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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-24699
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1742957
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
One Kendall Square, Building 200, Suite 223
Cambridge, MA 02139
(Address of principal executive offices)
(617) 577-8020
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
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(Title of class)
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.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 15, 2000, there were outstanding 11,821,829 shares of the
registrant's common stock, $0.01 par value per share, which is the only
outstanding capital stock of the registrant. As of that date, the aggregate
market value of the shares of common stock held by non-affiliates (excludes
directors and executive officers of the registrant) of the registrant (based on
the closing price for the common stock as reported on The Nasdaq National Market
on March 15, 2000) was approximately $208,365,975.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Documents from which portions are incorporated by reference
- ----------------- ----------------------------------------------------------
Part III Portions of the Registrant's Proxy Statement relating to
the Registrant's Annual Meeting of Stockholders to be held
on May 25, 2000 are incorporated by reference into Items 10,
11 and 12.
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BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business.............................................................1
Item 2. Properties..........................................................13
Item 3. Legal Proceedings...................................................14
Item 4. Submission of Matters to a Vote of Security Holders.................14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................................15
Item 6. Selected Financial Data.............................................16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........23
Item 8. Financial Statements and Supplementary Data.........................24
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure............................................43
PART III
Item 10. Directors and Executive Officers of the Registrant..................43
Item 11. Executive Compensation..............................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management......43
Item 13. Certain Relationships and Related Transactions......................43
PART IV
Item 14. Exhibits and Reports on Form 8-K....................................44
Signatures....................................................................46
Index to Exhibits.............................................................48
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PART I
ITEM 1. BUSINESS
OVERVIEW
Bright Horizons Family Solutions, Inc. (the "Company" or "Bright Horizons Family
Solutions") is a leading national provider of workplace services for employers
and families, including child care, early education and strategic work/life
consulting. The Company operates 300 family centers for over 220 clients and has
the capacity to serve more than 37,000 children in 34 states and the District of
Columbia. The family center concept evolved from the more traditional workplace
child care center and is designed to serve a broader segment of the work-site
population. Each family center provides a number of services designed to meet
the business objectives of the corporate client and the family needs of the
client's employees. The Company's services are designed to (i) address
employers' ever-changing workplace needs, (ii) enhance employee productivity,
(iii) improve recruitment and retention of employees and (iv) help project the
image as the employer of choice within the employer's industry.
With the changing demographics of today's workforce and the prevalence of dual
career families, a growing number of corporations are creating family benefits
to attract and retain employees and support them as parents. Bright Horizons
Family Solutions provides family center based child care, education and
enrichment programs, backup care, before and after school care for school age
children, summer camps, vacation care, elementary school (kindergarten through
fourth grade), and other family support services. The Company partners with
sponsors to provide these services.
Bright Horizons Family Solutions serves many of the nation's leading
corporations, including 68 Fortune 500 companies. In addition, 42 of Working
Mother magazine's "Top 100 Companies for Working Mothers" are clients of Bright
Horizons Family Solutions. The Company's clients include many of America's best
known companies, such as Bank of America, Bayer Pharmaceuticals, The Boeing
Company, Campbell Soup Company, Columbia/HCA Health Care Corporation, Eli Lilly
and Company, First Union National Bank, Glaxo Wellcome, Honeywell, Johnson &
Johnson, Merck & Co., Inc., MBNA Corporation, Motorola, SAS Institute, S.C.
Johnson & Son, Inc., Time Warner, Inc. and Universal Studios, Inc. The Company
also provides services for well known institutions such as Beth Israel Deaconess
Medical Center, John F. Kennedy Airport, the PGA Tour, and the United Nations.
Bright Horizons Family Solutions operates multiple centers for 31 of its
clients.
Bright Horizons Family Solutions, a Delaware corporation, was formed in
connection with the merger (the "Merger") of Bright Horizons, Inc. ("BRHZ") and
CorporateFamily Solutions, Inc. ("CFAM"), each of which were national leaders in
the field of work-site child care services for the corporate market. BRHZ and
CFAM entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement") on April 26, 1998, which was approved by a vote of the respective
companies on July 24, 1998 (the "Merger Date"). The merger has been treated as a
tax-free reorganization, and accounted for as a pooling of interests. Unless the
context otherwise requires, references in this Annual Report on Form 10-K to the
Company or Bright Horizons Family Solutions for periods prior to July 24, 1998
refer to one or both of the Company's predecessors, BRHZ and CFAM, as
appropriate.
BUSINESS STRATEGY
Bright Horizons Family Solutions has gained nationwide recognition as a quality
service provider and is well-positioned to serve corporate sponsors due to its
national scale, track record of serving major corporate sponsors, established
reputation, and position as a quality leader. The major elements of its business
strategy are the following:
Corporate Sponsorship. Corporate sponsorship enables Bright Horizons Family
Solutions to address simultaneously the three most important criteria used by
parents to evaluate and select a child care and early education provider:
quality of care, locational convenience and cost. By reducing the Company's
start-up and operating costs, corporate sponsorship enables the Company to
concentrate its investment in those areas that directly translate into high
quality care, including faculty compensation, teacher-child ratios, curricula,
continuing faculty education, facilities and equipment. Bright Horizons Family
Solutions' corporate-sponsored work-site facilities are conveniently located at
or near the parents' place of employment, and generally conform their hours of
operation to the work schedule of the sponsor. Work-site family centers allow
parents to spend more time with their children,
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both while commuting and during the workday, and to participate in and monitor
their child's ongoing care and education. Finally, because corporate support
generally defrays a portion of Bright Horizons Family Solutions' start-up and/or
operating costs, the Company is able to offer its customers high quality child
care and early childhood education services at competitive tuition levels. Some
corporations offer subsidized tuition to their employees as part of their
overall benefits package.
Quality Leadership. The critical elements of Bright Horizons Family Solutions'
quality leadership focus include:
- NAEYC Accreditation. Bright Horizons Family Solutions operates its
centers to qualify for accreditation by the National Association for
the Education of Young Children ("NAEYC"), a national organization
dedicated to improving the quality of care and developmental education
provided for young children. The Company believes that its commitment
to meeting NAEYC accreditation is an advantage in the competition for
corporate sponsorship opportunities, due to the Company's experience
with an increasing number of potential and existing corporate sponsors
that are requiring adherence to NAEYC criteria. NAEYC accreditation
criteria cover a wide range of quantitative and qualitative factors,
including, among others, faculty qualifications and development,
staffing ratios, health and safety, and physical environment. NAEYC
criteria generally are more stringent than state regulatory
requirements. The majority of child care centers are not
NAEYC-accredited, and Bright Horizons Family Solutions has more
NAEYC-accredited work-site child development centers than any other
provider. Of the Company's 300 family centers 259 were eligible for
accreditation, of which 187 have achieved accreditation by NAEYC.
- High Teacher-Child Ratios. High teacher-child ratios are a critical
factor in providing quality early education, facilitating more focused
care and enabling teachers to forge relationships with children and
their parents. Under Bright Horizons Family Solutions' approach, each
child has a teacher who is designated as the child's primary
caregiver. This teacher is responsible for monitoring a child's
developmental progress and tailoring programs to meet the child's
individual needs, while engaging parents in establishing and achieving
goals. Bright Horizons Family Solutions is committed to maintaining
the NAEYC-recommended teacher-child ratios for all age groups, with
many family centers exceeding the NAEYC recommended minimum ratios. By
contrast, most center-based child care providers conform only to the
minimum teacher-child ratios mandated by applicable governmental
regulations, which are generally less intensive than NAEYC standards
and vary widely from state to state.
- Highly Qualified Center Directors and Faculty. Bright Horizons Family
Solutions believes its faculty's education and experience are
exceptional when compared to other child care organizations. Our
typical center director has more than ten years of child care
experience and a college degree in an education-related field, with
many center directors holding advanced degrees. The Company has
developed a training program for its employees that establishes
minimum standards for its faculty. Teacher training is conducted in
each family center and includes orientation and ongoing training,
including training related to child development and education, health,
safety and emergency procedures. Training, designed to meet NAEYC
training standards, is conducted on a regular basis at each family
center and on a Company-wide basis. Management training is provided on
an ongoing basis to all center directors and includes human resource
management, risk management, financial management, customer service,
and program implementation. Additionally, because Bright Horizons
Family Solutions considers ongoing training essential to maintaining
high quality service, centers have training budgets for their faculty
that provide for in-center training, attendance at selected outside
conferences and seminars and partial tuition reimbursement for
continuing education.
- Innovative Curricula. Bright Horizons Family Solutions' innovative,
developmentally appropriate curricula distinguish it in an industry
typically lacking educational programs. The Company is committed to
improving upon the typical early education experience by creating a
dynamic and interactive environment that stimulates learning and
development. As part of its curricula the Company has developed The
"World at Their Fingertips," a comprehensive program that includes
Language Works, Math Counts, Science Rocks, Our World, and ArtSmart
programs that provide hands
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on experiences for children to see the world as an invitation to
learn, grow, and live fully; all of which are designed to enable the
children to see a world full of possibilities that are within their
reach. The learning centers, outdoor environments, projects,
activities, and field trips are all carefully planned to allow
children to independently explore, discover, and learn in preparation
for academic success. Themes and directions emerge from the interests
and experiences of the children, families, and teachers. Teachers
prepare and rotate the various programs that provide large and small
group experiences, extended projects, and field trips that are all
designed to enrich the children's learning. Teachers strive to create
experiences appropriate for each child, that provide both stimulation
and challenge, which in turn help children find new answers and
opportunities.
The World at Their Fingertips provides infants and toddlers with what
they need - a safe, responsive "World" rich with language and
opportunities to actively explore and enjoy. The World at Their
Fingertips preschool and kindergarten programs provides well planned
learning centers that allow for individualized learning, small groups,
and supportive teaching that prepares children for academic
excellence. The development of language, mathematical reasoning, and
scientific thought are emphasized throughout all the learning centers.
Bright Horizons Family Solutions seeks to involve parents in the
center's activities and supports the extension of learning into the
home. The Company believes its early childhood educational services
meet or exceed the standards established by the National Academy of
Early Childhood Programs ("NAECP"), a division of NAEYC.
- Attractive, Child-Friendly Facilities. Bright Horizons Family
Solutions believes that attractive, spacious, child-friendly
facilities are an important element in fostering high quality learning
environments for children. The Company's family centers are
custom-built and are designed to be state of the art facilities that
serve the children, families and teachers, and create a community of
caring. Center design incorporates natural light, openness and direct
access from the family center to a landscaped playground with the
objective of creating an environment that allows for the children to
learn indoors and out. Bright Horizons devotes considerable effort to
equipping its centers with child-sized amenities, indoor and outdoor
play areas with age-appropriate materials and design, while taking
full advantage of technology for both administrative and classroom
use. Facilities are designed to be cost-effective and fit specific
sites, budgets and clients' needs.
Leading Market Presence. Bright Horizons Family Solutions' strategy has been to
gain a leading market presence by leveraging its reputation and the visibility
of its client relationships to enhance its marketing and market penetration. In
addition, the Company believes that clustering its centers in selected
metropolitan and geographic areas provides operating and competitive advantages.
Clustering permits the Company to strengthen quality, develop local recruiting
networks, and efficiently allocate its faculty among nearby centers in cases of
illness, vacation or leave. Clustering also provides Bright Horizons Family
Solutions with economies of scale in management, purchasing, training and
recruiting. The Company believes that regional clustering serves as a
competitive advantage in developing its reputation within geographic regions and
securing new corporate sponsorships in those areas. Bright Horizons Family
Solutions currently has a significant market presence in work-site child care in
Atlanta, Boston, Charlotte, Chicago, Dallas/Fort Worth, Fort Lauderdale/Miami,
Hartford, Los Angeles, Nashville, New York, Raleigh/Durham, San Francisco,
Seattle, St. Louis, Tampa/St. Petersburg, Washington, D.C. and Wilmington,
Delaware.
Employer of Choice. Bright Horizons Family Solutions focuses on maintaining its
reputation as a premier employer in the early childhood education market. The
Company believes that its above-average compensation, comprehensive and
affordable benefits package and opportunities for internal career advancement
enable the Company to attract highly qualified, well-educated, experienced and
committed center directors and faculty. The Company believes that its benefits
package, which includes medical, dental and disability insurance, paid vacation
and sick leave, a 401(k) savings plan, stock options, tuition reimbursement and
child care discounts, is unusually comprehensive and affordable to the employee
by industry standards. These benefits, as well as the Company's comprehensive
training programs, are an important recruitment and retention tool for Bright
Horizons Family Solutions in the relatively low-paying child care industry.
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GROWTH STRATEGY
The key elements of Bright Horizons Family Solutions' growth strategy are as
follows:
Open Centers for New Corporate Sponsors. Bright Horizons Family Solutions'
regional and home office sales force, as well as senior management actively
pursue potential new corporate sponsors, particularly in industries that provide
work-site child care, early education and family support services as a standard
benefit. Bright Horizons Family Solutions believes that its national scale,
quality leadership and track record of serving corporate sponsors give it a
competitive advantage in securing new corporate sponsorship relationships. As a
result of the Company's national visibility as a high quality provider of
work-site child care, early education and family support services, prospective
sponsors regularly contact Bright Horizons Family Solutions requesting proposals
for operating a family center.
Expand Relationships with Existing Corporate Sponsors. Bright Horizons Family
Solutions aims to increase revenue from its existing corporate sponsor
relationships by developing new centers for sponsors who have multiple corporate
sites and offering additional services at its existing centers. Bright Horizons
Family Solutions' experience has been that corporate sponsors are more inclined
to employ the Company on a multi-site basis following the successful operation
of an initial family center. The Company operates 111 family centers at multiple
sites for 31 sponsors. In addition, nine clients are currently served by the
Company's National Access Program, which enables the employees of a sponsor to
access the network of the Company's family centers across the country.
Pursue Strategic Acquisitions. Bright Horizons Family Solutions seeks to acquire
existing work-site child care centers and local or regional networks to expand
quickly and efficiently into new markets and increase its presence in existing
geographic clusters. The fragmented nature of the work-site segment of the child
care, early education and family support services market continues to provide
acquisition opportunities. The Company believes that many of the smaller
regional chains and individual providers seek liquidity and/or lack the
professional management and financial resources that sponsors increasingly
demand.
Assume Management of Existing Child Care Centers. Assuming the management of
existing centers enables Bright Horizons Family Solutions to serve an existing
customer base with little start-up investment. As corporations reduce their
involvement in non-core business activities, the Company has assumed the
management of a number of work-site child care centers previously managed by a
corporate sponsor. Bright Horizons Family Solutions has also assumed the
management of work-site child care centers formerly operated by other providers.
Many such providers have experienced operating difficulties because they lack
the management expertise or financial depth needed to provide high quality child
care services to corporate sponsors.
Develop and Market Additional Services. Bright Horizons Family Solutions plans
to continue to develop and market additional early childhood education and
family support services, full and part-time child care, emergency back-up
work-site child care (serving parents when their primary child care options are
unavailable), the National Access Program, seasonal services (extending hours at
existing centers to serve sponsors with highly seasonal work schedules), school
vacation clubs, summer programs, elementary school programs, before and after
school care for school age children, vacation care, special event child care,
and to add residential child development centers in areas where tuition levels
can support the Company's quality standards. Additionally, the Company often
works with its sponsors to offer unique solutions and provide additional
services. Examples include Y2Kids, which provided extended care on the eve of
the year 2000, and parents night out, which provides evening care for a
sponsor's employees.
At December 31, 1999, the Company had over 60 family centers under development
and scheduled to open over the next 12 to 24 months, including 27 for existing
clients.
BUSINESS MODELS
Although the specifics of Bright Horizons Family Solutions' corporate
sponsorship arrangements vary widely, they generally can be classified into two
forms: (i) the sponsor model, where the Company operates a family center on or
near the premises of a sponsor, gives priority enrollment to the employees of
the corporate sponsor, receives some form of start-up and/or operating financial
support from the corporate sponsor and maintains profit-and-loss
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responsibility, and (ii) the management model, where Bright Horizons Family
Solutions manages a work-site family center under a cost-plus agreement with a
corporate sponsor.
The Sponsor Model. Family centers operating under the sponsor model currently
represent approximately 60% of Bright Horizons Family Solutions' family centers.
The Company typically designs and operates a work-site family center in exchange
for some form of financial or operating support from the sponsor. This
sponsorship can take a variety of forms, including reduced occupancy costs,
tuition assistance, operating subsidies, payment of pre-opening expenses and
assistance with start-up costs, such as architectural and design fees, real
estate broker fees, as well as capital equipment and initial supplies.
Historically, the Company has received the greatest support in the form of
reduced occupancy costs. Bright Horizons Family Solutions maintains
profit-and-loss responsibility for sponsorship-model family centers. The
sponsorship model can be classified into two subcategories: (i)
employer-sponsored, where Bright Horizons Family Solutions provides child care
on a priority enrollment basis for employees of a single employer sponsor, and
(ii) developer-sponsored, where the Company provides priority child care to the
employees of multiple employers located within a real estate developer's
property.
- The Employer-Sponsored Model. The employer-sponsored model is
typically characterized by a single employer (corporation, hospital,
government agency or university), or occasionally a consortium of
employers, entering into a contract with the Company to provide child
care and early education at a facility located in or near the
sponsor's offices. The sponsor generally provides for the construction
of the center and on an ongoing basis pays for maintenance and
repairs. In some cases, the sponsor also provides tuition assistance
to the employees and minimum enrollment guarantees to the Company.
Children of the sponsor's employees typically are granted priority
enrollment at the center. In some instances, enrollment may be limited
to the employees of the sponsor. Operating contracts under the
employer-sponsored model have terms that generally range from three to
ten years, require ongoing reporting to the sponsor and, in some
cases, limit annual tuition increases.
- The Developer-Sponsored Model. A developer-sponsored center is located
in a real estate developer's office building or office park. The
center serves as an amenity to the developer's tenants, giving the
developer an advantage in attracting quality tenants to its site. In
return for leasing the facility to Bright Horizons Family Solutions at
a discounted rent, the Company offers priority enrollment to the
children of the site's employees. Bright Horizons Family Solutions
typically negotiates lease terms of 10 to 20 years, including the
initial term and renewal options. Under the developer-sponsored model,
Bright Horizons Family Solutions typically operates its child
development centers with few ongoing operating restrictions or
reporting requirements.
The Management Model. Family centers operating under management model contracts
currently represent approximately 40% of Bright Horizons Family Solutions'
family centers. Under the management contract model, the Company receives a
management fee from a corporate sponsor and an operating subsidy for expenses in
excess of tuition revenues within an agreed upon budget. The sponsor is
typically responsible for all start-up costs and facility maintenance. The
management model enables the corporate sponsor to have a greater degree of
control with respect to budgeting, spending and operations. Management contracts
require the Company to satisfy certain periodic reporting requirements and
generally range in length from one to five years, with some terminable by the
sponsor without cause or financial penalty. The Company is responsible for
maintenance of quality standards, recruitment of center directors and faculty,
implementation of curricula and programs and interaction with parents.
OPERATIONS
General. Consistent with its strategy of establishing leading market presence,
Bright Horizons Family Solutions is organized into seven operational divisions,
largely along geographic lines. Each division is managed by a Divisional Vice
President and is divided into seven to ten regions, each headed by a Regional
Manager responsible for supervising the quality, operating performance and
client relationships for three to ten centers. A typical center is managed by a
staff consisting of an administrative team, including the center director, a
teaching staff and support personnel, with the total number of staff varying due
to the complexity and hours of operation of the program. A center director has
operating responsibility and is responsible for supervising local marketing,
hiring new teachers and performing administrative tasks such as payroll and
tuition collection. Bright Horizons Family Solutions
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performs most accounting, finance, information system, risk management, human
resources, administration, business development and marketing functions at the
corporate office level.
Center hours of operation are designed to match the schedules of the sponsor.
Most centers are open ten to twelve hours a day, Monday through Friday, although
some employer sponsors operate two or even three shifts at locations our
centers serve. Typical hours of operation are from 7:00 a.m. to 6:00 p.m. Bright
Horizons Family Solutions offers a variety of enrollment options, ranging from
full-time (40-50 hours per week) to part-time options. The majority of children
who attend the Company's family centers are enrolled on a full-time basis and
are children of the employees of the employer-sponsor or the developer-sponsor's
tenants. The remaining enrolled children come from the surrounding community,
where such enrollment is permitted under the terms of the contract.
Tuition depends upon the age of the child, the geographic location and the
extent to which a corporate sponsor subsidizes tuition. In fiscal 1999, average
full-time monthly tuition was approximately $920 for infants, $850 for toddlers
and $690 for preschoolers. Tuition at most of Bright Horizons Family Solutions'
centers is payable in advance and is due either monthly or weekly. In some
cases, parents can pay tuition through payroll deduction.
Facilities. The Company's family centers are primarily operated in work-site
locations and vary in design and capacity in accordance with sponsor needs and
state and federal regulatory requirements. A prototypical Company family center
is approximately 12,000 to 15,000 square feet, and has a capacity for
approximately 150 children. As of December 31, 1999, the Company's centers had a
total licensed capacity of approximately 37,200 children, with the smallest
having a capacity of 6 children and the largest having a capacity of over 450
children.
Bright Horizons Family Solutions believes that attractive, spacious and
child-friendly facilities are an important element in fostering a high quality
learning environment for children. The Company's family centers are designed to
be open and bright and to maximize visibility throughout the center. The Company
devotes considerable resources to equipping its centers with child-sized
amenities, indoor and outdoor play areas of age-appropriate materials and
design, family hospitality areas and computer centers. Commercial kitchens are
present in those centers that require hot meals to be prepared on site.
Health and Safety. The safety and well-being of the children in its care is a
high priority for Bright Horizons Family Solutions. The Company employs a
variety of security measures at its centers, which may include electronic access
systems, sign-out procedures for children, security guards, or other
site-specific procedures. In addition, Bright Horizons Family Solutions' high
ratio of teachers to children, together with the presence of center directors
and other management personnel, leads to enhanced supervision. Centers are
designed to minimize the risk of injury to small children by incorporating such
features as child-size amenities, rounded corners on furniture and fixtures,
age-appropriate toys and equipment and cushioned fall-zones surrounding play
structures.
Bright Horizons Family Solutions conducts ongoing training of personnel in the
areas of health, safety and emergency protocol, requires CPR and first aid
certification of center management personnel, and offers such certification to
all center faculty. The Company conforms to federal OSHA requirements with
respect to annual blood-born pathogen training of all center personnel.
MARKETING
Bright Horizons Family Solutions markets its services to two constituencies:
corporate sponsors and parents. Management believes that the Company's
operations in 34 states and the District of Columbia with 300 family centers and
the expertise and reputation of its management team in working with many of the
nation's leading companies have created name recognition within the work and
family services industry. The Company's board of directors, senior officers and
advisory board members are involved at the national level with education,
work/life and children's services issues, and their prominence and involvement
in such issues plays a key role in attracting new clients and developing
additional services and products for existing clients.
The Company's regional and corporate sales force and senior management maintain
relationships with larger customers and actively pursue potential new corporate
sponsors, particularly in industries that provide work-site child care as a
standard benefit in order to recruit and retain talented employees. The
Company's sales force is organized on both a national and regional basis, and is
responsible for identifying potential corporate sponsors,
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targeting real estate developers, identifying potential acquisitions and
managing the overall sales process. As a result of Bright Horizons Family
Solutions' national visibility as a high quality child care provider, potential
sponsors regularly contact the Company requesting proposals. Bright Horizons
Family Solutions competes for most employer sponsorship opportunities via a
request for proposal process.
At the family center level, directors are responsible for marketing to parents.
Bright Horizons Family Solutions seeks to develop a local reputation by
promoting its high quality faculty, facilities, programs, and interactive,
hands-on curricula. The Company's pre-opening and ongoing local marketing
efforts include open houses, local direct mail and media advertising, parent
referrals and community outreach. Many centers have parent advisory
organizations, which assist in marketing and also act as a sounding board for
developments in the education program. Center directors typically receive
assistance from corporate sponsors, who often advertise the center in internal
publications, provide mailing lists, answer questions and facilitate interaction
between Bright Horizons Family Solutions and parents. The Company also has a
marketing department that acts as a central resource for center-level marketing
programs, including the preparation of promotional materials.
COMPETITION
The market for child care and early education services is highly fragmented and
competitive. Bright Horizons Family Solutions experiences competition for
enrollment and for sponsorship of its family centers.
Bright Horizons Family Solutions believes that the key factors in the
competition for enrollment are quality of care, locational convenience and cost.
The Company competes for enrollment with nannies, relatives, family child care
and center-based child care providers, including for profit, not-for-profit and
government-based providers. Corporate sponsor support enables Bright Horizons
Family Solutions to limit its start-up and operating costs and concentrate its
investment in those areas that directly translate into high quality early
education, specifically faculty compensation, teacher-child ratios, curricula,
continuing faculty education, facilities and equipment. The Company believes
that many center-based child care providers are able to offer care at a lower
price than Bright Horizons Family Solutions by utilizing lower teacher-child
ratios, and offering their staff lower pay and limited or unaffordable benefits.
While the Company's tuition levels are generally above those of its competitors,
management believes it is able to compete effectively, particularly for
well-educated parents, by offering the convenience of a work-site location and a
higher quality of care.
Bright Horizons Family Solutions believes its ability to compete successfully
for corporate sponsorship depends on a number of factors, including reputation,
national scale, quality and scope of service, cost-effective delivery of
service, high quality of personnel and the ability to understand the business
needs of prospective clients and to customize sponsorship arrangements. Many
residential center-based child care chains either have divisions that compete
for corporate sponsorship opportunities or are larger and have substantially
greater financial or other resources that could permit them to compete
successfully against the Company in the work-site segment. Other child care
organizations focus exclusively on the work-site segment of the child care
market. Bright Horizons Family Solutions believes there are fewer than 10
companies that currently operate work-site child care centers on a national
basis.
The Company's biggest competitors include the employer-sponsored child care
divisions of large child care chains that primarily operate residential child
care centers such as Children's Discovery Centers/Knowledge Beginnings,
KinderCare Learning Centers, Aramark/Children's World, and Child Time.
Management believes that the Company is distinguished from its competitors by
its primary focus on corporate clients and commitment to NAEYC accreditation
standards. Bright Horizons Family Solutions believes it is well-positioned to
attract corporate sponsors who wish to outsource the management of new or
existing work-site early education centers due to the Company's national scale,
established reputation, position as a quality leader and track record of serving
major corporate sponsors. In addition, an increasing number of potential
corporate sponsors are requiring adherence to NAEYC criteria.
EMPLOYEES
As of December 31, 1999, Bright Horizons Family Solutions employed approximately
10,300 employees (including part-time and substitute teachers), of which
approximately 270 were employed at the Company's corporate,
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divisional and regional offices and the remainder were employed at Company's
family centers. Center employees include faculty and administrative personnel.
The Company does not have an agreement with any labor union and believes that
its relations with employees are good.
REGULATION
Child care centers are subject to numerous federal, state and local regulations
and licensing requirements. Although these regulations vary from jurisdiction to
jurisdiction, government agencies generally review, among other things, the
adequacy of buildings and equipment, licensed capacity, the ratio of teachers to
children, faculty training, record keeping, the dietary program, the daily
curriculum and compliance with health and safety standards. In most
jurisdictions, these agencies conduct scheduled and unscheduled inspections of
centers, and licenses must be renewed periodically. In some jurisdictions,
regulations have been enacted which establish requirements for employee
background checks or other clearance procedures for employees of child
development centers. Center directors and regional managers are responsible for
monitoring each center's compliance with such regulations. Repeated failures by
a center to comply with applicable regulations can subject it to sanctions,
which can include fines, corrective orders, being placed on probation or, in
more serious cases, suspension or revocation of the center's license to operate,
and could require significant expenditures by the Company to bring its family
centers into compliance. In addition, state and local licensing regulations
often provide that the license held by the Company may not be transferred. As a
result, any transferee of a family services business (primarily child care) must
apply to the applicable administrative bodies for new licenses. There can be no
assurance that the Company would not have to incur material expenditures to
relicense centers it may acquire in the future. Management believes the Company
is in substantial compliance with all material regulations applicable to its
business.
There are currently certain tax incentives for parents utilizing child care
programs. Section 21 of the Internal Revenue Code provides a federal income tax
credit ranging from 20% to 30% of certain child care expenses for "qualifying
individuals" (as defined therein). The fees paid to Bright Horizons Family
Solutions for child care services by eligible taxpayers qualify for the tax
credit, subject to the limitations of Section 21. The amount of the qualifying
child care expenses is limited to $2,400 for one child and $4,800 for two or
more children and, therefore, the maximum credit ranges from $480 to $720 for
one child and from $960 to $1,440 for two or more children.
INSURANCE
Bright Horizons Family Solutions currently maintains the following types of
insurance policies: workers' compensation, commercial general liability,
automobile liability, commercial property coverage, student accident coverage,
employment practices, directors' and officers' liability and excess "umbrella"
liability. The policies provide for a variety of coverages and are subject to
various limitations, exclusions and deductibles. Management believes that the
Company's current insurance coverages are adequate to meet its needs.
Bright Horizons Family Solutions has not experienced difficulty in obtaining
insurance coverage, but there can be no assurances that adequate insurance
coverage will be available in the future, or that the Company's current coverage
will protect it against all possible claims.
RISK FACTORS
Management of Growth. The Company and its predecessors have experienced
substantial growth during the past several years through internal growth and by
acquisition. The Company's ability to experience future growth will depend upon
a number of factors, including the ability to further develop existing client
relationships and to obtain new client relationships, the expansion of services
and programs offered by the Company, the maintenance of high quality services
and programs and the hiring and training of qualified management, divisional
vice presidents, regional managers, center directors and other personnel. The
Company may experience difficulty in attracting and retaining qualified
personnel in various markets necessary to meet growth opportunities. Hiring and
retaining qualified personnel may require increased salaries and enhanced
benefits in more competitive markets, which could result in a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, difficulties in hiring and retaining qualified personnel may also
impact the Company's ability to accept additional enrollment at its centers
which could result in a material adverse effect on the Company's business,
results of operations and financial condition. Sustaining growth may require the
implementation of enhancements to
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operational and financial systems and will also depend on the Company's ability
to expand its sales and marketing force. There can be no assurance that the
Company will be able to manage its expanding operations effectively or that it
will be able to maintain or accelerate its growth, and any failure to do so
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Market Acceptance of Work and Family Services. The Company's business strategy
depends on employers recognizing the value of work and family services. There
can be no assurance that there will be continued growth in the number of
employers that view work-site family services as cost-effective or beneficial to
their work forces. Any negative change in current corporate acceptance of
financially supported child care could have a material adverse effect on the
Company's business, results of operations, financial condition and growth
prospects. There can be no assurance that demographic trends, including an
increasing percentage of mothers in the work force, will continue to lead to
increased market share for the center-based segment in general and the work-site
segment in particular.
Competition. The Company competes for corporate clients as well as individual
enrollment in a highly fragmented and competitive market. For enrollment, the
Company competes with family child care (operated out of the caregiver's home)
and center-based child care (residential and work-site child care centers, full
and part-time nursery schools, and church-affiliated and other not-for-profit
providers). In addition, substitutes for organized child care, such as
relatives, nannies, and the option of one parent caring for a child, compete
with the Company. In addition, family child care providers often operate at
standards lower than the national accreditation standards at which the Company
operates. Management believes the Company's ability to compete successfully
depends on a number of factors, including quality of care, locational
convenience and cost. The Company often is at a price disadvantage with respect
to family child care providers, who operate with little or no rental expense and
generally do not comply or are not required to comply with the same health,
safety, insurance and operational regulations as the Company. Many of its
competitors in the center-based segment also offer child care at a substantially
lower price than the Company, and some have substantially greater financial
resources than the Company or have greater name recognition. The Company also
competes with many not-for-profit providers of child care and preschools, some
of which are able to offer lower pricing than the Company. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, or that competitive pressures faced by the Company will
not have a material adverse effect on its business, results of operations and
financial condition.
In the competition for corporate clients, the Company primarily competes with
other organizations that focus on the work-site segment of the child care
market and with certain center-based child care chains that have divisions that
compete for corporate opportunities. The Company also competes with a diverse
group of large and small competitors for a range of child care and other work
and family services including work/life, employee benefits and management
consultants. Some of these competitors have significantly greater financial
resources and may be willing to enter into contract models, invest initial
capital in facilities or enter into other financial arrangements that are not
consistent with the Company's business strategy. Many of these competitors offer
consulting, work-site child care and other services at lower prices than the
Company. Increased competition for corporate relationships on a national or
local basis could result in increased pricing pressure and/or loss of market
share, thereby having a material adverse effect on the Company's business,
results of operations and financial condition, as well as its ability to attract
and retain qualified family center personnel and its ability to pursue its
growth strategy successfully.
Dependence on Corporate Client Relationships. A significant portion of the
Company's business is derived from family centers associated with corporate
clients for which the Company provides work-site family services for single or
multiple sites pursuant to management contracts. While the specific terms of
such contracts vary, some management contracts are subject to early termination
by the corporate client without cause. While the Company has a history of
consistent contract renewals, there can be no assurance that future renewals
will be secured. The early termination or non-renewal of a significant number of
corporate management contracts or the termination of a multiple-site corporate
client relationship could have a material adverse effect on the Company's
business, results of operations and financial condition.
Changing Economic Conditions. The Company's revenue and net income are subject
to general economic conditions. A significant portion of the Company's revenue
is derived from employers and real estate developers who historically have
reduced their expenditures for work-site family services during economic
downturns. In addition, a significant percentage of the Company's family centers
are sponsored by real estate developers offering on-site child care as an
amenity to attract tenants to their buildings. Changes in the supply and demand
of real estate
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could adversely affect real estate developers' willingness to subsidize child
care operations at new developments or their ability to obtain financing for
developments offering developer-sponsored child care services. Should the
economy weaken in any future period, these corporate clients may reduce or
eliminate their expenditures on work and family services, and prospective
clients may not commit resources to such services. The Company's revenues
depend, in part, on the number of dual income families and working single
parents who require child care services. A deterioration of general economic
conditions may adversely impact the Company because of the tendency of
out-of-work parents to discontinue utilization of child care services. These
factors could have a material adverse effect on the Company's business, results
of operations and financial condition.
Risks Associated with Acquisitions. The Company plans as part of its growth
strategy to evaluate the acquisition of other providers of work/life, child care
and consulting services. Acquisitions involve numerous risks, including
potential difficulties in the assimilation of acquired operations, not meeting
financial objectives, diversion of management's attention, negative financial
impacts based on the amortization of acquired intangible assets, the dilutive
effects of the issuance of Common Stock in connection with an acquisition and
potential loss of key employees of the acquired operation. No assurance can be
given as to the success of the Company in identifying, executing and
assimilating acquisitions in the future.
Dependence on Key Management. The success of the Company is highly dependent on
the efforts, abilities, and continued services of its executive officers and
other key employees. The loss of any of the executive officers or key employees
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company believes that its future success
will depend upon its ability to continue to attract, motivate and retain
highly-skilled managerial, sales and marketing, divisional, regional and center
director personnel. Although the Company historically has been successful in
retaining the services of its senior management, there can be no assurance that
the Company will be able to do so in the future.
Ability to Obtain and Maintain Insurance; Adverse Publicity. The Company
currently maintains the following types of insurance policies: workers'
compensation, commercial general liability, automobile liability, commercial
property coverage, student accident coverage, directors' and officers' liability
coverage, employment practices liability and excess "umbrella" liability
including coverage for child abuse and molestation. These policies provide for a
variety of coverages and are subject to various limitations, exclusions and
deductibles. To date, the Company has been able to obtain insurance in amounts
it believes to be appropriate. There can be no assurance that the Company's
insurance premiums will not increase in the future as a consequence of
conditions in the insurance business generally or the Company's experience in
particular. As a result of adverse publicity concerning reported incidents of
alleged abuse at child care centers and the length of time before the expiration
of applicable statutes of limitations for the bringing of child abuse and
personal injury claims (typically a number of years after the child reaches the
age of majority), some operators of child care and family centers have had
difficulty obtaining general liability insurance, child abuse liability
insurance or similar liability insurance or have been able to obtain such
insurance only at substantially higher rates. Any adverse publicity concerning
reported incidents of child abuse at any child care centers, whether or not
directly relating to or involving the Company, could result in decreased
enrollment at the Company's centers, termination of existing corporate
relationships, inability to attract new corporate relationships or increased
insurance costs, any of which could have a material adverse effect on the
Company's business, results of operations, and financial condition.
Litigation. Because of the nature of its business, the Company is and expects
that in the future it may be subject to claims and litigation alleging
negligence, inadequate supervision and other grounds for liability arising from
injuries or other harm to the people it serves, primarily children. In addition,
claimants may seek damages from the Company for child abuse, sexual abuse and
other acts allegedly committed by Company employees. The Company has
occasionally been sued for claims relating to injuries to children in its care.
There can be no assurance that additional lawsuits will not be filed, that the
Company's insurance will be adequate to cover liabilities resulting from any
claim or that any such claim or the publicity resulting from it will not have a
material adverse effect on the Company's business, results of operations, and
financial condition including, without limitation, adverse effects caused by
increased cost or decreased availability of insurance and decreased demand for
the Company's services from corporate sponsors and parents.
Seasonality and Variability of Quarterly Operating Results. The Company's
revenue and results of operations fluctuate with the seasonal demands for child
care. The Company's revenue typically declines during the third
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quarter as a result of decreased enrollments in its family centers as parents
withdraw their children for vacations, as well as withdraw their older children
in preparation for entry into elementary schools. There can be no assurance that
the Company will be able to adjust its expenses on a short-term basis to
minimize the effect of these fluctuations in revenue. The Company's quarterly
results of operations may also fluctuate based upon the number and timing of
center openings and/or acquisitions, the performance of new and existing
centers, the contractual arrangements under which centers are operated, the
change in the mix of such contractual arrangements, the timing and level of
consulting and development fees, center closings, competitive factors and
general economic conditions. The inability of existing centers to maintain their
current profitability, the failure of newly opened centers to contribute to
profitability and the failure to maintain and grow the consulting and
development services could result in additional fluctuations in the future
operating results of the Company on a quarterly or annual basis.
Impact of Governmental Regulation. The Company's family centers are subject to
numerous federal, state and local regulations and licensing requirements.
Although these regulations vary greatly from jurisdiction to jurisdiction,
government agencies generally review, among other things, the adequacy of
buildings and equipment, licensed capacity, the ratio of staff to children,
staff training, record keeping, the dietary program, the daily curriculum and
compliance with health and safety standards. The Company is also required to
comply with the ADA, which prohibits discrimination on the basis of disability
in public accommodations and employment. Failure of a center to comply with
applicable regulations or the ADA can subject it to governmental sanctions,
which might include fines, corrective orders, probation, or, in more serious
cases, suspension or revocation of the center's license to operate or an award
of damages to private litigants and could require significant expenditures by
the Company to bring its family centers into compliance. In addition, state and
local licensing regulations often provide that the license held by a family
services company may not be transferred. As a result, any transferee of a family
services business (primarily child care) must apply to any applicable
administrative bodies for new licenses. There can be no assurance that the
Company would not have to incur material expenditures to relicense centers it
may acquire in the future. There can be no assurance that government agencies
will not impose additional restrictions on the Company's operations which could
adversely affect the Company's business, results of operations, and financial
condition. In addition, under the Internal Revenue Code, certain tax incentives
are available to parents utilizing child care programs. Any change in such
incentives could cause a number of parents to remove their children from the
Company's centers, which would adversely affect the Company's business, results
of operations and financial condition. Although the Company expects to pay
employees at rates above the minimum wage, increases in the federal minimum wage
could result in a corresponding increase in the wages paid to the Company's
employees, which could adversely affect the Company's business, results of
operations and financial condition.
Possible Volatility of Stock Price. The prices at which the Company's Common
Stock trades is determined by the marketplace and is influenced by many factors,
including the liquidity of the market for the Common Stock, investor perception
of the Company and of the work/life industry generally, and general economic and
market conditions. In addition, the stock market historically has experienced
volatility which has affected the market price of securities of many companies
and which has sometimes been unrelated to the operating performance of such
companies. In addition, factors such as announcements of new services or offices
or acquisitions by the Company or its competitors or third parties, as well as
market conditions in the Company's industry, may have a significant impact on
the market price of the Common Stock. The market price may also be affected by
movements in prices of stocks in general. In addition, the exercise of options
to purchase shares of the Common Stock may cause dilution to existing
stockholders.
Potential Effect of Anti-Takeover Provisions. The Company's Certificate of
Incorporation and Bylaws contain certain provisions that could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise. These provisions establish staggered terms for members of
the Company's Board of Directors and include advance notice procedures for
stockholders to nominate candidates for election as directors of the Company and
for stockholders to submit proposals for consideration at stockholders'
meetings. In addition, the Company is subject to Section 203 of the Delaware
General Corporation Law which limits transactions between a publicly held
company and "interested stockholders" (generally, those stockholders who,
together with their affiliates and associates, own 15% or more of a company's
outstanding capital stock). This provision of the DGCL may have the effect of
deterring certain potential acquisitions of the Company. The Company's
Certificate of Incorporation provides for 5,000,000 authorized but unissued
shares of preferred stock, the rights, preferences, qualifications, limitations
and restrictions of which may be fixed by the Company's Board of Directors
without any further action by stockholders.
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EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the names, ages, titles and principal occupations and
employment for the past five years of the executive officers of the Company:
Roger H. Brown, 43 -- President and Chief Executive Officer. Mr. Brown has
served as a director and President of the Company since the Merger, and was
appointed Chief Executive Officer of the Company in May 1999. Mr. Brown
co-founded BRHZ and served as Chairman and Chief Executive Officer of BRHZ from
its inception in 1986 until the Merger. Prior to 1986, he worked as a management
consultant for Bain & Company, Inc. Mr. Brown currently serves as a director for
The Horizons Initiative, a non-profit organization that provides support for
homeless children and their families, Stand for Children, a non-profit
organization dedicated to improving the quality of life for children and
Advantage Schools, Inc., a charter school management company. Mr. Brown is the
husband of Linda A. Mason.
Linda A. Mason, 45 -- Co-Chairman of the Board. Ms. Mason has served as a
director of the Company since the Merger. Ms. Mason also served as Chairman of
the Board from the Merger until May 1999 when she became Co-Chairman of the
Board. Ms. Mason co-founded BRHZ and served as a director and President of BRHZ
from its inception in 1986 until the Merger. From its inception until September
1994, Ms. Mason also acted as BRHZ's Treasurer. Prior to founding BRHZ, Ms.
Mason was co-director of the Save the Children relief and development effort in
Sudan and worked as a program officer with CARE in Thailand. Prior to 1986, Ms.
Mason worked as a management consultant with Booz, Allen and Hamilton. Ms. Mason
also is a director of The Horizons Initiative and Whole Foods Market, Inc.,
which owns and operates retail food stores, is a Fellow of the Yale Corporation
and serves on the Advisory Board for the Yale School of Management. Ms. Mason is
the wife of Roger H. Brown.
Marguerite W. Sallee, 54 -- Co-Chairman of the Board. Ms. Sallee served as the
Chief Executive Officer and director of the Company from July 1998 until May
1999, when she became Co-Chairman of the Board of the Company. In July 1999, Ms.
Sallee co-founded and became Chief Executive Officer and a director of Frontline
Group, inc., a corporate training company. Ms. Sallee is a founder of CFAM and
served as President, Chief Executive Officer and a director of CFAM from
February 1987 until the Merger. Prior thereto, Ms. Sallee served as Commissioner
of Human Services in former Tennessee Governor Lamar Alexander's cabinet. She is
a director of Saks Incorporated, an owner and operator of department stores, and
is a former Chairman of the Nashville Area Chamber of Commerce. In addition,
Ms. Sallee is a delegate to the Presidential Summit for Children.
Mary Ann Tocio, 51 -- Chief Operating Officer. Ms. Tocio has served as Chief
Operating Officer of the Company since the Merger. Ms. Tocio joined BRHZ in 1992
as Vice President and General Manager of Child Care Operations. She was
appointed Chief Operating Officer of BRHZ in November 1993, and remained as such
until the Merger. From 1983 to 1992, Ms. Tocio held several positions with
Wellesley Medical Management, Inc., including Senior Vice President of
Operations, where she managed more than 100 ambulatory care centers nationwide.
Prior to that time, Ms. Tocio held various management positions with several
Boston-area hospitals.
Stephen I. Dreier, 57 -- Chief Administrative Officer and Secretary. Mr. Dreier
has served as Chief Administrative Officer and Secretary of the Company since
the Merger. He joined BRHZ as Vice President and Chief Financial Officer in 1988
and became its Secretary in November 1988 and Treasurer in September 1994. Mr.
Dreier served as BRHZ's Chief Financial Officer and Treasurer until September
1997, at which time he was appointed to the position of Chief Administrative
Officer, a position which he held until the Merger. From 1976 to 1988, Mr.
Dreier was Senior Vice President of Finance and Administration for the John S.
Cheever/Paperama Company. Prior to that time, Mr. Dreier served as Manager of
Financial Control for the Westinghouse Worldwide Construction Product Group.
David Lissy, 34 -- Chief Development Officer. Mr. Lissy has served as Chief
Development Officer of the Company since the Merger. He joined BRHZ as Vice
President of Development in September 1997. Prior to joining the Company, Mr.
Lissy served as Senior Vice President/General Manager at Aetna/U.S. Healthcare,
the employee benefits division of Aetna, Inc., in the Northern New England
region. Prior to that role, Mr. Lissy was Vice President of Sales and Marketing
for U.S. Healthcare and had been with U.S. Healthcare in various sales and
management roles since 1987. Mr. Lissy is a graduate of Ithaca College.
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Elizabeth J. Boland, 40 -- Chief Financial Officer. Ms. Boland joined BRHZ in
1997 and served as Chief Financial Officer until the merger at which point she
served as Senior Vice President of the Company. Ms. Boland has served as Chief
Financial Officer of the Company since June 1999. From 1994 to 1997, Ms. Boland
was Chief Financial Officer of The Visionaries, Inc., an independent television
production company. From 1990 to 1994, Ms. Boland served as Vice
President-Finance for the Olsten Corporation, a publicly traded provider of
home-health care and temporary staffing services. From 1981 to 1990, she worked
on the audit staff at Price Waterhouse LLP in Boston, completing her tenure as a
senior audit manager. Ms. Boland is a graduate of the University of Notre Dame.
ITEM 2. PROPERTIES
The following table summarizes the locations of Bright Horizons Family
Solutions' centers by state as of December 31, 1999:
Alabama 1 Nevada 3
Arizona 3 New Hampshire 1
California 25 New Jersey 21
Colorado 1 New York 14
Connecticut 17 North Carolina 21
Delaware 7 Ohio 3
District of Columbia 5 Pennsylvania 9
Florida 22 Rhode Island 2
Georgia 7 South Carolina 2
Illinois 30 South Dakota 1
Indiana 6 Tennessee 7
Iowa 5 Texas 12
Kentucky 2 Utah 1
Maine 3 Virginia 4
Maryland 7 Washington 10
Massachusetts 34 Wisconsin 7
Michigan 2 West Virginia 1
Missouri 4
As of December 31, 1999, Bright Horizons Family Solutions operated 300 centers
in 34 states and the District of Columbia, of which sixteen were owned and the
remaining were operated under leases or operating agreements. The Company's
owned family centers located in San Jose, California; Glastonbury and Orange,
Connecticut; Tampa, Florida; Quincy, Massachusetts; White Plains, New York;
Raleigh/Durham, North Carolina; Austin, Texas and Bellevue, Washington are not
currently encumbered by mortgages. The leases have terms ranging from five to
twenty years, often with renewal options, with most leases having an initial
term of five to ten years. Some of the leases provide for contingent payments if
the center's operating revenues, profits or enrollment exceed a specified level.
Bright Horizons Family Solutions maintains corporate offices in Cambridge,
Massachusetts and Nashville, Tennessee. The Company leases approximately 10,000
square feet for its office in Cambridge, Massachusetts under an operating lease
that expires August 31, 2002, and subleases an additional 5,000 square feet that
expires in June 2000. The Company leases approximately 10,000 square feet for
its office in Nashville, Tennessee under an operating lease that expires July
30, 2000. In addition, the Company has entered into a lease agreement for 43,000
square feet of office space in Watertown, Massachusetts with occupancy expected
to take place in the second quarter of 2000.
The Company also has operating leases with terms that expire from December 2000
to August 2003 on approximately 13,000 square feet for administrative offices in
El Segundo, California; Itasca, Illinois; Bellevue, Washington; Rockville,
Maryland; Flower Mound, Texas and Morristown, New Jersey.
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ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, subject to claims and suits arising in the
ordinary course of its business. Such claims have, in the past, generally been
covered by insurance. Management believes the resolution of other legal matters
will not have a material effect on the Company's financial condition or results
of operations, although no assurance can be given with respect to the ultimate
outcome of any such actions. Furthermore, there can be no assurance that the
Company's insurance will be adequate to cover all liabilities that may arise out
of claims brought against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal year 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since July 27, 1998, the Company's Common Stock has been traded on the Nasdaq
National Market under the symbol "BFAM." From the period beginning with BRHZ's
initial public offering in November 1997 and ending on the date of the Merger,
the BRHZ common stock was traded on the Nasdaq National Market under the symbol
"BRHZ." From the period beginning with CFAM's initial public offering in August
1997 and ending on the date of the Merger, the CFAM common stock was traded on
the Nasdaq National Market under the symbol "CFAM." The table below sets forth
the high and low quarterly sales prices for the Company's Common Stock, BRHZ
common stock and CFAM common stock as reported in published financial sources
for each quarter during the last two years:
Price Range of Common Stock
------------------------------------------------------------------------------------
Bright Horizons Family CorporateFamily
Solutions Bright Horizons Solutions
-------------------------- ----------------------- ------------------------
High Low High Low High Low
1999
Fourth Quarter $20 1/8 $12 1/2 * * * *
Third Quarter $20 1/4 $13 7/8 * * * *
Second Quarter $23 3/8 $14 11/16 * * * *
First Quarter $28 5/8 $16 3/4 * * * *
1998
Fourth Quarter $27 1/8 $17 1/4 * * * *
Third Quarter $28 1/8 $18 1/8 $28 3/4 $20 $24 5/8 $18 3/8
Second Quarter ** ** $31 1/4 $24 1/4 $31 3/4 $22
First Quarter ** ** $28 1/2 $16 1/8 $26 5/8 $19
* No established public trading market was available for the BRHZ or CFAM common
stock after July 24, 1998.
** No established public trading market for the Company's Common Stock existed
prior to July 27, 1998.
The Company has never declared or paid any cash dividends on its Common Stock.
The Company currently intends to retain all earnings to support operations and
to finance expansion of its business; therefore, the Company does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. Any
future decision concerning the payment of dividends on the Company's Common
Stock will be at the Board of Directors' discretion and will depend upon
earnings, financial condition, capital needs and other factors deemed pertinent
by the Board of Directors. In addition, the Company may be restricted in the
payment of dividends pursuant to a credit facility. See Item 7, Managements'
Discussion and Analysis of Financial Condition and Results of Operation
Liquidity and Capital Resources.
The number of stockholders of record at March 15, 2000 was 169, and does not
include those stockholders who hold shares in street name accounts.
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ITEM 6. SELECTED FINANCIAL DATA
BRHZ operated on a fiscal year ended June 30. CFAM had a fiscal year ending on
the Friday closest to December 31. The Company operates on a calendar year. The
following financial information has been compiled from the Company's
consolidated financial statements, which combine financial position and
operating results as of and for the years ended December 31, 1999 ("Fiscal Year
1999"), December 31, 1998 ("Fiscal Year 1998"), December 31, 1997 and January 2,
1998 ("Fiscal Year 1997") for BRHZ and CFAM, respectively, June 30, 1996 and
December 27, 1996 ("Fiscal Year 1996") for BRHZ and CFAM, respectively, and June
30, 1995 and December 29, 1995 ("Fiscal Year 1995") for BRHZ and CFAM,
respectively.
Due to the different fiscal year ends, BRHZ's results of operations for the six
month period ended December 31, 1996 are not included in the restated financial
statements for Fiscal Years 1997 or 1996. For this period, BRHZ had revenues of
$40 million, net income of $407,000 and total changes in common stockholders'
equity of ($137,000).
Fiscal Year
1999 1998 (1) 1997 1996 (2) 1995
---- -------- ---- -------- ----
Statement of income data (in thousands except per share amounts):
Revenue $243,290 $209,372 $172,555 $127,107 $80,613
Operating income 12,843 1,237 5,048 2,430 1,397
Income before taxes 13,558 2,447 5,004 1,893 1,332
Net income before preferred stock
dividends and accretion on
redeemable preferred stock 7,927 474 2,761 4,057 2,174
Net income available to common
stockholders 7,927 474 1,844 2,930 1,047
Diluted earnings per share $ 0.63 $ 0.04 $ 0.30 $ 0.66 $ 0.28
Weighted average diluted shares
outstanding 12,586 12,411 9,293 4,502 7,665
Financial position at fiscal year end (in thousands except per share amounts):
Working capital $ 3,342 $12,040 $18,005 $ 4,137 $ 1,251
Total assets 107,073 91,463 76,842 44,816 29,938
Long-term debt, including current
maturities 687 685 783 9,648 5,937
Common stockholders' equity
(deficit) 62,286 53,380 46,663 (8,720) (11,884)
Dividends per common share -- -- -- -- --
(1) The Company recognized merger costs of $7.5 million related to the merger
of BRHZ and CFAM. As a result of the non-deductibility of certain
transaction costs associated with the Merger, the Company recognized tax
expense of $2.0 million.
(2) The Company recognized an income tax benefit of $2.0 million principally
the result of net reductions in valuation allowances for deferred tax
assets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the
Company. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release any modifications or
revisions to these forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence
of unanticipated events. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the Company cautions
investors that actual financial and operating results may differ materially
from those projected in forward-looking statements made by, or on behalf
of, the Company. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
performance, or achievements of the Company to be materially different from
any future results, performance, or achievements expressed or implied by
such forward-looking statements. See "Risk Factors" above for a description
of a number of risks and uncertainties which could affect actual results.
GENERAL
Bright Horizons Family Solutions is a leading national provider of
workplace services for employers and families, including child care, early
education and strategic work/life consulting. As of December 31, 1999, the
Company managed 300 family centers, with over 60 family centers under
development. The Company has the capacity to serve more than 37,000
children in 34 states and the District of Columbia and has partnerships
with many of the nation's leading employers, including 68 Fortune 500
companies and 42 of Working Mother Magazine's "100 Best Companies for
Working Mothers" in 1999. The Company seeks to cluster centers in
geographic areas to enhance operating efficiencies and to create a leading
market presence.
The Company, a Delaware corporation, was formed as a result of the Merger,
by and among the Company, BRHZ and CFAM, which was approved by the
shareholders of BRHZ and CFAM on July 24, 1998. Each issued and outstanding
share of BRHZ common stock was converted into 1.15022 shares of the
Company's Common Stock, and each issued and outstanding share of CFAM
common stock was converted into one share of Common Stock. Each outstanding
option of BRHZ and CFAM was converted into an option to purchase shares of
Common Stock at the same conversion ratios referenced above. The
transaction has been accounted for as a pooling of interests and tax-free
reorganization. All historical equity amounts have been restated to reflect
the respective exchange ratios, and certain reclassifications have been
made for consistent presentation, which had no effect on net income.
Center Economics. The Company's revenue is principally derived from the
operation of family centers, and to a lesser extent, other services
including consulting services. Family center revenues consist of parent
fees for tuition, amounts paid by corporate sponsor clients to fund a
portion of a family center's operating costs, and management fees paid by
client sponsors. Revenue growth has primarily resulted from the addition of
new family centers as well as increased enrollment and tuition, and
expanded programs at existing family centers. Parent fees comprise the
largest component of a center's revenue and are billed on a monthly or
weekly basis, payable in advance. The parent fees are generally comparable
to or slightly higher than prevailing area market rates for tuition.
Amounts paid by corporate sponsor clients are payable monthly and may be
dependent on a number of factors such as enrollment, the center's operating
costs, budgeted amounts, and the extent to which the sponsor wishes to
subsidize parent fees. Management fees are generally fixed and payable
monthly. Although the specifics of the Company's sponsorship arrangements
vary widely, there are two basic forms, the sponsor model and the
management model.
The Company employs the sponsor model in approximately 60% of its family
center sites. Under the sponsor model, a family center is operated at or
near the sponsor's work site. The Company retains profit-and-loss
responsibility for the operation of the family center, and, as part of the
arrangement, may receive financial support from the sponsor. Client support
can take various forms, including reduced occupancy costs,
tuition-assistance and start-up and/or operating cost assistance. Newly
opened sponsored centers generally operate at a
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loss until utilization levels reach approximately 60%, which typically
occurs within 6 to 18 months of operation. In exchange for client
sponsorship, the Company gives priority enrollment to the children of
employees or tenants affiliated with the sponsor.
Under the management model, which comprises approximately 40% of the
Company's operating sites, the Company operates a family center under a
cost-plus agreement. These contracts generally include a management fee and
require that the sponsor provide an operating subsidy for operating
expenses in excess of parent fees or tuition within an agreed upon budget.
Therefore, the Company does not sustain pre-opening or initial operating
losses under the management model. The management model centers experience
slightly lower operating margins than the sponsor model centers at full
maturity.
Under the sponsor model, the tuition paid by parents is supplemented in
some cases by direct payments from sponsors and, to a far lesser extent,
direct payment from government agencies. Under the management contract
model, in addition to parent tuition, revenue also includes management fees
and operating subsidies. Tuition, management fees and fees for priority
enrollment rights paid in advance are recorded as deferred revenue and are
recognized in the appropriate period.
In centers operating under the sponsor model, the Company may be required
to make capital expenditures necessary to initially fit out, equip and
furnish the family centers, as well as make similar expenditures to
refurbish and maintain existing centers. While sponsors generally provide
for the space or construction of the family center, the Company may pay for
leasehold improvements or construction costs. The Company may make capital
investments when it is able to obtain favorable purchase terms or when a
sponsor agrees to pay fees in advance for long-term priority enrollment
rights in the center, or for other guarantees.
In centers operating under the management model, the sponsor typically
provides for all costs associated with building, fitting out, equipping,
furnishing and supplying the family center. The sponsor is also typically
responsible for ongoing occupancy and maintenance costs.
Cost of services expenses consist of direct expenses associated with the
operation of family centers and with the delivery of consulting services.
Family center cost of services consist primarily of staff salaries, taxes
and benefits; food costs; program supplies and materials, parent marketing
and occupancy costs. Personnel costs are the largest component of a family
center's operating costs, and comprise approximately 80% of a family
center's operating expenses. However, personnel costs will be
proportionately larger in family centers operating under the management
contract model and proportionally lower in family centers operating under
the sponsor model. Consulting cost of services are comprised primarily of
staff salaries, taxes and benefits; contract labor; and other direct
operating expenses.
Selling, general and administrative expenses are comprised primarily of
salaries, taxes and benefits for non-center personnel, including corporate,
regional and business development personnel; accounting and legal fees;
information technology; occupancy costs for corporate and regional
personnel and other general corporate expenses.
Amortization expense is being recognized over the period benefited by
certain intangible assets, which include goodwill, non-compete agreements
and contract rights associated with acquisitions made by the Company.
New Centers. In Fiscal Year 1999, the Company added 37 new family centers,
15 of which are operating under the sponsor model and 22 of which are
operating under the management contract model. In the same period, the
Company closed 11 centers which were either not meeting operating
objectives or transitioned to other service providers. The Company
currently has over 60 centers under development, scheduled to open over the
next 12 to 24 months. The opening of new centers is subject to a number of
conditions and factors, including, among others, construction timing,
sponsor needs and weather conditions.
Seasonality. The Company's business is subject to seasonal and quarterly
fluctuations. Demand for child care and early education services has
historically decreased during the summer months. During this season,
families are often on vacation or have alternative child care arrangements.
Demand for the Company's services generally increases in September upon the
beginning of the new school year and remains relatively stable
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throughout the rest of the school year. Results of operations may also
fluctuate from quarter to quarter as a result of, among other things, the
performance of existing centers including enrollment and staffing
fluctuations, the number and timing of new center openings and/or
acquisitions, the length of time required for new centers to achieve
profitability, center closings, refurbishment or relocation, the
sponsorship model mix of new and existing centers, the timing and level of
sponsorship payments, competitive factors and general economic conditions.
RESULTS OF OPERATIONS
The Company operates on a calendar year. BRHZ operated on a fiscal year
ended June 30. CFAM had a fiscal year ending on the Friday closest to
December 31. The following financial information has been compiled from the
Company's consolidated financial statements, which combine financial
position and operating results as of and for the years ended December 31,
1999 ("Fiscal Year 1999"), December 31, 1998 ("Fiscal Year 1998"), and
December 31, 1997 and January 2, 1998 ("Fiscal Year 1997") for BRHZ and
CFAM, respectively.
The following table sets forth statement of income data as a percentage of
revenue for the Fiscal Years 1999, 1998, and 1997:
Fiscal Year Fiscal Year Fiscal Year
1999 1998 1997
Revenue 100.0% 100.0% 100.0%
Cost of services 85.8 86.3 86.5
------- ------ -------
Gross profit 14.2 13.7 13.5
Selling, general & administrative 8.6 9.1 9.5
Amortization 0.3 0.4 0.6
Other charges -- 3.6 0.5
------ ------ -------
Income from operations 5.3 0.6 2.9
Net interest income (expense) 0.3 0.6 --
------ ------ -------
Income before income taxes 5.6 1.2 2.9
Income tax provision 2.3 1.0 1.3
------ ------ -------
Net income 3.3% 0.2% 1.6%
====== ====== =======
Fiscal Year 1999 Compared To Fiscal Year 1998
Revenue. Revenue increased $33.9 million, or 16.2%, to $243.3 million for
Fiscal Year 1999 from $209.4 million for Fiscal Year 1998. At December 31,
1999, the Company operated 300 family centers, as compared with 274 at
December 31,1998, a net increase of 26 family centers. Growth in revenues
is primarily attributable to the net addition of new family centers,
maturation of existing family centers, modest growth in the existing base
of family centers and tuition increases of approximately 4% to 5%.
Gross Profit. Gross profit increased $6.1 million, or 21.2%, to $34.7
million for Fiscal Year 1999 from $28.6 million for Fiscal Year 1998. The
increase in gross profit as a percentage of revenue, to 14.2% for Fiscal
Year 1999 from 13.7% for Fiscal Year 1998, is attributable to the higher
proportion of centers operating as mature, stabilized facilities,
improvements in operating efficiencies, and the closure of centers in 1999
that were underperforming. Gross profit also improved as a result of strong
enrollment in family centers open less than two years, as well as better
operating results at the Company's new centers as compared to those centers
opened in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.9 million, or 10.2%, to $20.9 million
for Fiscal Year 1999 from $19.0 million for Fiscal Year 1998. The decrease
as a percentage of revenue to 8.6% in Fiscal Year 1999 from 9.1% in Fiscal
Year 1998 relates to a larger revenue base and increased overhead
efficiencies. The dollar increase is primarily attributable to investments
in
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regional management, sales personnel, information systems and
communications personnel necessary to support long-term growth.
Other Charges. In connection with the Merger in Fiscal Year 1998, the
Company recognized a charge of $7.5 million ($5.4 million after tax) which
included transaction costs of $2.8 million, non-cash asset impairment
charges of $1.4 million, severance costs of $0.5 million and one-time
incremental integration costs directly related to the Merger totaling $2.8
million.
Income from Operations. Income from operations totaled $12.8 million for
Fiscal Year 1999, as compared with income from operations of $1.2 million
for Fiscal Year 1998. Excluding the other charges incurred in Fiscal Year
1998, referred to above, operating income for Fiscal Year 1999 would have
increased by $4.1 million, or 47.0%, from $8.7 million in Fiscal Year 1998.
Net Interest Income (Expense). Net interest income in Fiscal Year 1999
totaled $700,000 as compared to $1.2 million for Fiscal Year 1998. The
decrease in interest income is attributable to lower levels of invested
cash.
Income Tax Provision. The Company had an effective tax rate of 41.5% in
Fiscal Year 1999. As a result of the non-deductibility of certain
transaction costs associated with the Merger, the Company had an effective
tax rate of 81% for Fiscal Year 1998. Excluding the effects of these
non-deductible expenses, the effective tax rate would have approximated 41%
for Fiscal Year 1998. Management expects the effective rate for 2000 to be
consistent with that experienced in Fiscal Year 1999.
Fiscal Year 1998 Compared To Fiscal Year 1997
Revenue. Revenue increased $36.8 million, or 21.3%, to $209.4 million for
Fiscal Year 1998 from $172.6 million for Fiscal Year 1997. At December 31,
1998, the Company operated 274 family centers, as compared with 245 at
December 31,1997, a net increase of 29 family centers. Growth in revenues
is primarily attributable to the net addition of new family centers,
maturation of existing family centers, modest growth in the existing base
of family centers and tuition increases of approximately 4% to 5%.
Gross Profit. Gross profit increased $5.4 million, or 23.1%, to $28.6
million for Fiscal Year 1998 from $23.2 million for Fiscal Year 1997. The
increase in gross profit as a percentage of revenue, to 13.7% for Fiscal
Year 1998 from 13.5% for Fiscal Year 1997, is attributable to the higher
proportion of centers operating as mature, stabilized facilities and strong
enrollment in newer family centers, partially offset by higher depreciation
associated with renovations at a number of older centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.7 million, or 16.4%, to $19.0 million
for Fiscal Year 1998 from $16.3 million for Fiscal Year 1997. The decrease
as a percentage of revenue to 9.1% in Fiscal Year 1998 from 9.5% in Fiscal
Year 1997 relates to a larger revenue base and increased overhead
efficiencies. The dollar increase is primarily attributable to investments
in regional management, sales personnel, information systems and
communications personnel necessary to support long-term growth.
Other Charges. In connection with the Merger, the Company recognized a
charge of $7.5 million ($5.4 million after tax) described above. Amounts
included in accrued expenses related to these merger costs were $345,000
and $2.2 million at December 31, 1999 and 1998, respectively. For Fiscal
Year 1997, other charges reflect a non-cash compensation charge ($297,000)
related to the lifting of restrictions on common stock held by an officer
of the Company, and also include costs associated with a public offering of
securities of BRHZ which were treated as a period cost ($543,000) when the
offering was delayed.
Income from Operations. Income from operations totaled $1.2 million for
Fiscal Year 1998, as compared with income from operations of $5.0 million
for Fiscal Year 1997. Excluding the other charges (described above)
incurred in Fiscal Years 1998 and 1997 of $7.5 million and $840,000,
respectively, operating income for Fiscal Year 1998 would have totaled $8.7
million, representing an increase of 48%, or $2.8 million, compared to
income from operations of $5.9 million for Fiscal Year 1997.
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Net Interest Income (Expense). Net interest income of $1.2 million for
Fiscal Year 1998 increased $1.3 million from $44,000 of net interest
expense for Fiscal Year 1997. The increase in interest income and decrease
in interest expense is attributable to the investment of the proceeds
received from the initial public offerings of CFAM and BRHZ (which closed
in August 1997 and November 1997, respectively) and the repayment of
approximately $8.0 million of debt with the proceeds from the respective
stock offerings.
Income Tax Provision. Due to the non-deductibility of certain transaction
costs associated with the Merger, the Company had an effective tax rate of
81% for Fiscal Year 1998. In Fiscal Year 1997 the Company had an effective
tax rate of 45% due to the non-deductibility associated with the
compensation charge associated with the lifting of restrictions on common
stock. Excluding the effects of these non-deductible expenses, the
effective tax rate would have approximated 41% for Fiscal Year 1998 and 42%
in Fiscal Year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are the ongoing operations of its
existing family centers and the addition of new centers through development
or acquisition. The Company's primary source of liquidity has been from
existing cash balances, which are primarily the result of proceeds from the
initial public offerings and cash flow from operations. These balances are
supplemented by borrowing capacity under the Company's various credit
arrangements. The Company had working capital of $3.3 million and $12.0
million at December 31, 1999 and December 31, 1998, respectively.
Cash provided by operating activities was $15.2 million, $9.1 million, and
$10.3 million for Fiscal Years 1999, 1998, and 1997, respectively. The
increase of $6.1 million in cash provided by operating activities in Fiscal
Year 1999 was primarily the result of an increase in net income of $7.5
million. In addition, the Company was able to utilize existing prepaid
income taxes and deferred tax assets against current year obligations to
provide additional cash from operating activities. These amounts were
offset by an increase in accounts receivable, prepaid expenses and other
current assets, and a smaller increase in accrued expenses and accounts
payable than had been experienced in Fiscal Year 1998. In Fiscal Year 1998,
the decrease of $1.2 million in cash provided by operating activities from
1997 was principally the result of the costs incurred in connection with
the Merger, which had the effect of reducing cash provided by operating
activities by $2.0 million in Fiscal Year 1998. The increase in deferred
revenue of $2.0 million and $2.7 million in Fiscal Years 1999 and 1998,
respectively, was associated with (i) fees paid in advance for long-term
priority enrollment rights in certain centers and (ii) parent tuition paid
in advance. Such advances increased $1.8 million in Fiscal Year 1997.
Cash used in investing activities increased to $20.4 million for Fiscal
Year 1999 from $17.2 million for Fiscal Year 1998 and $12.3 million for
Fiscal Year 1997, principally due to $18.1 million of fixed asset additions
and leasehold improvements, as compared to $13.7 million and $10.7 million
of fixed asset additions and leasehold improvements in Fiscal Years 1998
and 1997, respectively. Of the $18.1 million of fixed asset additions in
Fiscal Year 1999, approximately $13.2 million relate to new family centers;
of the remainder, approximately $3.2 million relates to the refurbishment
and expansion of existing family centers, with the balance expended for
office expansion and investment in information technology in corporate,
regional and district offices. Management expects to maintain, or increase
slightly, the current level of center related fixed asset spending through
2000. The Company also made several acquisitions of child care centers for
cash payments totaling $2.0 million, $3.6 million and $2.0 million in
Fiscal Years 1999, 1998, and 1997, respectively.
Cash used by financing activities totaled $2.5 million in Fiscal Year 1999.
The decrease of $5.6 from 1998 was principally the result of the Company's
repurchase of 495,000 shares of its Common Stock at a cost of $7.1 million.
During Fiscal Years 1999 and 1998, the Company received $5.1 million and
$4.4 million, respectively, in net proceeds from the issuance of Common
Stock associated with the exercise of stock options and warrants. In Fiscal
Year 1998 these proceeds were partially offset by the repurchase of shares
of the Company's Common Stock, which were subsequently reissued to fulfill
warrant and stock option exercises. Cash provided by financing activities
decreased to $3.1 million for Fiscal Year 1998, from $19.3 million for
Fiscal Year 1997. During Fiscal Year 1997, BRHZ and CFAM each completed
initial public offerings, which along with proceeds from other issuances of
stock raised $28.3 million net of fees associated with the offerings. The
Company repaid $9.7 million of debt and capital lease obligations,
primarily with the proceeds from the public offerings of BRHZ and CFAM,
while incurring additional obligations of $724,000 for Fiscal Year 1997.
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On July 20, 1999, the Board of Directors approved a plan to repurchase up
to 500,000 shares of the Company's common stock, which was subsequently
increased to a total of 1,250,000 shares on October 20, 1999. At December
31, 1999 the Company had repurchased 495,000 shares for a total of $7.1
million. Share repurchases under the stock repurchase program will be made
from time to time with the Company's cash in accordance with applicable
securities regulations in open market or privately negotiated transactions.
The actual number of shares purchased and cash used, as well as the timing
of purchases and the prices paid, will depend on future market conditions.
The Company has a bank commitment for a $40.0 million unsecured line of
credit for working capital, acquisition financing and general corporate
purposes. The credit facility will consist of a two and one-half year
revolving line of credit and a three year term loan period. At the
Company's option, the line of credit will bear interest at either i) Prime,
or ii) LIBOR plus a spread based on debt levels and coverage ratios. The
agreement will require the Company to comply with certain covenants, which
include, among other things, the maintenance of specified financial ratios,
and may prohibit the payment of dividends without bank approval.
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist primarily of high quality commercial paper and institutional money
market accounts. The carrying value of these instruments approximates
market value due to their short maturities.
Management believes that funds provided by operations and the Company's
existing cash and cash equivalent balances and borrowings available under
lines of credit will be adequate to meet planned operating and capital
expenditure needs for at least the next 18 months. However, if the Company
were to make any significant acquisitions or make significant investments
in the purchase of facilities for new or existing centers for corporate
sponsors, it may be necessary for the Company to obtain additional debt or
equity financing. There can be no assurance that the Company would be able
to obtain such financing on reasonable terms, if at all.
NEW PRONOUNCEMENTS
The Company will be required to adopt the provisions of Statement of
Accounting Standards No.133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS
133, as amended by Statement of Accounting Standards No. 137, will require
the Company to recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. The accounting for gains and losses from changes in the fair value
of a particular derivative will depend on the intended use of the
derivative. SFAS 133 will be effective for the Company's financial
reporting beginning in the first quarter of fiscal 2001. The Company does
not expect the adoption of SFAS 133 to have a material impact on the
Company's results of operations, financial condition or cash flows.
In December 1999, the American Institute of Certified Public Accountants
(AICPA) issued Staff Accounting Bulleting (SAB) 101 to clarify the
accounting rules on revenue recognition and to provide more specific
guidance on existing broad revenue recognition rules. The Company is
required to formally adopt this new framework beginning in the quarter
ended March 31, 2000. The Company does not expect the adoption of this
bulletin will have a material effect on the Company's results of
operations, financial condition or cash flows.
MARKET RISK
Foreign Currency Risk. The Company's revenues and expenses are both
generated and denominated in United States dollars, and as such, changes in
exchange rates will not have an impact on the Company's operating results,
financial position or cash flows.
Interest Rate Risk. As of December 31, 1999, the Company's investment
portfolio consisted of institutional money market funds, which due to their
short maturities are considered cash equivalents. The Company's primary
objective with its investment portfolio is to invest available cash while
preserving principal and meeting liquidity needs. These investments, which
approximate $6.2 million, have an average interest rate of
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approximately 5.75% and are subject to interest rate risk. Due to the
average maturity and conservative nature of the investment portfolio, a
sudden change in interest rates would not have a material effect on the
value of the portfolio. Management estimates that had the average yield of
the Company's investments decreased by 100 basis points in Fiscal Year
1999, the Company's interest income for the year ended December 31, 1999
would have decreased by approximately $91,000. This estimate assumes that
the decrease would have occurred on the first day of 1999 and reduced the
yield of each investment instrument by 100 basis points. The impact on the
Company's future interest income as a result of future changes in
investment yields will depend largely on the gross amount of the Company's
investments.
The Company is also subject to interest rate risk under the terms of its
various lines of credit which have variable rates of interest. The
Company's outstanding indebtedness in Fiscal Year 1999 was subject to
interest rates that were fixed, and the Company had no amounts outstanding
under its lines of credit in Fiscal Year 1999. The impact on the Company's
future interest expense as a result of future changes in interest rates
will depend largely on the gross amount of the Company's borrowings.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operation. There can be no assurance, however, that the
Company's business will not be affected by inflation in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds no market risk sensitive trading instruments, for trading
purposes or otherwise. For a discussion of the Company's exposure to market
risk, see "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market Risk."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bright Horizons Family Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Bright Horizons
Family Solutions, Inc. (a Delaware corporation) as of December 31, 1999 and 1998
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bright Horizons Family
Solutions, Inc. as of December 31, 1999 and 1998 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Nashville, Tennessee
February 11, 2000
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Bright Horizons Family Solutions, Inc.
Consolidated Balance Sheets
(in thousands except share data)
December 31,
------------
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 12,752 $ 20,439
Accounts receivable, net of allowance for
doubtful accounts of $1,290 and
$709, respectively 17,858 13,302
Income taxes receivable -- 2,243
Prepaid expenses and other current assets 2,251 1,520
Current deferred tax asset 4,966 4,579
--------- --------
Total current assets 37,827 42,083
Fixed assets, net 48,437 32,175
Goodwill and other intangibles, net 15,909 14,095
Noncurrent deferred tax asset 4,192 2,599
Other assets 708 511
--------- --------
Total assets $ 107,073 $ 91,463
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
obligations due under capital leases $ 172 $ 67
Accounts payable and accrued expenses 23,017 21,759
Deferred revenue, current portion 9,462 7,565
Income taxes payable 780 --
Other current liabilities 1,054 652
--------- --------
Total current liabilities 34,485 30,043
Long-term debt and obligations due under
capital leases, net of current portion 515 618
Accrued rent 1,400 1,560
Other long-term liabilities 2,692 2,731
Deferred revenue, net of current portion 5,695 3,131
--------- --------
44,787 38,083
--------- --------
Commitments and Contingencies (Note 13)
Stockholders' equity:
Common Stock $0.01 par value
Authorized: 30,000,000 shares
Issued: 12,310,000 and 11,554,000 at
December 31, 1999 and 1998, respectively
Outstanding: 11,815,000 and 11,554,000 at
December 31, 1999 and 1998, respectively 123 115
Additional paid-in capital 75,641 67,589
Treasury stock, 495,000 shares at cost (7,081) --
Accumulated deficit (6,397) (14,324)
--------- --------
Total stockholders' equity 62,286 53,380
--------- --------
Total liabilities and stockholders' equity $ 107,073 $ 91,463
========= ========
The accompanying notes are an integral part of the
consolidated financial statements
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Bright Horizons Family Solutions, Inc.
Consolidated Statements of Income
(in thousands except per share data)
1999 1998 1997
Revenue $243,290 $209,372 $ 172,555
Cost of services 208,631 180,770 149,312
-------- -------- ---------
Gross profit 34,659 28,602 23,243
Operating expenses:
Selling, general and administrative 20,903 18,972 16,299
Amortization 913 893 1,056
Other charges (Note 11) -- 7,500 840
-------- -------- ---------
Income from operations 12,843 1,237 5,048
Interest income (expense), net 715 1,210 (44)
-------- -------- ---------
Income before income taxes 13,558 2,447 5,004
Income tax expense 5,631 1,973 2,243
-------- -------- ---------
Net income before preferred stock
dividends and accretion on
redeemable common stock 7,927 474 2,761
Preferred stock dividends and accretion
on redeemable common stock -- -- 917
-------- -------- ---------
Net income available to common stockholders $ 7,927 $ 474 $ 1,844
======== ======== =========
Earnings per share - basic $ 0.66 $ 0.04 $ 0.43
======== ======== =========
Weighted average number of common shares - basic 11,945 11,172 4,333
======== ======== =========
Earnings per share - diluted $ 0.63 $ 0.04 $ 0.30
======== ======== =========
Weighted average number of common and
common equivalent shares - diluted 12,586 12,411 9,293
======== ======== =========
The accompanying notes are an integral part of the
consolidated financial statements.
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Bright Horizons Family Solutions, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(in thousands)
Additional Total
Common Stock Paid-In Treasury Accumulate Stockholders'
Shares Amount Capital Stock Deficit Equity
Balance Fiscal Year 1996 2,506 $ 24 $ 6,952 $ -- $(15,833) $ (8,857)
Exercise of stock options 183 2 399 -- -- 401
Exercise of warrants 350 4 165 -- -- 169
Shares issued in public stock offering 2,954 30 27,657 -- -- 27,687
Redemption of preferred stock for
common stock 4,736 47 24,432 -- -- 24,479
Shares issued in connection with acquisition 125 1 642 -- -- 643
Accretion of preferred stock -- -- -- -- (843) (843)
Common stock restriction removed -- -- 297 -- -- 297
Accretion of redeemable common stock -- -- -- -- (74) (74)
Net income before preferred stock dividends and
accretion on redeemable common stock -- -- -- -- 2,761 2,761
------- ------ -------- ------- -------- --------
Balance at December 31, 1997 10,854 108 60,544 -- (13,989) 46,663
Exercise of stock options 723 7 4,281 -- -- 4,288
Exercise of warrants 26 -- 160 -- -- 160
Repurchase of shares (49) -- (325) -- (809) (1,134)
Options issued in connection with acquisition -- -- 375 -- -- 375
Tax benefit from the exercise of stock options -- -- 2,554 -- -- 2,554
Net income before preferred stock dividends and
accretion on redeemable common stock -- -- -- -- 474 474
------- ------ -------- ------- -------- --------
Balance at December 31, 1998 11,554 115 67,589 -- (14,324) 53,380
Exercise of stock options 756 8 5,103 -- -- 5,111
Tax benefit from the exercise of stock options -- -- 2,927 -- -- 2,927
Stock based compensation -- -- 22 -- -- 22
Repurchase of common stock (495) -- -- (7,081) -- (7,081)
Net income before preferred stock dividends
and accretion on redeemable common stock -- -- -- -- 7,927 7,927
------- ------ -------- ------- ------- --------
Balance at December 31, 1999 11,815 $ 123 $ 75,641 $(7,081) $(6,397) $ 62,286
======= ====== ======== ======= ======= ========
The accompanying notes are an integral part of the
consolidated financial statements.
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Bright Horizons Family Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands)
1999 1998 1997
Net income before preferred stock dividends
and accretion on redeemable common stock $ 7,927 $ 474 $ 2,761
Adjustments to reconcile net income before preferred
stock dividends and accretion on redeemable common
stock to net cash provided by operating activities:
Depreciation and amortization 4,912 3,960 2,949
Non-cash expenses 22 -- 297
Asset write-downs and loss on disposal of fixed assets 208 1,248 49
Decrease in goodwill from utilization of tax benefit -- -- 737
Deferred income taxes (1,914) (1,257) (770)
Changes in assets and liabilities:
Accounts receivable (4,474) (4,270) (1,515)
Income taxes receivable 5,171 (2,243) --
Prepaid expenses and other current assets (727) 3,814 (665)
Accounts payable and accrued expenses 1,348 6,622 2,351
Income taxes payable 780 (962) 883
Deferred revenue 1,964 2,749 1,802
Accrued rent (160) 42 (82)
Other long-term assets 11 (97) (136)
Other current and long-term liabilities 160 (938) 1,599
-------- -------- --------
Total adjustments 7,301 8,668 7,499
-------- -------- --------
Net cash provided by operating activities 15,228 9,142 10,260
-------- -------- --------
Cash flows from investing activities:
Additions to fixed assets, net of acquired amounts (18,059) (13,711) (10,704)
Proceeds from disposal of fixed assets 25 181 406
(Increase) decrease in other assets (400) (21) 14
Payments for acquisitions (1,964) (3,615) (1,972)
-------- -------- --------
Net cash used for investing activities (20,398) (17,166) (12,256)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,111 4,448 28,257
Purchase of treasury stock (7,081) (1,134) --
Principal payments of long-term debt and
obligations under capital leases (547) (235) (9,661)
Borrowing of long-term debt and
obligations under capital leases -- -- 724
-------- -------- --------
Net cash (used in) provided by financing
activities (2,517) 3,079 19,320
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (7,687) (4,945) 17,324
Cash and cash equivalents, beginning of period 20,439 25,384 8,060
-------- -------- --------
Cash and cash equivalents, end of period $ 12,752 $ 20,439 $ 25,384
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
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Bright Horizons Family Solutions, Inc.
Notes To Consolidated Financial Statements
For Fiscal Years 1999, 1998, and 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Bright Horizons Family Solutions, Inc. (the "Company") was
incorporated under the laws of the state of Delaware on April 27, 1998 and
commenced substantive operations upon the completion of the merger by and
between Bright Horizons, Inc. ("BRHZ") and CorporateFamily Solutions, Inc.
("CFAM") on July 24, 1998 (the "Merger"). The Company provides workplace
services for employers and families including child care, early education and
strategic work/life consulting throughout the United States.
The Company operates its family centers under various types of arrangements,
which generally can be classified in two forms: (i) the corporate-sponsored
model, where the Company operates a family center on the premises of a corporate
sponsor and gives priority enrollment to the corporate sponsor's employees and
(ii) the management contract model, where the Company manages a work-site family
center under a cost-plus arrangement, typically for a single employer.
BUSINESS COMBINATION AND BASIS OF PRESENTATION -- On April 26, 1998 BRHZ and
CFAM entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement"). Pursuant to the Merger Agreement, as amended, BRHZ and CFAM have
merged with subsidiaries of the Company and are now wholly owned subsidiaries of
the Company. The Merger was approved by a vote of the stockholders of BRHZ and
CFAM on July 24, 1998 and has been treated as a tax free reorganization and
accounted for as a pooling of interests. In the Merger, each share of BRHZ
common stock ("BRHZ Common Stock") was exchanged for 1.15022 shares of the
Company's $0.01 par value per share common stock ("Common Stock"), and each
share of CFAM common stock ("CFAM Common Stock") was exchanged for one share of
Common Stock. Each outstanding option to purchase shares of BRHZ Common Stock
and CFAM Common Stock has been converted into an option to purchase shares of
the Company's Common Stock at the same conversion ratios referenced above. The
accompanying consolidated financial statements have been restated to include the
financial position and results of operations for both BRHZ and CFAM for all
periods presented, unless otherwise indicated. All historical amounts have been
restated to reflect the respective exchange ratio, and certain reclassifications
have been made for consistent presentation, which had no effect on net income.
The Company operates on a calendar year. BRHZ had a fiscal year ending on June
30. CFAM had a fiscal year ending on the Friday closest to December 31. The
accompanying consolidated financial statements combine financial position and
operating results as of and for the year ended December 31, 1999 ("Fiscal Year
1999"), December 31, 1998 ("Fiscal Year 1998"), and December 31, 1997 and
January 2, 1998 ("Fiscal Year 1997") for BRHZ and CFAM, respectively.
Due to the different fiscal year ends, BRHZ's results of operations for the six
month period ended December 31, 1996 are not included in the restated financial
statements for Fiscal Years 1997 or 1996. For this period, BRHZ had revenues of
$40 million, net income of $407,000 and total changes in common stockholders
equity of ($137,000). Accordingly, an adjustment has been included in the
Company's Consolidated Statement of Stockholders' Equity for Fiscal Year 1997 to
reflect this activity.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
BUSINESS RISKS -- The Company is subject to certain risks common to the
providers of child care and early education, including dependence on key
personnel, dependence on client relationships, competition from alternate
sources or providers of the Company's services, market acceptance of work and
family services, and general economic conditions.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
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liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK -
Financial instruments that potentially expose the Company to concentrations of
credit risk consist mainly of cash and accounts receivable. The Company
maintains its cash in domestic financial institutions of high credit standing.
The Company's accounts receivable are derived primarily from the services it
provides. The Company believes that no significant credit risk exists at
December 31, 1999 or 1998, and that the carrying amounts of the Company's
financial instruments approximate fair market value.
CASH EQUIVALENTS -- The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of high quality commercial paper and institutional
money market accounts. The carrying value of these instruments approximates
market value due to their short maturities.
FIXED ASSETS -- Property and equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to expense as incurred,
whereas expenditures for improvements and replacements are capitalized.
The cost and accumulated depreciation of assets sold or otherwise disposed of
are removed from the accounts and the resulting gain or loss is reflected in the
consolidated statements of income.
INTANGIBLE ASSETS - Goodwill and other intangible assets principally consist of
goodwill, various contract rights, customer lists and non-compete agreements.
The excess of the aggregate purchase price over the fair value of identifiable
assets of businesses acquired (goodwill) is being amortized on a straight-line
basis over the estimated period benefited, ranging from eighteen to twenty-five
years. Other intangible assets are amortized over the estimated period of
benefit, utilizing a straight-line method, over periods ranging from 3 to 10
years, as applicable.
Subsequent to an acquisition, the Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining useful life
of its intangible assets may warrant revision or that the remaining balance of
such assets may not be recoverable in accordance with the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
("SFAS 121"). When factors indicate that such assets should be evaluated for
possible impairment, the Company uses an estimate of the acquired operation's
undiscounted cash flows over the remaining life of the asset in measuring
whether the asset is recoverable. Management does not believe any such
impairment currently exists.
DEFERRED REVENUE -- Deferred revenue results from prepaid tuitions,
employer-sponsor advances and cash received on consulting or development
projects still in process.
OTHER CURRENT AND LONG-TERM LIABILITIES -- Other current and long-term
liabilities consist primarily of deposits held pursuant to certain family center
management contracts. The deposits will be remitted to the clients upon
termination of the respective contracts. Amounts also consist of parent fee
deposits.
INCOME TAXES -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS
109"). Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the fiscal years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
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REVENUE RECOGNITION - Revenue is recognized as services are performed. In both
the corporate-sponsored model and the management contract model, revenues
consist primarily of tuition paid by parents, supplemented in some cases by
payments from corporate sponsors and, to a lesser extent, by payments from
government agencies. Revenues also include management fees paid by corporate
sponsors. In the management contract model, in addition to tuition and
management fee revenues, revenue is also recognized for operating subsidies paid
either in lieu of or to supplement tuition.
The Company maintains contracts with its corporate sponsors to manage and
operate their family centers under various terms. The Company's contracts are
generally 3 to 10 years in length with varying renewal options. Management
expects to renew the Company's existing contracts for periods consistent with
the remaining renewal options allowed by the contracts or other reasonable
extensions.
STOCK-BASED COMPENSATION -- Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for employee stock-based compensation using the intrinsic value method as
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB Opinion No. 25"), and related interpretations. Under
APB Opinion No. 25, no compensation cost related to employee stock options has
been recognized because options are granted with exercise prices equal to or
greater than the fair market value at the date of grant. Certain options granted
to non-employees and certain options issued in connection with an acquisition
(see Note 2) have been accounted for under the provisions of SFAS 123.
EARNINGS PER SHARE - The Company accounts for earnings per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). Under the standards established by SFAS 128,
earnings per share is measured at two levels: basic and diluted earnings per
share. Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares after considering the additional dilution related to
preferred stock, options and warrants.
COMPREHENSIVE INCOME -- The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"("SFAS
130"), which established standards for displaying comprehensive income and its
components in a full set of financial statements. Comprehensive income
encompasses all changes in shareholders' equity (except those arising from
transactions with owners) and includes net income, net unrealized capital gains
or losses on available for sale securities and foreign currency translation
adjustments. Comprehensive income for all periods presented was the same as net
income for the Company.
SEGMENT REPORTING - The Company has adopted the provisions of Statement of
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information," which established standards for reporting
information about operating segments in its financial statements. SFAS 131 also
established standards for related disclosures about products and services,
geographic areas and major customers. The Company currently operates in one
industry segment in the continental United States with no single customer
accounting for more than 10% of the Company's revenue.
NEW PRONOUNCEMENTS -- In January 1999 the Company adopted the provisions of
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"), issued by the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants. SOP 98-5 requires the costs
of start-up activities and organization costs, as defined, to be expensed as
incurred. The adoption did not have a material impact on the Company's results
of operation, financial condition or cash flow.
The Company will be required to adopt the provisions of Statement of Accounting
Standards No.133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS 133, as amended by Statement
of Accounting Standards No. 137, will require the Company to recognize all
derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. The accounting for
gains and losses from changes in the fair value of a particular derivative will
depend on the intended use of the derivative. The standard will be effective for
the Company's financial reporting beginning in the first quarter of fiscal 2001.
The
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Company does not expect the adoption of SFAS 133 to have a material impact on
the Company's results of operations, financial condition or cash flows.
RECLASSIFICATIONS -- Certain amounts in the prior year financial statements have
been reclassified to conform with the current years presentation.
2. ACQUISITIONS
In 1999, the Company acquired substantially all the assets of four single-site
child care companies and 100% of the outstanding stock of a single-site child
care company for aggregate consideration of approximately $2.0 million in cash,
the issuance of notes payable to sellers totaling $550,000 and the assumption of
liabilities of approximately $100,000. The purchase prices have been allocated
based on the estimated fair value of the assets and liabilities acquired at the
date of acquisition. Estimated goodwill and other intangible assets totaling
approximately $2.5 million have been recorded and are being amortized over
periods not to exceed 18 years.
In 1998, the Company acquired substantially all the assets of two single-site
child care companies and 100% of the outstanding stock of two additional
single-site child care companies for aggregate consideration of approximately
$3.6 million in cash, the assumption of liabilities of approximately $730,000
and options to purchase 30,120 shares of the Common Stock which were valued at
approximately $375,000 under the provisions of SFAS 123. Included in the amounts
of liabilities assumed are contingent payments of approximately $215,000, of
which $100,000 has been paid as of December 31,1999. The purchase price has been
allocated based on the estimated fair value of the assets and liabilities
acquired at the date of acquisition. Goodwill amounting to approximately $4.1
million resulted from these transactions and is being amortized over a period of
18 years.
Effective July 1, 1997, BRHZ acquired the business and substantially all the
assets and liabilities of Pacific Preschools, Inc. d.b.a. The Learning Garden
for approximately $1.6 million in cash and 108,333 shares of BRHZ Common Stock
in a transaction which was accounted for as a purchase. The purchase price was
allocated based on the estimated fair value of the assets and liabilities
acquired at the date of acquisition. Goodwill of approximately $2.7 million
resulted from the transaction and is being amortized over a period of 25 years.
The above transactions have been accounted for as purchases and the operating
results of the acquired companies have been included from the respective dates
of acquisition.
3. FIXED ASSETS
Fixed assets consist of the following:
Estimated useful lives December 31, December 31,
(years) 1999 1998
------- ---- ----
Buildings 20 - 40 $ 26,618,000 $ 15,957,000
Furniture and equipment 3 - 15 18,429,000 15,027,000
Leasehold improvements 3 / life of lease 12,594,000 8,368,000
Land -- 4,465,000 2,694,000
------------ ------------
62,106,000 42,046,000
Less accumulated depreciation and
amortization (13,669,000) (9,871,000)
------------ ------------
Fixed assets, net $ 48,437,000 $ 32,175,000
============ ============
Fixed assets in Fiscal Years 1999 and 1998 include automobiles and office
equipment of $338,000 and $358,000, respectively, held under capital leases.
Amortization expense relating to fixed assets under capital leases was
approximately $38,000 and $45,000 for Fiscal Years 1999 and 1998, respectively.
Accumulated amortization relating to fixed assets under capital leases totaled
approximately $287,000 and $269,000 for Fiscal Years 1999 and 1998,
respectively.
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4. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31, December 31,
1999 1998
---- ----
Goodwill, net of accumulated amortization of
$3,415,000 and $2,543,000, respectively $ 15,056,000 $13,121,000
Non-compete agreements and contract rights, net of
accumulated amortization of $3,081,000 and
$2,967,000, respectively 834,000 948,000
Other intangibles, net of accumulated amortization of
$18,000 and $11,000, respectively 19,000 26,000
------------ -----------
$ 15,909,000 $14,095,000
============ ===========
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, December 31,
1999 1998
---- ----
Accounts payable $ 1,397,000 $ 1,394,000
Accrued payroll and employee benefits 14,645,000 11,083,000
Accrued other expenses 6,630,000 7,081,000
Accrued merger related expenses 345,000 2,201,000
------------ ------------
$ 23,017,000 $ 21,759,000
============ ============
6. LINE OF CREDIT
The Company maintains a $5.0 million revolving credit facility with a bank to be
used for working capital and other general corporate purposes, which expires on
August 1, 2000. Borrowings under the credit facility, which is subject to
renewal on an annual basis are unsecured, and will bear interest at LIBOR plus
1.5%. No amounts have been advanced under the facility as of December 31, 1999.
7. LONG-TERM DEBT AND OBLIGATIONS DUE UNDER CAPITAL LEASES
Long-term debt consists of the following:
December 31, December 31,
1999 1998
---- ----
Unsecured note payable to a corporation, with quarterly
payments of interest only at 8.25%; principal
amounts of $60,000 are payable annually, note
matures in October 2004. $ 300,000 $ --
Unsecured note payable to a limited partnership, with
quarterly payments of interest only at 8.50%;
principal amounts of $50,000 are payable annually,
note matures in December 2004. 250,000 --
Mortgage payable to a bank, repaid in 1999 -- 480,000
Notes payable to a state agency with monthly payments of
approximately $2,300 including interest of 5.0%, with
final payments due January 2001 and March 2007;
secured by related furniture, fixtures and equipment 73,000 92,000
Obligations under capital leases at rates of 8.0% to 10.24%,
secured by automobiles and certain office equipment;
due in 2001 64,000 113,000
----------- ---------
Total debt and obligations due under capital leases 687,000 685,000
Less current maturities (172,000) (67,000)
----------- ---------
Long-term debt and obligations due under capital leases $ 515,000 $ 618,000
=========== =========
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8. INCOME TAXES
Income tax expense consisted of the following for Fiscal Years 1999, 1998 and
1997:
Fiscal Year Fiscal Year Fiscal Year
1999 1998 1997
---- ---- ----
Current tax expense $ 4,684,000 $ 676,000 $ 2,276,000
Benefit from the exercise of stock options 2,927,000 2,554,000 --
Benefit of acquired deferred tax assets
applied to reduce goodwill -- -- 737,000
Deferred tax expense (1,980,000) (1,257,000) (770,000)
----------- ----------- -----------
Income tax expense, net $ 5,631,000 $ 1,973,000 $ 2,243,000
=========== =========== ===========
A reconciliation of the U.S. Federal statutory rate to the effective rate is as
follows:
Fiscal Year Fiscal Year Fiscal Year
1999 1998 1997
---- ---- ----
U. S. Federal statutory rate $4,610,000 $ 832,000 $ 1,701,000
Benefit of acquired deferred tax assets
applied to reduce goodwill -- -- 737,000
Change in valuation allowance -- -- (416,000)
Return to provision adjustments impacting
deferred tax assets -- -- (420,000)
State taxes on income 775,000 121,000 293,000
Non-deductible merger costs -- 935,000 --
Permanent differences and other 246,000 85,000 348,000
---------- ---------- -----------
Income tax expense, net $5,631,000 $1,973,000 $ 2,243,000
========== ========== ===========
Deferred tax assets are as follows:
Fiscal Year Fiscal Year Fiscal Year
1999 1998 1997
---- ---- ----
Net operating loss carryforwards $1,414,000 $ 734,000 $ 784,000
Reserve on assets 593,000 277,000 234,000
Liabilities not yet deductible 4,077,000 3,743,000 2,361,000
Deferred revenue 1,897,000 2,409,000 1,353,000
Amortization 1,013,000 827,000 800,000
Other 164,000 (812,000) 389,000
---------- ----------- ----------
$9,158,000 $ 7,178,000 $5,921,000
========== =========== ==========
As of December 31, 1999 the Company has federal net operating loss carryforwards
of approximately $4.0 million, which are subject to annual limitations and are
available to offset certain current and future taxable earnings and expire at
various dates, the earliest of which is December 31, 2007. In addition, the
Company has net operating losses in a number of states totaling approximately
$7.8 million, which may only be used to offset operating income of certain of
the Company's subsidiaries in those particular states. Management believes the
Company will generate sufficient future taxable income to realize deferred tax
assets prior to the expiration of any net operating loss carryforwards and that
the realization of the net deferred tax asset is more likely than not.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
Pursuant to the Merger Agreement and Registration Statement on Form S-4
(Registration No. 333-57035), dated June 17, 1998, BRHZ and CFAM were merged
with subsidiaries of the Company and are now wholly owned subsidiaries of the
Company. The Merger was approved by a separate vote of the stockholders of BRHZ
and CFAM on July 24, 1998, and has been treated as a tax-free reorganization and
accounted for as a pooling of interests. In the
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Merger, each share of BRHZ Common Stock was exchanged for 1.15022 shares of the
Company's Common Stock, $0.01 par value per share, and each share of CFAM Common
Stock was exchanged for one share of Common Stock. All historical amounts in the
accompanying financial statements have been restated to reflect the respective
exchange ratio.
BRHZ PUBLIC OFFERING
Pursuant to the Registration Statement on Form S-1, as amended (Registration No.
333-14981) which was declared effective November 6, 1997, BRHZ completed an
initial public offering of 3,415,500 shares of BRHZ Common Stock, of which
1,350,000 shares of BRHZ Common Stock were issued and sold by BRHZ and 2,065,500
of which were sold by selling stockholders, at an offering price of $13.00 per
share (the "BRHZ Offering"). BRHZ received proceeds of approximately $15.6
million (after deducting underwriting discounts and other expenses).
Approximately $4.0 million was used to repay outstanding indebtedness.
In connection with the BRHZ Offering, BRHZ effected a .33 for 1 reverse stock
split. Accordingly, all references in the accompanying financial statements to
common share or per common share information have been restated to reflect the
reverse stock split.
In connection with the offering, all outstanding shares of BRHZ's Series A,
Series B and Series C Mandatorily Redeemable Convertible Preferred Stock
(collectively, the "BRHZ Convertible Preferred Stock") were converted into an
aggregate of 3,100,512 shares of BRHZ Common Stock, and outstanding warrants,
which otherwise would have expired upon the closing of the offering, were
converted into 303,924 shares of BRHZ Common Stock. The BRHZ Convertible
Preferred Stock was initially recorded at fair value. From the date of issuance
to the date of the mandatory redemption for BRHZ Common Stock, $9.1 million in
accretion and dividends were recorded as charges to retained earnings and as
increases to the carrying value of preferred stock. Upon the redemption of these
securities for BRHZ Common Stock, the carrying value of the BRHZ Convertible
Preferred Stock was recorded as a credit to common stock and paid-in capital.
Redeemable common stock issued in connection with an acquisition was also
converted to BRHZ Common Stock in connection with the BRHZ Offering.
CFAM PUBLIC OFFERING
Pursuant to the Registration Statement on Form S-1, as amended (Registration No.
333-29523) which was declared effective August 12, 1997, CFAM completed an
initial public offering of 2,702,500 shares of CFAM Common Stock, of which
1,401,386 shares were issued and sold by CFAM, at an offering price of $10.00
per share (the "CFAM Offering"). CFAM received net proceeds of approximately
$12.1 million (after deducting underwriting discounts and expenses).
Approximately $3.7 million was used to repay all of the Company's then
outstanding bank borrowings.
In connection with the CFAM Offering, CFAM effected a .65 for 1 reverse stock
split. Accordingly, all references in the accompanying consolidated financial
statements to common share or per common share information have been restated to
reflect the reverse stock split. As a result of the CFAM Offering, all 1,125,000
shares of CFAM's issued and outstanding Series A preferred stock were converted
into 1,169,935 shares of CFAM Common Stock.
STOCK OPTIONS
The Company has established an incentive compensation plan under which it is
authorized to grant both incentive stock options and non-qualified stock options
to employees and directors, as well as other stock-based compensation. Under
terms of the 1998 Stock Incentive Plan, 1,500,000 shares of the Company's Common
Stock are available for distribution. As of December 31, 1999, there were
approximately 752,000 Shares of Common Stock eligible for grant under the plan.
In accordance with the Merger Agreement, the Company also assumed all
obligations for outstanding options to purchase shares of BRHZ and CFAM.
Options granted under the plan expire at the earlier of ten years from date of
grant or three months after termination of the holder's employment with the
Company unless otherwise determined by the Compensation Committee of the Board
of Directors. The following table summarizes information about stock options
outstanding at December 31, 1999:
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Weighted
Options Average Weighted Options Weighted
Outstanding Remaining Average Exercisable Average
Range of at December 31, Contractual Exercise at December 31, Exercise
Exercise Price 1999 Life (years) Price 1999 Price
-------------- ---- ------------ ----- ---- -----
$ .01 - $ 2.40 61,538 3.7 $ 1.03 52,555 $ 0.91
$ 2.41 - $ 4.80 55,261 4.9 $ 3.09 41,593 $ 3.08
$ 4.81 - $ 7.20 90,026 4.9 $ 6.49 69,828 $ 6.54
$ 7.21 - $ 9.60 713,050 6.7 $ 7.77 697,942 $ 7.77
$ 9.61 - $ 12.00 32,654 7.8 $ 11.14 23,069 $ 11.08
$ 12.01 - $ 14.40 172,175 9.0 $ 14.18 -- --
$ 14.41 - $ 16.80 45,000 8.3 $ 16.42 22,096 $ 16.59
$ 16.81 - $ 19.20 490,069 8.7 $ 18.92 110,574 $ 18.73
$ 19.21 - $ 21.60 25,000 8.5 $ 19.67 23,400 $ 19.60
$ 21.61 - $ 24.00 55,640 8.9 $ 21.85 10,577 $ 21.75
------ --- -------- ------ -------
1,740,413 7.4 $ 12.00 1,051,634 $ 8.98
The Company accounts for options issued to employees and directors under APB
Opinion No. 25. Options issued to employees and directors have been granted with
exercise prices equal to or greater than the fair value of the Company's Common
Stock on the date of grant.
In 1999, 3,600 options were granted to members of the Company's advisory board.
These options were valued at approximately $43,000 using the Black-Scholes
option-pricing model. The Company recognized compensation expense of
approximately $22,000, which is included in Company's operating results for
Fiscal Year 1999, with the balance of approximately $21,000 being recorded as
deferred compensation in stockholders' equity.
Certain options issued in connection with an acquisition in Fiscal Year 1998
were granted with an exercise price less than the fair value of the Company's
Common Stock. These options were valued at approximately $375,000 using the
Black-Scholes option-pricing model, and included in the determination of
proceeds paid for the acquisition.
SFAS 123 established new financial accounting and reporting standards for
employee stock-based compensation plans. The Company has adopted the
disclosure-only provisions of SFAS 123. As a result, no compensation cost for
options granted to employees and directors of the Company has been recognized
for the Company's stock option plans. Had compensation cost for the stock option
plans been determined based on the fair value at the grant date for awards in
Fiscal Years 1995 through 1999 consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts for Fiscal Years 1999, 1998 and 1997:
Fiscal Year Fiscal Year Fiscal Year
1999 1998 1997
---- ---- ----
Net income (loss) available to common stockholders:
As reported $ 7,927,000 $ 474,000 $ 1,844,000
Pro forma $ 5,215,000 $ (814,000) $ 719,000
Earnings (loss) per share - Basic:
As reported $ 0.66 $ 0.04 $ 0.43
Pro forma $ 0.44 $ (0.07) $ 0.17
Earnings (loss) per common share assuming dilution:
Net income (loss):
As reported $ 7,927,000 $ 474,000 $ 2,761,000
Pro forma $ 5,215,000 $ (814,000) $ 719,000
Earnings (loss) per share - Diluted:
As reported $ 0.63 $ 0.04 $ 0.30
Pro forma $ 0.43 $ (0.07) $ 0.14
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Under the provisions of FAS 123, proforma diluted earnings per share for Fiscal
Year 1998 are the same as basic earnings per share, as the effects of additional
dilution related to the conversion of options would have been anti-dilutive. In
addition, pro forma diluted earnings per share for Fiscal Year 1997 did not
assume conversion of preferred stock as the effect would have been
anti-dilutive.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option on its date of grant has been estimated for pro
forma purposes using the Black-Scholes option-pricing model using the following
weighted average assumptions:
Fiscal Year Fiscal Year Fiscal Year
1999 1998 1997
---- ---- ----
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 54.3% 35.0% 35.0%
Risk free interest rate 6.76% 5.05% - 5.77% 5.60% - 6.42%
Expected life of options 7.0 years 7.5 - 8.5 years 5.0 - 7.5 years
Weighted-average fair value per share
of options granted during the year $ 9.82 $ 6.84 $ 3.94
A summary of the status of the Company's option plans, including options issued
to members of the Board of Directors, is as follows for Fiscal Years 1999, 1998
and 1997:
Fiscal Year 1999 Fiscal Year 1998 Fiscal Year 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of
period 2,004,890 $ 10.44 2,153,842 $ 6.56 1,675,300 $ 5.16
Granted 223,405 15.45 571,337 19.12 729,946 8.46
Exercised (421,693) 5.95 (669,717) 5.71 (183,377) 2.01
Canceled (66,189) 14.95 (50,572) 5.71 (68,027) 5.02
---------- --------- --------- --------- ---------- --------
Outstanding at end of period 1,740,413 $ 12.00 2,004,890 $ 10.44 2,153,842 $ 6.56
Exercisable 1,051,634 $ 8.98 1,322,495 $ 7.15 988,950 $ 5.29
In addition to the above plans, the Company issued 30,120 options in connection
with an acquisition in Fiscal Year 1998, which are excluded from the above
figures. The options are fully vested, have an exercise price of $10.375 and
expire in 2008. As of December 31, 1998, 10,000 of the options were outstanding
and were exercised in January 1999. The options were valued using the
Black-Scholes option-pricing model, the value of which was included in the
purchase price of the transaction. CFAM also issued 32,500 options to purchase
CFAM Common Stock during 1996 to its vice-chairman in exchange for consulting
services. The options had an exercise price of $7.69 per share. The options were
valued under the provisions of SFAS 123 and compensation expense was recorded.
The options were subject to accelerated vesting in connection with the Merger
and were exercised in Fiscal Year 1998. During 1995, CFAM also issued 325,000
options to purchase CFAM Common Stock to an employee and former stockholder of
RCCM. The options were granted at an exercise price of $7.69 per share. In
connection with the Merger, the options vested immediately and were exercised in
February 1999.
The Company recognizes a tax deduction upon the exercise of non-qualified stock
options and disqualifying dispositions of incentive stock options due to the
recognition of compensation expense in the calculation of its taxable income.
The amount of the compensation recognized for tax purposes is based on the
difference between the market value of the common stock and the option price at
the date the options are exercised. These tax benefits are credited to
additional paid-in capital.
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STOCK PURCHASE WARRANTS
In connection with the issuance in fiscal year 1991 of BRHZ's Series C
Redeemable Convertible Preferred Stock and the issuance of convertible debt,
which was subsequently retired, to certain stockholders, BRHZ issued warrants
for the purchase of 305,045 shares of BRHZ Common Stock. The warrants were
exercisable at $.60 per share and were exercised concurrent with the BRHZ
Offering in November 1997.
Prior to 1994, CFAM issued stock purchase warrants for the purchase of 78,000
shares of CFAM Common Stock to a stockholder. Warrants for the purchase of
26,000 shares of CFAM Common Stock were outstanding at January 2, 1998 at an
average exercise price of $6.15, and were exercised in Fiscal Year 1998.
REDEEMABLE COMMON STOCK
On July 1, 1997, 108,333 shares of BRHZ Common Stock were issued in connection
with the Pacific Preschools, Inc. acquisition. These shares were redeemable at
the option of the holder upon the occurrence of certain events. The redemption
feature terminated upon the BRHZ Offering.
The Company recorded a charge of $74,000 to accumulated deficit in Fiscal Year
1997 to reflect the accretion of the redeemable common stock.
TREASURY STOCK
On July 20, 1999, the Company's Board of Directors approved a stock repurchase
plan authorizing the Company to repurchase up to 500,000 shares of its common
stock. On October 20, 1999, the Company's Board of Directors authorized the
repurchase of an additional 750,000 shares under the plan that allows shares of
the Company's common stock to be purchased in the open market or through
privately negotiated transactions. The Company carries the treasury shares at
cost. At December 31, 1999 the Company had repurchased 495,000 shares at a cost
of $7.1 million, which remain in the treasury. Shares repurchased will be
available for reissuance under the Company's stock incentive plan as well as
other appropriate uses.
In January 1998, CFAM purchased 48,750 shares of CFAM Common Stock for $1.1
million. The shares were subsequently reissued to satisfy stock warrant and
option exercises.
10. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
All outstanding shares of BRHZ Convertible Preferred Stock were redeemed in
conjunction with the BRHZ initial public offering. The shares converted into
3,100,512 shares of BRHZ Common Stock at a ratio of 1.67 shares of BRHZ Common
Stock for each share of BRHZ Convertible Preferred Stock.
All outstanding shares of CFAM preferred stock were redeemed in conjunction with
the CFAM Offering. The CFAM preferred shares converted into 1,169,935 shares of
CFAM Common Stock.
The Company recorded a charge of $843,000 to accumulated deficit for Fiscal Year
1997 to reflect the accretion of preferred stock dividends.
11. OTHER CHARGES IN THE STATEMENTS OF INCOME
MERGER COSTS. In connection with the Merger, the Company recognized a charge of
$7.5 million ($5.4 million after tax) in Fiscal Year 1998, which included
transaction costs of $2.8 million, non-cash asset impairment charges of $1.4
million, severance costs of $0.5 million and one time incremental integration
costs directly related to the Merger totaling $2.8 million.
STOCK COMPENSATION CHARGE. Concurrent with the CFAM Offering, CFAM removed the
restrictions, set forth in the restricted stock agreement, on 32,500 shares of
common stock held by an officer of CFAM. As a result, CFAM recorded a
non-recurring, non-cash stock compensation charge of $297,000 (for which CFAM
received no tax deduction) in the quarter ended September 30, 1997.
38
41
OFFERING COSTS. In the quarter ended June 30, 1997, BRHZ incurred costs of
$543,000 associated with a public offering of securities. Because the offering
was delayed, the amounts incurred were treated as a period cost.
12. EARNINGS PER SHARE
The following tables present information necessary to calculate earnings per
share for Fiscal Years 1999, 1998 and 1997:
Fiscal Year 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic earnings per share
Income available to common stockholders $7,927,000 11,945,000 $ .66
======
Effect of dilutive securities
Options and warrants -- 641,000
---------- ---------- ------
Diluted earnings per share $7,927,000 12,586,000 $ .63
========== ========== ======
Fiscal Year 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic earnings per share
Income available to common stockholders $ 474,000 11,172,000 $ .04
======
Effect of dilutive securities
Options and warrants -- 1,239,000
---------- ----------
Diluted earnings per share $ 474,000 12,411,000 $ .04
========== ========== ======
Fiscal Year 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic earnings per share
Income available to common stockholders $ 1,844,000 4,333,000 $ .43
=====
Effect of dilutive securities
Options and warrants 1,118,000
Convertible preferred stock 917,000 3,842,000
----------- ---------
Diluted earnings per share $ 2,761,000 9,293,000 $ .30
=========== ========= =====
The above earnings per share on a diluted basis has been prepared in accordance
with SFAS 128 based on the historical results and weighted average shares of
each company, adjusted for the effect on weighted average shares for the merger
exchange ratio. In Fiscal Years 1999 and 1998 the weighted average number of
stock options excluded from the above calculation of earnings per share was
322,721 and 1,449, respectively, as they were anti-dilutive.
13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various equipment, automobiles, office space and family
center facilities under non-cancelable operating leases. Many of the leases
contain renewal options for various periods. Certain leases contain provisions
which include additional payments based upon revenue performance, enrollment or
the level of the Consumer Price Index at a future date. Rent expense was
approximately $8.8 million, $7.6 million and $5.7 million in Fiscal Years 1999,
1998, and 1997, respectively. Future minimum payments under non-cancelable
operating leases are as follows:
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42
Year Ending
2000 9,463,000
2001 9,496,000
2002 8,137,000
2003 7,430,000
2004 6,810,000
Thereafter 33,134,000
------------
$ 74,470,000
Future minimum lease payments include approximately $1.1 million of lease
commitments, which are guaranteed by third parties pursuant to operating
agreements for family centers.
EMPLOYMENT AND NON-COMPETE AGREEMENTS
The Company has employment agreements with three of its executive officers. The
agreements provide for payment of 1.0 to 2.99 times annual salary upon the
termination of employment without cause or resignation for good reason as set
forth in the employment agreements. The agreed upon value of these contracts in
1999 was approximately $1.2 million. The agreements for two of the executives
expire in 2003, with the other expiring in 2000.
The Company also has severance agreements with six additional executives that
provide for up to 24 months of compensation upon the termination of employment
following a change in control of the Company. The maximum amount payable under
these agreements in 1999 was approximately $1.9 million.
The employment and severance agreements prohibit the abovementioned employees
from competing with the Company or divulging confidential information for one to
two years after their separation from the Company.
OTHER
The Company is a defendant in certain legal matters in the ordinary course of
business. Management believes the resolution of such legal matters will not have
a material effect on the Company's financial condition or results of operations.
The Company's family centers are subject to numerous federal, state and local
regulations and licensing requirements. Failure of a center to comply with
applicable regulations can subject it to governmental sanctions, which could
require expenditures by the Company to bring its family centers into compliance.
14. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Retirement Savings Plan (the "Plan") for all
employees with more than 1,000 hours of credited service annually and who have
been with the Company one or more years. The Plan is funded by elective employee
contributions of up to 15% of their compensation. Under the Plan the Company
matches 25% of employee contributions for each participant up to 8% of the
employee's compensation. Expense under the Plan, consisting of Company
contributions and Plan administrative expenses paid by the Company, totaled
$674,000, $596,000, and $571,000 in Fiscal Years 1999, 1998 and 1997,
respectively.
15. RELATED PARTY TRANSACTIONS
The Company has an agreement with S.C. Johnson & Son, Inc., the employer of a
member of its Board of Directors, to operate and manage a family center. In
return for its services under these agreements, the Company received management
fees and operating subsidies of $274,000, $301,000 and $249,000, respectively,
for Fiscal Years 1999, 1998 and 1997. Additionally, the Company provided
consulting services for such employer in Fiscal Year 1997 of $60,000.
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16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LONG-TERM DEBT
The carrying amounts approximate fair value which is estimated based on the
current rates offered to the Company for debt of the same remaining maturities.
17. STATEMENT OF CASH FLOW INFORMATION
The following table presents supplemental disclosure of cash flow information
for Fiscal Years 1999, 1998 and 1997:
Fiscal Year Fiscal Year Fiscal Year
1999 1998 1997
---- ---- ----
Cash payments of interest $ 60,000 $ 69,000 $ 655,000
Cash payments of income taxes 1,611,000 3,954,000 1,363,000
Non cash financing activities:
Issuance of options in connection with acquisition -- 375,000 --
Restriction removed on common stock -- -- 297,000
Compensation expense recognized in connection with
the issuance of options 22,000 -- --
Tax benefit realized from the exercise of
stock options 2,927,000 2,554,000 --
Accretion of preferred stock and redeemable
common stock -- -- 917,000
During the period ending December 31, 1997, BRHZ entered into capital lease
obligations of $62,000 in connection with lease agreements for automobiles and
office equipment. The Company did not enter into any capital lease arrangements
in Fiscal Years 1999 or 1998.
In Fiscal Year 1999 the Company entered into an agreement to manage a child care
center in exchange for a transfer of non-cash assets having a value of
approximately $2.3 million.
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44
In conjunction with the purchase of child care management companies, as
discussed in Note 2, liabilities were assumed as follows:
Fiscal Year Fiscal Year Fiscal Year
1999 1998 1997
---- ---- ----
Fair value of assets acquired $ 2,594,000 $ 4,724,000 $ 3,992,000
Issuance of common stock and
stock options -- (375,000) (569,000)
Cash paid (1,964,000) (3,615,000) (1,972,000)
----------- ----------- -----------
Liabilities assumed $ 630,000 $ 734,000 $ 1,451,000
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the Fiscal Years 1999 and 1998 are summarized as
follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands except per share data)
FISCAL YEAR 1999:
Revenue $58,461 $60,960 $61,139 $62,730
Operating income 3,018 3,380 2,964 3,481
Income before taxes 3,229 3,525 3,175 3,629
Net income 1,905 2,079 1,876 2,067
Net income available to
common stockholders 1,905 2,079 1,876 2,067
Basic earnings per share $ 0.16 $ 0.17 $ 0.15 $ 0.18
Diluted earnings per share $ 0.15 $ 0.16 $ 0.15 $ 0.17
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands except per share data)
FISCAL YEAR 1998:
Revenue $48,868 $52,307 $ 53,161 $55,036
Operating income 2,060 2,226 (5,525) 2,476
Income before taxes 2,340 2,564 (5,208) 2,751
Net income 1,375 1,517 (4,049) 1,631
Net income available to
common stockholders 1,375 1,517 (4,049) 1,631
Basic earnings per share $ 0.13 $ 0.14 $ (0.36) $ 0.14
Diluted earnings per share $ 0.11 $ 0.12 $ (0.36) $ 0.13
42
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Item I - Election of Directors" appearing in the Company's
proxy statement for the annual meeting of stockholders to be held on May 25,
2000 sets forth certain information with respect to the directors of the Company
and is incorporated herein by reference. Pursuant to General Instruction G(3),
certain information with respect to persons who are or may be deemed to be
executive officers of the Company is set forth under the caption "Business -
Executive Officers of the Company" in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Company's proxy
statement for the annual meeting of stockholders to be held on May 25, 2000 sets
forth certain information with respect to the compensation of management of the
Company and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Stock Ownership" appearing in the Company's proxy
statement for the annual meeting of stockholders to be held on May 25, 2000 sets
forth certain information with respect to the ownership of the Company's Common
Stock and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" appearing
in the Company's proxy statement for the annual meeting of stockholders to be
held on May 25, 2000 sets forth certain information with respect to certain
relationships and related transactions between the Company and its directors and
officers and is incorporated herein by reference.
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46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) The financial statements filed as part of this report are
included in Part II, Item 8 of this Annual Report on Form 10-K.
(2) All Financial Statement Schedules other than those listed
below have been omitted because they are not required under
the instructions to the applicable accounting regulations of
the Securities and Exchange Commission or the information to
be set forth therein is included in the financial statements
or in the notes thereto. The following additional financial
data should be read in conjunction with the financial
statements included in Part II, Item 8 of this Annual Report
on Form 10-K:
Page Number
-----------
Report of Arthur Andersen LLP, Independent Public 24
Accountants (included in Report in Part II, Item 8)
Schedule II - Valuation and Qualifying Accounts 45
(3) The exhibits filed or incorporated by reference as part of
this report are set forth in the Index of Exhibits of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on October 25, 1999,
relating to the approval of an increase in the stock
repurchase plan by the Board of Directors on October 20, 1999.
(c) Exhibits
Refer to Item 14(a)(3) above.
(d) Not applicable
44
47
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts
Additions
Balance at charged to
beginning of costs and Deductions- Balance at end
period expenses charge offs of period
------ -------- ----------- ---------
Fiscal Year 1999 $ 709,000 $ 825,000 $ 244,000 $ 1,290,000
Fiscal Year 1998 $ 579,000 $ 375,000 $ 245,000 $ 709,000
Fiscal Year 1997 $ 448,000 $ 291,000 $ 160,000 $ 579,000
Accrued merger costs
Additions
Balance at charged to
beginning of costs and Deductions- Balance at end
period expenses charge offs of period
------ -------- ----------- ---------
Fiscal Year 1999 $ 2,201,000 $ -- $ 1,856,000 $ 345,000
Fiscal Year 1998 $ -- $ 7,500,000 $ 5,299,000 $ 2,201,000
45
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
March 29, 2000 By: /s/ Elizabeth J. Boland
-----------------------------------
Elizabeth J. Boland
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Roger H. Brown Director, Chief Executive Officer March 7, 2000
- --------------------------- (Principal Executive Officer)
Roger H. Brown
/s/ Linda A. Mason Co-Chairman of the Board March 7, 2000
- ---------------------------
Linda A. Mason
/s/ Marguerite W. Sallee Co-Chairman of the Board March 7, 2000
- ---------------------------
Marguerite W. Sallee
/s/ Elizabeth J. Boland Chief Financial Officer (Principal March 7, 2000
- --------------------------- Financial and Accounting Officer)
Elizabeth J. Boland
/s/ Joshua Bekenstein Director March 7, 2000
- ---------------------------
Joshua Bekenstein
/s/ JoAnne Brandes Director March 7, 2000
- ---------------------------
JoAnne Brandes
/s/ William H. Donaldson Director March 7, 2000
- ---------------------------
William H. Donaldson
/s/ E. Townes Duncan Director March 7, 2000
- ---------------------------
E. Townes Duncan
/s/ Fred K. Foulkes Director March 7, 2000
- ---------------------------
Fred K. Foulkes
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49
/s/ Sara Lawrence-Lightfoot Director March 7, 2000
- ----------------------------
Sara Lawrence-Lightfoot
/s/ Robert D. Lurie Director March 7, 2000
- ----------------------------
Robert D. Lurie
/s/ Ian M. Rolland Director March 7, 2000
- ----------------------------
Ian M. Rolland
47
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INDEX OF EXHIBITS
2.1* Amended and Restated Agreement and Plan of Merger dated as of June 17,
1998, ("Merger Agreement") by and among Bright Horizons Family
Solutions, Inc., CorporateFamily Solutions, Inc., Bright Horizons, Inc.,
CFAM Acquisition, Inc., and BRHZ Acquisition, Inc.
3.1* Certificate of Incorporation
3.2 Amended and Restated Bylaws (Incorporated by Reference to Exhibit 3 of
the Quarterly Report on Form 10-Q filed on November 12, 1999)
4.1* Article IV of Bright Horizons Family Solutions, Inc.'s Certificate of
Incorporation
4.2 Article IV of Bright Horizons Family Solutions, Inc.'s Bylaws
(Incorporated by Reference to Exhibit 3 of the Quarterly Report on Form 10-Q
filed on November 12, 1999)
4.3 Specimen Common Stock Certificate (Incorporated by Reference to Exhibit 4.3
of the Form 8-K filed on July 28, 1998).
10.1* 1998 Stock Incentive Plan
10.2 First Amendment to the 1998 Stock Incentive Plan (Incorporated by Reference
to Exhibit 10 of the Quarterly Report on Form 10-Q filed on November 16, 1998).
10.3* 1998 Employee Stock Purchase Plan
10.4* Employment Agreement of Linda A. Mason
10.5 Amended and Restated Employment Agreement of Marguerite W. Sallee
10.6* Employment Agreement of Roger H. Brown
10.7* Employment Agreement of Mary Ann Tocio
10.8 Severance Agreement for Stephen I. Dreier (Incorporated by Reference to
Exhibit 10.8 of the Registration Statement on Form S-1 of Bright Horizons, Inc.
(Registration No. 333-14981))
10.9 Severance Agreement for Elizabeth J. Boland (Incorporated by Reference to
Exhibit 10.9 of the Registration Statement on Form S-1 of Bright
Horizons, Inc. (Registration No. 333-14981))
10.10 Severance Agreement for David H. Lissy (Incorporated by Reference to
Exhibit 10.11 of the Registration Statement on Form S-1 of Bright
Horizons, Inc. (Registration No. 333-14981))
10.11* Severance Agreement for Melanie Ray
10.12* Severance Agreement for Michael Day
10.13* Severance Agreement for Nancy Rosenzweig
10.14* Form of Indemnification Agreement
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule for Fiscal Year Ended 1999 (For SEC use only)
- -----------------
* Incorporated by Reference to the Registration Statement on Form S-4
filed on June 17, 1998 (Registration No. 333-57035).
48