, certain officers of the company exercised stock options to purchase 337,500 shares of the Company’s common stock. In lieu of paying cash to exercise the stock options, the officers exchanged 93,265 shares of personally held Company common stock.

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-pu rpose 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. The proposal, if approved, would substantially amend FASB Statement No. 123, Accounting for Stock-Based Compensation. If impleme nted, 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 and six months ended June 30, 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 that 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 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 the first installment of common stock was delivered in July 2004.

•

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 will deliver from escrow a total of approximately $167,000 and approximately 9,000 shares. In addition, the

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shareholders of Clinical Pharmacology 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 SFBC Miami’s revenue levels for the period July 1, 2003 through June 30, 2004, Clinical Pharmacology has attained the maximum earn-out of $4,000,000 for the first measurement period ending June 30, 2004. In the first quarter of 2004, the Company recorded a liability of $4.0 million on its balance sheet. The amount is payable one half in cash and one half in shares (75,354 shares) in August 2004.

•

Our November 2003 acquisition of 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 and six month periods ended June 30, 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.