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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 year ended December 31, 2001
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
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 15, 2002, there were outstanding 12,318,176 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, 2002) was approximately $346,218,908.
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, 2002 are incorporated by reference into
Items 10, 11, 12 and 13.
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...........................................24
Item 8. Financial Statements and Supplementary Data..........................................................25
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, Financial Statement Schedules, and Reports on Form 8-K.....................................43
Signatures.......................................................................................................45
Index to Exhibits................................................................................................47
PART I
ITEM 1. BUSINESS
OVERVIEW
Bright Horizons Family Solutions, Inc. (the "Company" or "Bright Horizons Family
Solutions") is a leading provider of workplace services for employers and
families, including child care, early education and strategic work/life
consulting. The Company operates 390 child care and early education centers for
over 325 clients and has the capacity to serve more than 48,000 children in 36
states and the District of Columbia, Canada, Guam, Ireland and the United
Kingdom. The child care and early education 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 child care and early education 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 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 fifth
grade), and other family support services.
Bright Horizons Family Solutions serves many of the nation's leading
corporations, including 82 Fortune 500 companies. In addition, 48 of Working
Mother magazine's "Top 100 Companies for Working Mothers" in 2001 are clients of
Bright Horizons Family Solutions. The Company's clients include many of
America's best known companies, such as Abbott Laboratories, Inc., Bank of
America, Bayer Pharmaceuticals, The Boeing Company, Bristol Myers Squibb,
Citigroup, Eli Lilly and Company, Glaxo SmithKline PLC, Johnson & Johnson, JP
Morgan Chase, Merck & Co., Inc., MBNA Corporation, Motorola, Pfizer, Inc., SAS
Institute, S.C. Johnson & Son, Inc., Staples, Inc., Timberland, Time Warner,
Inc., Universal Studios, Inc and Wachovia Corp. The Company also provides
services for well known institutions such as Johns Hopkins University, the
International Monetary Fund, the PGA Tour, and the United Nations. Bright
Horizons Family Solutions operates multiple centers for 33 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
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operation to the work schedule of the sponsor. Work-site child care and early
education centers allow parents to spend more time with their 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 390 child care and early education centers
285 were eligible for accreditation, of which 224 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 child care and early education centers
exceeding the NAEYC recommended minimum ratios. By contrast,
many 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 child care and
early education 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 child care and early education 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
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Company has developed "The World at Their Fingertips," a
comprehensive program that includes Language Works, Math
Counts, Science Rocks, Our World, and ArtSmart; the goals of
which are to prepare children for academic excellence and
build the foundations for success in life, while providing a
rich and rewarding childhood. 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. Themes and directions
emerge from the interests and experiences of the children,
families, and teachers, which are incorporated into the
children's learning. 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 help develop the
problem-solving, language and social skills necessary for
academic excellence. The development of language, mathematical
reasoning, and scientific thought are emphasized throughout
all the learning centers. The Company uses learning centers,
outdoor environments, projects, activities, and field trips,
all of which are designed to allow children to independently
explore, discover, and learn through their experiences. The
"World at Their Fingertips" seeks to involve parents in the
developmental process by documenting a child's progress and
sharing in goal setting. 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 child care and early education centers are generally
custom-built and designed to be state of the art facilities
that serve the children, families and teachers, and create a
community of caring. Typical center design incorporates
natural light, openness and direct access from the child care
and early education 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, Las Vegas, Los Angeles, Nashville, New York, Newark,
Philadelphia, Raleigh/Durham, San Diego, San Francisco, Seattle, St. Louis,
Tampa/St. Petersburg, Washington, D.C., 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 has
been renamed 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,
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are an important recruitment and retention tool for Bright Horizons Family
Solutions in the relatively low-paying child care industry.
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, resources,
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 child care and early education 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 child care and early education center. The Company operates 138
child care and early education centers at multiple sites for 33 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 child care and early education centers across the country.
Pursue Strategic Acquisitions. Bright Horizons Family Solutions seeks to acquire
existing 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 the Company's participating child
care and early education centers.
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At December 31, 2001, the Company had over 50 child care and early education
centers under development and scheduled to open over the next 12 to 24 months,
including 25 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 child care and early education
center on or near the 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 child care and early education center under a
cost-plus agreement with a corporate sponsor.
The Sponsor Model. Centers operating under the sponsor model currently represent
approximately 58% of Bright Horizons Family Solutions' child care and early
education centers. The Company typically designs and operates a work-site child
care and early education 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
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 facilities or 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 care
and early education centers with few ongoing operating
restrictions or reporting requirements.
The Management Model. Child care and early education centers operating under
management model contracts currently represent approximately 42% of Bright
Horizons Family Solutions' child care and early education centers. Under the
management model, the Company receives a management fee from a corporate sponsor
and an operating subsidy to supplement tuition received from parents 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.
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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 eleven operational divisions,
largely along geographic lines. Each division is managed by a Divisional Vice
President, and is further divided into regions. Each region is 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 child care and early education 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 2001, average
full-time monthly tuition was approximately $1,030 for infants, $940 for
toddlers and $755 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 or through
automated clearing house ("ACH") withdrawals.
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 child care and
early education center is approximately 10,000 to 15,000 square feet, and has a
capacity for approximately 120-150 children. As of December 31, 2001, the
Company's centers had a total licensed capacity of approximately 48,300
children, with the smallest having a capacity of 6 children and the largest
having a capacity of over 460 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 child care and early education
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
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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 390 child care and early education 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, 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 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 child care and early education 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
7
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, 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, 2001, Bright Horizons Family Solutions employed approximately
13,300 employees (including part-time and substitute teachers), of whom
approximately 305 were employed at the Company's corporate, divisional and
regional offices and the remainder were employed at the Company's child care and
early education 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
Childcare 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 center's compliance with such regulations. Repeated failures by
a center to comply with applicable regulations can subject it to sanctions,
which can include fines, corrective orders, being placed on probation or, in
more serious cases, suspension or revocation of the center's license to operate,
and could require significant expenditures by the Company to bring its child
care and early education 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 child care and early education 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. In 2002,
the tax credit will range from 20% to 35% of qualifying child care expenses
which will be limited to $3,000 for one child and $6,000 for two or more
children in 2002, and therefore the maximum credits will range from $600 to
$1,050 for one child and $1,200 to $2,100 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,
professional liability, employment practices, directors' and officers' liability
and excess "umbrella"
8
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 and expand existing client relationships,
obtaining new client relationships, the expansion of services and programs
offered by the Company, the maintenance of high quality services and programs,
and the hiring and training of qualified 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, quality of
service, results of operations and financial condition. Sustaining growth may
require the implementation of enhancements to operational and financial systems
and may 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
9
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 child care and early education 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 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 child care and
early education centers are sponsored by real estate developers offering on-site
child care as an amenity to attract tenants to their sites. Changes in the
supply and demand of real estate could adversely affect real estate developers'
willingness to subsidize child care operations at new or existing developments
or their ability to obtain financing for developments offering
developer-sponsored child care services. Should the economy weaken further or
experience a protracted delay in its recovery, corporate clients may reduce or
eliminate their expenditures on work and family services, and prospective
clients may not commit resources to such services. In addition, should the size
of an employer's workforce be reduced the Company may have a smaller base of
families it is able to offer its services to. The Company's revenues depend, in
part, on the number of dual income families and working single parents who
require child care services. The further 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, the dilutive effects of the issuance of the Company's common stock
("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, professional 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 or child care market
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
10
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 early education
centers have had difficulty obtaining general liability insurance, child abuse
liability insurance or similar liability insurance or have been able to obtain
such insurance only at substantially higher rates. Any adverse publicity
concerning reported incidents of child abuse at any child care centers, whether
or not directly relating to or involving the Company, could result in decreased
enrollment at the Company's centers, termination of existing corporate
relationships, inability to attract new corporate relationships or increased
insurance costs, any of which could have a material adverse effect on the
Company's business, results of operations, and financial condition.
Litigation. Because of the nature of its business, the Company is and expects
that in the future it may be subject to claims and litigation alleging
negligence, inadequate supervision and other grounds for liability arising from
injuries or other harm to the people it serves, primarily children. In addition,
claimants may seek damages from the Company for child abuse, sexual abuse and
other acts allegedly committed by Company employees. The Company has
occasionally been sued for claims relating to 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. Revenue in the Company's centers which have mature operating levels
typically declines during the third quarter as a result of decreased enrollments
in its child care and early education 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,
hiring practices and compliance with health and safety standards. Failure of a
center to comply with applicable regulations and requirements could 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 child care and early education 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. 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 child care and early
education centers, which would adversely affect the Company's business, results
of operations and financial condition. In addition, certain tax incentives have
been enacted for businesses providing child care to their employees. Any changes
to such incentives could effect a sponsor's willingness to continue or commence
providing child care services to its employees, which could 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
11
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 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, 45 - Executive Chairman of the Board. Mr. Brown has served as a
director of the Company since its inception in 1998 and has also served as
Executive Chairman of the Board since January 2002. Mr. Brown was Chief
Executive Officer of the Company from June 2000 to December 2001, and was
President of the Company from July 1998 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, and 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 NAEYC accreditation process. Mr.
Brown is the husband of Linda A. Mason.
Linda A. Mason, 47 - Chairman of the Board. Ms. Mason has served as a director
of the Company since its inception in 1998. Ms. Mason also served as Chairman of
the Board from July 1998 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, the Globe Newspaper Company, a
subsidiary of The New York Times Company which owns and publishes The Boston
Globe, and Whole Foods Market, Inc., an owner and operator of natural and
organic foods supermarkets. Ms. Mason is also 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.
David Lissy, 36 -- Chief Executive Officer. Mr. Lissy has served as a director
of the Company since November 2001 and has also served as Chief Executive
Officer of the Company since January 2002. Mr. Lissy served as Chief
12
Development Officer of the Company from 1998 until January 2002. He also served
as Executive Vice President from June 2000 to January 2002. Mr. Lissy joined
BRHZ as Vice President of Development in September 1997. Prior to joining
BRHZ, 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.
Mary Ann Tocio, 53 - President and Chief Operating Officer. Ms. Tocio has served
as a director of the Company since November 2001 and has also served as Chief
Operating Officer of the Company since its inception in 1998. Ms. Tocio 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.
Elizabeth J. Boland, 42 -- 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.
Stephen I. Dreier, 59 -- Chief Administrative Officer and Secretary. Mr. Dreier
has served as Chief Administrative Officer and Secretary of the Company since
the Merger. He joined BRHZ as Vice President and Chief Financial Officer in 1988
and became its Secretary in November 1988 and Treasurer in September 1994. Mr.
Dreier served as BRHZ's Chief Financial Officer and Treasurer until September
1997, at which time he was appointed to the position of Chief Administrative
Officer, a position which he held until the Merger. From 1976 to 1988, Mr.
Dreier was Senior Vice President of Finance and Administration for the John S.
Cheever/Paperama Company. Prior to that time, Mr. Dreier served as Manager of
Financial Control for the Westinghouse Worldwide Construction Product Group.
ITEM 2. PROPERTIES
As of December 31, 2001, Bright Horizons Family Solutions operated 390 centers
in 36 states and the District of Columbia, Canada, Guam, Ireland, and the United
Kingdom, of which twenty-four were owned and the remaining were operated under
leases or operating agreements. The Company's owned child care and early
education centers located in Chandler and Tempe, Arizona; San Jose, California;
Glastonbury and Orange, Connecticut; Tampa, Florida; Alpharetta, Georgia;
Foxborough and Quincy, Massachusetts; Fishkill and White Plains, New York; Cary,
Raleigh, and 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 feet 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 2003 to January 2007 on approximately 23,000 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 on approximately 10,000 square feet in Cambridge, Massachusetts that
expires in August 2002 that is subleased to a third party.
13
The following table summarizes the locations of Bright Horizons Family
Solutions' child care and early education centers as of December 31, 2001:
Alabama 1 Nevada 4
Arizona 4 New Hampshire 2
California 30 New Jersey 27
Colorado 1 New York 16
Connecticut 19 North Carolina 25
Delaware 7 Ohio 5
District of Columbia 7 Pennsylvania 13
Florida 25 Rhode Island 2
Georgia 12 South Carolina 2
Illinois 34 South Dakota 1
Indiana 8 Tennessee 7
Iowa 5 Texas 18
Kentucky 2 Utah 1
Louisiana 1 Virginia 5
Maine 4 Washington 14
Maryland 7 Wisconsin 7
Massachusetts 46 Canada 1
Michigan 4 Guam 3
Minnesota 1 Ireland 2
Missouri 4 United Kingdom 10
Nebraska 3
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 calendar year 2001.
14
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
2001 2000
---- ----
High Low High Low
Fourth Quarter 28.000 23.000 30.250 20.125
Third Quarter 31.700 22.200 30.000 19.500
Second Quarter 32.050 22.000 22.000 16.250
First Quarter 28.125 21.125 23.125 15.375
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, 2002 was 142, and does not
include those stockholders who hold shares in street name accounts.
15
ITEM 6. SELECTED FINANCIAL DATA
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:
2001 2000(1) 1999 1998(2) 1997
---- ------- ---- ------- ----
Statement of income data (in thousands except per share amounts):
Revenues $ 345,862 $ 291,143 $ 243,290 $ 209,372 $ 172,555
Income from operations 20,021 16,446 12,843 8,737 5,048
Income before taxes 19,936 15,772 13,558 2,447 5,004
Net income before preferred stock
dividends and accretion on
redeemable preferred stock 11,527 9,212 7,927 474 2,761
Net income available to common
stockholders 11,527 9,212 7,927 474 1,844
Diluted earnings per share $ 0.90 $ 0.74 $ 0.63 $ 0.04 $ 0.30
Weighted average diluted shares
outstanding 12,798 12,522 12,586 12,411 9,293
Financial position at year end (in thousands except per share amounts):
Working (deficit) capital $ (3,547) $ (6,265) $ 3,342 $ 12,040 $ 18,005
Total assets 161,018 136,895 107,073 91,463 76,842
Long-term debt, including current
maturities 890 581 687 685 783
Common stockholders' equity 89,417 75,283 62,286 53,380 46,663
Dividends per common share -- -- -- -- --
Operating data at year end
Child care and early education centers
managed 390 345 300 274 245
Licensed capacity 48,337 43,069 37,150 34,377 30,232
(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.
16
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, among other things, 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, 2001, the Company managed 390
child care and early education centers, with over 50 child care and early
education centers under development. The Company has the capacity to serve more
than 48,000 children in 36 states, the District of Columbia, Canada, Guam,
Ireland and the United Kingdom, and has partnerships with many of the nation's
leading employers, including 82 Fortune 500 companies and 48 of Working Mother
Magazine's "100 Best Companies for Working Mothers" in 2001. 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 in a transaction accounted for as a pooling of
interests and structured as a tax-free reorganization.
In 2000, the Company began operating in Europe through the acquisitions of
Nurseryworks Limited, based in London, England which operates nine child care
centers in the greater London area, and Circle of Friends, based in Ireland,
which operates two childcare centers. In 2001, the Company commenced operations
in Canada upon the opening of a child care and early education center in the
Toronto, Canada area. 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 child care and early education centers, and to a lesser extent,
other services including consulting services. Child care and early education
center revenues consist of parent fees for tuition, amounts paid by sponsors to
subsidize parent fees, and management fees paid by client sponsors. Revenue
growth has primarily resulted from the addition of new child care and early
education centers, as well as increased enrollment and tuition, and expanded
programs at existing 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 extent to which the sponsor wishes to subsidize parent fees, the quality
enhancements a sponsor wishes to make in the operations of the center, and
budgeted amounts. Management fees are generally fixed and payable monthly.
Although the specifics of the Company's sponsorship arrangements vary widely,
there are two basic forms, the sponsor model and the management model.
17
The Company employs the sponsor model in approximately 58% of its child care and
early education center sites. Under the sponsor model, a child care and early
education center is operated at or near the sponsor's work site. The Company
retains profit-and-loss responsibility for the operation of the center, and, as
part of the arrangement, may receive financial support from the sponsor. Sponsor
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.
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
child care and early education centers, as well as make similar expenditures to
refurbish and maintain existing centers. While sponsors generally provide for
the space or construction of the child care and early education 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.
Under the management model, which comprises approximately 42% of the Company's
operating sites, the Company operates a child care and early education center
under a cost-plus agreement. These contracts generally include a management fee
and require that the client provide an operating subsidy to supplement parent
fees or tuition within an agreed upon budget. The operating subsidies are
dependent on the tuition levels the sponsor chooses to set for its employees and
the cost structure associated with operating the center, including program
enhancements the sponsor wishes to make. Due to the financial commitment of the
client, the Company does not sustain pre-opening or initial operating losses
under the management model. To the extent that the costs of operating the center
vary from planned levels, the operating subsidies paid by client sponsors will
also vary; however, the Company generally earns a fixed return in management
model centers which is unaffected by the variations in operating subsidy. At
mature operating levels the management model centers generally experience
slightly lower operating margins than the sponsor model centers.
In centers operating under the management model, the sponsor typically provides
for all costs associated with building, fitting out, equipping, furnishing and
supplying the child care and early education center. The sponsor is also
typically responsible for ongoing occupancy and maintenance costs.
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 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 65%, which
typically occurs within 18 to 30 months of operation.
Cost of services expenses consist of direct expenses associated with the
operation of child care and early education centers and with the delivery of
consulting services. 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 center's
operating costs, and comprise approximately 80% of a center's operating
expenses. However, personnel costs will be proportionately larger in child care
and early education centers operating under the management model and
proportionally lower in child care and early education centers operating under
the sponsor model. Consulting cost of services are composed primarily of staff
salaries, taxes and benefits; contract labor; and other direct operating
expenses.
Selling, general and administrative expenses are composed primarily of salaries,
taxes and benefits for non-center personnel, including corporate, regional and
business development personnel; accounting and legal fees;
18
information technology; occupancy costs for corporate and regional personnel and
other general corporate expenses.
Amortization expense is being recognized over the period benefited by certain
intangible assets, which include goodwill, non-compete agreements and contract
rights associated with acquisitions made by the Company.
New Centers. In 2001, the Company added 56 new child care and early education
centers, 24 of which are operating under the sponsor model and 32 of which are
operating under the management model. In the same period, the Company closed 11
centers that were either not meeting operating objectives or transitioned to
other service providers. The Company currently has over 50 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 table has been compiled from the Company's consolidated financial
statements and sets forth statement of income data as a percentage of revenue
for the years ended December 31, 2001, 2000, and 1999:
2001 2000 1999
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Cost of services 85.3 85.3 85.8
----- ----- -----
Gross profit 14.7 14.7 14.2
Selling, general and administrative 8.3 8.4 8.6
Amortization 0.6 0.7 0.3
----- ----- -----
Income from operations 5.8 5.6 5.3
Other charges -- (0.2) --
Net interest income -- -- 0.3
----- ----- -----
Income before income taxes 5.8 5.4 5.6
Income tax expense 2.5 2.2 2.3
----- ----- -----
Net income 3.3% 3.2 % 3.3%
===== ===== =====
Comparison of results for the year ended December 31, 2001 to the year ended
December 31, 2000
Revenue. Revenue increased $54.8 million, or 18.8%, to $345.9 million in 2001
from $291.1 million in 2000. At December 31, 2001, the Company operated 390
child care and early education centers, as compared with 345 at December
31, 2000, a net increase of 45 centers. Growth in revenues is primarily
attributable to the net addition of new child care and early education centers,
modest growth and the maturation in the existing base of child care and early
education centers, and tuition increases of approximately 4% to 6%.
19
Gross Profit. Gross profit increased $8.1 million, or 18.9%, to $50.8 million in
2001 from $42.7 million in 2000. Gross profit as a percentage of revenue
remained consistent with last year at 14.7% due primarily to stable performance
in the mature base of centers. In 2001, management model centers, which
contribute to the overall margin from their initial month of operations, offset
the losses incurred by new and ramping up employer-sponsored and
developer-sponsored centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4.2 million, or 17.3%, to $28.6 million in
2001 from $24.4 million in 2000. The decrease as a percentage of revenue to 8.3%
in 2001 from 8.4% in 2000 relates to a larger revenue base and increased
overhead efficiencies. The dollar increase is primarily attributable to
investments in regional management and operations personnel necessary to support
long-term growth, and to a lesser degree to additional investments in sales
personnel and finance and administrative support staff. In addition, selling,
general and administrative expenses associated with expansion in the United
Kingdom and Ireland represent a full year's costs in 2001 as compared to a
partial year's costs in 2000.
Income from Operations. Income from operations totaled $20.0 million in 2001, as
compared with income from operations of $16.4 million in 2000. Operating income
in 2001 increased by $3.6 million, or 21.7%, from 2000.
Net Interest (Expense) Income. Net interest expense in 2001 totaled $85,000 as
compared to net interest income of $30,000 in 2000. The increase in net interest
expense is attributable to lower levels of invested cash, lower average interest
rates and to interest paid on intermittent borrowings under the line of credit.
Income Tax Expense. The Company had an effective tax rate of 42.2% in 2001. In
2000 the effective tax rate was 41.6%. The increase in the effective rate is due
principally to losses in certain foreign subsidiaries where the Company is not
currently able to recognize a tax benefit. Management expects a modest decrease
in the effective rate for 2002 due to the effects of discontinuing the
amortization of non-deductible assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
and the achievement of profitable operating results in the foreign subsidiaries
by the end of 2002.
Comparison of results for the year ended December 31, 2000 to the year ended
December 31, 1999
Revenue. Revenue increased $47.8 million, or 19.7%, to $291.1 million in 2000
from $243.3 million in 1999. At December 31, 2000, the Company operated 345
child care and early education centers, as compared with 300 at December
31,1999, a net increase of 45 child care and early education centers. Growth in
revenues is primarily attributable to the net addition of new child care and
early education centers, maturation of existing child care and early education
centers, modest growth in the existing base of child care and early education
centers and tuition increases of approximately 4% to 6%.
Gross Profit. Gross profit increased $8.0 million, or 23.3%, to $42.7 million in
2000 from $34.7 million in 1999. The increase in gross profit as a percentage of
revenue, to 14.7% in 2000 from 14.2% in 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, 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 in
2000 from $20.9 million in 1999. The decrease as a percentage of revenue to 8.4%
in 2000 from 8.6% in 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 in 2000, as
compared with income from operations of $12.8 million in 1999. Operating income
in 2000 increased by $3.6 million, or 28.1%, from 1999.
20
Other Charges. In 1999 and 2000 the Company made equity investments in two
privately held companies associated with the child care and early education
industry. In the quarter ended December 31, 2000, the Company was notified that
one of the entities, which developed internet based educational and
entertainment content for children and families, was discontinuing further
program and content development until additional funding could be secured. The
Company was also notified in this period by the other entity in which the
Company held an equity investment that, due to contractions in business,
additional funding would be necessary to continue its operations. Based on the
outlook for additional funding for either of these companies, management
assessed that the potential for future recovery of these investments was not
likely. As a result, the Company recognized a charge of $704,000 ($412,000 after
tax) in connection with the impairment of these equity investments. In February
2001 the internet based company filed for bankruptcy, and in April 2001, the
assets of the other Company were liquidated and the Company officially abandoned
the stock.
Net Interest (Expense) Income. Net interest income in 2000 totaled $30,000 as
compared to $715,000 in 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 2000, and
41.5% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are from the ongoing operations of its
existing child care and early education 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 $3.5 million and $6.3 million at
December 31, 2001 and 2000, respectively.
Cash provided by operating activities was $31.1 million, $17.0 million and $15.2
million for years ended December 31, 2001, 2000 and 1999, respectively. The
increase of $14.1 million in cash provided by operating activities in 2001 was
primarily the result of an increase in net income before depreciation and
amortization of $4.6 million, as well as a smaller increase in accounts
receivable in 2001 as compared to 2000. In addition, accounts payable and
accrued expenses, due in large part to balances in accrued salary and benefits
at year-end, and workers compensation insurance, increased $7.8 million compared
to an increase of $3.5 million in 2000. Operating cash flow also increased as
the result of $5.3 million in deferred revenue in 2001 as compared to $3.2
million in 2000. The increase in cash provided by operating activities in 2000
from 1999 was primarily the result of an in increase in net income before
depreciation and amortization of $3.9 million, offset by an increase in accounts
receivable in 2000 as compared to 1999. Additionally, operating cash flow
increased as the result of $3.2 million in deferred revenue as compared to $2.0
million of deferred revenue in 1999, as well as an increase in accounts payable
and accrued expenses. Deferred revenue of $5.3 million, $3.2 million and $2.0
million in 2001, 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 was $22.2 million for the year ended December
31, 2001 compared to $28.3 and $20.4 million for the years ended December 31,
2000 and 1999, respectively. The decrease in 2001 was principally due to a
reduction of cash paid out for acquisitions, which totaled $1.2 million in 2001
compared to $8.2 million in 2000. Of the $21.0 million of fixed asset additions
in 2001, approximately $13.7 million relate to new child care and early
education centers; of the remainder, approximately $7.2 million relates to the
refurbishment and expansion of existing child care and early education centers,
with the balance expended for office expansion and investment in information
technology in corporate, regional and district offices. Management expects to
maintain, or increase slightly, the current level of center related fixed asset
spending through 2002.
Cash used in financing activities totaled $4.7 million for the year ended
December 31, 2001, compared to cash provided by financing activities of $7.2
million in 2000. In 2001, the Company made net payments of $5.2 million to its
lines of credit and $1.1 million in short-term debt payments. In the year ended
December 31, 1999
21
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 the years 2001, 2000 and 1999, the Company received $1.8, $2.6 and $5.1
million, respectively, in net proceeds from the issuance of Common Stock
associated with the exercise of stock options.
In 1999, the Board of Directors approved a plan to repurchase up to a total of
1,250,000 shares of the Company's Common Stock. At December 31, 2001 the Company
had repurchased 495,000 shares for a total of $7.1 million, all of which was
acquired in 1999. Share repurchases under the stock repurchase program may 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 its lines of
credit will be adequate to meet planned operating and capital expenditure needs
for at least the next 12 months. The Company's existing $40.0 million line of
credit expires in June 2002, which management expects to renew on similar terms.
However, if the Company is unable to renew the facility, or were to make any
significant acquisition(s) or investments in the purchase of facilities for new
or existing child care and early education 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.
CRITICAL ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States. The preparation
of these statements requires management to make certain estimates, judgments and
assumptions, which affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expenses in the periods presented. The application of the Company's accounting
policies involves the exercise of judgment and assumptions that pertain to
future uncertainties and as a result, actual results could differ from these
estimates. The accounting policies we believe are critical in the preparation of
the Company's consolidated financial statements relate to revenue recognition,
accounts receivable, goodwill and other intangibles, liability for insurance
obligations and income taxes.
Revenue Recognition. The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin 101, which requires that four basic criteria be met before
recognizing revenue: persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the fee is fixed and determinable, and
collectibility is reasonably assured. 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 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. Revenue is recognized as services
are performed. In some instances the Company receives revenue in advance of
services being rendered, which is deferred until the services have been
provided.
Accounts Receivable. The Company generates accounts receivable from fees charged
to parents and client sponsors, and to a lesser degree governmental agencies.
The Company monitors collections and payments from these customers and maintains
a provision for estimated losses based on historical trends, in addition to
amounts established for specific customer collection issues that have been
identified. Amounts charged to this provision for uncollectible accounts
receivable have historically been within the Company's expectations, but there
can be no assurance that future experience will be consistent with the Company's
past experience.
22
Goodwill and Intangibles. Accounting for acquisitions requires management to
make estimates related to the fair value of assets and liabilities acquired,
including intangible assets, with any residual balance being allocated to
goodwill. Accounting for intangible assets requires management to make
assessments concerning the value of these intangible assets and whether events
or circumstances indicate that these assets been impaired. On January 1, 2002
the Company will be required to adopt the provisions of have Statement of
Financial Accounting Standards ("SFAS") No. 141, "Accounting for Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" which,
among other things, require the Company to discontinue the amortization of
goodwill as well as intangible assets with indefinite lives. In lieu of
recording amortization of intangible assets the Company will be required to
complete an initial review of goodwill and intangible assets for impairment in
2002, and annually thereafter. Should it be determined that any of these assets
have been impaired, the Company would be required to record an impairment
charge. The Company does not expect to record an impairment charge in 2002,
however, there can be no assurance that such a charge will not be recorded in
2002 or in future periods.
Liability for Insurance Obligations. The Company self-insures a portion of its
workers compensation and medical insurance plans. Due to the nature of these
liabilities, which may not fully manifest themselves for several years, the
Company estimates the obligations for liabilities incurred but not yet reported
or paid based on available data and experience. While management believes that
the amounts accrued for these obligations is sufficient, any significant
increase in the number of claims and costs associated with claims made under
these plans could have a material adverse effect on the Company's financial
position or results of operations.
Income Taxes. Accounting for income taxes requires management to estimate its
income taxes in each jurisdiction in which it operates. Due to differences in
the recognition of items included in income for accounting and tax purposes for
items such as deferred revenue, temporary differences arise which are recorded
as deferred tax assets or liabilities. The Company estimates the likelihood of
recovery of these assets, which is dependent on future levels of profitability
and enacted tax rates. Should any amounts be determined not to be recoverable,
or assumptions change, the Company would be required to take a charge, which
could have a material effect on the Company's financial position or results of
operations.
NEW PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Accounting for Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." These statements will modify accounting for business
combinations after September 30, 2001 and will affect the Company's treatment of
goodwill and other intangible assets at the start of the year 2002, and for
acquisitions consummated after June 30, 2001. The statements require that
goodwill existing at the date of adoption be reviewed for possible impairment
and that impairment tests be periodically repeated, with impaired assets written
down to fair value. Additionally, existing goodwill and intangible assets must
be assessed and classified with the statement's criteria. Intangible assets with
estimated useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indeterminable lives will
cease. Although the Company has not yet determined the full impact of these
statements on reported results, amortization expense on amortizable intangible
assets is expected to be approximately $250,000 to $400,000 in 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. This statement does
not apply to obligations that arise solely from a plan to dispose of a
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The Company does not expect the
adoption of this statement to have a material impact on its results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset, or distributed to owners in a spin-off be considered held and
used until it is disposed of. The changes in this statement require that one
accounting model be used for long-lived assets to be disposed of by sale,
23
whether previously held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal transactions.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years, with early application encouraged. The provisions of this
statement generally are to be applied prospectively. The Company does not expect
the adoption of this statement to have a material impact on its results of
operations.
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 Canada, Ireland, and the United Kingdom. The Company does not
currently use financial derivative instruments to hedge foreign currency
exchange rate risks associated with its foreign subsidiaries.
The assets and liabilities of the Company's Canadian, Irish and United Kingdom
subsidiaries, whose functional currencies are the Canadian dollar, Irish pound
and British 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 the
cumulative translation adjustment in stockholders' equity. Management estimates
that had the exchange rate in each country had a devaluation of 10% relative to
the U.S. dollar, the Company's consolidated earnings before taxes would have
decreased by approximately $36,000.
Interest Rate Risk. As of December 31, 2001, the Company's investment portfolio
primarily 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 $9.7 million at year end, have an average interest rate of
approximately 2.6% and are subject to interest rate risk. As a result of 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 in these investments and its other interest bearing accounts
decreased by 100 basis points in 2001, the Company's interest income for the
year ended December 31, 2001 would have decreased by approximately $100,000.
This estimate assumes that the decrease would have occurred on the first day of
2001 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 2001, the Company's interest expense for the year ended December 31,
2001 would have increased by approximately $10,000. This estimate assumes that
the increase would have occurred on the first day of borrowings and increased
the rate charged by 100 basis points during the term of the borrowing.
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."
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of 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, 2001 and 2000
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. 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, 2001 and 2000 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 11, 2002
25
Bright Horizons Family Solutions, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
2001 2000
--------- ---------
Assets
Current Assets:
Cash and cash equivalents $ 12,770 $ 8,599
Accounts receivable, net of allowance for doubtful
accounts of $1,512 and $1,477, respectively 26,738 23,945
Prepaid expenses and other current assets 3,994 3,508
Current deferred tax asset 7,743 5,297
--------- ---------
Total current assets 51,245 41,349
Fixed assets, net 77,761 64,433
Goodwill and other intangibles, net 24,375 24,256
Noncurrent deferred tax asset 7,057 6,151
Other assets 580 706
--------- ---------
Total assets $ 161,018 $ 136,895
========= =========
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 251 156
Accounts payable and accrued expenses 36,154 28,007
Deferred revenue, current portion 15,045 10,720
Income taxes payable 1,553 540
Other current liabilities 1,789 1,872
--------- ---------
Total current liabilities 54,792 47,614
Long-term debt and obligations due under capital
leases, net of current portion 639 425
Accrued rent 1,816 1,744
Other long-term liabilities 4,570 3,358
Deferred revenue, net of current portion 9,784 8,471
--------- ---------
Total liabilities 71,601 61,612
--------- ---------
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock, $0.01 par value
Authorized: 30,000,000 shares
Issued: 12,769,000 and 12,564,000 shares at
December 31, 2001 and 2000, respectively
Outstanding: 12,274,000 and 12,069,000 shares at
December 31, 2001 and 2000, respectively 128 126
Additional paid-in capital 82,132 79,398
Treasury stock, 495,000 shares at cost (7,081) (7,081)
Cumulative translation adjustment (104) 25
Retained earnings 14,342 2,815
--------- ---------
Total stockholders' equity 89,417 75,283
--------- ---------
Total liabilities and stockholders' equity $ 161,018 $ 136,895
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
26
Bright Horizons Family Solutions, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
Year ended December 31:
--------------------------------------------
2001 2000 1999
--------- --------- --------
Revenues $ 345,862 $ 291,143 $243,290
Cost of services 295,027 248,405 208,631
--------- --------- --------
Gross Profit 50,835 42,738 34,659
Selling, general and administrative 28,601 24,388 20,903
Amortization 2,213 1,904 913
--------- --------- --------
Income from operations 20,021 16,446 12,843
Other charges -- (704) --
Net interest (expense) income (85) 30 715
--------- --------- --------
Income before taxes 19,936 15,772 13,558
Income tax expense 8,409 6,560 5,631
--------- --------- --------
Net income $ 11,527 $ 9,212 $ 7,927
========= ========= ========
Earnings per share - basic $ 0.95 $ 0.77 $ 0.66
==-====== ========= ========
Weighted average number of common shares - basic 12,189 11,895 11,945
========= ========= ========
Earnings per share - diluted $ 0.90 $ 0.74 $ 0.63
========= ========= ========
Weighted average number of common and common equivalent
shares - diluted 12,798 12,522 12,586
========= ========= ========
The accompanying notes are an integral part of the consolidated
financial statements.
27
Bright Horizons Family Solutions, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(in thousands)
Compre-
Common Stock Additional Treasury Cumulative Retained Total hensive
Paid In Stock Translation Earnings Stockholders Income
Shares Amount Capital Adjustment (Deficit) Equity
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 31, 1999 7,927
------ ------ -------- ------- ----- --------- ------- =======
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 31, 2000 9,237
------ ------ ------ ------- ----- -------- ------ =======
Balance at December 31, 2000 12,069 126 79,398 (7,081) 25 2,815 75,283
Exercise of stock options 205 2 1,800 -- -- -- 1,802
Options issued in connection
with an acquisition -- -- 12 -- -- -- 12
Stock-based compensation -- -- 17 -- -- -- 17
Tax benefit from the exercise
of stock options -- -- 905 -- -- -- 905
Translation adjustment -- -- -- -- (129) -- (129) (129)
Net income -- -- -- -- -- 11,527 11,527 11,527
------ ------ -------- ------- ----- --------- ------- -------
Comprehensive net income for
the year ended December 31, 2001 $11,398
Balance at December 31, 2001 12,274 $ 128 $82,132 $(7,081) $(104) $14,342 $89,417
====== ====== ======= ======= ===== ======== =======
The accompanying notes are an integral part of the
consolidated financial statements.
28
Bright Horizons Family Solutions, Inc
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31:
------------------------------------------
2001 2000 1999
-------- -------- --------
Net income $ 11,527 $ 9,212 $ 7,927
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,781 7,525 4,912
Non-cash expenses 17 71 22
Asset write-downs and loss on disposal of fixed assets 167 718 208
Deferred income taxes (2,447) (2,290) (1,914)
Changes in assets and liabilities:
Accounts receivable (2,777) (6,006) (4,474)
Income tax receivable -- -- 5,171
Prepaid expenses and other current assets (485) (825) (727)
Accounts payable and accrued expenses 7,800 3,520 1,348
Income taxes payable 1,013 851 780
Deferred revenue 5,277 3,236 1,964
Accrued rent 172 344 (160)
Other long-term assets 95 (212) 11
Other current and long-term liabilities 946 809 160
-------- -------- --------
Net cash provided by operating activities 31,086 16,953 15,228
-------- -------- --------
Cash flows from investing activities:
Additions to fixed assets, net of acquired amounts (21,005) (19,677) (18,059)
Proceeds from the disposal of fixed assets -- 21 25
Increase in other assets -- (503) (400)
Payments for acquisitions, net of cash acquired (1,162) (8,167) (1,964)
-------- -------- --------
Net cash used in investing activities (22,167) (28,326) (20,398)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock 1,802 2,573 5,111
Purchase of treasury stock -- -- (7,081)
Principal payments of long-term debt and obligations
under capital leases (237) (175) (547)
Principal payments of short-term debt (1,109) --
Borrowings under lines of credit 1,500 16,038 --
Payments under lines of credit (6,690) (11,226) --
-------- -------- --------
Net cash (used in) provided by financing activities (4,734) 7,210 (2,517)
-------- -------- --------
Effect of exchange rates on cash balances (14) 10 --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 4,171 (4,153) (7,687)
Cash and cash equivalents, beginning of period 8,599 12,752 20,439
-------- -------- --------
Cash and cash equivalents, end of period $ 12,770 $ 8,599 $ 12,752
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
29
Bright Horizons Family Solutions, Inc.
Notes To Consolidated Financial Statements
For the years ended December 31, 2001, 2000 and 1999
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, Canada, Guam,
Ireland and the United Kingdom.
The Company operates its child care and early education centers under various
types of arrangements, which generally can be classified in two forms: (i) the
sponsor model, where the Company operates a child care and early education
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 child care and early education center under a
cost-plus arrangement, typically for a single employer.
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 Ireland
and the United Kingdom, and in October 2001 the Company opened a center in
Ontario, Canada. The functional currency of the foreign operations is the local
currency. 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
accounting principles generally accepted in the United States 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. The primary estimates in the consolidated financial statements
include, but are not limited to, revenue recognition, accounts receivable,
goodwill and intangible assets, liability for insurance obligations, and income
taxes.
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 the line 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, 2001 or 2000, 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.
30
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 fees and tuitions,
employer-sponsor advances and cash received on consulting or development
projects 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 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 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 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 child care and early education 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
31
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 2001, the FASB issued SFAS No. 141, "Accounting for
Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." These statements modify accounting for business combinations after
September 30, 2001 and will affect the Company's treatment of goodwill and other
intangible assets at the start of the year 2002, and for acquisitions
consummated after June 30, 2001. The statements require that goodwill existing
at the date of adoption be reviewed for possible impairment and that impairment
tests be periodically repeated, with impaired assets written down to fair value.
Additionally, existing goodwill and intangible assets must be assessed and
classified with the statement's criteria. Intangible assets with estimated
useful lives will continue to be amortized over those periods. Amortization of
goodwill and intangible assets with indeterminable lives will be discontinued.
Although the Company has not yet determined the full impact of these statements
on reported results, amortization expense on existing goodwill and intangible
assets is expected to be approximately $250,000 to $400,000 in 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. This statement does
not apply to obligations that arise solely from a plan to dispose of a
long-lived asset. This statement shall be effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company does not
expect the adoption of this statement to have a material impact on its
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset, or distributed to owners in a spin-off be considered held and
used until it is disposed of. This statement requires that one accounting model
be used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and broads the presentation of discontinued
operations to include more disposal transactions. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years,
with early application encouraged. The provisions of this statement generally
are to be applied prospectively. The Company does not expect the adoption of
this statement to have a material impact on its operations.
32
2. ACQUISITIONS
In 2001, the Company acquired substantially all the assets of one single-site
and one multi-site child care company for aggregate consideration of
approximately $1.2 million in cash, the issuance of a note payable to a seller
totaling $550,000, and the assumption of liabilities of approximately $700,000.
The purchase prices have been allocated based on the estimated fair value of the
assets and liabilities acquired at the date of acquisition. Estimated goodwill
and other intangible assets totaling approximately $2.3 million have been
recorded. Based on the provisions of SFAS No. 142 requiring adoption for
acquisitions after July 1, 2001, goodwill and other intangible assets of
approximately $700,000 were not subject to amortization in 2001. Goodwill and
other intangible assets subject to amortization were amortized through
December 31, 2001, over periods not exceeding 18 years.
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 $3.2 million and the issuance of options to purchase 4,000 shares
of the Common Stock which were valued at approximately $40,000 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. Goodwill and other intangible assets totaling approximately
$10.3 million were recorded, and through December 31, 2001, amortized over
periods not exceeding 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 were recorded, and through December 31, 2001, amortized over
periods not exceeding 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. As of January 1, 2002 goodwill and intangible
assets with indefinite lives will no longer be amortized; other intangible
assets lives will be amortized over their useful lives.
3. FIXED ASSETS
Fixed assets consist of the following:
Estimated useful lives December 31, December 31,
(years) 2001 2000
---------------------- ------------ ------------
Buildings 20 - 40 $ 40,911,000 $ 31,699,000
Furniture and equipment 3 - 15 28,697,000 23,639,000
Leasehold improvements 3/life of lease 26,321,000 22,411,000
Land -- 8,413,000 5,923,000
------------ -------------
104,342,000 83,672,000
Less accumulated depreciation and amortization (26,581,000) (19,239,000)
------------ -------------
Fixed assets, net $ 77,761,000 $ 64,433,000
============ =============
Fixed assets include automobiles and office equipment held under capital leases
totaling $159,000 and $179,000 in 2001 and 2000, respectively. Depreciation
expense relating to fixed assets under capital leases was approximately $12,000
and $19,000 for 2001 and 2000, respectively. Accumulated depreciation relating
to fixed assets under capital leases totaled approximately $151,000 and $159,000
at December 31, 2001 and 2000, respectively.
33
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31, December 31,
2001 2000
------------ ------------
Goodwill, net of accumulated amortization of $6,905,000 and
$5,040,000, respectively $ 23,610,000 $ 23,361,000
Non-compete agreements and contract rights, net of accumulated
amortization of $3,443,000 and $3,261,000, respectively 761,000 884,000
Other intangibles, net of accumulated amortization of $33,000 and
$26,000, respectively 4,000 11,000
------------ ------------
$ 24,375,000 $ 24,256,000
============ ============
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, December 31,
2001 2000
------------ ------------
Accounts payable $ 1,448,000 $ 2,269,000
Accrued payroll and employee benefits 23,557,000 17,853,000
Accrued insurance 2,957,000 1,804,000
Accrued other expenses 8,192,000 6,081,000
------------ ------------
$ 36,154,000 $ 28,007,000
============ ============
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. 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, 2001 the Company did not have
any amounts outstanding, had $40.0 million available under the line of credit
and was in compliance with the covenants of the agreement. The weighted average
interest rate related to amounts outstanding in 2001 was 6.4%.
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.
34
7. LONG-TERM DEBT AND OBLIGATIONS DUE UNDER CAPITAL LEASES
Long-term debt consists of the following:
December 31, December 31,
2001 2000
------------ ------------
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 $ 180,000 240,000
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 150,000 200,000
Unsecured note payable to a corporation, with quarterly payments of
interest only at 5.00%; principal amounts of $34,375 are payable
quarterly, note matures in October 2005 516,000 --
Note payable to a state agency with monthly payments of approximately $800
including interest of 5.0%, with final payment due March 2007; secured
by related furniture, fixtures and equipment 44,000 50,000
Secured notes payable and obligations under capital leases, repaid in 2001 -- 91,000
--------- ---------
Total debt and obligations due under capital leases 890,000 581,000
Less current maturities (251,000) (156,000)
--------- ---------
Long-term debt and obligations due under capital leases $ 639,000 $ 425,000
========= =========
8. INCOME TAXES
Income tax expense for years ended December 31, 2001, 2000 and 1999 consisted of
the following:
2001 2000 1999
------------ ------------ ------------
Current tax expense $ 11,811,000 $ 8,446,000 $ 4,684,000
Benefit from the exercise of stock options 905,000 1,088,000 2,927,000
Deferred tax expense (4,307,000) (2,974,000) (1,980,000)
------------ ------------ ------------
Income tax expense, net $ 8,409,000 $ 6,560,000 $ 5,631,000
============ ============ ============
Following is a reconciliation of the U.S. Federal statutory rate to the
effective rate for the years ended December 31:
2001 2000 1999
------------ ------------ ------------
Federal tax computed at statutory rate $ 7,051,000 $ 5,526,000 $ 4,610,000
State taxes on income, net of federal tax benefit 1,058,000 847,000 775,000
Foreign taxes 27,000 -- --
Permanent differences and other 273,000 187,000 246,000
------------ ------------ ------------
Income tax expense, net $ 8,409,000 $ 6,560,000 $ 5,631,000
============ ============ ============
Deferred tax assets are as follows:
2001 2000 1999
------------ ------------ ------------
Net operating loss carryforwards $ 1,007,000 $ 1,335,000 $ 1,414,000
Reserve on assets 667,000 753,000 593,000
Liabilities not yet deductible 6,780,000 4,330,000 4,077,000
Deferred revenue 3,620,000 3,063,000 1,897,000
Depreciation 1,106,000 386,000 (207,000)
Amortization 1,067,000 1,078,000 1,013,000
Other 553,000 503,000 371,000
------------ ------------ ------------
$ 14,800,000 $ 11,448,000 $ 9,158,000
============ ============ ============
35
As of December 31, 2001 the Company has federal net operating loss carryforwards
of approximately $2.3 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, 2010. In addition, the
Company has net operating losses in a number of states totaling approximately
$3.6 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
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 the
terms of the 1998 Stock Incentive Plan, as amended in 2001, 2,250,000 shares of
the Company's Common Stock are available for distribution upon exercise. As of
December 31, 2001, there were approximately 825,000 shares of Common Stock
eligible for grant under the plan.
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, 2001:
Weighted
Options Average Weighted Options Weighted
Outstanding Remaining Average Exercisable Average
Range of at December 31, Contractual Exercise at December 31, Exercise
Exercise Price 2001 Life (years) Price 2001 Price
-------------- --------------- ------------ -------- --------------- --------
$ 0.0000 - $ 2.7640 19,386 2.4 $ 1.8841 18,422 $ 1.8467
$ 2.7641 - $ 5.5280 14,238 3.6 $ 3.3649 11,233 $ 3.3359
$ 5.5281 - $ 8.2920 541,909 4.6 $ 7.6748 531,530 $ 7.6836
$ 8.2921 - $11.0560 2,350 5.6 $10.0000 2,350 $10.0000
$11.0561 - $13.8200 28,754 5.8 $11.3000 28,754 $11.3000
$13.8201 - $16.5840 156,527 7.9 $14.9219 57,644 $14.9180
$16.5841 - $19.3480 671,199 7.3 $18.1071 267,909 $18.4217
$19.3481 - $22.1120 61,777 6.7 $21.2012 52,052 $21.0926
$22.1121 - $24.8760 449,450 9.6 $23.4450 5,425 $22.9839
$24.8761 - $27.6400 35,100 9.3 $26.9451 1,220 $25.7596
--------- --- -------- ------- --------
1,980,690 7.1 $16.0923 976,539 $11.8308
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.
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. There were no grants to the advisory board in 2001.
These options were valued at approximately $65,000 and $45,000, respectively,
using the Black-Scholes option pricing model. The Company recognized related
compensation expense of approximately $17,000, $71,000 and $22,000 in its
operating results for the years ended December 31, 2001, 2000 and 1999,
respectively. Certain options issued in connection with an acquisition in 2000
were granted with an exercise price less than the fair value of the Company's
common stock. These options were valued at approximately $40,000.
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 1995 through 2001 consistent with the provisions of SFAS No. 123, the
36
Company's net income and earnings per share would have been reduced to the
following pro forma amounts for years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Net income:
As reported $ 11,527,000 $ 9,212,000 $ 7,927,000
Pro forma $ 7,741,000 $ 5,888,000 $ 5,215,000
Earnings per share - Basic:
As reported $ 0.95 $ 0.77 $ 0.66
Pro forma $ 0.64 $ 0.49 $ 0.44
Earnings per share - Diluted:
As reported $ 0.90 $ 0.74 $ 0.63
Pro forma $ 0.62 $ 0.48 $ 0.43
Because the method of accounting prescribed by 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:
2001 2000 1999
---- ---- ----
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 47.1% 56.0% 54.3%
Risk free interest rate 5.32% 4.95% 6.76%
Expected life of options 7.3 years 7.7 years 7.0 years
Weighted-average fair value per share
of options granted during the year $13.66 $11.15 $9.82
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 the years ended December
31:
2001 2000 1999
--------------------- -------------------- --------------------
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 1,763,655 $13.22 1,740,413 $12.00 2,004,890 $10.44
Granted 475,075 23.67 320,826 17.26 223,405 15.45
Exercised (205,144) 8.77 (254,708) 10.10 (421,693) 5.95
Canceled (52,896) 16.75 (42,876) 12.47 (66,189) 14.95
--------- ------ --------- ------ --------- ------
Outstanding at end of period 1,980,690 $16.09 1,763,655 $13.22 1,740,413 $12.00
Exercisable 976,539 $11.83 974,680 $10.05 1,051,634 $ 8.98
In addition to the above plans, the Company issued options to purchase 30,120
shares of common stock in connection with an acquisition in 1998, which are
excluded from the above figures, which were exercised in 1998 and 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. During 1995, CFAM
issued options to purchase 325,000 shares of CFAM common stock to an employee
and former stockholder of an acquired entity, which were exercised in February
1999.
The Company realizes 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
37
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.
TREASURY STOCK
In 1999, the Company's Board of Directors approved a stock repurchase plan
authorizing the Company to repurchase up to 1,250,000 shares of its common stock
in the open market or through privately negotiated transactions. At December 31,
2001 the Company had repurchased 495,000 shares at a cost of $7.1 million, which
remain in the treasury, all of which were repurchased in 1999. The Company
carries the treasury shares at cost. Shares repurchased will be available for
reissuance under the Company's stock incentive plan as well as other appropriate
uses.
10. OTHER CHARGES IN THE STATEMENTS OF INCOME
In 1999 and 2000 the Company made equity investments in two privately held
companies associated with the child care and early education industry. In the
quarter ended December 31, 2000, the Company was notified that one of the
entities, which developed internet based educational and entertainment content
for children and families, was discontinuing further program and content
development until additional funding could be secured. The Company was also
notified in this period by the second entity, in which the Company held an
equity investment, that due to contractions in business, additional funding
would be necessary to continue its operations. Based on the outlook for
additional funding for these companies, management assessed that the potential
for future recovery of these investments as not likely. As a result, the Company
recognized a charge of $704,000 ($412,000 after tax) in connection with the
impairment of these equity investments. In February 2001 the internet based
company filed for bankruptcy, and in April 2001, the assets of the other Company
were liquidated and the Company officially abandoned the stock.
11. EARNINGS PER SHARE
The following tables present information necessary to calculate earnings per
share for the years ended 2001, 2000 and 1999:
Year Ended December 31, 2001
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic earnings per share
Income available to common stockholders $11,527,000 12,189,000 $ .95
=====
Effect of dilutive securities
Options -- 609,000
----------- ----------
Diluted earnings per share $11,527,000 12,798,000 $ .90
=========== ========== =====
Year Ended December 31, 2000
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) 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
=========== ========== =====
38
Year Ended December 31, 1999
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic earnings per share
Income available to common stockholders $ 7,927,000 11,945,000 $ .66
=====
Effect of dilutive securities
Options and warrants -- 641,000
----------- ----------
Diluted earnings per share $ 7,927,000 12,586,000 $ .63
=========== ========== =====
The above earnings per share on a diluted basis has been prepared in accordance
with SFAS No. 128. The weighted average number of stock options excluded from
the above calculation of earnings per share was 20,387 in 2001, 272,621 in 2000
and 322,721 in 1999, as they were anti-dilutive.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various office equipment, automobiles, child care and early
education 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 $12.3 million, $9.9 million and $8.8
million in the years 2001, 2000, and 1999, respectively. Future minimum payments
under non-cancelable operating leases are as follows:
Year Ending
2002 $ 13,055,000
2003 12,892,000
2004 12,213,000
2005 11,143,000
2006 10,378,000
Thereafter 47,066,000
-------------
$ 106,747,000
=============
Future minimum lease payments include approximately $1.4 million of lease
commitments which are guaranteed by third parties pursuant to operating
agreements for child care and early education 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
maximum amount payable under these agreements in 2001 was approximately $1.0
million.
The Company has severance agreements with two executives that provide for one
year's annual salary upon the termination of employment without cause or
resignation for good reason as set forth in the agreement and up to 24 months of
compensation upon the termination of employment following a change in control of
the Company. The Company also has severance agreements with three 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 2001 was approximately $2.2 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.
39
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 child care and early education 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 child
care and early education 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
$1,117,000, $946,000, and $674,000 in 2001, 2000 and 1999, 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 child care and early
education center. In return for its services under these agreements, the Company
received management fees and operating subsidies of $301,000, $295,000, and
$274,000, respectively, for 2001, 2000 and 1999.
15. STATEMENT OF CASH FLOW SUPPLEMENTAL INFORMATION
The following table presents supplemental disclosure of cash flow information
for years ended December 31:
2001 2000 1999
----- ---- ----
Supplemental cash flow information
Cash payments of interest $ 240,000 $ 208,000 $ 60,000
Cash payments of income taxes 9,968,000 8,032,000 1,611,000
Non cash operating activities:
Compensation expense recognized in connection with
the issuance of options 17,000 71,000 22,000
Non cash investing and financing activities:
Issuance of options in connection with acquisition 12,000 28,000 --
Tax benefit realized from the exercise of stock 905,000 1,088,000 2,927,000
options
In 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.
40
In conjunction with the purchase of child care management companies, as
discussed in Note 2, the fair value of assets acquired are as follows:
2001 2000 1999
---- ---- ----
Cash paid $ 1,162,000 $ 8,167,000 $ 1,964,000
Issuance of common stock and
stock options -- 40,000 --
Issuance of notes payable 550,000 1,109,000 550,000
Liabilities assumed 682,000 3,373,000 80,000
------------ ------------ ------------
Fair value of assets acquired $ 2,394,000 $ 12,689,000 $ 2,594,000
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 2001 and 2000 are
summarized as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands except per share data)
2001:
Revenue $ 81,736 $ 85,756 $ 87,173 $ 91,197
Operating income 4,870 5,100 4,823 5,228
Income before taxes 4,796 5,109 4,816 5,215
Net income 2,789 2,964 2,787 2,987
Net income available to
common stockholders 2,789 2,964 2,787 2,987
Basic earnings per share $ 0.23 $ 0.24 $ 0.23 $ 0.24
Diluted earnings per share $ 0.22 $ 0.23 $ 0.22 $ 0.23
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands except per share data)
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
41
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, 2002 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, 2002 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, 2002 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, 2002 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.
42
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
in Report in Part II, Item 8) 25
Schedule II - Valuation and Qualifying Accounts 44
(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
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 2001 $ 1,477,000 $ 933,000 $ 898,000 $ 1,512,000
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
Accrued merger costs
Balance at Additions
beginning of charged to costs Deductions- Balance at end
period and expenses charge offs of period
------------ ---------------- ----------- --------------
Fiscal Year 2001 $ -- $ -- $ -- $ --
Fiscal Year 2000 $ 345,000 $ -- $ 345,000 $ --
Fiscal Year 1999 $ 2,201,000 $ -- $ 1,856,000 $ 345,000
44
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.
April 1, 2002 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 Executive Chairman of the Board April 1, 2002
- ---------------------------
Roger H. Brown
/s/ Linda A. Mason Co-Chairman of the Board April 1, 2002
- ---------------------------
Linda A. Mason
/s/ David H. Lissy Director, Chief Executive Officer April 1, 2002
- --------------------------- (Principal Executive Officer)
David H. Lissy
/s/ Mary Ann Tocio Director, President and Chief April 1, 2002
- --------------------------- Operating Officer
Mary Ann Tocio
/s/ Elizabeth J. Boland Chief Financial Officer (Principal April 1, 2002
- --------------------------- Financial and Accounting Officer)
Elizabeth J. Boland
/s/ Joshua Bekenstein Director April 1, 2002
- ---------------------------
Joshua Bekenstein
/s/ JoAnne Brandes Director April 1, 2002
- ---------------------------
JoAnne Brandes
/s/ William H. Donaldson Director April 1, 2002
- ---------------------------
William H. Donaldson
/s/ E. Townes Duncan Director April 1, 2002
- ---------------------------
E. Townes Duncan
45
/s/ Fred K. Foulkes Director April 1, 2002
- ---------------------------
Fred K. Foulkes
/s/ Sara Lawrence-Lightfoot Director April 1, 2002
- ---------------------------
Sara Lawrence-Lightfoot
/s/ Robert D. Lurie Director April 1, 2002
- ---------------------------
Robert D. Lurie
/s/ Ian M. Rolland Director April 1, 2002
- ---------------------------
Ian M. Rolland
/s/ Marguerite W. Sallee Director April 1, 2002
- ---------------------------
Marguerite W. Sallee
46
INDEX OF EXHIBITS
2.1* Amended and Restated Agreement and Plan of Merger dated as of June 17,
1998 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 Amended and Restated 1998 Stock Incentive Plan (Incorporated by
Reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed on
November 14, 2001)
10.2* 1998 Employee Stock Purchase Plan
10.3* Employment Agreement of Linda A. Mason
10.4 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)
10.5* Employment Agreement of Roger H. Brown
10.6 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))
10.7 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))
10.8 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))
10.9 Severance Agreement for Mary Ann Tocio (Incorporated by Reference to
Exhibit 10.2 of the Quarterly Report on Form 10-Q filed on May 15,
2001)
10.10* Severance Agreement for Michael Day
10.11* Form of Indemnification Agreement
10.12 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)
10.13 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)
10.14 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
99.1 Letter of representation from Arthur Andersen
- -----------------------
* Incorporated by Reference to the Registration Statement on Form S-4
filed on June 17, 1998 (Registration No. 333-57035).
47