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: September 30, 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.) |
& nbsp; | |
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 14,765,917 shares of common stock outstanding as of November 5, 2004.
INDEX
ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SFBC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Unaudited) September 30, 2004 | December 31, 2003 | ||||||
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ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 143,484,862 | $ | 56,020,452 | |||
Investment in marketable securities | 8,105,452 | 3,911,546 | |||||
Accounts receivable, net | 45,617,147 | 32,857,531 | |||||
Income tax receivable | — | 1,350,507 | |||||
Loans receivable from stockholders | 202,247 | 210,870 | |||||
Deferred income taxes | 167,754 | 121,565 | |||||
Prepaids and other current assets | 5,549,886 | 4,058,486 | |||||
Total current assets | 203,127,348 | 98,530,957 | |||||
Loans receivable from stockholders | 200,000 | 400,000 | |||||
Property and equipment, net | 44,086,262 | 24,177,018 | |||||
Goodwill, net | 66,800,225 | 47,789,383 | |||||
Other intangibles, net | 4,091,272 | 2,111,493 | |||||
Other assets, net | 5,392,742 | 41,751 | |||||
Total assets | $ | 323,697,849 | $ | 173,050,602 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities | |||||||
Accounts payable | $ | 5,557,150 | $ | 5,765,365 | |||
Accrued liabilities | 4,912,976 | 4,913,332 | |||||
Purchase consideration due to stockholders | 659,376 | 1,739,677 | |||||
Advance billings | 4,636,669 | 4,733,819 | |||||
Income taxes payable | 1,294,565 | — | |||||
Mortgage payable, current portion | 415,240 | — | |||||
Notes payable, current portion | 2,340,067 | 1,997,733 | |||||
Total current liabilities | 19,816,043 | 19,149,926 | |||||
Deferred income taxes | 818,072 | 303,721 | |||||
Mortgage payable | 8,454,224 | — | |||||
Notes payable | 4,066,749 | 3,653,683 | |||||
Convertible senior notes payable | 143,750,000 | — | |||||
Minority interest in joint venture | 233,744 | — | |||||
Commitments | — | — | |||||
Stockholders' equity | |||||||
Preferred stock. $0.10 par value, 5,000,000 shares authorized, none issued | — | — | |||||
Common stock, $0.001 par value, 40,000,000 shares authorized, | 14,766 | 14,986 | |||||
Additional paid-in capital | 105,897,605 | 123,854,436 | |||||
Retained earnings | 37,967,577 | 24,223,139 | |||||
Deferred compensation | (606,043 | ) | (732,380 | ) | |||
Accumulated other comprehensive earnings | 3,285,112 | 2,583,091 | |||||
Total stockholders' equity | 146,559,017 | 149,943,272 | |||||
Total liabilities and stockholders' equity | $ | 323,697,849 | $ | 173,050,602 | |||
The accompany notes are an integral part of these financial statements.
1
SFBC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
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Net revenue | $ | 40,360,663 | $ | 29,078,652 | $ | 110,264,251 | $ | 70,232,241 | |||||
Costs and expenses | |||||||||||||
Direct costs | 21,872,811 | 17,396,095 | 60,634,216 | 40,653,670 | |||||||||
Selling, general and administrative expenses | 10,816,253 | 7,284,094 | 30,701,248 | 20,331,372 | |||||||||
Total costs and expenses | 32,689,064 | 24,680,189 | 91,335,464 | 60,985,042 | |||||||||
Earnings from operations | 7,671,599 | 4,398,463 | 18,928,787 | 9,247,199 | |||||||||
Other income (expense) | |||||||||||||
Interest income | 401,775 | 26,469 | 767,873 | 116,155 | |||||||||
Interest expense | (749,565 | ) | (126,418 | ) | (990,244 | ) | (303,439 | ) | |||||
Total other income (expense) | (347,790 | ) | (99,949 | ) | (222,371 | ) | (187,284 | ) | |||||
Earnings before income taxes and minority interest | 7,323,809 | 4,298,514 | 18,706,416 | 9,059,915 | |||||||||
Income tax expense | 2,020,821 | 873,549 | 4,735,382 | 1,667,600 | |||||||||
Earnings before minority interest | 5,302,988 | 3,424,965 | 13,971,034 | 7,392,315 | |||||||||
Minority interest in joint venture | 32,188 | — | 226,596 | — | |||||||||
Net earnings | $ | 5,270,800 | $ | 3,424,965 | $ | 13,744,438 | $ | 7,392,315 | |||||
Earnings per share: | |||||||||||||
Basic | $ | 0.35 | $ | 0.30 | $ | 0.91 | $ | 0.67 | |||||
Diluted | $ | 0.34 | $ | 0.28 | $ | 0.87 | $ | 0.62 | |||||
Shares used in computing earnings per share: | |||||||||||||
Basic | 15,094,518 | 11,503,698 | 15,127,654 | 11,060,832 | |||||||||
Diluted | 15,713,187 | 12,340,712 | 15,823,859 | 11,859,645 | |||||||||
The accompany notes are an integral part of these financial statements.
2
SFBC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 | 2003 | ||||||
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Cash flows from operating activities | |||||||
Net earnings | 13,744,438 | 7,392,315 | |||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||
Depreciation and amortization | 4,813,263 | 3,431,885 | |||||
Amortization of deferred debt issue costs | 164,716 | — | |||||
Gain or loss on disposal of property and equipment | (38,321 | ) | — | ||||
Minority interest | 226,596 | — | |||||
Provision for bad debt | 552,548 | (140,000 | ) | ||||
Noncash compensation - reduction of note receivable | 200,000 | 200,000 | |||||
Common stock options issued as compensation | 126,337 | — | |||||
Changes in assets and liabilities | |||||||
Accounts receivable | (11,606,412 | ) | (5,682,567 | ) | |||
Income tax receivable | 1,350,507 | 290,221 | |||||
Prepaid expenses and other current assets | (1,173,439 | ) | (625,848 | ) | |||
Other assets | 71,320 | (114,590 | ) | ||||
Accounts payable | (222,355 | ) | (1,160,220 | ) | |||
Accrued liabilities | (266,256 | ) | 1,027,435 | ||||
Advance billings | (493,078 | ) | (831,129 | ) | |||
Income taxes payable | 1,133,565 | 429,708 | |||||
Deferred income taxes | 476,162 | (896,579 | ) | ||||
Total adjustments | (4,684,847 | ) | (4,071,684 | ) | |||
Net cash provided by operating activities | 9,059,591 | 3,320,631 | |||||
Cash flows from investing activities | |||||||
Cash consideration - acquisitions, net of cash acquired | (17,847,443 | ) | (10,611,805 | ) | |||
Additional purchase price consideration | (3,815,571 | ) | — | ||||
Purchase of property and equipment | (19,751,187 | ) | (3,335,795 | ) | |||
Proceeds from the disposal of property and equipment | 138,262 | — | |||||
Change in marketable securities | (4,191,185 | ) | 653,743 | ||||
Loans to officers/stockholders | 8,623 | (43,370 | ) | ||||
Repayment on loans to officers/stockholders | — | 183,400 | |||||
Net cash used in investing activities | (45,458,501 | ) | (13,153,827 | ) | |||
Cash flows from financing activities | |||||||
Borrowings against bank line of credit | 10,000,000 | 9,455,556 | |||||
Payments on bank line of credit | (10,000,000 | ) | — | ||||
Principal additions to mortgage payable | 9,000,000 | — | |||||
Principal payments on mortgage payable | (130,536 | ) | — | ||||
Principal additions to and payments on notes payable | 98,588 | (695,980 | ) | ||||
Proceeds from the issuance of convertible senior notes | 143,750,000 | — | |||||
Debt issue costs attributable to convertible senior notes | (5,364,243 | ) | — | ||||
Purchase of treasury stock | (24,952,600 | ) | — | ||||
Proceeds from the issuance/exercise of warrants and common stock | 1,174,733 | 1,960,483 | |||||
Net cash provided by financing activities | 123,575,942 | 10,720,059 | |||||
Net effect of exchange rate changes on cash | 287,378 | 121,996 | |||||
Net increase in cash and cash equivalents | 87,464,410 | 1,008,859 | |||||
Cash and cash equivalents at beginning of period | 56,020,452 | 6,361,496 | |||||
Cash and cash equivalents at end of period | $ | 143,484,862 | $ | 7,370,355 | |||
The accompany notes are an integral part of these financial statements.
3
SFBC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 | 2003 | ||||||
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Supplemental disclosures: | |||||||
Interest paid | $ | 990,244 | $ | 303,439 | |||
Income taxes paid | $ | 1,101,000 | $ | 1,242,855 | |||
Supplemental disclosures of non-cash investing and finance activities: | |||||||
Fair value of net assets (liabilities) assumed in connection with | $ | 4,503,846 | $ | 4,511,419 | |||
Common stock issued in connection with acquisition of business | $ | 3,820,817 | $ | 9,526,592 | |||
Common stock options issued as compensation | $ | 126,337 | $ | — | |||
Reduction of note receivable in lieu of bonus payment | $ | 200,000 | $ | 200,000 | |||
Additional purchase consideration related to the acquisition of businesses | $ | 4,339,765 | $ | — | |||
Common shares forfeited in lieu of cash payment related to option exercises | $ | 2,269,125 | $ | — | |||
The accompany notes are an integral part of these financial statements.
4
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”), SFBC New Drug Services, Inc., SFBC Ft. Myers, Inc., SFBC Analytical Laboratories, Inc., SFBC Taylor Technology, 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, owns 49% of a joint venture, SFBC An apharm 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 held by third parties. All financial information presented in this report relating to Canadian and European subsidiaries has been converted to United States dollars. All intercompany transactions and balances have been eliminated in consolidation.
For the period January 1, 2003 through July 6, 2003, Anapharm owned a 49% interest in NDS Canada located in London, Ontario Canada. For this period, NDS Canada’s results, which were not material, were reported using 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 of Florida, Inc. (“Clinical Pharmacology”), merging Clinical Pharmacology into SFBC Miami. See Note 3 to the Condensed Consolidated Financial Statements.
On July 25, 2004 the Company acquired Taylor Technology, Inc., based in Princeton, NJ. 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 and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the remaining quarter and for the year end ing December 31, 2004.
5
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, references 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.
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 may 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.
Net Earnings Per Share
The Company applies Statement of Financial Accounting Standards No. 128, "Earnings Per Share" 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 the dilutive effect of common stock equivalents. Included in diluted shares are common stock equivalents relating to stock options with a dilutive effect of 618,669 and 696,205 shares of common stock for the three and nine month periods ended September 30, 2004 and 837,014 and 798,813 shares of common stock for the three and nine month periods ended September 30, 2003.
6
Stock Based Compensation
At September 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 det ermined based on the fair value of the options at the grant dates consistent with the method of SFAS 123.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||