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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-24699
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1742957
- --------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
209 Tenth Avenue South, Suite 300
Nashville, TN 37203
and
One Kendall Square, Building 200
Cambridge, MA 02139
(Address of principal executive offices)
(615) 256-9915
(617) 577-8020
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
- --------------------------------------------------------------------------------
(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 19, 1999, there were outstanding 12,052,602 shares of the
registrant's common stock, $0.01 par value per share, which is the only class of
common or voting 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 19, 1999) was approximately $201,927,608.
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 20, 1999 are incorporated by
reference into Items 10, 11, 12 and 13.
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BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................................................1
Item 2. Properties...........................................................................................14
Item 3. Legal Proceedings....................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders..................................................15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................16
Item 6. Selected Financial Data..............................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........................................26
Item 8. Financial Statements and Supplementary Data..........................................................27
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.................48
PART III
Item 10. Directors and Executive Officers of the Registrant...................................................48
Item 11. Executive Compensation...............................................................................48
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................48
Item 13. Certain Relationships and Related Transactions.......................................................48
PART IV
Item 14. Exhibits and Reports on Form 8-K.....................................................................49
Signatures.......................................................................................................52
Index to Exhibits................................................................................................54
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PART I
ITEM 1. BUSINESS
OVERVIEW
Bright Horizons Family Solutions, Inc. (the "Company" or "Bright Horizons Family
Solutions") is the nation's leading provider of work-site child care, early
education, and work/life consulting services, operating 274 family centers for
over 220 clients. Bright Horizons Family Solutions has the capacity to serve
more than 34,000 children in 35 states and the District of Columbia. The family
center concept evolved from the more traditional workplace child care center and
is designed to serve a broader segment of the work-site population. Each family
center provides a number of services designed to meet the business objectives of
the corporate client and the family needs of the client's employees. The
Company's services are designed to (i) address employers' ever-changing
workplace needs, (ii) enhance employee productivity, (iii) improve recruitment
and retention of employees and (iv) help project the image as the employer of
choice within the employer's industry.
With the changing demographics of today's workforce and the prevalence of dual
career families, a growing number of corporations are creating family benefits
to attract and retain employees and support them as parents. Bright Horizons
Family Solutions provides family center based child care, education and
enrichment programs, backup care, before and after school care for school age
children, summer camps, vacation care, elementary school (kindergarten through
fourth grade), and other family support services. The Company partners with
sponsors to provide these services.
Bright Horizons Family Solutions serves many of the nation's leading
corporations, including 68 Fortune 500 companies. In addition, 44 of
WorkingMother magazine's "Top 100 Companies for Working Mothers" are clients of
Bright Horizons Family Solutions. The Company's clients include many of
America's best known companies, such as Allied Signal, Bank of America, Bayer
Pharmaceuticals, The Boeing Company, Campbell Soup Company, Columbia/HCA Health
Care Corporation, Eli Lilly and Company, First Union National Bank, Glaxo
Wellcome, Johnson & Johnson, Merck & Co., Inc., MBNA Corporation, Motorola, SAS
Institute, Time Warner, Inc. and Universal Studios, Inc. The Company also
provides services for well known institutions such as the United Nations, The
PGA Tour, John F. Kennedy Airport and Beth Israel Deaconess Medical Center.
Bright Horizons Family Solutions operates multiple centers for 20 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"). Under the terms of the Merger
Agreement, BRHZ and CFAM merged with subsidiaries of the Company, and are now
wholly owned subsidiaries of the Company. In the Merger, each share of BRHZ
common stock was converted into 1.15022 shares of the Company's common stock,
$0.01 par value per share (the "Common Stock"), and each share of CFAM common
stock was converted into one share of the Company's Common Stock. The merger has
been treated as a tax free reorganization, and accounted for as a pooling of
interests. Unless the context otherwise requires, references in this Annual
Report on Form 10-K to the Company or Bright Horizons Family Solutions for
periods prior to July 24, 1998 refer to one or both of the Company's
predecessors, BRHZ and CFAM, as appropriate.
BUSINESS STRATEGY
Bright Horizons Family Solutions has gained nationwide recognition as a quality
service provider and is well-positioned to serve corporate sponsors due to its
national scale, track record of serving major corporate sponsors, established
reputation, and position as a quality leader. The major elements of its business
strategy are the following:
Corporate Sponsorship. Corporate sponsorship enables Bright Horizons Family
Solutions to address simultaneously the three most important criteria used by
parents to evaluate and select a child care and early education provider:
quality of care, convenience and cost. By reducing the Company's start-up and
operating costs, corporate sponsorship enables the Company to concentrate its
investment in those areas that directly translate into
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high quality care, including faculty compensation, teacher-child ratios,
curricula, continuing faculty education, facilities and equipment. Bright
Horizons Family Solutions' corporate-sponsored work-site facilities are
conveniently located at or near the parents' place of employment, and generally
conform their hours of operation to the work schedule of the sponsor. Work-site
family centers allow parents to spend more time with their children, 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.
At December 31, 1998, 165 out of the Company's 274 family
centers were accredited by NAEYC.
- High Teacher-Child Ratios. High teacher-child ratios are a
critical factor in providing quality early education,
facilitating more focused care and enabling teachers to forge
relationships with children and their parents. Under Bright
Horizons Family Solutions' approach, each child has a teacher
who is designated as the child's primary caregiver. This
teacher is responsible for monitoring a child's developmental
progress and tailoring programs to meet the child's individual
needs, while engaging parents in establishing and achieving
goals. Bright Horizons Family Solutions is committed to
maintaining the NAEYC-recommended teacher-child ratios for all
age groups, with many family centers exceeding the NAEYC
recommended minimum ratios. By contrast, most center-based
child care providers conform only to the minimum teacher-child
ratios mandated by applicable governmental regulations, which
are generally less intensive than NAEYC standards and vary
widely from state to state.
- Highly Qualified Center Directors and Faculty. Bright Horizons
Family Solutions believes its faculty's education and
experience are exceptional when compared to other child care
organizations. Our typical center director has more than ten
years of child care experience and a college degree in an
education-related field, with many center directors holding
advanced degrees. 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. The Company has
developed a training program for its employees that
establishes minimum standards for its faculty. Teacher
training is conducted in each family center and includes
orientation and ongoing training, including training related
to child development and education, health, safety and
emergency procedures. Training is conducted on a regular basis
at each family center and in company-wide meetings and is
designed to meet NAEYC training standards. 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.
- Innovative Curricula. Bright Horizons Family Solutions'
innovative, developmentally appropriate curricula distinguish
it in an industry typically lacking educational programs. The
Company is
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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
comprehensive curricula, the Company has developed "The World
at Their Fingertips" program for learning, which emphasizes
the importance of active learning, language and skilled
teacher support to foster each child's individual strengths.
"The World at Their Fingertips" includes many components
designed to promote physical, cognitive, emotional, and
language development and provides a developmentally
appropriate educational curriculum enabling teachers to
provide individualized, responsive care and affection for each
child. The infant and toddler program provides an environment
for development with learning centers planned to maximize
large and small motor experiences, sensory and cognitive
experiences, language, music and personal experiences. The
preschool program provides a developmentally appropriate
learning-centered curriculum, including dramatic play, art
expression, construction/blocks, computer and music/movement.
Bright Horizons Family Solutions seeks to involve parents in
the center's activities and supports the extension of learning
into the home. The Company's early childhood educational
services meet or exceed the standards established by the
National Academy of Early Childhood Programs ("NAECP"), a
division of NAEYC.
- Attractive, Child-Friendly Facilities. Bright Horizons Family
Solutions believes that attractive, spacious, child-friendly
facilities are an important element in fostering high quality
learning environments for children. The Company's family
centers are custom-built and are designed to be open and
bright and to maximize visibility throughout the center.
Bright Horizons devotes considerable effort to equipping its
centers with child-sized amenities, indoor and outdoor play
areas with age-appropriate materials and design, family
hospitality areas and computer centers.
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 markets provides operating and competitive advantages. Clustering
permits the Company to strengthen quality, develop local recruiting networks,
and efficiently allocate its faculty among nearby centers in cases of illness,
vacation or leave. Clustering also provides Bright Horizons Family Solutions
with economies of scale in management, purchasing 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
major market presence in work-site child care in Atlanta, Boston, Charlotte,
Chicago, Dallas/Fort Worth, Hartford, Los Angeles, Nashville, New York,
Raleigh/Durham, San Francisco, Seattle, Tampa/St. Petersburg, Washington, D.C.
and Wilmington, Delaware.
Employer of Choice. Bright Horizons Family Solutions focuses on maintaining its
reputation as a premier employer in the early childhood education market. The
Company believes that its above-average compensation, comprehensive and
affordable benefits package and opportunities for internal career advancement
enable the Company to attract highly qualified, well-educated, experienced and
committed center directors and faculty. The Company believes that its benefits
package, which includes medical, dental and disability insurance, paid vacation
and sick leave, a 401(k) savings plan, stock options, tuition reimbursement and
child care discounts, is unusually comprehensive and affordable to the employee
by industry standards. These benefits, as well as the Company's comprehensive
training programs are an important recruitment and retention tool for Bright
Horizons Family Solutions in the relatively low-paying child care industry.
GROWTH STRATEGY
The key elements of Bright Horizons Family Solutions' growth strategy are as
follows:
Open Centers for New Corporate Sponsors. Bright Horizons Family Solutions'
regional and home office sales force, as well as senior management, actively
pursue potential new corporate sponsors, particularly in industries that provide
work-site child care, early education and family support services as a standard
benefit. Bright Horizons Family Solutions believes that its national scale,
quality leadership and track record of serving corporate sponsors give it a
competitive advantage in securing new corporate sponsorship relationships. As a
result of the Company's national visibility as a high quality provider of
work-site child care, early education and family support services,
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prospective sponsors regularly contact Bright Horizons Family Solutions
requesting proposals for operating a family center.
Expand Relationships with Existing Corporate Sponsors. Bright Horizons Family
Solutions aims to increase revenue from its existing corporate sponsor
relationships by developing new centers for sponsors who have multiple corporate
sites and offering additional services at its existing centers. Bright Horizons
Family Solutions' experience has been that corporate sponsors are more inclined
to employ the Company on a multi-site basis following the successful operation
of an initial family center. The Company currently operates 95 family centers at
multiple sites for 20 sponsors. In addition, 6 clients are currently served by
the Company's National Access Program, which enables the employees of a sponsor
to access the network of the Company's family centers across the country.
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.
Pursue Strategic Acquisitions. Bright Horizons Family Solutions seeks to acquire
existing work-site child care centers and local or regional networks to expand
quickly and efficiently into new markets and increase its presence in existing
geographic clusters. The fragmented nature of the work-site segment of the child
care, early education and family support services market continues to provide
acquisition opportunities. The Company believes that many of the smaller
regional chains and individual providers seek liquidity and/or lack the
professional management and financial resources that sponsors increasingly
demand.
Develop and Market Additional Services. Bright Horizons Family Solutions plans
to continue to develop and market additional early childhood education and
family support services, full and part-time child care, emergency back-up
work-site child care (serving parents when their primary child care options are
unavailable), the National Access Program, seasonal services (extending hours at
existing centers to serve sponsors with highly seasonal work schedules), school
vacation clubs, summer programs, elementary school programs, before and after
school care for school age children, vacation care, special event child care,
and to add residential child development centers in areas where tuition levels
can support the Company's quality standards.
At December 31, 1998, the Company had over 50 family centers under development
and scheduled to open over the next 12 to 18 months, including 23 for existing
clients.
BUSINESS MODELS
Although the specifics of Bright Horizons Family Solutions' corporate
sponsorship arrangements vary widely, they generally can be classified into two
forms: (i) the sponsor model, where the Company operates a family center on or
near the premises of a sponsor, and gives priority enrollment to the employees
of the corporate sponsor, receives some form of start-up and/or operating
financial support from the corporate sponsor and maintains profit-and-loss
responsibility, and (ii) the management model, where Bright Horizons Family
Solutions manages a work-site family center under a cost-plus agreement with a
corporate sponsor.
The Sponsor Model. Family centers operating under the sponsor model currently
represent approximately 60% of Bright Horizons Family Solutions' family centers.
The Company typically designs and operates a work-site family center in exchange
for some form of financial or operating support from the sponsor. This
sponsorship can take a variety of forms, including reduced occupancy costs,
tuition assistance, payment of pre-opening expenses and assistance with start-up
costs, such as architectural and design fees, real estate broker fees, as well
as capital equipment and initial supplies. Historically, the Company has
received the greatest support in the form of reduced occupancy costs. Bright
Horizons Family Solutions maintains profit-and-loss responsibility for
sponsorship-model family centers. The sponsorship model can be classified into
two subcategories: (i) employer-sponsored, where Bright Horizons Family
Solutions provides child care on a priority enrollment basis for employees of a
single
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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 early education at a facility located in or
near the sponsor's offices. The sponsor generally provides for
the construction of the center and on an ongoing basis pays
for maintenance and repairs. In some cases, the sponsor also
provides tuition assistance to the employees and minimum
enrollment guarantees to the Company. Children of the
sponsors' employees typically are granted priority enrollment
at the center. In some instances, enrollment may be limited to
the employees of the sponsor. Operating contracts under the
employer-sponsored model have terms that generally range from
three to ten years, require ongoing reporting to the sponsor
and, in some cases, limit annual tuition increases.
- The Developer-Sponsored Model. A developer-sponsored center is
located in a real estate developer's office building or office
park. The center serves as an amenity to the developer's
tenants, giving the developer an advantage in attracting
quality tenants to its site. In return for leasing the
facility to Bright Horizons Family Solutions at a discounted
rent, the Company offers priority enrollment to the children
of the site's employees. Bright Horizons Family Solutions
typically negotiates lease terms of 10 to 20 years, including
the initial term and renewal options. Under the
developer-sponsored model, Bright Horizons Family Solutions
typically operates its child development centers with few
ongoing operating restrictions or reporting requirements.
The Management Model. Family centers operating under management model contracts
currently represent approximately 40% of Bright Horizons Family Solutions'
family centers. Under the management contract model, the Company receives a
management fee from a corporate sponsor and is reimbursed by the corporate
sponsor for any expenses in excess of tuition revenues within an agreed upon
budget. The sponsor is typically responsible for all start-up costs and facility
maintenance. The management model enables the corporate sponsor to have a
greater degree of control with respect to budgeting, spending and operations.
Management contracts require the Company to satisfy certain periodic reporting
requirements and generally range in length from one to five years, with some
terminable by the sponsor without cause or financial penalty. The Company is
responsible for maintenance of quality standards, recruitment of center
directors and faculty, implementation of curricula and programs and interaction
with parents.
OPERATIONS
General. Consistent with its strategy of establishing leading market presence,
Bright Horizons Family Solutions is organized into seven operational divisions,
largely along geographic lines. Each division is managed by a Divisional Vice
President and is divided into five to nine regions, each headed by a Regional
Manager responsible for supervising the quality, operating performance and
client relationships for three to eleven centers. A typical center is managed by
a staff consisting of an administrative team, including the center director, a
teaching staff and support personnel, with the total number of staff varying due
to the complexity and hours of operation of the program. A center director has
operating responsibility and is 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,
business development and marketing functions at the corporate office level.
Center hours of operation are designed to match the schedules of the sponsor.
Most centers are open ten to twelve hours a day, Monday through Friday, although
some employer sponsors operate two and even three shifts at locations our
centers serve. Typical hours of operation are from 7:00 a.m. to 6:00 p.m. Bright
Horizons Family Solutions offers a variety of enrollment options, ranging from
full-time (40-50 hours per week) to part-time options. The majority of children
who attend the Company's family centers are enrolled on a full-time basis, and
are children of the employees of the employer-sponsor or the developer-sponsor's
tenants. The remaining enrolled children come from the surrounding community,
where such enrollment is permitted under the terms of the contract.
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Tuition depends upon the age of the child, geographic location and the extent to
which a corporate sponsor subsidizes tuition. In fiscal 1998, average full-time
monthly tuition was approximately $920 for infants, $800 for toddlers and $680
for preschoolers. Tuition at most of Bright Horizons Family Solutions' centers
is payable in advance and is due either monthly or weekly. In some cases,
parents can pay tuition through payroll deduction.
Facilities. The Company's family centers are primarily operated in work-site
locations and vary in design and capacity in accordance with sponsor needs and
state and federal regulatory requirements. A prototypical Company family center
is approximately 12,000 to 15,000 square feet, and has a capacity for
approximately 150 children. As of December 31, 1998, the Company's centers had a
total licensed capacity of approximately 34,400 children, with the smallest
having a capacity of 6 children and the largest having a capacity of over 450
children.
Bright Horizons Family Solutions believes that attractive, spacious and child
friendly facilities are an important element in fostering a high quality
learning environment for children. The Company's family centers are designed to
be open and bright and to maximize visibility throughout the center. The Company
devotes considerable resources to equipping its centers with child-sized
amenities, indoor and outdoor play areas of age-appropriate materials and
design, family hospitality areas and computer centers. Commercial kitchens are
present in those centers that require hot meals to be prepared on site.
Health and Safety. The safety and well-being of the children in its care is a
high priority for Bright Horizons Family Solutions. The Company employs a
variety of security measures at its centers, which may include electronic access
systems, sign out procedures for children, security guards, or other
site-specific procedures. In addition, Bright Horizons Family Solutions' high
ratio of teachers to children, together with the presence of center directors
and other management personnel, leads to enhanced supervision. Centers are
designed to minimize the risk of injury to small children by incorporating such
features as child-size amenities, rounded corners on furniture and fixtures,
age-appropriate toys and equipment and cushioned fall-zones surrounding play
structures.
Bright Horizons Family Solutions conducts ongoing training of personnel in the
areas of health, safety and emergency protocol, requires CPR and first aid
certification of center management personnel, and offers such certification to
all center faculty. The Company conforms to federal OSHA requirements with
respect to annual blood-born pathogen training of all center personnel.
MARKETING
Bright Horizons Family Solutions markets its services to two constituencies:
corporate sponsors and parents. Management believes that the Company's
operations in 35 states and the District of Columbia with 274 Family Centers and
the expertise and reputation of its management team in working with many of the
nation's leading companies have created name recognition within the work and
family services industry. The Company's board of directors, senior officers and
Advisory Board members are involved at the national level with education,
work/life and children's services issues, and their prominence and involvement
in such issues plays a key role in attracting new clients and developing
additional services and products for existing clients.
The Company's regional and home office 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' national visibility as
a high quality child care provider, potential sponsors regularly contact the
Company requesting proposals. Bright Horizons Family Solutions competes for most
employer sponsorship opportunities via a request for proposal process.
At the family center level, directors are responsible for marketing to parents.
Bright Horizons Family Solutions seeks to develop a local reputation by
promoting its high quality faculty, facilities, programs, and interactive,
hands-on curricula. The Company's pre-opening and ongoing local marketing
efforts include open houses, local direct mail and media advertising, parent
referrals and community outreach. Many centers have parent advisory
organizations, which assist in marketing and also act as a sounding board for
developments in the education program. Center directors typically receive
assistance from corporate sponsors, who often advertise the center in
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internal publications, provide mailing lists, answer questions and facilitate
interaction between Bright Horizons Family Solutions and parents. The Company
also has an established corporate 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 service, 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
faculty-child ratios, and offering their staff lower pay and limited or
unaffordable benefits. While the Company's tuition levels are generally above
those of its competitors, management believes it is able to compete effectively,
particularly for well-educated parents, by offering the convenience of a
work-site location and a higher quality of care.
Bright Horizons Family Solutions believes its ability to compete successfully
for corporate sponsorship depends on a number of factors, including reputation,
national scale, quality and scope of service, cost effective delivery of
service, high quality of personnel and the ability to understand the business
needs of prospective clients and to customize sponsorship arrangements. Many
residential center-based child care chains either have divisions that compete
for corporate sponsorship opportunities or are larger and have substantially
greater financial or other resources that could permit them to compete
successfully against the Company in the work-site segment. Other child care
organizations focus exclusively on the work-site segment of the child care
market. Bright Horizons Family Solutions believes there are fewer than 10
companies that currently operate work-site child care centers on a national
basis.
The Company's biggest competitors include the employer-sponsored child care
divisions of large child care chains which primarily operate residential child
care centers such as Children's Discovery Centers/Knowledge Universe, KinderCare
Learning Centers, Children's World, and Child Time. Management believes that the
Company is distinguished from its competitors by its exclusive focus on
corporate clients and commitment to NAEYC accreditation standards. Bright
Horizons Family Solutions believes it is well-positioned to attract corporate
sponsors who wish to outsource the management of new or existing work-site early
education centers due to the Company's national scale, established reputation,
position as a quality leader and track record of serving major corporate
sponsors. In addition, an increasing number of potential corporate sponsors are
requiring adherence to NAEYC criteria.
EMPLOYEES
As of December 31, 1998, Bright Horizons Family Solutions employed approximately
9,350 employees (including part-time and substitute teachers), of which
approximately 230 were employed at the Company's corporate, divisional and
regional offices and the remainder were employed at the Company's family
centers. Center employees include faculty and administrative personnel. Except
for an agreement with a labor union that represents approximately 60 employees
at one the Company's family centers located in Huntsville, Alabama, the Company
does not have any agreements with labor unions. The Company believes that its
relations with employees are good.
REGULATION
Child care centers are subject to numerous federal, state and local regulations
and licensing requirements. Although these regulations vary from jurisdiction to
jurisdiction, government agencies generally review, among other things, the
adequacy of buildings and equipment, licensed capacity, the ratio of teacher to
children, faculty training, record
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keeping, the dietary program, the daily curriculum and compliance with health
and safety standards. In most jurisdictions, these agencies conduct scheduled
and unscheduled inspections of centers, and licenses must be renewed
periodically. In some jurisdictions, regulations have been enacted which
establish requirements for employee background checks or other clearance
procedures for employees of child development centers. Center directors and
regional managers are responsible for monitoring each center's compliance with
such regulations. Repeated failures by a center to comply with applicable
regulations can subject it to sanctions, which can include fines, corrective
orders, being placed on probation or, in more serious cases, suspension or
revocation of the center's license to operate, and could require significant
expenditures by the Company to bring the its family centers into compliance.
In addition, state and local licensing regulations often provide that the
license held by the Company may not be transferred. As a result, any transferee
of a family services business (primarily child care) must apply to any
applicable administrative bodies for new licenses. There can be no assurance
that the Company would not have to incur material expenditures to relicense
centers it may acquire in the future. Management believes the Company is in
substantial compliance with all material regulations applicable to its business.
Bright Horizons Family Solutions also is required to comply with the Americans
with Disabilities Act ("ADA"), which prohibits discrimination on the basis of
disability in public accommodations and employment. Costs incurred to date by
Bright Horizons Family Solutions to comply with ADA have not been significant.
The Company believes it is in substantial compliance with all material
regulations applicable to its business.
There are currently certain tax incentives for parents utilizing child care
programs. Section 21 of the Internal Revenue Code provides a federal income tax
credit ranging from 20% to 30% of certain child care expenses for "qualifying
individuals" (as defined therein). The fees paid to Bright Horizons Family
Solutions for child care services by eligible taxpayers qualify for the tax
credit, subject to the limitations of Section 21. The amount of the qualifying
child care expenses is limited to $2,400 for one child and $4,800 for two or
more children and, therefore, the maximum credit ranges from $480 to $720 for
one child and from $960 to $1,440 for two or more children.
INSURANCE
Bright Horizons Family Solutions currently maintains the following types of
insurance policies: workers' compensation, commercial general liability,
automobile liability, commercial property liability, student accident coverage,
employment practices liability, director and officer liability and excess
"umbrella" liability. The policies provide for a variety of coverages, are
subject to various limitations and exclusions, and deductibles. Management
believes that the company's current insurance coverages are adequate to meet its
needs.
Bright Horizons Family Solutions has not experienced difficulty in obtaining
insurance coverage, but there can be no assurances that adequate insurance
coverage will be available in the future, or that the Company's current coverage
will protect it against all possible claims.
RISK FACTORS
Management of Growth. The Company and its predecessors have experienced
substantial growth during the past several years through internal growth and by
acquisition. The Company's ability to experience future growth will depend upon
a number of factors, including the ability to further develop existing client
relationships and to obtain new client relationships, the expansion of services
and programs offered by the Company, the maintenance of high quality services
and programs and the hiring and training of qualified management, divisional
vice presidents, regional managers, center directors and other personnel. The
Company may experience difficulty in attracting and retaining qualified
personnel in various markets necessary to meet growth opportunities. Hiring and
retaining qualified personnel may require increased salaries and enhanced
benefits in more competitive markets, which could result in a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, difficulties in hiring and retaining qualified personnel may also
impact the Company's ability to accept additional enrollment at its centers
which could result in a material adverse effect on the Company's business,
results of operations and financial condition. Sustaining growth may require the
implementation of enhancements to operational and financial systems and will
also depend on the Company's ability to expand its sales and marketing
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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. In the competition 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. Management believes the Company's ability to
compete successfully depends on a number of factors, including quality,
locational convenience and price. 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.
In addition, family child care providers often operate at standards lower than
the national accreditation standards at which the Company operates. 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 which focus on the work-site segment of the child care
market and with certain center-based child care chains that have divisions which
compete for corporate opportunities. The Company also competes with a diverse
group of large and small competitors for a range of child care and other work
and family services including work/life, employee benefits and management
consultants. Some of these competitors have significantly greater financial
resources and may be willing to enter into contract models, invest initial
capital in facilities or enter into other financial arrangements that are not
consistent with the Company's business strategy. Many of these competitors offer
consulting, work-site child care and other services at lower prices than the
Company. Increased competition for corporate relationships on a national or
local basis could result in increased pricing pressure and/or loss of market
share, thereby having a material adverse effect on the Company's business,
results of operations and financial condition, as well as its ability to attract
and retain qualified family center personnel and its ability to pursue its
growth strategy successfully.
Dependence on Corporate Client Relationships. A significant portion of the
Company's business is derived from family centers associated with corporate
clients for which the Company provides work-site family services for single or
multiple sites pursuant to management contracts. While the specific terms of
such contracts vary, some management contracts are subject to early termination
by the corporate client without cause. While the Company has a history of
consistent contract renewals, there can be no assurance that future renewals
will be secured. The early
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termination or nonrenewal of a significant number of corporate management
contracts or the termination of a multiple-site corporate client relationship
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Changing Economic Conditions. The Company's revenue and net income are subject
to general economic conditions. A significant portion of the Company's revenue
is derived from employers and real estate developers who historically have
reduced their expenditures for work-site family services during economic
downturns. In addition, a significant percentage of the Company's family centers
are sponsored by real estate developers offering on-site child care as an
amenity to attract tenants to their buildings. Changes in the supply and demand
of real estate could adversely affect real estate developers' willingness to
subsidize child care operations at new developments or their ability to obtain
financing for developments offering developer-sponsored child care services.
Should the economy weaken in any future period, these corporate clients may
reduce or eliminate their expenditures on work and family services, and
prospective clients may not commit resources to such services. The Company's
revenues depend, in part, on the number of dual income families and working
single parents who require child care services. A deterioration of general
economic conditions may adversely impact the Company because of the tendency of
out-of-work parents to discontinue utilization of child care services. These
factors could have a material adverse effect on the Company's business, results
of operations and financial condition.
Risks Associated with Acquisitions. The Company plans as part of its growth
strategy to evaluate the acquisition of other providers of work/life,
employer-sponsored child care and consulting services. While the Company reviews
acquisition candidates in the ordinary course of its business, the Company is
not currently a party to any agreements or negotiations with respect to any
material acquisitions. Acquisitions involve numerous risks, including potential
difficulties in the assimilation of acquired operations, diversion of
management's attention, negative financial impacts based on the amortization of
acquired intangible assets, the dilutive effects of the issuance of Common Stock
in connection with an acquisition and potential loss of key employees of the
acquired operation. No assurance can be given as to the success of the Company
in identifying, executing and assimilating acquisitions in the future.
Dependence on Key Management. The success of the Company is highly dependent on
the efforts, abilities, and continued services of its executive officers and
other key employees. The loss of any of the executive officers or key employees
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company believes that its future success
will depend upon its ability to continue to attract, motivate and retain
highly-skilled managerial, sales and marketing, divisional, regional and center
director personnel. Although the Company historically has been successful in
retaining the services of its senior management, there can be no assurance that
the Company will be able to do so in the future.
Ability to Obtain and Maintain Insurance; Adverse Publicity. The Company
currently maintains the following types of insurance policies: workers'
compensation, commercial general liability, automobile liability, commercial
property liability, student accident coverage, directors' and officers'
liability coverage, employment practices liability and excess "umbrella"
liability including coverage for child abuse and molestation. These policies
provide for a variety of coverages and are subject to various limitations,
exclusions and deductibles. To date, the Company has been able to obtain
insurance in amounts it believes to be appropriate. There can be no assurance
that the Company's insurance premiums will not increase in the future as a
consequence of conditions in the insurance business generally or the Company's
experience in particular. As a result of adverse publicity concerning reported
incidents of alleged abuse at child care centers and the length of time before
the expiration of applicable statutes of limitations for the bringing of child
abuse and personal injury claims (typically a number of years after the child
reaches the age of majority), some operators of child care and family centers
have had difficulty obtaining general liability insurance, child abuse liability
insurance or similar liability insurance or have been able to obtain such
insurance only at substantially higher rates. Any adverse publicity concerning
reported incidents of child abuse at any child care centers, whether or not
directly relating to or involving the Company, could result in decreased
enrollment at the Company's centers, termination of existing corporate
relationships, inability to attract new
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corporate relationships or increased insurance costs, any of which could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Litigation. Because of the nature of its business, the Company is and expects
that in the future it may be subject to claims and litigation alleging
negligence, inadequate supervision and other grounds for liability arising from
injuries or other harm to the people it serves, primarily children. In addition,
claimants may seek damages from the Company for child abuse, sexual abuse and
other acts allegedly committed by Company employees. The Company has
occasionally been sued for claims relating to injuries to children in its care.
There can be no assurance that additional lawsuits will not be filed, that the
Company's insurance will be adequate to cover liabilities resulting from any
claim or that any such claim or the publicity resulting from it will not have a
material adverse effect on the Company's business, results of operations, and
financial condition including, without limitation, adverse effects caused by
increased cost or decreased availability of insurance and decreased demand for
the Company's services from corporate sponsors and parents.
Seasonality and Variability of Quarterly Operating Results. The Company's
revenue and results of operations fluctuate with the seasonal demands for child
care. The Company's revenue typically declines during the third quarter as a
result of decreased enrollments in its centers as parents withdraw their
children for vacations and their older children for entry into elementary
schools. There can be no assurance that the Company will be able to adjust its
expenses on a short-term basis to minimize the effect of these fluctuations in
revenue. The Company's quarterly results of operations may also fluctuate based
upon the number and timing of center openings and/or acquisitions, the
performance of new and existing centers, the contractual arrangements under
which centers are operated, the change in the mix of such contractual
arrangements, the timing and level of consulting and development fees, center
closings, competitive factors and general economic conditions. The inability of
existing centers to maintain their current profitability, the failure of newly
opened centers to contribute to profitability and the failure to maintain and
grow the consulting and development services could result in additional
fluctuations in the future operating results of the Company on a quarterly or
annual basis.
Impact of Governmental Regulation. The Company's Family Centers are subject to
numerous federal, state and local regulations and licensing requirements.
Although these regulations vary greatly from jurisdiction to jurisdiction,
government agencies generally review, among other things, the adequacy of
buildings and equipment, licensed capacity, the ratio of staff to children,
staff training, record keeping, the dietary program, the daily curriculum and
compliance with health and safety standards. The Company also will be required
to comply with the Americans with Disabilities Act (the "ADA"), which prohibits
discrimination on the basis of disability in public accommodations and
employment. Failure of a center to comply with applicable regulations or the ADA
can subject it to governmental sanctions, which might include fines, corrective
orders, probation, or, in more serious cases, suspension or revocation of the
center's license to operate or an award of damages to private litigants and
could require significant expenditures by the Company to bring its family
centers into compliance. In addition, state and local licensing regulations
often provide that the license held by a family services company may not be
transferred. As a result, any transferee of a family services business
(primarily child care) must apply to any applicable administrative bodies for
new licenses. There can be no assurance that the Company would not have to incur
material expenditures to relicense centers it may acquire in the future. There
can be no assurance that government agencies will not impose additional
restrictions on the Company's operations which could adversely affect the
Company's business, results of operations, and financial condition. In addition,
under the Internal Revenue Code (the "Code"), certain tax incentives are
available to parents utilizing child care programs. Any change in such
incentives could cause a number of parents to remove their children from the
Company's centers, which would adversely affect the Company's business, results
of operations and financial condition. Although the Company expects to pay
employees at rates above the minimum wage, increases in the federal minimum wage
could result in a corresponding increase in the wages paid to the Company's
employees, which could adversely affect the Company's business, results of
operations and financial condition.
Possible Volatility of Stock Price. The prices at which the Company's Common
Stock trades is determined by the marketplace and is influenced by many factors,
including the liquidity of the market for the Common Stock, investor perception
of the Company and of the work/life industry generally, and general economic and
market conditions. In addition, the stock market historically has experienced
volatility which has affected the market price of securities of many companies
and
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which has sometimes been unrelated to the operating performance of such
companies. In addition, factors such as announcements of new services or offices
or acquisitions by the Company or its competitors or third parties, as well as
market conditions in the Company's industry, may have a significant impact on
the market price of the Common Stock. The market price may also be affected by
movements in prices of stocks in general. In addition, the exercise of options
to purchase shares of the Common Stock may cause dilution to existing
stockholders.
Potential Effect of Anti-Takeover Provisions. The Company's Certificate of
Incorporation and Bylaws contain certain provisions that could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise. These provisions establish staggered terms for members of
the Company's Board of Directors and include advance notice procedures for
stockholders to nominate candidates for election as directors of the Company and
for stockholders to submit proposals for consideration at stockholders'
meetings. In addition, the Company is subject to Section 203 of the Delaware
General Corporation Law which limits transactions between a publicly held
company and "interested stockholders" (generally, those stockholders who,
together with their affiliates and associates, own 15% or more of a company's
outstanding capital stock). This provision of the DGCL may have the effect of
deterring certain potential acquisitions of the Company. The Company's
Certificate of Incorporation provides for 5,000,000 authorized but unissued
shares of preferred stock, the rights, preferences, qualifications, limitations
and restrictions of which may be fixed by the Company's Board of Directors
without any further action by stockholders.
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:
Linda A. Mason, 44 -- Chairman of the Board. Ms. Mason has served as a director
and Chairman of the Board of the Company since the Merger. Ms. Mason co-founded
BRHZ and served as a director and President of BRHZ from its inception in 1986
until the Merger. From its inception until September 1994, Ms. Mason also acted
as BRHZ's Treasurer. Prior to founding BRHZ, Ms. Mason was co-director of the
Save the Children relief and development effort in Sudan and worked as a program
officer with CARE in Thailand. Prior to 1986, Ms. Mason worked as a management
consultant with Booz, Allen and Hamilton. Ms. Mason also is a director of The
Horizons Initiative and Whole Foods Market, Inc., which owns and operates retail
food stores, is a Fellow of the Yale Corporation and serves on the Advisory
Board for the Yale School of Management. Ms. Mason is the wife of Roger H.
Brown.
Marguerite W. Sallee, 53 -- Chief Executive Officer. Ms. Sallee has served as a
director and Chief Executive Officer of the Company since the Merger. Ms. Sallee
is a founder of CFAM and served as President, Chief Executive Officer and a
director of CFAM from February 1987 until the Merger. Prior thereto, Ms. Sallee
served as Commissioner of Human Services in former Tennessee Governor Lamar
Alexander's cabinet. She is a director of Saks Incorporated, an owner and
operator of department stores, a director of MagneTek, Inc., a manufacturer of
integrated electrical products, and is a former Chairman of the Nashville Area
Chamber of Commerce. In addition, Ms. Sallee is a delegate to the Presidential
Summit for Children.
Roger H. Brown, 42 -- President. Mr. Brown has served as a director and
President of the Company since the Merger. 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 on the Governing Board of
the NAEYC, the Child Care Action Campaign, The Horizons Initiative and Advantage
Schools, Inc., a charter school management company. Mr. Brown is the husband of
Linda A. Mason.
Mary Ann Tocio, 50 -- Chief Operating Officer. Ms. Tocio has served as Chief
Operating Officer of the Company since the Merger. Ms. Tocio joined BRHZ in 1992
as Vice President and General Manager of Child Care Operations. She was
appointed Chief Operating Officer of BRHZ in November 1993, and remained as such
until the Merger. From 1983 to 1992, Ms. Tocio held several positions with
Wellesley Medical Management, Inc., including Senior Vice President of
Operations, where she managed more than 100 ambulatory care centers nationwide.
Prior to that time, Ms. Tocio held various management positions with several
Boston-area hospitals.
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Michael E. Hogrefe, 38 -- Chief Financial Officer. Mr. Hogrefe has served as
Chief Financial Officer of the Company since the Merger. Mr. Hogrefe served as
an Executive Vice President, Chief Financial Officer and Secretary of CFAM from
January 1996 until the Merger. Mr. Hogrefe served as Treasurer of Service
Merchandise Company, Inc., a national retail chain of catalog stores, from July
1993 through January 1996 and as Assistant Treasurer from March 1990 to July
1993. Prior to that, Mr. Hogrefe served as Assistant Treasurer of Financial
Management for Equicor -- Equitable HCA Corporation from 1988 to 1990 and in a
variety of positions for The Equitable Companies, Inc., from 1982 to 1988,
culminating his employment as Assistant Treasurer.
Stephen I. Dreier, 56 -- 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.
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ITEM 2. PROPERTIES
The following table summarizes the locations of Bright Horizons Family
Solutions' centers by state as of December 31, 1998:
Alabama 2 Nevada 2
Arizona 2 New Hampshire 1
California 28 New Jersey 17
Colorado 1 New Mexico 2
Connecticut 15 New York 11
Delaware 4 North Carolina 21
District of Columbia 5 Ohio 4
Florida 22 Pennsylvania 8
Georgia 5 Rhode Island 2
Illinois 28 South Carolina 2
Indiana 5 South Dakota 1
Iowa 5 Tennessee 7
Kentucky 2 Texas 8
Maine 3 Utah 1
Maryland 7 Virginia 4
Massachusetts 29 Washington 9
Michigan 1 Wisconsin 6
Missouri 3 West Virginia 1
As of December 31, 1998, Bright Horizons Family Solutions operated 274 centers
in 35 states and the District of Columbia, of which eleven were owned and the
remaining were operated under leases or operating agreements. One of Bright
Horizons Family Solutions' owned centers in Orange, Connecticut is subject to a
mortgage of $480,000. The Company's owned family centers in Glastonbury and
Orange, Connecticut, Tampa, Florida, Quincy, Massachusetts, Raleigh, North
Carolina, White Plains, New York, and Bellevue, Washington are not subject to
mortgages. The leases have terms ranging from five to 20 years, often with
renewal options, with most leases having an initial term of five to 10 years.
Some of the leases provide for contingent payments if the center's operating
revenues, profits or enrollment exceed a specified level.
Bright Horizons Family Solutions maintains corporate offices in Cambridge,
Massachusetts and Nashville, Tennessee. The Company's leases approximately
10,000 square feet for its office in Cambridge, Massachusetts under an operating
lease that expires August 31, 2002, and 14,210 square feet for its office in
Nashville, Tennessee under an operating lease that expires July 30, 2000.
The Company also has operating leases with terms that expire from April 1999 to
December 2001, on approximately 12,000 square feet for administrative offices in
El Segundo, California; Itasca, Illinois; Bellevue, Washington; Rockville,
Maryland; Flower Mound, Texas and Morristown, New Jersey.
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ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, subject to claims and suits arising in the
ordinary course of its business. Such claims have, in the past, generally been
covered by insurance. Management believes the resolution of other legal matters
will not have a material effect on the Company's financial condition or results
of operations, although no assurance can be given with respect to the ultimate
outcome of any such actions. Furthermore, there can be no assurance that the
Company's insurance will be adequate to cover all liabilities that may arise out
of claims brought against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal year 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since July 27, 1998, the Company's Common Stock has been traded on the Nasdaq
National Market under the symbol "BFAM." From the period beginning with BRHZ's
initial public offering in November 1997 and ending on the date of the Merger,
the BRHZ common stock was traded on the Nasdaq National Market under the symbol
"BRHZ." From the period beginning with CFAM's initial public offering in August
1997 and ending on the date of the Merger, the CFAM common stock was traded on
the Nasdaq National Market under the symbol "CFAM." The table below sets forth
the high and low quarterly sales prices for the Company's Common Stock, BRHZ
common stock and CFAM common stock as reported in published financial sources
for each quarter during the last two years:
Prince Range of Common Stock
----------------------------------------------------------------------------------------
Bright Horizons Family Bright Horizons CorporateFamily Solutions
Solutions
--------------------------- -------------------------- ------------------------------
High Low High Low High Low
1998
Fourth Quarter $27 1/8 $17 1/4 * * * *
Third Quarter $28 1/8 $18 1/8 $28 3/4 $20 $24 5/8 $18 3/8
Second Quarter ** ** $31 1/4 $24 1/4 $31 3/4 $22
First Quarter ** ** $28 1/2 $16 1/8 $26 5/8 $19
1997
Fourth Quarter ** ** $20 1/8 $13 3/4 $22 3/8 $14
Third Quarter ** ** * * $18 1/4 $12 1/4
Second Quarter ** ** * * * *
First Quarter ** ** * * * *
* No established public trading market was available for the BRHZ common stock
prior to November 7, 1997 or after July 24, 1998, and no established public
trading market was available for the CFAM commo stock prior to August 13,
1997 or after July 24, 1998.
** No established public trading market for the Company's Common Stock existed
prior to July 27, 1998.
The Company has never declared or paid any cash dividends on its Common Stock.
The Company currently intends to retain all earnings to support operations and
to finance expansion of its business; therefore, the Company does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. Any
future decision concerning the payment of dividends on the Company's Common
Stock will be at the Board of Directors' discretion and will depend upon
earnings, financial condition, capital needs and other factors deemed pertinent
by the Board of Directors.
The number of stockholders of record at March 19, 1999 was 189, and does not
include those stockholders who hold shares in street name accounts.
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Application of Proceeds from Initial Public Offerings
Pursuant to a Registration Statement on Form S-1, as amended (Registration No.
333-14981), which was declared effective on November 6, 1997, BRHZ completed an
initial public offering of 3,415,500 shares of BRHZ common stock, of which
1,350,000 shares of BRHZ common stock were issued and sold by BRHZ and 2,065,500
shares were sold by selling stockholders, at an offering price of $13.00 per
share. BRHZ received net proceeds of approximately $15.6 million (after
deducting underwriting discounts and other expenses). Approximately $4.0 million
was used to repay outstanding indebtedness.
Pursuant to a Registration Statement on Form S-1 , as amended (Registration No.
333-29523), which was declared effective on August 12, 1997, CFAM completed an
initial public offering of 2,702,500 shares of CFAM common stock, of which
1,401,386 shares were issued and sold by CFAM and 1,301,114 shares were sold by
selling shareholders, at an offering price of $10.00 per share. CFAM received
net proceeds of approximately $12.1 million (after deducting underwriting
discounts and expenses). Approximately $3.7 million was used to repay all of
CFAM's then outstanding bank borrowings.
The Company intends to use the remaining proceeds from the initial public
offerings of BRHZ and CFAM for working capital and general corporate purposes,
including the merger and integration of the operations of BRHZ and CFAM and the
financing of potential acquisitions and new centers under development.
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ITEM 6. SELECTED FINANCIAL DATA
BRHZ operated on a fiscal year ended June 30. CFAM had a fiscal year ending on
the Friday closest to December 31. The Company operates on a calendar year. The
following financial information has been compiled from the Company's
consolidated financial statements, which combine financial position and
operating results as of and for the years ended December 31, 1998 and January 1,
1999 ("Fiscal Year 1998") for BRHZ and CFAM, respectively, December 31, 1997 and
January 2, 1998 ("Fiscal Year 1997") for BRHZ and CFAM, respectively, June 30,
1996 and December 27, 1996 ("Fiscal Year 1996") for BRHZ and CFAM, respectively,
June 30, 1995 and December 29, 1995 ("Fiscal Year 1995") for BRHZ and CFAM,
respectively, and June 30, 1994 and December 30, 1994 ("Fiscal Year 1994") for
BRHZ and CFAM, respectively.
Due to the different fiscal year ends, BRHZ's results of operations for the six
month period ended December 31, 1996 are not included in the restated financial
statements for Fiscal Years 1997 or 1996. For this period, BRHZ had revenues of
$40 million, net income of $407,000 and total changes in common stockholders'
equity of ($137,000).
Fiscal Year
1998 1997 1996 1995 1994
Statement of operation data
(in thousands except per share amounts)
Revenue $209,372 $172,555 $127,107 $ 80,613 $ 56,525
Operating income 1,237 5,048 2,430 1,397 919
Income before taxes 2,447 5,004 1,893 1,332 852
Net income before preferred
stock dividends and accretion
on redeemable preferred stock 474 2,761 4,057 2,174 1,170
Net income available to common
stockholders 474 1,844 2,930 1,047 42
Basic earnings per share $ 0.04 $ 0.43 $ 1.16 $ 0.47 $ 0.02
Weighted average basic shares
outstanding 11,172 4,333 2,522 2,227 2,100
Diluted earnings per share* $ 0.04 $ 0.30 $ 0.66 $ 0.28 $ 0.02
Weighted average diluted shares
outstanding 12,411 9,293 4,502 7,665 2,583
Financial position at Fiscal Year end
(in thousands except per share amounts)
Working Capital 12,040 18,005 4,137 1,251 1,450
Total Assets 91,463 76,842 44,816 29,938 15,732
Long term debt, including
current maturities 685 783 9,648 5,937 1,596
Common stockholders equity
(deficit) 53,380 46,663 (8,720) (11,884) (14,682)
Dividends per common share -- -- -- -- --
* The above earnings per share on a diluted basis has been prepared in
accordance with SFAS 128 based on the historical results and weighted
average shares of each company, adjusted for the effect on weighted average
shares for the merger exchange ratio. The diluted earnings per share in
Fiscal Year 1996 is affected by the fact that the preferred stock of BRHZ
was anti-dilutive on a standalone basis. The diluted earnings per share in
Fiscal Year 1994 is affected by the fact that the preferred stock of BRHZ
was anti-dilutive on a standalone basis, and the preferred stock and options
of CFAM were anti-dilutive on a standalone basis.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release any modifications or revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events. In
connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions investors that future
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 form any future results, performance, or
achievements expressed or implied by such forward-looking statements. See "Risk
Factors" above for a description of a number of risks and uncertainties which
could affect actual results.
GENERAL
Bright Horizons Family Solutions is a leading national provider of workplace
services for employers and families, including childcare, early education and
strategic work/life consulting. As of December 31, 1998 the Company manages 274
family centers, with over 50 family centers under development. The Company has
the capacity to serve more than 34,000 children in 35 states and the District of
Columbia and has partnerships with many of the nation's leading employers,
including 68 Fortune 500 companies and 44 of Working Mother Magazine's "100 Best
Companies for Working Mothers" in 1998. The Company seeks to cluster centers in
geographic areas to enhance operating efficiencies and to create a leading
market presence.
The Company, a Delaware corporation, was formed as a result of the Merger, by
and among the Company, BRHZ and CFAM, which was approved by the shareholders of
BRHZ and CFAM on July 24, 1998. Each issued and outstanding share of BRHZ common
stock was converted into 1.15022 shares of the Company's Common Stock, and each
issued and outstanding share of CFAM common stock was converted into one share
of Common Stock. Each outstanding option of BRHZ and CFAM was converted into an
option to purchase shares of Common Stock at the same conversion ratios
referenced above. The transaction has been accounted for as a pooling of
interests and tax-free reorganization. All historical equity amounts have been
restated to reflect the respective exchange ratios, and certain
reclassifications have been made for consistent presentation, which had no
effect on net income.
Center Economics. The Company's revenue is principally derived from the
operation of family centers, and to a lesser extent, other services including
consulting services. Family center revenues consist of parent fees for tuition,
amounts paid by corporate sponsor clients to fund a portion of a family center's
operating costs, and management fees paid by client sponsors. Revenue growth has
primarily resulted from the addition of new family centers as well as increased
enrollment and tuition, and expanded programs at existing family centers. Parent
fees comprise the largest component of a center's revenue, and are billed on a
monthly or weekly basis, payable in advance. The parent fees are generally
comparable to prevailing area market rates for tuition. Amounts paid by
corporate sponsor clients are payable monthly and may be dependent on a number
of factors such as enrollment, the center's operating costs, or 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.
The Company employs the sponsor model in approximately 60% of its family center
sites. Under the sponsor model, a family center is operated at or near the
sponsor's worksite. The Company retains profit-and-loss responsibility for the
operation of the family center, and, as part of the arrangement, may receive
financial support from the sponsor. Client support can take various forms,
including reduced occupancy costs, tuition-assistance and start-up and/or
operating cost assistance. Newly opened sponsored centers generally operate at a
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loss until utilization levels reach approximately 60%, which typically occurs
within 6 to 12 months of operation. In exchange for client sponsorship, the
Company gives priority enrollment to the children of employees or tenants
affiliated with the sponsor.
Under the management model, which comprises approximately 40% of the Company's
operating sites, the Company operates a family center under a cost-plus
agreement. These contracts generally include a management fee and require that
the sponsor reimburse the Company for operating expenses in excess of parent
fees or tuition within an agreed upon budget. Therefore, the Company does not
sustain pre-opening or initial operating losses under the management model. The
management model centers experience slightly lower operating margins than the
corporate-sponsored model at full maturity.
Under the sponsor model, the tuition paid by parents is supplemented in some
cases by direct payments from sponsors and, to a far lesser extent, direct
payment from government agencies. Under the management contract model, in
addition to parent tuition, revenue also includes management fees and
reimbursable expenses. Tuition, management fees and fees for priority enrollment
rights paid in advance are recorded as deferred revenue and are recognized in
the appropriate period.
In centers operating under the sponsor model, the Company may be required to
make capital expenditures necessary to initially fit out, equip and furnish the
family centers, as well as make similar expenditures to refurbish and maintain
existing centers. While sponsors generally provide for the space or construction
of the family center, the Company may pay for leasehold improvements or
construction costs. The Company may make capital investments when it is able to
obtain favorable purchase terms or when a sponsor agrees to pay fees in advance
for long-term priority enrollment rights in the center, or for other guarantees.
In centers operating under the management model, the sponsor typically provides
for all costs associated with building, fitting out, equipping, furnishing and
supplying the family center. The sponsor is also typically responsible for
ongoing occupancy and maintenance costs.
Cost of services expenses consist of direct expenses associated with the
operation of family centers and with the delivery of consulting services. Family
center cost of services consist primarily of staff salaries, taxes and benefits;
food costs; program supplies and materials, parent marketing and occupancy
costs. Personnel costs are the largest component of a family center's operating
costs, and comprise approximately 80% of a family center's operating expenses.
However, personnel costs will be proportionately larger in family centers
operating under the management contract model and proportionally lower in family
centers operating under the sponsor model. Consulting cost of services are
comprised primarily of staff salaries, taxes and benefits; contract labor; and
other direct operating expenses.
Selling, general and administrative expenses are comprised primarily of
salaries, taxes and benefits for non-center personnel, including corporate,
regional and business development personnel; accounting and legal fees;
information technology; occupancy costs for corporate and regional personnel and
other general corporate expenses.
Amortization expense is being recognized over the period benefited by certain
intangible assets, which include goodwill, non-compete agreements and contract
rights associated with acquisitions made by the Company.
New Centers. In Fiscal Year 1998, the Company added 38 new family centers, 17 of
which are operating under the sponsor model and 21 of which are operating under
the management contract model. In the same period, the Company closed 9 centers
which were not meeting operating objectives. The Company currently has over 50
centers under development, scheduled to open over the next 12 to 18 months. The
opening of new centers is subject to a number of conditions and factors,
including, among others, construction timing, sponsor needs and weather
conditions.
Seasonality. The Company's business is subject to seasonal and quarterly
fluctuations. Demand for child care and early education services has
historically decreased during the summer months. During this season, families
are often on vacation or have alternative child care arrangements. Demand for
the Company's services generally increases in September upon the beginning of
the new school year and remains relatively stable
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throughout the rest of the year. Results of operations may also fluctuate from
quarter to quarter as a result of, among other things, the performance of
existing centers including enrollment and staffing fluctuations, the number and
timing of new center openings and/or acquisitions, the length of time required
for new centers to achieve profitability, center closings, refurbishment or
relocation, the sponsorship model mix of new and existing centers, the timing
and level of sponsorship payments, competitive factors and general economic
conditions.
Initial Public Offerings. On November 6, 1997, BRHZ completed an initial public
offering of 3,415,500 shares of BRHZ common stock, of which 1,350,000 shares of
BRHZ common stock were issued and sold by BRHZ and 2,065,500 of which were sold
by selling stockholders, at an offering price of $13.00 per share. BRHZ received
proceeds of approximately $15.6 million (after deducting underwriting discounts
and other expenses). Approximately $4.0 million was used to repay outstanding
indebtedness.
On August 12, 1997, CFAM completed an initial public offering of 2,702,500
shares of CFAM common stock, of which 1,401,386 shares were issued and sold by
CFAM, at a public offering price of $10.00 per share. CFAM received net proceeds
of approximately $12.1 million (after deducting underwriting discounts and
expenses). Approximately $3.7 million was used to repay all of the Company's
then outstanding bank borrowings.
RESULTS OF OPERATIONS
BRHZ operated on a fiscal year ended June 30. CFAM had a fiscal year ending on
the Friday closest to December 31. The Company operates on a calendar year. The
following financial information has been compiled from the Company's
consolidated financial statements, which combine financial position and
operating results as of and for the years ended December 31, 1998 and January 1,
1999 ("Fiscal Year 1998") for BRHZ and CFAM, respectively, December 31, 1997 and
January 2, 1998 ("Fiscal Year 1997") for BRHZ and CFAM, respectively, and June
30, 1996 and December 27, 1996 ("Fiscal Year 1996") for BRHZ and CFAM,
respectively.
Due to the different fiscal year ends, BRHZ's results of operations for the six
month period ended December 31, 1996 are not included in the restated financial
statements for Fiscal Years 1997 or 1996. For this period, BRHZ had revenues of
$40 million, net income of $407,000 and total changes in common stockholders
equity of ($137,000).
The following table sets forth statement of operations data as a percentage of
revenue for the Fiscal Years 1998, 1997, and 1996:
Fiscal Year Fiscal Year Fiscal Year
1998 1997 1996
Revenue 100.0% 100.0% 100.0%
Cost of services 86.3 86.5 87.6
----- ----- -----
Gross profit 13.7 13.5 12.4
Selling, general & administrative 9.1 9.5 8.7
Amortization 0.4 0.6 1.8
Other charges 3.6 0.5 --
----- ----- -----
Income from operations 0.6 2.9 1.9
Net interest income (expense) 0.6 -- (0.4)
----- ----- -----
Income before income taxes 1.2 2.9 1.5
Income tax (provision) benefit (1.0) (1.3) 1.7
----- ----- -----
Net income 0.2% 1.6% 3.2%
===== ===== =====
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Fiscal Year 1998 Compared To Fiscal Year 1997
Revenue. Revenue increased $36.8 million, or 21.3%, to $209.4 million for Fiscal
Year 1998 from $172.6 million for Fiscal Year 1997. At December 31, 1998, the
Company operated 274 family centers, as compared with 245 at December 31,1997, a
net increase of 29 family centers. Growth in revenues is primarily attributable
to the net addition of new family centers, maturation of existing family
centers, modest growth in the existing base of family centers and tuition
increases of approximately 4% to 5%.
Gross Profit. Gross profit increased $5.4 million, or 23.1%, to $28.6 million
for Fiscal Year 1998 from $23.2 million for Fiscal Year 1997. The increase in
gross profit as a percentage of revenue, to 13.7% for Fiscal Year 1998 from
13.5% for Fiscal Year 1997, is attributable to the higher proportion of centers
operating as mature, stabilized facilities and strong enrollment in newer family
centers, partially offset by higher depreciation associated with renovations at
a number of older centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.7 million, or 16.4%, to $19.0 million for
Fiscal Year 1998 from $16.3 million for Fiscal Year 1997. The decrease as a
percentage of revenue from 9.5% in Fiscal Year 1997 to 9.1% in Fiscal Year 1998
relates to a larger revenue base and increased overhead efficiencies. The dollar
increase is primarily attributable to investments in regional management, sales
personnel, information systems and communications personnel necessary to support
long term growth.
Other Charges. In connection with the Merger, the Company recognized a charge of
$7.5 million ($5.4 million after tax) which included transaction costs of $2.8
million, non-cash asset impairment charges of $1.3 million, severance costs of
$0.5 million and one time incremental integration costs directly related to the
Merger totaling $2.9 million. At December 31, 1998, $2.2 million of these costs
are included in accrued expenses. The Company expects the majority of the
accrued liability associated with the charge, which has been included in accrued
expenses on the accompanying consolidated balance sheet, to be paid by September
30, 1999. For Fiscal Year 1997, other charges reflect a non-cash compensation
charge ($297,000) related to the lifting of restrictions on common stock held by
an officer of the Company, and also include costs associated with a public
offering of securities of BRHZ which were treated as a period cost ($543,000)
when the offering was delayed.
Income from Operations. Income from operations totaled $1.2 million for Fiscal
Year 1998, as compared with income from operations of $5.0 million for Fiscal
Year 1997. Excluding the other charges (described above) incurred in Fiscal
Years 1998 and 1997 of $7.5 million and $840,000, respectively, operating income
for Fiscal Year 1998 would have totaled $8.7 million, representing an increase
of 48%, or $2.8 million, compared to income from operations of $5.9 million for
Fiscal Year 1997.
Net Interest Income (Expense). Net interest income of $1.2 million for Fiscal
Year 1998 increased $1.3 million from $44,000 of net interest expense for Fiscal
Year 1997. The increase in interest income and decrease in interest expense is
attributable to the investment of the proceeds received from the initial public
offerings of CFAM and BRHZ (which closed in August 1997 and November 1997,
respectively) and the repayment of approximately $8.0 million of debt with the
proceeds from the respective stock offerings.
Income Tax (Provision) Benefit. Due to the non-deductibility of certain
transaction costs associated with the Merger, the Company had an effective tax
rate of 81% for Fiscal Year 1998. In Fiscal Year 1997 the Company had an
effective tax rate of 45% due to the non-deductibility associated with the
compensation charge associated with the lifting of restrictions on common stock.
Excluding the effects of these non-deductible expenses, the effective tax rate
would have approximated 41% for Fiscal Year 1998 and 42% in Fiscal Year 1997.
Fiscal Year 1997 Compared To Fiscal Year 1996
Revenue. Revenue increased $45.4 million, or 35.8%, to $172.6 million for Fiscal
Year 1997 from $127.1 million for Fiscal Year 1996. At fiscal year end 1997, the
Company operated 245 family centers, as compared with 209 at fiscal year end
1996, a net increase of 36 family centers. Revenue growth is principally due to
the addition of new family centers, the maturation of existing family centers,
modest growth in the existing base of family centers and tuition increases at
existing centers of approximately 4% to 5%. In addition, BRHZ acquired 24
GreenTree centers in December 1995 and, due to the change in reported fiscal
years described above, there is
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a full period of operations included in Fiscal Year 1997 for these centers
compared to six months of operating results in Fiscal Year 1996, generating a
revenue increase of approximately $9.7 million in Fiscal Year 1997.
Gross Profit. Gross profit increased $7.5 million, or 47.5%, to $23.2 million
for Fiscal Year 1997 from $15.8 million for Fiscal Year 1996. The increase in
gross profit as a percentage of revenue, to 13.5% for Fiscal Year 1997 from
12.4% for Fiscal Year 1996, relates to improved performance in the GreenTree
centers acquired in December 1995 as well as the proportionally lower number of
centers operating under the management contract model which typically maintain
somewhat higher expense levels. The effect of the full year of operating results
for the Greentree centers, as well as their improved operating performance,
accounted for $1.6 million of the overall dollar increase in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.2 million, or 46.9%, to $16.3 million for
Fiscal Year 1997 from $11.1 million for Fiscal Year 1996. The increase as a
percentage of revenue from 8.7% in Fiscal Year 1996 to 9.5% in Fiscal Year 1997
was primarily attributable to investments in regional management and sales
personnel necessary to support long term growth, the incremental costs of
operating as a publicly traded company and, to a lesser extent, the incremental
costs associated with the increased number of centers in operation.
Amortization. Amortization expense decreased from $2.2 million in Fiscal Year
1996 to $1.1 million in Fiscal Year 1997. Expenses associated with the
amortization of non-compete agreements totaled $1.7 million in Fiscal Year 1996
compared to $420,000 in Fiscal Year 1997 due to the use of an accelerated method
of amortization. The remaining $140,000 of such amortization was recorded in
Fiscal Year 1998.
Income from Operations. Income from operations totaled $5.0 million for Fiscal
Year 1997, as compared with income from operations of $2.4 million for Fiscal
Year 1996. Excluding the other charges (described above) incurred in Fiscal Year
1997 of $840,000, operating income for Fiscal Year 1997 would have totaled $5.9
million, representing an increase of 142.3%, or $3.5 million, compared to $2.4
million for Fiscal Year 1996.
Net Interest Expense. Net interest expense of $44,000 for Fiscal Year 1997
decreased $493,000 from $537,000 of net interest expense for Fiscal Year 1996.
The decrease in net interest expense is attributable to the repayment of
approximately $8.0 million of debt in the third and fourth quarters of 1997 with
the proceeds from the initial public offerings of CFAM and BRHZ in 1997.
Income Tax (Provision) Benefit. The Company had an effective tax rate of 45% for
Fiscal Year 1997 due to the non-deductibility of the non-cash compensation
charge included in other charges in Fiscal Year 1997. Excluding this charge, the
effective tax rate would have been 42% in Fiscal Year 1997. In Fiscal Year 1996
the Company had a tax benefit of $2.2 million on income before taxes of $1.9
million. The benefit is the result of a net reduction in the valuation allowance
by $2.5 million in order to utilize net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are the ongoing operations of its
existing family centers and the addition of new centers through development or
acquisition. The Company's primary source of liquidity has been proceeds from
the initial public offerings and cash flow from operations, supplemented by
borrowing capacity under the Company's $15 million revolving lines of credit
with two banks. The Company had working capital of $12.0 million and $18.0
million at December 31, 1998 and December 31, 1997, respectively.
Cash provided by operating activities was $9.2 million, $10.4 million, and $6.9
million for Fiscal Years 1998, 1997 and 1996, respectively. The decrease of $1.2
million in cash provided by operating activities in 1998 was principally the
result of the costs incurred in connection with the Merger, which had the effect
of reducing cash provided by operating activities by $2.0 million in Fiscal Year
1998. The $2.7 million increase in deferred revenue was associated with (i) fees
paid in advance during Fiscal Year 1998 for long term priority enrollment rights
in certain centers and (ii) parent tuition paid in advance. Such advances
increased $1.8 million in Fiscal Year 1997.
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Cash used in investing activities increased to $17.2 million for Fiscal Year
1998 from $12.4 million for Fiscal Year 1997 and $4.9 million for Fiscal Year
1996, principally due to $13.3 million of fixed asset additions and leasehold
improvements, as compared to $10.7 million for Fiscal Year 1997 and $1.8 million
for Fiscal Year 1996. Of the $13.3 million of fixed asset additions in 1998,
approximately $8.3 million relate to new family centers; of the remainder,
approximately $3.4 million relates to the refurbishment and expansion of
existing family centers, with the balance expended for office expansion and
investment in information technology in corporate, regional and district
offices. Management expects to maintain, or increase slightly, the current level
of center related fixed asset spending through 1999. The Company has also made
several small acquisitions of child care centers for cash payments totaling $3.6
million, $2.0 million and $3.1 million in Fiscal Years 1998, 1997 and 1996,
respectively. Management does not expect that such small scale acquisitions will
comprise a significant portion of cash spending in the next twelve to eighteen
months.
Cash provided by financing activities decreased to $3.1 million for Fiscal Year
1998, from $19.3 million for Fiscal Year 1997. During Fiscal Year 1998, the
Company received $4.4 million in net proceeds from the issuance of Common Stock
associated with the exercise of stock options and warrants. These proceeds were
partially offset by the repurchase of shares of the Company's Common Stock,
which were subsequently reissued to fulfill warrant and stock option exercises.
During Fiscal Year 1997, BRHZ and CFAM each completed initial public offerings,
which along with proceeds from other issuances of stock raised $28.3 million,
net of fees associated with the offerings. The Company repaid $9.7 million of
debt and capital lease obligations, primarily with the proceeds from the public
offerings of BRHZ and CFAM, while incurring additional obligations of $724,000
for Fiscal Year 1997.
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist primarily
of high quality commercial paper and institutional money market accounts. The
carrying value of these instruments approximates market value due to their short
maturities.
Management believes that funds provided by operations and the Company's existing
cash and cash equivalent balances and borrowings available under lines of credit
will be adequate to meet planned operating and capital expenditure needs for at
least the next 18 months. However, if the Company were to make any significant
acquisitions or make significant investments in the purchase of facilities for
new or existing centers for corporate sponsors, it may be necessary for the
Company to obtain additional debt or equity financing. There can be no assurance
that the Company would be able to obtain such financing on reasonable terms, if
at all.
YEAR 2000 CONVERSION
The term "Year 2000 issue" refers to the necessity of converting computer
information systems so that such systems recognize more than two digits to
identify a year in any given date field and are thereby able to differentiate
between years in the twentieth and twenty-first centuries ending with the same
two digits (e.g. 1900 and 2000). The Company has and will continue to coordinate
the identification, evaluation, and implementation of changes to computer
systems and applications necessary to achieve a Year 2000 date conversion with
no effect on or disruption to its business operations. The Company is also
evaluating non-system issues relative to the Year 2000 and beyond.
The Company has communicated with suppliers, customers, financial institutions
and others with which it does business to coordinate Year 2000 conversion and
will continue to monitor their progress to assess the potential impact in the
event of non-compliance. The Company believes the potential failure of third
parties' systems will not have a material adverse impact on the Company's
operations, cash flows or financial condition.
The Company completed several projects as part of planned upgrades or
replacements and not as part of the Company's Year 2000 conversion. The Company
believes that the implementation of these projects had the effect of making a
majority of the Company's hardware and information systems Year 2000 compliant.
During 1998, as part of normal upgrades and replacements, the Company spent
approximately $200,000 to upgrade hardware it identified as not being Year 2000
compliant. The Company anticipates that it will make capital expenditures of
$500,000 to $1,000,000 to upgrade its hardware and information systems in 1999.
The
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upgrades planned for 1999 are part of planned upgrades or replacements done
in the normal course of business and not as part of the Company's Year 2000
conversion. The projected costs for 1999 are based upon management's best
estimates, which were derived utilizing numerous assumptions of future events.
There can be no guarantee however, that these cost estimates will be achieved,
and actual results could differ materially. The Company believes that the
Company's past efforts, in conjunction with the planned upgrades and
replacements in 1999, will substantially make its hardware and information
systems Year 2000 compliant.
As part of its Year 2000 preparations, the Company has identified its most
reasonably likely worst case scenario as the replacement of hardware, software
and equipment that are not Year 2000 compliant. Notwithstanding the foregoing,
management does not currently believe that the costs of assessment, remediation
or replacement of the Company's systems will have a material adverse effect on
the Company's operations, cash flows or financial condition.
NEW PRONOUNCEMENTS
In 1998, the Company adopted the provisions of Statements of Accounting
Standards Nos. 130 and 131, and Statement of Position 98-1.
SFAS 130, "Reporting Comprehensive Income" establishes standards for displaying
comprehensive income and its components in the Company's financial statements.
Comprehensive income encompasses all changes in stockholders equity with the
exception of those transactions arising with its owners. The adoption of this
pronouncement had no effect on the Company's results of operations, as
comprehensive income was the same as net income for the Company.
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information"
establishes standards for reporting information about operating segments in its
annual financial statements and requires reporting selected information about
operating segments in interim financial reports. The standard also establishes
requirements for related disclosure about the Company's products and services,
geographic areas and major customers. The Company operates in one industry
segment, and accordingly, the adoption of this pronouncement had no effect on
the Company's presentation of operating results or financial position.
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" establishes standards for accounting for
the costs of computer software developed or obtained for internal use and
requires that costs be charged to operations or capitalized depending upon
factors described in the statement. The adoption of SOP 98-1 had no impact on
the Company's results of operation, financial position or cash flows.
The Company will be required to adopt the provisions of Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities", which requires that the
costs of start-up activities and organization costs be expensed as incurred. The
Company does not expect that the adoption of the pronouncement to have a
material impact on the Company's results of operation, financial condition or
cash flows.
MARKET RISK
Foreign Currency Risk. The Company's revenues and expenses are both generated
and denominated in United States Dollars, and as such, changes in exchange rates
will not have an impact on the Company's operating results, financial position
or cash flows.
Interest Rate Risk. As of December 31, 1998, the Company's investment portfolio
consisted of commercial paper and 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 $12 million, have an average interest rate of approximately 6% and
are subject to interest rate risk. Due to the average maturity and conservative
nature of the investment portfolio, a sudden change in interest rates would not
have a material effect on the value of the portfolio. Management estimates that
had the average yield of the Company's investments decreased by 100 basis
points, the Company's interest income for the year ended December 31,
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1998 would have decreased by approximately $200,000. This estimate assumes that
the decrease occurred on the first day of 1998 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
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operation. There can be no assurance, however, that the Company's
business will not be affected by inflation in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds no market risk sensitive trading instruments, for trading
purposes or otherwise. For a discussion of the Company's exposure to market
risk, see "Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bright Horizons Family Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of BRIGHT HORIZONS
FAMILY SOLUTIONS, INC. (a Delaware corporation) and subsidiaries as of December
31, 1998 and 1997 and the related consolidated statements of income,
stockholders' equity and cash flows for the three years in the period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the statements of income, stockholders' equity and cash flows for the
year ended June 30, 1996 of Bright Horizons, Inc., a company acquired during
1998 in a transaction accounted for as a pooling of interests, as discussed in
Note 1. Such statements are included in the consolidated financial statements of
Bright Horizons Family Solutions, Inc. for the year ended December 31, 1996 and
reflect total revenues of 50% for the year ended December 31, 1996, of the
related Bright Horizons Family Solutions, Inc. consolidated totals. These
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to amounts included for Bright Horizons,
Inc., is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Bright Horizons Family Solutions,
Inc. and subsidiaries as of December 31, 1998 and December 31, 1997 and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, based on our audits and
the report of the other auditors, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Nashville, Tennessee
February 9, 1999
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30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Bright Horizons, Inc.
In our opinion, the consolidated statements of income, of changes in
stockholders' equity and of cash flows (not presented separately herein) present
fairly, in all material respects, the results of operations and cash flows of
Bright Horizons, Inc. and its subsidiaries for the year ended June 30, 1996, in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
August 1, 1996, except for the stock split
which is as of October 8, 1997, and
the adoption of SFAS 128 which is as of
May 14, 1998
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Bright Horizons Family Solutions, Inc.
Consolidated Balance Sheets
(in thousands except share data)
December 31,
------------
1998 1997
(Note 1) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 20,439 $ 25,384
Restricted cash -- 176
Accounts receivable, net of allowance for
doubtful accounts of $709 and
$579 respectively 13,302 9,003
Income taxes receivable 2,243 --
Prepaid expenses and other current assets 1,520 2,605
Current deferred tax asset 4,579 2,688
-------- --------
Total current assets 42,083 39,856
Fixed assets, net 31,482 21,232
Deferred charges, net 693 692
Goodwill and other intangibles, net 14,095 11,280
Noncurrent deferred tax asset 2,599 3,233
Other assets 511 549
-------- --------
Total assets $ 91,463 $ 76,842
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt and
obligations under capital leases $ 67 $ 80
Accounts payable and accrued expenses 21,759 14,647
Deferred revenue, current portion 7,565 4,612
Amounts held in escrow -- 176
Income taxes payable -- 962
Other current liabilities 652 1,374
-------- --------
Total current liabilities 30,043 21,851
Long term debt and obligations due under
capital leases, net of current portion 618 703
Accrued rent 1,560 1,519
Other long term liabilities 2,731 2,771
Deferred revenue, net of current portion 3,131 3,335
-------- --------
38,083 30,179
-------- --------
Commitments and Contingencies (Note 13)
Stockholders' equity:
Common Stock $.01 par value, 30,000,000 shares
authorized, 11,554,000 and 10,854,000
shares issued and outstanding at
December 31, 1998 and 1997, respectively 115 108
Additional paid in capital 67,589 60,544
Accumulated deficit (14,324) (13,989)
-------- --------
Stockholders' equity 53,380 46,663
-------- --------
Total liabilities and stockholders' equity $ 91,463 $ 76,842
======== ========
The accompanying notes are an integral part of the consolidated
financial statements
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Bright Horizons Family Solutions, Inc.
Consolidated Statements of Income
(in thousands except per share data)
Fiscal Year 1998 Fiscal Year 1997 Fiscal Year 1996
(Note 1) (Note 1) (Note 1)
Revenue $209,372 $172,555 $127,107
Cost of services 180,770 149,312 111,351
-------- -------- --------
Gross profit 28,602 23,243 15,756
Selling, general and administrative 18,972 16,299 11,097
Amortization 893 1,056 2,229
Other charges (Note 11) 7,500 840 --
-------- -------- --------
Income from operations 1,237 5,048 2,430
Interest income (expense), net 1,210 (44) (537)
-------- -------- --------
Income before income taxes 2,447 5,004 1,893
Income tax (expense) benefit (1,973) (2,243) 2,164
-------- -------- --------
Net income before preferred stock dividends
and accretion on redeemable common stock 474 2,761 4,057
Preferred stock dividends and accretion on redeemable
common stock -- 917 1,127
-------- -------- --------
Net income available to common stockholders $ 474 $ 1,844 $ 2,930
======== ======== ========
Earnings per share - basic $ 0.04 $ 0.43 $ 1.16
======== ======== ========
Weighted average number of common shares - basic 11,172 4,333 2,522
======== ======== ========
Earnings per share - diluted $ 0.04 $ 0.30 $ 0.66
======== ======== ========
Weighted average number of common and
common equivalent shares - diluted 12,411 9,293 4,502
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
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33
Bright Horizons Family Solutions, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(in thousands)
Common Stock Additional Accumulated Total
Shares Amount Paid In Deficit Stockholders'
Capital Equity
Balance Fiscal Year 1995 (Note 1) 2,433 $ 24 $ 6,713 $(18,621) $(11,884)
Issuance of non-qualified stock options
(Notes 9 and 17) -- -- 100 -- 100
Exercise of options 34 -- 106 -- 106
Issuance of restricted common stock (Note 17) 33 -- 28 -- 28
Accretion of preferred stock -- -- -- (1,127) (1,127)
Net income before preferred stock dividends and
accretion on redeemable common stock -- -- -- 4,057 4,057
------ ---- -------- -------- --------
Balance Fiscal Year 1996 2,500 24 6,947 (15,691) (8,720)
Adjustment to conform fiscal year of
Bright Horizons, Inc. (Note 1) 6 -- 5 (142) (137)
Exercise of options 183 2 399 -- 401
Exercise of warrants (Note 9) 350 4 165 -- 169
Shares issued in public stock offering (Note 9) 2,954 30 27,657 -- 27,687
Redemption of preferred stock for
common stock (Note 9) 4,736 47 24,432 -- 24,479
Shares issued in connection with acquisition
(Note 2) 125 1 642 -- 643
Accretion of preferred stock -- -- -- (843) (843)
Common stock restriction removed (Notes 11 and 17) -- -- 297 -- 297
Accretion of redeemable common stock -- -- -- (74) (74)
Net income before preferred stock dividends
and accretion on redeemable common stock -- -- -- 2,761 2,761
------ ---- -------- -------- --------
Balance at December 31, 1997 10,854 108 60,544 (13,989) 46,663
Exercise of options 723 7 4,281 -- 4,288
Exercise of warrants (Note 9) 26 -- 160 -- 160
Repurchase of shares (Note 9) (49) -- (325) (809) (1,134)
Options issued in connection with acquisition
(Notes 2, 9 and 17) -- -- 375 -- 375
Tax benefit from the exercise of non-qualified
options (Note 9) -- -- 2,554 -- 2,554
Net income before preferred stock dividends and
accretion on redeemable common stock -- -- -- 474 474
------ ---- -------- -------- --------
Balance at December 31, 1998 11,554 $115 $ 67,589 $(14,324) $ 53,380
====== ==== ======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
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Bright Horizons Family Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year 1998 Fiscal Year 1997 Fiscal Year 1996
(Note 1) (Note 1) (Note 1)
Net income before preferred stock dividends and accretion
on redeemable common stock $ 474 $ 2,761 $ 4,057
Adjustments to reconcile net income before preferred
stock dividends and accretion on redeemable common
stock to net cash provided by operating activities:
Depreciation and amortization 3,923 2,918 3,590
Non-cash expenses (Note 17) -- 297 68
Asset writedowns and (gain) loss on disposal
of fixed assets 1,248 49 46
Decrease in goodwill from utilization of
tax benefit -- 737 1,142
Deferred income taxes (1,257) (770) (3,659)
Changes in assets and liabilities:
Accounts receivable, trade (4,270) (1,515) (2,831)
Income taxes receivable (2,243) -- --
Prepaid expenses and other current assets 3,814 (665) 156
Accounts payable and accrued expenses 6,622 2,351 2,145
Income taxes payable (962) 883 187
Deferred revenue 2,749 1,802 728
Accrued rent 42 (82) (69)
Other current and long-term liabilities (938) 1,599 1,373
-------- -------- --------
Total adjustments 8,728 7,604 2,876
-------- -------- --------
Net cash provided by operating activities 9,202 10,365 6,933
-------- -------- --------
Cash flows from investing activities:
Additions to fixed assets, net of acquired amounts (13,339) (10,670) (1,817)
Proceeds from disposal of fixed assets 181 406 33
Increase in deferred charges (432) (139) (87)
(Increase) decrease in other assets (21) 14 17
Payments for acquisitions (3,615) (1,972) (3,067)
-------- -------- --------
Net cash used for investing activities (17,226) (12,361) (4,921)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,448 28,257 106
Purchase of treasury stock (1,134) -- --
Net borrowings under line of credit -- -- 500
Principal payments of long term debt and
obligations under capital leases (235) (9,661) (794)
Borrowing of long term debt and
obligations under capital leases -- 724 --
-------- -------- --------
Net cash provided by (used in) financing
activities 3,079 19,320 (188)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (4,945) 17,324 1,824
Cash and cash equivalents, beginning of period 25,384 8,060 5,673
-------- -------- --------
Cash and cash equivalents, end of period $ 20,439 $ 25,384 $ 7,497
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
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Bright Horizons Family Solutions, Inc.
Notes To Consolidated Financial Statements
For Fiscal Years 1998, 1997 and 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Bright Horizons Family Solutions, Inc. (the "Company") was
incorporated under the laws of the state of Delaware on April 27, 1998 and
commenced substantive operations upon the completion of the merger by and
between Bright Horizons, Inc. ("BRHZ") and CorporateFamily Solutions, Inc.
("CFAM") on July 24, 1998 (the "Merger"). The Company provides workplace
services for employers and families including child care, early education and
strategic work/life consulting throughout the United States.
The Company operates its family centers under various types of arrangements,
which generally can be classified in two forms: (i) the corporate-sponsored
model, where the Company operates a family center on the premises of a corporate
sponsor and gives priority enrollment to the corporate sponsor's employees and
(ii) the management contract model, where the Company manages a work-site family
center under a cost-plus arrangement, typically for a single employer.
BUSINESS COMBINATION AND BASIS OF PRESENTATION -- On April 26, 1998 BRHZ and
CFAM entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement"). Pursuant to the Merger Agreement, as amended, BRHZ and CFAM have
merged with subsidiaries of the Company and are now wholly owned subsidiaries of
the Company. The Merger was approved by a vote of the stockholders of BRHZ and
CFAM on July 24, 1998, and has been treated as a tax free reorganization and
accounted for as a pooling of interests. In the Merger, each share of BRHZ
common stock ("BRHZ Common Stock") was exchanged for 1.15022 shares of the
Company's $.01 par value per share common stock ("Common Stock"), and each share
of CFAM common stock ("CFAM Common Stock") was exchanged for one share of Common
Stock. Each outstanding option to purchase shares of BRHZ Common Stock and CFAM
Common Stock has been converted into an option to purchase shares of the
Company's Common Stock at the same conversion ratios referenced above. The
accompanying consolidated financial statements have been restated to include the
financial position and results of operations for both BRHZ and CFAM for all
periods presented, unless otherwise indicated. All historical amounts have been
restated to reflect the respective exchange ratio, and certain reclassifications
have been made for consistent presentation, which had no effect on net income.
BRHZ operated on a fiscal year ended June 30. CFAM had a fiscal year ending on
the Friday closest to December 31. The Company operates on a calendar year. The
accompanying consolidated financial statements combine financial position and
operating results as of and for the fiscal years ended December 31, 1998 and
January 1, 1999 ("Fiscal Year 1998") for BRHZ and CFAM, respectively, December
31, 1997 and January 2, 1998 ("Fiscal Year 1997") for BRHZ and CFAM,
respectively, and June 30, 1996 and December 27, 1996 ("Fiscal Year 1996") for
BRHZ and CFAM, respectively.
Due to the different fiscal year ends, BRHZ's results of operations for the six
month period ended December 31, 1996 are not included in the restated financial
statements for Fiscal Years 1997 or 1996. For this period, BRHZ had revenues of
$40 million, net income of $407,000 and total changes in common stockholders
equity of ($137,000). Accordingly, an adjustment has been included in the
Company's Consolidated Statement of Stockholders' Equity for Fiscal Year 1997 to
reflect this activity.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates.
CASH EQUIVALENTS -- The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of high quality commercial paper and institutional
33
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money market accounts. The carrying value of these instruments approximates
market value due to their short maturities.
RESTRICTED CASH -- In connection with the acquisition of Resources for Child
Care Management ("RCCM") in 1995, the Company was required to maintain cash in
escrow pending the final resolution of certain tax matters. The resolution of
such matters was completed in 1998.
FIXED ASSETS -- Property and equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to expense as incurred,
whereas expenditures for improvements and replacements are capitalized.
The cost and accumulated depreciation of assets sold or otherwise disposed of
are removed from the accounts and the resulting gain or loss is reflected in the
consolidated statements of income.
DEFERRED CHARGES -- Deferred charges include real estate brokers' fees, and
architectural and design fees, specifically attributable to family center
facilities which are capitalized and amortized on a straight line basis over the
base period of the related center facility lease. For Fiscal Years 1998 and
1997, accumulated amortization was approximately $321,000 and $570,000,
respectively.
INTANGIBLE ASSETS - Goodwill and Other Intangible Assets consist of goodwill,
and various contract rights 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, not exceeding twenty-five years.
Other intangible assets are amortized over the estimated period of benefit,
utilizing an accelerated or straight-line method, over periods ranging from 3 to
10 years, as applicable.
Subsequent to an acquisition, the Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining useful life
of its intangible assets may warrant revision or that the remaining balance of
such assets may not be recoverable. 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.
DEFERRED REVENUE -- Deferred revenue results from prepaid tuitions,
employer-sponsor advances and cash received on consulting or development
projects still in process.
OTHER CURRENT AND LONG TERM LIABILITIES -- Other current and long-term
liabilities consist primarily of deposits held pursuant to certain family center
management contracts. The deposits will be remitted to the clients upon
termination of the respective contracts. Amounts also consist of parent fee
deposits.
INCOME TAXES -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS
109"). Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the fiscal years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
REVENUE RECOGNITION - Revenue is recognized as services are performed. In both
the corporate-sponsored model and the management contract model, revenues
consist primarily of tuition paid by parents, supplemented in some cases by
payments from corporate sponsors and, to a lesser extent, by payments from
government agencies. Revenues also include management fees paid by corporate
sponsors. In the management contract model, in addition
34
37
to tuition and management fee revenues, revenue is also recognized for
reimbursable expenses paid either in lieu of or to supplement tuition.
The Company maintains contracts with its corporate sponsors to manage and
operate their family centers under various terms. The Company's contracts are
generally three to ten years in length with varying renewal options. Management
expects to renew the Company's existing contracts for periods consistent with
the remaining renewal options allowed by the contracts or other reasonable
extensions.
STOCK-BASED COMPENSATION -- Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for employee stock-based compensation using the intrinsic value method as
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB Opinion No. 25"), and related Interpretations. Under
APB Opinion No. 25, no compensation cost related to employee stock options has
been recognized because options are granted with exercise prices equal to or
greater than the fair market value at the date of grant. Certain options issued
in connection with an acquisition (see Note 2) have been accounted under the
provisions of SFAS 123.
EARNINGS PER SHARE -- In Fiscal Year 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). Under the standards established by SFAS 128, earnings per share is
measured at two levels: basic earnings per share 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.
NEW PRONOUNCEMENTS -- In January 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income"("SFAS 130"). SFAS 130 establishes standards for displaying comprehensive
income and its components in a full set of financial statements. Comprehensive
income encompasses all changes in shareholders' equity (except those arising
from transactions with owners) and includes net income, net unrealized capital
gains or losses on available for sale securities and foreign currency
translation adjustments. Adoption of this pronouncement has not had a material
impact on the Company's results of operations, as comprehensive income for 1998
was the same as net income for the Company.
In December 1998, the Company adopted the provisions of Statement of Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information", which established standards for reporting information
about operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports
issued to stockholders. SFAS 131 superseded Statement of Accounting Standards
No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company operates in one industry
segment, and, accordingly, the adoption of SFAS 131 has had no effect on the
Company's presentation of operating results and financial position.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 establishes standards for accounting for
the costs of computer software developed or obtained for internal use. The
Company adopted SOP 98-1 in 1998. SOP 98-1 requires that costs should either be
expensed or capitalized depending upon factors described in SOP 98-1. The
adoption of SOP 98-1 had no impact on the Company's results of operations,
financial position or cash flows.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires
the costs of start-up activities and organization costs, as defined, to be
charged to operations as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. Management does not expect the adoption to
have a material impact on the Company's results of operations, financial
condition or cash flows in 1999.
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RECLASSIFICATIONS -- Certain reclassifications have been made in the Fiscal Year
1996 and Fiscal Year 1997 consolidated financial statements to conform to the
Fiscal Year 1998 presentation.
2. ACQUISITIONS
Effective December 25, 1998, the Company acquired 100% of the outstanding stock
of Kidstop at Boynton Beach, Inc., and the business and substantially all the
assets of Kidstop Early Learning Centers, Inc., for approximately $2.4 million,
which includes contingent payments of $200,000 payable upon achievement of
certain operating targets. The transaction has been accounted for as a purchase,
and the operating results have been included from the date of acquisition. The
purchase price has been tentatively allocated based on the estimated fair value
of the assets and liabilities acquired at the date of acquisition. Goodwill
tentatively amounting to approximately $2.1 million resulted from the
transaction and is being amortized over a period of 18 years. A final allocation
will occur in 1999 and is not expected to be materially different from the
tentative allocation.
Effective September 8, 1998, the Company acquired Creative Movement Center, Inc.
("CMC") through a merger of CMC into an indirect, wholly owned subsidiary of the
Company, with CMC surviving the merger. The consideration paid in connection
with the merger was approximately $900,000 cash, the assumption of net
liabilities of approximately $250,000, contingent payments of $275,000 payable
upon the achievement of certain operating targets, and options to purchase
30,120 shares of the Common Stock which were valued at $375,000 under the
provisions of SFAS 123. The transaction has been accounted for as a purchase,
and the operating results of CMC have been included from the date of
acquisition. The purchase price has been allocated based on the estimated fair
value of the assets and liabilities acquired at the date of acquisition.
Goodwill of approximately $1.8 million resulted from the transaction and is
being amortized over a period of 18 years.
Effective July 1, 1997, BRHZ acquired the business and substantially all the
assets and liabilities of Pacific Preschools, Inc. d.b.a. The Learning Garden
for approximately $1,600,000 in cash and 108,333 shares of BRHZ Common Stock in
a transaction which was accounted for as a purchase. The operating results of
the acquired company have been included from the date of acquisition. The
purchase price was allocated based on the estimated fair value of the assets and
liabilities acquired at the date of acquisition. Goodwill of approximately
$2,700,000 resulted from the transaction and is being amortized over a period of
25 years.
Effective December 1, 1995, BRHZ acquired the business and some of the assets
and liabilities of GreenTree Child Care Services, Inc. ("GreenTree"), a child
care management company from the Service Master Company L.P., for approximately
$6,000,000, including a $3,000,000 note payable, in a transaction which was
accounted for as a purchase. The operating results of the acquired company have
been included from the date of acquisition. The purchase price was allocated
based on the estimated fair value of the assets and liabilities acquired at the
date of acquisition. Approximately $3,000,000 in goodwill and intangible assets
were recorded as a result of the transaction. Goodwill was reduced by
approximately $1,140,000 and $740,000 in Fiscal Years 1996 and 1997,
respectively, due to the benefit of acquired deferred tax assets, and is being
amortized over 25 years. BRHZ also issued a common stock purchase warrant for
66,666 shares of BRHZ's Common Stock at an exercise price of $10.50 per share,
which was forfeited by The Service Master Company L.P. in December 1997.
3. FIXED ASSETS
Fixed assets consist of the following:
Depreciable lives December 31, December 31,
(years) 1998 1997
------- ---- ----
Furniture and equipment 3 - 15 $14,844,000 $11,069,000
Buildings 20 - 40 15,706,000 10,537,000
Leasehold improvements 3 / life of lease 7,786,000 4,345,000
Land -- 2,694,000 1,887,000
----------- -----------
41,030,000 27,838,000
Less accumulated depreciation (9,548,000) (6,606,000)
----------- -----------
Fixed assets, net $31,482,000 $21,232,000
=========== ===========
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39
Fixed assets in Fiscal Year 1998 and Fiscal Year 1997 include automobiles and
office equipment of $358,000 held under capital leases. Amortization expense
relating to fixed assets under capital leases was approximately $45,000 and
$37,000 for Fiscal Year 1998 and Fiscal Year 1997, respectively. Accumulated
amortization relating to fixed assets under capital leases totaled approximately
$269,000 and $224,000 for Fiscal Year 1998 and Fiscal Year 1997, respectively.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31, December 31,
1998 1997
---- ----
Goodwill, net of amortization of $2,543,000 and
$1,961,000, respectively $13,121,000 $ 9,834,000
Non compete agreements and contract rights, net of
amortization of $2,967,000 and $2,669,000,
respectively 948,000 1,446,000
Other, net of amortization of $11,000 26,000 --
----------- -----------
$14,095,000 $11,280,000
=========== ===========
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, December 31,
1998 1997
---- ----
Accounts payable $ 1,394,000 $ 651,000
Accrued payroll and employee benefits 12,255,000 8,887,000
Accrued expenses 5,909,000 5,109,000
Accrued merger related expenses 2,201,000 --
----------- -----------
$21,759,000 $14,647,000
=========== ===========
6. LINES OF CREDIT
The Company maintains a $10,000,000 unsecured line of credit with a bank which
bears interest at either the bank's prime rate or LIBOR plus a spread based on
funded debt levels. A fee of .125% per annum of the unused line of credit,
adjusted for certain increases in debt borrowings, is payable quarterly. The
credit line expires on October 31, 1999. The agreement requires the Company to
comply with certain covenants, which include, among other things, the
maintenance of specified financial ratios. The Company has drawn $480,000 from
this facility in order to purchase real estate, which has been subsequently
secured by a mortgage. This amount represents a reduction in the amount of funds
available to be drawn upon, and has been included in long term debt on the
accompanying consolidated balance sheet. See Note 7.
The Company also maintains a $5,000,000 revolving credit facility with a bank to
be used for working capital and other general corporate purposes, which expires
on August 1, 1999. Borrowings under the credit facility, which is subject to
renewal on an annual basis, are unsecured, and will bear interest at the Libor
plus 2.0%. No amounts have been advanced under the facility as of December 31,
1998.
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7. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, December 31,
1998 1997
---- ----
Mortgage payable to a bank with monthly payments of interest only at either (i)
the bank's prime rate, or (ii) LIBOR plus a spread based on the Company's funded
debt levels; principal payment due October 2003; secured by real estate $480,000 $480,000
Notes payable to a state agency with monthly payments of approximately $2,300
including interest of 5%, with final payments due January 2001 and April 2007;
secured by related furniture, fixtures and equipment 92,000 112,000
Unsecured notes payable to a bank, repaid in 1998 -- 29,000
Obligations under capital leases at rates of 8% to 10.24%, secured by
automobiles and certain office equipment; due in 2001 113,000 162,000
-------- --------
Total debt 685,000 783,000
Less current maturities (67,000) (80,000)
-------- --------
Long-term debt $618,000 $703,000
======== ========
8. INCOME TAXES
Income tax expense (benefit) consisted of the following for Fiscal Years 1998,
1997, and 1996 (Note 1):
Fiscal Year Fiscal Year Fiscal Year
1998 1997 1996
---- ---- ----
Current tax expense $ 676,000 $ 2,276,000 $ 353,000
Deferred tax expense (1,257,000) (770,000) (1,734,000)
Reduction in valuation allowance -- -- (1,925,000)
Benefit from the exercise of non-qualified options 2,554,000 -- --
Benefit of acquired deferred tax assets applied to reduce
goodwill -- 737,000 1,142,000
----------- ----------- -----------
Income tax expense (benefit), net $ 1,973,000 $ 2,243,000 $(2,164,000)
=========== =========== ===========
A reconciliation of the U.S. Federal statutory rate to the effective rate is as
follows:
Fiscal Year Fiscal Year Fiscal Year
1998 1997 1996
---- ---- ----
U. S. Federal statutory rate $ 832,000 $1,701,000 $ 643,000
Benefit of acquired deferred tax assets applied to reduce
goodwill -- 737,000 1,142,000
Change in valuation allowance -- (416,000) (4,455,000)
Return to provision adjustments impacting deferred tax assets
-- (420,000) --
State taxes on income 121,000 293,000 295,000
Non-deductible merger costs 935,000 -- --
Permanent differences and other 85,000 348,000 211,000
---------- ---------- -----------
Income tax expense (benefit), net $1,973,000 $2,243,000 $(2,164,000)
========== ========== ===========
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Deferred tax assets are as follows:
Fiscal Year Fiscal Year
1998 1997
---- ----
Net operating loss carryforwards $ 734,000 $ 784,000
Reserve on assets 277,000 234,000
Liabilities not yet deductible 3,743,000 2,361,000
Deferred Revenue 2,409,000 1,353,000
Amortization 827,000 800,000
Other (812,000) 389,000
---------- ----------
$7,178,000 $5,921,000
========== ==========
As of December 31, 1998 the Company has federal net operating loss carryforwards
of approximately $1.7 million which are subject to annual limitations and are
available to offset certain current and future taxable earnings and expire at
various dates through 2007. 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 realization of the
net deferred tax asset is more likely than not.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
Pursuant to the Merger Agreement and Registration Statement on Form S-4
(Registration No. 333-57035), dated June 17, 1998, BRHZ and CFAM were merged
with subsidiaries of the Company, and are now wholly owned subsidiaries of the
Company. The Merger was approved by a separate vote of the stockholders of BRHZ
and CFAM on July 24, 1998, and has been treated as a tax free reorganization and
accounted for as a pooling of interests. In the Merger, each share of BRHZ
Common Stock was exchanged for 1.15022 shares of the Company's Common Stock,
$.01 par value per share, and each share of CFAM Common Stock was exchanged for
one share of Common Stock. All historical amounts in the accompanying financial
statements have been restated to reflect the respective exchange ratio.
BRHZ PUBLIC OFFERING
Pursuant to the Registration Statement on Form S-1, as amended (Registration No.
333-14981) which was declared effective November 6, 1997, BRHZ completed an
initial public offering of 3,415,500 shares of BRHZ Common Stock, of which
1,350,000 shares of BRHZ Common Stock were issued and sold by BRHZ and 2,065,500
of which were sold by selling stockholders, at an offering price of $13.00 per
share (the "BRHZ Offering"). BRHZ received proceeds of approximately $15.6
million (after deducting underwriting discounts and other expenses).
Approximately $4.0 million was used to repay outstanding indebtedness.
In connection with the BRHZ Offering, BRHZ effected a .33 for 1 reverse stock
split. Accordingly, all references in the accompanying financial statements to
common share or per common share information have been restated to reflect the
reverse stock split.
In connection with the offering, all outstanding shares of BRHZ's Series A,
Series B and Series C Mandatorily Redeemable Convertible Preferred Stock
(collectively, the "BRHZ Convertible Preferred Stock") were converted into an
aggregate of 3,100,512 shares of BRHZ Common Stock, and outstanding warrants,
which otherwise would have expired upon the closing of the offering, were
converted into 303,924 shares of BRHZ Common Stock. The BRHZ Convertible
Preferred Stock was initially recorded at fair value. From the date of issuance
to the date of the mandatory redemption for BRHZ Common Stock, $9.1 million in
accretion and dividends were recorded as charges to retained earnings and as
increases to the carrying value of preferred stock. Upon the redemption of these
securities for BRHZ Common Stock, the carrying value of the BRHZ Convertible
Preferred Stock was recorded as a credit to common stock and paid-in capital.
Redeemable common stock issued in connection with an acquisition was also
converted to BRHZ Common Stock in connection with the BRHZ Offering.
39
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CFAM PUBLIC OFFERING
Pursuant to the Registration Statement on Form S-1, as amended (Registration No.
333-29523) which was declared effective August 12, 1997, CFAM completed an
initial public offering of 2,702,500 shares of CFAM Common Stock, of which
1,401,386 shares were issued and sold by CFAM, at an offering price of $10.00
per share (the "CFAM Offering"). CFAM received net proceeds of approximately
$12.1 million (after deducting underwriting discounts and expenses).
Approximately $3.7 million was used to repay all of the Company's then
outstanding bank borrowings.
In connection with the CFAM Offering, CFAM effected a .65 for 1 reverse stock
split. Accordingly, all references in the accompanying consolidated financial
statements to common share or per common share information have been restated to
reflect the reverse stock split. As a result of the CFAM Offering, all 1,125,000
shares of CFAM's issued and outstanding Series A preferred stock were converted
into 1,169,935 shares of CFAM Common Stock.
The Company intends to use the balance of the net proceeds from both the
offerings for working capital and general corporate purposes, including the
merger and integration of the operations of BRHZ and CFAM, and financing of
potential acquisitions and new centers currently under development.
STOCK OPTIONS
The Company has established an incentive compensation plan under which it is
authorized to grant both incentive stock options and non-qualified stock options
to employees and directors, as well as other stock-based compensation. Under
terms of the 1998 Stock Incentive Plan, 1,500,000 shares of the Company's Common
Stock are available for distribution. As of December 31, 1998, there were
approximately 950,000 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. In accordance with the Merger Agreement, the Company assumed all
obligations for outstanding options to purchase shares of BRHZ and CFAM. The
following table summarizes information about stock options outstanding at
December 31, 1998:
Weighted Average Weighted
Number Remaining Weighted Number Average
Range of Outstanding Contractual Average Exercisable Exercise
Exercise Price at 12/31/98 Life Exercise Price at 12/31/98 Price
-------------- ----------- ---- -------------- ----------- -----
$ 0.01 - $ 2.40 141,659 4.4 $ .84 123,338 $ .73
$ 2.41 - $ 4.80 106,181 5.0 $ 3.43 84,904 $ 3.51
$ 4.81 - $ 7.20 138,129 5.3 $ 6.43 108,034 $ 6.46
$ 7.21 - $ 9.60 1,274,440 7.2 $ 7.74 1,253,654 $ 7.74
$ 9.61 - $12.00 57,604 8.9 $10.71 38,435 $10.42
$12.01 - $14.40 -- -- -- -- --
$14.41 - $16.80 38,417 9.0 $16.62 16,878 $16.62
$16.81 - $19.20 533,585 9.7 $18.94 17,252 $17.27
$19.21 - $21.60 17,000 9.1 $19.87 15,000 $19.75
$21.61 - $24.00 32,875 9.7 $21.83 -- $ -- .
--------- --- ------ --------- ------
2,339,890 7.5 $10.11 1,657,495 $ 7.28
Upon completion of the Merger, all previously outstanding options to purchase
CFAM Common Stock granted by CFAM were subject to accelerated vesting and became
immediately exercisable. In addition, options to purchase BRHZ Common Stock
granted to certain BRHZ executives were subject to accelerated vesting and
became immediately exercisable upon completion of the Merger. All remaining
outstanding options to purchase BRHZ
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Common Stock were converted into options to purchase shares of Common Stock
under the terms and conditions under which they were granted, adjusted for the
above mentioned exchange ratios.
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. As a result, no compensation cost has been
recognized. Certain options issued in connection with an acquisition were
granted with an exercise price less than the fair value of the Company's Common
Stock, which were valued at approximately $375,000 under the provisions of SFAS
123.
SFAS 123 established new financial accounting and reporting standards for
stock-based compensation plans. The Company has adopted the disclosure-only
provision of SFAS 123. As a result, no compensation cost has been recognized for
the Company's stock option plans. Had compensation cost for the stock option
plans been determined based on the fair value at the grant date for awards in
Fiscal Years 1998 through 1995 consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts for Fiscal Years 1998 and 1997:
Fiscal Year Fiscal Year
1998 1997
------------ -----------
Net income (loss) available to common stockholders:
As reported $ 474,000 $1,844,000
Pro forma $(286,000) $ 734,000
Earnings (loss) per share - Basic:
As reported $ 0.04 $ 0.43
Pro forma $ (0.03) $ 0.17
Earnings (loss) per common share assuming dilution:
Net income (loss):
As reported $ 474,000 $2,761,000
Pro forma $(286,000) $1,651,000
Earnings (loss) per share - Diluted:
As reported $ 0.04 $ 0.30
Pro forma $ (0.03) $ 0.14
Under the provisions of SFAS 123, proforma diluted earnings per share for Fiscal
Year 1998 are the same as basic earnings per share, as the effects of additional
dilution related to the conversion of options would have been anti-dilutive.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option on its date of grant has been estimated for
pro-forma purposes using the Black-Scholes option pricing model using the
following weighted average assumptions:
Fiscal Year Fiscal Year
1998 1997
--------------- -------------
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 35.0% 35.0%
Risk free interest rate 5.05% - 5.77% 5.60% - 6.42%
Expected life of options 7.5 - 8.5 years 5 - 7.5 years
Weighted-average fair value per share
of options granted during the year $ 6.84 $ 3.94
41
44
A summary of the status of the Company's option plans, including options issued
to members of the Board of Directors, is as follows for Fiscal Years 1998, 1997
and 1996:
Fiscal Year 1998 Fiscal Year 1997 Fiscal Year 1996
---------------- ---------------- ----------------
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 2,153,842 $ 6.56 1,675,300 $5.16 1,160,790 $4.07
Granted 571,337 19.12 729,946 8.46 566,109 7.15
Exercised (669,717) 5.71 (183,377) 2.01 (34,254) 3.12
Canceled (50,572) 5.71 (68,027) 5.02 (68,739) 4.33
--------- ------ --------- ----- --------- -----
Outstanding at end of period 2,004,890 $10.44 2,153,842 $6.56 1,623,906 $5.09
Exercisable 1,322,495 988,950 780,860
The weighted average contractual life remaining on options outstanding under the
above plans at December 31, 1998 is 7.6 years.
In connection with the CMC acquisition the Company issued 30,120 options, which
are excluded from the above figures. The options are fully vested, have an
exercise price of $10.375 and expire in 2008. As of December 31, 1998 10,000 of
the options were outstanding; which were exercised in January 1999. The options
were valued under the provisions of SFAS 123, the value of which was included in
the purchase price of the transaction.
In addition to the above plans, CFAM issued 32,500 options to purchase CFAM
Common Stock during 1996 to its vice-chairman in exchange for consulting
services. The options had an exercise price of $7.69 per share. The options were
valued under the provisions of SFAS 123 and compensation expense was recorded.
The options were subject to accelerated vesting in connection with the Merger,
and were exercised in Fiscal Year 1998.
During 1995, CFAM also issued 325,000 options to purchase CFAM Common Stock to
an employee and former stockholder of RCCM. The options were granted at an
exercise price of $7.69 per share. In connection with the Merger, the options
vested immediately and will remain in effect until their expiration ten years
after date of issuance. All 325,000 options outstanding at December 31, 1998
were exercised in February 1999.
The Company recognizes a tax deduction upon the exercise of non-qualified stock
options due to the recognition of compensation expense in the calculation of its
taxable income. The amount is based on the difference between the market value
of the common stock and the option price. These tax benefits are credited to
additional paid in capital.
STOCK PURCHASE WARRANTS
In connection with the issuance in fiscal 1991 of BRHZ's Series C Redeemable
Convertible Preferred Stock and the issuance of convertible debt, which was
subsequently retired, to certain stockholders, BRHZ issued warrants for the
purchase of 305,045 shares of BRHZ Common Stock. The warrants were exercisable
at $.60 per share and were exercised concurrent with the BRHZ Offering in
November 1997.
Prior to 1994, CFAM issued stock purchase warrants for the purchase of 78,000
shares of CFAM Common Stock to a stockholder. Warrants for the purchase of CFAM
Common Stock outstanding at January 2, 1998 and December 27, 1996, totaled
26,000 and 52,000, respectively, and had exercise prices ranging from $5.77 to
$7.69 per share. The 26,000 stock purchase warrants outstanding as of January 2,
1998 were exercised during Fiscal Year 1998.
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REDEEMABLE COMMON STOCK
On July 1, 1997, 108,333 shares of BRHZ Common Stock were issued in connection
with the Pacific Preschools, Inc. acquisition. These shares were redeemable at
the option of the holder upon the occurrence of certain events. The redemption
feature terminated upon the BRHZ Offering.
The Company recorded a charge of $74,000 to accumulated deficit in Fiscal Year
1997 to reflect the accretion of the redeemable common stock.
TREASURY STOCK
In January 1998, CFAM purchased 48,750 shares of CFAM Common Stock for $1.1
million. The shares were subsequently reissued to satisfy stock warrant and
option exercises.
10. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
All outstanding shares of BRHZ Convertible Preferred Stock were redeemed in
conjunction with the BRHZ initial public offering. The shares converted into
3,100,512 shares of BRHZ Common Stock at a ratio of 1.67 shares of BRHZ Common
Stock for each share of BRHZ Convertible Preferred Stock.
All outstanding shares of CFAM preferred stock were redeemed in conjunction with
the CFAM Offering. The CFAM preferred shares converted into 1,169,935 shares of
CFAM Common Stock.
The Company recorded charges of $843,000 and $1,127,000 to accumulated deficit
for Fiscal Years 1997 and 1996, respectively, to reflect the accretion of
preferred stock dividends.
11. OTHER CHARGES IN THE STATEMENT OF INCOME
MERGER COSTS. In connection with the Merger, the Company recognized a charge of
$7.5 million ($5.4 million after tax) which included transaction costs of $2.8
million, non cash asset impairment charges of $1.3 million, severance costs of
$0.5 million and one time incremental integration costs directly related to the
Merger totaling $2.9 million. At December 31, 1998, $2.2 million of these costs
are included in accrued expenses. The Company expects the majority of the
accrued liability associated with the charge, which has been included in accrued
expenses on the accompanying consolidated balance sheet, to be paid by September
30, 1999.
STOCK COMPENSATION CHARGE. Concurrent with the CFAM Offering, CFAM removed the
restrictions, set forth in the restricted stock agreement, on 32,500 shares of
common stock held by an officer of CFAM. As a result, CFAM recorded a
non-recurring, non-cash stock compensation charge of $297,000 (for which CFAM
received no tax deduction) in the quarter ended September 30, 1997.
OFFERING COSTS. In the quarter ended June 30, 1997, BRHZ incurred costs of
$543,000 associated with a public offering of securities. Because the offering
was delayed, the amounts incurred were treated as a period cost.
12. EARNINGS PER SHARE
The Company has adopted the provisions of SFAS 128. Under the standards
established by SFAS 128, earnings per share is measured at two levels: basic
earnings per share 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. All
periods presented have been restated to reflect the adoption of SFAS 128.
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The following tables present information necessary to calculate earnings per
share for Fiscal Years 1998, 1997 and 1996:
Fiscal Year 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic earnings per share
Income available to common stockholders $ 474,000 11,172,000 $.04
====
Effect of dilutive securities
Options and warrants -- 1,239,000
---------- ----------
Diluted earnings per share $ 474,000 12,411,000 $.04
========== ========== ====
Fiscal Year 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic earnings per share
Income available to common stockholders $1,844,000 4,333,000 $.43
====
Effect of dilutive securities
Options and warrants -- 1,118,000
Convertible preferred stock 917,000 3,842,000
---------- ----------
Diluted earnings per share $2,761,000 9,293,000 $.30
========== ========== ====
Fiscal Year 1996
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic earnings per share
Income available to common stockholders $2,930,000 2,522,000 $1.16
====
Effect of dilutive securities
Options and warrants -- 810,000
Convertible preferred stock 29,000 1,170,000
---------- ----------
Diluted earnings per share $2,959,000 4,502,000 $.66
========== ========== ====
The above earnings per share on a diluted basis has been prepared in accordance
with SFAS 128 based on the historical results and weighted average shares of
each company, adjusted for the effect on weighted average shares for the merger
exchange ratio. The diluted earnings per share in Fiscal Year 1996 is affected
by the fact that the preferred stock of BRHZ was anti-dilutive in Fiscal Year
1996 on a standalone basis.
13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various equipment, automobiles, office space and family
center facilities under non-cancelable operating leases. Many of the leases
contain renewal options for various periods. Certain leases contain provisions
which include additional payments based upon revenue performance, enrollment or
the level of the Consumer Price Index at a future date. Rent expense was
approximately $7,075,000, $5,643,000, and $4,398,000 in Fiscal Years 1998, 1997,
and 1996, respectively. Future minimum payments under non-cancelable operating
leases are as follows:
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Year Ending
1999 $ 6,429,000
2000 5,909,000
2001 5,198,000
2002 4,315,000
2003 3,857,000
Thereafter 17,306,000
-----------
$43,014,000
===========
Future minimum lease payments include approximately $295,000 of lease
commitments, which are guaranteed by third parties pursuant to operating
agreements for family centers.
EMPLOYMENT AND NON-COMPETE AGREEMENTS
Subsequent to its acquisition of RCCM, the Company entered into an employment
agreement with a former stockholder of RCCM. The agreement contained certain
severance benefits including salary continuation until August 27, 1998, if the
employee was terminated without cause prior to that date. The same individual
also entered into an agreement not to compete with the Company. This agreement
provided for the payment of an aggregate of $500,000, payable in equal yearly
installments of $100,000, in exchange for the individual's commitment not to
compete with the Company for a period of five years from the date of his
termination. In connection with the Merger, the Company's and the employee's
obligations under the employment agreement and the agreement not to compete were
terminated in consideration of a cash payment of approximately $360,000 from the
Company to the employee.
OTHER
The Company is a defendant in certain legal matters in the ordinary course of
business. Management believes the resolution of such legal matters will not have
a material effect on the Company's financial condition or results of operations.
The Company's family centers are subject to numerous federal, state and local
regulations and licensing requirements. Failure of a center to comply with
applicable regulations can subject it to governmental sanctions, which could
require expenditures by the Company to bring its family centers into compliance.
14. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Retirement Savings Plan (the "Plan") for all
employees with more than 1,000 hours of credited service annually and who have
been with the Company one or more years. The Plan is funded by elective employee
contributions of up to 15% of their compensation. Both BRHZ and CFAM maintain
individual plans ("BRHZ Plan" and "CFAM Plan", respectively). Under the BRHZ
Plan the Company matches 25% of employee contributions for each participant up
to 8% of the employee's compensation. Under the CFAM Plan the Company matches
25% of employee contributions for each participant up to 6% of the employee's
compensation. Expense under the Plan, consisting of Company contributions and
Plan administrative expenses paid by the Company, totaled $596,000, $571,000,
and $261,000 in Fiscal Years 1998, 1997 and 1996, respectively.
15. RELATED PARTY TRANSACTIONS
The Company has an agreement with S.C. Johnson & Son, Inc., the employer of a
member of its Board of Directors, to operate and manage a family center. In
return for its services under these agreements, the Company received management
fees of $58,000 $50,000 and $50,000, respectively, for Fiscal Years 1998, 1997,
and 1996. Additionally, the Company provided consulting services for such
employer in Fiscal Years 1997 and 1996 of $60,000 and $65,000, respectively.
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16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
CASH, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LONG-TERM DEBT
The carrying amounts approximate fair value which is estimated based on the
current rates offered to the Company for debt of the same remaining maturities.
17. STATEMENT OF CASH FLOW INFORMATION
The following table presents supplemental disclosure of cash flow information
for fiscal years 1998, 1997, and 1996:
Fiscal Year Fiscal Year Fiscal Year
1998 1997 1996
---- ---- ----
Supplemental cash flow information:
Cash payments of interest $ 69,000 $ 655,000 $ 538,000
Cash payments of income taxes 3,954,000 1,363,000 157,000
Non cash financing activities:
Issuance of options in exchange for consulting
services -- -- 100,000
Issuance of options in connection with
acquisition 375,000 -- --
Restriction removed on common stock -- 297,000 --
Tax benefit realized from the exercise of
non-qualified stock options 2,554,000 -- --
Issuance of restricted common shares -- -- 28,000
Accretion of preferred stock and redeemable
common stock -- 917,000 1,127,000
BRHZ acquired certain family centers by entering into mortgages of approximately
$978,000 in the period ended June 30, 1996.
During the periods ending December 31, 1997 and June 30, 1996 BRHZ entered into
capital lease obligations of $62,000 and $27,000, respectively, in connection
with lease agreements for automobiles and office equipment. The Company did not
enter into any capital lease arrangements in Fiscal Year 1998.
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In conjunction with the purchase of childcare management companies, as discussed
in Note 2, liabilities were assumed as follows:
Fiscal Year Fiscal Year Fiscal Year
1998 1997 1996
---- ---- ----
Fair value of assets acquired $ 5,048,000 $ 3,992,000 $ 8,578,000
Issuance of common stock and
stock options (375,000) (569,000) --
Cash paid (3,615,000) (1,972,000) (3,067,000)
----------- ----------- -----------
Liabilities assumed $ 1,058,000 $ 1,451,000 $ 5,511,000
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the Fiscal Years 1998 and 1997 are summarized as
follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands except per share data)
Fiscal Year 1998:
Revenue $48,868 $52,307 $53,161 $55,036
Operating income 2,060 2,226 (5,525) 2,476
Income before taxes 2,340 2,564 (5,208) 2,751
Net income 1,375 1,517 (4,049) 1,631
Net income available to
common stockholders 1,375 1,517 (4,049) 1,631
Basic earnings per share $ 0.13 $ 0.14 $ (0.36) $ 0.14
Diluted earnings per share $ 0.11 $ 0.12 $ (0.36) $ 0.13
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands except per share data)
Fiscal Year 1997:
Revenue $39,336 $42,136 $43,923 $47,160
Operating income 1,574 982 839 1,653
Income before taxes 1,420 880 810 1,894
Net income 802 485 345 1,129
Net income available to
Common stockholders 521 203 (9) 1,129
Basic earnings per share $ 0.20 $ 0.08 $ 0.00 $ 0.13
Diluted earnings per share $ 0.10 $ 0.05 $ 0.00 $ 0.10
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Item I - Election of Directors" appearing in the Company's
proxy statement for the annual meeting of stockholders to be held on May 20,
1999, 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 20, 1999,
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 20, 1999,
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 20, 1999, sets forth certain information with respect to certain
business relationships and transactions between the Company and its directors
and officers and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) The financial statements filed as part of this report are
included in Part II, Item 8 of this Annual Report on Form
10-K.
(2) All Financial Statement Schedules other than those listed
below have been omitted because they are not required under
the instructions to the applicable accounting regulations of
the Securities and Exchange Commission or the information to
be set forth therein is included in the financial statements
or in the notes thereto. The following additional financial
data should be read in conjunction with the financial
statements included in Part II, Item 8 of this Annual Report
on Form 10-K:
Page Number
-----------
Report of Arthur Andersen LLP, Independent Public Accountants (included 27
in Report in Part II, Item 8)
Report of PricewaterhouseCoopers LLP 50
Schedule II - Valuation and Qualifying Accounts 51
(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
(1) The Company filed an amendment to the Current Report on Form
8-K (originally filed on July 28, 1998) on October 7, 1998 to
include pro forma financial statements for fiscal years 1997,
1996 and 1995.
(c) Exhibits
Refer to Item 14(a)(3) above.
(d) Not applicable
49
52
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of
Bright Horizons, Inc.
Our audit of the consolidated financial statements of Bright Horizons, Inc.
referred to in our report dated August 1, 1996, except for the stock split which
is as of October 8, 1997, and the adoption of SFAS 128 which is as of May 14,
1998, appearing on page 28 of this Form 10-K also included an audit of the
Financial Statement Schedule II of Bright Horizons, Inc. (not presented
separately herein). In our opinion, this Financial Statement Schedule of Bright
Horizons, Inc. presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
August 1, 1996, except for the stock split
which is as of October 8, 1997, and
the adoption of SFAS 128 which is as of
May 14, 1998
50
53
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts
Balance at Additions Deductions- Balance at end
beginning of charged to costs Charge offs of period
period and expenses
Fiscal Year 1998 $579,000 $375,000 $245,000 $ 709,000
Fiscal Year 1997 $448,000 $291,000 $160,000 $ 579,000
Fiscal Year 1996 $196,000 $332,000 $ 97,000 $ 431,000
51
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BRIGHT HORIZONS FAMILY SOLUTIONS, INC.
March 25, 1999 By: /s/ Michael E. Hogrefe
-----------------------------------------
Michael E. Hogrefe
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/ Linda A. Mason Chairman of the Board March 25, 1999
- ------------------------------------
Linda A. Mason
/s/ Marguerite W. Sallee Director, Chief Executive Officer March 25, 1999
- ------------------------------------ (Principal Executive Officer)
Marguerite W. Sallee
/s/ Roger H. Brown Director, President March 25, 1999
- ------------------------------------
Roger H. Brown
/s/ Mary Ann Tocio Chief Operating Officer March 25, 1999
- ------------------------------------
Mary Ann Tocio
/s/ Michael E. Hogrefe Chief Financial Officer (Principal March 25, 1999
- ------------------------------------ Financial and Accounting Officer)
Michael E. Hogrefe
/s/ Stephen I. Dreier Chief Administrative Officer and March 25, 1999
- ------------------------------------ Secretary
Stephen I. Dreier
/s/ Joshua Bekenstein Director March 25, 1999
- ------------------------------------
Joshua Bekenstein
/s/ JoAnne Brandes Director March 25, 1999
- ------------------------------------
JoAnne Brandes
52
55
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William H. Donaldson Director March 25, 1999
- ------------------------------------
William H. Donaldson
/s/ E. Townes Duncan Director March 25, 1999
- ------------------------------------
E. Townes Duncan
/s/ Fred K. Foulkes Director March 25, 1999
- ------------------------------------
Fred K. Foulkes
/s/ Sara Lawrence-Lightfoot Director March 25, 1999
- ------------------------------------
Sara Lawrence-Lightfoot
/s/ Robert D. Lurie Director March 25, 1999
- ------------------------------------
Robert D. Lurie
/s/ Ian M. Rolland Director March 25, 1999
- ------------------------------------
Ian M. Rolland
53
56
INDEX OF EXHIBITS
2.1* Amended and Restated Agreement and Plan of Merger dated as of June 17,
1998 ("Merger Agreement") by and among Bright Horizons Family
Solutions, Inc., CorporateFamily Solutions, Inc., Bright Horizons,
Inc., CFAM Acquisition, Inc., and BRHZ Acquisition, Inc.
3.1* Certificate of Incorporation
3.2* Bylaws
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
4.3 Specimen Common Stock Certificate (Incorporated by Reference to Exhibit
4.3 of the Form 8-K filed on July 28, 1998).
10.1* 1998 Stock Incentive Plan
10.2 First Amendment to the 1998 Stock Incentive Plan (Incorporated by
Reference to Exhibit 10 of the Quarterly Report on Form 10-Q filed on
November 16, 1998).
10.3* 1998 Employee Stock Purchase Plan
10.4* Employment Agreement of Linda A. Mason
10.5* Employment Agreement of Marguerite W. Sallee
10.6* Employment Agreement of Roger H. Brown
10.7* Employment Agreement of Michael E. Hogrefe
10.8* Employment Agreement of Mary Ann Tocio
10.9 Severance Agreement for Dana Friedman, James Greenman and Sandy
Schrader (Incorporated by Reference to Exhibit 10.8 of the Registration
Statement on Form S-1 of CorporateFamily Solutions, Inc. (Registration
No. 333-29523))
10.10 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))
10.11 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))
10.12 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))
10.13* Severance Agreement for Melanie Ray
10.14* Severance Agreement for Michael Day
10.15* Severance Agreement for Nancy Rosenzweig
10.16* Form of Indemnification Agreement
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule for Fiscal Year Ended 1999 (For SEC use only)
- -----------------------
* Incorporated by Reference to the Registration Statement on Form S-4
filed on June 17, 1998 (Registration No. 333-57035).
54