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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, 2000
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)
200 Talcott Avenue South
Watertown, MA 02472
(Address of principal executive offices)
(617) 673-8000
(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
- --------------------------------------------------------------------------------
(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 16, 2001, there were outstanding 12,099,859 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, 2001) was approximately $241,975,135.
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 23, 2001 are
incorporated by reference into Items 10, 11, 12 and
13.
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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......... 42
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 42
Item 11. Executive Compensation....................................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 42
Item 13. Certain Relationships and Related Transactions............................................... 42
PART IV
Item 14. Exhibits and Reports on Form 8-K............................................................. 43
Signatures............................................................................................... 45
Index to Exhibits........................................................................................ 47
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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 345 family centers for over 250 clients and has
the capacity to serve more than 43,000 children in 34 states and the District of
Columbia, Guam, the United Kingdom and Ireland. 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 client and
the family needs of the sponsor'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
sixth grade), and other family support services.
Bright Horizons Family Solutions serves many of the nation's leading
corporations, including 80 Fortune 500 companies. In addition, 44 of Working
Mother magazine's "Top 100 Companies for Working Mothers" in 2000 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, Bristol Myers Squibb, Citigroup, Eli Lilly and Company,
First Union National Bank, Glaxo SmithKline PLC, Johnson & Johnson, JP Morgan
Chase, Merck & Co., Inc., MBNA Corporation, Motorola, SAS Institute, S.C.
Johnson & Son, Inc., Timberland, 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
32 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 recognition as a quality service
provider and is well-positioned to serve its clients due to its 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. Corporate sponsorship helps
reduce the Company's start-up and operating costs and 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
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children, 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 345 family centers 268 were eligible for
accreditation, of which 217 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 providers. 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 learn, explore and enjoy. The World at Their
Fingertips preschool and kindergarten programs provide well planned
learning centers that allow for individualized learning, small groups,
and supportive teaching that prepare 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 and 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. The
Company devotes considerable effort to equipping its centers with
child-sized amenities and 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, improve management and
oversight, 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 Atlanta, Boston, Charlotte, Chicago, Dallas/Fort Worth, Fort
Lauderdale/Miami, Hartford, Los Angeles, Nashville, New York, Raleigh/Durham,
San Diego, San Francisco, Seattle, St. Louis, Tampa/St. Petersburg, Washington,
D.C. and Wilmington, Delaware and London, England.
Employer of Choice. Bright Horizons Family Solutions focuses on maintaining its
reputation as a premier employer in the early childhood education market and was
recently named as one of Fortune's "100 Best Companies to Work for in America".
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 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 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 124 family centers at multiple
sites for 32 sponsors. In addition,16 clients are currently served by the
Company's Network Access Program, which enables the employees of a sponsor to
access a 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 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 are often necessary.
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.
Geographic Expansion. Bright Horizons Family Solutions seeks to target areas
that management believes are underserved by existing service providers. By
targeting areas with a concentration of potential and existing corporate
sponsors, the Company can offer a more comprehensive solution to a sponsor's
needs.
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 Network 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 and 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, such as Travel Care, which allows parents who travel the option of
bringing their children by providing care at participating family centers.
At December 31, 2000, the Company had over 60 family centers under development
and scheduled to open over the next 12 to 24 months, including 30 for existing
clients.
BUSINESS MODELS
Although the specifics of Bright Horizons Family Solutions' 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
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premises of a sponsor, gives priority enrollment to the employees or affiliates
of the sponsor, receives some form of start-up and/or operating financial
support from the sponsor and maintains profit-and-loss 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. The Company offers priority
enrollment to the children of the site's employees in return
for discounted rent or other facilities related concessions.
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 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.
In addition to the sponsor and management models, the Company may establish a
center in instances where it has been unable to cultivate sponsorship, or
sponsorship opportunities do not currently exist. In these instances the Company
will typically lease space in locations that experience and demographics
indicate that demand for the Company's services exists.
OPERATIONS
General. Consistent with its strategy of establishing leading market presence,
Bright Horizons Family Solutions is organized into nine operational divisions,
largely along geographic lines. Each division is managed by a Divisional
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Vice President and is divided into five to twelve regions, each headed by a
Regional Manager responsible for supervising the quality, operating performance
and client relationships for three to eleven 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 also responsible for supervising
local marketing, hiring new teachers and performing administrative tasks such as
payroll and tuition collection. Bright Horizons Family Solutions performs most
accounting, finance, information system, risk management, human resources,
administration and business development 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 or affiliates of the sponsor. 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 2000, average
full-time monthly tuition was approximately $990 for infants, $910 for toddlers
and $740 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 10,000 to 12,000 square feet, and has a capacity for
approximately 125-140 children. As of December 31, 2000, the Company's centers
had a total licensed capacity of approximately 43,100 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
international operations, and the expertise and reputation of its management
team in managing 345 family centers for many of the world'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,
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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, targeting real estate
developers, identifying potential acquisitions and managing the overall sales
process. As a result of Bright Horizons Family Solutions' 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 provide access to channels of
internal communication such as e-mail, websites, intranets, mailing lists and
internal publications. In addition, many sponsors promote the family center as
an important employee benefit and answer questions to facilitate interaction
between the Company 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,
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 sponsors who wish to outsource the management of new or existing
work-site early education centers due to the Company's scale,
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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, 2000, Bright Horizons Family Solutions employed approximately
11,800 employees (including part-time and substitute teachers), of which
approximately 315 were employed at the Company's corporate, 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 care
facilities. Center directors and regional managers are responsible for
monitoring each family center's compliance with such regulations. Repeated
failures by a family 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 family 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 Company believes 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 has experienced substantial growth during the
past several years through internal growth and by acquisition. The Company's
ability to grow in the future 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
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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 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 contractual arrangements. While the specific terms of
such contracts vary, some 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
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non-renewal of a significant number of 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 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. In
addition, the Company may not be able to increase tuition at a rate consistent
with increases in operating costs. 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, additional investment, 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
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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 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 family
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 family 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. 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. Movements in prices of stocks in general
may also affect the market price. 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
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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.
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, 44 - Chief Executive Officer. Mr. Brown has served as a director
of the Company since the Merger and has also served as Chief Executive Officer
of the Company since May 1999. Mr. Brown was President of the Company from the
Merger until June 2000. 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 of 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. He is also the Chairman of the commission to reinvent the
National Association for the Education of Young Children's (NAEYC) accreditation
process. Mr. Brown is the husband of Linda A. Mason.
Linda A. Mason, 46 - 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 the Globe Newspaper Company, a
subsidiary of The New York Times Company which owns and publishes The Boston
Globe, is a Fellow of the Yale Corporation and serves on the Advisory Board of
the Yale University School of Management. Ms. Mason is the wife of Roger H.
Brown.
Mary Ann Tocio, 52 - President and Chief Operating Officer. Ms. Tocio has served
as Chief Operating Officer of the Company since the Merger and was appointed
President in June 2000. 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.
Ms. Tocio is also a director of Zany Brainy, Inc. a specialty retailer of high
quality educational products for children.
Elizabeth J. Boland, 41 -- Chief Financial Officer and Treasurer. 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 Finance for 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 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.
Stephen I. Dreier, 58 -- 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
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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, 35 -- Chief Development Officer and Executive Vice President. Mr.
Lissy has served as Chief Development Officer of the Company since the Merger,
and was appointed Executive Vice President in June 2000. 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.
ITEM 2. PROPERTIES
The following table summarizes the locations of Bright Horizons Family
Solutions' family centers as of December 31, 2000:
Alabama 1 Nevada 4
Arizona 4 New Hampshire 2
California 27 New Jersey 23
Colorado 1 New York 14
Connecticut 18 North Carolina 23
Delaware 7 Ohio 3
District of Columbia 5 Pennsylvania 11
Florida 25 Rhode Island 2
Georgia 8 South Carolina 2
Illinois 31 South Dakota 1
Indiana 8 Tennessee 7
Iowa 5 Texas 16
Kentucky 2 Utah 1
Maine 3 Virginia 6
Maryland 7 Washington 13
Massachusetts 36 Wisconsin 7
Michigan 3 Guam 3
Missouri 4 United Kingdom 9
Nebraska 1 Ireland 2
As of December 31, 2000, Bright Horizons Family Solutions operated 345 centers
in 34 states and the District of Columbia, Guam, the United Kingdom and Ireland,
of which twenty were owned and the remaining were operated under leases or
operating agreements. The Company's owned family centers located in Tempe,
Arizona; San Jose, California; Glastonbury and Orange, Connecticut; Tampa,
Florida; Alpharetta, Georgia; Quincy, Massachusetts; White Plains, New York;
Raleigh/Durham, North Carolina; Austin, Texas and Bellevue, Washington are not
currently encumbered by mortgages. The leases typically have terms ranging from
five to twenty years with various expiration dates, 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 leases approximately 43,000 square, for its
corporate offices in Watertown, Massachusetts under an operating lease that
expires in 2010. The company subleases approximately 16,000 square feet of this
facility to third parties. The Company also has operating leases with terms that
expire from October 2001 to March 2006 on approximately 24,000 square feet for
administrative offices in California, Florida, Illinois, Maryland, New Jersey,
Tennessee, Texas, Washington and London, England. The Company is also party to a
lease
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on approximately 10,000 square feet in Cambridge, Massachusetts that expires in
August 2002 that is subleased to a third party.
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 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "BFAM." The table below sets forth the high and low quarterly sales
prices for the Company's Common Stock as reported in published financial sources
for each quarter during the last two years:
Price Range of Common Stock
2000 1999
---- ----
High Low High Low
Fourth Quarter 30 1/4 20 1/8 20 1/8 12 1/2
Third Quarter 30 -- 19 1/2 20 1/4 13 7/8
Second Quarter 22 -- 16 1/4 23 3/8 14 11/16
First Quarter 23 1/8 15 3/8 28 5/8 16 3/4
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.
The number of stockholders of record at March 15, 2001 was 143, 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, 2000 ("Fiscal Year
2000"), 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, and June 30, 1996 and December 27, 1996 ("Fiscal Year 1996")
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).
2000(1) 1999 1998(2) 1997 1996(3)
--------- -------- -------- -------- ---------
Statement of income data
(in thousands except per share amounts):
Revenue $ 291,143 $243,290 $209,372 $172,555 $ 127,107
Operating income 16,446 12,843 8,737 5,048 2,430
Income before taxes 15,772 13,558 2,447 5,004 1,893
Net income before preferred stock
dividends and accretion on
redeemable preferred stock 9,212 7,927 474 2,761 4,057
Net income available to common
stockholders 9,212 7,927 474 1,844 2,930
Diluted earnings per share $ 0.74 $ 0.63 $ 0.04 $ 0.30 $ 0.66
Weighted average diluted shares
outstanding 12,522 12,586 12,411 9,293 4,502
Financial position at fiscal year end
(in thousands except per share amounts):
Working capital (deficit) $ (6,265) $ 3,342 $ 12,040 $ 18,005 $ 4,137
Total assets 136,895 107,073 91,463 76,842 44,816
Long-term debt, including current
maturities 581 687 685 783 9,648
Common stockholders' equity (deficit) 75,283 62,286 53,380 46,663 (8,720)
Dividends per common share -- -- -- -- --
Operating data at fiscal year end
Family centers managed 345 300 274 245 215
Licensed capacity 43,069 37,150 34,377 30,232 25,448
(1)The Company recognized a non-recurring charge of $704,000 in connection with
a writedown in the value of certain equity investments made by the Company.
(2)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.
(3)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, 2000, the
Company managed 345 family centers, with over 60 family centers under
development. The Company has the capacity to serve more than 43,000
children in 34 states, the District of Columbia, Guam, the United Kingdom
and Ireland and has partnerships with many of the nation's leading
employers, including 80 Fortune 500 companies and 44 of Working Mother
Magazine's "100 Best Companies for Working Mothers" in 2000. 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 was 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.
In April 2000 the Company assumed the operation of three child care centers
for the U.S. Navy in Guam. Additionally, in May 2000 the Company acquired
Nurseryworks Limited, based in London, England, which operates nine child
care centers in the greater London area. Finally, in December 2000 the
Company acquired Circle of Friends, based in Ireland, which operates two
child care centers. The operations of the Company's non-domestic child care
centers are not material to the Company's operating results, financial
position or cash flows.
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 or contributed by sponsors 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 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
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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 loss until utilization
levels reach approximately 55%, 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 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 as earned.
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.
In addition to the sponsor and management models, the Company may establish
a center in instances where it has been unable to cultivate sponsorship, or
sponsorship opportunities do not currently exist. In these instances the
Company will typically lease space in locations where experience and
demographics indicate that demand for the Company's services exist. These
centers typically operate at a loss until utilization levels reach
approximately 60%, which typically occurs within 12 to 24 months of
operation.
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
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.
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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 2000, the Company added 54 new family centers,
30 of which are operating under the sponsor model and 24 of which are
operating under the management model. In the same period, the Company
closed 9 centers that 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 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 model mix (sponsor vs. management) of new
and existing centers, the timing and level of sponsorship payments,
competitive factors and general economic conditions.
RESULTS OF OPERATIONS
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, 2000 ("Fiscal
Year 2000"), December 31, 1999 ("Fiscal Year 1999") and December 31, 1998
("Fiscal Year 1998").
The following table sets forth statement of income data as a percentage of
revenue for the Fiscal Years 2000, 1999, and 1998:
Fiscal Year Fiscal Year Fiscal Year
2000 1999 1998
Revenue 100.0% 100.0% 100.0%
Cost of services 85.3 85.8 86.3
------ ------ ------
Gross profit 14.7 14.2 13.7
Selling, general and administrative 8.4 8.6 9.1
Amortization 0.7 0.3 0.4
------ ------ ------
Income from operations 5.6 5.3 4.2
Other charges (0.2) -- (3.6)
Net interest income -- 0.3 0.6
------ ------ ------
Income before income taxes 5.4 5.6 1.2
Income tax expense 2.2 2.3 1.0
------ ------ ------
Net income 3.2% 3.3 % 0.2%
====== ====== ======
Fiscal Year 2000 Compared To Fiscal Year 1999
Revenue. Revenue increased $47.8 million, or 19.7%, to $291.1 million for
Fiscal Year 2000 from $243.3 million for Fiscal Year 1999. At December 31,
2000, the Company operated 345 family centers, as compared with 300 at
December 31,1999, a net increase of 45 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 6%.
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Gross Profit. Gross profit increased $8.0 million, or 23.3%, to $42.7
million for Fiscal Year 2000 from $34.7 million for Fiscal Year 1999. The
increase in gross profit as a percentage of revenue, to 14.7% for Fiscal
Year 2000 from 14.2% for Fiscal Year 1999, is attributable to the higher
proportion of centers operating as mature, stabilized facilities. This
improvement in centers open greater than two years was partially offset by
lower margins in centers that were open less than two years compared to
centers at this maturity stage in Fiscal Year 1999, due largely to a
greater number of sponsor model centers, which incur losses during the ramp
up stage.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.5 million, or 16.7%, to $24.4 million
for Fiscal Year 2000 from $20.9 million for Fiscal Year 1999. The decrease
as a percentage of revenue to 8.4% in Fiscal Year 2000 from 8.6% in Fiscal
Year 1999 relates to a larger revenue base and increased overhead
efficiencies. The dollar increase is primarily attributable to investments
in regional management, sales personnel and operations personnel necessary
to support long-term growth, as well as selling, general and administrative
expenses associated with expansion in the United Kingdom and Ireland.
Income from Operations. Income from operations totaled $16.4 million for
Fiscal Year 2000, as compared with income from operations of $12.8 million
for Fiscal Year 1999. Operating income for Fiscal Year 2000 increased by
$3.6 million, or 28.1%, from Fiscal Year 1999.
Other Charges. In Fiscal Year 2000 the Company recognized a charge of
$704,000 ($412,000 after tax) in connection with a writedown in the value
of certain equity investments made by the Company.
Net Interest Income. Net interest income in Fiscal Year 2000 totaled
$30,000 as compared to $715,000 for Fiscal Year 1999. The decrease in net
interest income is attributable to lower levels of invested cash and to
borrowing under the line of credit.
Income Tax Expense. The Company had an effective tax rate of 41.6% in
Fiscal Year 2000. In Fiscal Year 1999 the effective tax rate was 41.5%.
Management expects the effective rate for 2001 to be consistent with the
past two years.
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 regional management, sales personnel, information systems and
communications personnel necessary to support long-term growth.
Income from Operations. Income from operations totaled $12.8 million for
Fiscal Year 1999, as compared with income from operations of $8.7 million
for Fiscal Year 1998. Operating income for Fiscal Year 1999 increased by
$4.1 million, or 47.0%, from Fiscal Year 1998.
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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.
Net Interest Income. Net interest income in Fiscal Year 1999 totaled
$700,000 as compared to $1.2 million for Fiscal Year 1998. The decrease in
net interest income is attributable to lower levels of invested cash.
Income Tax Expense. 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.
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 and cash flow from operations, supplemented by
borrowings available under the Company's various credit arrangements. The
Company had a working capital deficit of $6.3 million at December 31, 2000
and working capital of $3.3 million at December 31, 1999.
Cash provided by operating activities was $17.0 million, $15.2 million and
$9.1 million for Fiscal Years 2000, 1999 and 1998, respectively. The
increase of $1.8 million in cash provided by operating activities in Fiscal
Year 2000 was primarily the result of an in increase in net income before
depreciation and amortization of $3.9 million. Additionally, operating cash
flow increased as the result of $3.2 million of deferred revenue as
compared to $2.0 million of deferred revenue in Fiscal Year 1999 as well as
an increase in accounts payable and accrued expenses. These amounts were
offset by an increase in accounts receivable. The increase of $6.1 million
in cash provided by operating activities in Fiscal Year 1999 as compared to
Fiscal Year 1998 was primarily the result of an increase in net income
before depreciation and amortization of $8.4 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. The increase in deferred revenue of $3.2 million and
$2.0 million in Fiscal Years 2000 and 1999, 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.
Cash used in investing activities increased to $28.3 million for Fiscal
Year 2000 from $20.4 million for Fiscal Year 1999 and $17.2 million for
Fiscal Year 1998, principally due to $19.7 million of fixed asset additions
and leasehold improvements, as compared to $18.1 million and $13.7 million
of fixed asset additions and leasehold improvements in Fiscal Years 1999
and 1998, respectively. Of the $19.7 million of fixed asset additions in
Fiscal Year 2000, approximately $12.8 million relate to new family centers;
of the remainder, approximately $3.7 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, including the relocation of the Company's
corporate offices. Management expects to maintain, or increase slightly,
the current level of center related fixed asset spending through 2001. The
Company also made several acquisitions of child care centers for cash
payments totaling $8.2 million, $2.0 million and $3.6 million in Fiscal
Years 2000, 1999 and 1998, respectively.
Cash provided by financing activities totaled $7.2 million in Fiscal Year
2000, as compared to cash used by financing activities of $2.5 million in
1999. The increase was primarily the result of net borrowings of $4.8
million under its $40.0 million line of credit which was executed March 30,
2000. In Fiscal Year 1999 cash used by financing activities was primarily
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 2000, 1999 and 1998,
the Company received $2.6, $5.1 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.
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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, 2000 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 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 family centers, 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
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133, as amended by SFAS No.
137 and SFAS No. 138, will be effective for the Company's financial
reporting beginning in the first quarter of fiscal 2001. SFAS No. 133 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. The Company does not expect the adoption of SFAS No.
133 to have a material impact on the results of its operations or financial
position.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of
APB Opinion No. 25". This interpretation provides guidance on the
application of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", including (i) the definition of
an employee, (ii) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (iii) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and
(iv) the accounting for an exchange of stock compensation awards in a
business combination. The interpretation is effective July 1, 2000 and the
effects of applying the interpretation are recognized on a prospective
basis. The adoption of this interpretation did not have a material impact
on the Company's results of operations or financial condition.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", a
replacement of SFAS No. 125. This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The statement provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The statement is effective for
recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company does not expect the adoption of SFAS No. 140
to have a material impact on the results of its operations or financial
position.
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MARKET RISK
Foreign Currency Risk. The Company's exposure to fluctuations in foreign
currency exchange rates is primarily the result of foreign subsidiaries
domiciled in the United Kingdom and Ireland. The Company does not currently
use financial derivative instruments to hedge foreign currency exchange
rate risks associated with its European subsidiaries.
The assets and liabilities of the Company's United Kingdom and Irish
subsidiaries, whose functional currencies are the British pound and Irish
pound, respectively, are translated into U.S. dollars at exchange rates in
effect at the balance sheet date. Income and expense items are translated
at the average exchange rates prevailing during the period. The cumulative
translation effects for the subsidiaries are included in cumulative
translation adjustment in stockholders' equity.
The operations of the Company's United Kingdom and Irish subsidiaries are
not material to the Company's consolidated results of operations;
therefore, the impact of a 10% change in the exchange rate would not have a
significant impact on the Company's results of operations or financial
position.
Interest Rate Risk. As of December 31, 2000, 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 $5.4 million, have an average interest rate of approximately
5.5% 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 2000, the
Company's interest income for the year ended December 31, 2000 would have
decreased by approximately $54,000. This estimate assumes that the decrease
would have occurred on the first day of 2000 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 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. Management estimates that had the average interest rate
incurred on the Company's average borrowings under its lines of credit
increased by 100 basis points in Fiscal Year 2000, the Company's interest
expense for the year ended December 31, 2000 would have increased by
approximately $20,000. This estimate assumes that the increase would have
occurred on the first day of borrowings and increased the rate charged by
100 basis points.
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, 2000 and 1999
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the three years in the period ended December 31, 2000.
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, 2000 and 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
- ------------------------
Boston, Massachusetts
February 8, 2001
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Bright Horizons Family Solutions, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
2000 1999
Assets
Current Assets:
Cash and cash equivalents $ 8,599 $ 12,752
Accounts receivable, net of allowance for doubtful
accounts of $1,477 and $1,290, respectively 23,945 17,858
Prepaid expenses and other current assets 3,508 2,251
Current deferred tax asset 5,297 4,966
----------- ----------
Total current assets 41,349 37,827
Fixed assets, net 64,433 48,437
Goodwill and other intangibles, net 24,256 15,909
Noncurrent deferred tax asset 6,151 4,192
Other assets 706 708
----------- ----------
Total assets $ 136,895 $ 107,073
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Lines of credit and short term debt $ 6,319 $ --
Current portion of long-term debt and obligations
due under capital leases 156 172
Accounts payable and accrued expenses 28,007 23,017
Deferred revenue, current portion 10,720 9,462
Income taxes payable 540 780
Other current liabilities 1,872 1,054
----------- ----------
Total current liabilities 47,614 34,485
Long-term debt and obligations due under capital
leases, net of current portion 425 515
Accrued rent 1,744 1,400
Other long-term liabilities 3,358 2,692
Deferred revenue, net of current portion 8,471 5,695
----------- ----------
Total liabilities 61,612 44,787
----------- ----------
Commitments and contingencies (Note 12)
Stockholders' equity:
Common Stock $0.01 par value
Authorized: 30,000,000 shares
Issued: 12,564,000 and 12,310,000 shares at
December 31, 2000 and 1999, respectively
Outstanding: 12,069,000 and 11,815,000 shares at
December 31, 2000 and 1999, respectively 126 123
Additional paid-in capital 79,398 75,641
Treasury stock, 495,000 shares at cost ( 7,081) ( 7,081)
Cumulative translation adjustment 25 --
Retained earnings (deficit) 2,815 ( 6,397)
----------- ----------
Total stockholders' equity 75,283 62,286
----------- ----------
Total liabilities and stockholders' equity $ 136,895 $ 107,073
=========== ==========
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)
2000 1999 1998
Revenues $ 291,143 $ 243,290 $ 209,372
Cost of services 248,405 208,631 180,770
------------- ------------- -------------
Gross Profit 42,738 34,659 28,602
Selling, general and administrative 24,388 20,903 18,972
Amortization 1,904 913 893
------------- ------------- -------------
Income from operations 16,446 12,843 8,737
Other charges (704) -- (7,500)
Net interest income 30 715 1,210
------------- ------------- -------------
Income before taxes 15,772 13,558 2,447
Income tax expense 6,560 5,631 1,973
------------- ------------- -------------
Net income $ 9,212 $ 7,927 $ 474
============= ============= =============
Earnings per share - basic $ 0.77 $ 0.66 $ 0.04
============= ============= =============
Weighted average number of common shares - basic 11,895 11,945 11,172
============= ============= =============
Earnings per share - diluted $ 0.74 $ 0.63 $ 0.04
============= ============= =============
Weighted average number of common and common equivalent
shares - diluted 12,522 12,586 12,411
============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements
26
29
Bright Horizons Family Solutions, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(in thousands)
Common Stock Additional Cumulative Retained Total
Paid In Treasury Translation Earnings Stockholders Comprehensive
Shares Amount Capital Stock Adjustment (Deficit) Equity Income
------ -------- ---------- ---------- ----------- ---------- ----------- -------------
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
Options issued in connection
with an acquisition -- -- 375 -- -- -- 375
Repurchase of common stock (49) -- (325) -- -- (809) (1,134)
Tax benefit from the exercise
of stock options -- -- 2,554 -- -- -- 2,554
Net income -- -- -- -- -- 474 474 474
------------------------------------------------------------------------------------------------
Comprehensive net income for
the year ended December 474
31, 1998 ------------------------------------------------------------------------------------------------
Balance at December 31, 1998 11,554 115 67,589 -- -- (14,324) 53,380
Exercise of stock options 756 8 5,103 -- -- -- 5,111
Repurchase of common stock (495) -- -- (7,081) -- -- (7,081)
Stock-based compensation -- -- 22 -- -- -- 22
Tax benefit from the exercise
of stock options -- -- 2,927 -- -- -- 2,927
Net income -- -- -- -- -- 7,927 7,927 7,927
------------------------------------------------------------------------------------------------
Comprehensive net income for
the year ended December 7,927
31, 1999 ------------------------------------------------------------------------------------------------
Balance at December 31, 1999 11,815 123 75,641 (7,081) -- (6,397) 62,286
Exercise of stock options 254 3 2,570 -- -- -- 2,573
Options issued in connection
with an acquisition -- -- 28 -- -- -- 28
Stock-based compensation -- -- 71 -- -- -- 71
Tax benefit from the exercise
of stock options -- -- 1,088 -- -- -- 1,088
Translation adjustment -- -- -- -- 25 -- 25 25
Net income -- -- -- -- -- 9,212 9,212 9,212
------------------------------------------------------------------------------------------------
Comprehensive net income for
the year ended December $ 9,237
31, 2000 ------------------------------------------------------------------------------------------------
Balance at December 31, 2000 12,069 $ 126 $ 79,398 $ (7,081) $ 25 $ 2,815 $ 75,283
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements
27
30
Bright Horizons Family Solutions, Inc
Consolidated Statements of Cash Flows
(in thousands)
2000 1999 1998
Net income $ 9,212 $ 7,927 $ 474
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,525 4,912 3,960
Non-cash expenses 71 22 --
Asset write-downs and loss on disposal of fixed assets 718 208 1,248
Deferred income taxes (2,290) (1,914) (1,257)
Changes in assets and liabilities:
Accounts receivable (6,006) (4,474) (4,270)
Income tax receivable -- 5,171 (2,243)
Prepaid expenses and other current assets (825) (727) 3,814
Accounts payable and accrued expenses 3,520 1,348 6,622
Income taxes payable 851 780 (962)
Deferred revenue 3,236 1,964 2,749
Accrued rent 344 (160) 42
Other long-term assets (212) 11 (97)
Other current and long-term liabilities 809 160 (938)
------------ ------------ ------------
Net cash provided by operating activities 16,953 15,228 9,142
------------ ------------ ------------
Cash flows from investing activities:
Additions to fixed assets, net of acquired amounts (19,677) (18,059) (13,711)
Proceeds from the disposal of fixed assets 21 25 181
Increase in other assets (503) (400) (21)
Payments for acquisitions, net of cash acquired (8,167) (1,964) (3,615)
------------ ------------ ------------
Net cash used in investing activities (28,326) (20,398) (17,166)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock 2,573 5,111 4,448
Purchase of treasury stock -- (7,081) (1,134)
Principal payments of long-term debt and obligations
under capital leases (175) (547) (235)
Borrowings under lines of credit 16,038 -- --
Payments under lines of credit (11,226) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 7,210 (2,517) 3,079
------------ ------------ ------------
Effect of exchange rates on cash balances 10 -- --
------------ ------------ ------------
Net decrease in cash and cash equivalents (4,153) (7,687) (4,945)
Cash and cash equivalents, beginning of period 12,752 20,439 25,384
------------ ------------ ------------
Cash and cash equivalents, end of period $ 8,599 $ 12,752 $ 20,439
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements
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31
Bright Horizons Family Solutions, Inc.
Notes To Consolidated Financial Statements
For Fiscal Years 2000, 1999 and 1998
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, Guam, the United
Kingdom, and Ireland.
The Company operates its family centers under various types of arrangements,
which generally can be classified in two forms: (i) the sponsor model, where the
Company operates a family center on the premises of a sponsor and gives priority
enrollment to the sponsor's employees or affiliates and (ii) the management
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, 2000 ("Fiscal Year
2000"), December 31, 1999 ("Fiscal Year 1999"), and December 31, 1998 ("Fiscal
Year 1998).
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.
FOREIGN OPERATIONS - In 2000 the Company acquired operations based in the United
Kingdom and Ireland. The assets and liabilities of the Company's foreign
subsidiaries, which are not material to the Company's consolidated financial
statements, are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the period. The cumulative translation effects
for subsidiaries using a functional currency other than the U.S. dollar is
included as a cumulative translation adjustment in stockholders' equity and is a
component of comprehensive income.
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, the ability to hire and retain qualified personnel 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 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.
29
32
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, accounts receivable and lines of credit. The
Company maintains its cash in 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, 2000 or 1999, 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 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 two to ten
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 ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." 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 advance of services being performed
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 include parent fee
deposits and amounts payable under acquisition agreements.
INCOME TAXES - The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
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 No. 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.
REVENUE RECOGNITION - Revenue is recognized as services are performed. In both
the sponsor model and the management model, revenues consist primarily of
tuition paid by parents, supplemented in some cases by payments from sponsors
and, to a lesser extent, by payments from government agencies. Revenues also
include management
30
33
fees paid by corporate sponsors. In the management 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 - SFAS No. 123, "Accounting for Stock-Based
Compensation," 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
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," 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. The Company accounts for options granted to non-employees and certain
options issued in connection with acquisitions using the fair value method, in
accordance with the provisions of SFAS No. 123.
EARNINGS PER SHARE - The Company accounts for earnings per share in accordance
with the provisions of SFAS No. 128, "Earnings per Share." Under the standards
established by SFAS No. 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 if applicable.
COMPREHENSIVE INCOME - Comprehensive income encompasses all changes in
stockholders' 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.
SEGMENT REPORTING - The Company currently operates in one industry segment and
generates in excess of 90% of revenue and operating profit domestically.
Additionally, no single customer accounts for more than 10% of the Company's
revenue.
NEW PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS
No. 137 and SFAS No. 138, will be effective for the Company's financial
reporting beginning in the first quarter of fiscal 2001. SFAS No. 133 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. The
Company does not expect the adoption of SFAS No. 133 to have a material impact
on the results of its operations or financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." On March 24, 2000,
the SEC deferred implementation of SAB No. 101 until the second calendar quarter
of 2000, and on June 26, 2000, implementation was further deferred until the
fourth quarter of calendar 2000. The Company was required to comply with this
guidance no later than the fourth quarter of fiscal 2000. The adoption of this
guidance did not have a material impact on the accompanying financial
statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," a replacement
of SFAS No. 125. This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after
31
34
December 15, 2000. The Company does not expect the adoption of SFAS No. 140 to
have a material impact on the results of its operations or financial position.
RECLASSIFICATIONS - Certain amounts in the prior years' financial statements
have been reclassified to conform with the current year's presentation.
2. ACQUISITIONS
In 2000, the Company acquired substantially all the assets of two multi-site
child care companies and 100% of the outstanding stock of one domestic
single-site and two foreign multi-site child care companies for aggregate
consideration of approximately $8.2 million in cash, the issuance of notes
payable to a seller totaling $1.1 million, the assumption of liabilities of
approximately $3.4 million and the issuance of options to purchase 4,000 shares
of the Common Stock which were valued at approximately $28,000 using the
Black-Scholes option pricing model. 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 $10.4 million have been recorded and are being amortized over
periods not to exceed 18 years.
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. 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 the issuance of options to purchase 30,120 shares of Common Stock, which
were valued at approximately $375,000 using the Black-Scholes option pricing
model. 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.
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. The acquisitions were not material and therefore no pro-forma
information has been presented.
3. FIXED ASSETS
Fixed assets consist of the following:
Estimated useful lives December 31, December 31,
(years) 2000 1999
------- ---- ----
Buildings 20 - 40 $ 31,699,000 $ 26,618,000
Furniture and equipment 3 - 15 23,639,000 18,429,000
Leasehold improvements 3 / life of lease 22,411,000 12,594,000
Land -- 5,923,000 4,465,000
----------- -----------
83,672,000 62,106,000
Less accumulated depreciation and amortization (19,239,000) (13,669,000)
----------- -----------
Fixed assets, net $ 64,433,000 $ 48,437,000
=========== ============
Fixed assets include automobiles and office equipment held under capital leases
totaling $179,000 and $338,000 in Fiscal Years 2000 and 1999, respectively.
Depreciation expense relating to fixed assets under capital leases was
approximately $19,000 and $38,000 for Fiscal Years 2000 and 1999, respectively.
Accumulated depreciation relating to fixed assets under capital leases totaled
approximately $159,000 and $287,000 for Fiscal Years 2000 and 1999,
respectively.
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4. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31, December 31,
2000 1999
---- ----
Goodwill, net of accumulated amortization of $5,040,000 and
$3,415,000, respectively $ 23,361,000 $ 15,056,000
Non-compete agreements and contract rights, net of accumulated
amortization of $3,261,000 and $3,081,000, respectively 884,000 834,000
Other intangibles, net of accumulated amortization of $26,000 and
$18,000, respectively 11,000 19,000
------------ ------------
$ 24,256,000 $ 15,909,000
============ ============
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, December 31,
2000 1999
---- ----
Accounts payable $ 2,269,000 $ 1,397,000
Accrued payroll and employee benefits 17,853,000 14,645,000
Accrued other expenses 7,885,000 6,630,000
Accrued merger related expenses -- 345,000
------------ -----------
$ 28,007,000 $23,017,000
============ ============
6. LINES OF CREDIT AND SHORT TERM DEBT
The Company entered into a $40.0 million unsecured line of credit for working
capital, acquisition financing and general corporate purposes with two banks
effective March 30, 2000. This facility replaces the line of credit facility
that the Company had in place at December 31, 1999. The credit facility consists
of a revolving line of credit, which expires on June 30, 2002, at which time any
outstanding indebtedness will be converted into a three-year term loan. 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
requires the Company to comply with certain covenants, which include, among
other things, the maintenance of specified financial ratios, and prohibits the
payment of dividends without bank approval. At December 31, 2000 the Company had
$4.8 million outstanding and approximately $35.2 million available under the
line of credit and was in compliance with the covenants of the agreement. The
weighted average interest rate related to the amount outstanding at December 31,
2000 was 8.6%.
The Company also entered into a L350,000 unsecured line of credit for working
capital and general corporate purposes with a bank effective September 2000. The
facility is payable on demand and expires in September 2001. The facility bears
interest at 3.5% over the bank's base rate, which is currently 6%, for a total
interest rate of 9.5%. At December 31, 2000 the Company had L308,000
(approximately $460,000) outstanding under the facility.
A short-term note payable in the amount of $1.1 million, bearing interest at
approximately 6%, was issued in December, 2000 in connection with an
acquisition, and was repaid in January 2001.
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7. LONG-TERM DEBT AND OBLIGATIONS DUE UNDER CAPITAL LEASES
Long-term debt consists of the following:
December 31, December 31,
2000 1999
---- ----
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. $ 240,000 $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. 200,000 250,000
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 51,000 73,000
Secured notes payable to a bank, repaid January 2001 79,000 --
Secured note payable to a bank, repaid January 2001 3,000 --
Obligations under capital leases at rates of 8.0% to 10.24%, secured by
automobiles and certain office equipment; due in 2001 8,000 64,000
--------- ---------
Total debt and obligations due under capital leases 581,000 687,000
Less current maturities (156,000) (172,000)
--------- ---------
Long-term debt and obligations due under capital leases $ 425,000 $ 515,000
========= =========
8. INCOME TAXES
Income tax expense for Fiscal Years 2000, 1999 and 1998 consisted of the
following:
Fiscal Year Fiscal Year Fiscal Year
2000 1999 1998
---- ---- ----
Current tax expense $ 8,446,000 $ 4,684,000 $ 676,000
Benefit from the exercise of stock options 1,088,000 2,927,000 2,554,000
Deferred tax expense (2,974,000) (1,980,000) (1,257,000)
----------- ----------- -----------
Income tax expense, net $ 6,560,000 $ 5,631,000 $ 1,973,000
=========== =========== ===========
A reconciliation of the U.S. Federal statutory rate to the effective rate is as
follows:
Fiscal Year Fiscal Year Fiscal Year
2000 1999 1998
---- ---- ----
U. S. Federal statutory rate $5,526,000 $ 4,610,000 $ 832,000
State taxes on income 847,000 775,000 121,000
Non-deductible merger costs -- -- 935,000
Permanent differences and other 187,000 246,000 85,000
---------- ---------- ----------
Income tax expense, net $6,560,000 $5,631,000 $1,973,000
========== ========== ==========
Deferred tax assets are as follows:
Fiscal Year Fiscal Year Fiscal Year
2000 1999 1998
---- ---- ----
Net operating loss carryforwards $ 1,335,000 $ 1,414,000 $ 734,000
Reserve on assets 753,000 593,000 277,000
Liabilities not yet deductible 4,330,000 4,077,000 3,425,000
Deferred revenue 3,063,000 1,897,000 2,409,000
Depreciation 386,000 (207,000) (812,000)
Amortization 1,078,000 1,013,000 827,000
Other 503,000 371,000 318,000
---------- ---------- ----------
$11,448,000 $9,158,000 $7,178,000
=========== ========== ==========
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37
As of December 31, 2000 the Company has federal net operating loss carryforwards
of approximately $3.0 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
$5.4 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 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.
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, 2000, there were
approximately 465,000 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, 2000:
Weighted
Options Average Weighted Options Weighted
Outstanding Remaining Average Exercisable Average
Range of at December 31, Contractual Exercise at December 31, Exercise
Exercise Price 2000 Life (years) Price 2000 Price
-------------- ---- ------------ ----- ---- -----
$ 0.0000 - $ 2.6125 57,625 3.3 $ 1.7112 53,276 $ 1.6683
$ 2.6126 - $ 5.2250 28,514 4.1 $ 3.8917 20,969 $ 3.9712
$ 5.2251 - $ 7.8375 651,336 5.6 $ 7.6682 630,183 $ 7.6859
$ 7.8376 - $ 10.4500 4,350 7.9 $10.0000 3,350 $10.0000
$ 10.4501 - $ 13.0625 28,754 6.8 $11.3000 28,754 $11.3000
$ 13.0626 - $ 15.6750 162,901 8.9 $14.8380 31,161 $14.8536
$ 15.6751 - $ 18.2875 338,881 9.0 $17.0423 24,347 $16.6470
$ 18.2876 - $ 20.9000 431,767 7.7 $19.0398 157,850 $19.0955
$ 20.9001 - $ 23.5125 48,052 7.9 $21.7189 23,640 $21.6635
$ 23.5126 - $ 26.1250 11,475 9.1 $24.8537 1,150 $24.0000
------ --- -------- ----- --------
1,763,655 7.1 $13.2195 974,680 $10.0507
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.
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For the years ended December 31, 2000 and 1999, options to purchase 4,000 and
3,600 shares of Common Stock, respectively, were granted to members of the
Company's advisory board. These options were valued at approximately $74,000 and
$45,000, respectively, using the Black-Scholes option pricing model. The Company
recognized compensation expense of approximately $71,000 and $22,000 in its
operating results for the years ended December 31, 2000 and 1999, respectively.
A balance of approximately $25,000 has been recorded as a component of
additional paid-in capital at December 31, 2000.
Certain options issued in connection with acquisitions in Fiscal Years 2000 and
1998 were granted with an exercise price less than the fair value of the
Company's Common Stock. These options were valued at approximately $28,000 and
$375,000, respectively, using the Black-Scholes option pricing model, and are
included in the determination of proceeds paid for the acquisitions.
SFAS No. 123 established new financial accounting and reporting standards for
employee stock-based compensation plans. The Company has adopted the
disclosure-only provisions of SFAS No. 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 2000 consistent with the provisions of SFAS
No. 123, the Company's net income (loss) and earnings (loss) per share would
have been reduced to the following pro forma amounts for years ended December
31, 2000, 1999 and 1998:
Fiscal Year 2000 Fiscal Year 1999 Fiscal Year 1998
---- ---- ----
Net income (loss):
As reported $ 9,212,000 $ 7,927,000 $ 474,000
Pro forma $ 5,888,000 $ 5,215,000 $ (814,000)
Earnings (loss) per share - Basic:
As reported $ 0.77 $ 0.66 $ 0.04
Pro forma $ 0.49 $ 0.44 $ (0.07)
Earnings (loss) per common share assuming dilution:
Net income (loss):
As reported $ 9,212,000 $ 7,927,000 $ 474,000
Pro forma $ 5,888,000 $ 5,215,000 $ (814,000)
Earnings (loss) per share - Diluted:
As reported $ 0.74 $ 0.63 $ 0.04
Pro forma $ 0.48 $ 0.43 $ (0.07)
Under the provisions of SFAS No. 123, pro forma 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.
Because the method of accounting prescribed SFAS No. 123 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
2000 1999 1998
---- ---- ----
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 56.0% 54.3% 35.0%
Risk free interest rate 4.95% 6.76% 5.05% - 5.77%
Expected life of options 7.7 years 7.0 years 7.5 - 8.5 years
Weighted-average fair value per share
of options granted during the year $ 11.15 $ 9.82 $ 6.84
36
39
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 2000, 1999
and 1998:
Fiscal Year 2000 Fiscal Year 1999 Fiscal Year 1998
---------------- ---------------- ----------------
Number of Weighted Number of Weighted Number of Weighted
Shares Average Shares Average Shares Average
Exercise Exercise Exercise
Price Price Price
------------------------- ------------------------ ------------------------
Outstanding at beginning of
period 1,740,413 $12.00 2,004,890 $ 10.44 2,153,842 $ 6.56
Granted 320,826 17.26 223,405 15.45 571,337 19.12
Exercised (254,708) 10.10 (421,693) 5.95 (669,717) 5.71
Canceled (42,876) 12.47 (66,189) 14.95 (50,572) 5.71
--------- ------ --------- ----- --------- ------
Outstanding at end of period 1,763,655 $13.22 1,740,413 $12.00 2,004,890 $ 10.44
Exercisable 974,680 $10.05 1,051,634 $ 8.98 1,322,495 $ 7.15
In addition to the above plans, the Company issued options to purchase 30,120
shares of Common Stock in connection with an acquisition in Fiscal Year 1998,
which are excluded from the above figures, which 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
options to purchase 32,500 shares of CFAM Common Stock during 1996 to its
vice-chairman in exchange for consulting services, which were valued using the
Black-Scholes option pricing model and compensation expense was recorded. These
options were exercised in Fiscal Year 1998. During 1995, CFAM also issued
options to purchase 325,000 shares of CFAM Common Stock to an employee and
former stockholder of RCCM, which 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.
STOCK PURCHASE WARRANTS
Prior to 1994, CFAM issued stock purchase warrants for the purchase of CFAM
Common Stock to a stockholder. Warrants outstanding for the purchase of 26,000
shares of CFAM Common Stock, which had an average exercise price of $6.15, were
exercised in Fiscal Year 1998.
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, 2000 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. OTHER CHARGES IN THE STATEMENTS OF INCOME
In Fiscal Year 2000 the Company recognized an expense of $704,000 ($412,000
after tax) in connection with a writedown in the value of certain equity
investments made by the Company.
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40
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.
11. EARNINGS PER SHARE
The following tables present information necessary to calculate earnings per
share for Fiscal Years 2000, 1999 and 1998:
Fiscal Year 2000
Income (Numerator) Shares (Denominator) Per Share
Amount
Basic earnings per share
Income available to common stockholders $ 9,212,000 11,895,000 $ .77
=====
Effect of dilutive securities
Options -- 627,000
----------- ----------
Diluted earnings per share $ 9,212,000 12,522,000 $ .74
=========== ========== =====
Fiscal Year 1999
Income (Numerator) Shares (Denominator) Per Share
Amount
Basic earnings per share
Income available to common stockholders $ 7,927,000 11,945,000 $ .66
=====
Effect of dilutive securities
Options -- 641,000
------------ ----------
Diluted earnings per share $ 7,927,000 12,586,000 $ .63
=========== ========== =====
Fiscal Year 1998
Income (Numerator) Shares (Denominator) Per Share
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
========= ========== =====
The above earnings per share on a diluted basis has been prepared in accordance
with SFAS No. 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 2000, 1999 and 1998 the weighted average number
of stock options excluded from the above calculation of earnings per share was
272,621, 322,721 and 1,449, respectively, as they were anti-dilutive.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various office equipment, automobiles, family center
facilities and office space 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 $9.9 million, $8.8 million and $7.6 million in Fiscal
Years 2000, 1999, and 1998, respectively. Future minimum payments under
non-cancelable operating leases are as follows:
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Year Ending
2001 11,832,000
2002 10,823,000
2003 10,080,000
2004 9,350,000
2005 8,357,000
Thereafter 42,455,000
----------
$ 92,897,000
============
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 two of its executive officers. The
agreements provide for payment of 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 agreements for the two executives expire in 2003. The
Company has an employment agreement with an additional executive that provides
for one years annual salary up the termination of employment without cause or
resignation for good reason as set forth in the agreement. The maximum amount
payable under these contracts in 2000 was approximately $1.1 million.
The Company also has severance agreements with five 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 2000 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.
13. 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
$946,000, $674,000, and $596,000 in Fiscal Years 2000, 1999 and 1998,
respectively.
14. 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 $295,000, $274,000 and $301,000, respectively,
for Fiscal Years 2000, 1999 and 1998.
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15. STATEMENT OF CASH FLOW INFORMATION
The following table presents supplemental disclosure of cash flow information
for Fiscal Years 2000, 1999 and 1998:
Fiscal Year Fiscal Year Fiscal Year
2000 1999 1998
---- ---- ----
Supplemental cash flow information
Cash payments of interest $ 208,000 $60,000 $ 69,000
Cash payments of income taxes 8,032,000 1,611,000 3,954,000
Non cash operating activities:
Compensation expense recognized in connection with
the issuance of options 71,000 22,000 --
Non cash investing and financing activities:
Issuance of options in connection with acquisition 28,000 -- 375,000
Tax benefit realized from the exercise of stock
options 1,088,000 2,927,000 2,554,000
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.
In conjunction with the purchase of child care management companies, as
discussed in Note 2, the fair value of assets acquired are as follows:
Fiscal Year Fiscal Year Fiscal Year
2000 1999 1998
---- ---- ----
Cash paid $ 8,167,000 $ 1,964,000 $ 3,615,000
Issuance of common stock and
stock options 28,000 -- 375,000
Issuance of notes payable 1,109,000 550,000 --
Liabilities assumed 3,373,000 80,000 734,000
--------- --------- ---------
Fair value of assets acquired $ 12,677,000 $ 2,594,000 $ 4,724,000
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the Fiscal Years 2000 and 1999 are summarized as
follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands except per share data)
FISCAL YEAR 2000:
Revenue $ 66,622 $ 72,066 $ 74,504 $ 77,951
Operating income 3,877 4,234 3,843 4,492
Income before taxes 3,952 4,283 3,881 3,656
Net income 2,312 2,499 2,260 2,141
Net income available to
common stockholders 2,312 2,499 2,260 2,141
Basic earnings per share $ 0.20 $ 0.21 $ 0.19 $ 0.18
Diluted earnings per share $ 0.19 $ 0.20 $ 0.18 $ 0.17
40
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First Second Third Fourth
Quarter Quarter Quarter Quarter
FISCAL YEAR 1999: ------- ------- ------- -------
(in thousands except per share data)
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
41
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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 "Proposal I - Election of Directors" appearing in the
Company's proxy statement for the annual meeting of stockholders to be held on
May 23, 2001 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 23, 2001 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 23, 2001 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 23, 2001 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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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 Accountants (included 24
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
Not applicable
(c) Exhibits
Refer to Item 14(a)(3) above.
(d) Not applicable
43
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BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts
Balance at Additions
beginning of charged to costs Deductions- Balance at end
period and expenses charge offs of period
------ ------------ ----------- --------------
Fiscal Year 2000 $1,290,000 $719,000 $532,000 $1,477,000
Fiscal Year 1999 $709,000 $825,000 $244,000 $1,290,000
Fiscal Year 1998 $579,000 $375,000 $245,000 $ 709,000
Accrued merger costs
Balance at Additions
beginning of charged to costs Deductions- Balance at end
period and expenses charge offs of period
------ ------------ ----------- --------------
Fiscal Year 2000 $ 345,000 $ -- $ 345,000 $ --
Fiscal Year 1999 $2,201,000 $ -- $1,856,000 $ 345,000
Fiscal Year 1998 $ -- $7,500,000 $5,299,000 $ 2,201,000
44
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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 28, 2001 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 28, 2001
- ------------------------------------
Roger H. Brown (Principal Executive Officer)
/s/ Linda A. Mason Co-Chairman of the Board March 28, 2001
- ------------------------------------
Linda A. Mason
/s/ Marguerite W. Sallee Co-Chairman of the Board March 28, 2001
- ------------------------------------
Marguerite W. Sallee
/s/ Elizabeth J. Boland Chief Financial Officer (Principal March 28, 2001
- ------------------------------------
Elizabeth J. Boland Financial and Accounting Officer)
/s/ Joshua Bekenstein Director March 28, 2001
- ------------------------------------
Joshua Bekenstein
/s/ JoAnne Brandes Director March 28, 2001
- ------------------------------------
JoAnne Brandes
/s/ William H. Donaldson Director March 28, 2001
- ------------------------------------
William H. Donaldson
/s/ E. Townes Duncan Director March 28, 2001
- ------------------------------------
E. Townes Duncan
/s/ Fred K. Foulkes Director March 28, 2001
- ------------------------------------
Fred K. Foulkes
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/s/ Sara Lawrence-Lightfoot Director March 28, 2001
- ------------------------------------
Sara Lawrence-Lightfoot
/s/ Robert D. Lurie Director March 28, 2001
- ------------------------------------
Robert D. Lurie
/s/ Ian M. Rolland Director March 28, 2001
- ------------------------------------
Ian M. Rolland
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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
(Incorporated by reference to Exhibit 10.5 of the Annual Report on Form
10-K filed on March 29, 2000)
10.6* Employment Agreement of Roger H. Brown
10.7 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))
10.8 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))
10.9 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))
10.10* Severance Agreement for Melanie Ray
10.11* Severance Agreement for Michael Day
10.12* Form of Indemnification Agreement
10.13 Credit Agreement, dated as of March 30, 2000, among Bright Horizons
Family Solutions, Inc. as Borrower, the Lenders party thereto, and
Fleet National Bank, as Agent for the Lenders (certain schedules and
exhibits to this document are omitted from this filing, and the
Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the SEC upon request) (Incorporated by Reference
to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed on May 12,
2000)
10.14 Revolving Credit Note, dated March 30, 2000, payable to the Bank of
America, N.A. in the principal amount of $15,000,000 (Incorporated by
Reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q filed on
May 12, 2000)
10.15 Revolving Credit Note, dated March 30, 2000, payable to the Fleet
National Bank in the principal amount of $25,000,000 (Incorporated by
Reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed on
May 12, 2000)
23.1 Consent of Arthur Andersen LLP
- -----------------------
* Incorporated by Reference to the Registration Statement on Form S-4
filed on June 17, 1998 (Registration No. 333-57035).
47